Why Investors Might Think Twice About Chasing the Biggest Stocks
If you have been watching the news in the stock markets this year, you may have heard about how tech stocks are dominating the market (A few big tech stocks (FAANGM)). You may also be wondering, should I simply buy tech stocks for my retirement portfolio?
Dimensional Fund Advisors released a whitepaper that looks at the performance of Top 10 stocks in the years leading up to joining the top 10, and in the years afterward.
What they found was, on the runup to being a top 10 stock, they outperformed the market - but after joining the top 10, they lagged the market.
From 1927 to 2019, the average annualized return for these stocks over the three years prior to joining the Top 10 was nearly 25% higher than the market.
In the three years after, the edge was less than 1%
Five years after joining the Top 10, these stocks were, on average, underperforming the market—a stark turnaround from their earlier advantage.
The gap was even wider 10 years out.
Intel is an illustrative example. The technology giant posted average annualized excess returns of 29% in the 10 years before the year it ascended to the Top 10 but, in the next decade, underperformed the broad market by nearly 6% per year.
So, the lesson is - buying the top stocks is historically not a great strategy. To capture the outsized returns of top 10 stocks, you need to own them before they become big stocks. At Walhout Financial, my portfolios tilt towards small cap and value stocks (cheap stocks). We hope (and expect) that the next crop of top stocks is in that basket, and the goal is to hold them while they are on the way up and capture those returns.
Reasons to Keep Life Insurance in Retirement:
Today we will wrap up our series on estate planning with a discussion about life insurance. Life insurance is another tool in the tool box that can help you with your estate planning. We will discuss several ways that life insurance can be used to smooth out your estate planning process.
Insurance has a few key benefits that make it a useful tool for estate planning
• Life insurance proceeds are not taxed at death
• Life insurance goes around the estate and is not subject to probate, it is also private
• It is highly customizable - you can name and change beneficiaries any time
• It is timely - life insurance proceeds are typically paid out within 30 days. Estates can take up to 2 years or more to settle.
○ This also includes segregated funds. Segregated funds are investment portfolios in a life insurance wrapper. The biggest benefit of using these types of products is their estate benefit, especially for non-registered accounts.
Not everyone needs life insurance in retirement. It can be costly, especially as you are getting a little older. Many retirees may wonder whether they should get rid of their policies as they are getting ready to retire. Before getting rid of that life insurance, here are some reasons that you may want to hold onto it.
1. Pay off Debts
a. Lines of Credit, Credit Cards, Mortgages
b. Life insurance can help you repay those debts when you die instead of having to sell investments
c. However, if you have enough savings, you may not need the additional insurance
2. Cover Taxes at Death
a. RRSP's, Capital Gains from Investment portfolios, cottages, other real estate
b. Life insurance can make sure that there is enough money in the estate to pay the tax bill
c. Otherwise, the tax will need to be paid through some other means
3. Cover final expenses
a. funeral costs, legal fees
4. Income for dependents
a. Ideally you don't have dependents at retirement, but you may
b. Your spouse may also be your dependent, ie if you have a large pension and 50% of that goes away if you pass away, there may be a need for additional income for your spouse
c. Keep in mind as well that OAS and CPP basically end (some small benefits for low-income with OAS, and the CPP survivor benefit may see a large reduction as well
5. Leave a large estate for your beneficiaries
a. Could be your children or charities
b. Life insurance is a great way to create a legacy, it is tax-free and efficient way of getting additional money to your beneficiaries
6. Equalize your estate
a. You can use real estate to equalize your estate between your heirs
b. Ie. You have 3 kids and pass the cottage down to them, but only one of them will use it and wants to buy the other ones out. The life insurance money can be used to finance that purchase
c. Or, you have treated your children differently in their lifetimes and you want to rectify that with your estate, but the money may not be there to do that otherwise. Life insurance is a very elegant way to solve this problem
So, how do you know if you need life insurance in retirement? Have a financial plan. Go to a CFP financial planner who can help you plan this out, stress test your plan against the scenarios above, and decide whether life insurance makes sense as part of your plan going forward.
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Thanks, and have a great week!
Disclaimer - This podcast is for informational purposes only. Please consult with a financial advisor familiar with your unique financial situation before making any decisions. Nothing in this broadcast constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Mark Walhout is the owner and lead financial advisor at Walhout Financial and an Investment Fund Representative at Investia Financial Services Inc.