Record amounts of household debt in Canada are once again catching the headlines of financial markets, however it is not time to panic, yet.
The good news is that asset prices are also rising and at a faster pace than Canadians are building debt (so debt has been productive):
The ratio of Debt to Total Assets is lower and has been coming down steadily since the Financial Crisis. In other words Canadians, as a whole, have generally been investing wisely.
As well the cost of servicing the debt (payments of principal plus interest as a proportion of disposable income) remains low at 14%.
63.5% of Canadians total assets are financial assets (cash, savings, investments) 36.5% are non-financial assets (real estate for the most part).
So on the whole, household balance sheets are not in terrible shape.
However, the risks are pretty high because these are broad averages and studies by the Bank of Canada have shown that those who are more highly leveraged (greater amounts of debt) are vulnerable.
If asset prices, either financial or non financial (or both) start to retreat, the debt to asset ratio will climb (as it did in the financial crisis) and debt becomes non-productive and a drag on household balance sheets.
Rising costs to service the debt (interest rate increases) will also take their toll and of course any threat to household income (employment) will also be a factor.
From a family wealth management perspective, when you are reviewing your own household balance sheet, you want to make sure that you have the liquidity to endure a short-term crisis (because, believe it or not they do happen) and be appropriately balanced.
Over-exposure to any one asset class (especially real estate, where it is not necessarily so liquid) can be problematic.
Having the ability to be flexible and tactical, one of our key themes for 2017, is paramount.
That is why, prior to creating any investment strategy, you need to have a deep understanding of the composition of your net worth and within the context of your long-term goals, are able to withstand any short-term volatility so that your goals do not get derailed.
That is why we take the time and effort to understand our clients needs, goals, time horizon and risk tolerance long before we recommend an investment strategy.
There is no "one strategy fits all", because everyone is different.
Canadians are in relatively good shape as a whole, but within the whole, there are plenty of vulnerabilities and they need to be protected. We can help.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist