As the year draws to a close, the Rational Reminder Podcast team delivers an engaging year-end special with a unique twist. Rather than curating clips from previous episodes, Ben Felix, Dan Bortolotti, and Mark McGrath dive into an AMA-style episode, answering listener-submitted questions. They share reflections on lessons learned, highlight impactful community discussions, and provide thoughtful takes on investing strategies, personal growth, and financial planning. They discuss their evolving views on human capital integration, portfolio diversification, and the importance of behavioural finance in long-term planning. They also revisit key themes from earlier episodes and offer heartfelt thank-yous to their team and audience for a remarkable year. Join us for a mix of practical insights, entertaining banter, and a glimpse into what’s ahead for the Rational Reminder Podcast. Don’t miss this memorable year-end wrap-up!
Key Points From This Episode:
(0:00:00) Episode format and a thank you to the PWL Capital team, producers, and audience.
(0:05:14) Influential community discussions and their insights on efficient ETF design.
(0:10:14) Hear the reason behind Ben's decision to shave his head for so long.
(0:13:51) How to integrate human capital into useful financial planning and strategy.
(0:19:33) They share their thoughts on the evolving definition of success in life and work.
(0:23:33) Their top finance and investment book recommendations for retail investors.
(0:28:50) Uncover the nuances of assessing a value premium within an ETF.
(0:30:46) How real-life events shaped their approach to providing guidance and financial advice.
(0:37:18) Return stacking and a comparison of Dimensional's and Avantis' vector portfolios.
(0:41:05) Risks of bonds, bills, and credit and why past returns do not guarantee future results.
(0:48:27) Explore the complexities of tax-efficient ETFs and Thrift Savings Plan (TSP) options.
(0:56:50) Balancing long-term investment assumptions with short-term market dynamics.
(1:03:23) We debate the U.S. market's valuation and the implications for asset allocation.
(1:10:15) Hard financial lessons from Ben, Mark, and Dan's investment journeys.
(1:16:29) Unpack the pros and cons of life insurance, infinite banking, and whole life insurance.
(1:28:35) Aftershow: reviews, Marks's beard, a final thank you, and more.
Read the Transcript
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We are hosted by me, Benjamin Felix, Chief Investment Officer at PWL Capital, Dan Bortolotti, Portfolio Manager at PWL Capital, and Mark McGrath, Associate Portfolio Manager at PWL Capital.
Mark McGrath: Welcome. Big episode.
Ben Felix: Yes. The year-end episode.
Dan Bortolotti: Lots to get through today.
Ben Felix: Yes. It could be a long episode. I don't know. We'll see, we'll see how it goes. We're breaking from our usual year-end tradition, which listeners may be familiar with. We've mentioned this in a previous episode, but I'll explain quickly now. Instead of taking clips from throughout the year and making a clip episode where we kind of discuss some of the highlights from the year, we instead asked our audience to send us questions. The idea would become like an AMA. We have not prepared. We're just going to go through the questions and answer them as they come. We received in total of 161 questions from listeners. We're not going to get through all of them. That's why I joked about potentially being a long episode, but we're going to go through as many as we can. That's going to be the episode. I think it's a neat idea. If it works well, we'll do it again next year.
Before we get into that, I do want to say a few year-end thank yous, which is another tradition that we've kept as long as we've been doing the podcast. So, I want to thank Matt Gambino, who's actually here with us now, but you can't see him. He's our video producer. He's the guy that makes all of the YouTube content happen. Without him, we would not have that channel and that content. And YouTube has been a big source of growth for the podcast. The audio downloads have been kind of flat this year, but on YouTube, it's continued to grow at a pretty good pace. That's great to see. We have Matt to thank for creating that content.
I also want to thank The Podcast Consultant. That's the name of their business. They are our audio producers, so all of the audio post-production goes through them. They've been doing our podcast ever since the very beginning. If you want to start a podcast and pay for professional production, they are the place to go. They do a great job.
I also have to thank the PWL Compliance team. They listen to every single episode before it's published. They jokingly gave us an extra big thanks for the two-hour Mike Green and Randy Cohen episode that was like pretty geeky for our compliance team, are not necessarily into the geekiest content. So, they thanked us for that one, which was funny.
Dan Bortolotti: How often does compliance ever flag anything and say, “You guys can't say that on the air?”
Ben Felix: They never do.
Dan Bortolotti: I didn't think so.
Ben Felix: I don't think we've had anything rejected. Big stuff is like forward-looking promises. We're going to get you 12% a year returns. We're usually saying the opposite.
Dan Bortolotti: The answer is actually 11.
Ben Felix: I think we're pretty tame from a compliance perspective. They don't give us a hard time. It's incredible they listen to every single episode before it's released, and we appreciate that.
Also, to thank the marketing team at PWL, they take all of the content and make sure it gets posted in the right places at the right times, which is in itself a big undertaking. They also do all the social media posting on Twitter and Instagram to help promote the podcast and get it into the hands of more people or the ears of more people. Angelica Montagano, in particular, she leads the marketing team and she's been closely involved with the podcast since the very beginning.
Also, I have to thank all the guests that have joined us this year. Obviously, we appreciate, we ask some pretty incredible people to come join us for conversations and they usually say yes and they usually dedicate a lot of time both preparing to talk to us and talking to us.
I've got to thank the moderators in the Rational Reminder community. We have a growing moderation team, of volunteer moderators who are people that are highly engaged in the Rational Reminder community. They really make it what it is. If you compare it to other online forums that discuss investment-related topics, I think our moderation is much heavier than the typical online forum. I think that's a good thing, and I think the people who were involved in the Rational Reminder community would agree with me and that's why they're there. So, the moderation team does a great job keeping things on track.
Also, I would like to thank the listeners, if you're listening, I mean, this is why we're creating content. If nobody listened, it would not be that fun to make a podcast. I mean, the content in this episode is all questions from listeners. That's pretty cool too. Then I'm going to thank you, two guys, Dan and Mark, for joining us as new co-hosts this year. It's an exciting evolution of the podcast, and I'm excited to continue building it out with you guys.
Mark McGrath: Well, likewise, thank you for having us and for all the work you put into it as well.
Dan Bortolotti: It's really been very enjoyable to kind of get back behind the mic and have this kind of outreach with readers, listeners, viewers, clients, prospects, everybody else.
Ben Felix: You guys are both naturals and it's a lot of fun making the podcast with you. All right. So, I think we can jump into our AMA episode. We have these 161 questions from listeners and we're just going to start from the very first one. So, it's a bit of a first come, first serve, I guess. We will save the questions that we don't answer today for future episodes. Because we got so many questions, I think that we can probably make an AMA segment for future episodes for a while, at least until we run out of questions. So, let's start.
***
Ben Felix: The first question that we got came in from Tala, who is a member of the Rational Reminder community. They ask, “What was a particularly influential post or discussion in the community that genuinely changed your mind about something?” Oh, man. That one's basically on me because I know you guys aren't in there as much.
The discussion with or about Andrew Chen's research and the discussion that followed his episode was really interesting, made you think a lot about just the robustness of data around factors and whether differences in expected returns are really there statistically, and what potentially could not invalidate Andrew's research, but give hope to factor investors despite Andrew's research. I think Andrew's research is valid, but there are still good reasons to believe that tilting toward higher expected return stocks can make sense. That's probably the biggest one.
I mean, the discussions about Mike Green's stuff and discussion that followed Mike Green's episode, that was also pretty eye-opening. I mean, I know you guys listen to that episode too, but that discussion in the community around that leading up to that episode and following it was definitely eye-opening just in terms of seeing the different sides of that argument on whether index funds are really having a detrimental effect on financial markets. Those are probably the biggest ones for me.
Mark McGrath: Yes, like you said, I don't spend a ton of time in there unless I'm tagged in something, so I'll leave that question with you then.
Ben Felix: Off the top of my head, those are the two biggest ones, but the discussion is so good. Often pick up ideas and bits and pieces and arguments that maybe haven't seen before.
Mark McGrath: Nice. Are we just going to rotate through the questions then?
Ben Felix: Yes, sure.
Mark McGrath: To all on the podcast, what would an ETF composed in your name consist of? This is an anonymous question. What would an ETF composed and your name consists of? So, assuming this is a question around what would that investment strategy look like, I'll let you guys give your thoughts to you. But I think honestly, so the funds we use for clients are from Dimensional Fund Advisors. And Ben, you said the other day, it's kind of like a big index fund with mild tilts towards some of these factors that we talk about all the time. I'm just talking about specifically their 100 % equity portfolio, but it's a single fund global equity right now, something like 13,000 global stocks with a bit of Canadian home bias, super low fee, tilted towards small value and profitability. And there's a reason we use those funds, but it's exactly what we believe is optimal for most clients. So, I think our ETFs would probably be pretty similar to that.
Ben Felix: Dan's answer might be different, but for me, I'd be similar to you, Mark, that I'd mostly market cap weight, but a bit of a tilt toward sources of higher expected return. I'd keep it super simple, but I would definitely maintain broad diversification, which is why it would be like a super unprofitable ETF for me as the ETF issuer.
Dan Bortolotti: That said, I would say that the asset allocation ETFs, the traditional ones from Vanguard, iShares, BMO, and now even a few other ETF providers are pretty great. I mean, just at a little context of that, I mean, going back, when I first started talking about this stuff 15 years ago, I used to dream of funds like that. I openly said that on my blog and in articles that I wrote, if only an ETF provider could just build a balanced index portfolio in a single fund, there is hundreds of billions of dollars in balanced mutual funds, almost all of them actively managed and very expensive. I was saying if people could just build an ETF with a low-cost, diversified index portfolio in one product, that's all anybody really needs.
Now, thank goodness, we have many of them, and people are voting with their money. Those asset allocation ETFs have been extremely successful. I wasn't sure whether there would be much take-up, but I'm very glad to see that they've been very successful.
Ben Felix: You could have launched a Canadian Couch Potato asset the allocation ETF and that would have probably picked up a lot of assets.
Dan Bortolotti: I will tell you the opportunity came up. We didn't get very far with it. There was some discussions. I'm glad I didn't do it, but I'm glad that somebody did it and branded it. Well, didn't brand it, just put it under their own ETF provider name because the brand isn't what's important, but certainly have a lot better choices than we did 10 years ago.
Ben Felix: Would that be your ETF if you made an ETF in your name?
Dan Bortolotti: Yes, exactly. I would say that if somebody said to me, “Can you design the ideal ETF?” I would say it's probably already been done. You could argue over little tweaks, but I mean, we're 98% of the way there.
Mark McGrath: XEQT or VEQT?
Dan Bortolotti: It doesn't even need to be VEQT, right? It could be VBAL, VGRO, or whatever your asset allocation happens to be. I actually like the Vanguard ones a little bit more than the iShares ones. I think the iShares ones are maybe a little too heavily weighted to U.S. equities, but that's a quibble. I think either one of them are just fine.
Ben Felix: I agree with all that.
Dan Bortolotti: Ben, you got to do the next question.
Ben Felix: You guys can't answer that one. "Please explain why Ben decided to shave his head for so long." It's a pretty boring story, honestly. At a point in time, as now, I'm getting my hair cut again at a regular frequency now, but 10 years ago, I would go and get my haircut every three to four weeks, kind of like this, like I have it now. I'd go to this barber shop that was like, I don't know, a 10-minute drive from my house. I was starting to have kids and it was getting busier and busier, but I would go and get my haircut. And the place I went to took cash only, which was fine. It was like an old-school barber shop. It was kind of cool.
But there's an ATM in the building that it was in, and so I would just go to the ATM that had no extra fees. I used the Tangerine Bank at the time, which is like a low-fee bank in Canada, and they were bought by Scotiabank, so you could use their ATMs with no fees. Scotiabank ATM, so the Scotiabank ATM. I'd go and take $20 out, which was enough to pay for the haircut and a tip. It was easy. And then they raised their prices to a point where they might have been to $20 or something like that or close to $20. So, to tip, I would have had to have $20 and some change. I was like, “Where am I going to get change? This is crazy.”
So, I went in one time and I paid for my haircut, or I got cash out to pay for my haircut. Maybe it's the second time. Maybe I went in the first time and I'd like break a second 20 and then I had all this change kicking around. This is brutal. And the second time I went back, I told the guy, he starts cutting and I'm thinking like, “Man, I don't want to do this every few weeks. This is really annoying.” And he's like halfway through cutting my hair. I was like, “You know what? Just shave it off.” He looks at me like shocked eyes. He's like, “Are you sure?” “Yeah, just shave it down to a no-guard.” He's like, “Wow, okay.” And he did. And then I left and I stopped at Walmart on the way home and bought clippers and shaved my own head for 10 years. It was very convenient. Then recently decided to stop shaving my head. That's it. That's the story.
Mark McGrath: That is not the explanation I was expecting. And it does really beg the question, A, where were you getting haircuts for only 20 bucks? And B, why didn't you just use a credit card?
Ben Felix: They were cash only.
Mark McGrath: Oh, okay.
Ben Felix: It was like a really old-school place. And maybe that's why their prices were so low too, was in like an old strip mall and super old school. They hadn't updated the place in 30 years or something. I liked that about it. And they had a bunch of older guys that cut hair and you could tell they'd been there for probably decades. That vibe was cool, but it was cash only. I couldn't pay with a credit card. That was it. I mean, the inconvenience of having to figure out where to get my extra $2 coin from every few weeks was like, “You know what? I'm just not going to do this anymore.”
Mark McGrath: Once you broke that second 20, if it's $2 for a tip, that's 10 haircuts with the change. You only have to break the 20 once every 10 haircuts.
Ben Felix: And I'm carrying change around in my wallet like it's just too much.
Mark McGrath: Why don't you stick it at home in a jar and you just go bring it when you go to get your haircut then?
Ben Felix: I guess.
Mark McGrath: A haircut bowl.
Ben Felix: I could have solved the problem different ways, Mark, but that's the way I chose to solve it.
Mark McGrath: On the one hand, I'm not surprised. On the other hand, I thought it was just a pure efficiency thing. I'm busy. This is easier. I can do it at home.
Ben Felix: That was part of it too. Then it became, this is minorly inconvenient, and then I started thinking about it. For 10 years, I cut my hair once a week, and it took 10 minutes, and it was great.
Mark McGrath: I just booked a haircut, and it's $40, and it's just a barber, nothing fancy, and that's before tip. So, tip on top, you're looking at $50 now.
Ben Felix: Mine's about the same now. The other thing that happened is that we moved after that, and I wasn't 10 minutes away anymore, so became a hassle, and I guess I could have found another place, maybe, I don't know. Now, where we live, there's a really great hairdresser that's like a five-minute walk from my house. So, that also played into the decision to start having hair again. Anyway, enough about hair.
Mark McGrath: Dan, you want to read the next one?
Dan Bortolotti: Okay. So, our next question. How should individual investors consider their working human capital as an allocation to their overall portfolio? Is there strong evidence to consider diversifying even further from their native currency? For example, a negative tilt away from home country bias. For example, 50% U.S. allocation for U.S. investors. That question is from Mitchell Layton.
Mark McGrath: We talked about this, I don't think it's released yet, or if it will be released by the time of this recording. But we talked about this with a guest recently, how to kind of integrate human capital into useful financial planning models. I think it's difficult like Moshe Milevsky has a book on this called Are You a Stock or a Bond? It largely talks about the volatility and stability of your income stream. So, I mean, if you're a firefighter, or a police officer, or a tenured professor or something like that. It was a very, very stable income, a relatively good income, perhaps a pension, workplace benefits, long-term disability and everything else. Your human capital is more bond-like in nature. It's a lot more stable. Or if you're a sales professional that's especially in like a cyclical industry, say like a real estate or tech sales or something like that, your human capital is a lot more volatile.
So, I think you do have to keep in mind. A lot of this for me comes down to risk capacity and risk tolerance profiling. We go through an exercise with all of our clients where we look at risk capacity and tolerance and helping to design portfolios. Part of that risk capacity is some of those things I just mentioned. Do you have stable income? When do you need to withdraw from the portfolio? Do you have adequate life and disability insurance? So, I think there's ways that you can kind of incorporate that into the capacity section of portfolio design. But it's very difficult to say, I mean, you can take the present value, I guess, of your existing salary with some assumptions over your lifetime, but if you jump firms, if you'd make a career change, it's very, very difficult to integrate that, but that's kind of how I think of it as just through the risk profile lens.
Ben Felix: I think that makes sense. We spent a lot of time talking about this when we did some episodes on the Intertemporal Capital Asset Pricing Model, ICAPM. We had Sebastien Betermier talking about his paper, 'Who Are the Value and Growth Investors?', where he talked about how people shift from having a value tilt or a growth tilt to a value tilt over time as there's human capital characteristics change. We talked to John Cochran. He's got that paper 'Portfolios for Long-Term Investors' where he talks about how his vision for financial advice is that financial advisors could be helping people get their optimal portfolio tilts relative to their human capital, and that would be a really valuable form of financial advice.
So, for a bit, we're thinking about how could we do that? How could we systematically give that kind of advice? Then we talked to Gerard O'Reilly from Dimensional Fund Advisers about it when he was on Rational Reminder and we're kind of asking for his input and advice and like, how could we incorporate that information into designing portfolios? I thought his answer was pretty insightful, practically. He was like, I think that's a really smart idea, theoretically, but practically, that's kind of like measuring with a micrometre and cutting with an axe. We just don't have enough high-fidelity information to really make precise allocation recommendations between different types of stocks based on what your human capital characteristics are.
In the Rational Reminder community, actually, somebody had written notes about Scott Cederburg's paper on life cycle investing. He recently released an updated version of it. It talks about the correlation between domestic stocks and labour income. They have labour income in the model, and they look at different specifications for the correlation between labour income and home country stocks, and they do find that when you have a high correlation between labour income and your home country market, the optimal amount of home country bias does decrease. There's still a pretty high optimal home country bias in their model, but it goes from, I think, around a third in domestic stocks to around 20% at a high correlation between labour income and the stock market.
So, interesting stuff to think about, I think practically though, it's like the Gerard O'Reilly comment, kind of hard to really pinpoint how to use that information in practice. What do you think, Dan?
Dan Bortolotti: Yes, I think this is probably much more of an issue for people who are investing in individual stocks as opposed to having already very broadly diversified portfolios. Some of the things I have seen in the past or people, for example, having a high allocation to stocks in their employer's company. Or if for example, you work in the tech sector and most of your investments are in tech stocks, then you're just kind of doubling down on those idiosyncratic risks. I think if you start from a premise where you already have a very broadly diversified portfolio with minimal exposure to any individual company and only moderate exposure to any individual sector, it's less of a concern.
Ben Felix: Yes, I agree with that. Some of our clients own some employer stock in technology companies that make up a pretty large portion of the index. So, we did start wondering at one point, should we be doing like a direct indexing model where we can carve these out? And then you look at what the actual percentage of in the overall global portfolio, in many cases not to 100% stock portfolio, you look at what that stock actually makes up of the overall thing.
Dan Bortolotti: One percent or something.
Ben Felix: Yes. It's a tiny, tiny amount. So, you have to go carve up the whole portfolio, increase costs, potentially introduce other problems to address that, we decided it was probably not worth it. I agree. Broad diversification makes a lot of those issues go away.
Mark McGrath: I think the other part to that question is interesting as well, the issue you tilt away from home country bias. I think that's largely a currency question. I guess it's an economic question as well. If all of your human capital is in Canadian currency, how do you justify the home bias as well? But I think Ben, your answer on Cederburg's paper looked at that labour income. I haven't read the paper, but I assume currency risk was part of it.
Ben Felix: Yes, for sure, it was. And it's interesting that you still see a pretty significant home-country bias, even when there's a reasonably high correlation.
Mark McGrath: Next question?
Ben Felix: Yes, next one. How do you define success in your life? How has this definition changed over time for each of you?
Dan Bortolotti: I got asked that question when I was a guest on the podcast, as of course, everyone does. I would answer the question much differently from the way I answered it on the podcast. If I remember correctly, it was something to the fact of, in the past, I think I might have focused more on achievement, professional success, family and relationships and things like that too, although that's a little harder to quantify.
But I would say over time, the way it has changed for me is just to try to focus on being as authentic as possible and whatever your definition of success and failure in terms of your professional life, your career, be honest about it and do the best you can in every situation and be as genuine as possible in every relationship you have, and success will typically follow from that.
Ben Felix: Yes, that's good. I was asked when we did the CFA Wealth Management Conference, I think that was last year. I think my answer was something along the lines of, if you're successful, you have to enjoy what you're doing kind of minute-to-minute, most of the time, not all the time, but you have to be pretty happy with how you spend your time. But you also have to be able to look back on the broader picture of your life and be happy with where you are. Those two things can often conflict because you might really enjoy drinking beers in the hot tub. But if you do that all the time, you might look back and reflect on your life and be like, “Wow, I have not done a whole lot.”
How has that changed over time? I have a harder time thinking about that one. Having kids changes stuff, but I think that relates back to how you spend your time. I'd be more inclined to stay at the office for 15 hours a day while I was studying for the CFA exams before having kids. I'd be much less willing to do that now.
Dan Bortolotti: You're down to 12 or 13 now?
Ben Felix: Yes. I don't think I worked that much. I hope not. It depends what you count as work, I guess. I don't know. I like your answer a lot though, Dan, about how achievement and stuff like that was really important earlier, and that's changed over time. I think the same is probably true for me too, spending time with family, having not necessarily lots but good, genuine relationships with a handful of people I think is really important. But for sure, early on in my career, I was super focused on got to do the CFA, got to do my MBA, got to do the CFP or whatever. I'm glad I did all that stuff. But if I had to do it all again now, I don't think I would.
Mark McGrath: Such a big question. You can fail at a lot of stuff and still be generally a success. It almost kind of depends on how you weight the things that are important to you as well. When I make big decisions, I try to fast forward myself to my deathbed and then look back on things and this kind of goes to your answers as well. Thinking really big picture about your whole life.
Joining PWL, I had to do the same exercise, like am I going to look back on my life and say, “I should not have done that thing.” I often find that that gives me a lot of clarity. Ben, to your point, once you have kids or at least once I had kids, how I think about the answers to those questions has changed dramatically. I agree with a lot of things that both of you have said. I mean, for me, I think it's, did you leave the world a better place, Ben, when you came into it. And even that is super vague, but if you can have a positive impact on people and be a net benefit to the human race, I think that alone can be a good definition of success. And then I think separately from that, how your kids and family or anybody close to you views you like, what's your legacy over the long run? Was it Alfred Nobel who created the Nobel Prize because people thought he died and they wrote awful things about him in the newspaper. And then he thought, this is my legacy and he totally changed.
Dan Bortolotti: No, you know what happened there? He invented TNT.
Mark McGrath: Oh, that's what it was.
Dan Bortolotti: He visualized what people would write about him when he died that he thought people would say, you created this incredibly destructive force. So, his solution was to create a more positive force, which everybody remembers him now for the Nobel Prizes and most people forget what he was originally famous for.
Mark McGrath: Mission accomplished. Good on you, Alfred.
Dan Bortolotti: Yes, it worked.
Mark McGrath: So, I don't know, I think family and how my kids perceive me and what benefit I bring to them and just raising them and teaching them to be good humans and I'll be content with that in the long run.
Ben Felix: I'm going to read the next one because you guys are going to be biased. I'm just kidding. I'm going to be biased too. What personal finance/investment books would you recommend for a retail investor? I think you guys both have great books. Dan, your most recent one is Reboot Your Portfolio. I read that in full before we had you on our podcast to prepare for that conversation. I thought it was fantastic.
Dan Bortolotti: Thank you.
Ben Felix: Mark, you've got a book coming out called Wealthier - The Canadian Edition. You're co-authoring with Dan Solin, and I've also read that book. I read the American version before you rewrote it for Canada. And I've also read your Canadian version. Also, excellent. Those are two great options from people that I know and trust. That's all I got.
Mark McGrath: Thank you. Appreciate the nod.
Dan Bortolotti: What's the release date, Mark, on yours?
Mark McGrath: I’m going to call it down as soon as we finish recording this. So, the audiobook has been recorded, which is really cool.
Dan Bortolotti: Did you read it?
Mark McGrath: No, I was going to. Actually, I'd asked Ben to do it originally, and he reluctantly agreed to do it. Then as we kind of got closer, I was like, “Hey, man, can you be able to get this done on time?” He's like, “Yes, yes. For sure.” And I was like, “Hey, we got to get this done in two weeks.” He's like, “Not a chance.” And I was like, “Yes, I figured.” I wish you just said no in the first place. I know how busy you are.
Ben Felix: I thought I would do it later, and then later became now, and I didn't have time. It always happens.
Mark McGrath: Totally. Story of my life. Dan has released, obviously, several audiobooks himself, and so he had a great narrator already lined up, and that narrator had it back to us in a couple of weeks. So really, we're just dotting I’s and crossing T's now, like the website's ready to go. I think we're any day now I'm going to hit the go button. It's December 9th that we're recording this. I'm hoping before the end of the year it's looking pretty good for some stocking stuffers for Christmas. Might actually be out by the time people are listening to this.
But this is going to be a clichéd answer, I think, because it's become such a super famous book now. But I think The Psychology of Money by Morgan Housel was one of the more impactful books I've read. I'll say virtually none of it was new information to me, but Morgan's writing style is just so incredible and the way he reframes thoughts into ways that make me rethink my answers to the same questions is just incredible. So, I think I highlighted and dogged that book more than any other personal finance book I've ever read.
Dan Bortolotti: I'd say something along those lines, too. In fact, I was going to mention that specific title. I mean, another one would be Thinking Fast and Slow by Daniel Kahneman, which is not an investment book. But once you've gotten to the point where you have an understanding of the fundamentals of investing and you're going to get to that pretty quickly with any number of introductory investment books. I'll back up and say, for me, in my formative period, it was like John Bogle and Larry Swedroe, and I read all the classics of indexing, A Random Walk Down Wall Street and Winning the Loser's Game and all those. Those are out of date now in the sense that they don't offer a lot of practical investment advice, but they do ground you in the theory of just how difficult it is to beat the market and why it's mostly a huge waste of time.
Once you get to that, the stuff that you need to keep reading, even after you think you already know it, is the behavioural investing and behavioural finance stuff because we're all so prone to that. Kahneman talks about it in his book, it's even when you're aware of the biases, you will still fall prey to them. So, you have to keep reminding yourself how difficult it is to be an investor from a behavioural point of view. Most of the rest ends up being details once you have a fundamental grasp of the concepts.
Mark McGrath: That's a great answer. I'll throw one more in the ring, and I've talked about this book before. That's Christine Van Cauwenberghe 's Wealth Planning Strategies for Canadians. She releases an updated version every year. I have it on like subscribe and save, basically, it's through Thomson Reuters every March or so, I get a fresh copy. It's a reference guide to all things financial planning. So, if you're a DIY investor who really wants to get into the financial planning side of things, I don't think there's much if anything in that book about investing, but there's lots on family dynamics, tax implications, estate planning, insurance, disability planning, everything you can think of. So, it's a thousand pages, but it's also really, really well organized.
The first half is organized by relationship status. So, it's like, if you're married, here's a section for you. If you're divorced or separated or widowed. You can kind of just go to the section that applies to you, and then you can just read through that entire section, and it's really, really enlightening. And as a reference book, I go back to that book almost daily for financial planning questions.
Dan Bortolotti: It's very well written for a big doorstopper of a reference book. Like you're not
going to sit down and read it sequentially, but whenever you zero in on the section you need, it's extremely clearly written. It's a pretty invaluable resource, I think, for anyone in financial planning.
Mark McGrath: The end of each section contains an appendix that goes through the differences on a per-province basis. So, it can apply to you regardless of where you live, which is pretty rare because a lot of things like family law, for example, really are provincial domains. And so, if you're reading something on a blog and you don't realize that it's actually written for an audience in a different province than you, you might actually take away the wrong understanding of the answer.
Ben Felix: I've got the 2024 edition, not 2025. You're going to think I'm crazy based on what you just said, Dan, but I read it cover to cover.
Dan Bortolotti: Yes. That doesn't surprise me, actually.
Ben Felix: It is really well-written.
Mark McGrath: So, I did too. It's one of the textbooks for the CLU designation. I originally read it cover to cover, and that's what led me to realize how powerful the book it was for a practitioner, and I think for DIY investors as well.
Okay, next one. I expect Ben's probably going to answer this one, but "Could you cover the approach on how to assess a value premium within an ETF, please? The only small-cap value funds available in the UK are the U.S. and European Spider MSCI, as an example. Love the content." And that's from Nick.
Ben Felix: You can assess the exposure to the value premium with an ETF by running a factor regression, that'll tell you its historical risk exposure, and then you can also look at its characteristics. So, you can look at a value metric like price to book, and you can see how the fund you're looking at compares to the index or to some other benchmark. That's really it. You've got factor regressions for how its exposures have been historically, and then you've got characteristics for how its current exposures look, and that's pretty much it. There's a lot more than just looking at those things, though, that goes into choosing a fund and an investment, so caution is warranted. There's a reason that there are threads in the Rational Reminder community with many thousands of posts discussing which value fund you should pick if you're in the UK.
There are topics on that topic that are extremely long. There's a reason for that. It's not as simple as a single metric.
Dan Bortolotti: You should do a YouTube video one of these days on how to do a factor regression. I tried to figure it out on my own with absolutely zero technical background or training in that and couldn't figure it out at all.
Ben Felix: Justin Bender used to have blog posts on that. I don't know if they're still up.
Dan Bortolotti: I think I worked on those with him. Well, basically I just translated, but we all have to dig through and find out. I'm sure there are better, more efficient ways to do it, maybe better access to data than there used to be. But that was a fun exercise to do because,
of course, I had no clue and still couldn't do it with a gun to my head. But at least I understand the basic idea of what they're supposed to achieve and the raw materials.
Ben Felix: There are tools now too. Back then when Justin wrote those posts, I don't think portfolio visualizer existed. Now, it does exist. So, like how much do you really need to be able to do it in Excel? I don't know. Could be a good video though. I'm sure people would watch it.
Dan Bortolotti: So, next up, this question is from SA. "What is the most found personal experience you've had that changed the way you guide your clients?" Wow, big one. Who wants to take that first?
Ben Felix: My mom had breast cancer when I was younger. That was a profound experience. It really changed my perspective on life. She survived, but it wasn't obvious that she would. And then some recency bias. I was playing basketball a week ago when we were recording this, a few weeks ago when it comes out. Played with the same group of people on Thursday nights all the time. We were in between games, not even playing. I had one of the guys that I've known for years now. He was walking toward the end of the court and he just collapsed and his heart stopped. We were able to revive him. Two of the guys knew CPR and knew how to use a defibrillator. He went to the hospital. He was okay in the end, but he was freaking terrifying. Stuff like that. It just really highlights life does not go forever. It comes back to my comment on success. You have to enjoy what you're doing all the time because you don't know how long it's going to last.
How does it affect clients? I mean, I think that's why did we do all of this content that we did on happiness and on living a good life and how investing in financial decisions relate back to that. It's for that reason. We don't exist as advisors to make people the most money possible for the sake of having a lot of money. We tie it back to living a good life and there's evidence around that to an extent that I think we try to use to help people really get the most out of their lives through their money. Money is such a powerful tool in determining how people are able to live their lives. I think that's the approach that we try to take to giving advice.
Mark McGrath: Yes, that's a great answer, Ben. I've talked about what happened with my own father on the podcast before and I've written about it and I think that was obviously impactful. It's these kinds of unforeseen events that you kind of just throw up your hands and go like, “YOLO.” You got to go out and do the things that bring you joy and you can't really wait for anybody else. So, you kind of learn that just through things happening to you in life. But in terms of how to guide clients, it's difficult because you have to find some balance. You can't plan assuming that's going to happen.
We have to, for clients, generally plan for, call it worst case, financial scenarios, which is like a really, really long and healthy life where you get to spend the money and you're active and everything else. We're looking for financial stability. It's hard to find that balance, I think, but outside of that, Dan, your blog was profoundly impactful on how I guide clients. This is maybe a little bit more quantitative, but your blog was my introduction to index investing, and that was full on epiphany for me at the time that I really started getting into it and it completely changed how I work with clients, not just on the investment portfolio, because that's obvious. But by switching clients into index funds and understanding things like market's work and are relatively efficient most of the time and you don't need to spend all this time on analysis and stock picking and reading research reports and listening to fund managers. It just opens up all of your time to do other work for clients. That wasn't as obvious to me until it started happening and I was realizing like, “Oh now, I can actually spend all this time being a financial planner,” and it was only through that that it really occurred to me that these other areas of financial planning that are equally, if not more important than portfolio design.
So, that totally changed the trajectory of not only my own career, but how I actually think about delivering advice and think about what good advice is.
Dan Bortolotti: Glad to have had a positive impact. It's funny because if I take this question to the second part of it, which is how has it changed the way you guide your clients? I came at this industry the opposite way that you did, Mark. I was, I think, still writing about it and not in the industry, while you were already working with clients and I was not. So, I was later in the game. When I first started doing this, my understanding or my impression was, I'd written so much about investing. I wasn't really writing about financial planning. It wasn't really an area of my expertise other than at a very basic level. And I assumed that most clients who wanted to work with me were primarily interested in investing.
All of our initial discussions when they were prospective clients and early on was how we're going to build a portfolio and what the strategy was and very much investment-focused. Gradually, I started to realize most clients, I would say, aren't really too interested in those small details, and I can remember the first time I worked with a client that was pretty early on in my career, first time I had a client pass away. When you work with the surviving spouse, you quickly realize your value is not that you know how to build a portfolio with maximum diversification on the efficient frontier. It's that you're going to be there and offer the comfort and report that people need at a very acute event like that, but also on a much larger scale.
Clients want to know they can trust you and that you, and that you will be a good steward of their funds and that you will give them good advice that's in their best interest. And the rest is details. That's 95% of what we do. I feel in the value that we add. It took me a few years, though, to truly come around to that and start to focus a lot less on investing and really try to
improve my skills, A, as a planner and B, just as someone who can have some empathy for clients and get to know their lives and deliver our value in that way, rather than just portfolio construction.
Ben Felix: I've got one more actually to add. I was thinking a different kind of profound, I guess, but I was interviewed for an article in The Globe and Mail in my first year in financial services when I was selling actively managed mutual funds. I mentioned one of the funds that I liked. I got absolutely roasted in the comments of The Globe and Mail. Absolutely roasted. It was a wake-up call that forced me to go and look at what I was doing and what I was being taught by the place that I was working at and the fund companies whose products I was selling. So, that was was eye-opening and that's what led me to discover indexing, and Dan, your blog and PWL, different kind of profound, but that definitely had an impact on me. Being roasted on the Internet is a great way to learn.
Mark McGrath: Well, it depends on your personality. I know a lot of people that get roasted on the Internet and seem to be allergic to learning anything new.
Ben Felix: That's true.
Dan Bortolotti: You were roasted in the early days. You were like an OG victim of Internet abuse. I mean that was pre-social media. It sounds like it was just on the web.
Ben Felix: On the web, comments section of The Globe and Mail. Unfortunately, they changed their comments engine so you can no longer go and find those comments. In hindsight, I wish I'd screen kept them and frame them, but changed the whole trajectory of my career in this industry.
All right. "What are your thoughts on the concept of return stacking, where products utilize future leverage to make space for diversifying alternatives? For example, trend following and carry." Sure. If you're into that kind of thing, I mean, I don't have a super strong opinion on it. We don't use it for clients. Not that interested in starting to use it for clients. People come to us because we manage portfolios in a way that's very, very simple and evidence-based, people that advocate for return stacking might say that it's also evidence-based, but there are levels of evidence that's going to make people mad, I'm sorry.
The simplicity of the way that we invest with index funds or financial funds, it's really easy to communicate to clients. People get it, people want it, and if the market does poorly, the portfolios do poorly, that's it. Having to explain something more complex is just not something that I think we need to do. And you said, Dan, in one of your posts, you were talking about factor investing, actually, but you said that nobody failed to achieve their goals because they didn't have a small cap value tilt or whatever. It's a really insightful statement, statement, and I think about it a lot. Maybe we could find some better way. Nothing's going to be guaranteed, but maybe we add in return stacking and we start using futures to get access to other sources of expected return of portfolios.
How much is that going to change the expected outcome for our clients? And how much certainty do we have around how it's going to change the expected outcome? I don't have enough confidence in that.
Dan Bortolotti: What is the risk that any change might be negative?
Ben Felix: It might be negative or might be perceived as negative. What if the clients can't stick with it because they don't understand the strategy? All that kind of stuff. I know this is kind of the hot thing right now, return stacking. It's not actually a new thing. It's portable alpha. It's been around for a long time conceptually. It's being marketed a lot right now, which is fine. People who make these products are very smart. I follow them online. I like them, but it's not something that fits with the way that we think about markets or our business model or what our clients want. So, those are my thoughts. Do you guys have any comments?
Mark McGrath: The people who are largely involved in that story right now, is it, I want to say, ReSolve and Corey Hoffstein and Rodrigo?
Ben Felix: Yes. Those guys are awesome. They're awesome and they're brilliant. It's not a knock against them.
Mark McGrath: Love their stuff. I just want to preface with that. I have a ton of respect for them and followed and learned a lot from them, but it's more complex. There's additional risks there to your point. Are our clients going to fail to achieve to meet the outcomes that they want because they didn't add a bit of leverage to their funds. I don't think so.
Ben Felix: All right. The plan was to not skip any questions, but this next one's like a five-part question, so I think we can skip that one, unfortunately. It's just too much. One of the things we try and do when we interview guests is we never have two-part questions. If you listen to our episodes, very rarely, if ever, do we have two-part questions because it's really hard to answer them. That question was like five parts. It's not easy to answer.
Mark McGrath: I'll go to the next one then. "Can you speak to the recent changes that Dimensional has made to their vector portfolios? How do they now compare to the approach of a firm like Avantis?"
Ben Felix: So, Dimensional hasn't changed their methodology, but they have changed the emphasis that they're giving to the different factors. So, the vector portfolios used to have more of a small cap value tilt. They've changed the methodology to have a more equal emphasis on size value and profitability. That's based on their research that shows that the premiums are not statistically different from each other. So, having an equal emphasis on them gives the best-expected outcome, basically. There's no good empirical reason to tilt more towards small cap and value than toward profitability, so they made a bit of a change to the methodology.
How does that compare to a firm like Avantis? I think Avantis did have more profitability exposure, so maybe it brings them closer, but overall, they still have differences in their methodologies. The underlying methodologies have not changed. It's just the way that Dimensional is emphasizing different return premiums has changed a little bit.
Dan Bortolotti: This is a good one, actually. I'll read it. But Ben, you'll be the guy to answer. "Much of the public discourse involving factor investing seems to concern equities exclusively. Yet are there equivalents for bonds and fixed income. For example, risk factors such as maturity term length, credit rating, et cetera. How should individual investors consider such factors for bonds, bills, and credit holdings?"
Ben Felix: The expected returns overall are lower in fixed income, so I think they get a little bit less attention. But we did an episode with the Head of Fixed Income from Dimensional, Dave Plecha. We also did our own episode on factor investing in fixed income. I don't remember which episode numbers those were, but you can go and look them up. There's something there. There's good evidence on a term premium. There's good evidence on a credit premium, although a little dicier may be on credit depending on how you look at it. There are funds now from Avantis, and I think Dimensional now has ETFs too that are available that do this. They have broadly diversified fixed-income portfolios that do put emphasis on return premiums within the fixed-income space.
Do you need that? Again, I mean, I love Dan's point about, is anyone going to fail to achieve their goals because they didn't have a tilt toward credit in their portfolio? Probably not. I think simplicity is super important. But I mean, listen, it depends how much each individual wants to optimize their portfolio, how confident they are in the return premiums, how much time they dedicate to it. But we use, like in our portfolios where we're using Dimensional Funds, they do tilt toward different fixed income factors at different times. That's one of the, I guess, unique things with fixed income is that the tilts change over time. The cash flow side of fixed income is much more certain than with equities, which makes you a little bit more confident that differences in prices are all about discount rates.
So, Dimensional does vary their exposure to longer and shorter maturity bonds, and they vary their exposure to different credit rating bonds based on prices. We use funds to do that. Do you need that? How should individual investors consider such factors? If you want to pursue them, there are products that do it. Do you need them to meet your goals? Probably not. PWL does use funds that do consider factors in fixed income.
All right. Oh, I love this question. "How do you explain the discrepancy between past results are no guarantee for future predictions? I don't know if that's what it means to say, but I think people know what I'm talking about, versus the stock market had returned 7% an average per year, and we'll use that to predict your money's growth for the coming 20 years. Feel free to rephrase." The question is, how do we square the statement of past returns are not a guarantee of future results, which is standard disclosure in financial services? How do you square that with thinking that we're going to get positive returns from the stock market going forward?
The first thing that I would say is the stock market had returned 7% per year. We'll use that to predict your money's growth for the coming 20 years. That's not how we do it at all. So, that's the first comment I would make. We, at PWL, look at the global average across all stock markets and make some adjustments for valuations. We net out the portion of return that comes from historical valuation changes. We also apply a portion of our estimate that comes from the current valuation of stocks. So, when stock valuations are really high, our expected return estimate is going to be a little bit lower. We do make some adjustments, I think, to try and be conservative, and we also look at all stock markets across the world, including markets that have failed and closed, to try and not have an upward biased estimate.
That's one piece of it. And then that statement is like a regulatory disclosure. So, I don't know if we need to square anything we say with it. The general idea that how can we look at past returns of anything and think that has information about the future, a big part of it is why did that happen? So, there's theory behind that. Stocks should be riskier than bonds. That make sense logically, theoretically, and empirically all around the world. Directionally, the idea that a riskier asset should have higher expected return. We have pretty good reason to believe that. As a point estimate though, can you look at historical returns and say that's what you're going to get in the future? No, I don't think that's the case at all. What do you guys think?
Mark McGrath: In my view, it's not a prediction about what your money is going to do over the next X number of years. It's that we need to make reasonable financial planning assumptions. I think, Ben, the description of how you arrive at PWL's financial planning assumptions is just that that's the best way that we are aware of to come up with what we believe to be a reasonable assumption, and that's our starting point for financial planning. But then we also do all sorts of stress testing and scenario testing. So, I don't think at any point I've ever told the client, I predict this is going to happen. It's more, these are the assumptions we're using in this plan. We can look at different assumptions. We can look at what if your portfolio is more conservative or more aggressive or if inflation's higher or run Monte Carlo analysis.
But it is largely true that past performance doesn't predict future returns, and that type of disclosure and compliance statement, I think also applies more specifically to very specific products more so than it does to general financial planning assumptions. If you see a fund fact sheet or something like that about a whatever it is technology sector ETF, and it's done 18% annualized for 10 years, there's a reason that disclosure is there is because you can't just assume that that's going to happen in the future and a lot of people would be sued without that disclosure. So, I think that's more product specific whereas what we're doing I think is more financial planning specific.
Ben Felix: Yes, that's a really good point.
Dan Bortolotti: As a financial planner, you have to use assumptions. What are you doing if you're not going to apply some sort of assumptions? The question becomes, your assumptions just have to be as reasonable as possible and you have to be able to back them up. If you're going to pull a number out of the air and say stocks are going to return 10% a year, you need to be able to defend that. PWL now does a really good job, I think at its expected returns assumptions and the methodology.
I know, Ben, you're intimately involved in doing this, and maybe you want to share a little bit about that experience compared to the way other organizations do it, which may be better or worse. I don't know. But I think I've been very impressed with the way PWL has come up with a methodology and we're updated twice a year. We use those updates in our financial plans and I feel very confident using them for clients for sure, which I've definitely seen other return assumptions that seem a little bit, let's just call them optimistic.
Ben Felix: I think it's getting better. FP Canada has been issuing expect return assumptions for a while now. I'm on that committee now. This year is my first year there. We did make some changes to move a little bit more toward what PWL does, just including some input from market valuations, which I think are really important. But yes, building the PWL methodology was a great experience. That's something that I spent a ton of hours working with Ray Kerzérho at PWL, just figuring out, we needed something simple that we could explain to clients, but that gave us good information about expected returns. It took current market conditions into account. I like her methodology a lot. I think it's easy to explain, gives reasonable estimates and response to changes in the market, which I think are all important characteristics for expected return assumptions.
There are lots of organizations out there now that have, I think, reasonable enough expected returns that are published like BlackRock has them, Vanguard has them, Conquest Planning, the financial planning software that we use, gives us access to a set of assumptions as well if we didn't want to use our own. And they're all within the same kind of range. Yes, it's much different from using 10% a year, which, unfortunately, I think some people are still doing.
Dan Bortolotti: Next one. "Do you know some tax-exempt ETFs? If yes, what are the pros and cons? It's difficult to find ETF with a built-in capital loss, only return of capital or reinvested distributions, low turnover, and less actively managed." And this is from Gerald, that's a French name. I don't know how to say that with a French accent. Gerald, I don't know. I think what he's probably talking about is corporate-class funds, which I don't know if you've talked about that much on the podcast, Ben, or if anybody has.
Ben Felix: There's a few ETFs that have launched recently that are like anti-dividend ETFs that
aren't holding any dividend stocks to try and be more tax efficient. I don't know what tax-exempt ETFs though.
Dan Bortolotti: It could be the total return ETFs by Horizons or Global X, or just corporate class funds in general that try to wipe out any taxable distributions.
Ben Felix: It could be that.
Mark McGrath: I don't have a ton of experience with them, but I think, he's mentioning it's difficult to find an ETF for the built-in capital loss. I think what he's talking about is, usually, a mutual fund is a trust. It can be organized as a corporation, where all of the funds that are within that corporation can have gains and losses, or income and losses offset against each other. So, you might have fund A that's lost a lot of money, and then fund B that's gained a lot of money, and those losses, and those gains can offset such that the taxable investor isn't required to pay tax on the income or gains of the fund. So, those are called corporate class funds. I think, on the surface, those are really interesting in some cases. But I think there's a trade off because there's not really a lot of options in that space and most corporate class funds are actively managed high-fee funds. So, what you might gain in tax efficiency, you might lose elsewhere.
There is the Global X funds or Horizons funds, which they've undergone some changes. Ben, then you know more about these than I do. But I think primarily, now, the tax efficiency comes from the corporate class structure, not from the rolled structure. So, I don't know if you want to talk about those funds.
Ben Felix: You have to be careful with corporate class in general. Mark, I think you and I looked at a case of this recently, where a corporate class fund can look more tax efficient, because of the distributions that it pays out to you as the fund investor. But the fund corporation can actually end up paying quite a bit of tax at the fund level. When you combine the two layers of tax together, corporate class can actually look less tax efficient in some cases than just owning the ETF on its own.
With the Horizons' Total Return Fund specifically, they are still using a total return structure. So, their returns are coming from fully taxable derivative income inside the corporate class. And they have a big loss carry forward, which they can use to offset net taxable income in the fund. They banked some serious losses during COVID by realizing swap contracts. But as that loss pool gets smaller and smaller over time, the risk with those funds is that, if there's net income in the fund, so if the fund corporation has to pay tax on net income, which just means, the swap contracts are positive because the indexes have gone up and the fund corporation has to realize the income on one of the swap contracts, that net income is taxed inside the fund, and then, allocated pro rata to the fund that was kind of responsible for it. Because of the way a mutual fund corporation is taxed, when you net out all of the numbers, it's possible for you to end up worse off, for having invested in that corporate class fund than having just held the underlying assets in a mutual fund trust.
For different types of income, the threshold for that is different. Mark Soth did a series of blog posts on this that I thought were really good, and I kind of worked on thinking through those products together. But our position on them right now is that, we're not super comfortable with the risk of that net income happening inside the fund. We're also just a little worried about the longevity of that structure. And I know, Dan, you and Justin talked about this years ago when they had the previous structure before the tax changes forced them to switch to a corporate class. And you guys had the same position, which really influenced how we thought about it back then. I think, now, with the current structure, it's a different set of risks, but we're still not comfortable with it.
Dan Bortolotti: Anytime you layer on some tax-efficient structure, given the climate in Canada regarding eliminating perceived tax shelters, which are typically assumed to benefit only the wealthy. It just seems like these are in the crosshairs of government. We've just seen it over and over, over the last 15 to 20 years. Who knows whether such a structure will survive, but it does seem at least possible that this structure could eventually be eliminated by legislation, and then, you're in a situation where you might have forced liquidation of the fund. It's just, again, one less thing to worry about. So far, it's worked out extremely well. I will have to say, anybody who's owned the formerly Horizons, now Global X funds for the last 10 or 15 years has deferred a lot of tax, especially on the U.S. side.
But U.S. equities right now, what's the yield is less than 2%. So, you're not really paying all that much tax on distributions from a traditional U.S. index fund right now. Most of the gains has been capital gains, even in a traditional ETF structure. So, I'm not sure how beneficial it actually is going to be going forward.
Ben Felix: They have funds for international stocks and bonds too, which again, the case gets stronger, but the risk still doesn't go away. The problem is, in the event of net income, there's potential for the total return to be taxed as income inside the fund as opposed to the mix of capital gains and foreign dividends or interest that you would have had as an individual. So, there is a possible outcome where that ends up being less tax efficient. There's also a possible outcome where if that becomes an issue that these funds, like you mentioned, then could close down, which can cause other problems. That probably wouldn't happen. They'd probably just switch to being a regular fund at that point.
But in any case, is it going to be the difference between our clients beating their goals or not? Probably not. Does it introduce additional complexity and risks that we'd have to worry about and the client would have to worry about? Yes. Does it make sense for some people? Sure. I mean, I know Mark Soth is a fan of them still despite understanding the risks. But him and I have talked about this and we kind of agree that it's very different for an individual to say, "Yes, I'm comfortable with these risks" than for a firm like PWL to tell our clients, "Yes, we are comfortable with these risks." So, two completely different animals. Next one, we can skip because it's very specific to a U.S. account type.
Dan Bortolotti: Can I ask it, and we'll all spend 10 seconds on it?
Ben Felix: Oh, sure.
Dan Bortolotti: I think there's an interesting answer that's going to be general enough that could be useful to listeners. So, the question is, "How would you invest the TSP?" in parentheses, it's Thrift Savings Plan, it's the federal government's type of 401(k). This is from Keith from Connecticut. So, 401(k) is almost like a group RSP. I think it's like an employer-sponsored tax deferral plan in the U.S. and I've never heard of the Thrift Savings Plan, but it sounds like it's relatively equivalent. Without getting into the nuances or technicalities of how these accounts work, I just thought it'd be interesting or at least maybe useful to think from a framework of how we allocate assets or investments to our portfolios.
I think about it as, I think about my portfolio first, and then what buckets to use later, not the opposite. So, we've talked about asset location, Ben, and I know you've done a lot of work on this. But for me, if a 401(k)-type plan or a Thrift Savings Plan is a retirement asset, then it follows the same guidelines as the rest of my retirement assets in terms of how I invest them. Again, I don't know anything about the Thrift Savings Plan, so maybe this is a terrible answer, but I would, honestly, if it's in that retirement bucket, I'm investing it the same way as all my other retirement funds.
Ben Felix: I'm too nervous to know nothing about the account type and say something that doesn't mean anything. You're bold, Mark.
Mark McGrath: Oh, yeah. It could be like, "No, it actually doesn't work this way and your answer is dumb and maybe that's true." But I get this question in a different way a lot of the times. Like, how would you invest this type of account versus that type of account? Look, it's all fungible. Like it's all one pot of money for me in retirement. The tax treatments are going to be different, but I'm not going to make different portfolio decisions based on that. I'm allocating everything that's in the retirement bucket, gets invested the same way. Then, I choose which buckets, whether it's TFSA, RSP or what have you, to put that in. But the portfolio for me doesn't change based on the type of account. Maybe there's some nuance on U.S. plans that make that answer terrible, but that's what I think about it.
Dan Bortolotti: I think that's the right approach. I remember back when TFSAs were first launched and people would ask questions like that. "What should I invest in my TFSA?" It's like, "Well, what are you investing in the rest of your portfolio?" It took us a while to realize, asset location considerations do need to be considered, but these are not fundamental questions. You're not going to use different strategies or hold fundamentally different funds necessarily depending on the account type. It's important to think of the portfolio as a whole when making any decision like that.
Ben Felix: All right. "In terms of portfolio construction, is there ever a case for buying anything other than the EQT or the S&P 500? If a higher risk appetite existed, what other ETFs or assets would be recommended?" I wouldn't just buy the S&P 500. That's the first thing that I would say here is that, even though it has revenues from all over the world, which is the common argument for just investing in the S&P 500, I think it's still got a lot of concentration. In the U.S. market, it's still companies that are subject to U.S. tax rates and financing costs, which are not diversified even if the revenue streams are. And to the specifics of the U.S. market, there's a question coming up, I think, on valuations in the U.S., which they're pretty high. I'm not predicting that the U.S. market's going to crash, but valuations in the U.S. market are very high relative to history. I wouldn't invest solely in the S&P 500.
The EQT, on the other hand, is a globally diversified equity portfolio. It still has a decent chunk in the U.S., but it's also got a big chunk in Canada, and in international developed and emerging markets. That's fine, but it's also a 100 % equity portfolio, which is not going to be right for everybody. You have to be aware of your ability to take risk, also your willingness to take risk, your comfort with volatility, all that kind of stuff. If a higher risk appetite existed, whether – I mean, our view on this is that, tilting toward riskier stocks can make sense if you really want to take more risk. You can also use leverage with whatever your optimal portfolio you decide is. If you really want to take more risk, you can borrow a little bit of money to invest more in that thing. Of course, comes with its own risks and complexities that people have to make sure they understand before doing it.
Mark McGrath: I agree that I wouldn't ever be 100% equity in one country. I think recency bias is driving a lot of this conversation about the S&P 500. Yes, sure. It's been a long time that the U.S. has been doing really, really well, but there's other periods in history where you'd be crazy to invest only in U.S. stocks just based on recent five-to-seven-year performance. So, I'm not really convinced that the U.S. is always and forever going to be the source of the highest returns around the world. Something like VEQT is great.
I think, Ben, one thing that should be really clear is when you're talking about more risk, you're talking about more compensated risk. You can take more risk by holding two stocks instead of 10,000, but you shouldn't expect higher returns from that. You should just expect a lot more volatility and dispersion. So, how do you take compensated risk but increase the risk of the overall portfolio? I think, probably, leverage is the best answer to that, not a recommendation because compliance is going to listen to this podcast. I am not recommending leverage. I'm just saying that's how you juice the returns if it worked out in the long run.
Dan Bortolotti: I will say too, just reading between the lines of this question. When somebody asks or somebody implies that they have a higher risk appetite than 100% equity portfolio, the alarm bells go off for me. Because I want to know what exactly have you experienced in your investing life, because if you lived through 2008 with a leveraged 100% equity portfolio, I'm sorry, but very, very few people can do that. It's extremely easy to overestimate your risk tolerance and it's very easy to do it following a couple of years like we've just had in the markets. Have you ever met anybody who you felt in order to meet their financial goals need to leverage a 100% equity portfolio? I mean, they don't exist, I don't think.
If you need to take that much risk, then you've got other problems. I'm not saying that to be derogatory, I just mean, if you can't meet your financial goals with the expected return on 100% equity portfolio. Then, the problem is more likely that you need to save more or expect to spend less or invest for a longer period of time. Taking more risk is not the answer there.
Ben Felix: I agree with that. I will mention, it's worth giving a nod to Scott Cedeburg's research here, just on the question of what is risk, like in this case. At least, the way I read the question, it's kind of asking about risk framed as volatility. But Scott Cederburg's research and also, David Blanchett has a recent paper out looking at how risk changes over very long periods of time. At very long horizons, like 30-year horizon, volatility becomes a little bit less important. The higher expected return of stocks actually in some samples makes them a little bit less risky than bonds, which tend to be more affected by inflation risk. Stocks tend to have negative autocorrelation, which means that, after a recently bad period of returns, you tend to have a good period. And after a recently good period, you tend to have a bad period.
That negative autocorrelation makes stocks a little bit less risky at long horizons. Bonds tend to have positive autocorrelation, wherein you have negative bond returns in real terms, usually due to high inflation. That tends to be persistent. Meaning, you tend to have a few years of really negative bond returns, which makes bonds a little bit more risky at very long horizons. While bonds may be less volatile in the short term, they can actually be riskier at long horizons. But, to your point, Dan, you still have to be able to live with your portfolio. I don't know if people always appreciate what it feels like to live through a proper long-term downturn. A lot of people live through COVID, and they're like, "Hey, that wasn't so bad."
Mark McGrath: It was three months.
Dan Bortolotti: It lasted three months. By the end of the year, it was highly positive. That's not what we're talking about. It's a great point though about risk equals volatility. There are many types of risks. But I think volatility is the risk that makes people behave badly. That's the reason why you temper an all-equity portfolio with fixed income. It's not because you want to reduce your long-term risk or you want to enhance your returns because you won't be doing either of those things. But you will be dampening your short-term volatility, which is what gets most investors into trouble.
Mark McGrath: I think the other thing you pointed this out, Dan, is it gets you thinking like, what have they not been through, what are they not seeing in their portfolio? I think, often, this type of question comes from somebody usually is younger, just getting started, and it's trying to figure out how they can accumulate as much wealth as possible. Somebody like that who does go through that type of event in the near term is likely going to do so with a smaller portfolio. So, even if they have gone through some kind of market volatility, the dollars may not have been that impactful. And they think to themselves, "Oh, that's easy. I lost 50% of my portfolio. Only $3,000 at this point."
Once you go through that with a seven-figure and eight-figure portfolio, if you get there, the conversations with my clients are in dollar terms. It's like, "We're down 40%. That's $4 million." They don't think in percents as much as they do in nominal dollar terms, I find. I think there's very few people who are saying, "How can I increase the risk on my portfolio" if you've gone through an event like that with a reasonable sum of money.
Dan Bortolotti: For sure. I'll take the next one. This question is from Al, but I have to admit, when I first saw it, I thought it said AI, and I thought it was like a ChatGPT-generated question, but it sounds like it's from a real human. Al says he's 34, planning for the long term, and just starting his investing journey this year. And his question is, on a lot of people's minds, I think he says, "Given the overvaluation in the S&P 500 and the significant returns over the past few years, does it still make sense to stick with the asset allocation approach of allocating around 45% to U.S. markets or would it be prudent to reduce this exposure?" Probably the most popular question most of us are getting these days from clients and otherwise.
Mark McGrath: Ben, I bet you're going to have the longest and best answer to this, so I'll just go quick here, I think. One, we don't know that the U.S. market is overvalued. I think we can probably only really say that it's highly valued historically speaking, but overvalued, I think you can only really identify in hindsight. So, I think that's an important distinction. We know it's expensive historically, but we don't know that it's overvalued, because overvalued, assumes a correction is coming. We don't know that that's going to be the case. And the rest of the question is kind of leading that idea, should we reduce risk because we're expecting a correction? Maybe we just don't know. The U.S. market has been expensive for many, many years and still continues to go up. So, by reducing your U.S. equity, there's potentially an opportunity cost if markets do keep going up.
The other thing I think that is perhaps more important is that this individual is 34, planning for the long term and just starting their investment journey this year. And so, if they're really just getting started, going back to what I said in the previous answer, even if you're right and the U.S. market crashes 50% tomorrow, the actual dollar-term exposure that you have to that crash is not likely to be meaningful to you over the long run in terms of your financial plan. So, if I'm just getting started on my journey, I wouldn't start trying to think about tactical asset allocation in my portfolio. I mean, we don't really use that even ourselves. And I don't think investors like that should get hung up on questions like this. I think, just get started, just go with an asset allocation ETF for some fund of your choosing, and just start putting money into it, and then see how things go. Even if the market crashes, it's not likely to be meaningful to your long-term goals if you're just getting started.
Ben Felix: If it were obvious that the U.S. market were overvalued, its value would decrease, and we would see a correction back to whatever it should be. I agree with you, Mark. You can't really say that it's overvalued relative to its own history. It's highly valued. I was looking at the numbers for Japan this morning because this topic is coming up a lot right now. I did actually do a Twitter post that maybe I shouldn't have done because it probably exacerbated this type of thinking from people. But I showed that there's only a few months in history where U.S. equity markets have been as highly valued in terms of their Shiller-CAPE ratio, the cyclically adjusted price-to-earnings ratio. Only been a handful of months in history, where they were at their current level of valuation, at least on the day that I did the tweet or higher. All of those months were concentrated around the 1998 to 2000 period where U.S. stocks went crazy during the dot-com, what ended up being a bubble, but you didn't necessarily know that at the time.
On average, in all of those handfuls of months where valuations have been as high as they are now, the 10-year forward return, the ten-year return following that starting month, has been on average, negative. It's negative 1.29 % annualized for all those periods. That's kind of scary. But to your point, Mark, we don't know if current valuations are high relative to the future. We only know that they're high relative to the past. In my little example, there is a tiny sample, like it doesn't mean that much.
I was poking around the data for Japan. I just want to share a couple of interesting points there. Japan, of course, famously had insanely high valuations, at least in hindsight in the eighties, leading up to 1989 in December is when they had a crash. I don't know if people are familiar with the story, but if you invested in Japanese stocks in December 1989, and held them until now, I think your annualized return in nominal terms was about 1%. I think it might have been 1.19 % annualized. In any case, very, very low. Adjust for inflation, adjust for treasury bill returns, it was a negative return. It's not very good over such a long period of time. That's December 1989 until November 2024. That's a very long period to not get any returns from stocks.
On the way up though, and this is the part that's interesting to think about in the context of U.S. valuations. If you look in June 1985, Shiller-CAPE for Japanese stocks was about 38, which is roughly where it is now. If you look at the ten-year returns starting from that point, Japanese stocks actually beat the world, excluding Japan stocks for the following 10 years by about 90 basis points annualized. Valuations can be really high and you can still have positive returns. And in that case, you can still have returns that beat other geographic regions.
Mark McGrath: That assumes you invested your entire stack all at once in Japan and never bought again, especially with this individual asking this question, they're 34 and just getting started. Ideally, you're going to be putting money to work every single time you have available money to invest. So, if the U.S. market does have a correction in a big way, you're going to be accumulating hopefully.
Ben Felix: You should almost be happy.
Mark McGrath: Exactly. You're going to be hopefully buying at those levels and it's the average price over time that really matters, unless you've just received a $10 million lottery, I'm going to need to allocate all of it today. I just don't think it's an impactful outcome over the long run, even if the market's too correct.
Ben Felix: My Japan example just kind of shows, yes, U.S. market is very expensive in terms of its valuations relative to its own history, but that doesn't mean they can't go higher. And there's a non--zero chance that they go a lot higher and you end up missing out on a bunch of returns. We can't predict the peak. We don't know when it's going to turn around or if it's going to turn around. The other possibility is that, the fundamentals, like the earnings side of that equation of the Shiller-CAPE grow so much that valuations aren't so high anymore and we don't have a big crash. Lots of different possible outcomes. I think people worry a lot about this, but it's probably not as concerning as people tend to imagine.
Mark McGrath: Or that could happen and the Canadian dollar could drop more than the USD, which offsets of the losses too, if you're holding U.S. risk. There's other potential sources of returns and risk there that can offset. Was it 2016 or something, 2015? I think U.S. markets were flat, but USD was up 20%. So, you were up 20 % just on the currency. Lots of stuff that can happen.
Ben Felix: All right. Should we do two more questions?
Dan Bortolotti: Sounds good.
Ben Felix: We've gotten to 18, so we definitely wouldn't have gotten through 161. There was no hope there.
Mark McGrath: No, I think we were like, "Oh, we can bring it to half, and make it a two-part episode." No, we got through more than eight.
Ben Felix: I think what we can do is we can make a segment going forward. We can add a segment on AMA questions and we can just pull from this list until it's exhausted, and then, maybe refresh it. I don't know. We'll see how long that lasts us. All right, "What have been your most significant investment mistakes and what valuable lessons did you learn from them?" You
guys want to go?
Dan Bortolotti: I've never made a mistake.
Mark McGrath: Nice.
Ben Felix: I'm not surprised.
Dan Bortolotti: I was actually fortunate just the way my life unfolded, was I didn't really have much money to invest until I had already learned about it. In other words, I didn't invest a lot of money when I was young. Then, realized 20 years later that I was doing it all wrong. But I would say, when I first started to learn about sensible investing, my biggest mistake was tinkering. I was in pursuit of what's the optimal portfolio. And of course, at that time, asset allocation ETFs didn't exist. So, I was building my portfolio from individual ETFs. I was like, "I have to have 7.2%
commodities and I have to have this, that." And I had 10, 12 ETF portfolios with my $50,000 or whatever I had at the time. Eventually, realize this is all a massive waste of time, energy, and money. I needed to focus on simplicity, saving more, and sticking to a discipline plan without tinkering with it.
It took me a little while to get there, but once I did, I have found it very easy to stick to it. Because intellectually, I know why it's the right thing. Also, I happen to not have that gene. I've never bought an individual stock. I'm not interested in speculation of any kind so that part's easy. But it did take me a while to get used to the idea that most of the tiny details don't matter as much as the big picture does.
Ben Felix: Great answer. Mark?
Mark McGrath: Triple-leveraged Bitcoin. Have either of you guys ever been margin-called before?
Ben Felix: No.
Mark McGrath: Really?
Ben Felix: No.
Mark McGrath: Just me. There was a period in my life where I was selling put options, cash-secured puts without getting into a big explainer about it, basically. If you're selling a put, you are selling the obligation to purchase a stock at a certain price. Let's just say, you love Apple. I'm just making up numbers. I don't even know what Apple trades for, but you love Apple at $100 a share. You sell a put at $80, and you collect a premium, so you collect $2 on that. And it's a four-week contract, let's say. As long as Apple doesn't go to 80 or below during that four weeks, you get to collect your $2 in premium, and you move on to the next contract. If it does go to $80, you get exercise and you have to buy the stock at 80 bucks, which actually, the narrative goes, that's a great thing. Because now, you're buying a stock that you like anyway at a steep discount. What could go wrong?
Well, the stocks can stay down for a very significant period of time. The stocks can blow through $80 and you're buying them at 80, but now they're trading at $50, and they stay there perpetually. It's one thing if you're doing this cash-secured, meaning, in that example, you have the $80 available to actually buy the stock when it's assigned to you. So, that would be the more intelligent way I would suggest to do something like this. But you can also do something called naked selling in case you guys didn't know this. You can do that and not have the money. If it goes to $80 and you don't have the money to buy the stock in your account, then you can get margin call. And margin call means, basically, you need to put more money in your account or they're liquidating you and you're going to lose a lot of money.
So, I've been through that, which is really fun for me. Not stressful at all. Thought I might lose my house and my family's going to disown me, but other than that, came out okay, and here we are. Don't sell naked, put options on stocks, especially if the market's going to crash. We'll have a bad time.
Dan Bortolotti: Top that one, Ben.
Ben Felix: I think I might have a worse one.
Mark McGrath: Oh, yeah?
Dan Bortolotti: Uh-oh.
Ben Felix: In two instances, people that I knew well enough who have had successful exits before, meaning that they started a company, raised money, and then either went public or otherwise sold and did quite well for themselves. We're raising capital for new businesses. I knew these guys had had exits in the past, I knew they were very financially successful. Because I knew them well enough, I guess, they asked, "Do you want to invest in this thing? We're doing this thing." They told me what the company was about. This is years ago now. I don't know. I felt like that was a kind of a cool thing to do. I had a little bit more income than I'd had when I was younger, and I couldn't afford to do something like this. So, I thought, "I'll do this. This is what smart people do." Both of them went to zero. Very unsuccessful. I guess an angel investment type thing. I don't want to describe the types of businesses they were. I'm a very unsuccessful angel investor.
Dan Bortolotti: But without describing the type of businesses, would you say, is that outcome bias, and that lots of businesses go to zero not because they were terrible, but just because they were unsuccessful, and that's part of the risk of investing in a startup. It doesn't necessarily mean you made a profound mistake based on the information you had at the time. Or, was it more that just, I trusted these guys, I didn't even look at the business plan?
Ben Felix: I looked at the business plan in both cases. In one case, there was a, I'd call it a company-specific issue where they raised money for one business, and then they were acquired by another business, and then there was a conflict between management of those two firms, and that caused enough issues that they had a lot of trouble. That company still exists. At one point, they were listed, been delisted, and anyway, it's currently worth nothing. It might be worth something at some point, but it's still not a great outcome. That was a very company-specific issue. Then, the other one was an industry issue where they were building a business in an industry that could have done very well, and that asset prices in that industry just completely tanked for a period of time while they were building their business. And that I think really decreased their ability to access capital. They ended up having to do another raise at some point, and there was just nothing there for them. So, they ended up folding for that reason.
Two different reasons for the bad outcome. I think both were smart business ideas. They're being run by groups of very, very smart people. But yes, I mean, just goes to show you that there are a lot of things that can go wrong when you're investing in one thing, especially an early-stage company.
Mark McGrath: The cool thing though is that you can put angel investor in your LinkedIn bio now, Ben.
Ben Felix: Yes, I could do that. Then, people might ask me about my investments though.
Mark McGrath: True.
Ben Felix: Unsuccessful angel investor.
Mark McGrath: Only talk about your winners, that's rule number one.
Ben Felix: We'll do one more?
Mark McGrath: Yes. There's two insurance questions here back-to-back, so I don't know if you want to just take both of them, and then call it a day.
Ben Felix: Yes, sure.
Mark McGrath: "What are your thoughts on life insurance? Would you recommend a young Canadian couple with a new baby who have not yet maxed out TFSA, FHSA, and RRSP room, no RESP to implement what we call infinite banking with life insurance? I already know your answer, but was hoping to understand your rationale on this." So, Ben, I know you've been working on something with respect to infinite banking. I've got my own thoughts on this as well, but I think, Ben, that's probably pretty fresh for you, what you think about infinite banking.
Ben Felix: So, infinite banking is the idea that you can buy a participating whole-life policy and you can overfund it. You can put more money, and then is required to pay premiums. Those deposits, the cash value of the policy will then accrue participating policy dividends, which increases the overall cash value, and that compounds over time, which is great. And then, you can borrow against your cash value from the insurance company, and the amount that you borrow, you pay interest on to the insurance company, and that interest goes back into the participating pool, which is why it's called infinite banking. Because you're paying interest to yourself, is the way that it's sold. I don't think it's much more complicated than that, but that's the way that it's sold.
In the modeling that we've done on this, it is really, really hard for an insurance policy to come close to matching the expected outcome of any of those account types, TFSA, FHSA, RRSP, and RESP. The reason being that the expected returns inside of an insurance policy tend to be relatively low. A participating life insurance policy can look a little bit better, but there's also risk in that case because the participating policy dividends are not necessarily going to be as high as they have been in the past, or as they're currently illustrated at.
So, when you purchase one of these policies, it would be shown what's called an illustration, which is like a projection of how the policy is going to look in the future. That will be based on the current dividend scale, which is the participating policy rate, dividend rate that was most recently paid, I think. But it's always really important to ask to see those illustrations at current dividend scale minus 1%, and current dividend scale minus 2% because the current dividend scale is not guaranteed. And over the last 20 or so years, policy dividend rates have decreased. They've actually come back up a little bit now, but it's not a guaranteed thing.
The idea is, that everybody needs financing throughout their lives, and the best way to do it is through this. I don't think that's true. I think that you can invest in your registered accounts, which are tax-preferred in various ways. The RESP, you get additional grants and bonds in some cases from the government, which make it really, really hard for an insurance policy to match it. You can meet your financing needs with traditional means of financing, like taking a vehicle loan or leasing a vehicle instead of taking a policy loan. I think that's a perfectly reasonable alternative.
When you read the book called Becoming Your Own Banker, that's kind of the whole foundation of infinite banking as a concept. This isn't the best way to argue against it, but I think it's important. The thing that I found most striking about it is, that it's extremely ideological. It's not so much about, this is a really smart financial strategy and this is going to give you a better expected outcome. It's like, you don't want to pay interest to the bank, you want to pay it to yourself. There's a lot more anti-government, almost conspiracy-level language in that book. I think that colours a lot of the logic of the strategy as a whole.
But when you run the numbers, which we've done for a paper that I'm working on with Jason Pereira, it's really hard to make insurance match the expected outcome of investing in registered accounts. That paper's still a work in progress. Hopefully, we'll do a more detailed explanation of our results. We've still got to work on a few modifications to the cases. In general, I think, the statement that it's difficult for a permanent insurance policy to match the expected outcome of investing in a registered account, and accessing financing through traditional means, I think that's going to hold true in most cases.
Dan Bortolotti: Looking at the first part of this listener's question, what would you recommend for a young Canadian couple with a new baby who have not yet maxed out registered accounts, et cetera, et cetera? Get cheap term life insurance. That has to be your number one consideration. Disaster-proof your life as Preet Banerjee used to put it in his book, because it's the idea is that you've got to look after that before you start investing.
If you procrastinate on the insurance until after you have maxed your registered accounts, you might never get there. And then, of course, the other encouraging part about all this, it's a lot easier to get cheap term insurance when if you're a young, healthy couple with a new baby, than it is to start worrying about maxing registered accounts. So, don't get fancy with this. Get cheap term insurance to cover all of the contingencies that you can imagine, and you can worry
about these more advanced strategies later if they're really that important to you, and if they really turn out to be advantageous. But it's not what you need right now.
Mark McGrath: Yes. I think the other thing I'll say, and this is maybe some kind of logical fallacy, but I'll say it anyway. Of all of the great fee-only or fee-based financial planners I know, and I make that distinction because I mean, of all the great planners I know who are not purely insurance sales folks. I don't know a single one that has an infinite banking policy themselves. I don't have one. I don't have permanent insurance myself. I see no need for it. I find it's very telling that the people who know about financial planning, and not just insurance generally, and I'm sure there's people who are going to message saying, "That's not true and I have a policy, but I've never met somebody who does use infinite banking." These are from people who could sell you infinite banking if it was optimal, but also are not biased towards it, because it's not the only source of income. So, I think that's a very telling point.
TFSA, FHSA, RRSP, RESP, you don't need to jump through hoops to use these accounts. They're right there for you. They're very easy to open. You can implement these in a low-cost way. For the most part, these are very, very liquid as well, and you're not locking yourself into any sort of long-term contract like you are with whole life. There's a lot of downside to the lack of flexibility that comes with these types of policies. And yes, the liquidity comes from you being able to borrow against it, but then, you're just introducing interest rate risk to your plan as well. Because if interest rates go up in dividends and paid-up insurance amounts don't keep up, you can end up in a problem where you're starting to exceed the allowable level of cash value and interest in the policies. So, there's a whole bunch of downside risks that I think in my experience, those who sell this type of stuff rarely talk about, like lower-than-expected dividends, interest rate risk, lack of liquidity, and being walked into something for a longer period of time.
There's very few circumstances where I think it's optimal. As we've said in all episode, do you know anybody that didn't meet their financial goals because they didn't
implement infinite banking? No.
Ben Felix: I will say that it's not a totally insane strategy, and the modelling that we've done on it, it's not horrible. You're not necessarily throwing your money away. It can work, I'm sure, for the right person. If it's a strategy that really speaks to you for whatever reason, and it's going to allow you to be disciplined more so than you would otherwise. Hey, that's fine, I guess. But I think, it probably is suboptimal for most people most of the time. I think it's really important, you mentioned it, Mark, that a permanent insurance policy is a contract that you're entering into. And breaking that contract, like if you decided to cancel the policy, it can be really expensive, especially early on. Those considerations are really important. Buying cheap term insurance for your life insurance needs and investing in your registered accounts is much more flexible. You don't have a contractual obligation.
A counterargument to that is that you don't have a contractual obligation. The insurance policy might encourage discipline, which for some people, maybe that's important. But that philosophy, that strategy is generally oversold by people who are, in my experience, only insurance licensed. And if it works for some people, that's fine. But I think it would be wise for people who are being pitched that strategy to look for alternative perspectives just to understand the potential downsides. Not that it's a terrible strategy that nobody should ever do, but you have to hear information about it from someone who's not biased to give you a certain view.
Mark McGrath: Last one?
Ben Felix: You can answer this one. "Parents bought whole life insurance for their child. The child is now an adult, 33 years old. Should the child take over the policy or do a cash surrender? What are the considerations, or is there someone unbiased that we can recommend they talk to?"
Mark McGrath: I actually got whole-life quotes for my own two kids last year. There's a point where this becomes an interesting strategy. They've already done it. Parents bought it for the child and the child is now 33 years old. So, one of the things that's really, I think, potentially attractive about this type of thing is that the policy can be transferred to the adult child. They can take over ownership of the policy and that's not a taxable disposition, necessarily. Oftentimes, if you were to transfer an insurance policy between arm's length parties or between a corporation and an individual, it's a taxable disposition. But in the case where you're transferring it to children, I think as long as they are the ones who are insured under the policy, I want to say, going from memory there, then, it's not a taxable disposition.
You're getting permanent life insurance for your kids at a very young age, which makes it relatively cost-effective, ensures that they have some insurance in case something happens health-wise as they get older, and they're young adults, and they have some kind of health problems and wouldn't otherwise qualify. Well, at least, you've got this insurance in place, and then you can transfer it to them, and they can take over the policy, and that's not a taxable disposition. We can't say for certain because we don't have the full picture of why this insurance was purchased in the first place. We don't know anything about their financial situation. What would they do with this policy if you were to transfer it? Would they keep it? Would they borrow against it? Would they cash it in? Are you concerned that they might do that and you want to hold it back and make sure that they don't have access to the money? We don't know. It's certainly a consideration.
I think, in the right case, assuming that that child who's the life insured has reached some kind of financial maturity. And if there's still premium payments required, they can take over the premium payments. I think it's totally reasonable to transfer it to them, but this was ideally bought under some kind of goal or plan. So, I'd be curious to know why they bought it in the first place and if it makes sense to transfer it to them. Tons of great insurance advisors out here. I won't name-drop on this episode, but this is a question from Alexis. Alexis, if you're listening, feel free to reach out to me on LinkedIn or Twitter. Just send me an email, I can give you some recommendations to unbiased advisors that you can talk to about that. Dan, I don't know if you've got much experience in these types of policies.
Dan Bortolotti: Your comment about, this was obviously done with some kind of long-term plan. I mean, maybe or maybe the policy was just sold to them inappropriately. I mean, who knows? Insurance is one of those things too that the answer is virtually always, it depends, in the sense that the 33-year-old in question here. I mean, what's their situation now. Do they need permanent life insurance? What's their health like? Obviously, if you've had a diagnosis in the past, or you find yourself more or less uninsurable, of course, you should take the policy, take it over, and continue it. If you don't need permanent insurance and you're in a situation in your life where it might make sense to take the cash surrender value, get cheap term insurance, do something productive with the cash surrender value, that's important too. There's lots of possible answers here that we can't possibly know without understanding the circumstances.
Mark McGrath: Agreed. One thing maybe to consider is that to surrender the policy and withdraw the cash value could be taxable as well. Basically, the cash value of the policy minus its adjusted cost base. And if the policy's been enforced that long, it's likely the adjusted cost base is relatively low, and we don't know how big this particular policy is. But the excess of the cash value minus the adjusted cost basis is taxable when you withdraw it, and it's taxed as income, not a capital game. So, surrendering it could be a tax event that they aren't aware of or weren't prepared for. So, something to keep in mind.
Ben Felix: So, we got through 20 questions. We'll save the other 141 for future episodes.
Mark McGrath: How long have we been recording for?
Ben Felix: Almost two hours.
Mark McGrath: Whoof, 20 questions in two hours. How many do we get, 160?
Ben Felix: 161 in total.
Mark McGrath: Oh man, this is 16 hours to get through all of these questions if we were to sit down and do them one by one
Ben Felix: If we made one episode that long, people would actually listen to it though. That's the crazy thing.
Mark McGrath: Some people would.
Dan Bortolotti: We could do a whole episode about your hair.
Mark McGrath: Almost. Yeah.
Ben Felix: I don't know about a whole episode.
Dan Bortolotti: Maybe half an episode.
Ben Felix: Maybe half an episode. Should we go to the after-show? We have a couple of reviews.
Mark McGrath: Sure. All right.
Ben Felix: So, we got one from Grouty11 from Great Britain. They say, "I listened to the end and I hate the show." Five-star review, though. I think it's a play on Mark and I talking about how if you're listening to the end and hate the show, that's on you. So, they clearly were listening to the end and hate the show, but gave us five stars. That's great.
Mark McGrath: I appreciate that.
Dan Bortolotti: And they are no doubt listening to the end of this show as well, of course.
Ben Felix: Yes. So, this one, "Insightful, funny, and factual." They say, "Truly one of the best podcasts I've listened to, cannot think of a better one to recommend. The quality of content is incredible and it is presented in an enjoyable manner. Over the years, this podcast and the community have had a significant and positive impact on my financial position and ambitions. A big thank you to the entire team. Finally, I want to express how amazing Mark's beard truly is, one of a kind. If only the other hosts could keep up."
Mark McGrath: The latter part is true. I don't foresee you guys keeping up, but there's not much to it really.
Ben Felix: It's a nice beard though.
Mark McGrath: Thanks.
Dan Bortolotti: I couldn't grow a beard like that if I tried for sure.
Ben Felix: I couldn't either.
Mark McGrath: I take it for granted, eh? My hair grows like almost up to underneath my eyes, so I have to shave like here. If you look close enough, it kind of connects to the eyebrows on the side and I got a pluck in the middle too. So, it's like literally goes like all the way around. So, it's like the bane of my existence. But to those who can't grow a beard, they're like, "Oh man, that's sick. You can grow a great beard." I'm like, "I don't think you understand how much work it is just to not look ridiculous every day." Maybe I do look ridiculous every day. I don't know. But thank you.
Ben Felix: You look great. I have no hope of growing a beard like that. It's super patchy. During COVID, I grew it because COVID was crazy.
Dan Bortolotti: Save 20 bucks.
Ben Felix: I shaved it myself. I never paid anybody to shave my beard. The hair thing was never about saving the 20 bucks. It was just about the hassle of getting changed, and I don't know, man. I didn't mind paying. If I could have used a credit card, I would have kept going. To your point, it was just the change situation, just was killing me.
Mark McGrath: Have you guys seen me with a bigger beard? Have I ever shown you pictures?
Ben Felix: I've seen pictures. Before you came here, before you started with PWL, your Twitter picture was you with that gigantic beard.
Dan Bortolotti: And you hired him anyway?
Mark McGrath: It's been bigger than that, actually. I should grow it back out. There's been some heft to it back in the day, but I get this, you can tell here, where it's gray here, and it's like a racing stripe that goes right down the center, like ZZ Top kind of thing. I think it looks weird, but I don't know. Maybe I'll bring it back. People like it.
Ben Felix: Yes, you can bring it back.
Dan Bortolotti: Wait for the playoffs.
Mark McGrath: There you go. I'm a Vancouver fan though, so it's like, you never know.
Dan Bortolotti: So, there won't be any playoffs.
Mark McGrath: That's the problem.
Ben Felix: All right. Since this is our year-end episode, do we have parting words, anything that you guys can think of to say to our audience before we end the year?
Mark McGrath: I don't get to engage with the audience probably as much as you do, Ben, because I know you spend a lot of time in the community. But I do hear from a lot of people online who reach out directly to me and are super appreciative of the show. So, for me, it's been an honour and a pleasure, and honestly, still kind of pinching myself that I'm here co-hosting this podcast. It's been so influential in my life. So, big thank you to all of our listeners.
Ben Felix: With Dan too.
Mark McGrath: Yes. Well, I know.
Ben Felix: Not just on this podcast, but on this podcast with Dan.
Mark McGrath: With the Couch Potato too. It's ridiculous. So, I'm just super grateful to be here, and obviously, this opportunity exists because you guys did such a great job with it for the first many years, and it built such an incredible community of people and listeners. So, thanks to everybody who's involved in the production and getting it out, and thanks to all the listeners for sticking by and putting up with me over the past few months as well.
Dan Bortolotti: I would echo that as well. I mean, I know you guys know, I was just sunsetting my own podcast when Rational Reminder took off. You guys have had just incredible longevity, and I know how difficult it was to just crank out an episode every month or two to be able to do what you do every week for as many years as you've done it. Has been amazing and it's been a great opportunity for me to get on board, and feel like back as part of the community again, and generate the content that PWL has been well known for. Nice to be back in the seat.
Ben Felix: Yes. It's awesome having you guys here. I think that's it. I mean, thanks to everyone for listening and we'll be back in a week. We're not taking any time off. The podcast isn't. We will. We pre-recorded episodes though, so there will be an episode coming out, but I don't know about you guys. I'm probably going to take a little bit of time to relax over the holidays.
Mark McGrath: I'm going to Mexico. My wife and kids are there right now and I'll be joining them for a couple of weeks.
Ben Felix: Nice.
Mark McGrath: You doing anything, Dan?
Dan Bortolotti: No, I'm not going away. I might take a few days off, but staying close to home this year.
Ben Felix: Me too. There's a small ski hill, not like where you live, Mark, but there's a small ski hill where I live. My kids enjoy that. The last couple of years, we've stuck around here and just kind of hung out. But it's nice that things slow down around the holidays, even if you don't take time off. Like I could still come to my office and do work, but there's like nothing else happening.
Dan Bortolotti: Clients tend to be pretty quiet around the holidays. They've got better things to worry about, especially this year. It's been such a good year for markets. I think there's just a little bit less anxiety than there has been in the past.
Ben Felix: All right. Well, we'll leave it there. We appreciate everyone listening throughout the year and we'll see you in the new year. Enjoy the holidays. All the best.
Is there an error in the transcript? Let us know! Email us at info@rationalreminder.ca.
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Participate in our Community Discussion about this Episode:
https://community.rationalreminder.ca/t/episode-337-2024-year-end-ama-episode-discussion/33724
Paper From Today’s Episode:
'Who Are the Value and Growth Investors?' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12473
'Portfolios for Long-Term Investors' — https://academic.oup.com/rof/article/26/1/1/6484661
'Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice' — https://dx.doi.org/10.2139/ssrn.4590406
Books From Today’s Episode:
Are You a Stock or a Bond? — https://amazon.com/Are-You-Stock-Bond-Financial/dp/0133115291
Reboot Your Portfolio — https://amazon.com/Reboot-Your-Portfolio-Successful-Investing-ebook/dp/B09P4G9LR7
Wealthier — https://amazon.com/Wealthier-Investing-Field-Guide-Millennials-ebook/dp/B0CX2VD1CW
The Psychology of Money — https://amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681
Thinking, Fast and Slow — https://amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555
A Random Walk Down Wall Street — https://amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338/
Winning the Loser's Game — https://amazon.com/Winning-Losers-Game-Strategies-Successful/dp/1264258461/
Wealth Planning Strategies for Canadians 2024 — https://amazon.ca/Wealth-Planning-Strategies-Canadians-2024/dp/166871504X
Becoming Your Own Banker — https://amazon.com/Becoming-Your-Own-Banker-Infinite/dp/B001NZO1DS
Links From Today’s Episode:
Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemind
Rational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://x.com/MarkMcGrathCFP
Dan Bortolotti on LinkedIn — https://www.linkedin.com/in/dan-bortolotti-8a482310/
Canadian Couch Potato — https://canadiancouchpotato.com/
The Podcast Consultant — https://thepodcastconsultant.com/
Morgan Housel — https://www.morganhousel.com
Dimensional Fund Advisors — https://dimensional.com/
Avantis — https://avantisfi.com/
Dan Solin — https://danielsolin.com/
Global X — https://globalxetfs.com/