Yup, it’s time to have a look at what is going right in the markets, and what is going right for investors. Being in the semi-retirement stage when the risks are greater, and with that lens, I am quick to consider the risks and to put those risks on the table. But there’s much to be thankful for as well (completely coincidental theming to Canadian Thanksgiving, honest). The stock market has delivered some wonderful returns and it is quite possible that there are more gains to come. And there are many signs that we are working our way towards the other side of the pandemic. There’s good news in the markets, on the Sunday Reads.
This week in the Globe and Mail, Ian McGugan suggested that we don’t lose sight of good news around stocks. That article is paywall, but I will give you the good news bits.
From Ian …
Household finances offer more reason to cheer. In July, a report from BMO Capital Markets estimated that the net worth of Canadian families surged by $2-trillion during the pandemic – a 17-per-cent increase – thanks to soaring real estate prices and red-hot stock markets.
And from BMO …
While Canada remains a country of heavy borrowers, household debts fell in comparison to both household incomes and household assets. Contrary to the doom-and-gloom scenarios of a year and a half ago, “almost every major metric of household financial strength has improved through this highly unusual cycle,” BMO chief economist Douglas Porter wrote.
The massive wealth buffer
The post goes on to offer that the value of household assets is now 6.5 times that of household debt. That buffer of wealth could turn into future spending and be an engine of economic growth.
American households are hoarding $3.3 trillion in cash.
And companies are rolling in the money.
As John Authers of Bloomberg recently noted, operating margins for the benchmark S&P 500 of large U.S. companies sit at their highest level since Bloomberg’s data began in the 1990s. The rest of the developed world and the emerging markets are enjoying their biggest margins since 2007.
It is business investment that drives real growth. The Conference Board of Canada offered that business investment (outside of the oil patch) will increase 7% next year. And of course we know that the energy sector is just booming. That sector and other resources is leading the export charge for Canada.
And Eric Lacselles, the Chief Economist at RBC, suggests that stagflation worries are greatly overstated.
These days, the problem is not, for the most part, a negative 1970s-style supply shock but rather a positive demand shock driven by higher-than-normal appetite for consumer goods running into mostly temporary bottlenecks. “This is not stagflation,” Mr. Lascelles declared in a note this week.
In a recent post, economist David Rosenberg suggested that inflation is likely transitory. He feels that (after we burst the real estate and stock market bubbles, ha) the concern will shift back to deflationary. Hey, I never promised this post would be void of risk chatter. Perhaps we go back to the low growth disinflationary world that we all no so well. But in the end, who knows? We get what we get. And one can make a sensible argument that we are in for more gains if the risks are kept in check.
Rebalancing is your best friend
The stock markets have offered a gift. If you are in retirement or in the retirement risk zone you might sock away some of those incredible gains, storing them to spend one day.
It’s not market timing, it’s called rebalancing. And rebalancing is something that is not easy to do. We might fear losing out on future gains. But if you’re still invested in the stock markets, you’re going to also benefit from those future gains. Those gains might fund spending if you’re in retirement, or if you’re in that retirement risk zone those additional stock profits are building your ‘socked away money’ that is likely in cash, bonds and commodities.
Rebalancing is an investors best friend, just as the only free lunch is diversification.
Stock market gains over the last 12 years (especially for U.S. stocks) are way above historical levels. That’s a gift, wrapped, with a giant bow on top. Those who rebalance unwrap that gift. The ‘rebalancer’ will accept future gifts as well.
The dividends are rolling in
Of course many North American investors employ a high dividend or dividend growth investment strategy. They might even mix those two styles. The pandemic has not affected a well-constructed dividend portfolio, in fact the dividends keep rolling in and growing. The dividend growth investor is not as quick to rebalance to safer pastures, they want to keep feeding that dividend growth machine. It is an incredible positive feedback loop that helps these investors stay on track.
Here’s a recent update on Passive Canadian Income, another at All About The Dividends, CTCI readers always check out Mark’s progress at My Own Advisor. And Mike The Dividend Guy will take a dividend growth approach. He has some wonderful total returns and a growing income stream. And here’s the August update from Bob at Tawcan. Congrats to Bob who was recently featured in the Globe and Mail, courtesy of Rob Carrick.
Last but not least the September dividend update on GenYMoney.
Big dividends and big returns
And of course wonderful total returns can certainly accompany high dividends. Have a read of the Beat The TSX Portfolio. I take a hybrid approach, with Canadian stocks more tuned to that BTSX style and the U.S. stock portfolio in the quality dividend growth area. Incredibly, we experienced no dividend cuts through the pandemic. I’ve had no dividend cuts from the time of creating the current portfolio mix several years ago, for Canadian or U.S. stocks. There has been incredible dividend growth and market-beating total returns.
Yes that’s some good news in the markets for a quality and wide moat skew.
Here’s an approximation of what the growing income stream would look like for the Canadian dividend stocks in my RRSP portfolio. This is based on a hypothetical $10,000 starting value, and hence a $400 initial dividend (4% yield) that has grown to an $870 payment in 2020. It will be larger in 2021 as well. And we’re waiting for those big Canadian bank dividend increases that are advertised to potentially be double digit increases. We’ll be thankful for that.
Dividends and your portfolio
In designing your portfolio you might choose to go the dividend route. There’s nothing wrong with that at all IMHO. Just keep greater geographic diversification in mind. And manage the risks with non-correlated assets. Here’s my take on the Balanced Portfolio.
There are many ways to skin the portfolio cat, the all-in-one asset allocation ETFs will provide that diversification and they’ll take care of that rebalancing for you.
I recently had a look at the performance of the Balanced asset allocation ETFs.
And I am thrilled that I was invited to update and rewrite the Canadian Couch Potato section for MoneySense. There were a few hiccups putting that together, but I think and hope that is fixed up. We’ll be adding longer term performance charts soon, comparing the couch potato models to the mutual fund benchmark. It’s high fees vs low fees. Place your bets, ha.
More Sunday Reads
Also on MoneySense, how much should you take out of your RRSP in your 60’s? That’s a great post courtesy of financial planner Jason Heath.
Must read: What is a fee-for-service financial planner?
On The Hub, our friend Fritz Gilbert offers some fascinating retirement stats.
And on Mark’s Weekend Reads, here’s why dividends matter.
You can check out an energy dividend stock update on Million Dollar Journey.
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