Rising interest rates + Good reads from the PF community

Lately, the talk of the town seems to be the rising interest rates. Earlier this month, the Bank of Canada raised the benchmark interest rate by whopping 0.5% to 1%, making it the biggest rate hike since 2000. Given the high inflation rate, it is almost a given that these rate hikes will continue throughout 2022 and beyond.

But before you freak out, let’s step back and look at the big picture. At 1%, the benchmark interest rate is still relatively low compared to the past interest rates.

BoC Interest Rates

I still remember years ago before the financial crisis, being able to get GIC rates at around 5%. And some people may remember +10% interest rates in the 80s or early 90s. Back then, interest rates were much much higher than measly below 1% rates we’ve been seeing the last decade.

Historical interest rates
Historical BoC overnight rates

What’s going to happen to the stock market? Well the general rule is that when Bank of Canada or the Federal Reserve cuts interest rates, stock market goes up. When Bank of Canada or the Federal Reserve raises interest rates, stock market goes down.

Does that mean the stock market will start performing poorly and we should all switch to buying bonds/bond ETFs and GIC’s and forget about the stock market?

Well, not necessarily. I looked around on the internet for data and put together the TSX performance vs. BoC prime rate comparison table below. Please note, this is not the most scientific study and I took data from multiple sites.

Historical TSX Performance and BoC prime rate compared

Do I have any conclusion from this table? Well, while there are some correlations between interest rates and TSX performance, it’s not as simple as rate goes up stock market goes down and vice versa. There are many other factors that will affect stock market returns. So, for most investors, I think it’s best to just stay in the market and diversify through time. For those that are living off their investments already, then some safer investments like bonds, money market funds, and GIC’s may make sense. For me, I believe living off dividends and not touch the principal continues to make a lot of sense, assuming you don’t get hit by a ton of dividend cuts when the market is volatile, of course.

And what about the Canadian real estate market? The rising interest rates should for sure put some pressure on the high housing price in Canada. Will the higher borrowing cost, ban on foreign home purchases for two years, taxation for property flippers, and end of blind bidding cool down the hot Canadian housing market? I guess we’ll have to wait and see.

Good Reads From The PF Community

Here are some good reads from the personal finance community that I’ve come across in the past few weeks.

I always enjoyed Dave at Accidental FIRE’s unique writing perspective and style. The Money to Anxiety Ratio is something we should all consider when we examine our mental health – “she took more than a $150,000 pay cut for her new job in Norfolk. Her new job is as a lawyer for the Department of Defense, aka the Federal Gubment.  And even though her pay was cut by more that twice the amount of the median household income in America, she’s happier than ever. At one point she texted me “my anxiety to money ratio is better than I could have ever imagined. This is what healthy living feels like, I should have done this earlier.” Money to anxiety ratio. What a great concept. She now works 40 hours a week, no more. She never works on weekends. Her case load is reasonable. So although her pay went down a sh$t-ton, her anxiety level went down even more.” 

I was so happy to see that No More Waffles had finally started blogging again, after a 5-year hiatus. He asked a very important question – Why Financial Independence? – “for me at the moment its point is very clear: we can leverage financial freedom to make it easier for ourselves to live more purposefully. But to do that we first need to figure out what gives us purpose. Financial independence is a powerful tool you can leverage, but it’s nothing more than a tool. Don’t think you need to reach it first before you can be happy, because you’ll find nothing at the finish line that’s worth your time but the hard questions.

Amazon, Alphabet, Tesla, CIBC are all planning to split their stocks to reduce the share price in 2022. Preet made an excellent video explaining stock splits.

Darius Foroux explained The Paradox of Happiness: Why desiring more makes us miserable – “When you see someone with a desirable career, your mind might downplay your own, and say, “Maybe you should change your job.” I became aware of the thought pattern and quickly stopped it by ignoring my thoughts. The truth is that more things will not make you happier. In fact, I believe that anything beyond having enough can only destroy your happiness. That’s because chasing desires is an endless pit that can really harm you.

Dividend Growth Investor reminded us – Do not time the market – “Stocks go up in the long run, because they are ownership pieces of real businesses. Over time, these businesses earn more money, and reinvest a portion to grow the business. They end up generating more than they know what to do with, on aggregate, and send those excess profits to shareholders. All of this tends to grow the values of those businesses as well. It is a true virtuous cycle, which lets the long-term investor take full advantage of the power of compounding.”

do not time the market
Source: Putnam

Most of us invest in RRSP and TFSA to take advantage of these tax-advantaged accounts. But what happens when you need the money? Mark from My Own Advisor wrote an excellent article on How and when to withdraw from RRSP and TFSA – “We don’t intend to touch our TFSA assets in any early retirement years at all… Instead, this will allow both TFSAs to compound over time. In our 70s, with RRSP/RRIF assets largely gone, our plan will be to live off tax-free income from our TFSAs and government benefits (CPP and OAS). I’ve anticipated our TFSAs are likely going to be worth hundreds of thousands of dollars in the coming decades, which should be more than enough to fund senior care. So, our NRT drawdown order will support that.

What’s coming on the blog

I mentioned previously that I have written a post on how do foreign withholding taxes work for dividend stocks and ETFs. I had scheduled this post for publishing in April but decided to push it out to May. So don’t worry, the post is coming!

Have a great weekend everyone!

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14 thoughts on “Rising interest rates + Good reads from the PF community”

  1. Hi Off topic. I enjoy your articles but I noticed this article was difficult to read as repeated adds posted in centre of the article. Is this something new ? I apologize in advance if this is just the way it goes or have others noticed. I read on my ipad which does not have the latest IOS update as its not compatible with my early Ipad Air. Thank you for posting insightful & interesting topics.

  2. I see significant market impacts as learning opportunities that have shaped my portfolio to become more durable to withstanding large market drops while maintaining a desired cashflow.

    2008 financial crisis led to not being overexposed to the financial sector, 2014 commodity drop (oil, iron, steel, etc…) hurt if you were overexposed to these industries and then of course you have Covid where a significant portion of the economy was shutdown and you got to see which companies were considered essential. Already with inflation I see fellow bloggers being more selective with their buying shares of companies that grow their dividend at or above the rate of inflation. I’m sure with rising rates investors will lean more towards companies that have small or no debt on their balance sheets.

  3. Great post Tawcan. I agree with your take on bonds. But boy, I can’t say I wouldn’t be tempted to jump at a ~8% long-term bond of sufficient quality were one to become available. I doubt we’ll see something like that, but a boy can dream!

  4. If the market is going down, I wonder if it is prudent to do small shorts or buy puts as it’s on the way down (while simultaneously doing DCA). If the market drops, then you get extra cash flow to buy even more at a discount. If the market rises, then you might lose a small amount on your puts and shorts (assuming you set a stop) but your overall capital increases.

  5. Thanks for another great post. I like the last chart, stay invested! I actually bought around $44K worth of stocks and ETFs in the past month. I am nervous but I think it will pay off eventually especially when I see the growth in the monthly dividends I receive! No need to check that magical number of (Total) everyday!

  6. Tech is really taking a beating and yet interest rates have not actually increased much but will be over the next couple of months. I’m diversified in everything except I don’t have much tech so my dividend stream is good from energy, industrials, financials, utilities, consumer. I’m looking for non dividend stocks for my corporate account and GOOG, AMZN, QQQ are looking tempting and hitting my buy targets but I know they will go down even more.
    Patience is the best virtue now. If rates go up to 4-5% over the next 12 months then for sure these tech names will be down to 2020 levels.
    Best part of high rates for savers is that no management fees of ETF fees are taken, just put them in GIC or Government bonds. Down side is the taxes but your stress levels are reduced as your principal is secured.


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