Wells Fargo global investment strategist Douglas Beath is pointing to two recent studies showing that older investors have drastically increased their portfolio weightings in equities over the past 12 years. He thinks this may be a mistake.
The strategist cited a Vanguard study showing that active investors over the age of 55 now hold 70 per cent of assets in equities, almost double the 38 per cent found in 2011. Similarly, 40 per cent of U.S. Fidelity investors between the ages of 65-69 were found to hold more than 65 per cent of their portfolios in equities.
Relative returns are one of the biggest reasons for the trend. From 1980 to July 2023, the S&P 500 generated an average annual return of 11.8 per cent compared with the Bloomberg U.S. Aggregate Bond Index’s 6.7 per cent. The success of buy-the-dip strategies in stocks have also made the asset class more popular.
Investors have also become accustomed to the Federal Reserve slashing interest rates at the first sign of trouble in equities, limiting downside. In addition, expanded life expectancies have increased the need for capital gains – savings must last longer.
Mr. Beath finds reasons to believe that the higher equity weightings will negatively affect performance in the years ahead. The large U.S. budget deficits will limit the Federal Reserve’s ability to step in, cut rates and support stocks, making buy-the-dip strategies less effective. (Big deficits increase the need for financing so it’s possible that rates need to be kept elevated to ensure bonds sell.)
There is also the issue of ‘higher for longer’ bond yields which, as inflation pressure eases, offer competitive risk-free returns compared with equities. To some extent, bond yields have gone from a tailwind (when they were low and offered poor income, motivating portfolio asset reallocation to equities) to a headwind.
I don’t have comparable asset mix data for Canadian investors. My assumption is that, faced with the same trend of low bond yields and the prevalence of dividend-paying equities on the TSX, there has been similar asset allocation trends among older Canadians. As such, I would agree with Mr. Beath and advocate caution, and for investors to limit risk by adding to fixed income if currently overweight stocks.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
General Electric (GE-N) The U.S. company has undergone a huge metamorphosis through the years, with the past five under chairman and CEO Lawrence Culp being particularly dramatic. His goal was to simplify the company, and that he has done. The stock has been reacting, with the market cap doubling in less than a year following a long stretch of miserable returns. The Contra Guys explain why they see more strong returns ahead.
Nvidia (NVDA-Q) Shares of Nvidia touched a record high on Thursday, a day after the company blew past expectations with its quarterly revenue forecast as an artificial-intelligence boom fueled demand for its chips. However, Nvidia’s stock buyback surprised some investors. While shareholders often see buybacks as an encouraging sign when a company’s stock appears cheap, Nvidia’s shares have shot up some 220 per cent in 2023, leaving investors searching for the reasons behind the company’s move, as Reuters reports.
The Rundown
The best little investment in Canada grows up – and gets cheaper
The question of what to invest in can very often be settled with just three words: Asset allocation ETF. As Rob Carrick reports, a recent change in fees made to TD Asset Management’s ETF lineup makes them even more appealing.
The world loves Canadian bonds. Stocks? Not so much
International investors scooped up a net $121-billion of Canadian bonds over the 12 months up to the end of June, according to the latest data on international transactions in securities from Statistics Canada. This builds on a trend of heavy foreign involvement in the Canadian bond market since the pandemic began. At the same time, the international appetite for Canadian equities has faded. Foreign investors reduced their holdings of Canadian stocks by $45-billion over the past year, with net selling seen in seven consecutive months. Tim Shufelt looks for the reasons behind it.
The challenges of screening for democracy
In an investment world trumpeting new-found ethical and sustainability guidelines, the seeming indifference of markets to democratic credentials still remains stark, explains Reuters’ Mike Dolan.
Stimulus or bust: Investors staying out of China until the spending starts
Global investors fleeing China have one simple message for the country’s leadership: put prudence aside for a short while, and start spending big. As they go from hope to disappointment and now capitulation, investors are losing patience with what they see as incoherent, slow and stingy measures by China to revive its sputtering economy and defuse a deepening property crisis.
Others (for subscribers)
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Number Cruncher: 13 U.S. stocks trading near their 52-week highs
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: Billionaire Jimmy Pattison invests $13-million in this stock
Ted Dixon: Persistent CEO selling not a good look for Royal Bank stock
Monica Rizk: Bullish on Visa Inc.
U.S. mortgage lender Better’s shares sink in Nasdaq debut
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Ask Globe Investor
Question: In a recent column, John Heinzl wrote that in a family registered education savings plan (RESP) each child can only access $7,200 of Canada Education Savings Grant (CESG) money. I don’t understand this. In our case, after 20 years the original grant money has grown substantially. What will happen to the growth if each beneficiary can only withdraw $7,200? And if multiple family members have set up RESP accounts for both of our two children, how can we confirm how much each child has withdrawn? I can’t see it in the statements we get from our financial institutions.
Answer: First, let me clear up some confusion. The value of the grants in an RESP does not increase with the market value of the account. For example, say a beneficiary has received the maximum of $7,200 of CESG in his or her RESP, and the investments in the account subsequently rise by 50 per cent. The beneficiary will still have $7,200 of grants; the additional $3,600 will be classified as investment earnings.
When a beneficiary is enrolled in a qualifying postsecondary program, grants and earnings can be withdrawn as an educational assistance payment (EAP), which is taxed in the hands of the student, often at a relatively low marginal tax rate. The financial institution – also known as the RESP promoter – keeps track of the dollar value of grants, investment earnings and contributions in the account.
With a family RESP, grants can be shared among beneficiaries. However, it is the responsibility of the subscriber (usually a parent or grandparent) to make sure no beneficiary exceeds the $7,200 CESG withdrawal limit, or the excess will have to be repaid to the government. When there are multiple family RESPs at different financial institutions, subscribers have to be even more careful.
Before you make an EAP, contact the financial institution(s) and ask for the balances of CESG, earnings and contributions in the account, as well as the amount of CESG withdrawn for each beneficiary to date. If a beneficiary is getting close to the CESG withdrawal limit, ask the financial institution to withdraw only enough CESG to hit the $7,200 cap, with the balance of the EAP classified as earnings.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com.)
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Compiled by Globe Investor Staff