Of course, the situation in Greece has been front page news this week and it has created some choppy waters for investors (it was another volatile day on the markets yesterday – but that was apparently caused by a trading error). Amid the headlines, and the increased market volatility, we thought it might be helpful to take a look at how the sovereign debt situation has evolved and why it is causing so much noise (and by extension, investor anxiety).

Each day, there seems to be a new take on the story and many of the headlines have been conflicting. For example, consider the following:

• Two EU Ministers: No Bailout for Greece – Wall Street Journal (Jan 18)
• Merkel Says Greece Doesn’t Need Financial Support – Dow Jones (Mar 22)
• Fears rise that Greece is days from defaulting – Associated Press (Apr 12)
• Greece begins talks on details of IMF aid deal – Reuters (Apr 22)
• EU: Greece loan package coming soon but worries persist – Globe (Apr 30)
• Greece swallows tough medicine in bailout – Globe (May 3)
• Analysts like Greek bank despite nation’s woes – Bloomberg (May 4)

However, as is often the case when it comes to complex issues, there’s usually more to the story than meets the eye. The situation in Europe is complicated and very volatile and many investment management teams are monitoring new developments closely.

Also, amid the noise, it should be noted that there have been other developments that, while not front page news, are noteworthy nonetheless from an investment standpoint.

For example, the U.S. dollar has strengthened which has benefited U.S. dollar denominated investments, and global bond spreads have widened, creating potential investment opportunities.

Another important note is that many of our favorite dividend growth stocks have returned to profitability. Regardless of the happenings in the world economy, when our dividend growth stocks are making money, we will be rewarded accordingly… But, it will take faith in our philosophy and time for the markets to catch up to us .

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More Than Just Resources

Canada has not gone unnoticed by investors abroad. A report last week indicated that Canada has benefited from record net inflows of foreign investment in Canadian securities.

By extension, demand for the loonie has also increased, and this is one of the reasons why the Canadian dollar currently sits near parity with its U.S. counterpart.

Foreign investors purchased $109 billion worth of Canadian securities in 2009, and another $11.8 billion in the first month of 2010. They were particularly keen on Canadian corporate bonds in 2009, purchasing nearly 80% of net new corporate issues. Meanwhile, Canadian investors were noticeably more conservative – nearly all bonds issued or backed by the Government of Canada stayed in Canada.

Why Canada?

There are good reasons for this renewed interest in Canadian investments. Canada has a highly educated workforce, a rock-solid financial system, and one of the strongest economies in the developed world. What’s more, the Canadian stock market has delivered some of the best returns in the world over the past 10 years. (Could this be a warning sign though?)

All of these points underscore the importance of having Canadian exposure as a core holding in a well diversified portfolio.

For example, over the past few years studies have shown that only a small number of actively managed funds beat their respective indexes which has proliferated the interest in ETFs, most of which use a passive index-tracking strategy. According to Investment Executive, over the past five years ETFs have grown at an annual rate of close to 30% versus about 6% for mutual funds.

ETFs are legitimate products and they can play a fantastic role in investor portfolios. But the way ETFs are understood by many investors seems to be based on a few faulty assumptions.

Common Assumptions About ETFs

1. All investors should focus on how their investments are performing relative to an index. But if you use an investment strategy you’re comfortable with and generate a good level of return with a reasonable level of risk (and ultimately reach your investment goals by doing so), then perhaps the return of an index is not so important.
2. Everyone is a do-it-yourself investor. ETF fees don’t include the cost of the professional advice and guidance that most investors need to navigate the financial world as they go through the different stages of life.
3. All ETFs share qualities like low fees. In reality, though, ETFs can differ dramatically in cost. And often, there are additional costs to consider, among them brokerage commissions since ETFs are bought and sold on the stock market, through stockbrokers.

The needs of most long-term investors reading this site can be well served through a diverse group of high quality dividend growth stocks. However, some folks are passionate about ETFs, and those folks can benefit from some clarification.

ETFs can be great tools when they are understood and used correctly in a portfolio. In fact, there are some fantastic dividend ETFs that can provide investors with smaller portfolios a good diversification while they are raising funds to purchase individual stocks.  Dividend ETFs specific to different countries or markets can be a great way to get exposure to markets in which you are not yet comfortable purchasing individual stocks.  Those searching for yield may look to high yield ETFs to diversify risk while still maintaining an above average yield within their portfolio.  

Even using them  as points of research to see which stocks they are holding makes Dividend ETFs, in and of themselves, worth something.

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1.)    The interest rate charged on the mortgage

2.)    The amortization, or length, of the mortgage.

When it comes to lenders or banks deciding upon the amount and rate of the mortgage loan, they will certainly look into the financial background of the borrower.

Lenders are typically looking to satisfy themselves of the Three C’s of credit – Including the capacity to repay the loan, along with the credit history and the character of the individual. These factors can be determined initially by looking at the credit score, and secondly by calculating several ratios before the determination of how much credit they can grant to the borrower.

The Real Cost of A Mortgage

When one decides to buy a house, there are several payments that must be paid on time in addition to the actual mortgage payment. These other payments should always be included when we ask ourselves the question ‘How much can I borrow for a mortgage’?

Such additional payments consist of home owners insurance, property tax and home owners association fees. When these are all added to the mortgage payment, they comprise a more realistic cost of home ownership. In addition, add this to your other anticipated monthly expenses and this is one of the ways to estimate how much you can really afford when you apply for a mortgage.

Private Mortgage Insurance – PMI

This might be another expense that could alter how much mortgage we can afford. Private mortgage insurance, also known as PMI; is an additional cost that must be added if you are not able to afford 20% of the homes price paid as a down payment. In such a case, you will need to purchase private mortgage insurance in order to protect the bank’s investment in your high ratio mortgage.

Front-End Ratio

The front and ratio is the comparison between the monthly mortgage cost-which includes insurance, real estate taxes, private monthly insurance with your total monthly income. Generally mortgage costs are given to make up between 26% to 29% of your monthly income, in this case your monthly maximum repayment amount would be $840. This is another analysis you can use in answering the How much I can borrow for a mortgage question.

Back-end Ratio

When your total income is compared with your total debt payments, this is called back end ratio. This, more comprehensive, ratio includes credit card debt and college loans, and any other debt you have. It can make a total of up to 33 to 40% of your income.

For example, if your bank sets 35% as the limit, and you have a monthly income of $3000. In this case your total debt paid in a month would be $1,050. If you pay $400 as a monthly student loan, you would then have a maximum of $650 left from your income which can be used to repay the mortgage loan.

Credit Score

If you have a good credit score, the banks may increase the limit of the above ratio calculations because your history of repayment cements the bank’s faith in your credibility. Once the ration is determined, all the aforementioned characteristics and calculations help both the borrower and lender in deciding how much credit is really affordable for the borrow.

As you can see, answering the question ‘How much can I borrow for a mortgage’ is not as easy as we might think.  There are many variables that lenders take into consideration and we must fully understand those variables in order to determine how much mortgage we can really afford.  It’s just not as easy as some online mortgage calculators would have you believe!

For more information on Mortgages, check out my Mortgage Survival Guide For the First Time Homebuyer!

What’s interesting is that dopamine has also been identified by researchers in the field of neuroeconomics (which combines neuroscience, economics, and psychology to study how people make financial decisions) as the cause for imprudent, short-sighted investment decisions.

Not surprisingly, dopamine tends to be released in the brain more frequently when market volatility increases. This is precisely why it’s so important for investors to always make rational, long-term investment decisions based on facts and strategies, not emotion.

Investing Facts

With that in mind, to kick off your week I thought it would be helpful to provide you with a few market facts you might find useful:

• 2009 was the 22nd best year ever for the S&P 500 Index going back 128 years (as far back as data is available). The index however, is still 29% off its 2007 high.
• Despite rising over 30% last year, the S&P/TSX Composite Index is still about 18% below the high water mark it set in July 2007.
• Last year, the MSCI World Index rose 27% in US$ – its biggest annual gain since 2003 and proof that diversifying globally is still an important investment strategy.
• After peaking in November 2008, the VIX index – a closely watched measure of stock market volatility – fell 75% in 2009, a record annual drop.
• After an outstanding 2008, U.S. government bonds ended 2009 with their worst one-year performance in three decades. Despite this, and an improving environment for stocks, flows into mutual funds in the US are still running at five to one in favour of fixed-income assets over equity markets.

Although infomercials and investments are worlds apart, consumers and investors alike, need to make rational decisions based on facts and their long-term needs. For investors, a key success factor is having a well developed investment strategy, complete with rules in place. With a strategy, like investing in dividend growth stocks, you can turn to your stock selection strategy rather than Tony Little or Vince Offer - my personal favourite.

Slap Chop anyone?

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