Revisiting an Essential Guide: Why Young People Must Cultivate Both Financial and Human Capital

Revisiting an Essential Guide: Why Young People Must Cultivate Both Financial and Human Capital"

By James Parkyn

Due to overwhelming demand, we're bringing back one of our most popular posts, "Young People Need to Grow Both Their Financial and Human Capital." As parents increasingly seek guidance on introducing their children to the world of investing, the message in this post remains as vital as ever. The earlier one starts building wealth, the better, and many parents who wish they'd begun sooner are now eager to equip their kids with essential investing skills. To aid in this endeavor, we've created the eBook, Investing Life Skills for Early Savers, which has resonated deeply with readers. This compact guide distills seven crucial investing concepts into just 28 pages, making it an indispensable resource for young savers. As we revisit this insightful post, we hope it serves as a timely reminder that, much like the classic Nike slogan suggests, in investing, the most important step is simply to start.

For more insights and information on investing and personal financing topics, listen to our Capital Topics podcast on our website or wherever you get your podcasts.

Navigating the Market Turmoil

Navigating the Market Turmoil 

By James Parkyn - PWL Capital - Montreal

Stick to your plan and adjust allocations as needed 

Market dips aren’t usually much fun for investors. But they’re often a good opportunity to take stock.  

It’s important to remind ourselves that occasional pullbacks aren’t just inevitable; they can be healthy, even in a strong bull market. Market turmoil can also be a good time to check if we need to rebalance our portfolio and review allocation targets and risk tolerance. 

In the first of our two-part mid-year market review, we looked at how stock markets soared in the first half of 2024. Canada’s S&P/TSX Composite Index was up by 6.05% in the first six months of the year. Internationally, almost all the main indexes we follow made new all-time highs. 

U.S. equities did especially well. The S&P 500 hit a remarkable 31 new all-time highs by mid-year, with tech stocks helping to drive the index to its 13th best yearly start since 1950. 

Pullback was inevitable  

Given the long stretch of almost uninterrupted gains, a pullback at some point was inevitable. Indeed, the TSX kicked off August with a sharp tumble, losing about 5% from its high to the low three days later. 

South of the border, the S&P 500 lost approximately 8% in those same three days before mounting a recovery. The tech-heavy NASDAQ-100 Index has done worse in a decline that started in mid-July, dropping about 15% by August 5. 

Japan has fared especially badly, with its Nikkei 225 Index plummeting about 25% from its mid-July peak to the August 5 low.  

Turmoil explanations vary 

Why did markets go berserk? Some pundits blamed disappointing U.S. job numbers, while others pointed to a sudden rise in the Japanese yen and a bursting tech bubble. “The simplest explanation,” wrote columnist Jason Zweig in The Wall Street Journal, is that “markets went haywire early this week because markets consist of people, and crazy behavior is contagious.” 

The fact is occasional pullbacks aren’t just inescapable in healthy bull markets; they’re common and may even be beneficial. They can work like a release valve when stocks get too steamy, and they provide a good basis for a new rally. 

“Uncertainty is underrated” 

Corrections are also part of the risk that investors take on in order to make a return, as Dimensional Fund Advisors chair David Booth explained in an insightful recent commentary in Fortune. 

“Uncertainty is underrated. Without it, there would be no surprises, no joy in watching sports, and no 10% average annualized return on the stock market over the past century. All investments involve risk—there is no guarantee of success. Investors can be rewarded for taking on the risk of not knowing exactly how things will play out.” 

Booth said the job of investors is to manage their risk: “That means ensuring our portfolios are diversified across regions and asset classes.” 

Good time to rebalance  

At PWL, we couldn’t agree more. Our approach is to manage risk with an evidence-based approach of passive long-term investing in a diversified portfolio. As asset values fluctuate, we also regularly rebalance to maintain allocation targets. 

For readers who aren’t clients, we suggest regularly reviewing your portfolio to see if it’s still in line with your targets. This is especially important after a prolonged rally such as the one we’ve seen since September 2022. 

A rally can cause the stock portion of your portfolio to be significantly greater than it should be based on your investment plan and risk tolerance. In that case, you may need to rebalance your portfolio to bring it back in line with your targets. 

Reflect on targets and risk tolerance 

The recent turbulence is also a good opportunity to reflect on your allocation targets and risk tolerance. Be sure they’re still aligned with your needs and expectations.  

If you feel you can stay the course during a correction, there may be no reason to make changes.  

A skilled financial advisor can help you craft an investment plan to ensure sufficient funds to live on and protect your legacy. 

Follow your investment plan with discipline 

The most important lesson of all is to follow your investment plan with discipline and shut out the market noise. That’s especially important when noise levels rise.  

As money manager Shelby M. C. Davis, founder of Davis Selected Advisers, has said, “History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” 

Indeed, since the early August pullback in stocks, the main Canadian and U.S. indexes have recovered a good part of their losses. No one can know if the turmoil will continue, but we can get some peace of mind knowing that pullbacks eventually end. And in the meanwhile, following an investment plan with discipline can help you stay the course. 

Read 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.

2024’s Bullish First Half

2024’s Bullish First Half 

By James Parkyn - PWL Capital - Montreal

An impressive start for equities capped by recent turbulence: part one of our two-part mid-year review 

In this post, we’ll review the performance of the markets so far in 2024. It’s a subject we cover twice a year to help you better evaluate your portfolio’s performance. 

Our review will come in two parts. First, we present our mid-year market check-in. In our next blog post, we’ll take a look at the market turbulence of the first few days of August and our thoughts on steps to help protect your portfolio. 

Recent volatility aside, the year 2024 got off to a great start. Equities built on a powerful rally in 2023 that saw the S&P 500 Index return an impressive 15.8% in the last two months of that year. 

Rally came despite uncertainties 

As we mentioned in our recent podcast, the strong results for 2024 came despite a load of uncertainties. Stubborn inflation meant prolonged high interest rates that impacted the economy. Market pundits speculated about the possibility of a soft landing or even recession. 

This has been coupled with instability over Russia’s war with Ukraine, conflict in the Middle East, U.S.-China superpower rivalry and heated election campaigns in major powers, including the U.S.  

But despite the headwinds, equity markets have shrugged off the doubts. As the Wall Street saying goes, the bull market has been climbing a wall of worry. As well, gross domestic product growth has remained positive in Canada, the U.S. and the Euro Area, and inflation has started to decline, allowing some central banks (like Canada’s) to start cutting rates. 

Short-term bonds outdid longer-term 

How did markets do in the first half of 2024? Starting with fixed income, yields in Canada and in the U.S. remain well above the average of the last 20 years. 

In Canada the yield on the 10-year Government of Canada bond was 3.5% on June 30, which is 100 basis points above the 20-year average of 2.5%. In the U.S., the yield on the 10-year Treasury note was approximately 4.4% on June 30, or 140 basis points above the 20-year average of 3.0%.  

Year to date, Canadian short-term bonds were up 1.6% as of June 30, while the total bond market, which holds longer-dated maturities, was down by 0.4%. (Remember that bond yields and bond prices move in opposite directions.)  

Almost all equity indexes hit new highs 

Equity markets have done much better. All the main indexes we follow had strong positive returns in the first half of the year, making new all-time highs. U.S. equities have done especially well, with the S&P 500 hitting a remarkable 31 new highs by mid-year. 

An exception has been the MSCI Emerging Markets Index, which was impacted by the poor performance of Chinese equities which despite their recent surge remain down close to 42% from their all-time high. 

In Canada, the S&P/TSX Composite Index was up by 6.1% in the first half. Large and mid-cap growth stocks led the way with a 7.4% gain compared with 4.7% for large and mid-cap value stocks. Small cap stocks outperformed large and mid-cap stocks with a performance of 9.3%.  

S&P 500 had its 13th best yearly start since 1950 

South of the border, U.S. equities were also on a tear. The S&P 500 Index had its 13th best yearly start since 1950, while the U.S. total market index had a strong performance of 13.6% in U.S. dollars or 17.2% in Canadian dollars. 

Driven largely by soaring tech stocks, U.S. large and mid-cap growth names did especially well. They had an extraordinary 24.6% return as of June 30 in Canadian dollars compared to 10.1% for large and mid-cap value stocks. U.S. small cap stocks, however, underperformed. 

International developed-country large and mid-cap stocks also did nicely—up by 11.1% in local currencies. Small cap stocks trailed, however, with a performance of just 3.8%. Emerging markets stocks also performed well, gaining 11.2%; again, value and small-cap stocks trailed growth and large cap. 

“Vulnerable to a major correction” 

When François and I did our mid-year market review podcast on July 31, we wondered how long the outperformance would persist. “The noise in the financial media, from market analysts, is that valuations levels are stretched and are vulnerable to a major correction,” we said. 

Although no one can predict the future and the market is a random walk, the equity markets did correct sharply in the days after our podcast. 

In our next blog post, we’ll review what happened and share our advice on how to help protect your portfolio in times of turbulence. 

More detailed market statistics can be found on our Capital Topics’ website. Read 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.

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.