2024 budget misses the mark

2024 budget misses the mark

By James Parkyn - PWL Capital - Montreal

The 2024 federal budget unfairly targets higher-income earners, potentially stifling investment

The 2024 federal budget presented on April 16 is a disappointment and a missed opportunity.

Finance Minister Chrystia Freeland’s budget unfairly targets higher-income earners and businesses in a way that could curtail investment.

Meanwhile, a significant potential revenue source exists that the federal government could do more to tap: those who don’t pay the taxes that they legally owe.

$19 billion capital-gains tax hike

The budget introduces new spending of $52.9 billion over five years on affordable housing, pharmacare, the Canadian Armed Forces, artificial intelligence technology and other programs.

Where will all this money come from? one might ask. A large portion—$19.4 billion (including $6.9 billion this year)—is to be paid for by increases to capital gains taxes. In particular, the capital gains inclusion rate—the amount of capital gains subject to tax—is to be increased from one-half to two-thirds on capital gains that exceed $250,000 when realized on or after June 24, 2024, in personal taxable accounts.

For investments held in corporations and trusts, there is no $250,000 exemption; all capital gains will be taxed at two-thirds.

For employees who exercise stock options granted by their employer, there will be a one-third deduction of the taxable benefit above $250,000. For situations where the taxable benefit is up to a combined limit of $250,000 for both employee stock options and capital gains, taxpayers will still be entitled to a deduction of one half.

The 2024 budget includes another notable change that will affect investors and businesses. The budget proposes to increase the lifetime capital gains exemption from $1,016,836 to $1,250,000 on gains realized on the disposition of qualified small business corporation shares and farm or fishing property as of June 25, 2024.

“Precisely the wrong policy”

The federal government has said the capital-gains tax changes will affect just 0.13% of Canadians with an average gross income of $1.4 million. But we feel the changes are a disincentive to investment, may cause investors and business owners to sell assets, and could lead some Canadians to change estate planning.

In more extreme reactions, some ultra-wealthy Canadians may decide to emigrate from Canada and give up their tax residency. This would represent a huge opportunity cost of lost income-tax revenues to all levels of government.

In an editorial on the budget titled “The Liberals’ capital-gains tax hike punishes prosperity,” The Globe and Mail said, “The Liberals have gone to great pains to portray the capital-gains changes as a tax paid by the ultrawealthy… There is another basic principle of taxation policy: Whatever you tax, contracts. Higher tobacco taxes mean fewer cigarettes will be bought, for instance—a point Ms. Freeland’s budget makes in hiking excise taxes.

“What’s true for smokes is true for investment: increased capital-gains taxes will be a disincentive. Given Canada’s deepening productivity woes, it is precisely the wrong policy.”

Higher-income Canadians already pay fair share

We can only concur. As this blog noted last fall, higher-income Canadians already pay more than their fair share. The top 1% of income-earning families pay 22.5% of the country’s personal income taxes, while the top 10% pay 54.4%, according to  Statistics Canada data for 2021.

Not only is it unfair to raise taxes even more on higher-income earners, what’s especially galling is that the government has a large source of revenues it could pursue more intently instead: people and businesses that avoid paying taxes they legally owe.

In an eye-opening report, the Canada Revenue Agency has estimated it was missing out on up to $23.4 billion each year in taxes owed to the government, which it didn’t collect. This is over three times more than the $6.9 billion to be raised this year by the capital-gains tax changes.

The 2024 budget does propose new funds for the CRA to reduce call center wait times. But the CRA would also benefit from increasing funding for tax enforcement to crack down on tax evasion, which could help the government collect some of these missing billions.

This seems like a much more economically more sensible solution—not to mention a fairer one—than soaking law-abiding taxpayers and businesses even more.

We recommend consulting your financial and tax advisors to get clarity on how to optimize your situation under the proposed rules. In many cases, for example, it’s advisable to defer selling assets; if you realize gains now, you pay tax immediately and have less money after tax to reinvest.

That said, everyone’s situation is different. A good advisor can help you crunch the numbers to determine the best solution for you.

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.

How to retire happy

How to retire happy

By James Parkyn - PWL Capital - Montreal

Retirement can be financially and psychologically stressful. Here’s how to make a smooth transition

Canadians are retiring in greater numbers than ever, and they’re enjoying longer, more active lives while retired. Their main concern is often not money, but what to do with all their newfound time.

It can be quite a challenge. After focusing for decades on career and saving money, now they have no job to occupy their time and they often wonder about their purpose in life.

Our Capital Topics podcast series addressed retirement a couple of times, and there was such strong interest that we decided to follow up with a more comprehensive eBook. I’m excited to announce that it’s now available.

Financial and psychological questions

My eBook “The New Retirement” covers both financial questions and the sometimes-trickier psychological ones. Clients of all ages frequently ask us about both types of issues.

They wonder how much income they’ll need for retirement and how much they can safely spend. A lot of their questions, however, are psychological.

How can they transition to a retirement lifestyle? How will they find meaning, foster good relationships and stay healthy?

It’s not just older people asking the questions. It’s gratifying to me that younger clients are responding positively to the eBook. They not only want to help their parents prepare for retirement, but they also realize they need to think about the same dilemmas themselves.

Top retirement regret: lack of connections

The challenges were highlighted by Rob Carrick, the personal finance columnist at The Globe and Mail. He asked his retired readers to share their biggest regret.

Money wasn’t at the top of the list. In fact, only 5% said they regretted not saving more for retirement. Instead, leading regrets included failing to work harder on connections with family, friends and community. Many also wished they had thought more about how to fill their days.

In over 25 years of experience, I’ve had many conversations about the same things. Retirement for most people is an abstract destination. We work hard to put away money, but we rarely think in depth about how we’ll spend two, three or even four decades in retirement.

Planning for retirement happiness

I find the happiest retirees have often done just that: They thought ahead about retirement and did a little planning for how they want to live. If you’re already retired, don’t worry; it’s never too late to get started on this. Embracing the future with a plan helps with any big step in life.

Where do we start? First, look at the big picture: your vision for retirement. Who are you as a person? What are your retirement goals? How will you accomplish them?

The eBook includes a checklist of eight questions to clarify this vision.

1. When should you retire?

2. Where will you live?

3. How will you keep healthy?

4. How will you maintain and improve relationships?

5. How will you fill your day?

6. What other claims will there be on your time (e.g. managing finances, taking care of your household or loved ones)?

7. How will you manage stress?

8. How will you give back to the community?

Paying for retirement

Once you define your retirement vision, it’s easier to figure out how to pay for it. The financial transition is of course another challenge.

It’s important to consider two questions. How much income will you need in retirement? And how much can you safely withdraw from your savings each year?

We often hear that you should aim for 70% of your pre-retirement income before taxes to maintain your lifestyle in retirement. This may apply for some people, but not for others. Leading Canadian retirement expert Malcolm Hamilton says most Canadians will do just fine with less than 70%.

The 4% rule vs a tailored approach

As for how much you can safely spend, it depends on the person. For some, the 4% rule applies. It states you can spend 4% of your nest egg in the first year of retirement and then adjust the dollar amount for inflation each year with minimal risk of running out of money.

For many retirees, a more tailored or flexible approach is best. Our team helps clients create a retirement financial plan based on their specific retirement goals, spending, taxes and estate planning.

Then we follow up regularly to review portfolio performance and evolving personal needs, and adjust spending and withdrawals accordingly.

Happy retirement is within reach

The good news is that many people can afford to spend far more in retirement.

The fact is that a happy retirement is within our reach, especially with a little planning. Thinking about the psychological and financial challenges can smooth the transition and help you enjoy many healthy, active and meaningful years, connected with family, friends and community.

They maybe even be some of the best years of your life!

Find past blog posts, our eBooks and podcast on the PWL Capital, Team Parkyn-Doyon La Rochelle’s web site and on our Capital Topics website. And download your free copy of my eBook The New Retirement.

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN AND HIS TEAM TO PLAN YOUR RETIREMENT WITH PEACE OF MIND.

Remember these lessons from market history to build your wealth

Remember these lessons from market history to build your wealth

By James Parkyn

Readers of this blog will know the importance we give to taking a long-term perspective on the markets.

That’s why each year we review the summary of the UBS Global Investment Returns Yearbook. The yearbook is a remarkable resource that looks at historical returns from 35 global markets back to 1900.

This year’s edition is the 25th. Historically, it was published by the Credit Suisse Research Institute and authored in collaboration with Paul Marsh and Mike Staunton of the London Business School and Elroy Dimson of Cambridge University. We’re grateful that UBS decided to continue its production and the collaboration with its authors after merging with Credit Suisse in 2023.

One of the topics explored in this year’s edition is investment risk and the extremes of global market performance—both good and bad—dating back to 1900.

Investors take risk to earn returns, but sometimes market volatility can test the nerves of even the most experienced investor. That was certainly the case in 2022, one of the worst years for stock and bond returns.

Indeed, the yearbook shows that U.S. government bond performance in 2022 adjusted for inflation was the worst since 1900 by a margin of about 15 percentage points. The real return for U.S. bonds was about -35% versus an average historical return of 2.2%. Unfortunately, stock returns were also dismal in 2022. The U.S. stock market generated a real return of about -30% versus an average of 8.4%.

It’s unusual for bonds to be more volatile than stocks as we see in the data provided by the yearbook. The six worst episodes for stock market investors were the 1929 Wall Street crash and Great Depression, the 1973-74 oil shock and recession, the popping of the dot.com bubble in 2000-02 and the global financial crisis of 2008-09.

Since the turn of the century, we’ve had our fair share of tough times. The yearbook notes: “In its 24-year life, the 21st century already has the dubious honor of hosting four bear markets, two of which ranked among the four worst in history.”

While this observation is enough to give any investor pause about the riskiness of stocks, it’s important keep sight of two lessons from market history.

First, stocks have always recovered from bear markets and gone on to reach new highs. However, the time to recovery has varied greatly.

In the U.S. stock market—by far the largest in the world—the recovery has occurred in a matter of months, as was the case after the COVID bear market of 2020, or over a period of years, especially if inflation is taken into account.

For example, after the tech bubble burst in March 2000, it took seven and a half years from the start of the bear market to full recovery in July 2007. Soon after, the financial crisis hit, causing another collapse. This time, it took four years for the market to recover. Together, the two bear markets made up what’s know as the lost decade in U.S. stocks.

The second lesson is that the good times in the stock market tend to last longer than the bad times and generate much better gains than the losses experienced during bear markets. The yearbook provides data on four “golden ages” for the stock market investors, each covering a decade. They were the recoveries following the first and second world wars, the expansionary 1980s and the 1990s tech boom.

Real equity returns in the 1980-89 period were 357% in the U.S. market and 247% globally. The 1990-99 tech boom produced 276% gain in the U.S. and 114% globally (a number dragged down by poor performance in Japan). The conclusion? To participate in market recoveries and benefit from the good times, you must remain invested through the shorter, but painful bad times.

As we saw in a recent blog post, stocks are not risk-free even over long periods, but they give you the best chance to outpace inflation and increase your wealth in real terms. Global diversification and disciplined rebalancing will soften the blow of negative periods in the markets and allow you to enjoy the longer, more profitable upsides.

If you’ve been investing for some time, you’ve already experienced both good and bad periods in the markets. When the next bear market occurs, it’s important to recall market history as well as your own personal experience. Those reflections will help give you the confidence to remain patient and avoid missing the next upswing.

For more commentary and insights on investing and personal finance, be sure to listen to our latest Capital Topics podcast and subscribe to never miss an episode. And download your free copy of our popular eBook Seven Deadly Sins of Investing. bscribe to never miss an episode.

Is 100% stocks really the best option for your portfolio ?

Is 100% stocks really the best option for your portfolio ?

By James Parkyn

Much of the investing world looks at bonds as the “safe” portion of an investment portfolio, a bulwark against the volatility in the stock market. Hence, you have popular asset allocation strategies like the 60/40 balanced portfolio and target date funds that increase bond exposure as investors get older.

However, recent research calls into question the traditional view of bonds and it’s attracting a lot of attention. The research by three U.S. finance professors led by University of Arizona professor Scott Cederberg comes to the surprising conclusion that a portfolio holding 100% stocks and no bonds is best, even for people already in retirement.

That’s certainly an eye-catching conclusion, but one that comes with many important nuances.

The researchers studied data from 39 developed countries over 130 years of returns from stocks, bonds and treasury bills as well as inflation.

In the first of three papers based on this database, the authors show that while stocks are risky—the probability of losing money in real terms (net of inflation) is 12% after 30 years—bonds and treasury bills are even riskier. Across the 39 countries, the probability of losing money on treasury bills was 37%, and on intermediate-term government bonds 27%.

In the second paper, the researchers found that while stocks were the least risky investment over the long term, adding international stocks to the mix reduced the riskiness significantly. In fact, for a portfolio composed only of domestic stocks, the probability of losing money net of inflation over 30 years was 13%, but if you add 50% international stocks, the probability of losing money drops to 4%.

The third and most recent paper was the most interesting for us. In it, the professors simulated the financial lives of 1 million couples – from 39 countries – who start saving 10% of their salary from the age of 25 until their retirement at 65.

Upon retirement, they withdraw 4% of their savings, indexed to inflation, until the death of the last spouse. The simulations take into account, in addition to market fluctuations, mortality risk and the risk of job loss. They also take account of old age pensions such as Social Security, the U.S. equivalent of our Old Age Security in Canada.

The researchers—Scott Cederburg, Aizhan Anarkulova and Michael O’Doherty—compared five investment strategies over the lifetime of the couples:

• 100% treasury bills

• 60/40 balanced portfolio

• 100% stock allocation at age 25 and gradually reducing stocks in favour of bonds over the years

• 100% domestic stocks

• 50% domestic stocks / 50% international stocks

The success of each of these strategies was evaluated on a number of criteria, including, most importantly, the couples’ risk of outliving their money.

An internationally diversified portfolio of stocks turned out to be the least risky strategy, both before and after retirement, even though a 100% stock portfolio did expose couples to the greatest risk of a drop in wealth that may be temporary or last several years.

What explains the superior performance of the 100% international equity portfolio?

• Stocks have a much higher expected return than treasury bills and bonds. The authors estimate real expected stock returns to be four times those of bonds.

• After a period of decline, stocks tend to rebound. By contrast, bonds tend to continue to fall because inflation persists.

• International stocks provide protection against domestic inflation.

• In the long run, stock and bond returns have a fairly high correlation of 0.5. Thus, over the long term, bonds offer little protection against poor stock market returns.

So, what to make of the findings? First, they are a clear confirmation that an internationally diversified stock portfolio beats one that is concentrated in domestic stocks.

Second, it’s crucial to remember that these financial simulations assumed the couples were perfectly rational even in the midst of major market declines. In the real world, emotions all too often derail the best intentions of investors.

Many investors—especially those in retirement or close to it—will have a hard time watching their all-stock portfolio sink in a bear market by 40% or more, even if they understand intellectually that stock markets bounce back over time. The danger of panicking and selling at just the wrong moment is real.

The authors are not claiming that equities are “safe” investments. Instead, they are saying you need the higher returns they provide to continue accumulating wealth even in retirement to avoid outliving your money in an era when many people are living to over 90 years old. 

The research provides good food for thought about the optimal asset allocation. And, above all, it reinforces the importance of having an experienced investment advisor to guide you in making decisions and sticking with your financial plan through good times and bad.

In the next episode of our Capital Topics podcast, we take a closer look at this fascinating research with PWL Capital Senior Researcher Raymond Kerzérho, who also gives us an update on our latest estimates of future asset class returns. Be sure to download the podcast and subscribe to never miss an episode.

2023 Capital Markets Review

2023 Capital Markets Review

By James Parkyn & François Doyon La Rochelle

2023 was marked by positive returns in all asset classes with the help of a massive rally near year-end. Despite the outbreak of the war in the Middle East, the hope of an imminent reduction in central bank rates – amid receding global inflation pressure – led stocks and bonds to appreciate substantially, with double-digit returns in several asset classes.

Inflation rates were cut by half in Canada (from 6.3% to 3.1%), the US (from 6.5% to 3.1%), and the UK (from 11.6% to 5.3%). Inflation also declined substantially in the European Union, Japan, China, and South Korea.

On the interest rate front, the Bank of Canada and the US Federal Reserve maintained their restrictive monetary policy, increasing their benchmark interest rates from 4.25% to 5% and from 4.50% to 5.50%, respectively. Ten-year government bond yields declined in Canada from 3.3% to 3.1% and were stable in the US at 3.9%.

Nine of the eleven sectors of the global stock market produced positive returns in 2023,[i] the top performers being information technology (47%), communication services (34%), and consumer discretionary (26%). Poland (48%), Greece (47%), and Mexico (38%) were the top‑performing country markets.

Here are our observations on asset-class returns in 2023:

• Short-term and total market Canadian bond indices produced returns of 5% and 6.7%, respectively.

• Short-term and total market global bonds (hedged to the Canadian dollar) delivered 4.7% and 6.3% returns, respectively.

• Canadian stocks delivered a return of 11.8%.

• US stocks returned 23.3% in Canadian dollars and 26% in US dollars.

• International developed market stocks returned 15.7% in Canadian dollars and 16.1% in local currencies.

• Emerging market stocks returned 7.9% in Canadian dollars.

• The Canadian dollar has appreciated relative to the major currencies. This explains the mildly lower CAD returns on US and international stocks compared to local currency returns.

• Large-cap stocks outperformed small-cap stocks in all developed markets and underperformed in emerging markets.

• Growth stocks massively outperformed value in the US, while the reverse occurred in emerging markets. Value and growth stocks had similar returns in Canada and international developed markets.

 Looking forward to 2024, investors will continue to face uncertainty. With an upcoming US election and geopolitical tensions in Europe, Asia, and the Middle East, it could be tempting to question our investment strategy. However, investors should remember that since the turn of the millennium, the global stock market has had positive returns in 16 of the last 24 years. Over this period, despite four bear markets, investors who stayed the course were rewarded. We remain convinced that the wisest course of action is to have a sound investment plan that you can stick with in good times and bad. We will invest with discipline for each client, with an appropriate mix of stocks and bonds. Portfolios will remain extremely diversified globally, and we will avoid the false promises of active management and investment fads. Finally, as always, we will optimize portfolio costs and taxes.

[i] All returns are calculated in Canadian dollars unless otherwise mentioned. Data source: DFA Web.

You will find our best advice on how to cope with the current bear market in our latest blogs and podcasts on Capital Topics and on our team’s Web site. Enjoy!