Making sense of the markets this week: August 10


Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Should investors say goodbye to the 60/40 balanced portfolio?

For so many years, investors have fallen back on the classic portfolio split: 60% stocks for growth and 40% bonds to manage the risks. And, historically, bonds would also pitch in on the total return front. But with bond yields at historic lows, the bond component does not have much to offer in the way of returns, and many are suggesting a reset or rethink of the 60/40 portfolio

From Bloomberg:

“‘I don’t think bonds can provide the standard historical returns investors are used to,’ said Andrew Sheets, Morgan Stanley’s chief of cross-asset strategy in London. ‘The starting yield is at a point where that type of return is just not possible. Investors are going to have to lower expectations of 60-40 portfolios, and will have to look elsewhere for what can be in the 40%.’”

That said, the humble 60/40 portfolio continues to defy the odds and confound the experts. In 2020 YTD to August 4,  iShares Balanced Portfolio (XBAL) is up over 4%. The one-year return to the end of July was 7.7%. 

Go figure. 

At the same time as we’re questioning portfolio allocation, we’re also challenging the 4% retirement rule of thumb. In a recent column here on MoneySense, Jonathan Chevreau asked: Is the 4% Rule obsolete? 

I really like this article, as well as this approach outlined on Think Advisor involving a “guardrail” of 6%. If you have a year when the annual withdrawal would constitute 6% of your portfolio value, you’ve hit the guardrail. Hit the brakes. You have to lower your spend rate for that year and avoid hitting that retirement guardrail. 

My own research leads me to embrace the idea of a “dynamic spending plan” for retirement, which may allow us to spend more during periods when the stock markets are roaring. Make more hay while the sun shines, but always keep an eye on those guard rails. (For many, it makes sense to seek advice from a qualified retirement specialist.)

Captain Obvious says: many Canadians have taken a financial detour due to COVID-19

Edward Jones released a study on the changing face of retirement in Canada, focusing on four central pillars: health, family, purpose and finances. The report looks at the impact of COVID-19, which has accelerated many of the trends highlighted in this study. 

“We’ve certainly seen COVID-19’s disruptive influence on finances, with the pandemic impacting retirement timing and financial confidence,” said David Gunn, country leader at Edward Jones Canada. One in three Canadians are planning to retire are thinking about retiring later, predominantly for financial reasons.

The pandemic has put many important money issues on the table, including the need to plan for retirement, and to create a generous emergency fund

At the same time, the pandemic has also brought many families closer together, figuratively and literally. We’ve had to huddle and stay within our family bubbles for many months and, for some (but certainly not all), the pandemic was an opportunity to strengthen family ties. (In my neighbourhood, for example, many young adults returned to mom and dad’s house, leaving the downtown condo behind.) 

On generational generosity, 63% of respondents said they would help a family member even if that meant jeopardizing their own future. That is being tested in 2020 due to COVID-19: to date, 17% of parents have provided financial support to their children during the pandemic. 

The study also found money is not happiness in retirement—a finding that may be surprising to many. Gunn also offered: 

“Only 3% say they want their money to enable them to buy or experience nice things. Clearly, security and freedom are the primary purpose[s] of money in retirement.” 

One of the main observations was that, for the vast majority, health and family holds more importance than wealth. 

Direct indexing: a threat to ETFs and advisors?

I’ve been waiting for this trend to catch on. 

Direct indexing lets you strip out the companies you don’t want out of an index such as the S&P 500, creating a custom index “fund.” You might create your own socially or environmentally responsible index. You might strip out all of the tobacco companies, gambling and pot stocks, alcohol producers and companies with a poor environmental record. You can also apply other filters, such as stock value or quality. 

O’Shaughnessy Asset Management has created a direct investing product with a cool name— Canvas—that is now being shared with a select group of registered investment advisors. 

It could be a very useful tool in the arsenal of automated tax loss harvesting. 

James Werner, a financial planner in Austin, Texas, was interviewed in MarketWatch: 

“He calls Canvas ‘the next generation’ of direct indexing capability, and says with a laugh that ‘the next generation beyond that’— likely one enabled by Schwab—is going to replace financial advisors like himself.”

This is an interesting trend, which I’ve been watching since early 2015. Starting with the US Dividend Achievers Index as my base, I simply purchased many of the largest cap holdings to create my custom index. More than five years later, I am more than pleased with the results.

Is this a threat to traditional ETFs and advisors? We’ll have to keep an eye on the direct investing trend. 

Canadians are starting to gain confidence

The Bloomberg Nanos Canadian Confidence Index, which has risen three points over the past two weeks to 49.8, has returned to the torrid pace of gains recorded early in the rebound and has now recovered about two-thirds of its pandemic losses. The recovery from a deep downturn has been strong, given the index’s record low drop to 37.1 in April. 

Canadians are showing less worry about finances and their job situations. 

Let’s hope more happy and confident consumers will translate to more open wallets. 

What the U.S. election might mean for the markets

Everything is infused with political tone in the U.S. these days, and The New York Times, for its part, offers that a Biden victory would be bullish for stocks

But that same Times article suggests that “the Trump corporate tax cut, to 21% from 35%, was a corporate windfall, accounting for nearly half the 23% growth in earnings per share for the S&P 500 in 2018”. 

Biden has proposed raising the corporate tax rate to 28%, which “would be a mid-single digit hit” to earnings per share, analysts said. 

But President Trump does not see the need to speculate. He’s more than sure that the stock markets would collapse under President Biden. From Twitter:

But the thing is, no one knows what any president “might do” to the stock markets. Pundits offered that President Obama would be a disaster for the economy and stocks. When Obama was elected the Dow Jones Industrial Average closed at 9,625. Eight years later after two terms the Dow had marched all the way to 18,332. 

Have some fun on the Macrotrends site, where you can compare the stock market returns under each President. 

On MarketWatch, Brett Arends offered: nobody knows what either candidate will mean for the stock market, and everyone who says they know is talking out of their hat.”

We don’t invest in Trump or Biden. We invest in the Apple’s, Google’s, Coke’s and Home Depot’s. 

That said, this might all be a moot point. President Trump (who is trailing in the polls) wants to delay the election due to COVID. He is also sending scary signals that he would not accept the results of the November election, saying:  “I have to see.”

Dale Roberts is a proponent of low-fee investing who blogs at

The post Making sense of the markets this week: August 10 appeared first on MoneySense.


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