Embracing Market Highs

Embracing Market Highs

By James Parkyn - PWL Capital - Montreal

Stocks are soaring. Should we worry? Research shows staying invested is the best approach

Equity markets have been on a tear for months and are regularly making new highs. The S&P 500 was up 15% year-to-date as of late June, with the index reaching new record highs 33 times this year so far. The Nasdaq 100 index is doing even better—up 18.1% in 2024.

Most investors in stocks are rightfully pleased. But this is also a time when questions arise about how to respond to sky-high equity prices. Is it best to wait for a correction to add to investments? Perhaps it’s even a time to take profits and lighten up on holdings?

At PWL, we see rising stocks as a sign of a strong economy and something to embrace. Market highs are a normal and healthy phenomenon that investors should welcome. Our view is that it’s time in the market that counts, not timing the market.

As Warren Buffett once observed, “The only value of stock forecasters is to make fortune tellers look good.”

New market highs are common 

It turns out there’s good data to support this view of market highs. The broad U.S. equity market has made 1,250 new highs since 1950, or over 16 per year, according to a recent report from RBC Global Asset Management.

Interestingly, RBC found that investing in the S&P 500 only at all-time highs would have led to a return “close to the average return of the index for one, two- and three-year periods.” In other words, there was little difference between investing at highs and investing at any other time.

You might think a market high is the very worst time to invest. Not necessarily. In fact, since 1950, the average five-year return for investing only at all-time highs was 10.3%. That compares to 11.3% for investing on all other dates. “New market highs are not as meaningful as some people may think,” RBC said.

A retreat isn’t inevitable

Research from Dimensional Fund Advisors came to a similar conclusion. Its report, titled “Why a Stock Peak Isn’t a Cliff,” found that average annualized compound returns after a new monthly closing high were 13.7% after one year, according to data from 1926 to 2022. This was actually higher than the 12.4% return after months that ended at any level.

Five years later, the comparable returns were 10.2% after closing-high months versus 10.3% for all other months.

“History shows that reaching a new high doesn’t mean the market will then retreat,” Dimensional concluded. “In fact, stocks are priced to deliver a positive expected return for investors every day, so reaching record highs with some regularity is exactly the outcome one would expect.”

Correction fears 

But isn’t there a higher risk of correction after an all-time high? This is a valid question. Legendary investor Peter Lynch addressed it nicely with this comment in 1995: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

RBC also evaluated this question in its report. It looked at how often the S&P 500 has finished down by over 10% after an all-time high since 1950.

One year out, the market had such a correction 9% of the time. Three years on, the market was down 10% or more only 2% of the time. And five years out, the index has never been down by more than 10%.

Protect yourself with a good plan

Corrections are inevitable; markets are down one in four years on average. But there’s no way to predict when a correction will happen, and the evidence shows they don’t happen after every market high.

What we can do is prepare. At PWL, we do this with our evidence-based approach of passive long-term investing in a diversified portolio. As asset values fluctuate, we regularly rebalance to maintain allocation targets.

It’s a good idea to regularly review and update your long-term investment strategy and asset allocation with an advisor, especially if your goals or risk tolerance changes. But what’s most important is to follow your plan with discipline—no matter what the market does day to day.

And that may make it a little easier to sit back and enjoy the bounty when markets make new highs.

Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website. 

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

Magnificent 7 Peaks and Perils

Magnificent 7 Peaks and Perils 

By James Parkyn - PWL Capital - Montreal

Today’s high-flying stocks are rarely tomorrow’s. Research shows you lose when you chase past performance 

Yesterday’s home runs don’t win today’s games. Keep this classic truth from Babe Ruth in mind when you hear the market chatter about the “Magnificent Seven” stocks.  

These are the seven high-flying tech mega-companies that have investors and commentators abuzz lately: NVIDIA, Microsoft, Apple, Alphabet (Google), Amazon, Meta (Facebook) and Tesla. 

The Mag 7, as they’re sometimes called, performed exceptionally in 2023, ranging from a 48% gain for Apple to an astonishing 239% for NVIDIA. As a group, these seven giants returned 75.7% last year, more than triple the 24.2% gain of the S&P 500. As of mid-June, the Mag 7 made up 28.8% of the S&P 500 index’s market cap. 

(I talk more about the Magnificent Seven in my latest Capital Topics podcast with François Doyon La Rochelle.) 

Not a new phenomenon 

The seven-star stocks certainly have impressive results, but this is far from being the first time a small handful of darling companies has turned heads or dominated markets. In the late 1990s, the dot-com companies were all the rage. In the 1970s, we had the Nifty Fifty. 

The Mag 7 stocks themselves are a successor to the FAANG big tech stocks (Facebook, Amazon, Apple, Netflix and Google), which in turn succeeded the FANG stocks. Today's stock concentration is also nothing new. In fact, while NVIDIA is 7% of the total U.S. stock-market value, that’s small potatoes compared to AT&T, which was 13% of the market in 1932, the Wall Street Journal reports. In 1928, General Motors was 8% of the market, while in 1970, IBM made up 7%. 

High performers underwhelmed 

As the examples of AT&T, GM and IBM show, market leaders don’t stay at the top forever. In January, when Amazon became the world’s largest company by market cap, the Wall Street Journal took a look at what happened to the 10 previous companies that held the top spot. 

In the five years before they reached No. 1, these companies outperformed the market by an average of 48 percentage points, the newspaper found. But over the five years after they hit No. 1, they underperformed the U.S. stock market by 6 percentage points on average. 

It’s like the old maxim says: Past returns are no guarantee of future results. Indeed, if we can be fairly certain of anything, it’s that today’s market heroes are unlikely to be tomorrow’s. 

Top 10 no more 

In 2000, the top 10 stocks in the S&P 500 included tech giants Microsoft, Intel, Lucent, IBM and Cisco. Today, except for Microsoft, none of these companies or any of the other then-top-10 stocks are in the list. IBM was one of the largest U.S. stocks for over six decades and made up 6.4% of the S&P 500 index in 1985; as of late June, it sits at No. 56 and has a weight of 0.35%. 

Another classic example is General Electric (GE). It was in the top 10 for nine decades, but is now No. 48. In fact, Morningstar recently named GE to the top spot in its list of “15 Stocks That Have Destroyed the Most Wealth Over the Past Decade.”  

GE’s market cap dropped by $55 billion over the 10-year period ending in 2023, by far the most of any U.S. stock, Morningstar said. 

Diversification is key 

IBM and GE aren’t unique. A former Yale University finance professor, Antti Petajisto, looked at data going back to 1926. Stocks that were among the top 20% performers over the prior five years had a median market-adjusted return 17.8% lower than the broad equity market during the ensuing 10 years, Petajisto found. 

The results suggest it’s a bad idea for investors to hold a high portion of their assets in single stocks, he said. “Concentrated stock positions usually contribute negatively to portfolio returns… The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.” 

High-flying stocks come and go 

At PWL, we fully agree. This is why we invest in a broadly diversified portfolio using evidence-based strategies. That has allowed us to benefit from the Magnificent Seven’s gains through our ownership of broad index funds. And it also means we’re well positioned to benefit from the next generation of market stars. 

At times like these, we like to refer to Warren Buffett’s words of wisdom. In 2018, Buffett was asked by an investor at Berkshire’s annual meeting why he hadn’t bought Microsoft. “We missed a lot in the past, and I suspect we’ll miss a lot more in the future,” Buffett responded. 

In other words, high-flying stocks come and go. Swinging wildly for the fences doesn’t win the game. Solid, consistent play over the long run does. 

Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website. 

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

Patience and a focus on the long run

Patience and a focus on the long run

By James Parkyn - PWL Capital - Montreal

How to invest the Warren Buffett way—lessons from the latest Berkshire letter

Warren Buffett’s letters to shareholders are always packed with brilliant investing wisdom and fascinating insights. And this year’s is no different.

Buffett is the world’s most famous stock investor for a good reason. He grew a struggling New England textile manufacturer into a massive conglomerate that today is the seventh-largest U.S. company by market value—over $870 billion as of mid-June. Along the way, Buffett has used the annual Berkshire Hathaway shareholder letter to document the nuts and bolts of his success since 1965.

At PWL, we like to follow Buffett because we share his focus on a long-term investor’s mindset—meaning buying and holding as long as it is sensible to do so. I also talk about Buffett’s most recent shareholder letter in my latest Capital Topics podcast with François Doyon La Rochelle

Charlie Munger was Berkshire’s “architect”

Buffett started this year’s letter with a loving tribute to his longtime friend and business partner Charlie Munger, who died in November just 33 days shy of his 100th birthday.

Buffett, 93, describes Munger as his “part older brother, part loving father” who repeatedly “jerked me back to sanity when my old habits surfaced.” Munger was the “architect” of Berkshire, while Buffett “acted as the ‘general contractor’ to carry out the day-by-day construction of his vision. Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades,” he writes.

“Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”

Apple gains illustrate strategy

The Berkshire philosophy based on Munger’s vision is simple. Success comes from patiently riding out market volatility and holding positions for the long term, not trying to time the market.

Berkshire’s investment in Apple is a great example illustrating the approach. Berkshire came to Apple fairly late, buying its initial position only in 2016 and purchasing $36 billion (figures in USD) of Apple stock over the next three years. The investment paid off astonishingly well. As of May, Berkshire’s stake had soared in value to $157 billion, the Wall Street Journal reported .

“Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock. Nothing in Buffett’s long career comes close,” the newspaper said.

Berkshire has made an annualized return of over 26% from Apple including dividends—compared to a 12.9% gain for the S&P 500 during the same period.al-gains taxes will be a disincentive. Given Canada’s deepening productivity woes, it is precisely the wrong policy.”

Stock-picking “harder than you would think”

Buffett’s Apple investment shows the value of holding for the long run and ignoring the short-term volatility that the stock has seen over the years.

At the same time, lest anyone come away thinking the Apple story is a great argument for stock-picking, Buffett warns strongly against such a conclusion.

“Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes,” he writes. “It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”

Upside limited

Buffett’s letter includes a good example of the risks of stock-picking. He describes “severe earnings disappointment” at Berkshire Hathaway Energy—the company’s 100%-owned utilities and energy investment, which encountered significant regulatory and other issues last year.

Buffett acknowledges that he and his partners “did not anticipate or even consider” these issues and “made a costly mistake in not doing so.”

And despite Berkshire’s own meteoric growth, he warns that the gains aren’t likely to repeat in future: “We have no possibility of eye-popping performance.” The company is in a way a victim of its own success; as Buffett has warned in the past, “A high growth rate eventually forges its own anchor.”

“Patience pays”

Buffett himself is famous for suggesting that investors invest passively and broadly for the long term and avoid investment funds with high fees. As he puts it in his shareholder letter, “Patience pays.”

At PWL, we couldn’t agree more. Our own approach is to invest passively in a broadly diversified portfolio using evidence-based strategies. And this has meant that through our ownership of broad index funds, we’ve owned Apple stock even longer than Warren Buffett!

An investor’s mindset, a long-term focus, patience—the essence of what Buffett calls his “common sense” approach rooted in his birthplace of Omaha, Nebraska—are ideas we can all benefit from.

Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.

Read more about Charlie Munger in the book Poor Charlie’s Almanac: The Wit and Wisdom of Charles T. Munger, now in its fourth edition.

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

2024 budget misses the mark

2024 budget misses the mark

By James Parkyn - PWL Capital - Montreal

The 2024 federal budget unfairly targets higher-income earners, potentially stifling investment

The 2024 federal budget presented on April 16 is a disappointment and a missed opportunity.

Finance Minister Chrystia Freeland’s budget unfairly targets higher-income earners and businesses in a way that could curtail investment.

Meanwhile, a significant potential revenue source exists that the federal government could do more to tap: those who don’t pay the taxes that they legally owe.

$19 billion capital-gains tax hike

The budget introduces new spending of $52.9 billion over five years on affordable housing, pharmacare, the Canadian Armed Forces, artificial intelligence technology and other programs.

Where will all this money come from? one might ask. A large portion—$19.4 billion (including $6.9 billion this year)—is to be paid for by increases to capital gains taxes. In particular, the capital gains inclusion rate—the amount of capital gains subject to tax—is to be increased from one-half to two-thirds on capital gains that exceed $250,000 when realized on or after June 24, 2024, in personal taxable accounts.

For investments held in corporations and trusts, there is no $250,000 exemption; all capital gains will be taxed at two-thirds.

For employees who exercise stock options granted by their employer, there will be a one-third deduction of the taxable benefit above $250,000. For situations where the taxable benefit is up to a combined limit of $250,000 for both employee stock options and capital gains, taxpayers will still be entitled to a deduction of one half.

The 2024 budget includes another notable change that will affect investors and businesses. The budget proposes to increase the lifetime capital gains exemption from $1,016,836 to $1,250,000 on gains realized on the disposition of qualified small business corporation shares and farm or fishing property as of June 25, 2024.

“Precisely the wrong policy”

The federal government has said the capital-gains tax changes will affect just 0.13% of Canadians with an average gross income of $1.4 million. But we feel the changes are a disincentive to investment, may cause investors and business owners to sell assets, and could lead some Canadians to change estate planning.

In more extreme reactions, some ultra-wealthy Canadians may decide to emigrate from Canada and give up their tax residency. This would represent a huge opportunity cost of lost income-tax revenues to all levels of government.

In an editorial on the budget titled “The Liberals’ capital-gains tax hike punishes prosperity,” The Globe and Mail said, “The Liberals have gone to great pains to portray the capital-gains changes as a tax paid by the ultrawealthy… There is another basic principle of taxation policy: Whatever you tax, contracts. Higher tobacco taxes mean fewer cigarettes will be bought, for instance—a point Ms. Freeland’s budget makes in hiking excise taxes.

“What’s true for smokes is true for investment: increased capital-gains taxes will be a disincentive. Given Canada’s deepening productivity woes, it is precisely the wrong policy.”

Higher-income Canadians already pay fair share

We can only concur. As this blog noted last fall, higher-income Canadians already pay more than their fair share. The top 1% of income-earning families pay 22.5% of the country’s personal income taxes, while the top 10% pay 54.4%, according to  Statistics Canada data for 2021.

Not only is it unfair to raise taxes even more on higher-income earners, what’s especially galling is that the government has a large source of revenues it could pursue more intently instead: people and businesses that avoid paying taxes they legally owe.

In an eye-opening report, the Canada Revenue Agency has estimated it was missing out on up to $23.4 billion each year in taxes owed to the government, which it didn’t collect. This is over three times more than the $6.9 billion to be raised this year by the capital-gains tax changes.

The 2024 budget does propose new funds for the CRA to reduce call center wait times. But the CRA would also benefit from increasing funding for tax enforcement to crack down on tax evasion, which could help the government collect some of these missing billions.

This seems like a much more economically more sensible solution—not to mention a fairer one—than soaking law-abiding taxpayers and businesses even more.

We recommend consulting your financial and tax advisors to get clarity on how to optimize your situation under the proposed rules. In many cases, for example, it’s advisable to defer selling assets; if you realize gains now, you pay tax immediately and have less money after tax to reinvest.

That said, everyone’s situation is different. A good advisor can help you crunch the numbers to determine the best solution for you.

Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

How to retire happy

How to retire happy

By James Parkyn - PWL Capital - Montreal

Retirement can be financially and psychologically stressful. Here’s how to make a smooth transition

Canadians are retiring in greater numbers than ever, and they’re enjoying longer, more active lives while retired. Their main concern is often not money, but what to do with all their newfound time.

It can be quite a challenge. After focusing for decades on career and saving money, now they have no job to occupy their time and they often wonder about their purpose in life.

Our Capital Topics podcast series addressed retirement a couple of times, and there was such strong interest that we decided to follow up with a more comprehensive eBook. I’m excited to announce that it’s now available.

Financial and psychological questions

My eBook “The New Retirement” covers both financial questions and the sometimes-trickier psychological ones. Clients of all ages frequently ask us about both types of issues.

They wonder how much income they’ll need for retirement and how much they can safely spend. A lot of their questions, however, are psychological.

How can they transition to a retirement lifestyle? How will they find meaning, foster good relationships and stay healthy?

It’s not just older people asking the questions. It’s gratifying to me that younger clients are responding positively to the eBook. They not only want to help their parents prepare for retirement, but they also realize they need to think about the same dilemmas themselves.

Top retirement regret: lack of connections

The challenges were highlighted by Rob Carrick, the personal finance columnist at The Globe and Mail. He asked his retired readers to share their biggest regret.

Money wasn’t at the top of the list. In fact, only 5% said they regretted not saving more for retirement. Instead, leading regrets included failing to work harder on connections with family, friends and community. Many also wished they had thought more about how to fill their days.

In over 25 years of experience, I’ve had many conversations about the same things. Retirement for most people is an abstract destination. We work hard to put away money, but we rarely think in depth about how we’ll spend two, three or even four decades in retirement.

Planning for retirement happiness

I find the happiest retirees have often done just that: They thought ahead about retirement and did a little planning for how they want to live. If you’re already retired, don’t worry; it’s never too late to get started on this. Embracing the future with a plan helps with any big step in life.

Where do we start? First, look at the big picture: your vision for retirement. Who are you as a person? What are your retirement goals? How will you accomplish them?

The eBook includes a checklist of eight questions to clarify this vision.

1. When should you retire?

2. Where will you live?

3. How will you keep healthy?

4. How will you maintain and improve relationships?

5. How will you fill your day?

6. What other claims will there be on your time (e.g. managing finances, taking care of your household or loved ones)?

7. How will you manage stress?

8. How will you give back to the community?

Paying for retirement

Once you define your retirement vision, it’s easier to figure out how to pay for it. The financial transition is of course another challenge.

It’s important to consider two questions. How much income will you need in retirement? And how much can you safely withdraw from your savings each year?

We often hear that you should aim for 70% of your pre-retirement income before taxes to maintain your lifestyle in retirement. This may apply for some people, but not for others. Leading Canadian retirement expert Malcolm Hamilton says most Canadians will do just fine with less than 70%.

The 4% rule vs a tailored approach

As for how much you can safely spend, it depends on the person. For some, the 4% rule applies. It states you can spend 4% of your nest egg in the first year of retirement and then adjust the dollar amount for inflation each year with minimal risk of running out of money.

For many retirees, a more tailored or flexible approach is best. Our team helps clients create a retirement financial plan based on their specific retirement goals, spending, taxes and estate planning.

Then we follow up regularly to review portfolio performance and evolving personal needs, and adjust spending and withdrawals accordingly.

Happy retirement is within reach

The good news is that many people can afford to spend far more in retirement.

The fact is that a happy retirement is within our reach, especially with a little planning. Thinking about the psychological and financial challenges can smooth the transition and help you enjoy many healthy, active and meaningful years, connected with family, friends and community.

They maybe even be some of the best years of your life!

Find past blog posts, our eBooks and podcast on the PWL Capital, Team Parkyn-Doyon La Rochelle’s web site and on our Capital Topics website. And download your free copy of my eBook The New Retirement.

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN AND HIS TEAM TO PLAN YOUR RETIREMENT WITH PEACE OF MIND.