The Canadian Money Roadmap
Invest smarter, master your money, live & give more
The Canadian Money Roadmap
New and Noteworthy: YTD Stock Market Returns, Bad TikTok advice and Beyoncé causing inflation
Better late than never! This episode goes through the first half of the year (ish) and how different stock markets around the world have performed.
Next I explain why a viral TikTok video is completely wrong about income taxes.
And finally, why Beyoncé could be a culprit for causing inflation in Sweden.
All-in-one meeting tool with real-time transcription & searchable Meeting Memory™
Retire With Evan
Become more confident with your money - Financial Foundations Course
Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Neufeld. Today's the first episode of August and we're going to take a look at some things that are new and noteworthy. I want to do a bit of a recap on the first half of the year and see where returns have been in different stock markets around the world, and then take a look at some other things, like debunking some tax myths I found on TikTok and whether Beyonce could actually be blamed for inflation. Yes, you heard right in the intro there, I did talk about Beyonce potentially being a cause of inflation. I'm going to get you to hang on to the end of the episode for that little article that I found not too long ago, but anyways, thanks so much for joining me today, the first episode of every month. I like to do something that's either new or interesting, or sometimes I take a look at questions from Reddit, and today I wanted to do a bit of a recap of the first half of the year in terms of investment returns. I just want to start by being abundantly clear as to why I'm doing this and clarify some things that you should not be taking away from this episode. So, first of all, I really think it is important to know generally what's going on in the world and what's going on with your money. However, there is a risk of being too engaged and knowing too much and following things too closely, because the more you pay attention to the minute by minute workings of the stock market, the more likely you are to make decisions and act on things that are actually noise and not actually signal meaning things that are important to your investment success over time. So the thing that I'm going to say today is intended to be actionable or to give you some sort of FOMO or fear of missing out on being invested a certain way or not. I just think it's important for people to understand what's going on in the world and where returns are coming from at any given point, whether they're good or bad. So I probably should have done this in the first episode of July, but I'm only getting to it now. So the data that I have here I'm getting from Fidelity Investments. They do a really great job of distributing information on this kind of thing every week. But the article that I have here or the data that I have, comes further. We can review document from the end of July 21st, so not too long ago, but it's not exactly up to date here. See my disclaimer at the end of the episode, saying this data is historical, but anyways, we'll get started here. So I'm going to talk about a few of the big indexes or stock markets around the world and just what kind of returns you've seen in those specific areas here in Canada so far year to date, so that's from January to July 21. The Canadian stock market is up exactly 6.00%. 6%, that's not too bad, significantly better than the GIC rates Everybody was panicking to lock into at the end of last year and again, this is only for the first half-ish of the year. Now, if we move over to the United States, the two that I'm going to mention here are the S&P 500 and the NASDAQ. The S&P 500 is essentially the 500 largest companies and the NASDAQ is a grouping of specific companies. I won't get into how that grouping is determined, but essentially the NASDAQ is representative mostly of tech stocks. There are a few others in there, like Pepsi and, I think, costco and some stuff like that, but generally speaking, when you see the NASDAQ listed you can think these are tech stocks. Okay, so the S&P 500 has all those tech stocks, but they also have a few more boring things like oil and gas and health care and utilities, some hundred-year-old companies you know, like the proctor and gambles and Coca-colas and all that kind of stuff too. So the S&P 500 so far this year is up 15% in Canadian dollar terms. So for getting currency, getting rid of all that, 15% in Canadian dollar terms Pretty crazy. So the S&P 500 has been a really strong part of one's portfolio this year. Now if you look at the NASDAQ, you can see why the S&P 500 is doing well, because the tech component has been the dominant driver of return so far this year. So the NASDAQ is up pretty close to 31% year-to-date, which is crazy. That is not exactly what anyone would have thought going into this year, especially with interest rates going up. However, the sector alone so I'm taking this data from the JP Morgan guide to the market, so the data is a little bit older here, but it's close enough Year-to-date just the tech sector alone is up 43%. Communication services is up 36%, and that one's a little bit of a weird category because they include things like Facebook in there and I think Google might be in that one too. So it's communication services is not phone companies by any means. There's a lot of tech companies in there too. Consumer discretionary is also an interesting category, but that would include things like Apple. It's like, oh, that's a tech company. It's like, yeah, I guess, but they also sell phones that are discretionary, meaning you don't need it to live. That would be consumer staples, like groceries and things like that. So consumer discretionary would also include things like Amazon. So these big tech companies are companies that we think of as being big tech. Those have really been driving the market so far this year and those sectors are up anywhere between 33 and 43%. That's bananas. Now if you look at other sectors like energy, financials, healthcare, utilities, all of those sectors are actually negative on the year, and so the drivers of investment return so far in the United States have almost been exclusively from those sectors that we talked about, and most specifically the biggest companies in those sectors. Now if you look at smaller companies so that's called the Russell 2000,. That'd be the 2000 smallest companies in the US. They're doing just fine as well, but much less so. So they're up about 8.7%, close to 9% so far this year. Now if we move on to other parts around the world China last year was kind of coming out of their recession. They've been a little bit ahead of North America. In terms of their economic cycle. However, their stock market performance so far this year has been not as great, and so they have two different indexes that track stocks there. I'm not going to pretend to be a major expert in Chinese stocks, but both of them are slightly negative, single digit negative on the year, and so any investments in Chinese stocks on average haven't been performing exceptionally well so far. But other places like Japan and mainland Europe, they've been very positive as well, with the Japanese market being up almost 12% this year and the Euro stocks 50, that's about 17% so far. The UK is pretty close to Canada, where their index is up about six and a half. So instead of droning on and on about all the different numbers, hopefully you kind of picked up on the fact that this year has been really positive. I spoke with a client recently who we were just doing a basic portfolio review and he said yeah, I assume that things are pretty rough and we haven't really made much money here. I thought hmm, that's kind of interesting because things have been like almost exclusively positive, regardless of how you're invested. But yeah, this anchoring to last year, where last year was kind of negative across the board and he'd been speaking with some friends that were stock pickers, I think and yeah, there's money to be lost for sure, but a diversified portfolio so far this year is looking really good. So depends on how well you're diversified and what weights you have between different countries and different sectors. Because if you're a member of Canada's up 6% and the US market is up about 15% on average, if you have more in the US, your year to date performance looks really good. The opposite was true last year, right? So I'm not saying that you should have more in the US than you already have, because I don't know you, but all depends on what your split is between how you're diversified already in terms of how your performances look so far this year. If you were in exclusively energy stocks, which I know a lot of people thought that was the greatest idea in the world last year, especially here in Canada yeah, that's one of the sectors that's so far has been negative on the year. So chasing returns, so chasing the thing that worked well last year has not been a great strategy. Also, keep in mind last year what was the worst sector that you could have been in? That's right, consumer discretionary tech and communication services. They were brutal last year and so you know. It's just a general reminder again to not base your portfolio on the things that worked well last year or the things you think might work well next year. Having good diversification across the board really makes sure that you can get your fair share of the total return, regardless of what specific sectors or what specific companies are doing well that year. So this year, most of the diversified portfolios that I've seen in client portfolios and from you as listeners that have reached out to me, you would probably be decent if you're in 100% stocks anywhere between 9% and 13%, depending on how your split works. That would probably be a decent expectation so far this year. Now the tricky thing is if you have any bonds in your portfolio. The returns so far in bonds have not been that great, mostly because interest rates have continued to go up both here and abroad. That was kind of up in the air going into this calendar year whether interest rates would keep going up, because when interest rates go up. Bond values go down, however when interest rates go up, bond yields go up too. So the more interest rates go up, the better the return expectations for bonds in the future are. But so far year to date, the global aggregate bond index is up a whopping 0.01% so far this year. So the returns on bonds will be in the future for sure. I would say if you are someone that is of a stage of life or a risk profile that should have bonds, I would say just stay in your seat, because higher interest rates are a better indicator of future returns for bonds. However, this year they have not added to the portfolio at all. So someone who's in a 60-40, a typical balanced portfolio, returns there not nearly as positive as if you were invested in 100% stocks. Again, I'm not saying you should be in 100% stocks, because I don't know you and your situation, but that's just how the markets have shaped up this year. It's one thing to see stock market returns. It's another thing to evaluate them based on how expensive stocks are. Because if a stock is just going up and it's just getting more and more expensive and they're not making more relative profits, that makes it a tougher sell. That matches my philosophy a little bit. I'd be more of a value investor, where I'm not looking to get on a rocket ship and hope for the best. It's like well, we're buying companies here when we buy stocks. The same thing is true when you're buying ETFs and mutual funds. That's just pools of stocks, but anyways, just the concept here remains. It's one metric you can take a look at to see if stocks are actually getting more profitable or just more expensive. Jp Morgan's got a cool chart here that I'm going to try to explain, where they look at the PE ratio. So that's the price to earnings, meaning this number is going to give you an idea of how expensive a stock is, based on how much profit they make. And so over the last 25 years, the average PE is about 17. And last year, or in 2021, after the stock market really took off stocks were crazy expensive. They were about at 23 times. So last year, as the stock market kind of tumbled mostly in the US, but also around the world, stocks are kind of tumbling down, but the companies were holding up like their profits were still looking pretty good. There's a lot of fear about rising interest rates and inflation and recessions and all this kind of stuff. So stocks actually dropped, but they just got cheaper relative to how much profit they made. That was a good sign for investors, right. So at that time, stocks got as cheap as about 15 times Now today. The drivers of the market in general have been those seven largest companies in the US and, largely speaking, they're doing well, but their stock price is going up much faster than their earnings. So now, on average, the S&P 500 index is now about 19 times earnings. So All this to say yes, stock market has done well in the US in particular and in the tech sector in particular, but those are the most expensive parts of the market. So if you have an investment strategy that looks at highlighting lower price stocks or trying to buy companies at a cheaper price relative to their profits, your performance so far this year hasn't been good, but your opportunity has also gotten better because that part of the market has gotten cheaper relative to the most expensive names. Anyways, that would just be a caution that I have that if you see specific stocks or specific names or sectors that are doing really, really well, that would not be an indicator to jump in and buy it. I would say let's evaluate and see if it aligns with your goals and your risk tolerance, and if that part of the market is actually reasonably priced, my personal assessment would be that would be the most expensive part of the market right now, and so I wouldn't be jumping in to buy the most expensive stocks you can, because the forward returns once the stock is already expensive aren't very good. Anyways, I'll leave it there for now. When I talk about valuation, this PE ratio and the price to earnings ratio, that's just one metric that you can use. It is not some sort of crystal ball for predicting returns. So on a one year basis, the current PE ratio is not indicative of any sort of returns over a one year basis. So JP Morgan's got a great chart here that uses a statistical term called R squared. That's essentially like how closely correlated it is. So again, that's price to earnings versus one year returns and the R squared. There is 5%. That means it is completely random. The 100% means it's perfectly correlated and this is at 5%. So this is not some sort of indicator of a crash as imminent or any sort of bogeyman stuff. I don't believe in that. However, over time, if you look at the five year returns compared to price to earnings, the correlation gets a lot closer. Again, it's not perfect. It's about 33% correlation here and if I'm trying to describe the chart that I'm looking at, it's a dot plot where there's a tighter grouping of dots there and it's a sloping line from top left down to bottom right, which means that as things get more expensive, your expected returns in the future decline. So where things are today, we're kind of in the middle of that, but we would be on the lower end of expected returns just on an index level. This is one of those risks of buying the whole index, as opposed to perhaps a low cost diversified strategy that looks at lower prices and more value centric stocks within the index. But I digress right now the expected returns for the US market and otherwise are still positive on a go forward basis here. So again, I'm not trying to get into getting out of the market or anything like that. That is not my brand, that's not what I believe, but I think it's important to understand where things are today, just so you can start setting some expectations. Okay, so that's a quick recap so far on the year that was, or on the first half of the year that was. Pretty much doesn't matter where you've been invested, unless you had all of your money in China or really specific sectors of the market. Broadly speaking, you're probably doing pretty good this year.
Speaker 2:If you're in 100% bonds.
Speaker 1:You're going to have to be a little bit more patient, but the forward looking yields on bonds are also looking pretty good. Okay, let's change gears here a little bit. From time to time, I'll go on tiktok and I'll notice a little bit of financial advice coming from some suspect characters, and I found another one. Believe it or not and the reason that I'm mentioning it now is not because this is some person that's saying crazy things is that this video has a million views and he's saying something that is a really common misconception for Canadians in particular, and so I wanted to play a little clip from the video and then explain why he's completely wrong and clarify a massive misconception here as it relates to Canadian taxes.
Speaker 2:And it sucks, especially Ontario. I don't know why anyone wants to move here. Look at our tax brackets. It's actually stupid. Let's say you made it. You got the ultimate promotion, you worked your ass off. You're now making 100 grand a year. You're not, because almost half of it goes to the government. So realistically, you're bringing home 60 grand a year.
Speaker 1:Okay, did you catch that? He's complaining about taxes. You know the most common pastime in the world. No one likes paying taxes, but I get it. He created this scenario where he said that if you're in Ontario and you make a hundred thousand dollars, you take home 60,000. Sorry, I'm not going to say here that taxes are great and you should want to pay more in taxes and that it's really easy to make ends meet these days. That's not what I'm saying. I'm trying to explain how taxes actually work. So he was describing the tax bracket system and what he was confusing it with is that once you're in a certain tax bracket, he thinks that means that you paid that rate of tax on every dollar that you earn. No, you pay that rate of tax just on the money that's in that bracket. So as you make more, you pay more in tax on each additional dollar. And that's where the term marginal comes into play, because marginal means what do you pay on the next dollar earned? So in his case here, he says you make a hundred thousand dollars and you pay almost half of it in taxes, or you pay 40% in taxes. That means you take home 60,000. No, in Ontario, if you make a hundred thousand dollars, your marginal tax rate is actually only 33.89 and your average tax rate is 22%, which means that your after tax income this is before CPP and if you have pension deductions or things like that but your after income tax income is $77,872. So he's off by almost 20 grand, which is pretty important, being off by 20%. So, yes, taxes are a big part of our life, for sure. But, ontarians, you actually have the lowest average tax rate for a hundred thousand dollar earner besides BC, and they edge you out just by a little bit. So if you're someone that's making a hundred grand, yeah, ontario is probably the most expensive place to be as far as your cost of living, but you get to keep more of your money than we do here in Saskatchewan, even because your average tax rate is 22.1. Here in Saskatchewan, our average tax rate at a hundred grand is 24.97, called 25%. Now he has this guy has another video where he talks about this again, which is bananas because he's obviously wrong and all a lot of the comments. Thankfully, we're saying hey, man, you don't understand taxes. Yeah, he has another video where he's talking about if you make more money, the government just ends up taking half of it. It's like it's that's kind of half true where in Ontario, the highest tax bracket is over 50% it's 53.53. However, because you get the benefit of the lower tax brackets as well, your average tax rate so like let's say, you made a million dollars of salaried income or self employment income or whatever the case is a million your average tax rate is actually still below 50%. It's 49.36 in Ontario. So even at a million bucks I know it's a rounding error here but even at a million dollars of income, the government still doesn't take half of it. Okay now, that being said, I am in the camp that taxes are your largest expense in your life and it is prudent to use tools that will help you reduce your lifetime tax bill. So you'll hear me talk about that on the podcast quite often, but I am not someone who says that paying taxes is the worst and that we should never do it. No, by no means. But I'm stealing this line from somebody and I'm forgetting who it is. But you know, it's our job to pay our fair share of taxes, but we don't need to leave a tip Right. So there's lots of ways that we pay more taxes than we need to, but by planning in advance and working with a financial planner, instead of watching TikTok videos from people that don't know what they're talking about, you can actually reduce your tax bill more effectively today and in the future. There's no miracles, right? There's no magic things that financial planners have that can suddenly reduce your tax bill today, but you can put together a plan that prioritizes low taxes over the course of your whole life so that in the future and when you pass money on to your kids, you can keep the tax bill as minimal as possible. Okay, now, if anyone's still with me, I do want to talk about this Beyonce thing. I saw this article in CNBC and the headline is Beyonce shows blamed for fueling inflation in Sweden. Okay, so I the reason I bring this up is kind of funny, but also just indicative of the types of things that can cause inflation. So when people spend money, they're buying goods and services, and goods and services are only available in limited quantities in many cases. So in the case of a concert, beyonce was playing in Stockholm, and Stockholm is a world-class city, but it's small relative to a lot of major cities around the world she was playing two shows there and because her shows in the US were so expensive. A lot of people were flying in from the US and from other parts of Europe, and when people from out of country and out of the city come in, what are they going to do? They're going to stay in hotels, they're going to eat at restaurants, they're going to drink at bars, they're going to buy clothes, they're going to pay taxes. You know all these different things that happen, right. So money is coming in from all sorts of different places and being spent on things that your average day-to-day citizen might not be spending money on in that city, and so, especially with two concerts in a significant stadium, it actually could actually drive up inflation because of all the additional spending that was happening. So inflation, their inflation is actually going down, but it went down much less than expected. But the chief economist in Sweden for one of the banks there, he says perhaps all of the inflation isn't down to her, as there are other events taking place, but when you think about what was the cause of the less than expected deflation, she's the prime suspect. He says it's not just out of the blue. We did hear a month ago that it was very hard for fans to get accommodation and that hotel rates went up. Ding, ding, ding. Here's supply and demand, our old friend kind of creeping in again. It seems to be a reasonable guess. He says so Sweden is a country with only 10.4 million people and so because it's a smaller country and a major event like this, there's also events like Bruce Springsteen is playing in Gothenburg, which is a much, much smaller city, and he's really popular. So all sorts of these oddball major events are happening in Sweden, driving up inflation. So when we look at inflation, it's not just one factor at any given time. It's a complicated and very involved calculation and it often affects things that you might not necessarily be participating in right? So if inflation includes a calculation for things like accommodations and restaurant meals and air travel and you're just a person that was going to work that day and that part of the world, you might bike or even drive an electric car or something like that, it's like you might not even know the difference. But the headline of like oh, inflation declined by less than we expected. Beyonce and Bruce Springsteen are the problem. Well, yeah, maybe, but again, the idea of your own personal inflation rate is so much more valuable than understanding the inflation rate of the country. So this comes down to tracking your expenses and understanding the things that you're spending money on. That way, you can understand where you could reduce your spending, but also anticipate where things might be getting more expensive for you going forward. Anyways, I'll leave it there If if you're a person that was going to Beyonce or Taylor Swift or something like that, just know that you're part of the problem, not part of the solution. Anyways, thanks so much for joining me today. If you like episodes like this, let me know my emails in the show notes of this podcast. Thanks again for listening. We'll see you next week. Thanks for listening to this episode of the Canadian money roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.
