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Have low interest rates got you down?

Are you familiar with Shakespeare’s famous advice: “Neither a borrower nor a lender be”? Penned more than 400 years ago, it shows us just how long the world has been stressing out over bond interest rates!

When it comes to managing your investments amidst today’s historically low interest rates, I’d like to alter the Bard’s expression and suggest: Neither an optimist nor a pessimist be – at least not if you take either to extreme.

Instead, I suggest being a realist, or at least being advised by one. This is your best defense against the usual onslaught of extremist headlines from the financial peanut gallery. Flip-flopping from alarming to exuberant, they are forever trying to predict precisely when rates will reverse and rise … and continuously admonishing you about what you should or shouldn’t be doing about it, right away.

As I’ve covered in a previous post about interest rates and bond investing, we don’t make near-term financial forecasts, and we ignore anyone who tries to. That said, even the most stay-put investor must assess what the bond markets might reasonably deliver over the long haul. Here again, realism is your friend. It offers you the best odds for saving and investing in appropriate measure toward your personal target retirement numbers.

Then again, arriving at those plausible estimates is easier said than done. One recent voice of reason comes from the Bank of Canada’s Governor Stephen Poloz in his September 20th speech to the financial community (representing a CBC summary of Poloz’ full speech here):

  • “Canadians must be ready to readjust their retirement expectations in the face of continuing ‘ultra-low’ interest rates.”
  • “Low interest rates can generally mean higher prices for stocks and bonds, and lead to higher values for real estate.”
  • “That could mean a combination of putting aside more funds, working a little longer than planned or changing their investment mix.”

To put Poloz’s cautionary statements into perspective, Canadian bonds (as measured by the FTSE TMX DEX Canada bond universe) have returned in aggregate more than 9% per year since January 1980. Even over the past three years, this same index has returned almost 6% per year! However, as I write this today, annual short-term interest rates are below 1% and long-term rates are below 2%. (If we look outside of Canada, some government bonds are actually negative, but that is a story for another day.)

So … can you expect to earn 9% per year for the next 30 years, as we have previously? Given the Bank of Canada’s aforementioned outlook, it seems highly unlikely. If interest rates do rise again, so be it. But for rational retirement planning in today’s climate, a healthy dose of realism seems in order. Instead I often see investors and financial pros alike simply extrapolating these outsized historical returns into their future plans.

Armed with experience, I love it when I get to inform clients that they are doing so well, they should loosen up and spend a little more along the way. Unfortunately, it is more often my duty as a family’s financial advisor to inform them that the opposite is occurring. It’s not a role I relish at the time, but it’s my job to help them endure some of the markets’ slings and arrows that occur along the way, especially if it ultimately helps them retire according to plan.