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September 11, 2019 | Debt Repayment Before Investment Products is the Right Order

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

The 2019 Household Balance Sheet Report by Investor Economics found that in 2018 the financial holdings of Canadians–deposits, investment funds and direct holdings of securities–declined for the first time since the 2008 financial crisis.

This was the first year in a decade that Canadians on average started directing free cash flow to pay down debt rather than buy investment products.  As this trend continues, asset management companies should experience an ongoing decline in the amount of money going into their offerings, specifically toward retirement savings, the report said. See:  Canadians shift savings from investing to repaying debt for the first time in a decade.

This is a constructive step for households.  Depending on one’s income level, sometimes, the math does favour making tax-deductible contributions to retirement savings accounts before paying personal debt, but rarely in the case of non-registered savings.  In most cases, the interest rate on personal credit outstanding far exceeds the net return likely in investment markets.  Moreover, first and foremost, strong financial foundations are built on being cash flow positive and debt-free, with a healthy cash buffer maintained for contingencies.

At our management firm, we have long advised that individuals pay off their debt first before building savings in non-registered accounts. But this makes us a rare voice in a financial business fixated on maximizing its profits ahead of the best interests of its customers.

Two decades of risk-buying and insufficient savings/contributions have set both individuals and pensions on an unsustainable course.  Public pension and retirement funds are currently underfunded by trillions of dollars.  As the world weakens into the next recession, low and negative investment yields will intensify these issues and force unpalatable decisions that have heretofore gone largely ignored.   Most will have to raise contributions and push out retirement dates significantly and/or cut withdrawal/payout plans.  The later reality is faced, the worse option sets will be.  See:  The DB pension plan business model has failed –and everyone is paying the price:

For the past 20 years, many private-sector companies across Canada followed the same risky strategies for their defined-benefit (DB) pension plans as they did in previous decades. Unfortunately, over this time these strategies cost stakeholders almost $158-billion and jeopardized the retirement security of millions of Canadians.

…DB Pension Divisions are investing this money in a way that’s mismatched from the bond-like promises they made to employees. They make bets on equity markets and interest rates in the hopes of generating excess returns that will make it cheaper to pay these promised pensions.

But pain is not inevitable.  Facts must be accepted, and risks managed to meet financial goals.  Recessions and bear markets are recurring norms, not anomalies.  By anticipating and preparing for them in advance, repricing cycles can be used to one’s benefit.  Rejecting status quo recommendations, and coming into downturns with low leverage and high liquidity, are critical for successful outcomes.  Doing the opposite is self-destructive.

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September 11th, 2019

Posted In: Juggling Dynamite

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