BMO and CIBC drop mortgage rates

Bank of Montreal and Canadian Imperial Bank of Commerce on Monday announced a series of reductions to their regular mortgage rates, including a 10-basis-point cut to the benchmark five-year, fixed rate.

This puts the interest rate for these terms at 5.39% as of Tuesday for both banks. Last week, BMO, CIBC and other major Canadian banks reduced their key mortgage rates 10 basis points to 5.49%

In my opinion, this is to provide a slight stimulus to the economy, especially given that the interest rate decrease was not larger.

Read more: http://www.vancouversun.com/business/Bank+Montreal+CIBC+lower+mortgage+rates/3433346/story.html#ixzz0xTYFAsCE

BC's Deficit Higher than Reported

B.C.'s budget deficit should be $73 million higher than reported, says a report released Thursday by the province's auditor general, who took issue with the way the government accounted for a massive infrastructure project.

John Doyle reviewed the government's financial statements for the 2009/2010 fiscal year and in a 62-page report, concluded B.C.'s budget deficit should be $1.85 billion as opposed to the $1.77 billion reported by the government.

"I suspect if you went out to citizens and said, 'Is $73 million a lot of money?' they'd probably say 'Yes,"' said Doyle.

Opposition New Democrat Rob Fleming said the Liberal government's deficit grows with Doyle's report.

Fleming said the Liberals campaigned in May 2009 on a promise that the budget deficit would be no higher than $495 million, but the actual deficit number turned out to be more than three times that.

"Government was fast and loose with the facts about that," he said. "They are facing a crisis of trust on financial issues and I think the auditor general's report has reminded us what kind of accounting trickery they have been using."

Doyle's report included three reservations regarding the government's method of accounting, saying it deviates from the accounting norm, known as generally accepted accounting principles or GAAP.

He said the government is not following GAAP when it comes to the $3.2 billion Port Mann Bridge project, the largest infrastructure project in British Columbia history.

Finance Minister Colin Hansen said Doyle raised the same three budget objections in last year's report, but the government did not make any changes because it received the endorsement from the Finance Ministry's comptroller general, who essentially monitors and ensures the integrity of the province's books.

"He did not take issue with the transparency of our public accounts -- that everything is disclosed -- he just has disagreements with the accounting principles we apply to those three items," Hansen said.

"This comes down to differing opinions between the comptroller general and the auditor general as to what constitutes generally accepted accounting principles."

The government classified the Port Mann project as a revenue generator on the books when it will take 40 years to pay for itself, said Doyle.

"Yes, it is a big deal," he said. "Basically, government is saying that this is a commercial activity which is self-sustaining when in fact they haven't even built the bridge yet."

The government is working on a revised bridge funding model that it will present to the auditor general later this year, the report said.

Doyle's report said his increased deficit number also results from the government subtracting royalty credits for oil and gas producers from revenue rather than reporting them as expenses.

As well, the government is not recording liabilities for deep-well credits owed to oil and gas producers, he said.

The report said the government did adjust 25 other monetary issues that were of concern to the auditor general.

Of bond funds, T-bills and higher interest rates

Question: In 1994, I purchased a bond fund. Why has it gone down in value since then, because interest rates of gone up?
L.S., Chilliwack

Answer: A bond fund will normally hold govern-ment bonds (federal, provincial and municipal) or corporate bonds, which can have maturities from one month up to 30 years.These bonds are traded in a huge, liquid market (similar to the stock market) and have a guaranteed coupon/inter-est rate when they are purchased.

These bonds should not be confused with the Canada Savings Bonds or B.C. bonds offered in the fall which are cashable either once or twice a year.

Using last year as an example, let’s assume someone purchased $10,000 in 10-year Govern-ment of Ontario bonds paying six per cent. This year a comparable bond might return nine per cent.

If the last year’s buyer wanted to sell this spring, he would have to sell it in the bond market, because the government will not redeem the bond for another nine years.

A buyer of this bond might only pay the seller $9,500 for the bond because the bond only has a six per cent coupon on it. So in summary, as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise.

Question: Can you explain the difference between the bank rate and the prime rate?
T.J., Sardis

Answer: The Bank of Canada influences interest rates through setting a Canada Treasury Bill (T-bill) rate. It does this by buying and selling T-bills on the open market. When it wants interest rates to rise, it sells the T-bills at a higher interest rate.

The bank rate or the rate charged by the Bank of Canada to the chartered banks is set at one-quarter per cent higher than the T-bill rate. This rate is set on Tuesday morning of each week. This rate, in turn, influences the prime rate, which is the rate charged by the chartered banks to their best customers. All loans are based on this rate, including mortgages and credit cards.

Canadian dollar is vulnerable to fickle foreign investors

Over the past couple of years a great deal of attention has been directed towards public indebtedness in the U.S. and Canada.

Despite all of the attention given to this topic, few Canadians understand why they are being asked to make sacrifices to bring debt under control.

The total Canadian debt now stands at $661 billion or $23,065 per person. Out debt as a percentage of our GDP or gross domestic product, is approximately 93 per cent.

The U.S. total debt is now a staggering $4.55 trillion or $18,000 per person. As a percentage of GDP, the debt is approximately 69.9 per cent of the GDP. Although Canada’s debt is much lower in dollar terms, it is much higher in terms of the GDP. The Canadian figures do not also take into account the unfunded liabilities such as the Canada Pension Plan or Canadian Crown Corporations which could bring the total to well over $1 trillion.

Another important factor is that 43 per cent of our debt is owed to foreigners, especially the Japanese, while only seven per cent of the U.S. debt is owed to foreigners.

Because of this, the Canadian dollar is very vulnerable to fickle foreign investors. This is why the Loonie, while valued at .72 compared to the U.S. dollar is forecast to be from a pessimistic .60 to an optimistic .90 over the next three years.

What does this mean to the average Canadian?

Firstly, the public sectors’ demand for money crowds out businesses who need funds for job

Secondly, interest rates will be higher in Canada than they otherwise would be which hampers growth.

Thirdly, taxes must be higher for corporations or individuals to control the deficit. This means less disposable income for citizens and less profit for corporations. Invariably, skilled workers or corporations will relocate and unskilled workers or uncompet-itive subsidized business will remain. To protect client assets against a debt crisis, many financial advisors recommend allocating a portion of client’s portfolio outside of Canada dollars. In the event of a currency crisis, foreign investments will maintain their value on a global basis while Canadian investments will plummet.

This type of strategy is especially vital if your retirement plans include Florida or anywhere down south. If a portion of your savings or RSP is diversified outside of the Loonie, you can carry on with your retirement plans after your golden handshake. If you are 100 per cent invested in Canadian investments and the Loonie is valued at 60 cents or less, you may have to work longer or change your retirement plans.

Choosing a Mutual Fund

With more than 600 mutual funds sold in Canada, choosing which mutual fund to invest in can be difficult, even for the experienced investor.

But by exploring the possibilities and deciding what goals the investor has in mind, the choices can be narrowed down to a few funds, some of which are eligible for tax shelters like Registered Retirement Savings Plans.

While there are no guaranteed techniques for picking a top performer in the mutual fund field, there are a number of trends the investor should examine before making an investment decision.

Past performance is the best way to judge a fund. Although pas performance doesn’t always accurately reflect the way a fund will perform in the future, it will reveal how a fund performed under particular market conditions.

For example, some funds might perform well in strong, active markets but not fare so well when the market takes a downturn.

An excellent tool for examining the various funds and their performance records is the newspaper.

Larger daily papers such as The Globe and Mail, the Financial Post and The Financial Times of Canada publish surveys of mutual fund performance on a monthly basis.

The Financial Times, for example, publishes six performance figures for each fund; one month, three months and one year and average annual compound rates of return for one year, five years and ten years.

Another method of researching the funds is to use the various databases than can be accessed through your computer modem or at the library.

There are a number of organizations, such as Infoglobe and Infomart – On-line, that specialize in financial research and will gladly help you gather information on mutual funds.
Newspaper libraries are also open to the public.

You may be wondering: What is more important, short-term or long-term performance?
Many financial professionals consider mutual funds to be long-term investments.
But investors should also examine the fund’s current performance as it may reveal some changes that could conceivably cause an investor to change or reconsider their investment.
For example, a well-established fund with a long and proven record may begin to fall behind competing funds in a market that is recovering from a crash.

This could be an indication that the fund manager has changed his or her strategy or is being ultra-conservative, believing that the market is not ready to recover.

Make Your Money Work for You by Compounding

Make Your Money Work for You by Compounding

You’ve probably heard someone tell you to make your money work for you. There’s a way of doing just that and it’s called compounding. The short-term benefits of compounding are admittedly limited. The long-term benefits, however, can be dramatic.

If you invested $100 on the first business day of each month for 10 years at a 10% rate of return compounded monthly, you would accumulate $20,665, including your principal of $12,000. If you invested the same amount at a 15% rate of return, the total investment would be worth $27,866, a difference of $7,211.

But imagine investing that $100 over a longer period. After 20 years your principal investment of $24,000, earning 10% compounded monthly, would be worth $76,570. Your $100 a month invested over 30 years would earn $277,933, a substantial increase. Extend that over 40 years and your money would grow to $637,687.

Combine a higher rate of return with your investment and the effects of compounding are markedly greater. For example, if you invested your money at 15% over 40 years, you would have earned a staggering $3.1 million. Those five additional percentage points mean a difference of $2.5 million!

Compounding is money multiplying itself. Investors earn income on theirInvestors earn income on their income earned. Income payments grow each year because the amount upon which the payments are based, grow each year, too.

Let’s suppose you invest $1,000 at 12%. At the completion of the first year, your investment is worth $1,120, including the $120 in income earned. After two years, your investment will have grown another 12%, or $134.40. Your investment is now worth $1,254.40. After three years, your investment will be worth $1,404.92, including income earned of $150.52. As you can see, your income payments have grown steadily.

A handy tool for measuring the growth of your investment is the “rule of 72”. Simply divide the number 72 by the annual rate of return your investment will earn and the result will tell you how many years it will take for your investment to double.

For example, if you invested $1,000 at 10% your investment will double in 7.2 years (72/10 = 7.2). Invest the same amount at 15% and it will double in 4.8 years (72/15 = 4.8).
These examples illustrate that the two most important factors when making an investment decision are time and rate of return. The longer you allow your investment to grow and the greater the rate of return, the larger the future value of your investment will be. You’ve seen the dramatic difference between a 10-year and 20-year investment and what can happen when the rate of return is appreciably higher within the same period.

In the past, you might have put you money in term deposits or guaranteed investment certificates because they provided guaranteed returns and a low risk factor. As an alternative, you might want to consider mutual funds.

Remember to have patience, to allow your money to work for you. The cumulative effect of compounding can work wonders for your investment and your peace of mind.

If you’re saving for retirement, your children’s education or perhaps a dream vacation, choose an investment that will work hardest for you and give them time to grow. The longer you delay, the harder your money will have to work for you.

Discover the benefits for compounding. You won’t be disappointed.

Everybody’s RRSP goals are different

In the past years, purchasing an RRSP was a relatively easy task for many concerned people who simply went to the local bank and purchase a Term Deposit or GIC (Guaranteed Investment Certificate) RRSP. The tax break of anywhere from 25-54% is a great incentive for those putting aside a few dollars for retire-ment. What is also important, though, is the investment returns on this money invested in the RRSP. Where a Term Deposit RRSP at the bank once returned over 10%, investors this year are looking at returns in the 4% range. Another problem is that many people also have money coming due from term deposit RRSP’s with reinvestments risk. The alternative of choice this year appears to be mutual fund RRSP’s.

Mutual Fund RRSP’s are similar to Term Deposit RRSPs in that the investor receives a tax deduction up front and tax-free growth while the money remains within the RRSP umbrella. What is different is the type of investment. Mutual funds are simply pooled investments that allow you to purchase a diversified portfolio of securities. The fund manager combines your money with that of other investors. This large pool of money is then invested for you and other mutual fund unit-holders by the fund manager. Before mutual fund investing became an alternative, only very wealthy individuals could access the services of professional money managers.

For obvious reasons, mutual funds are becoming the investment of choice for RRSPs. When looking at mutual funds, do your looking at mutual funds, do your homework and use the following checklist:

• Because mutual funds are not guaranteed, one of the best ways to review a mutual fund is to find a mutual fund manager with a good, consistent long term track record.
• The stock market or bond market statistically goes up with time. Give the mutual fund time and don’t bail out if the market corrects.
• Statistics have shown that higher returns can be achieved and volatility of the mutual funds can be decreased when investing one’s money globally.

Set realistic goals for your RRSP. It’s difficult to get to your destination without a roadmap. Every person’s RRSP goals are different; don’t worry about what others invest in their RRSPs.

Consult with your financial advisor to set up a mix of mutual funds that are right for you.