Portfolio Confidential

Q:  manage my own portfolio and currently have half invested in the U.S. market and half in the Canadian market. Do you think now would be a good time for me to diversify and add some international (non-North American) exposure?

A: As always, I would need to know more about your overall situation to be in a position to offer specific investment advice. Having said that, given that Canada's global index weight is only about two to three percent of the global market cap, you are significantly over-weight Canada! Interestingly, Canadians and Australians are among the countries where investors over-weight their home market—look at the chart below.

Nothing wrong with rooting for Canada (or Australia) in the Olympics, but that level of home market favouritism is a bad idea when investing: the 50-year (before tax) average annual returns in Canadian dollars to 31 December 2021, has been 9.6% for the TSE versus 11.7% for the S&P 500 and 10.5% for European stocks. Giving up a percentage point or two to European or U.S. markets may not seem like a big deal, but over enough years, it makes a huge difference.

According to a Financial Times post from 24 December 2022 "…in Europe, the UK and in Japan, stocks are on sale. Our friend Dec Mullarkey, of SLC Management, reckons the gap in P/E ratios between U.S. and European stocks sits at six points, the widest it has been in decades."

Sounds like a great opportunity to me! But how to play it? EAFE markets could be pretty shaky right now as we may be heading into a global recession and/or World War III as a result of the war in Ukraine. And as John Bogle said in InvestmentNews in 2017 when asked about the argument that overseas stocks are cheaper than U.S. stocks: "One reason could be they are underpriced," Mr. Bogle said. "The other could be that they have a higher risk. Price/Earnings (PE) ratios don't come out of nowhere."

In the same article, Bogle also pointed out that "when you buy the S&P 500, you buy a portfolio where roughly half the earnings and revenue comes from abroad." Taking this into consideration, since you have 50% invested in the U.S. market, we can assume that you already have a 25% exposure to international stocks. My advice is to reduce your Canadian exposure to a much lower percentage of your overall portfolio and, depending on your risk tolerance, either add to your existing U.S. holdings and/or invest in EAFE markets via a low-cost Exchange-Traded Fund (ETF).

Full disclosure: at the time of writing, my personal portfolio has 15% exposure to Canada, so I am going to take my own advice and sell 12% to mirror the fact that Canada represents only two to three percent of the total world equity market value. I'll move 7% into my Vanguard U.S. Total Market Index ETF (ticker: VUN), and I'll add a new 6% position in iShares MSCI EAFE ETF (ticker: EFA.) The MSCI EAFE Index is composed of large and mid-cap developed market stocks, excluding the U.S. and Canada, and the ETF provides broad exposure to markets in Europe, Australia, and Asia.

The answer to your question is: yes. I do think now would be a good time to diversify and add some international exposure. But this isn't because I have a crystal ball and can accurately predict how world markets will perform in 2023 and beyond. I am basing my opinion on historic data and the relevant weight of the Canadian equity market versus world markets. Once again, since I do not know the details of your full financial situation, this is just a general answer to your question and needs to be taken in that context.

Q: My wife and I are both 71, and our portfolio is worth about $4 million. We own our house, and we have no children. I think we should be okay financially, but our big issues are around succession.  Given that we have separate trading accounts in our names, as well as separate Registered Retirement Income Funds (RRIFs) and separate Tax-Free Savings Accounts (TFSAs), and we want to distribute this money on our deaths, half to family and half to charity and friends, how do you organize this? We consider all the money in common: do we need two separate Wills, as we would like each family to receive equal amounts?

Also, how is the tax question settled on the last death?  Do they sell off everything right away, or can someone (and who would that someone be) sell discerningly, keeping tax consequences in mind?

A: All great questions! I asked Shaun Doody to offer his input. Shaun is a Partner in Fogler Rubinoff's Tax and Wills and Estates departments.

With many couples, the disposition of assets on the death of the first to die is often quite straightforward. Many (sometimes all) assets are held by the couple as joint tenants with the right of survivorship ("JTWROS"); this type of ownership, which can apply to a wide variety of assets, including real estate and bank/investment accounts, ensures that the assets pass directly to the surviving partner on death. Certain other assets (such as so-called "registered" accounts like RRSPs, RRIFs, and TFSAs, as well as insurance policies) can have a designated beneficiary; if the designated beneficiary is the surviving partner, then this will ensure that these assets will also pass directly to the survivor on death. None of these types of assets would depend on the deceased having a Will or their estate undergoing the probate process.

On the death of the surviving partner, however, the disposition of assets often becomes more complicated. In such a situation, a Will is extremely important because it can set out a distribution that both parties agree to while they are both alive. In this situation, many couples have what is often called "mirror Wills"; these types of Will are essentially mirror images of each other so that, regardless of which partner dies first, the assets of both people are still distributed in the same manner (because both members of the couple have to be alive to draft mirror Wills, they should be drafted even in a situation where assets would generally pass under JTWROS or through beneficiary designations). A properly drafted mirror Will encompasses bequests (to be paid on the first or second to die, as the couple wishes, and with language to ensure that such bequests are not paid twice if the couple dies at the same time), trusts (for younger children/incapable adults or for special assets like cottages), charitable contributions, and many other methods of dealing with assets.

Another option, which does not involve all the assets passing to the surviving partner on the death of the first to die, is for the Will of the first to die to establish what is called a "spouse trust." In such a trust, the assets of the first to die do not become the property of the survivor but are held in trust for their benefit; at the time of their death, the assets pass pursuant to the provisions of the Will of the first to die (this ensures that the survivor cannot change their mind (and their Will) after the death of the first to die.) One downside of this method, however, is that it would generally result in the survivor not having control over their inherited assets, which a surviving spouse may find unduly constraining.

A properly structured Will would also let the executors of the deceased (who are the people appointed in the Will to manage the estate and distribute it to the beneficiaries) deal with estate assets in a manner that makes sense. As an example, if the Will requires that the estate be divided among children—which often requires the disposition of such assets and the distribution of cash to the children—the provisions of the Will can make it clear that the executor does not have to hold a "fire sale" of estate assets but can, instead, dispose of assets over a reasonable amount of time in a judicious manner. The Will provision can also allow the executors to retain professional assistance where needed (lawyers, accountants, financial advisors, etc.), which, given that the role of an executor has become ever more complex over the years, is often a necessity with anything but the simplest of estates.

While speaking with a lawyer is a critical first step in drafting a Will, other professionals (such as accountants and financial advisors, as mentioned above) are often key players in the Will-drafting process and form part of a complete estate-planning team.

Do you have questions about your own investment portfolio? I have recently set up The Rich Thinking® Financial Advice Hotline. This will be a win/win: you get a free 30-minute confidential Zoom chat offering an independent, unbiased perspective on your financial situation with no sales pitch! In exchange, I get to use the anonymized data that will come from these conversations to make my Rich Thinking research even better. Email me tobook your Zoom discussion: barbara@barbarastewart.ca