Time to reduce U.S. equity exposure?

Time to reduce U.S. equity exposure?

By James Parkyn - PWL Capital - Montreal

Is it time to scale back on U.S. stock holdings? Investor concerns have intensified about equity market performance and tariff-related volatility south of the border.

The U.S. total market gained a modest 4.2% in Canadian dollars in 2025 through the end of July.

This was well behind vigorous rallies in many other countries:

• The Canadian total market has soared 12% year to date.

• International developed large and mid-cap stocks have shot up 13.5% in Canadian dollar terms.

• Emerging market large and mid-cap stocks have surged 13.6% in CAD terms.

(See our Market Statistics page for more data.)

Winning streak over?

The U.S. slump is especially striking because Wall Street handily beat international stocks for most of the period since the 2008-09 financial crisis.

The U.S. total market returned about 13.5% annually between 2010 and 2024, vastly better than international stocks, which gained an underwhelming 4.8%, according to Morningstar Direct.

Does this year’s shift mean the era of superior U.S. returns is over? Should we reallocate away from U.S. stocks?

Compelling case for diversification

The short answer is no. As we said in our podcast on the same topic, there is a compelling case for diversification within stocks. Our model allocates 20% to Canadian stocks, 50% to the U.S. and 30% to international stocks.

The balance between U.S. and international stocks is in line with their share of global market capitalization.

As U.S. or other stocks have outperformed, we have rebalanced to maintain these target allocations.

U.S. equities still vital

Changing the model now smacks of market timing or trying to forecast the future. And the evidence is overwhelming this doesn’t work.

Regardless of any short-term underperformance, the evidence is clear that U.S. equity investments should be a major part of our clients’ portfolios.

As we noted in May, U.S. equities have returned an impressive 9.7% annually since 1900, according to the UBS Global Investment Returns Yearbook 2025.

“Never bet against America”

Warren Buffet famously put it like this in his 2020 letter to shareholders: “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”

Excellent U.S. returns are due in large part to the strong U.S. dollar and tech boom. This includes stellar gains in the “Magnificent Seven” mega-stocks, which we’ve discussed previously. As well, investors have proven willing to pay higher multiples for U.S. stocks.

But high returns come with a price: volatility. Since 1900, U.S. equities have seen six years with annual returns below negative 40%. Patiently waiting out these drawdowns is crucial if we want to enjoy the longer-term gains.

U.S. valuations at historic extreme

What can we expect from U.S. stocks in coming years? Some analysts predict slowing U.S. earnings growth in coming years. Others say U.S. equities could continue to underperform due to excessive valuations, even despite this year’s trailing results.

Valuations may reflect “overly optimistic expectations” about future growth and the U.S. return edge, according to investment firm AQR Capital Management.

“By the end of 2024, relative valuations were at a historically extreme level, and we argue that some mean reversion is a sounder assumption than extrapolation of further richening,” AQR said in a report.

Investors “should know that the US has underperformed the rest of the world for extended periods, for example the decades of 2000s, 1980s, and 1970s.”

International diversification paid off

But as we know, it’s notoriously difficult to forecast the markets. Analysts consistently get it wrong.

What we do know is that international diversification has paid off. This year’s developments in stock markets simply confirm that.

The UBS Yearbook 2025 provided more evidence. It found that globally diversified portfolios have generated higher risk-adjusted returns over the past 50 years than investing in only domestic assets in almost all countries.

Discipline brings peace of mind

Disciplined—relying on a broadly diversified long-term investing strategy and not chasing trends—allows us to capture returns when leadership changes.

Patience is also key. Avoid letting short-term swings or headlines dictate your moves. Markets reward those who stay invested from one cycle to the next.

Find market statistics, model portfolios, more commentary, past blog posts, eBooks and podcasts on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website. 

Let us help you secure your legacy and make a lasting difference. Contact us today to learn more about our comprehensive wealth transfer and philanthropic planning services.

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Our best investment advice of 2024

Our best investment advice of 2024

By James Parkyn - PWL Capital - Montreal

The year gone by was extraordinary for stocks. In 2024, investors shrugged off high interest rates and warnings of a possible economic slowdown, boosting equities to multiple new all-time highs.

In the first half of 2024, the S&P 500 Index had its 13th best yearly start since 1950. By the end of December, the U.S. total market index had soared 34.31% in Canadian dollars, while Canadian equities shot up 21.65% and international large and mid-cap stocks gained 12.63% in Canadian dollars.

As we embark on a new year, we wanted to look back at some of our most popular blog posts of 2024.

1. Yesterday’s home runs don’t win today’s games.

   We reminded readers to keep Babe Ruth’s classic advice in mind when they heard tongues wag about the “Magnificent Seven” stocks that did so well last year.

   So-called “Mag 7” stocks such as NVIDIA, Microsoft and Apple performed exceptionally. But this was far from the first time a small handful of darling companies had turned heads or dominated markets.

   A Wall Street Journal analysis of 10 market-cap leaders found that these companies underperformed the U.S. stock market by 6 percentage points in the five years after they hit No. 1. As we often say at PWL, don’t chase past returns!

2. Patience pays: Warren Buffett’s advice to investors.

   We shared investing wisdom from Buffett’s annual newsletter to the shareholders of Berkshire Hathaway. The world’s most famous stock investor believes that success comes from patiently riding out market volatility and holding positions for the long term, not trying to time markets.

   “It’s harder than you would think to predict which [companies] will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen,” Buffett said.

3. As stocks rocketed to new highs, we talked about how investors should respond.

   Should you wait for a correction before adding to investments? Should you take profits?

   Evidence suggests that rising stocks are a normal and healthy sign of a strong economy. The broad U.S. equity market has made 1,250 new highs since 1950, or 16 per year, according to RBC Global Asset Management.

   Markets don’t necessarily retreat after record highs. In fact, RBC’s report and a second study from Dimensonal Fund Advisors found that returns after all-time highs weren’t materially different than those from investing at other times.

4. Almost all wealth creation typically comes from a tiny number of stocks.

   How tiny a number?

   New research shows that just 4% of stocks accounted for all stock market wealth creation above a risk-free investment in Treasury bills from 1926 to 2023. A majority of stocks—51.6% to be exact—actually had negative compound returns in this period. In other words, most stocks lost money over their life.

   Since we can’t know the future stars ahead of time, study author Hendrik Bessembinder concluded that it’s best to own the entire market through broad index funds. The research gives powerful support for investing strategies that focus on passively owning a well-diversified portfolio of stocks with a long-term horizon—the approach we use at PWL.

5. Can a crystal ball make you rich? Not necessarily, we reported in our blog.

   An experiment set out to see how 118 U.S. university graduate students—90% in finance or MBA programs—would do in the markets if they had access to the previous day’s Wall Street Journal.

   Not so well, it turned out. The students had an average return of just 3.2%—statistically indistinguishable from breaking even. Just under half of students (45%) lost money, while 16% went bust. They made winning trades only 51.5% of the time.

   These middling results were actually much better than those of 1,500 people who tried the same experiment on the study authors’ website. Their median result was a 30% loss, while 36% lost everything.

   The results are just another good example of how hard it is to guess what markets will do. Even advance information appears to be unhelpful for most people. It can actually be ruinous for some.

   As we often say at PWL, timing the market is a gamble. Data shows you’re better off with long-term investment plan that you stick to with discipline.

On behalf of PWL Capital’s Parkyn-Doyon La Rochelle team, we wish you and your family good health, prosperity and happiness in all you do in 2025!

Read 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.

Can a crystal ball make you rich?

Can a crystal ball make you rich? 

By James Parkyn - PWL Capital - Montreal

Markets are tough to predict even with advance information 

Imagine owning a crystal ball that lets you see tomorrow’s news in advance. You could cash in and get rich! 

Not so fast, says statistician and financial writer Nassim Nicholas Taleb, author of best-seller The Black Swan: The Impact of the Highly Improbable. “If you give an investor the next day’s news 24 hours in advance, he would go bust in less than a year,” he warns. 

Taleb’s assertion now has backing from a study by Victor Haghani and James White of financial management firm Elm Wealth. 

WSJ trading experiment 

They did an experiment with 118 U.S. university graduate students—90% in finance or MBA programs—to test Taleb’s claim. 

The students each got $50 and the front page of the Wall Street Journal (with market price data blacked out) published on 15 random days from 2008 to 2022. They then got the chance to bet on how the S&P 500 Index and 30-year U.S. Treasury bonds would do the next day.  

They could go either long (that is, bet the market would go up) or short (bet that it would go down). They were also allowed to use leverage of up to 50 times—meaning they could borrow to increase the size of their trades to potentially make (or lose) more money. 

Students broke even 

The study’s “Crystal Ball Trading Challenge” (which you can try yourself here) showed how hard it is to predict the markets—even if you have advance knowledge. The students grew their $50 to $51.62, meaning an average return of only 3.2%. The result was statistically indistinguishable from breaking even, the paper noted. 

Just under half of the students (45%) lost money, while 16% went bust. The players made winning trades only 51.5% of the time. 

While students bet on the direction of bonds correctly 56.2% of the time, they were right about the S&P 500 in just 48.2% of the trades. Moreover, they compounded their errors by using more leverage in their stock’s bets (where they were wrong more often) than in bonds trades. 

Ordinary participants lost 30% 

As middling as these results were, however, the students fared much better than the roughly 1,500 people who played the game on the study authors’ website. These participants’ median result was a 30% loss. Only 40% made a profit, and 36% lost everything. 

The study, titled “When a Crystal Ball Isn’t Enough to Make You Rich,” also included results from a select group of five very seasoned and successful traders from top organizations. They all made a profit, with a median gain of 60%.  

But even they were often wrong. They placed losing bets 37% of the time. The study found that they did better than the students mostly because of how they strategically used position sizes to place bigger bets when they had more confidence. 

“Taleb is right”  

These seasoned professionals’ superior results suggested that “there are teachable skills involved in successful discretionary investing,” the study said. 

But for the vast majority of people, “by and large we think Taleb is right,” the authors concluded. 

“It’s very humbling,” Haghani was quoted saying about the results. “Even if you have the news in advance, it’s still really hard to do asset allocation or whatever with a high chance of being right, let alone not knowing what’s going to happen.” 

Timing the market is a gamble 

The study is just another good example of how hard it is to guess what markets will do. Even advance information appears to be unhelpful for most people, and it may actually be ruinous for some.  

And in the real world where we don’t have the next day’s news, timing the market is even more of a gamble. 

Investing shouldn’t be about gambling. Data shows you’re better off with a diversified portfolio and long-term investment plan that you stick to with discipline. This can help you tune out the headlines and better capture the returns that the markets have to offer. 

We can leave the crystal balls for the carnival. 

Read 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.

Navigating the Market Turmoil

Navigating the Market Turmoil 

By James Parkyn - PWL Capital - Montreal

Stick to your plan and adjust allocations as needed 

Market dips aren’t usually much fun for investors. But they’re often a good opportunity to take stock.  

It’s important to remind ourselves that occasional pullbacks aren’t just inevitable; they can be healthy, even in a strong bull market. Market turmoil can also be a good time to check if we need to rebalance our portfolio and review allocation targets and risk tolerance. 

In the first of our two-part mid-year market review, we looked at how stock markets soared in the first half of 2024. Canada’s S&P/TSX Composite Index was up by 6.05% in the first six months of the year. Internationally, almost all the main indexes we follow made new all-time highs. 

U.S. equities did especially well. The S&P 500 hit a remarkable 31 new all-time highs by mid-year, with tech stocks helping to drive the index to its 13th best yearly start since 1950. 

Pullback was inevitable  

Given the long stretch of almost uninterrupted gains, a pullback at some point was inevitable. Indeed, the TSX kicked off August with a sharp tumble, losing about 5% from its high to the low three days later. 

South of the border, the S&P 500 lost approximately 8% in those same three days before mounting a recovery. The tech-heavy NASDAQ-100 Index has done worse in a decline that started in mid-July, dropping about 15% by August 5. 

Japan has fared especially badly, with its Nikkei 225 Index plummeting about 25% from its mid-July peak to the August 5 low.  

Turmoil explanations vary 

Why did markets go berserk? Some pundits blamed disappointing U.S. job numbers, while others pointed to a sudden rise in the Japanese yen and a bursting tech bubble. “The simplest explanation,” wrote columnist Jason Zweig in The Wall Street Journal, is that “markets went haywire early this week because markets consist of people, and crazy behavior is contagious.” 

The fact is occasional pullbacks aren’t just inescapable in healthy bull markets; they’re common and may even be beneficial. They can work like a release valve when stocks get too steamy, and they provide a good basis for a new rally. 

“Uncertainty is underrated” 

Corrections are also part of the risk that investors take on in order to make a return, as Dimensional Fund Advisors chair David Booth explained in an insightful recent commentary in Fortune. 

“Uncertainty is underrated. Without it, there would be no surprises, no joy in watching sports, and no 10% average annualized return on the stock market over the past century. All investments involve risk—there is no guarantee of success. Investors can be rewarded for taking on the risk of not knowing exactly how things will play out.” 

Booth said the job of investors is to manage their risk: “That means ensuring our portfolios are diversified across regions and asset classes.” 

Good time to rebalance  

At PWL, we couldn’t agree more. Our approach is to manage risk with an evidence-based approach of passive long-term investing in a diversified portfolio. As asset values fluctuate, we also regularly rebalance to maintain allocation targets. 

For readers who aren’t clients, we suggest regularly reviewing your portfolio to see if it’s still in line with your targets. This is especially important after a prolonged rally such as the one we’ve seen since September 2022. 

A rally can cause the stock portion of your portfolio to be significantly greater than it should be based on your investment plan and risk tolerance. In that case, you may need to rebalance your portfolio to bring it back in line with your targets. 

Reflect on targets and risk tolerance 

The recent turbulence is also a good opportunity to reflect on your allocation targets and risk tolerance. Be sure they’re still aligned with your needs and expectations.  

If you feel you can stay the course during a correction, there may be no reason to make changes.  

A skilled financial advisor can help you craft an investment plan to ensure sufficient funds to live on and protect your legacy. 

Follow your investment plan with discipline 

The most important lesson of all is to follow your investment plan with discipline and shut out the market noise. That’s especially important when noise levels rise.  

As money manager Shelby M. C. Davis, founder of Davis Selected Advisers, has said, “History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” 

Indeed, since the early August pullback in stocks, the main Canadian and U.S. indexes have recovered a good part of their losses. No one can know if the turmoil will continue, but we can get some peace of mind knowing that pullbacks eventually end. And in the meanwhile, following an investment plan with discipline can help you stay the course. 

Read 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.

Embracing Market Highs

Embracing Market Highs

By James Parkyn - PWL Capital - Montreal

Stocks are soaring. Should we worry? Research shows staying invested is the best approach

Equity markets have been on a tear for months and are regularly making new highs. The S&P 500 was up 15% year-to-date as of late June, with the index reaching new record highs 33 times this year so far. The Nasdaq 100 index is doing even better—up 18.1% in 2024.

Most investors in stocks are rightfully pleased. But this is also a time when questions arise about how to respond to sky-high equity prices. Is it best to wait for a correction to add to investments? Perhaps it’s even a time to take profits and lighten up on holdings?

At PWL, we see rising stocks as a sign of a strong economy and something to embrace. Market highs are a normal and healthy phenomenon that investors should welcome. Our view is that it’s time in the market that counts, not timing the market.

As Warren Buffett once observed, “The only value of stock forecasters is to make fortune tellers look good.”

New market highs are common 

It turns out there’s good data to support this view of market highs. The broad U.S. equity market has made 1,250 new highs since 1950, or over 16 per year, according to a recent report from RBC Global Asset Management.

Interestingly, RBC found that investing in the S&P 500 only at all-time highs would have led to a return “close to the average return of the index for one, two- and three-year periods.” In other words, there was little difference between investing at highs and investing at any other time.

You might think a market high is the very worst time to invest. Not necessarily. In fact, since 1950, the average five-year return for investing only at all-time highs was 10.3%. That compares to 11.3% for investing on all other dates. “New market highs are not as meaningful as some people may think,” RBC said.

A retreat isn’t inevitable

Research from Dimensional Fund Advisors came to a similar conclusion. Its report, titled “Why a Stock Peak Isn’t a Cliff,” found that average annualized compound returns after a new monthly closing high were 13.7% after one year, according to data from 1926 to 2022. This was actually higher than the 12.4% return after months that ended at any level.

Five years later, the comparable returns were 10.2% after closing-high months versus 10.3% for all other months.

“History shows that reaching a new high doesn’t mean the market will then retreat,” Dimensional concluded. “In fact, stocks are priced to deliver a positive expected return for investors every day, so reaching record highs with some regularity is exactly the outcome one would expect.”

Correction fears 

But isn’t there a higher risk of correction after an all-time high? This is a valid question. Legendary investor Peter Lynch addressed it nicely with this comment in 1995: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

RBC also evaluated this question in its report. It looked at how often the S&P 500 has finished down by over 10% after an all-time high since 1950.

One year out, the market had such a correction 9% of the time. Three years on, the market was down 10% or more only 2% of the time. And five years out, the index has never been down by more than 10%.

Protect yourself with a good plan

Corrections are inevitable; markets are down one in four years on average. But there’s no way to predict when a correction will happen, and the evidence shows they don’t happen after every market high.

What we can do is prepare. At PWL, we do this with our evidence-based approach of passive long-term investing in a diversified portolio. As asset values fluctuate, we regularly rebalance to maintain allocation targets.

It’s a good idea to regularly review and update your long-term investment strategy and asset allocation with an advisor, especially if your goals or risk tolerance changes. But what’s most important is to follow your plan with discipline—no matter what the market does day to day.

And that may make it a little easier to sit back and enjoy the bounty when markets make new highs.

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.