Welcome to Amygdala Mail, where I answer your questions about money. This week, we talk about investing under Donald Trump, bank stocks, cashing out in retirement, and buying a vehicle with cash.
Let’s welcome Mireille, who watches our neighbors to the South go and who is not sure she likes what she sees.
“If Trump were elected in the next election, should we decrease or increase our investments in American stocks? she asks. Or not touch it? Is the U.S. economy historically doing better under Republicans or Democrats? »
Thank you, Mireille, I’m sure you’re not the only one asking this question.
The short answer, without boring numbers: we should never let the political calendar influence our investment choices.
The long answer, with boring numbers: the American stock market has risen 9.8% on average under Democratic presidents, and 6% on average under Republican presidents since 1957, according to an analysis by The Motley Fool. An assessment due to the fact that George W. Bush was in the White House during the crash of the techno bubble in the year 2000, and also during the financial crisis of 2008.
In short, long-term growth is positive, regardless of who is in the White House. And, as portfolio manager Philippe Le Blanc points out in his most recent book, Stock market advantage, the American stock market rose 62.5% under Trump, without even taking into account dividends.
So, yes, I’m going to be nervous the evening of November 5th. But not for my investments.
Let’s then give the floor to Naomi, a millennial capitalist (they exist) who likes receiving the nice big dividends paid to her by TD and Scotiabank.
“I was wondering if I should sell my shares in TD and Scotiabank, with whom I have had good dividends and good returns since I started investing. I admit that the lurking cloud of recession scares me a little. I’m wondering if I should put all of this into diversified and balanced index funds. »
Don’t let the dividend scare you, Naomi. Just because there’s a big dividend doesn’t mean it’s a better investment.
Look at the results of investing 50% in TD and 50% in Scotia, compared to investing in a fund composed of the largest companies trading on the Toronto Stock Exchange, including dividend reinvestment, for 10 years.
You’re leaving money on the table by having such a concentrated portfolio: historically, diversification has paid off more. And this is even more true when a portfolio is internationally diversified.
So, when you say “the cloud of recession scares me,” what I mean is “I’m on the verge of selling my investments because the news worries me.”
Buying or selling an investment based on current events is the equivalent of playing with a fork in an outlet with wet feet. Don’t do it. Like, never. Markets have always been unpredictable in the short term, and always will be.
You have decades ahead of you. You should pray that the markets fall. When that happens, each new dollar can buy more assets. It’s counterintuitive, but a falling market increases expected returns in the future. A rising market makes them fall.
Next, let’s give the floor to Denise, who is intrigued by the 4% rule for retirement payout that I recently mentioned. She writes: “I’m 64, I’m thinking of retiring next year and I’ve never heard of the 4% payout. What does it mean ? »
Read the article “What 300,000 people learned about money”
This rule attempts to answer an old question: how much money can I withdraw from my investments to live on in retirement before I run out of money and go camping under a bridge?
The rule comes to us from an analysis carried out in 1994 by the American financial advisor William Bengen. It shows that you can disburse 4% of the value of an investment portfolio each year, and adjust the amount to cover inflation, for the next 30 years with very low risks of running out of money.
To take round numbers, the person who has $500,000 in investments can disburse $20,000 in the first year, $20,400 in the second year (if inflation is at 2%), $20,808 in the third year, and and so on.
Note that this rule was established based on a portfolio composed of 50% American stocks and 50% American bonds. It is subject to debate, with some finding it too restrictive, others too generous.
A 2023 study from Western Carolina University showed that adopting a variable disbursement rate based on the value of investments would be optimal, and would even allow disbursements of more than 4% in some years. In short, the 4% rule is not an immutable law, but can serve as a guide to roughly know what amounts our investments can generate.
Consult the study (in English)
Finally, the text entitled “Your retirement is in your driveway » provoked a lot of reactions.
Read the article “Your retirement is in your driveway »
Jean-Pierre writes: “What do you think of those who pay for their vehicle in cash? In any case, the dealer doesn’t like it! »
What, are you telling me that not everyone pays cash for their vehicle? That people are going into debt for a consumer good whose value is decreasing every day? I find it hard to believe you!
All joking aside, one thing I’ve never understood is: why resort to financing to drive a prestigious vehicle? If we can afford a prestigious vehicle, it’s because we are rich. And if you’re rich, you don’t need financing! It’s all very mysterious.
But I digress. I know that financing a vehicle is the choice of many people. I understand the logic. A vehicle: large amount. A vehicle payment: small amount. We prefer the small amount. Even if it means we enrich the bank.
If this is you, I challenge you to save to buy your next new or used vehicle yourself. To do it within your means, without the false feeling of wealth that access to credit provides, and without the psychological and financial risks that accompany the creation of debt.
No more “chariot payments”! Happiness.
And if you choose to continue financing a vehicle, no problem. But then you lose the right to complain that “everything is expensive”.
We can not have everything.