Weekend Reading: Stock Market Highs Edition

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 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!

4 Comments

  1. Barb on July 12, 2024 at 5:37 pm

    Imglad you are having a fabulous vacation with your family. A really excellent investment in the family future.

  2. Tom on July 13, 2024 at 1:28 am

    Enjoy your vacation, Robb.
    How’re the crowds?

  3. James G on July 13, 2024 at 5:36 am

    Very timely article. Mean reversion will happen. Just a question of when.

    Enjoy your vacation. I absolutely love Switzerland – especially Lauterbrunnen.

  4. Betty Therriault on July 16, 2024 at 12:07 pm

    Your holiday sounds wonderful. Switzerlandwas the only European country I missed viviting but I did enjoy Austria and Italy. Enjoy the remeinder of your holiday!

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