Weekend Reading: Stock Market Highs Edition

By Robb Engen | July 12, 2024 |

Weekend Reading Stock Market Highs Edition

Global stocks continue soaring to new all-time highs, with US large cap growth stocks (aka Big Tech) leading the way. Even the TSX is getting in on the action, finally surpassing its March 2022 high earlier this year.

Big returns are all around us, and it’s only natural for investors to feel a bit of FOMO about what could have been if they only picked THAT index fund, or THAT sector, or THAT high flying tech stock.

Every week I hear from readers and clients who are unhappy with their current portfolio and want to switch to something with better returns. 

This makes sense at first glance. We want to invest in things that have done well recently, or in things that have a long track record of doing well.

Chalk it up to the old days of stock picking or mutual fund selection, where you’d screen for the best performers of the past 1-5 years (maybe the last 10+ years if you’re really doing your due diligence) to find the best investments.

But this is classic performance chasing. Picking your investments based on past performance is likely to lead to poor future returns versus just buying a sensible and diversified portfolio of index funds.

If we start with the premise that investing has largely been solved with low cost index funds, and that investing complexity has largely been solved with asset allocation funds, then the only real decisions to make is to decide your risk appropriate asset mix (100/0, 80/20, 60/40, 40/60, etc.) and then flip a coin between those fund providers (Vanguard, iShares, BMO, etc.).

Unfortunately, buying a single asset allocation ETF doesn’t seem sophisticated enough for many investors. Why buy global stocks (VEQT), when Vanguard’s S&P 500 tracker (VFV) is flying higher?

It’s hard to argue with that. The S&P 500 has been absolutely crushing it lately with average annual returns of 15.29% over the past 10 years. But go back far enough through history and the average annual return is in the 8% to 10% range (depending on your start and end date).

So while the average DIY investor sees 15% annual returns over the past decade and wants a piece of the action, more astute investors see a big red flag called mean reversion. 

If longer-term annual returns average 8-10%, and the most recent decade saw returns of 15+%, a reversion to the mean would imply that future expected returns must be lower. Indeed, Vanguard Capital Markets Model forecasts show US large cap growth stocks averaging 3.2% to 5.2% per year for the next decade.

Compare that to global equities (ex-US), which are expected to return between 6.8% and 8.8.% over the next decade.

Obviously these are just models and forecasts based on current stock prices and expected growth – nobody can predict the future.

The point is you can’t expect to achieve the highest rate of return every single year, and you can’t expect to switch your investment strategy every year to chase those higher returns and not end up disappointed with the results.

Otherwise where does it end?

VEQT gives you 13,500+ global stocks. That diversification reduces the dispersion of outcomes, but the trade-off is “lower highs”.

VFV holds the largest 500 stocks in the US. It’s reasonably diversified, given the size of the US market and its global influence, and has excellent past returns. But US stock prices are incredibly high relative to historical valuations, and significant mean reversion is possible. The US did suffer through a “lost decade” in the 2000s, after all.

Why not take it even further. The NASDAQ has trounced the S&P 500 since inception 25 years ago. QQQ, which holds the 100 largest tech stocks, has a cumulative outperformance of 369.51% over the S&P 500 during that span.

Or, instead of holding 100 tech stocks, just pick the best one. NVIDIA’s stock has risen by more than 75% per year over the past 10 years.

But if it’s the highest returns you’re after, why not just go all-in on bitcoin? Over the last 12 years, it has had an annual growth rate of more than 100%.

The problem is that we can’t go back in time and invest in these ETFs, stocks, or coins. It’s their future returns that matter. And higher prices mean lower expected returns.

For my retirement portfolio, I’m looking to avoid lost decades and extreme volatility. That means fighting the FOMO and resisting the urge to chase shiny objects. By definition, something is always going to perform better than a globally diversified portfolio. That’s a feature, not a bug.

This Week’s Recap:

We’re a little more than halfway through an incredible vacation, with stops in London, Paris, Zurich, and Lauterbrunnen (where it is absolutely pouring rain as I write this). 

We’re sad to only get to spend two nights in the Lauterbrunnen valley, but happy we found such a beautiful area and we’re already plotting our next visit to Switzerland. 

Wengen

Off to Italy tomorrow for some much needed relaxation and warmer temperatures.

Weekend Reading:

Can we normalize a phased retirement? Why Morningstar’s Christine Benz is not ready for retirement, but she’s not waiting.

Single, no pension? MoneySense’s Jason Heath explains how to plan for retirement in Canada.

Why investors should expect the worst in the short run:

“Investors in equities win over the long-term by being optimistic, but that alone is not enough. We also need to be sufficiently realistic to understand that the long-term will include some torrid periods that will present the most exacting behavioural tests. If we don’t plan for those short-term challenges, we are unlikely to reach our long-run goals.”

With another US presidential election looming, how will the stock market react? Andrew Hallam shares how to build wealth, no matter who’s sleeping in the Oval Office.

Jonathan Clements’ financial life is suddenly looking much different as a 61-year-old with perhaps as little as a year to live.

She retired and now regrets her frugal retirement. Here’s why:

“I wish I’d taken some big trips when I first retired and had more energy,” Agnes said. “Now even short outings take it out of me. I’m trying, but it’s not the same.”

Uh-oh. Toronto is awash in new condo listings – 6,350 of them to be exact.

Early retirees, here’s how to get at least 39% more CPP.

Finally, PWL Capital portfolio manager Mark Magrath shares two risks of taking too many risks with your TFSA (G&M subs)

Have a great weekend, everyone!

Net Worth Update: 2024 Mid-Year Review

By Robb Engen | June 28, 2024 |

Welcome to another net worth update. I’ve been tracking and reporting my net worth twice a year for the past decade or so. It’s a good way to check on our financial progress and keep us on track with our goals.

We’re at the stage of our journey where forces outside of our control can have a major impact on our net worth. Our overall portfolio surpassed the $1M mark earlier this year, and that means a 10% increase or decrease on our investment returns moves the needle by $100,000.

Let’s be honest, outside of setting up an appropriate asset mix and choosing your investment vehicle(s), your returns are largely out of your control and can vary widely in the short-term.

So, while we try to keep the net worth needle moving forward, I’m careful not to take too much credit for an increase in portfolio value that has more to do with market returns rather than our own contributions.

Speaking of returns, well they have been excellent so far this year. Global stocks, represented by Vanguard’s All Equity ETF (VEQT), are up about 14.3% YTD. As you know, that’s where the bulk of our money is invested.

As for contributions, we’ve started filling up our TFSAs again and have each contributed $17,000 so far (on our way to a goal of contributing $28,000 each by year-end).

We’ve dumped $36,000 into our corporate investing account this year, and plan to contribute about $66,000 by year-end if all goes well. We’re able to do this thanks to consistently strong business income that continues to grow year-over-year (#blessed).

We also re-organized the kids’ RESP account to follow Justin Bender’s RESP strategy for family RESP accounts. The gist of it is that our oldest daughter has her portion of education savings invested in VEQT + VSB, while our youngest daughter has her portion invested in XEQT + XSB.

We now contribute to the RESP annually in January and do our rebalancing then to get to our target asset mix (more conservative as they get closer to post-secondary age).

Finally, we renewed our 1-year mortgage term at the end of April – opting for a 3-year fixed rate term this time around. We also switched lenders from TD to Pine Mortgage. So far, so good.

Now, let’s look at the numbers.

Net worth update: 2024 mid-year review

Total Assets – $2,146,728

  • Chequing account – $12,000
  • Corporate cash – $50,000
  • Corporate investment account – $386,706
  • RRSPs – $344,493
  • LIRA – $228,678
  • TFSAs – $34,499
  • RESP – $114,352
  • Principal residence – $976,000

Total Liabilities – $491,116

  • Mortgage – $491,116

Net worth – $1,655,612

Now let’s answer a few questions about the way I calculate our net worth:

Credit Cards, Banking, and Investments

We funnel all of our purchases onto a few different rewards credit cards to earn points on our everyday spending.

Our go-to card is the American Express Cobalt Card, which we use for groceries, dining, and gas. We also look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers. One I’m using currently is the American Express Aeroplan Reserve Card.

Our joint chequing account and the kids’ RESPs are held at TD. My wife has her own chequing and savings accounts at Tangerine. 

Our RRSPs, TFSAs, and my LIRA are held at the zero-commission trading platform Wealthsimple Trade. Our corporate investment account is held at Questrade.

You know all of this from my post about how I invest my own money.

RRSP / LIRA / RESP

The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.

My preferred method is to list the current value of my RRSP, LIRA, and RESP plans rather than discounting their future value to account for taxes and distributions.

I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP/LIRA and distribute the RESP to my kids, my net worth will decrease accordingly.

Principal Residence

We bought our home last year for $976,000, so that’s the price I’m using for our net worth calculation. I typically adjust the purchase price by inflation each year but I’ll likely keep listing it at the purchase price for a few years.

Astute readers will notice that the price of our previous home went from $459,000 to $555,000 from 2021 to 2022. That ended up being the sale price, so you can see that I was pretty conservative with the house value over the years.

Final Thoughts

We’re enjoying a more “normal” year with our finances after a tumultuous couple of years building our new house. Inflation is cooling off, interest rates are starting to fall, and maybe we’ll get that so-called soft-landing after all.

We also have a good plan to fill up our TFSAs over the next five years or so. 

Recent changes to the capital gains inclusion rate will affect our corporate investing account, but it’s still advantageous to shelter excess money inside our corporation and invest for the future. 

We’re taking a flexible approach that will see us having money in lots of different buckets for retirement (RRSP, LIRA, TFSA, corporation). That will help smooth out taxes as we navigate our way to and through retirement.

Finally, we’re looking forward to continue travelling this year as we visit London, Paris, Zurich (Taylor Swift!), Lauterbrunnen, Lake Como, and Venice on what is sure to be an epic trip in July. 

We’re also heading back to our happy place this fall with an eight-day stay in Edinburgh in October.

How’s your 2024 shaping up?

Weekend Reading: Create Your Own Robo-Advisor Edition

By Robb Engen | June 23, 2024 |

Create Your Own Robo-Advisor Edition

Robo-advisors have been around for a decade and, while its promise to disrupt the traditional financial services model has so far fallen flat, the concept of an automatically rebalanced, low-cost portfolio of index funds is still incredibly sound.

The investing landscape continues to evolve and when Vanguard introduced its suite of asset allocation ETFs in 2018, the robo-advisor model suddenly looked less appealing.

Indeed, for a fee of only 0.24%, DIY investors could build their own globally diversified and automatically rebalancing portfolio with just a single fund.

There was just one problem. For many investors, the idea of opening their own discount brokerage account, transferring existing accounts over to the new platform, and buying their own ETFs (even just one ETF) on a regular basis is quite daunting.

Wealthsimple Trade has elegantly solved that problem with a neat feature to automate contributions AND investment purchases.

Log-in to the Wealthsimple mobile app, tap your profile in the upper right, tap the settings gear in the upper right, and tap “automations”.

Tap “recurring investments”, tap “set up a recurring investment”, enter your chosen asset allocation ETF ticker symbol in the search field, and then tap the appropriate ETF.

Tap “buy”, tap the order type drop down in the upper right (should say “market” or “limit”), and tap “Recurring” at the bottom of the list.

Now set up the amount you want to contribute, your start date, the frequency of contributions, your funding source (i.e. chequing account), and which account type you’re contributing to.

Tap “Review”, and the tap “confirm recurring investment”.

This process will even buy fractional shares of your ETF, meaning every single dollar of your contribution will go towards your ETF purchase.

There you have it – you’ve just created your own DIY robo-advisor – a completely hands-off and automated investing experience!

Wealthsimple Trade also has an impressive promotion on right now where you can get a 1% match (no limit) when you deposit or transfer more than $15,000 into your account. The more you fund, the more you earn.

Use my referral code – FWWPDW – and we’ll both get $25 when you open and fund your account.

This Week’s Recap:

When looking at your financial projections over time, your numbers tell a story about what’s possible (or not).

No new posts from me for a few weeks as the kids’ school and activities wind down and we furiously scramble to get our work done before our upcoming trip to Europe.

From the archives: Build if/then statements into your financial plan.

I’ll have our bi-annual net worth update at the end of the month, and then we’re heading to Europe for three weeks so expect posts to be more sporadic.

Weekend Reading:

First up, I was absolutely gutted to find out that one of my favourite financial writers, Jonathan Clements, was diagnosed with cancer and only expects to live another year. Truly heartbreaking. All the best to you and your family, Jonathan.

From the Jonathan’s Humble Dollar blog – should we worry about markets being overvalued?

A professional retirement coach shares the three biggest mistakes that retirees make.

Tennis legend Roger Federer won 80% of his matches, but just 54% of all the points played. This is analogous to investing, where markets go up on slightly more days than they go down. The trick to getting legendary results with your portfolio is to stay invested and contribute regularly.

How do social media comparisons impact regular investors? Paging Roaring Kitty.

Marc at Loonies and Sense shares a really neat way to visualize the global markets.

Here’s Robin Powell on why picking the next Google or Amazon is extremely difficult:

“Why spend effort, time and money looking for needles when you can easily and cheaply buy the haystack?”

How Canada’s broken account transfer system led Wealthsimple to automatically reimburse transfer fees.

Morningstar’s Christine Benz took a six-week break from work and came back with some insights on retirement and life.

Many Canadians underspend in retirement for no good reason. Here’s what they can do (subscribers):

“They found retirees consistently spend approximately 75 per cent of what they could afford to based on available assets, with underspending increasing as retirees get older. Yet, they also found that after controlling for different levels of wealth, retirees with a larger proportion of guaranteed income spent more each year than retirees with a larger proportion of investments.”

Baby Boomers face a retirement like no generation before them, and rather than being the ‘beginning of the end,’ it’s the beginning of a new life phase.

A Wealth of Common Sense blogger Ben Carlson shares why his savings rate hit an all-time high in 2021, and why he feels that was more of a mistake than an accomplishment. I’ve had a similar experience.

Borrowers leaving money on the table by not negotiating their mortgage renewal rates.

Finally, is flying in Canada getting more expensive? It certainly seems that way.

Have a great weekend, everyone!

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