Does holistic financial advice translate into higher returns?

Does holistic financial advice translate into higher returns?

By James Parkyn - PWL Capital - Montreal

For the longest time, wealth management services were confined to building and managing financial portfolios for clients. Then came a holistic approach to financial planning, which promised superior outcomes by looking beyond simple portfolio returns to consider all aspects of an individual's financial life. But how exactly does holistic financial planning play out and does it really translate into higher returns?

In this post, I delve into the details of holistic financial planning to help you decide if working with a holistic financial advisor makes sense for you – and when you should make the switch.

What is holistic financial advice? 

Holistic financial planning (or comprehensive wealth management) considers all aspects of an individual's financial life. This goes beyond traditional advice on investments and retirement planning to encompass areas such as budgeting, debt management, insurance, tax planning, and estate planning. The goal is to create a tailored strategy that aligns with the client's overall financial goals and values.

Promised benefits of holistic financial planning 

The Parkyn—Doyon La Rochelle team has been staunch advocates for holistic financial advice for over 25 years. Based on our experience, we have seen that superior outcomes can be achieved by recognizing the interconnected nature of all financial decisions. 

How holistic wealth management works

All holistic financial advisors take a comprehensive view of the client’s financial life, but each team will have its own approach and skillset. That being said, there are some key steps that are typically involved in holistic wealth management services:

• The advisor will first meet with you and take the time to analyze your goals, values, financial situation, time horizon, and risk tolerance and capacity to tailor recommendations that optimize and simplify your financial life.  

• The advisor will then propose a multi-pronged approach that includes investment management, financial and tax planning as well as inter-generational wealth transfer & philanthropic planning.

• This multi-pronged approach will typically include a comprehensive roadmap that meticulously addresses and plans for major life events as a unified whole to optimize your financial well-being and overall quality of life.

• Once the approach and roadmap have been agreed upon, your financial expert becomes your trusted “quarterback”. They will often collaborate closely with your chosen accounting, legal, and insurance advisors to optimize financial efficiency, while balancing both your personal and business goals.

• Your advisor will continue to provide ongoing guidance and support that adapt to your ever-evolving circumstances, understanding that your financial, family and professional situations will not remain static over time. 

When is the right time to switch to holistic financial planning?

Most conventional financial planning will overlook at least a few key aspects of your financial life. If you are losing sleep over these missing aspects, it’s probably a sign that your current financial plan is not as comprehensive as it should be. This can be a good time to talk to a holistic financial advisor.

We have clients that come to us in their early twenties right up to the cusp of retirement. They may be just starting to think about their financial future, or at the point where they’re ready to solidify the legacy they will be leaving for future generations.

While the decision to switch financial advisors should never be taken lightly, it need not be painful or difficult. A good financial advisor will know how to guide you in the secure transfer of your assets and do all the heavy lifting, collaborating closely with the legal, tax and other advisors you know and trust. At the same time, they’ll ensure you retain full visibility and control over your finances.

By meticulously addressing and planning for life events as a unified whole, holistic financial planning can optimize your financial well-being and elevate your overall quality of life. Just like the harmony of a well-composed piece of music, success is achieved when all elements come together.

>>>See all our holistic wealth management services

The history of holism

The year is 1926. South African Prime Minister and natural science enthusiast Jan Christian Smuts coins the term ‘holism’ in his book Holism and Evolution. In it, he defines the concept as: "the tendency in nature to form wholes that are greater than the sum of the parts through creative evolution.”

The word ‘holistic’ was born out of this philosophy, and is employed today in many fields, to illustrate the importance of considering the whole, in lieu of focusing only on individual parts.

That same year, in London, England, Sir George Martin was born. Soon renowned for his musical brilliance and prowess as an arranger and producer, he earned the moniker of the "fifth Beatle." Martin's extraordinary knack for recognizing and amplifying the individual talents of John, Paul, George, and Ringo, transforming them into a cohesive force, became the stuff of legend. Understanding that the collective impact of the Beatles transcended their individual abilities, he played a pivotal role in shaping their enduring musical legacy, which continues to captivate audiences over six decades later.

The whole was always going to be bigger than the sum of the parts.

Want to know more about our approach to holistic wealth management?

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. 

4% of Stocks Created Wealth

4% of Stocks Created Wealth 

By James Parkyn - PWL Capital - Montreal

How to ensure you own tomorrow’s winners  

It’s well known that owning stocks can generate great returns over the long run. Less known is the fact that almost all of that wealth creation typically comes from a tiny number of stocks. 

New research shows that $1 invested in the U.S. stock market in 1926 would have grown to an impressive $229.40 by 2023. That’s a cumulative compound return of 22,840%.  

Even more remarkable, however, is that just 4% of stocks accounted for all stock market wealth creation above a risk-free investment in Treasury bills. In fact, a majority of stocks—51.6% to be exact—actually had negative compound returns from 1926 to 2023. In other words, slightly more than half of stocks lost money over their life. 

The median stock lost 7.41%  

These are some of the fascinating conclusions of Arizona State University economist Hendrik Bessembinder.  

In a new paper, Bessembinder analyzed the retrns of 29,078 publicly listed common stocks from 1926 to 2023. His findings give powerful support for investing strategies that focus on passively owning a broadly diversified portfolio of stocks with a long-term horizon—the approach we use at PWL. 

Here are some of Bessembinder’s other conclusions: 

• Companies remained publicly listed for only 11.6 years on average.  

• Just 31 stocks remained publicly listed in the database for the full 98 years.  

• The median cumulative compound return of all the stocks was -7.41% per year.  

Top performer gained 266 million percent 

How is it possible for the median return to be negative when the mean compound return was 22,840%? This is because of the magic of averaging. The mean average return is skewed heavily upward by massive gains of a small number of companies. These are the companies it’s essential to own for our investments to make money. 

As Bessembinder put it in a recent interview, “Long-run wealth enhancement in the public stock market is concentrated in relatively few stocks.” 

Among the best 30 performers: Emerson Electric Co., in 30th place, with a cumulative return of 2.4 million percent, and top dog Altria Group (formerly Philip Morris), with an otherworldly 266 million percent gain.  

Those aren’t typos. Stated differently, $1 invested in Emerson Electric would have become $24,098, while a dollar invested in Altria/Philip Morris stock would have grown to $2.66 million. 

Compounding led to massive profits 

These astonishing profits, incidentally, show the value of patiently accumulating compounded returns over the long run.  

Interestingly, Emerson Electric made its gains with what Bessembinder calls only a “moderately high” annualized compound return of 13.57%. The key was 79 years of compounding at this rate.  

Altria, for its part, had only a somewhat higher annualized compound return of 16.29%. But when compounded over 98 years, this yielded an extraordinary gain.  

Five firms accounted for 11.9% of gains   

Bessembinder’s findings confirm his earlier landmark research in which he found that just five of 26,168 publicly listed firms accounted for 11.9% of net U.S. shareholder wealth creation of $47.38 trillion from 1926 to 2019. 

This concentration is increasing. In 2016-2019, just five firms accounted for an even bigger slice—22.1%—of shareholder wealth creation. 

“This tendency for wealth creation to be concentrated in a few stocks has grown even stronger in recent years,” Bessembinder recently said. 

How to own the next winners  

What does all this mean? A tiny number of stocks is responsible for almost all wealth gain in the stock market. If you didn’t own those stocks, you would have lost money. How do you know which stocks to buy? You don’t. No one can know in advance which companies will be the best performers.  

The answer is not to gamble your savings and legacy on trying to find the hot new trend of the day, but to be sure you own the next Altria, Emerson or Google by owning every stock. This can be accomplished through broad index funds that hold all the companies in various market indexes, such as the S&P 500 Index or S&P/TSX Composite Index. 

As Bessembinder put it, “The only way to be certain of owning the stocks that turn out to be the future big gainers is to own all the stocks” in a broad index fund.  

At PWL, we couldn’t agree more. This is the approach that is at the core of our data-driven strategy focused on the long term. 

Fads and companies come and go, but a disciplined approach of owning the entire market ensures you’ll benefit from the winning companies of the next 98 years. 

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.

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.

Our best investment advice of 2023

Our best investment advice of 2023

By James Parkyn

This year has been one of recovery in the markets. But to benefit, you had to once again remain patient and keep a long-term perspective, especially through a sharp pullback in the markets this fall.

Through much of the year interest rates continued to rise as central banks kept up their battle against inflation. Then, with progress being made on inflation and the North American economy remaining surprisingly resilient, investor hopes for a soft economic landing and lower rates in 2024 began to rise. That sparked an impressive rally in the stock market in the final months of the year.

As 2023 comes to a close, we wanted to look back at some of our most popular blog posts.

1. The silver lining of a tough year in the markets is higher expected returns—2022 was an especially painful one for investors with both the stock and bond markets falling by double-digit percentages. The good news is that those declines led to a substantial improvement in future long-term expected returns. Higher bond yields were especially welcome for investors who have experienced nearly 15 years of ultra-low yields, including periods when they didn’t even keep pace with inflation.

   In PWL Capital’s latest Financial Planning Assumptions, our estimate for expected annual bond returns jumped to 4.19% from 2.48% at the end of 2021. Our expected return for a broadly diversified 60/40 stock/bond portfolio rose to 5.75% from 4.97%. The improvement could allow investors to reduce the riskiness of their portfolio while still achieving their financial goals, as I discuss in this post.

2. Here’s a better way to think about risk—When academics and professional investors talk about risk, they usually refer to technical concepts like volatility and standard deviation. But in an essay entitled Five Things I Know About Investing, famed finance professor Kenneth French proposes a simpler definition – risk is uncertainty about how much wealth it will take to achieve your lifetime goals. In light of this definition, I turned to one of our favourite authors, Morgan Housel. In his book, The Psychology of Money, Housel says risk is unavoidable because the future is unknowable, but you can take steps to put the odds on your side.

   • Don’t take risks that will deplete your wealth and prevent you from benefitting from the power of compounding over the long term.

   • Be prepared for things not to go as planned. You only have to think about the pandemic, the war in Ukraine or rising interest rates to know you should expect the unexpected. According to Housel, preparation can be in many forms: “A frugal budget, flexible thinking and a loose timeline – anything that lets you live happily with a range of outcomes.

   • Cultivate a “barbell personality”—be optimistic about the future, but paranoid about what will prevent you from getting there. Sensible optimism is a belief that odds are in your favour for things to work out over time even if you know there will be difficulties along the way. To make it to that optimistic future, you have to make prudent decisions and stay the course when things are looking bleak.

3. Why too much exposure to Canadian stocks hurts your portfolio—According to a report from Vanguard, Canadian stocks represent just 3.4% of the global equities market, but Canadian investors allocate 52.2% of the equity portion of their portfolio to Canadian stocks, a 15-to-1 mismatch.

    That kind of home bias can be found in other countries and is a serious impediment to portfolio diversification, which is the key to reducing risk. In Canada, the problem is made worse by the concentration of our market. The top 10 stocks represent nearly 37% of the Canadian index and the market is heavily overweighted in financial services (+16.4%), energy (+12.1%) and materials (+7.2%) as compared to the global market, and underweighted in information technology (-13.0%), health care (-11.7%) and consumer discretionary (-7.3%). As a result, the Canadian market has historically been more volatile than the global market without a proportionate increase in return. That’s a bad deal for investors and the obvious reason why you need a substantial quantity of global stocks to your portfolio mix.

4. Young people need to grow both their financial and human capital—This year we launched a new eBook, Investing Life Skills for Early Savers, that covers key investing concepts in a format that’s accessible and relevant for young people.

   One of the seven concepts included in the book is the importance of managing your human capital. While it gets very little attention in the media, this is of critical importance, especially for young people. Human capital is your potential to generate income over your lifetime. It can be defined as the present value of all future income from working and, for most people, it’s their most valuable asset. For young people, it represents a huge number and is even more valuable because it’s hedged against inflation because wages tend to rise over time.

   You can increase your human capital through education, training and cultivating interpersonal skills. You also need to protect it with tools like disability insurance. As you move through your career, your goal should be to convert your human capital into financial capital by earning, saving and making good investment decisions.

   If you haven’t already done so be sure to download your free copy of Investing Life Skills for Early Savers.

For more advice on investing and personal finance, subscribe to our Capital Topics podcast and download another of our popular eBooks, Seven Deadly Sins of Investing.

We hope you are enjoying a restful and joyous holiday season and the whole team joins in wishing you a healthy and prosperous 2024.

Is it time to dial back risk in your portfolio?

Is it time to dial back risk in your portfolio?

By James Parkyn

Earlier this year, I discussed how a painful 2022 in the markets created a much brighter picture for long-term investors going forward.

Double-digit losses in both the stock and bond markets last year led to an important gain in future expected investment returns.

The improvement in bond yields has been especially impressive for investors who lived through close to 15 years of ultra-low yields, including periods when they didn’t even keep pace with inflation. During that time, many investors increased the equity allocation in their portfolio to make up for anemic bond returns—accepting more risk in search of higher returns from the stock market.

The strategy worked for those who could stomach periods of volatility and stay invested. Despite some setbacks, including the sharp but mercifully short pandemic bear market in 2020, stocks produced excellent returns from the financial crisis of 2008-09 through 2021.

Now, the picture has changed. Fixed-income securities are yielding nearly 5% and the question becomes: Is it time to move money from stocks to fixed income to take advantage of the higher yields and reduce risk?

Yields in the 5% range weren’t unusual before the financial crisis and, without predicting the future direction of interest rates, current action in the bond market suggests they will remain higher for longer than many economists had predicted.

In PWL Capital’s latest Financial Planning Assumptions, our estimate for expected annual bond returns jumped to 4.19% from 2.48% at the end of 2021. Our expected return for a broadly diversified 60/40 stock/bond portfolio rose to 5.75% from 4.97%.

As I noted earlier this year, in estimating returns, our research team doesn’t pretend to know what will happen in the markets in advance. Instead, they take the average of all possible return scenarios for a broadly diversified portfolio of publicly traded investments over a 30-year time horizon. Of course, returns in any given year can vary widely from the estimates.

This article argues that investors tempted by high yields should be careful not to short-circuit their long-term investment plan by forgoing higher expected returns offered by stocks.

“Stocks, which carry a risk premium to compensate for added volatility, will beat bonds over time, and bonds, which earn extra yield from taking term and credit risk, will beat secure, short-term vehicles such as GICs,” writes investment manager Tom Bradley.

Nevertheless, the emergence of higher interest rates marks an important shift. Changing your asset mix should never be done lightly or based on temporary economic, geopolitical or market developments. Instead, it should be executed as part of a comprehensive financial plan that considers your financial and personal situation, your investment knowledge, objectives and needs, your time horizon and your risk tolerance and capacity.

However, if the evolution of fixed-income yields allows you to achieve your goals while reducing the riskiness of your portfolio, it’s an option you should seriously consider with your investment advisor.  

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.