Capital Topics

In this Episode, James Parkyn & François Doyon La Rochelle start by giving an update on the results of active vs passive management for 2023.

They then review the 2024 Federal Budget and the New Rules that affect Investors.

In this Episode, James Parkyn & François Doyon La Rochelle present James' latest eBook called "The New Retirement"

In this Episode, James Parkyn & François Doyon La Rochelle discuss the updated PWL long term expected returns on asset classes with PWL's senior researcher Raymond Kerzérho.

Then, they review with him a research paper from Professor Scott Cederburg on life cycle asset allocation.

In this Episode, James Parkyn & François Doyon La Rochelle will continue their yearly tradition and discuss the Investing Lessons of 2023

Then, they review "The Price of Time" by Edward Chancellor, a book that they highly recommend for all their listeners.

In this Episode, James Parkyn & François Doyon La Rochelle will start the new year by covering the global capital markets performance for 2023.

Then, they tackle how to measure your portfolio performance. Which goes hand in hand with the first topic.

Links to share:

Episode 48: 2022 Investing Lessons & 2023 Outlook — Capital Topics By James Parkyn & François Doyon La Rochelle https://www.capitaltopics.com/listen-here/episode-48-2022-investing-lessons-and-2023-outlook

- Market Statistics - Parkyn Doyon La Rochelle - December 2023 - PWL Capital By Raymond Kerzérho https://www.pwlcapital.com/resources/market-statistics-parkyn-doyon-la-rochelle-december-2023/

In this Episode, James Parkyn & François Doyon La Rochelle will first discuss year-end tax planning strategies for investors in Capital Market Securities

Then, they will chat with Raymond Kerzerho, PWL's Senior Researcher, about his latest blog regarding Canada's major pension plans.

Links to share:

• Episode 56 : RESP Withdrawal Planning and Investor Home Market Bias — Capital Topics By James Parkyn & François Doyon La Rochelle
• Episode #52 : The New Tax-Free First Home Savings Account FHSA — Capital Topics By James Parkyn & François Doyon La Rochelle
• Twelve Observations About the Big Canadian Pension Managers and Eight Takeaways for Individual Investors - PWL Capital By Raymond Kerzérho

In this Episode, James Parkyn & François Doyon La Rochelle will address why we prefer using total market ETFs or mutual funds to build our portfolios rather than other investments solutions.

They also share their thoughts on a real hot button issue for all Canadians, Taxes!

Raising taxes on top income earners is often proposed as a solution for generating a lot of extra revenues and at the same time reducing inequality in Canada.

Links to share:

• Raise taxes on high income earners? Let's try another approach — Capital Topics By James Parkyn - https://www.capitaltopics.com/blogue/raise-taxes-on-high-income-earners-lets-try-another-approach
• US Total Market or S&P 500 ETFs? - PWL Capital By Raymond Kerzérho - https://www.pwlcapital.com/us-total-market-or-sp-500-etfs/

In this Episode, James Parkyn & François Doyon La Rochelle give a brief overview of how registered education savings plan works and what are the best strategies to tap into your RESP savings most efficiently.

They also drill down into the stock component of your portfolio and on how much global exposure you should have.

Links to share:

- The Debate About the 60/40 Balanced Portfolio and the Review of the RRIF Mandatory Withdrawal Rules — Capital Topics By James Parkyn & François Doyon La Rochelle

- Capital Topics episode 23: The High Cost of Investing in Hedge Funds - PWL Capital By James Parkyn, Raymond Kerzérho & François Doyon La Rochelle

- Canadian Home Bias: A Case for Global Equity Diversification | Vanguard Canada By Bilal Hasanjee - Vanguard

- Global equity investing: The benefits of diversification and sizing your allocation (vanguard.com) By Scott J. Donaldson, Harshdepp Ahluwalia, Giulio Renzi-Ricci, Victor Zhu & Alexander Aleksandrovich – Vanguard

-The Canadian Equity Market Isn't as Canadian As it... | Morningstar By Dan Lefkovitz

In this Episode, James Parkyn & François Doyon La Rochelle review the Market Statistics as of June 30,2023 and update their listeners on Inflation.

Market Statistics – June 2023 : Market Statistics - Statistiques de marché (pwlcapital.com)

Read The Script:

1) Introduction:

François Doyon La Rochelle:

You're listening to Capital Topics, episode #55!

This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.

Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.

In this episode, we will discuss the following points:

- For our first topic, we will review and comment the market statistics for the first half of the year.

- And for our next topic, we will give you an update on inflation.

- Please note before we move on to our topics that we will take a summer break. We will be back for our next episode on September 28th.

Enjoy!

2) Mid-Year Review of Markets:

François Doyon La Rochelle: I will start today with a review of the market statistics as of June 30, 2023. So, after a very difficult year in 2022 when pretty much all asset classes posted big losses, I'm sure our listeners will be relieved and happy to hear that in the first half of 2023 stocks and bonds are generating positive returns. These positive returns are across the board as all the asset classes we follow, except for one, are in positive territory. As a reminder, you can find our Market Statistics report on our Capital Topics website in the resources section or on the PWL Capital website in our team section. We will provide the link for the market stats on the podcast page.

James Parkyn: Indeed François, after the historical devastation where both stocks and bonds were hammered with double-digit negative returns, investors should be quite pleased with the returns so far this year.

François Doyon La Rochelle: Totally James, particularly given the fact that most market pundits were skeptical about the outlook for markets entering the year. Many of them were forecasting a recession that has not yet materialized.

James Parkyn: Correct it has not materialized yet, GDP growth continues to be positive, personal consumption remains stubbornly strong and jobs are still being created at a strong pace both here in Canada and the U.S. Market Pundits are however expecting GDP growth to slow and even contract in the coming months on the back of the historic interest rate tightening cycle imposed by the central banks. As a reminder to our listeners, to tame inflation that had risen to multi decades highs last year - 8.1% here in Canada and 9.1% in the U.S., the Bank of Canada increased its overnight rate from 0.25% in March 2022 to 5% in July 2023. In the U.S., the Federal Reserve increased the Fed fund rates from 0.25% to 5.25% over the same period.

François Doyon La Rochelle: I must say that this tightening cycle had the desired effect on inflation since it has come down here in Canada and the U.S. to 2.8% and 3% respectively which is close to the long-term target of 2% set by both central banks. This said, the tightening cycle caused collateral damages particularly in the U.S. regional banks as the sharp interest rate increases left some banks in delicate positions prompting the intervention of the Federal Reserve.

James Parkyn: Regional banks were not the only worry for the markets in the first half of the year, there was, yet another debt ceiling political crisis in the U.S. that dominated the headlines for several weeks until an agreement to raise the debt limit was reached in June.

François Doyon La Rochelle: Despite all this noise, the stock markets have had a strong first half, particularly in the U.S. and the internationally developed markets. Those equities are now in the bull market territory and have risen more than 20% from the lows reached in October 2022. We will look at the details a bit later, but the S&P500 Index in the U.S. is up, in U.S. dollars, by 27.5% since the lows, and the index for internationally developed equities, the MSCI EAFE (Which is the acronym of Europe, Asia and the Far East) is up roughly 32.8% since the lows. Here in Canada, we are not yet in a bull market since the S&P/TSX Composite is up only 12.8% from October's 2022 lows.

James Parkyn: This may be surprising for some investors who are still emotionally caught up in the recency bias of last year. Capital market history teaches us that strong bull markets most often follow painful bear markets.

François Doyon La Rochelle: Absolutely James and there is a good chart from Dimensional in their mid-year review that shows, based on data from the Fama/French Total US Market Index extending from July 1926 to December 2022, that historically, after a market decline of 20% or more, the average return one year later is 22.2%, the cumulative average return after 3 years is 41.1% and the cumulative average return after 5 years is 71.8%.

James Parkyn: Yes, this data is very powerful as it is a stark reminder that you need to stay disciplined in bear markets by staying invested and sticking to your long-term plan. You can't afford to be out of the market when it turns positive.

François Doyon La Rochelle: Despite this nice rally from last year's bottom, it must be mentioned that the main indexes have not fully recovered to where they were at their all-time highs.

James Parkyn: Effectively, the S&P500, the MSCI EAFE, and the S&P/TSX Composite are still between 5% to 7% off their previous peaks as of June 30th.

François Doyon La Rochelle: With this being said let's now look at the market statistics as of June 30th. Let's start with the Canadian fixed income. 2022 was a historically difficult year for bonds as it was the worst year in many decades. Canadian short-term bonds in 2022 were down 4.04% and the total bond market, which holds longer-dated maturities was down by a whopping 11.7%. Year-to-date as of June 30th, despite an increase in the interest rate of 1% by the Bank of Canada, the Canadian short-term bonds are up 1.01% and the Canadian total bond market is up 2.51%.

James Parkyn: It's nice to see positive numbers in the bond market again, however, the performance you are quoting Francois is total return numbers, which includes interest income. If we look at bond prices, remember bond yields and bond prices move in opposite directions, short-term bonds on a price basis were down slightly. Longer-duration bond prices were up a bit.

François Doyon La Rochelle: You are right James, bond prices are down but especially in the short end because of the impact of the latest interest rate increases from the BOC. As an indication the yield on the benchmark Government of Canada 2-year bond was 3.82% at the beginning of the year and it now sits at 4.21%, so the price went down. The yield on the Government of Canada 10-year bond was 3.30% at the start of the year and it was 3.26% on June 30th, so the price went up.

James Parkyn: For those looking for the safety of GICs, there are some juicy rates available now. For example, you can get over 5.5% for a 1-year GIC and about 5.2% for a 5-year.

François Doyon La Rochelle: Now let's look at equities, stock markets around the globe were up everywhere year-to-date. Canadian equities were up by 5.70% led mainly by growth stocks since the large and mid-cap growth stocks had a performance of 8.1% versus 4.0% for large and mid-cap value stocks. Small-cap stocks also delivered a positive return with a performance of 3.0% year-to-date as of June 30th. In the U.S., the total stock market is up 16.2% in USD but because the Canadian dollar gained relative to the US dollar the performance in Canadian dollars was 13.5%. Year-to-date, large and mid-cap growth stocks vastly outperformed value stocks with a performance in Canadian dollars of 26% versus only 2.7% for value stocks. Small cap returned 5.6% in Canadian dollars with small growth again outperforming value with a performance of 10.9% versus 0.1% for small value.

James Parkyn: This is a complete reversal of what happened last year when large and mid-cap growth stocks were down significantly more than large and mid-cap value stocks. What is significant this year, is that a handful of mega-cap stocks are dominating the returns in the U.S. stock market. According to Morningstar, as of May 31st, 97% of the return on the Morningstar U.S. Large and Mid-Cap Index, which performs closely with the S&P500 Index, came from the 10 largest stocks in the index. This means that only 3% of the return came from all the over 700 stocks.

François Doyon La Rochelle: Yes, year-to-date performance in the U.S. market is very concentrated in a few stocks and a few sectors. Just looking at the top 5 holdings of the S&P500, which includes Apple, Microsoft, Amazon, NVIDIA, and Alphabet (Google) they have a performance year-to-date as of June 30th ranging from positive 36% for Alphabet to a whopping 189% for NVIDIA. In terms of sectors, 4 out of 7 sectors are experiencing negative returns in the first half. The sectors that are performing well are the technology, communication services, and consumer discretionary sectors. According to an RBC Global Asset Management report, since January 1st, 2020, only seven stocks in the S&P500 Index have produced more than half its cumulative return and these stocks are Meta, Apple, Alphabet, Microsoft, Amazon, NVIDIA and Tesla.

James Parkyn: Wow, this is impressive, but it means that if you are a stock picker and you did not hold any of these stocks in your portfolio you probably did poorly compared to the index. Remember there are thousands of stocks in the U.S. market and even more globally and research shows that most stocks, over very long periods, underperform one-month U.S. Treasury bills. This capital market history fact comes as a major surprise to most investors.

François Doyon La Rochelle: That's correct and that's one of the reasons why stock pickers have trouble beating indexes and why we use broadly diversified portfolios to make sure we have the winners in our clients' accounts.

Finally, looking at internationally developed equities, large and mid-cap stocks were also up year-to-date, they were up by 12.1% in local currency. In Canadian dollars, international developed equities were up 9.1% since the Canadian Dollar appreciated against the basket of currencies included in the MSCI EAFE Index. Here again, large and mid-cap growth stocks have outperformed value stocks with a performance of 11.5% in Canadian dollars compared to 6.7% for large and mid-cap value stocks. Similarly, in the U.S. and Canada, the small-cap stocks trailed large and mid-caps with a performance of 3.1%, that's also in Canadian dollars.

To conclude, emerging markets lagged compared to developed markets with a year-to-date performance of 2.6%, and contrary to developed markets' value and small-cap stocks fared better than growth and large-cap stocks.

So this wraps up the review of what happened in the Markets during the first half of the year.

3) Update on Inflation:

Francois Doyon La Rochelle: Our Main Topic today is an Update on Inflation. We have covered Inflation a lot since the spring of 2022. James, maybe we can start with a summary of where are we at now with Inflation Rates?

James Parkyn: Francois, Inflation cooled last month to its lowest pace in two years. As indicated earlier in the podcast, in the U.S., the consumer-price index or CPI climbed 3% in June from a year earlier, sharply below the recent peak of 9.1% in June 2022. The index for core inflation, which excludes volatile food and energy prices, in June also posted its smallest monthly increase in more than two years. The annual rate of inflation is now at the lowest it has been in just over two years. While the rate of inflation in the June CPI report remains above where the Fed wants it to be, the data suggests clear progress in getting price pressures down toward more acceptable levels.

François Doyon La Rochelle: In Canada, the news was even better. The latest Inflation number came in at 2.8% in June. What about Europe and the UK James?

James Parkyn: In Europe, inflation has eased to 5.5% in the 20 countries using the euro and to 7.9% in the U.K., but that's still far above the Central Banks' 2% target.

François Doyon La Rochelle: Does there appear to be a consensus among economists? Can Central Banks declare victory over Inflation?

James Parkyn: Nick Timaros in the WSJ reported in a recent article that: "Some Fed policymakers and economists are concerned that the easing in inflation will be temporary. They see inflation's slowdown as long overdue after the fading of pandemic-related shocks that pushed up rents and the prices of transportation and cars. And they worry underlying price pressures could persist, requiring the Fed to lift rates higher and hold them there for longer." So their biggest fear François is about whether wages and price growth can slow enough without an economic downturn.

François Doyon La Rochelle: Karen Dynan, an economist at Harvard University is quoted in that article. She states, "While things seem to be heading in the right direction with inflation, we are only at the start of a long process". So, James, what are economists on the other side of the debate saying?

James Parkyn: Nick Timaros goes on to state: "Other economists say that thinking ignores signs of current economic slowing that will gradually subdue price pressures. They also argue inflation will slow enough to push "real" or inflation-adjusted interest rates higher in the coming months. That would provide additional monetary restraint even if this week's rate increase is the last of the current tightening cycle".

François Doyon La Rochelle: So, the debate is really around wage inflation. The first camp of economists is nervous that there is too little slack and too much demand in the economy. They are not confident that inflation will return to the Fed's 2% inflation target in the coming years.

James Parkyn: Exactly. Many of these economists worry that wage growth is too strong. Without a recession, they see a tight labor market pushing up core inflation next year. Since an overheated labor market is likely to show up first in wages, many see pay gains as a good proxy of underlying inflation pressure. The thinking is that 3.5% annual wage growth would be consistent with inflation between 2% and 2.5%, assuming productivity grows around 1% to 1.5% a year.

François Doyon La Rochelle: According to the U.S Labor Department's employment-cost index, wages and salaries rose 5% in the January-to-March period from a year earlier. The Fed watches this index closely because it is the most comprehensive measure of wage growth.

James Parkyn: The second camp of economists believes there is ample evidence that the labor market is cooling, in turn reducing inflationary pressures. They point out that the amount of time it takes unemployed workers to find new work has been growing. Increases in hours worked by private-sector employees have slowed along with the number of unfilled jobs. Benjamin Tal, the deputy chief economist at CIBC World Markets, is quoted in the Global Mail that: "He expects the economy to be bleeding vacancies as opposed to jobs. Namely, companies will not be hiring but not be firing."

François Doyon La Rochelle: The encouraging news about inflation falling is that it has created space for the Central banks to be more patient and take their time about any further rate hikes.

James Parkyn: To support that point François, the Fed in the U.S. last month held its benchmark federal funds rate steady in a range between 5% and 5.25%. This was the first pause after 10 consecutive increases since March 2022, when officials raised it from near zero. As a reminder for our audience, the conventional thinking is that Interest-rate increases slow the economy through financial markets by lowering asset prices and raising the cost of borrowing. As we can see by what has happened in the financial markets and the economy, this has yet to transpire.

François Doyon La Rochelle: On July 27th, the Fed increased the Fed Funds rate by 25 Basis points to a target range between 5.25% and 5.50%. This was widely expected by the markets. This matches the prior peak reached over 2006-07. You'd have to go back to 2001 to find a period when rates were higher than today. The speed and size of the hikes (over 500 basis points in 16 months) are unmatched by any Fed tightening campaign since 1980. That said, CPI inflation is getting close to the Fed's 2% target. What are Central Bankers saying about the latest inflation numbers James?

James Parkyn: They are all staying on message insisting the pain will only get worse if inflation slips out of control. The governor of the Bank of England Andrew Bailey was quoted in the Financial Times: "Our job is to return inflation to target, and we will do what is necessary. I understand the concerns that go with that, but I'm afraid I always have to say – that it is a worse outcome if we don't get inflation back to target." Despite the risk of recession François, I feel the central bankers are emphasizing that they expect to keep rates at their peaks for some time – likely longer than stock and bond markets expect. They also appear to me to be very synchronized.

François Doyon La Rochelle: I agree James. The Bank for International Settlements (or BIS), the Switzerland-based global organization of central banks appears to agree as well. In a recent report, the BIS highlighted that since early 2021, almost 95% of the world's central banks have raised rates. Even more than during the inflationary oil price shocks of the 1970s. The BIS called it "the most synchronized and intense monetary policy tightening in decades."

James Parkyn: I think there is increasing acknowledgment that Policy mistakes were made during the Pandemic. That in turn requires that interest rates be normalized at much higher levels than the ultra-low rates in effect during the pandemic.

François Doyon La Rochelle: James, what are economists saying about the impact of fiscal policy or government spending on Inflation?

James Parkyn: David Parkinson writing in the Globe & Mail recently, asked the following question: "How much of Canada's nagging inflation problem can we blame on government spending?" In his article in the wake of the Bank of Canada's latest interest-rate increase, he highlights the fact Governor Tiff Macklem noted in the bank's latest economic projections, government spending growth is running at about two percent. This is on par with the estimated rate that the economy's potential output is growing. This implies that the government's contribution to the economy's supply-demand balance is neutral. In other words, it's not helping the excess demand problem that continues to fuel inflation pressures, but it's not compounding the problem, either. But he also goes on to make the case that if you compare government spending to pre-pandemic levels, fiscal policy is stimulative.

François Doyon La Rochelle: Intuitively, governments could also help fight inflation by reducing deficit-funded spending to cut demand. This would lower the pressure on Central Banks to raise interest rates further.

James Parkyn: To that point Francois, Gita Gopinath deputy executive director of the International Monetary Fund, in a speech at the European Central Bank's (ECB) annual conference in Sintra, Portugal, last month argued "Some side effects of fighting inflation with monetary policy could be reduced by giving fiscal policy a bigger role. Indeed, economic conditions call for fiscal tightening," She went on to say: "Given the economic conditions we have, both because of high inflation and record high debt levels, the two would call for a tightening of fiscal policy. If you look at projected fiscal deficits for many G7 countries, they look too high for far too long."

François Doyon La Rochelle: She also warned and I quote her: "Central banks must accept the "uncomfortable truth" that they may have to tolerate a longer period of inflation above their 2 percent target to avert a financial crisis." James, is there good news for Investors with lower Inflation?

James Parkyn: Yes, I believe there is good news for Investors in rates staying higher for longer. I also think that the real news is that we are now starting to get positive Real Interest rates. Finally, many Economists are forecasting lower Central Bank rates as early as 2024 and as far out as 2025. Morningstar chief economist Preston Caldwell stated in a recent report that "Inflation is now showing broad-based signs of deceleration," says "The Fed is still likely to hike in its July meeting, but today's CPI Inflation report supports our view that the Fed will pivot to aggressive cutting in 2024 after inflation falls." François, we now know that the Fed effectively increased their Fed funds rate after July's meeting.

François Doyon La Rochelle: For investors who have been avoiding fixed income because they're afraid of rising rates, now is the time to revisit their fixed income portfolio. Investors are getting compensated on a real basis, meaning after inflation, from their bond investments, and that hasn't been the case for quite some time.

James Parkyn: The perfect example is we are now getting much better rates on GICs. Recently, the GIC rates were 5.5% for 1 year, and about 5.2% for 5 years. These rates are significantly higher than our Estimate for Expected Return on Bonds of 4.26%. Our listeners can find our latest PWL Financial Planning Assumptions paper published on our PWL Website. Despite rising bond prices generally, yields are now higher than they have been for most of the past decade.

François Doyon La Rochelle: Right now, you're getting a good income out of a fixed income. Rates look attractive. On a "real" basis, rates also look attractive when compared to inflation expectations for the coming years. For example, the PWL estimate for inflation is 2.2% a year, meanwhile, an investor buying a 5-year GIC, like you mentioned James, would get 5.2% or a real yield of 3%.

James Parkyn: In Conclusion Francois, the key for Investors is that even if the Fed raises rates a bit further, the end of the current cycle of increases is on the horizon unless there is a dramatic resurgence in inflation. As we have said many times, we do not preach market timing about stocks AND bonds. Specifically for bonds, don't try to time the peak in interest rates.

I want to share with our listeners an interesting quote from Dimensional in their Mid-year Review report: "What investors do know is that markets will continue to quickly process information as it becomes available. A long-term plan, one focused on individual goals and built on confidence in market prices, can put investors in the best place for a good experience, whatever may be in store".

François Doyon La Rochelle: In other words, James, don't try to guess the end of the hiking cycle. As a reminder to our Listeners, our discipline is to invest with "The Investor Mindset, focused on the long term". We don't want to be led astray by short-term noise in the financial media and recent financial market volatility. This challenge is daunting and applies to all Investors including us Professionals. We have said it often on our Podcast: "It is simple to say but not easy to do: We must always be cognizant that we can fall into a trap of trying to "Forecast the Future".

4) Conclusion:

François Doyon La Rochelle: Thank you, James Parkyn for sharing your expertise and your knowledge.

James Parkyn: You are welcome, Francois.

François Doyon La Rochelle: That's it for episode #55 of Capital Topics!

Do not forget, if you would like to submit questions or suggestions for the show, please email us at: [email protected]

Also, if you like our podcast, please share it when with family and friends and if you have not subscribed to it, please do.

Again, thank you for tuning in and please join us for our next episode on September 28 exceptionally as we are taking a break for the summer.

Enjoy your summer and see you soon!

In this Episode, James Parkyn & François Doyon La Rochelle review the latest eBook authored by James Parkyn titled Investing Life Skills for Early Savers.

This eBook is available on the Capital topics website and in our Team's section on the PWL Capital website and will provide important life skills that will serve early savers on the road of making smart money decisions.

eBook:

Investing Life Skills for Early Savers - PWL Capital

Read The Script:

1. Introduction:

François Doyon La Rochelle: You're listening to Capital Topics, episode #54!

This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.

Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.

In this episode, we will review the latest eBook authored by James titled INVESTING LIFE SKILLS FOR EARLY SAVERS.

Enjoy!

1. Investing Life Skills for Early Savers :

François Doyon La Rochelle: In today's Podcast, we will cover only one Topic which is a Review of the latest eBook Authored by you James titled INVESTING LIFE SKILLS FOR EARLY SAVERS. This ebook is available on the Capital Topics website and in our Team's section on the PWL Capital website. This has been a major effort and, in our Team, we made a strategic decision a few years back to add Next Generation clients to our Practice which includes the children of our current clients.

James Parkyn: Yes, this has been a major undertaking as these younger clients are, in many cases, in the early stages of learning about saving and investing. In some cases, their thinking and experience are surprisingly advanced. In the case of the children of our clients, the parents were very happy we are undertaking this initiative. For them, it is part of their family values to help them develop what they consider to be an essential life skill going forward in their lives. Many of them also realize they wish they had started much younger than they did.

François Doyon La Rochelle: For our Listeners, this is an eBook format, so it is relatively short at 28 pages with a lot of pictures and graphic illustrations and, is meant to be an easy jargon-free read. James, what is the main message you are trying to get across to Early Savers?

James Parkyn: My main message is about the importance of starting early.

It is a life skill that will serve you well on the road of life and will give you the confidence to make smart money decisions. Just to be clear for our listeners, what we mean by 'Life Skills' are the skills you need to make the most out of life. Any skill that is useful in your life can be considered a life skill. Early savers need to make this a high priority.

François Doyon La Rochelle: You have had a lot of meetings with Early Savers over the last few years and what did you learn?

James Parkyn: First off, I had to connect with them, so I decided to start the conversation from the vantage point of "Start with Why". The idea comes from Author Simon Sinek who wrote a highly regarded book on the topic.

François Doyon La Rochelle: What else resonates for them?

James Parkyn: Well, I always like to connect with anecdotes about music. I mention the song "Time" by Pink Floyd from the seminal album "Dark Side of the Moon published in the early 1970s".

François Doyon La Rochelle: Ok, but this music is from their Parents' generation.

There is another song on that album called "Money", but the lyrics are mostly political.

James Parkyn: To my surprise, many know Pink Floyd and the song. What I like about the lyrics from the song "Time" is that they convey a key message about the importance of starting early. I suspect the Band probably did not realize it when they wrote the words but somehow, they related a fundamental lesson about learning Investing Life Skills early.

François Doyon La Rochelle: What do the lyrics say?

James Parkyn: "Ticking away the moments that make up a dull day. Fritter and waste the hours in an offhand way. Kicking around on a piece of ground in your hometown. Waiting for someone or something to show you the way. Tired of lying in the sunshine, staying home to watch the rain. You are young and life is long, and there is time to kill today. And then one day you find ten years have got behind you. No one told you when to run, you missed the starting gun."

François Doyon La Rochelle: Wow, that's incredible how relevant the message is to our Topic. This new eBook is trying to help Early Savers to understand the importance of starting now. There will be no one to fire a starting gun to tell you to start learning and investing.

James Parkyn: Exactly Francois. For me personally the joy of seeing the light go on about Investing in Life Skills is because they realize the concepts are really "accessible".

François Doyon La Rochelle: I like your choice of the word "Accessible" because it is very empowering to know and really feel "I can do this!". So, James let's get into the meat of the eBook content. What are the Life Skills Early Savers need to develop?

James Parkyn: We cover seven Investing Life Skills. The first Life Skill is Getting started. Investing in some Early Savers can be scary: "Where do I start? It is so complicated!" Even worse, some Early Savers may wonder "Why do I need to pay attention now? I have all my life ahead of me!" When you're starting, it's not easy to find the best route to achieving the financial goals you have set for yourself and your family. There are so many competing priorities to consider and only limited resources to commit to any one of them.

François Doyon La Rochelle: Adding to the challenge in today's wired world with the internet and social media ever present, Early Savers have way too much information at their fingertips and in fact, what they are seeking is real knowledge and practical information that they can use to get started and to help them on this new journey they are starting.

James Parkyn: I agree which is why we explain key concepts to help Early Savers take the first critical steps on their financial journey. And yes, Francois, we hope they will learn how to make good decisions and avoid major mistakes.

François Doyon La Rochelle: Getting started is all about explaining the magic of compound interest. Maybe you can explain to our listeners what compound interest is.

James Parkyn: Compounding is no small thing. Albert Einstein is reputed to have called it the eighth wonder of the world. It's the interest on the interest you've already earned. In other words, compounding is the money you earn on your original investment, plus the money you earn on the returns already accumulated over time.

François Doyon La Rochelle: There's another important reason for getting started early on your investing journey. You will be getting into the habit of saving while learning the principles of investing and building your confidence.

James Parkyn: Precisely! When you have lived through many bear markets and as you know Francois, we have had four since 2000, then your experience as an Investor with a Long-Term Mindset you will be less likely to panic sell because you have a well-engineered diversified portfolio is that you will recover and go on to grow in value.

François Doyon La Rochelle: What's a good way to get started?

James Parkyn: Early Savers should set up an automatic withdrawal from their bank account that goes directly to an investment account. That's called paying yourself first (before all your other expenses), and it works because you naturally adjust your spending to the amount of money you have on hand.

François Doyon La Rochelle: James let's discuss the second Life Skill Early Savers need to develop: Managing your Human Capital.

James Parkyn: Many people are unaware of their most valuable asset. It remains hidden in plain sight because it's taken for granted. What is this asset? Your potential to generate income over your lifetime. It's called your human capital and can be defined as the present value of all your future earnings. For most people, that works out to a huge number, especially if you're young. Your human capital is even more valuable because it's a hedge against inflation. Earnings tend to rise with the cost of living.

François Doyon La Rochelle: James the term "present value of all your future earnings" is jargon for many Listeners and Early Savers.

James Parkyn: Human capital is the present value of all future wages from working. You can increase your human capital by continuing your education or going for on-the-job training. Think of all your future expected earnings that you will take home as compensation up to the time you will retire from working. Then, estimate what it would be worth as a lump sum of investment capital.

François Doyon La Rochelle: As it grows, you also need to protect your human capital in the same way you safeguard other important assets.

James Parkyn: If you're like most people, you'll be rich in human capital when you start out in your working life, but poor in financial capital. As you move through your career, your goal should be to convert your human capital into financial capital by earning, saving and making good investment decisions. Both forms of capital are important, give them both the attention they deserve.

François Doyon La Rochelle: When you add into the mix the compound return on both Human and Financial Capital that is how you get to financial independence however you may define it. James let's now discuss the third skill Early Savers need to develop: Cultivating an Investor Mindset.

James Parkyn: Many people approach investing as if it were a game of chance that can be won by placing bets on the latest hot stock or investment fad. Blackrock Asset Management surveyed in 2015, 51% of Canadians said at the time that they believe investing is like gambling. While investing and gambling both involve risking money in hopes of realizing a financial gain, that's where the similarity ends. Investing – when done right – is about buying assets that have a positive expected return thanks to the income they pay and/or their long-term capital appreciation.

François Doyon La Rochelle: We have covered this concept in a past Podcast. The difference between Investing and Speculating sometimes is a question of perspective and timeline. Speculation often means you expect short-term easy gains. This is a question that challenges even us professionals.

James Parkyn: I agree. But for Early Savers, the Life Skill to develop is patiently sticking to a broadly diversified portfolio that reflects their risk tolerance and accepting that it may not produce the excitement of trying to hit the jackpot on a hot stock or a cryptocurrency. But they shouldn't be investing for thrills. Your aim should be to achieve your long-term goals, and that's not something to gamble on. I have heard the expression it is ok to lose money when you are young you can make it up later in life. I hate that and tell Early Savers to beware as if you look at the loss based on the effect of compounding over multiple decades of your lifespan then the loss is massively larger.

François Doyon La Rochelle: Next up is the fourth Life Skill Early Savers need to develop: Keeping Your Eye on the Long Term. What is your message about this Life Skill?

James Parkyn: Successful investors make consistent, smart money decisions and stick with them through market ups and downs over a period of decades. That requires discipline, an essential skill to learn early in your investing life. Develop your Plan and stick to it.

François Doyon La Rochelle: This is about not falling prey to the noise in the financial media and trading based on short-term capital market events and economic news. We have talked often on our Podcast about avoiding "market timing". Researchers have found it's one of the worst wealth-destroying mistakes you can make. A sharp downturn in the markets can be particularly difficult for some people to stomach. They talk themselves into the idea that they can pull out now and get back in when things get better.

James Parkyn: However, trying to time the market presents at least two problems. First, if you sell now, when will you know it's safe to buy back into the market? Second, you risk missing out on gains while you're on the sidelines and that can have a huge impact on your long-term returns. While it can be challenging, the best investment strategy – as supported by decades of academic research – is to hold a portfolio of broadly diversified, passively managed investments through good times and bad. Why passively managed? Because research clearly shows that most active fund managers underperform their index benchmark in any given year.

François Doyon La Rochelle: The fifth Life Skill Early Savers need to develop: Understanding Human Biases. James, what do you say to Early savers about the psychological aspects of Investing?

James Parkyn: I tell them they need to understand how their basic human instincts can cause them to make poor financial decisions. We all fall prey to mental and emotional biases that can lead to serious investing errors.

François Doyon La Rochelle: To control the influence of mental and emotional biases, you must first be aware of them and then guide yourself back to rational thinking and good decision-making processes. What are some of the key biases?

James Parkyn: Behavioral economics has been a huge growth area with two major Nobel Prizes being awarded to academics for their work in the past 20 years or so. There is an amazing amount of research that deals with Behavioral biases. I highlight the top 4 that I believe Early Savers should watch out for in your thinking about investments.

1. Recency Bias: This is the tendency to give greater importance to events that have occurred in the recent past. Recency bias can cause you to depart from your investment plan to jump on a hot market trend or sell during a market downturn.

1. Over-Confidence: It's common for people to develop unwarranted confidence in their abilities, including their ability to make exceptional profits in financial markets. Overconfidence can lead investors to make risky bets based on a misguided belief in their ability to predict the future.

1. Confirmation Bias: This occurs when investors seek out information that confirms their point of view and discount divergent opinions.

1. Loss Aversion: Behavioral finance researchers have determined that people feel the pain of a loss about twice as strong as the pleasure they get from an equivalent gain. Loss aversion is another bias that can distort your decision-making by causing you to prioritize avoiding losses over earning gains.

François Doyon La Rochelle: Good investment advice and processes such as annual portfolio reviews, automatic contributions, and periodic portfolio rebalancing can help Early Savers keep their emotions in check and keep them on track with their Long-Term Investment plan. The sixth Life Skill Early Savers need to develop: Diversifying to Reduce Your Risk. This is another topic we address often on our Podcast. What is the message of this Life Skill?

James Parkyn: Diversifying your portfolio by holding many investments in different markets is a fundamental strategy for successful investing. Noble Prize-winning economist Harry Markowitz famously described it as "the only free lunch in finance."

François Doyon La Rochelle: Markowitz demonstrated that when you combine assets that perform differently over time you lower the overall riskiness of your portfolio without reducing expected returns.

James Parkyn: It comes down to not putting all your eggs in one basket. When you own just a few stocks, the failure of any one of those companies can lead to a permanent loss of your savings. But when you own many stocks—ideally all of them in a given market— the poor performance of some will be offset by the better performance of others.

François Doyon La Rochelle: A word of caution: This doesn't mean you will never lose, but your gains and losses will reflect those of the overall market. You've removed what's known as unsystematic risk – the risk unique to a specific company or industry.

James Parkyn: The same principle applies to holding different asset types such as stocks, bonds, and real estate. Each produces different returns in any given period and by combining them in a portfolio you reduce its riskiness.

François Doyon La Rochelle: It may come as a surprise, but research shows that many investors hold woefully under-diversified portfolios.

James Parkyn: Fortunately, Early Savers can avoid this basic investing error by owning passively managed funds that allow you to broadly diversify at a very low cost.

François Doyon La Rochelle: The seventh and last Life Skill Early Savers need to develop: Controlling Your Emotions. James, how is this Life Skill different compared to learning about Human cognitive biases?

James Parkyn: Great Question Francois. As you said earlier, here is the message I want to convey is to pay attention to how you react emotionally to market volatility. Among the most important of these is to tune out media noise about the day-to-day movements in the markets and focus instead on your long-term Investment plan. It should have asset allocation targets that reflect your objectives and risk tolerance. As markets move up or down, you periodically rebalance your portfolio back to your target asset allocations and keep your faith that the process works overtime.

François Doyon La Rochelle: As we have stated before, The Financial Services industry and the Financial Media promote active management which pushes us to do a lot of trading. Think of all the industry advertising showing someone in front of a trading screen of stock quotes. Unfortunately, many Investors equate trading with adding value.

James Parkyn: I have a great quote from a longtime collaborator of Warrant Buffett, Louis Simpson, who oversaw investments at Berkshire Hathaway's giant GEICO insurance subsidiary. He once said: "We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting and not a lot of thinking." For me, this, in a nutshell, reflects how we manage our clients' money and how we are different from most of the financial services industry. We buy very carefully; we hold and defer tax and rebalance when it makes sense to do so. We do this all while sticking to the Clients' well-thought-out plans.

François Doyon La Rochelle: I love this quote too. Louis A. Simpson was one of Warren Buffett's favorite fund managers and a one-time potential successor. He was much lesser known than Buffett or Charlie Munger. Sadly, he passed away at the beginning of 2022 at age 85. We should point out to our Listeners that by acting a lot he means trading a lot. So now, let's get back to the Investing Life Skill of Controlling Your Emotions. When markets go up it's relatively easy to keep your emotions in check for most investors when your portfolio goes up every day.

James Parkyn: Down markets are a fact of life when you invest. Taking a controlled amount of risk is what allows you to earn returns and build your wealth. However, falling markets can create anxiety and pressure to act which can feel overwhelming at times. This is when investors must control their emotions to avoid making errors that will lead to a permanent loss of capital.

François Doyon La Rochelle: All Investors must guard against the fact their thoughts can deceive them. You may think you're making rational decisions when in fact your actions are being driven by fear. That's why you should prepare yourself for market downturns by striving to recognize when you're feeling under stress and cultivating strategies to deal with unhealthy emotions. James, you also provide recommendations for Books. What do you recommend?

James Parkyn: First, I recommend that the Early Savers read our eBook "7 Deadly Sins of Investing" that we published in 2021. It is in some ways a companion piece to this new eBook.

I also recommend two must-reads for Early Savers who want to develop a deeper level of knowledge:

1. The Psychology of Money by Morgan Housel: This is a very popular book and it is very useful to both Professional Investors and Individuals. award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life's most important topics.

1. Think, Act, and Invest Like Warren Buffett by Larry E. Swedroe Think, act and invest like the best investor out there: Warren Buffett. While you can't invest exactly like he does, Think, Act, and Invest Like Warren Buffett provides a solid, sensible investing approach based on Buffett's advice regarding investment strategies.

François Doyon La Rochelle: James, you also provide recommendations for Books for Parents. What Books do you recommend for them?

James Parkyn: I recommend two very good but different books:

1. It Makes Total Cents by Tom Henske. He is an American author. Some material in this book is specific to Americans Investors and reflects US tax laws. It Makes Total Cents (spelled with a "c" as a play on words) is a short, easy-to-read bite-size guide to help parents. This concise book is meant to be read a chapter per month covering the 12 most important money topics that a child should understand before going to university or college.

1. The Wisest Investment by Robin Taub. She is a Canadian and her book is about teaching your kids to be responsible, independent, and money smart. Robin Taub lays out a roadmap for teaching your kids about money.

Financial literacy has been a long-ignored subject and the result has been generation after generation entering adulthood without a grasp of money basics. This eventually leads to unnecessary stress in adulthood and ultimately causes stress leading to health issues.

François Doyon La Rochelle: James, you also provide recommendations for Books for Parents. What Books do you recommend for them?

1. Conclusion:

François Doyon La Rochelle: So, this is it for today's podcast Investing Life Skills for Early savers. Thank you, James Parkyn for sharing your expertise and your knowledge.

James Parkyn: You are welcome, Francois.

François Doyon La Rochelle: That's it for episode #54 of Capital Topics!

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