Folks, you may not see a rally like this again in your lifetime. The S&P 500 index is up roughly 100 per cent from market low, and the S&P/TSX composite index is up about 80 per cent. Looking at these returns, a reader who is headed into retirement in the next 12 months wonders whether it’s time to sell some of his stocks.
“Our returns are substantial and we never thought we would be in this position,” he wrote. “We have been thinking of selling off most of our holdings except top holdings (Canadian and U.S. banks, insurance companies etc.) and locking in our profits. We would keep the cash in our RRSPs until the next downturn and buy only top blue chip holdings. Any advice is greatly appreciated.”
This sounds like an exercise in market-timing, which is tricky to get right. There’s some optimism about stocks for 2022, so selling now might mean foregone profits. And then there’s the problem of timing a re-entry into the markets post-correction. This reader mentioned buying in the 2008 and 2020 crashes, so he obviously has the grit to buy low. But who knows how the next market crash will play out?
Here’s an alternative way for someone heading into retirement to look at this question of whether to sell stocks that have soared in the last while: How much risk do you need – how much money in stocks, in other words – to ensure your personal savings last the rest of your life?
Find the right portfolio mix for your needs and then tailor your current stock holdings to match. In fact, it sounds like the success of this investor in the stock market could mean a higher than necessary weighting in stocks. Taking some profits to get back to a more balanced portfolio makes sense. Bonds or guaranteed investment certificates are still a valid way to diversify a portfolio, even with interest rates expected to climb this year. Remember, higher rates mean rising yields on bonds and GICs.
Focusing on blue-chip stocks paying dividends also makes sense for an investor seeking to fine-tune a portfolio after a big run up. In a less dynamic stock market, total returns built on dividends plus changes in share price will become important.
-- Rob Carrick, personal finance columnist
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The Rundown
Why investors are shifting their focus to safety and conservatism
Back at the start of January, investors were panicking because of some hawkish-sounding minutes from a meeting of U.S. Federal Reserve policy makers. A few days later, those same investors went whistling past the hottest inflation reading in nearly 40 years. The simple explanation for these divergent reactions has to do with expectations. The Fed minutes surprised markets by sounding tougher than analysts had anticipated. In contrast, the inflation reading shocked no one because it landed right where economists figured it would. It all demonstrates how highly the market values predictability. And right now, as Ian McGugan tells us, it is in unusually short supply.
Also see: Earnings to test U.S. growth stocks after rocky start to year
A portfolio for investors more anxious about stock market downside than missing out on gains right now
The Two-Minute Portfolio is a long-running experiment in the idea of simplifying stock-picking in the Canadian market by investing equal amounts of money in the two largest dividend-paying stocks in each of 11 sectors of the S&P/TSX Composite Index. The past few years have not been great for the 2MP, as Rob Carrick tells us in reviewing 2021 performance. But there’s still reason to consider the strategy: the 2MP has consistently shown an ability to weather down markets better than the index.
Our dividend growth investor is buying on the dip
John Heinzl’s model Yield Hog Dividend Growth Portfolio is coming off a solid year in 2021 when it posted a total return, including dividends, of 23.1 per cent. That wasn’t quite as scorching hot as the S&P/TSX Composite Index’s total return of 25.1 per cent, but he’s still pleased with the performance. The portfolio’s core mission, after all, is to generate a growing stream of cash, and with 20 of the 22 securities having raised their dividends in 2021, the portfolio’s annualized income is up 55 per cent since inception on Oct. 1, 2017. Reinvesting dividends is one of the keys to building wealth and generating income, and he’s now announcing three purchases to use up that cash.
TD Bank adds some muscle to zero-commission stock trading
Investors have a new but familiar name to consider if they want to trade stocks and exchange-traded funds without the usual commission costs. Toronto-Dominion Bank on Monday introduced a new mobile app called TD Easy Trade that includes 50 free stock trades per calendar year. Rob Carrick tells us more about the product.
Hedge funds stand by U.S. dollar despite New Year slump
The U.S. dollar’s slump, despite a raft of positive news that should be the springboard for a strong start to the year, is puzzling. But puzzled or not, hedge funds are sticking to their guns, betting that the greenback will soon bounce back. Jamie McGeever of Reuters reports.
Others (for subscribers)
Canadian ETFs: December’s launches and terminations
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: CEO invests over $5.4-million in this stock after its price trades down
No new year resolution for out-of-favour copper market
Ask Globe Investor
Question: My mother recently passed away and her assets are currently invested in very conservative stocks. Can I take my inheritance in stocks, or must the stocks be sold and the proceeds distributed? If I have a choice, what are the major tax implications of stocks or cash? – Frank S.
Answer: My sympathies on the loss of your mother. The executor of the estate would normally liquidate the assets and use the proceeds to pay off all debts including final taxes. The remainder is distributed among the beneficiaries in accordance with your mother’s will.
There is nothing to stop you from requesting that your share of the estate be remitted in the form of stocks. If that can be done without compromising the other beneficiaries, the executor should try to accommodate you. However, if the stocks are held in a registered plan and you are not the plan’s designated beneficiary, that could be a problem. I suggest you request a meeting with the executor to explore the options.
As far as taxes are concerned, there are no death duties in Canada, whether an inheritance is received in stocks or cash. But if your mother has an RRSP or RRIF, the assets will be deemed to have taken into income at the time of death and taxed at her marginal rate – which will be very high if she had significant savings.
--Gordon Pape
What’s up in the days ahead
Gordon Pape takes a look at some do’s and don’ts for income investors. Plus, Tim Shufelt explains why the TSX has become a much more diversified index.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff