Risk Management is Key in Volatile Times

On 27 September 2011, Tiff Macklem, Senior Deputy Governor of the Bank of Canada, presented at the National Insurance Conference of Canada in Vancouver. His comments were instructive to investors and their advisors as it relates to risk management in a new economy.

Mr. Macklem stated that recessions following financial crises are more severe and are more difficult to overcome than normal recessions. He declared that we find ourselves in a fundamentally new fiscal landscape in which government debt "can no longer be considered a risk-free asset in many advanced countriesî. Specifically, the tendency of using government bonds as the benchmark against which many financial assets are priced is likely to disappear.

Slow economic recovery has also had the effect of accelerating the growth of emerging markets at the expense of more advanced economies.

In the first half of 2011 the markets saw an increase in risky investments, with investors attempting to yield higher returns. Assets such as high-yield bonds, leveraged loans, emerging-market equity and debt, and commodities are among some of the examples. More recently however, investors have shifted their search for safety and stability, sending prices of risky assets lower.

Macklem feels the early efforts to mitigate the sharp decline in the markets in 2008-2009 averted a much larger crisis, but stresses the fact that public confidence in governments is waning as a result of recent indecision as to which route to take.

Bottom line for those on fixed incomes in particular: As the markets remain volatile, the importance of guaranteed income sources increases. Seniors relying on Old Age Security will want to ensure they make the most efficient use of their income and take advantage of all subsidies and credits; tax planning in the current economic climate is more important than ever. Now is a good time to discuss retirement income planning options with qualified Master Financial Advisors (MFAs) who specialize in this subject area.