Money and Happiness | “The Recession Cloud Scares Me”

in Money and happiness, our journalist Nicolas Bérubé offers his thoughts on enrichment every Sunday. His texts are sent as a newsletter the next day.

Welcome to Amygdala Mail, where I answer your money questions. This week we talk about investing for Donald Trump, bank stocks, cashing out in retirement and buying a vehicle with cash.

Let’s welcome Mireille, who is watching our neighbors to the south leave and isn’t sure she likes what she sees.

“Should Trump be elected in the next election, should we reduce or increase our investments in US stocks? She is asking. Or not touch it? Has the US economy historically done better under Republicans or Democrats? »

Thanks Mireille, I’m sure you’re not the only one asking this.

The short answer, without boring numbers: we should never let the political calendar influence our investment decisions.

Long answer with boring numbers: the U.S. stock market has risen an average of 9.8% under Democratic presidents and an average of 6% under Republican presidents since 1957, according to an analysis by The Motley Fool. Rating given that George W. Bush was in the White House during the 2000 techno bubble bust and also during the 2008 financial crisis.

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 latest book, stock market advantage the US stock market is up 62.5% under Trump, even excluding dividends.

So yes, I will be nervous on the evening of November 5th. But not for my investments.

So let’s give the floor to Naomi, a millennial capitalist (they exist) who likes to get nice big dividends paid to her by TD and Scotiabank.

“I was wondering if I should sell my shares in TD and Scotiabank, with which I have had good dividends and good returns since I started investing. I’ll admit that the looming cloud of recession scares me a little. I’m wondering if I should put it all 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.

See the results of investing 50% in TD and 50% in Scotland compared to investing in a fund made up of the largest companies traded on the Toronto Stock Exchange, including dividend reinvestment, over 10 years.

By having such a concentrated portfolio, you are leaving money on the table: diversification has historically paid more. And this is even more true when the portfolio is internationally diversified.

So when you say “the recession cloud scares me” I mean “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. Do not 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 the markets go down. When this happens, each new dollar can buy additional assets. It’s counterintuitive, but a falling market increases expected returns in the future. A rising market causes them to fall.

Next, let’s have a word from Denise, who was intrigued by the 4% rule for retirement that I mentioned recently. She writes: “I’m 64, thinking about retiring next year and have never heard of a 4% payout. What does it mean ? »

Read “What 300,000 People Learned About Money”

This rule attempts to answer the age-old question: how much money can I withdraw from my investments to live in retirement before I run out of money and go camping under a bridge?

The rule is based on an analysis carried out in 1994 by the American financial advisor William Bengen. It shows that you can pay out 4% of the value of the investment portfolio each year and adjust the amount to cover inflation for the next 30 years with very little risk of running out of money.

To round the numbers, a person who has $500,000 in investments can withdraw $20,000 in the first year, $20,400 in the second year (if inflation is at 2%), $20,808 in the third year, and so on.

Note that this rule was established based on a portfolio of 50% US stocks and 50% US bonds. It is subject to debate, some consider it too restrictive, others too generous.

A 2023 study from Western Carolina University found that adopting a variable payout rate based on investment value would be optimal, even allowing payouts of more than 4% in some years. In short, the 4% rule is not an immutable law, but it can serve as a guide to roughly know what amounts our investments can generate.

Take a look at the study (in English)

At the end, a text entitled “Your pension is in yours.” driveway » caused a lot of reactions.

Read the article “Retirement is within you driveway »

Jean-Pierre writes: “What do you think about those who pay for their vehicle in cash? Either way, the dealer doesn’t like it! »

Are you telling me that not everyone pays cash for their vehicle? That people are going into debt for consumer goods, the value of which is decreasing every day? I find it hard to believe you!

All jokes aside, one thing I’ve never understood is: why resort to financing to drive a prestige vehicle? If we can afford a prestigious vehicle, it is because we are rich. And if you’re rich, you don’t need finance! It’s all very mysterious.

But I digress. I know that vehicle financing is a choice for many people. I understand the logic. Vehicle: large amount. Vehicle payment: small amount. We prefer small quantities. Even if it means making the bank richer.

If that’s you, I encourage you to save up to buy another new or used vehicle yourself. To do it within your means, without the false sense of wealth that access to credit provides, and without the psychological and financial risks that accompany the creation of debt.

No more “carriage payments”! Luck.

And if you decide to continue financing the vehicle, no problem. But then you lose the right to complain that “everything is expensive”.

We can’t have everything.

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