Are You Feeling Rich These Days?

Are you one of the extremely fortunate investors sitting on significant accrued gains generated during the market run-up over the last few years? Nvidia is a common name which has skyrocketed over 750% in the past 2 years alone. Are your gains from stocks such as Apple, that you have fortunately held for many years? Couple these returns with the currency gains, and you are even further ahead.

You may be confident there is more upside ahead and intend to hold on longer. Besides, your portfolio can only keep going up in a straight line, right? I will leave it to the DIY investors, portfolio managers or other Canadian MoneySaver contributors out there who are in a much better position than I am to assess company valuations and further upside potential. Instead, I will focus on the financial planning considerations in this article.

A Good Time To Reflect:

• How has the recent growth in your portfolio changed your net worth over the past few years?
• Do you know what impact this run-up has had on your ability to achieve your financial goals— in particular, your retirement goal?
• Are you well ahead of where you estimated you would be at this point, and in a much better position to retire sooner than initially planned?
• Have the prospects for a more extravagant lifestyle improved?
• Are you spending more now given you have this new-found wealth (at least on paper anyway)?
• Have you contemplated trimming the big gain positions and moving to a more broadly diversified or conservative asset mix, with a lower expected rate of return?
• Should you rebalance your portfolio and take profits, or hold on further but then run the risk of jeopardizing your favourable position?
• Is your friend giving you advice?
• How would you feel if you gave back a chunk of your profit? Remember Nortel? The old saying “a bird in the hand is better than two in the bush.”

So much to think about for sure!

My Advice Is This:

1. Update your net worth projection to take stock (no puns intended) and assess what your situation looks like now. The beginning of the year is a great time to work on your plan. Run a second scenario to see what the impact is if your portfolio gives back a chunk of the accrued gains. Another scenario could include a lower rate of return assumption to evaluate the probability of achieving your goal. Have you evaluated your rate of return need, or simply focused on the rate of return want?
2. Big-ticket purchases may have sat on the back burner, and you are in a better position now to proceed. For example, you may wish to help your children with a downpayment on their first home. Run this scenario and see what the impact is.
3. Do you have charitable intent? If so, gifting securities with an accrued gain can be a very tax-efficient way to initiate this.
4. Review your asset mix to assess how far your portfolio has drifted from the target asset allocation. Do you have a target asset allocation?
5. What is the weighting of the winners relative to the overall portfolio? If stock A was 5% and now represents 25%, re-evaluate the risk factor. There may be merit in taking some profit and offsetting the gains by triggering losses on names that have underperformed.
6. Consider building more certainty into your portfolio by reallocating a portion of the growth stocks to large-cap dividend payers. Perhaps Canadian dividend payers that have been out of favour should be brought back into the conversation.
7. Be mindful of the proposed capital gains inclusion rate change which the federal government has deferred to January 1, 2026.  The first $250,000 of capital gains in a non-registered account are included in income at a 50% inclusion, whereas amounts over and above are included at the new 66 2/3 % inclusion rate. The new 66 2/3% inclusion rates apply to any gains inside a corporation.

Finally, be careful not to fall into the overconfidence bias trap. Be sure to maintain a disciplined, calculated, and focused approach.