July 15, 2021

Episode 158: Loss Harvesting and the Myth of Tax Alpha

July 15, 2021

Welcome back to another episode of the Rational Reminder Podcast, where we give you the most considered and evidence-based information about investing in Canada. Our focus for this episode is the topic of tax loss harvesting, a subject we have touched on before but felt warranted a revisit, with some updates. To kick off the show, we review Playing to Win, looking at the illuminating perspective it offers with regards to strategy and preparation. From there we turn to some recent investing news on ETFs and Robinhood, before we get into the main course of today's show. There are plenty of pitches and arguments for why tax loss selling can be very rewarding, and while these are not necessarily false, there are certain ways in which the information can be misleading, or not comprehensive for all investors. We discuss how best to think about the supposed gains, noting the importance of high expected returns and the time frame in which a case study is made. We also think about some of the potentially negative results of letting tax drive your investment decisions, despite the seeming attractiveness of this route. One of the most important points here is the adjustment needed in order to apply these strategies to the Canadian market, as many of the pitches and research are based in the US system, which has significant differences when it comes to taxation. We highlight some red flags to look out for and give some more general warnings around rushing into investments that lean too heavily in this direction. So for all this and a bunch more great advice for your portfolio, join us for the show.

Key Points From This Episode:

This week's book review of Playing to Win by Roger Martin and A G Lafley. [0:08:43.3]
Continued increases for ETFs and comparing the statistics with recent history. [0:12:30.7]
Some amazing statistics about Robinhood users and cryptocurrency investments! [0:15:18.5]
A reintroduction to, and revisited analysis of, tax loss harvesting. [0:18:20.8]
The best times to consider tax loss selling; waiting for high expected returns. [0:27:55.5]
Recent findings on the tax alpha and modifying the arguments and assumptions. [0:33:20.5]
Creating a new base case to work from with some helpful adjustments. [0:38:41.3]
The importance of the time period when looking at historical returns for tax loss selling. [0:43:10.1]
Cases in which we believe tax loss selling makes the most sense. [0:46:14.3]
Looking at the tax implications of pooling funds with other investors. [0:49:02.7]
Locating these tax loss strategies within a specifically Canadian context. [0:52:18.5]
A couple Talking Sense cards dealing with leading and following, and protection. [0:55:25.5]
Bad advice of the week; looking at pensions in the UK. [0:58:03.5]

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making for Canadians. We are hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: So welcome to the dog days of summer. As I was waiting for you to join the recording here, I didn't know what dog days of summer were even when it was and it was summertime. But do you know what the dog days of summer comes from?

Ben Felix: No.

Cameron Passmore: So it's actually July 3 to August 11. And it's the time of the year where the sun occupies the same region of the sky as Sirius, which is a brightest star visible from any part of the Earth and as part of the constellation Canis Major, the Greater Dog. There you go. We're just starting the dog days of summer. We are recording this on the ninth, Friday the ninth. And also now know where the dog logo comes from in the Sirius XM logo.

Ben Felix: I didn't know that either.

Cameron Passmore: There we go. So dog days of summer. So recording Friday, because I'm off at a cottage next week. So I finally have a week of living like what you live every day now at your new place.

Ben Felix: It is cottage here. One of my neighbors said he was going to the cottage and I was like, "Isn't this where people go to be at a cottage?" But apparently when you live here, this becomes eventually, I guess, it's the adaptation principle. He was like, "Well, it gets so busy here in the weekend. What are you talking about?" But, I guess, remote has a different definition once you've lived in a relatively remote place. So my neighbors think that where I live is a bustling hotspot, but I'm like, "Hey, go spend some time on Preston Street."

Cameron Passmore: Yeah, you're not dragging your kayak down Preston Street. Anyways, I was talking to Angelica earlier and she wants us to do a summer promotion in our store. So for those who don't know on our Rational Reminder website rationalreminder.ca, there's a little shop button. We have a whole pile of products in there such as our regular mugs, our guest mugs for the first year and a half or so, water bottles, T-Shirts. Some people say our hoodies are the most comfortable hoodies ever. Ben is sporting blue. I'm sporting red today if you're not on the YouTube. And anyways, also every order that we get while supplies last gets a free pair of Rational Reminder socks, which are pretty snappy. And we do free shipping in North America.

Cameron Passmore: But for people listening to this episode, if you go from July 15, which is the release date of this episode to July 29 and order something, at checkout, you'll be asked to enter in a code. If you enter in rationalsummer, all lower case, you'll get 20% off. It's not bad for dog days of summer feature.

Ben Felix: No, it's very cool.

Cameron Passmore: We'll see if people are listening and wanting to check out the store. This stuff as nice. One podcast I wanted to highlight that I thought was really cool. I listened to this week, Barry Ritholtz on Masters in Business interviewed Brad stone, who is the senior executive editor for technology for Bloomberg, and also the author of the recently released book called Amazon Unbound on real story of Amazon and Jeff Bezos and how he keeps pushing the strategy envelope into so many things that when they go through the different decisions they made as a company of things that did not exist like three years ago, five years ago, 10 years ago, it's unbelievable. You think about the decision to have prime delivery, which is the subscription based delivery service, but then they're able to monetize by having merchants pay ad revenue to get higher in the rankings of product. So effectively, the way I interpret it, shifting delivery costs onto the suppliers Prime Video, Amazon web services, which is like a $50 billion business or something.

Ben Felix: Yeah, that was a big one.

Cameron Passmore: Whole Foods type of Washington Post, Amazon music that just goes on and on what they've done. Also, some flops like fire TV as well as their own phone. But to keep pushing so hard like this to create what they did and then you get the pandemic, which just simply accelerated virtually every part of their business, which is crazy to think about. Look what it did to Prime Video on demand for Alexa, for the basic shipping of Amazon food service, food delivery and AWS, it's absolutely mind blowing. They added 400,000 employees last year. They raised minimum wage. And it was great interview. Barry did a great job.

Ben Felix: That is cool. Success comes when opportunity meets preparation and Amazon was in a very good position. The pandemic for them happened to be a pretty significant opportunity and they clearly capitalized on it.

Cameron Passmore: Yeah. Upcoming guests, Bill Schultheis, we've mentioned a couple of times, author of Coffeehouse Investor. Katy Milkman is after that, author of the book, How to Change, that we've talked about. We interviewed her yesterday.

Ben Felix: That was a great conversation.

Cameron Passmore: I agree.

Ben Felix: An engineer who studied social science. So yeah, great outlook, great perspective.

Cameron Passmore: Yeah. And then the next guest after that is Dave Plecha, who is a global head of fixed income at Dimensional Fund. So to prepare for that, I suggest, people go back and listen to your description of factor investing in fixed income, which was episode 138. In the community, we had some interesting feedback lately. One was from Abby, some very good feedback. She said, "Hands down, I believe this." She has done best finance podcasts out there. And our forays from finance into other areas of broader life and satisfaction are captivating. So that's been our goal. Another one from M reviewer in Brazil. I thought of calling this a transformational show for finance geeks, but I realized that it is not as interesting and insightful for geeks, but the transformational piece I reserved for quote "us" the layman. I thought that was nice. But you may want to talk about the third one we got, but you got a kick out of.

Ben Felix: Well, Patrick from Sweden said that this is his top number one finance podcast by far. And he loves the academic approach to investing, really feels like we want to help him and inform the audience with greetings from Sweden. Very nice review. And it's his number one finance podcast. And he gave us three stars. So my question to Cameron when we saw that was I wonder how many stars number two podcasts gets?

Cameron Passmore: Maybe three stars means more in Sweden. I don't know.

Ben Felix: Maybe they've got a three star system. Angelica said that it was probably a mistake. We appreciate it regardless.

Cameron Passmore: Yeah, exactly. In the community some people... I was talking to Angelica I had noticed this, but some people really taking aback when you said in the last podcast that you do not have goals. And she said, "Ask Ben about that." So I guess a lot of people were quite surprised you don't have goals. I know we're driven. I think you and I both focus on the quality of work, perhaps work too hard, but we do enjoy it, but we don't set concrete targets in that way.

Ben Felix: Never set goals. Stuff just happens and you keep doing a good job. I don't know. I never set a goal of having a family, and then bam, four kids. Stuff just happens and you roll with it. I don't know. Do your best.

Cameron Passmore: But you prepare. We prepare for things. I've never been a fan of setting certain business targets, for example, you can only control the activity, you can't control the outcome, but you have to be prepared for what could happen. So you're always mindful of what can happen.

Ben Felix: It's like what I said a minute ago, that success comes when opportunity meets preparation. You can't really control the opportunities, but you can control the preparation.

Cameron Passmore: Exactly. As always, you can connect with us on Peloton CP 313 or #Rationalreminder. I'm on Goodreads, love seeing people there. We're both on Twitter, Rational Reminder. I think we're now over 500 followers on Instagram, which is cool.

Ben Felix: Really?

Cameron Passmore: Yeah.

Ben Felix: Wow.

Cameron Passmore: A lot of people showing up over there. And I must say Angelica and the team are really up. I think the look of the Instagram page is nice.

Ben Felix: That's cool. I've never actually seen it. I've only seen the screenshots that you sent me, because I don't have Instagram.

Cameron Passmore: You're not on Instagram? You didn't see Oscar wearing the Rational Reminder hat? That was a big hit. You see Oscar behind me here. I suppose a big hit. Anyways, we should get onto the episode.

Ben Felix: Yeah, let's go. Welcome to episode 158 of the Rational Reminder Podcast.

Cameron Passmore: So quick book review this week. One that I read a long time ago that honestly I'd forgotten about, but it was referred to me by a friend and peer named Hugh. So thank, Hugh, for reminding me about this. So the book is called Playing To Win by Roger Martin and A.G. Lafley. So I was talking to Hugh a couple of weeks ago about... Just become curious about how to create, manage, develop a company's strategy. And so Hugh said I got to check out this book. It's pretty well regarded. So I downloaded it and loved it. So it's written by, as I said, A.G. Lafley, who was CEO of Procter & Gamble, and Roger Martin, who was a professor at University of Toronto's Rotman School and who at the time was a consultant to A.G. Lafley at P&G. And it's an excellent read. And it defines strategy as the integrated set of choices, and highlight choices, that uniquely the firm in this industry so as to create sustainable advantage and superior value relative to its competition. So that sounds like a great MBA type sentence.

But they really highlighted how it is about choices and understanding the trade offs between different choices to execute on a strategy. They go through and I'll give the five choices that they identify. They relate to winning. But they tell this through the lens of products at P&G, which was way more fascinating than I thought it would be, because it doesn't really matter what the product is, these choices matter no matter what business you're in. So, number one, what is your winning aspiration? What is the purpose of the enterprise and it's motivating aspiration? Number two, where will you play? Where will you achieve your aspiration? And they really highlight there, have deep consumer understanding.

Now, they highlight in that section that it's up to you to go and tell consumers what they want, but to understand them well enough that you can help them articulate in your space what's the benefit to them. And the example they gave is toothpaste. So toothpaste for a long time is all about preventing cavities. Consumers want to prevent cavities that have morphed into, well, is it whitening? Is it a sensitive teeth? And it became oral health was a big thing that was a hot button for people.

Number three, how to win. What is your value proposition? What is your competitive advantage? Is it innovation? Is it research and development? Another good example there was the Swiffer example. And I didn't realize what a blockbuster success Swiffer was being, but they were losing in the hard surface space, which is the cleaners and pledge, I guess, and stuff like that. So they were losing worldwide in that space, but they lead rolled and paper towels, which is the bounty paper towels are the quicker picker upper. So they were able to bring that technology with the liquid materials that are used on surfaces together in one product being the Swiffer, complete blockbuster, wild success for Procter & Gamble. So I thought that was a great example.

Number four, core capabilities. And number five data management systems and measures to enable and support choices. And they talk about how these choices are made throughout an organization from the overarching guiding strategy to the frontline employee in a retail store, for example. Anyways, they highlight winning's the heart of any strategy. Otherwise, they say you end up getting mediocrity. So love the book. Hadn't realized it was the second time I read it, but it was great, just to say. Any thoughts on that or I just keep rolling?

Ben Felix: No, I'm just thinking about the fact that I should probably read the book too. Sounds very good. People know this because we talked about it in the community, but the reason that you've been thinking about business strategy is because we just had this pretty significant transition where you took majority ownership of PWL. So I guess I'm just saying that because people should maybe not be surprised if stuff like this is a bit of a theme in terms of where your head is at for the next little while.

Cameron Passmore: A couple of new stories in ETF space. Canada showing continued popularity in ETF sales. So year to date sales of 29 billion. So year to date for six months of 2021 is 35% over the same period last year, which has also record. However, crypto sales last month were over a billion dollars in May, felt at 315 million in June.

Ben Felix: Wow.

Cameron Passmore: Still a very small part of the market compared to mutual funds in Canada, but get this, there's 1,118 listed ETFs in Canada.

Ben Felix: Unreal.

Cameron Passmore: And then another interesting tweet from Eric Balchunas showing the top 25 US based asset managers. So this is not ETF managers. These are asset managers, which together manage over $52 trillion of assets. And he showed what percentage of their assets under management are in ETFs. So overall, the 25 largest asset management firms have 12% of their assets are in ETF structures. Five years ago, and he made this as a surprising statement, five years ago, half of these firms had nothing in ETFs.

Ben Felix: Wow.

Cameron Passmore: But the reality is there's very little change even today, because almost, I think, 12 of them have either nothing or very little in ETFs. But get this, of the 25 largest US based asset managers, four firms have a large percentage in ETFs. So I would say that's 27% or more. BlackRock has 34%.

Ben Felix: This is 34% of BlackRock's total assets.

Cameron Passmore: Totals assets are in ETFs. So 34%. Next is Invesco at 29.6, State Street at 29.3 and Vanguard at 27.

Ben Felix: Wow.

Cameron Passmore: So it shows even Vanguard has a lot of mutual funds, right?

Ben Felix: Yeah.

Cameron Passmore: So those are the big four, almost a 30% or higher. Number five firm is Dimensional at 4.7%.

Ben Felix: So 4.7% of their total assets are in ETFs at this point?

Cameron Passmore: Total assets. So their assets right now, Dimensional, is 637 on this chart, 637 billion US. And they have 30 billion in ETFs.

Ben Felix: They became by doing these conversions and then they launched a couple of ETFs as well. But I think I read they became the 11th largest ETF manager in the states just by basically flipping a switch.

Cameron Passmore: That's right. So that's why there's other firms that aren't on this list that manage more ETFs, but they're smaller in total assets.

Ben Felix: Got it.

Cameron Passmore: So these are the largest asset managers and their percentage in ETFs.

Ben Felix: Wow.

Cameron Passmore:I just thought that was interesting.

Ben Felix: Yeah.

Cameron Passmore: Other thing that's interesting, and this is a shout out to Ben Carlson at Ritholtz who did some analysis on his recent blog, looking at Robinhood, which filed its S-1 to go public sometime in the near future. Some crazy data points on this. There's close to 18 million active users on Robinhood with $80 billion of assets. 12 billion of that is in crypto. More than 50% of the users on Robinhood, this is their first ever brokerage account. 50% of all new retail accounts opened in the US since 2016 are on Robinhood.

Ben Felix: That's crazy.

Cameron Passmore: Get this one, 47% use the product on a daily basis. And of those that use it daily, they visit the site seven times per day. 98% use the app on a monthly basis. Now, we've had some bad news lately where Robinhood had to pay a fine for quoted as outages and misleading clients. Revenue is skyrocketing in 2020. They made almost a billion dollars in revenue up from under 300 million in 2019. In Q1 of this year of 2021, they made $522 million, which is more than half of what they made all of 2020, which was triple what they made the year before.

Ben Felix: Yeah. Wow.

Cameron Passmore: So much of the revenue came from pay for order flow, which we've talked about in the past. They make a ton of options. Options make up 3% of the assets, but they make up 38% of transaction revenues in Q1. I didn't know this, but when they go public, I guess they're holding back a fair chunk to be available to their own customers estimated to be between 20 and 35%.

Ben Felix: That's neat.

Cameron Passmore: Yeah. So Ben makes a comment at the end of this article saying it's wonderful that Robinhood has gotten so many new investors involved in the markets and they had an impact in driving down trading commissions. True. However, he says, "People always drink more at an open bar." That's what we talked about a couple of weeks ago, like is this access an easy access and gamification actually good for investor outcomes?

Ben Felix: Fascinating.

Cameron Passmore: I guess we'll see.

Ben Felix: I think that, that fine was for... I think it was about the execution of the trades, where they're advertising free trading, but the costs that their investors were actually paying were more than if they had been paying commissions at a different institution.

Cameron Passmore: We need to factor in that pay for order flow in that.

Ben Felix: Yeah. The quality of the execution of the trades. It was something like that. I remember reading about that last year. I think that's probably the same fund, but I'm not 100% sure on that.

Cameron Passmore: Hate to say it again, but I will. If you don't pay, you are the product. Onto the big topic today, which I was super nerdy. I'm super jazzed by it.

Ben Felix: To finish up on Robinhood, I think, that frequency that people are using those accounts, I can't tell you how many times I've conversations with our clients where they literally haven't looked at their accounts since the last time we met them six months ago or other cases where they haven't set up the online access that we've created, because they just never look, you have a way for me to look at it. I never looked so I didn't know. There's such a big difference in the characteristics of the type of people using our platform versus Robinhood, which I guess is obvious to say, but yeah.

All right. They nerd out geek topic, tax loss harvesting. Now, this is something that we've talked about before in past episodes. And I had done some analysis on it, but I revisited it because it came up in some stuff that I was working on. And I found a bunch of resources that I had not dug up the last time I looked at this. Last time, I had just done my own number crunching and come up with some conclusions. We'd come up with the optimal case for when loss harvesting would make sense, then talked about some of the different risks that are involved and stuff like that. But I think this is a much more robust analysis of loss harvesting. So we'll dive right into that.

One of the reasons I think it's relevant to talk about is that it's often promoted as a strategy for high net worth investors to be using. A lot of firms present it as a value added, like you should deal with us instead of these guys, because we do loss harvesting, or you should deal with us instead of doing it yourself, because we harvest your losses.

Cameron Passmore: Well, it's just a throw away you got to do it thing.

Ben Felix: Yeah. And you see with Robo-advisors too. I haven't looked at Wealthsimple's offering in quite a while, but I know at a point in time they had above a certain asset level that you could choose to turn on loss harvesting. And that's part of the value proposition. Now, to be fair we occasionally do loss harvesting too. We're just very selective about when we do it. And that's what we talked about. Last time we covered this topic. I want to be clear that I'm not saying this is a bad strategy, I just think the way that it's promoted in many cases is a little bit misleading. That's what we're going to talk about.

So what it is? What is loss harvesting for anybody listening that maybe does not know what it is? It's the process of selling a security that is at a loss for tax purposes. So the value is less than its adjusted cost basis, which is basically what you paid for the security. And then not buying that same security back for at least 30 days. In Canada, we have superficial loss rules where if you sold it to get the loss and then bought it back before 30 days or within 30 days, then the loss is denied as a superficial loss. In the United States, they have the wash-sale rules, which are, as far as I know, the same thing, but in any case, they're similar. And it's to avoid, well, this, just to avoid capturing the loss and continuing to own the security. They don't want you to do that.

So if you do this, if you trigger the loss, and you have a gain to offset, in Canada, if you have a gain in that tax year or within the last three tax years, you can use the loss to offset that gain and get what's basically an immediate tax savings. Now, you take the proceeds from the sale, so you've got the security that you've just sold at a loss, you take the proceeds from that sale. And I said, you can't reinvest it in the same security, but you're going to reinvest it in something that's very similar. Can't be identical, so that can't be the same stock. If it's an ETF, it can't be an ETF tracking the same index, but you can reinvest the proceeds in a non identical property.

But you're selling this thing at a loss, which means when you re-buy in the new asset, whatever it is, your cost basis on the new asset is going to be the same as your sale proceeds from what you just sold, which means effectively, because the thing that you sold had a higher cost base, which is why it was at a loss, when you do the re-investment, you're reducing your adjusted cost base relative to if you had not done this procedure. A lower adjusted cost base means when you eventually sell that asset in the future, you're going to have to pay the tax on that amount. So even though you're getting an immediate tax savings by triggering this loss, you're creating a larger future tax liability that should directly offset your immediate tax savings. The difference is in the timing. So you're deferring tax, you're getting the time value of the tax savings between when you get the tax savings now and when you pay that tax bill later.

Cameron Passmore: That is key. You have to understand this to get the rest of your points.

Ben Felix: Yeah.

Cameron Passmore: This is not a way to save tax, you're simply deferring tax.

Ben Felix: Yeah. So tax loss selling is a tax deferral strategy. And you're right, that is important to everything else that we're going to talk about here. Tax deferral is a good thing. Don't get me wrong, I'm not saying that tax loss selling is bad because it's just a deferral. Deferring tax is good. And that's the central argument for loss selling. If you can pay your taxes later, as opposed to now, yes, that is a good thing, but it's also not that straightforward. That's not the only thing that's going on here.

Now, I built a very basic model to estimate the benefit of capital gains tax deferral by comparing a hypothetical investor who uses loss selling to defer 100% of their capital gains each year for 20 years. Now, in my example, I'm assuming that this person has capital gains to offset. So that's important, because if an investor did not have capital gains in the current year or past three years or maybe the following year, like if they know they're going to have a gain in the very near term, if that's not true and you're just triggering losses for the sake of triggering losses, you can carry those losses forward, but they're not going to do anything for you.

Cameron Passmore: Right. So this is a realized gain, so not unrealized.

Ben Felix: That's correct.

Cameron Passmore: Realized gain. So soak up those realized losses.

Ben Felix: That is correct. You have to have realized gain. So in my example, and the same assumption is made in the papers that I found covering this topic, there are realized gains available to offset with the losses that we're triggering through the tax loss sales. So in my model, I had a 20 year time horizon, and I compared the loss selling case to just a straight buy and hold case. I had a 53.53% tax rate, which is the highest personal tax rate in Ontario in 2021. And I used an expected return for my base case of 7% per year. And I split that up as 2% in income. I didn't differentiate between Canadian dividends and income and just income. So 2% income, 2.5% in realized capital gains and 2.5% in unrealized capital gains.

Now, even that as a note is a pretty aggressive assumption, because realistically, I don't think our clients are realizing 50% of their gains every year. I know they're not. It's a much lower proportion of gains that are being realized. So that assumption will itself make loss harvesting look more attractive, because if you're deferring your gains anyway, you don't need to do the loss. You don't need to do the loss sale if you're not realizing any -.

Cameron Passmore: Yeah, you're already deferring them.

Ben Felix: Yeah, exactly. So you don't need to do anything fancy. That's one of the things that comes up when you start digging into when does tax loss selling make sense, one of the criteria is if you're doing a lot of trading. So if you have an actively managed strategy and you are realizing a bunch of gains, then this whole process becomes more compelling, but if you're a buy and hold index investor and you're almost never realizing gains, that diminishes a lot of that. And that's not even an angle that I look at in this analysis. So that was the base case.

I also made a case where returns are higher than expected. So instead of the 7% total return, I did a case where we've got still 2% dividends, but our capital gains are 8% instead of five. And again, split that between realized and unrealized gains. And then I did a low returns case where total capital gains are 2% per year. Again, split between realized unrealized. And then I compared these to the investor who didn't do any loss selling and then realized all their gains. In both cases, they're realizing all of their gains at the end of the period. The person doing the loss selling is going to have a bigger gain, because they've been reducing their cost base throughout the period.

So in the base case with a 7% return, I got 23 basis points of tax alpha and that's excess returns due to tax reduction. In the loss harvesting model, the way that I modeled it, because I didn't have actual securities in the model, I just had account values and adjusted cost basis and unrealized gains. So in the case where I'm doing the loss harvesting, the way that I captured that was that there were no realized gains in each time period. And all of the realized gains just accrued as unrealized gains. In the normal buy and hold case, you're realizing half of your gains. In the tax loss selling case, it's as if none of your gains were realized, because you're executing perfect tax loss sales to offset all of the gains, and then they're decreasing your adjusted cost base increasing the unrealized gain. So at the end of 20 years, the loss selling model has a much larger unrealized gain, but they haven't paid all those taxes on realized gains along the way like the buy and hold investor has.

Cameron Passmore: Fascinating.

Ben Felix: So that was just a hack way to do the model. I didn't have actual securities, it wasn't an empirical analysis using historical data or anything like that. Although, I did look at some papers that did that, but my model was very simple, but I think it does answer the question and it actually matches up with the results of the empirical papers that we're going to talk about.

Cameron Passmore: But it makes sense going back to your initial comment, which is you would only trigger losses enough to offset realized gains. So you're assuming there's no other gains going on in the person's life, just it’s portfolio centric.

Ben Felix: Correct. And then they're able to find enough losses to perfectly offset the gains that they would have otherwise realized.

Cameron Passmore: Got you.

Ben Felix: But clearly, it's a very simplified model. But again, I validated the model by comparing it to the empirical papers that we're going to talk about and it matches up. I was actually surprised after the fact when I looked at these papers in detail and found that they matched up with my model as this guy's nice. Okay. So in the normal case, 23 basis points of tax alpha, in the low return case, the tax alpha was only five basis points annualized. These are all annualized figures. And in the higher return case, so that's where we had a 10% return, the tax alpha was 49 basis points. And this was one of the things that when you start digging into, when does tax loss selling makes sense, high expected returns, I guess, are requirement as we just saw, I guess, but there are requirements to make this make sense, because if you think back, what is the value of loss harvesting, it's not a tax savings, it's a tax deferral. The higher your returns are, the more valuable that deferral becomes.

Cameron Passmore: Yes.

Ben Felix: We see that in the model that we just went through. So for my base case, is there an investor tax at the highest marginal rate now and in the future, the benefits of tax loss selling were 23 basis points if returns are 7%. So that's my base case, 23 basis points of tax alpha. Now, I assumed a constant tax rate for that 23 basis point number, but there are a couple of details here that I think are really important. One is that, some investors might expect to be in a lower tax bracket in the future. And we talked about like with the RRSP, which is a tax deferred savings vehicle. You put money in at a higher tax rate, take it out later at a lower tax rate. You get this bonus for being in a lower tax rate in the future. And it's the same concept with loss harvesting. If you can defer taxes now at a higher tax rate and pay them later at a lower tax rate, that makes things look that much better. Now, on the other hand-

Cameron Passmore: For tax loss harvesting.

Ben Felix: What did I say?

Cameron Passmore: No, I'm just finishing that.

Ben Felix: Yeah.

Cameron Passmore: Tax loss harvesting. If you're on a lower tax bracket later, tax loss harvesting becomes more attractive, because you're harvesting at higher tax rates and deferring to a lower tax rate.

Ben Felix: Right. Completely agreed. The other side of that though, the other side of that point is that there's been all this discussion in Canada about the capital gains inclusion rate increasing. For people that don't know Canadian tax, if someone has a capital gain, you pay tax at your marginal tax rate on half of that capital gain. But there's been a lot of discussion about the capital gains inclusion rate, potentially going up to 75%. So effectively your tax rate on gains increases in that case.

Cameron Passmore: Therefore, don't do tax loss harvesting.

Ben Felix: Well, if you get that outcome, then it's no longer a try, it's no longer a benefit. So that current and future tax rate question becomes really important. So I ran the numbers on this too and I used the normal, the 7% expected return case to compare it across different future tax regimes. I used one with a lower future tax rate and I just did 25% capital gains inclusion instead of 50%. And I did one higher tax rate with 75% capital gains inclusion in terms of actual percentage tax rates that ends up being 14% in the low future tax case, which is about what somebody in Ontario in 2021 would pay if they had $75,000 of income. That would be roughly their marginal tax rate. And in the 75% inclusion rate that equates to about a 40% total tax rate on capital gains. And just for context, the current highest rate on capital gains in Ontario is 27%. So in my low future case, we're cutting roughly in half and in the high future 75% inclusion case, we're adding about 13% to future taxes.

Cameron Passmore: Exactly.

Ben Felix: So if future taxes are low, tax loss harvesting gives me 46 basis points of annualized tax alpha.

Cameron Passmore: Makes sense.

Ben Felix: Pretty good, double my original base case with a constant tax rate. And if they're high in the future, so if the gains inclusion rate increases and you stay in the highest tax bracket, because that's the other input to this, the tax alpha drops to negative four basis points. So in that case, you're actually shooting yourself in the foot. A lot of ifs though, right? Like if the gains rate inclusion rate goes up and if you're still at the highest marginal tax bracket, then that's the bad outcome. But that's also one of the considerations that we'll talk about once we've covered off the rest of the topic.

So obviously as we just described, the difference in current and future tax rates are significant. I think there's an important nuance here between Canada and the US, so much of the financial research comes from the United States. So many of the products and pitches come from US centric companies. So I think in Canada, high net worth investors probably get a lot of information from US centric sources. So you hear tax loss harvesting and it sounds really compelling. In the states, even if your tax bracket stays the same, your level of taxable income stays the same, there's going to be a difference in short and long term capital gains tax rates. Short term capital gains are taxed at a higher rate than long term capital gains in the US. In Canada, it's not like that, you pay tax at your tax rate on half the gain no matter how long you held the asset for. So I think that makes a big difference, because if in the states you get this automatic boost from the difference between short and long term capital gains taxation.

Okay. So now I want to jump into this paper. One of the papers that I found, this is a 2020 paper in the Financial Analysts Journal, An Empirical Evaluation of Tax-Loss Harvesting by Shomesh Chaudhuri, Terence Burnham and Andrew Lo. I know Andrew Lo is at MIT. I'm not familiar with the other authors of the paper, but it is published in Financial Analysts Journal. Also on SSRN. So we can link to that version. So that they find in their analysis, I'll talk about what they did. They did an empirical analysis where they simulated a tax loss selling strategy using actual US historical stock market data for the 500 largest stocks in the US market from 1926 through 2018. And they found, this is a big number, they found a 1.1% tax alpha over the full period. That's pretty meaningful. Starting from around 1% tax alpha, that's, okay, let's go.

Cameron Passmore: But thanks to your set up. Listeners are saying what are all the other factors?

Ben Felix: Yeah. So they made some assumptions that they're not bad assumptions, they're not wrong assumptions, but they're assumptions that I wanted to modify a bit, which is what we're going to talk through here. So they assume that you're doing 1% per month of new deposits into the account. For a lot of people, that's maybe a reasonable assumption, for other people, maybe it's not, but I just think it's worth pointing out. They assume short term capital gains are taxed at 35% and long term capital gains are taxed at 15%. They ignore the wash-sale rule. So they assume that you can realize a loss and reinvest in the same security, which as we talked about earlier is not a realistic assumption. I get why they did it. It would be hard to do something else, because you can't really find the comparables or I don't know how they would find the comparable security to replace it with. Anyway, so that is what it is.

Now, they did look at a bunch of different scenarios though. So they looked at a case where short and long term capital gains are taxed at the same rate. If they tax them both at 35%, the rate for short term gains in the US, the tax alpha drops to 51 basis points from 1.1%. So pretty significant. I found it interesting that, that 0.51% is almost identical to the high return sample case with constant tax rates. Now, maybe that shouldn't be surprising, because like we mentioned before, in Canada, there is one tax rate for capital gains. So the fact that holding in their model, holding the rate constant of giving us results similar to my model is perhaps not surprising. They also looked at a 20% constant tax rate on short and long term gains, which is even closer to Canada, because we're at 27% at the highest rate and the annualized tax alpha drops 31 basis points.

So I did a little linear interpolation and found that at a 27% tax rate, you'd be looking at about 39 basis points of tax alpha. But that's before making all of the adjustments that we're about to talk about next. So they found based on the 500 largest companies, and like you asked about turnover earlier, Cameron, they did have turnover figures, because they were using historical data. I was like 30% turnover roughly, I believe, if I remember correctly. In their model, they found an estimated transaction cost of about 16 basis points per year. And that's based on 0.5 basis points per 1% of annual turnover from the loss selling strategy. Again, to reiterate, they're using the 500 largest US stocks for the sample and the transaction cost estimates were based on that. So if we're doing total market US as opposed to the 500 largest companies, your transaction costs are going to be higher.

Cameron Passmore: So do you know what rules they were following for triggering the losses?

Ben Felix: Yeah. So there's another 2003 paper that did some simulations on this and they followed the same methodology as them. They were using tax lots. They were just selling whatever tax lots had losses in each period. Now, tax lot accounting that's another important point that we're going to have to cover. That's an important difference between Canada and the US. In the US, you can group things by tax lots. And I'm not going to pretend to fully understand all the nuance there, because this is very US tax centric, which I'm nothing of an expert in. But if you have different lots of the same security, you can choose which tax lot to sell. If you bought a bunch of the same stock at different time intervals, you can choose the one that's at a loss, the lot that's at a loss. In Canada, our cost base calculation is the average cost. There's no room to choose a lot to do your sale.

Cameron Passmore: Yeah, that makes sense. Then when they trigger a loss, are they using that loss to offset other gains that are realized by the portfolio or do they assume the investor has other gains somewhere else to offset?

Ben Felix: That one. They're assuming that they're against offsets. The same assumption that I made in my model.

Cameron Passmore: Got you.

Ben Felix: But again, that becomes an important nuance that we're going to cover off as we move along here.

Cameron Passmore: And last question, what about diversification? They put rules in that, let's say, they're all down, would they sell?

Ben Felix: That was not in their model as far as I know from reading the paper. And again, you're touching on one of the other important points that we're going to get to as-

Cameron Passmore: Sorry, I'm jumping here.

Ben Felix: You're asking good questions.

Cameron Passmore: I try to think like the listener. So anyway.

Ben Felix: Okay. So where we ended off there is I had the 39 basis point estimate with Canadian tax rates and we had the 16 basis points of transaction costs. But then just to go back a little bit more, they had found in their base case in this paper, 1.1% as the tax alpha. It's worth noting too that when you look at marketing material for loss selling strategies or products, that's what you tend to see, one to 2% tax alpha is what you can expect from the strategy. So the paper so far, at least in that base case of theirs lines up with what you see in marketing material.

So the other thing that I wanted to look at, and again, fortunately, they did these calculations, what if you're not adding 1% per month to the portfolio? And the reason that matters is that if you're adding to the portfolio, each time you make an addition, you're bumping up your cost basis or you're creating new tax lots if you're in the US, but either way, you're giving yourself more opportunities to do loss sales. Whereas if you're not making contributions, eventually you're not going to have any opportunities for losses if everything ends up at a gain or most things end up in a gain position.

So their base case estimate, if we take out that 1% contribution and just leave it flat, drops from 1.1% annualized to 0.73% annualized. Then what I did is I took the relative reduction in tax alpha associated with a 27% tax rate and applied that to 0.73%. So that gives us a 0.26% tax alpha. I'm creating my own base case here. So no additional contributions with Canadian tax rates. So 26 basis point tax alpha before transaction costs, and we had those 16 basis points to wipe off. So that's 10 basis points that we have leftover after transaction costs. So I don't think that's super attractive, especially when we talk about some of the other stuff we're about to go through here. So that's my base case. My base case is 10 basis points. If you're making contributions, then it's higher. That's important to be mindful of.

Now, the other big thing here is that we're talking about 1926 to 2018. That's where you get the 1.1% starting point for a tax alpha. They also look at sub periods. And you start looking at the sub periods and there's some pretty significant nuance in here too. So the tax alpha in this paper is base assumptions from 1926 to 1949. I think about what happened over that time period, lots of volatility, lots of serious losses and lots of serious gains after those losses. Tax alpha over that period was 2.29% per year, pretty significant. And a lot of that was driven by great depression related stuff with the serious losses for a period of time, tons of volatility and an eventual bull market.

Cameron Passmore: So an opportunity for more tax loss harvesting?

Ben Felix: Tax loss harvesting, yeah, exactly. One of the issues with this, with the fact that a time like that is, and they bring this up in the paper, this isn't my commentary, it's theirs, they're assuming that there are gains to offset. But if you think about practically, if you don't have magical gains to offset the value of a loss selling strategy, empirically comes when there are massive losses, like in the Great Depression. But if you think through that scenario, you probably don't have any gains or much gains to be offsetting. So in the model, that's when this strategy is the most attractive, but it's also when you're least likely to have gains available to offset to make the strategy work. So in that most extreme period, tax alpha 2.29% with the caveat that I just mentioned.

And then other time periods, the tax alphas where lower, 0.57% was the lowest from 1949 to 1972. And then I think one period was around 0.8 and one was around 1%. But you take out that Great Depression madness, which can sometimes make sense to do when you're doing this type of analysis. And the average value in their base case drops pretty significantly. And that's still based on the differential between long and short term gains rates, tax rates in the states and the 1% monthly contributions. So I think if you make the adjustments for Canada, strip out the Great Depression or even if you don't, without doing it, I was still at 10 basis points of estimated tax alpha.

Now, the other thing I mentioned the importance of average returns over the time period in question in determining the expos to value of loss harvesting. The period we're talking about in this empirical analysis, the annualized return of the US stock market was 9.75%, which is close to my high 10% return scenario in my simple model, but obviously a lot higher than the expected return, especially for the US market considering how high prices are there.

Now, the other thing to remember is fees. So if you're doing loss selling with ETFs in your own account, you're paying transaction costs, you're dealing with tracking errors still, but you're not really paying fees. And these products are more common in the states than they are in Canada, but when you see a separately managed account being advertised or with loss selling being one of those features of it, you're going to pay more than the cost of owning a total market ETF. ETFs five basis points for market, maybe it's 25 or something with a value tilt or a small value tilt. I didn't price out separately managed account options in the US, but you're going to pay more than that to have this loss selling service applied. So that's a big issue too.

And then tracking error. So you mentioned tracking error. We've finally gotten there now. There's a paper by Birkin and Yi, and this is simulated as simulation by the other paper that we just mentioned by Andrew Lo and company. They followed the same methodology just with empirical data, but the tracking error issue was described in Birkin and Yi's 2003 paper as portfolio lock, which I think is a cool way to think about it. But this happens when gains are deferred and then the increase in the market value of the portfolio becomes larger than its cost basis. So you end up getting stuck with the security that you were using as a placeholder when you made your last sale.

Cameron Passmore: There you go.

Ben Felix: So over time, this accumulates, and you can end up with a portfolio that is very different from the portfolio you would have had if taxes had not been driving your investment decisions. And I think that's really important, because we assume, okay, here's the optimal portfolio, by doing tax loss selling and due to this portfolio lockup issue, you're going to have a portfolio that is different ignoring taxes for a second that is different. Well probably if your optimal portfolio was designed to have the exact risk and expected return characteristics that you want, the loss sale portfolio is going to be different, which is, I think by definition of the way that I just explained that, suboptimal, and it's because taxes were driving the investment decisions. If the tax savings are sufficient to offset the tracking error, then that's great. But I think as we've talked through this, it should be obvious that it's not obvious that the tax alpha's going to offset stuff like tracking error and all the other issues that we talked about.

Now, I do want to point out, like I mentioned earlier, we do loss selling in some cases. Like last March and April, we were combing through all of our clients to see where loss sales could make sense. Now, we're doing it at the fund level, not at the individual underlying security level, but similar thinking I think applies. So what I did want to talk through was the cases where loss selling can be a compelling strategy, because I'm not saying that it's total garbage, I'm just saying it's maybe not as attractive as it can be pitched as being. So you have to expect high average returns from the asset, you have to expect high volatility and high cross sectional dispersion of the individual security returns in the market that you're applying the strategy to. If you don't have that, then there aren't going to be lost selling opportunities.

I think volatility and cross sectional dispersion are a given in most stock markets. Average returns are obviously very uncertain. There's another interesting one in here, which is you're losing positions. So when you're doing the tax loss sales, you want your losers to have low trading costs, but I don't think that's that obvious. If you're selling your losers, I don't think it's obvious that they're going to have low trading costs. So another way of saying that is that the 16 basis point estimate for trading costs may be unrealistically attractive. And if you're really selling your losers, especially if it's not the 500 largest stocks, like the paper that we were talking about, my estimate is you'd have higher than a 16 basis point transaction cost drag, which of course the buy and hold investor would not have, because they don't have the high turnover that the loss selling strategy does.

And then the level of the individual, so I just talked about what the market has to look like. At the level of the individual, you should be expecting a lower future tax rate relative to your current tax rate for this to make sense. You have to have capital gains to offset. That's a huge assumption that's made in these models. And then that's got to be gains within the current year, past three years in Canada. Or if you're really sure you're going to have realized gains in the next year or two, then maybe this becomes interesting. Again, you should be making contributions to the account. There's a big drop off in the efficacy of this strategy, if you're not making contributions. If you're making withdrawals, it gets even uglier. So this is for someone in the accumulation phase, which matches up with the tax rate differential.

If you're accumulating, there's a good chance, unless someone has significant wealth, there's a good chance they're going to be at a higher tax rate now than in the future. And you've got to be comfortable eating tracking error. And that's an unpriced risk. You're taking some random risk with the loss of sale portfolio relative to the otherwise optimal buy and hold portfolio. I did want to mention a couple of things on funds as a structure. So I mentioned separately managed accounts, and those do exist in Canada. I don't hear about them nearly as much as you hear about them in the US, but they are still in Canada pitched to high net worth investors as a way to improve over the fund structure, because you get to do tax loss selling, you get to control your overall portfolio, you're not beholden to what other investors are doing inside of a fund. All that good stuff, I think, tends to get included in that pitch.

But pooling funds with other investors has some interesting tax attributes. A fund can use its cash flows to the advantage of all fund holders. A fund has positive cash inflows. The inflows dilute any unrealized gains inside the fund by increasing the average cost basis of the securities in the portfolio in Canada or creating new tax lots if you're in the US with their tax lot accounting. And then the inflows also can facilitate portfolio transactions like rebalancing using new cash as opposed to having to sell securities. I think that's an advantage. If a fund has a positive inflows, that's an advantage over doing individual securities or even individually ETFs in an account. Now, those are referred to as a paper that I found by Dixon 2000 paper. And he refers to this as positive tax externalities for equity funds and negative flows.

So I just talked about why positive flows into a fund can be a good thing for all unit holders of the fund. Negative flows would then seem like they're probably a bad thing, but in Canada, we have these two mechanisms, the capital gains refund mechanism and the allocation to redeemer's methodology. And they're designed to avoid double taxation on fund redemptions. So I'll talk about allocation to redeemers. When an investor leaves a fund, the fund can allocate capital gains to the redeeming unit older and claim a corresponding deduction that reduces the gains for the rest of the unit holders in the fund. The allocated capital gains are included in computing the redeeming unit holder's income, and the unit holder's redemption proceeds are reduced by a corresponding amount.

So it can, the negative flows, people taking money out of a fund can attenuate the negative externality of negative flows, because you can end up in a situation where a fund has realized gains they'd get pushed out to unit holders that sold the fund instead of being distributed to existing holders of the fund. So I don't think it's true in Canada that people leaving a fund or even negative flows are guaranteed to be a bad outcome for the remaining unit holders in the fund. I think that's an important piece where there can be a perception where holding individual securities or having a separately managed account, because they're more flexible, I guess, or you have more control, they can seem like better options than owning through a fund if you have the scale or the opportunity to own them directly. But I think it's a pretty good argument that funds can actually be more tax efficient than holding stuff directly.

Then just to finish this topic off. I wanted to talk about a couple, and we've mentioned them throughout the discussion, but there are a couple of points specific to Canada. And I just want to reiterate those, because again, we often hear about loss selling from the perspective of US investors in the US research. Even the papers that I looked at, they're all based on US tax code. And this is one I actually haven't mentioned yet. In Canada, we don't have a step up in cost basis on death, which is something that as far as I know, the US has. I think Biden was looking at getting rid of it, but I don't know if they did or maybe putting a cap on it.

Anyway, in the US if you die with the taxable account, you get a step up in cost basis on death, which means you don't pay gains tax on all of your appreciated securities, your heirs or your estate gets the assets at their market value. So the cost base is reset to market value on death. In Canada, we absolutely do not have that. If the second spouse dies, the full gain is taxable on the terminal tax return. Now in Canada, you can donate those appreciated securities and that makes the gain go away. But ignoring that or assuming that, that's not what somebody wants to do, in the loss selling case, you end up with this massive unrealized gain, which could push you into a higher tax bracket if you're not in the highest tax bracket.

And the other big one is Canada uses the average cost for the basis of securities while the US uses tax lots. They didn't separate out how much tax lot accounting contributed to their calculated tax alphas. So I can't a statement on. It was 1.1% with tax lot accounting and X amount with average cost, but it would have been lower using average cost accounting and there'd be fewer opportunities to do loss sales. So that's important piece for a Canadian thinking about, should I do this? The fact that we do average cost is important.

And then the last big one that I think I've already hammered home, but I'll mention anyway, is that we do not differentiate between short and long term capital gains in terms of the rate that you pay. So I would summarize all that as tax loss selling can be useful. I definitely wouldn't pay higher fees than owning a total market index fund in order to access tax loss selling. I think if you get a 1% tax alpha, that should raise some red flags or at least result in some deeper due diligence in terms of how that is being estimated. I think based on the numbers that we just walked through, it's highly sensitive to the inputs, but I think with reasonable inputs, I would say a 1% estimated tax alpha from loss selling is a little bit too aggressive.

And then the last piece for our Canadian listeners is that a lot of this stuff is way different in Canada than it is in the US. And I was, to be honest, surprised at how different the numbers start to look when you make it apply directly to Canada as opposed to a US investor.

Cameron Passmore: So to me, the takeaway, perhaps we have to make a T-shirt with this. It should be obvious, it is not obvious. Another Ben-ism.

Ben Felix: It should be obvious it is not obvious.

Cameron Passmore: Another great Ben-is. Okay. Onto the talking sense cards, again, this is the initiative for the University of Chicago Financial Education Initiative. Number one card, interesting, would you rather follow a path laid out for you or set a path for other people to follow? For me, for sure it's a rather interesting question actually. I like to set my own path. I think that's not the question, the question is, do you want to follow paths laid out for you or set a path for other people?

I guess, effectively we're living by setting a path for other people in what we do for people, but also in building the team and building our service. So I'm in the set of path for other people to follow.

Ben Felix: If I feel like I'm following a path that somebody else has set, I get very uncomfortable very quickly.

Cameron Passmore: That's also an interesting point, because the path we're following is a path that we are all creating as a team each in our own roles, but together we're going in this direction, right? Gets back to the strategy question, which is interesting.

Ben Felix: I think that's all I got. Yeah. Not a fan of doing the whatever seems easiest or following a predetermined path.

Cameron Passmore: Question number two, this one is very interesting and we've not seen these. So what could you do to protect yourself from something you worry about?

Ben Felix: By insurance.

Cameron Passmore: It depends on what you worry about, right? You can't buy insurance on your kids turning out to be great citizens, can't buy insurance for lots of different things.

Ben Felix: Say the question again.

Cameron Passmore: What could you do to protect yourself from something you worry about?

Ben Felix: You can be stoic about it, separate yourself from it.

Cameron Passmore: People often laugh at me, I seem to have some ability to completely be able to sit and not think about anything, which I know Lisa always says doesn't get how I do that. But I'm able to just be, not even worry about. If I wake up in the middle of the night, it's often like there's, I swear to you, there is nothing on my mind. It's not like worrying about work or other things in my life. I don't worry about a ton.

Ben Felix: I can't relate to that.

Cameron Passmore: Do you worry about stuff when you wake up in the middle of the night?

Ben Felix: I don't think about nothing. I don't know if I worry about stuff, but my mind does start racing. I find that to not think about anything or to not think about anything other than the task at hand. My favorite activity is challenging walks in the forest where literally can't think about anything else, because you'll fall on your face by tripping over a rock. That's the best to me.

Cameron Passmore: Interesting. I think that's true for any extreme sport or activity. It just forces everything out of your head for that period of time.

Ben Felix: Yeah, that's probably true.

Cameron Passmore: On the bad advice of the week quickly. We've talked a lot lately about how the fees of the Canada Pension Plan have risen over the past 20 years. And this prompted a bad advice of the week submission from listeners, Stuart, in the UK. So as always, if you contribute something we use in this segment, we'll send you off one of our hoodies. Anyways, he opened it by saying, this may not be bad advice, but it could lead to bad advice in the pension world in the UK. So the UK's Department for Work and Pensions, the DWP, this is from what I understand and reading a number of articles, has long had a cap on how much the fees can be inside their plans. These are for DC defined contribution plans. The fees had been kept capped or are capped 75 basis points. The average charge right now is 48 basis points, which is well below the cap. And I would say it's certainly in the reasonable range, but you can probably guess where this is going.

So I read another article that suggested that the DWP confirmed there will be no change, the 75 basis point charge cap for DC pension schemes. However, this cap is proposed to be loosened in October this year to allow schemes, that's their word, schemes to pay performance fees. So the objective is to remove the barrier to investing in illiquid asset classes, much like what you and I talked about it in the Canada Pension Plan that generate performance fees allowing schemes to accommodate the ebb and flow that sometimes is associated with the performance fees of these assets yet still remain within the cap.

So there are new rules apparently coming out this October in the UK to somehow allow those ebb and flows to fit into the pension cap, the fee cap of 75 basis points. And apparently the overwhelming majority of respondents to a survey, they did support the proposals to allow DC schemes to smooth these performance fees over a five year period with the goal of enabling greater investment in illiquid assets.

Ben Felix: It's crazy to me. You end up paying for the illiquidity premium. Remember that one we talked about a while ago?

Cameron Passmore: Mm-hmm (affirmative).

Ben Felix: The valuation of illiquid assets increase, because people like the smoothing effect that they have in portfolios. So you end up with a lower expected returns. Instead of a premium for illiquid assets, you end up with a negative premium.

Cameron Passmore: So maybe better to get the DWP on the blower and bring them up to speed.

Ben Felix: It shouldn't be a surprise, because as the growth of super low cost index funds, there has to be some other frontier for financial businesses to try and find margin, right? They're not just going to roll over and die and go, "Okay, well, we're out, we're going to stop making products now." There's lots of smart talented people out there too that probably think they can find alpha. I'm not saying that it's malicious or anything like that.

Cameron Passmore: Yeah. But it's ironic that we talked about a book on business strategy earlier, exactly. And we talked about the US asset managers. So look at that all ties together. Anything else?

Ben Felix: No. We got a bunch of new reviews recently. We're at almost between all of the different apple podcast platforms, like the different country platforms. We're at over 600 ratings now. And not all of those are reviews, but we do always appreciate when people leave us reviews. We read all of them. We read many of them out on the podcast. So if you're listening and getting value out of the podcast, we do appreciate a good rating, and the nice review is also appreciated.

Cameron Passmore: And remember for the dog days of summer in our store. For 20% off at checkout, put in the code, rationalsummer, all lower case. We'll get to see how many people interact with that based on this podcast. We only mentioned on this episode. So let's see. Go and get a bargain for your dog days of summer. Rational Reminder on sample. The hoodies are comfortable. All right, that's it.

Ben Felix: That is it.

Cameron Passmore: Thanks for listening.