In this episode of the Rational Reminder Podcast, Ben Felix and Dan Bortolotti celebrate the show’s 7th anniversary with a conversation centered around timeless investing wisdom. Drawing from a vibrant thread in the Rational Reminder community, they unpack dozens of quotes that distill decades of financial insight into actionable mantras. What begins as a curated list of one-liners quickly evolves into a masterclass on the behavioral and practical realities of long-term investing. From “pay yourself first” to “diversification is the only free lunch,” Ben and Dan explore how psychological resilience, humility, and clear planning matter more than predictive genius. The quotes spark deep discussions on topics ranging from portfolio construction and risk perception to fees, fear, and investor behavior—each one contextualized with real-world examples.
Key Points From This Episode:
(0:04) Celebrating 7 years of the podcast and its growing impact across video and audio platforms.
(1:33) Reflecting on PWL’s evolution and the value-aligned advisors looking to join.
(8:00) Introducing the main topic: timeless investing quotes from the Rational Reminder community.
(10:24) “Pay yourself first”: Why savings matter more than returns early on.
(14:06) The flaws in one-size-fits-all savings rules like “save 10% of your income.”
(15:07) “The investor’s worst enemy is himself”: Behavioral finance and investor psychology.
(17:17) “This time is different”: Templeton’s warning against market narratives and FOMO.
(20:31) “Have a philosophy you can stick with”: Why strategy persistence matters more than perfection.
(23:59) ARK as a case study: Conviction versus performance-chasing.
(26:38) Buffett on risk: Be ready for 50% drawdowns—even in diversified portfolios.
(28:58) The global market portfolio: Sharpe and Fama’s starting point for asset allocation.
(31:50) “Far more money is lost preparing for corrections”: Lynch on market timing mistakes.
(35:18) Volatility is emotional, not just mathematical—especially in crises like COVID or 2008.
(40:29) Charles Ellis: “Risk is not having the money when you need it.”
(42:08) “Volatility is the price of admission”: Embracing risk to pursue long-term returns.
(44:30) Ken Fisher: “Normal returns are extreme.” Why market behavior is rarely average.
(47:16) “Risk is what’s left when you think you’ve thought of everything.” Planning for the unknown.
(49:07) Life has a fat tail: LTCM and the perils of underestimating extreme events.
(50:25) “Make sure you’re at the table, not on the menu”: Cochrane on avoiding bad financial products.
(52:31) Bogle: “We get precisely what we don’t pay for.” Why low-cost beats high-fee.
(55:13) Trading and over-monitoring: Why “doing less” often means better returns.
(57:02) “It ain’t what you don’t know…”: Humility in the face of market uncertainty.
(59:26) “Diversification is the only free lunch”: Reducing risk without reducing expected return.
(1:00:35) Bogle: “Don’t look for the needle. Just buy the haystack.”
(1:02:38) Focus on what you can control: Savings, costs, asset allocation—not market returns.
Read The Transcript:
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer and Dan Bortolotti, Portfolio Manager at PWL Capital.
Dan Bortolotti: Welcome back.
Ben Felix: Yeah. I want to do a quick mention before we get into the episode that August 2nd was the 7th anniversary of the Rational Reminder Podcast. It's kind of cool.
I thought I'd share some quick stats there. The YouTube channel has, as of July 30th, when we're recording, gotten 2.7 million views. It's been watched for 762,000 hours.
Dan Bortolotti: That's a lot of hours.
Ben Felix: Which is around 87 calendar years of watch time, kind of crazy. Now that is also worth noting there that the YouTube channel didn't have video content.
We would post the audio without any video up until episode 101. Ken French, episode 100 was the last episode with no video. That's about two years into the podcast existence that we started posting video.
Most of those views came after we started posting actual video. It's interesting. I've heard people say over the years that they never thought they'd be interested in watching the video and they were always an audio listener, but for whatever reason, they decided to check out the video of an episode and then they never went back.
I always thought that was just interesting. I personally don't watch any podcasts. I listen to podcasts.
I would have trouble keeping a video on because I'm usually doing something else when I'm listening.
Dan Bortolotti: Yeah. I guess now if you have the YouTube premium, you can turn off the video on your phone and still listen. True.
But again, it does beg the question, why not just listen to it on your podcasting software? I guess they just like to look as well.
Ben Felix: Yeah. They like to look at us. I don't know.
It's weird to me. I don't like looking at myself. You can actually see in the data.
I wish I had prepared the data that the mix of audio and video has changed over time where the video has become an increasingly large portion of the overall consumption of the podcast. Anyway, the audio podcast has been downloaded 8.3 million times since inception of the podcast seven years ago. The Rational Reminder community, I can't remember when that started, but it was years into the podcast existence, has just under 12,000 users and generates around 500,000 monthly page views within the community.
That's all pretty cool. I did, reflecting on Rational Reminder, I wanted to give a shout out to you, Dan, because your Canadian Couch Potato podcast, it created the market for this type of content in Canada. Then when you stopped doing your podcast, Rational Reminder really just filled a void that you left.
Dan Bortolotti: Yeah. Thanks. No, it's nice of you to say.
I mean, it's true. It was early to the game. We had some really great social media consultants with us at the time.
I think my podcast launched in 2016. Does that sound right?
Ben Felix: Yeah, I think so. Yeah.
Dan Bortolotti: Which, again, relatively early. I mean, it seems like podcasts are everywhere now, but they weren't 10 years ago. It was kind of new and I really enjoyed doing it, but as you know, Ben, how much work they are to do, it was kind of getting in the way of my client work.
I had to give it up, but I'm really happy to have come full circle and joined you here.
Ben Felix: Yep. Very cool how it did come full circle like that. Okay.
That's it for the seventh year anniversary of Rational Reminder. I do also want to mention before we get into the episode that one of the coolest parts about our professional lives or my professional life, you've been not so involved with this part, Dan, post One Digital, is that we get to meet with Canadian advisors who are interested in joining PWL. I didn't realize how fun and interesting that would be.
The really incredible thing about it is that largely due to this podcast, we're meeting with advisors who are completely aligned with us on investment philosophy, planning approach, and other intangible stuff like just culture and the feel of the people, the kind of personalities of the people. That's been incredible because those people are now, because we're saying that we're interested in acquiring practices and having other advisors join our firm, people are reaching out and wanting to talk and so I get to spend time with them and it's just been really cool.
Dan Bortolotti: Ben, what's your sense of some of these advisors that you're talking to? Are they people who want to be using an approach like PWL but have not been able to do so at the firm they're currently at or are they people who are already doing something similar to what we're doing and just looking to be part of a bigger organization?
Ben Felix: Yeah, it's the second one so far. I think the first group probably does exist and we'll talk to them eventually. The second group though is much cleaner in terms of having a team or a firm like that transition into PWL and so the conversations we've had that have advanced so far have been with people who are honestly mirror images of like you take any advisor team from PWL, any individual advisor team, these teams are a mirror image of that.
They're using the same portfolios, same approach to planning. In many cases, they're using our tools like they're using our expected return assumptions and our CPP calculator and all that kind of stuff. They're typically using the same financial planning software that we're using so they're really teams that could be here already.
They just don't have PWL email addresses yet. Right. Excellent.
Yeah, so that's been cool. One thing that's been interesting is one of the hangups that some advisors have about joining a firm like PWL is that they don't feel like they can be an employee, which is interesting. Now, I've never felt like an employee personally at PWL, but I can see how that would be perceived because PWL is a bigger organization.
Ben Wilson, who's our head of M&A, we'll have him on the podcast eventually. He posted on LinkedIn about this and I just thought it was an insightful post so I wanted to share quickly. He's noticed what I just said that a lot of advisors who he's talking to, because they're effectively self-employed small business owners, they don't think that they could fit into an environment where they are an employee.
Ben says that they worry that joining a larger firm means giving up their autonomy and their flexibility or even their identity if they identify with their business or as being a business owner. What Ben says is that with the right fit, it can actually be the opposite because you're no longer alone in the trenches is what Ben wrote. You can go on vacation knowing your clients are still getting top-notch service from like-minded advisors.
Think of what I said a minute ago that a lot of these people we're talking to are mirror images of teams that we already have at PWL. If someone goes on vacation, their clients are getting served by people who are mirror images of themselves on client service and philosophy and all that kind of stuff. Ben writes that you don't have to juggle business management, tech, HR, research, and operations on top of doing client work.
It frees up your time from those types of tasks. Instead, you get to focus on financial planning, advising, making an impact in the lives of clients, and then Ben says, perhaps most importantly, you get to collaborate with high caliber peers who challenge you, support you, and share your commitment to doing what is best for clients. His main point is that joining the right firm doesn't take away your independence, it actually does the opposite.
It gives you breathing room, it amplifies the impact that you can have, and Ben says it can help you do your best work without burning out. I just thought that was insightful.
Dan Bortolotti: Burning out is definitely a risk in this business for people who do have a big book of business and are very high touch with clients as all of our advisors are here. Yeah, you got to make sure that you have a good team and that you're able to delegate and that you don't try to take on more than you can comfortably handle. That's not going to be best for clients either as well as for yourself.
Ben Felix: Totally. I do know a lot of people in this business that they've got decent books, but it's them and maybe one support person and it's tough because if you do want to deliver that level of client service and you're the only person available to do it, it's not so easy to find balance. That's my PWL pitch for the day.
Dan Bortolotti: All right.
Ben Felix: Ready to get into the main topic?
Dan Bortolotti: Yeah, let's do it. We've got, I think, a really interesting topic today where we're going to look at some nuggets of investing wisdom that we've compiled and that some listeners have suggested.
Ben Felix: Yeah, so let's jump into that. Yeah, so this came from a thread. The idea for this episode came from a thread in the Rational Reminder community where someone had said, I think it was titled, what are your favorite investing mantras?
They started with a few of their own. They kind of seeded the topic and then a whole bunch of people contributed. It became a really cool discussion and I was reading lots of quotes that I'd seen before and thinking like, oh yeah, that's a good one.
Then reading lots that I hadn't seen before and I was like, oh wow, that's a really good one. I want to remember these and compile the ones that I really like. So I just did that.
I took a bunch of these quotes and put them into a document and wrote why I think they're important, which I think is one thing to have the quote and then another thing to contextualize it in terms of how investors can use it. Okay, so let's jump in here. So some of the most valuable wisdom in investing exists in the form of short quotes that distill hard-earned experience and knowledge from expert practitioners and academics into a handful of words.
So what we're going to do is go through a bunch of these quotes, tell you why we think they're important. These are quotes that I think every investor should learn from. We'll read the quote, explain why we think it's important and how it can be applied to everyday financial decisions.
I do want to mention that they're not in any particular order of importance. They're not ranked. They're all important for different reasons at different times in an investor's journey.
All right, so for the first quote, this is one that often gets underappreciated in investing, which is saving. Saving is a necessary precondition for investing and for a lot of people, especially early in their saving and investing career, saving is going to be far more impactful and more reliable at building wealth than searching for higher investment returns. I think it's common for people to want to find the best stock or the best option strategy or factor tilt or whatever, but they're saving nothing or they're investing $1,000.
Not to talk down to people who are investing $1,000. That's a great place to start, but when you have $1,000 to invest, your savings rate is going to be much more important than your investment returns unless you can win the lottery, which you probably can't.
Dan Bortolotti: Right. What's the quote here?
Ben Felix: Yeah, sorry. Big build up there.
Dan Bortolotti: I know you're getting to it.
Ben Felix: This idea of saving being important is captured by a quote from George Clason, who's the author of The Richest Man in Babylon and really popularized. I knew the quote from Dave Chilton, but when I went and I actually posted this one in the Rational Reminder community and attributed it to Dave Chilton and someone said, actually, that's from The Richest Man in Babylon, which predates The Wealthy Barber by many decades. The quote is, pay yourself first.
Three words, but so much wisdom. Yes. It's really just to have any shot at building wealth while fighting off all of the temptations to spend, which we're surrounded with every day.
You have to save. You have to pay yourself before you have the chance to give in to the societal, biological, and psychological pressures that lead many people to overspend. That's the quote.
Dan Bortolotti: I think this one, really, you can take it in a lot of different directions, but it has so much resonance. I think it was Mark McGrath who did a piece in The Globe not long ago about top down budgeting or this idea that rather than worrying about what you spend and even more, what you spend on individual categories, how much you spend on restaurants and entertainment and whatever, start with the savings part. If you get that part right, it doesn't really matter what you do with the rest of it.
Now, what does that mean? You need to have some kind of specific financial plan. You can't just say, I'm going to save $100 a month and say, that's all I need.
You need to do some kind of planning to see how much you need to save. People might set a target they want to max their RRSP or if you can afford it, max the RRSP and the TFSA, whatever it is. If you're able to look after that by automating it, having it come off your paycheck, you don't really need to fuss too much about what you spend.
You can spend what's left and it doesn't really matter what you spend it on. Nobody likes, I don't think anyway, nobody really loves budgeting and itemizing every penny they spend. With this kind of pay yourself first strategy, you don't really need to do that.
Ben Felix: I am not a fan of budgeting. Some people are.
Dan Bortolotti: Yeah, neither am I.
Ben Felix: I don't get it. I don't get how that can be fun or enjoyable. Some people are into it, but I do the same thing.
I decide how much I want to save or need to save and then don't worry about how I spend the rest. The only thing to be cautious of, I guess, is going into debt because if you save the amount that you want, but to also have a line of credit and you're building that balance up every year, that can be problematic.
Dan Bortolotti: Yes, for sure.
Ben Felix: I think, like you said, Dan, automating that is huge. If you can set up payroll deductions through your employer, that's great. Not all employers offer that.
PWL does, which is great. If you can't do that, then just setting up an automatic contribution into your investment or retirement accounts is a pretty close approximation. If you can get payroll deductions, that's pretty good.
In terms of how much to save, like you mentioned, Dan, that's got to be based on some kind of financial plan or something like that. The Wealthy Barber, and I think the Richest Man in Babylon, also suggest 10% of your income always. Now, that's the tricky one.
If you asked an economist, they would generally disagree, I think, because if you look at the life cycle model, you'd probably be saving less early on in your career when you have less income available. Then as your income rises through your career trajectory, you'd start saving a higher proportion of your income. Overall, it gets you to a place where you can fund your future retirement consumption.
That's very different from 10%. An economist might say that you're sacrificing a huge amount of utility by saving 10% of your income when your income is relatively low. You could be enjoying your life more.
Anyway, I don't have a super strong opinion on this. I think the counter argument there is that if you don't start saving early, then you're not going to have the discipline to start saving later. I don't know how you approach this with clients, Dan, but I don't have a super strong opinion.
Dan Bortolotti: Honestly, I don't love a 10% rule of thumb, because I would say that for people with lower incomes, that's a stretch. If they can save 5% or 6%, that's probably very good. If you have a very high income, you need to be saving more than 10%.
It's going to depend a lot on your income. I would also say, and you hinted at this with earlier in your career, it's okay to save a lot less than that if you're in your peak spending years and you've got young kids in a mortgage. Especially paying off a mortgage is increasing your net worth in a similar way to savings.
Then again, as you get older, eventually, if you've paid that mortgage off, now you need to increase your savings.
Ben Felix: Right. Yeah.
Dan Bortolotti: 15%, 20% of your income was going towards your mortgage before and now it's paid off. You need to redirect that into a different way. Look, rules of thumb are always problematic, but I think this one is really a much more personal decision than any rule of thumb can possibly help you with.
Ben Felix: I agree with that. That would show up if you did a financial planning projection with proper financial planning software, that all of the things that you just said would show up. Okay, so that's pay yourself first, necessary precondition.
Next, we have some quotes on investing. Investing is as much a psychological endeavor as it is a financial one. Involves risk and uncertainty about the future, which are quantifiable to an extent financial issues, but doing it well, investing well requires overcoming the countless behavioral biases that plague most investors.
Ben Graham, who's one of the fathers of financial analysis and of the investment profession as a whole, said the investor's chief problem and even his worst enemy is likely to be himself. I think this is really important for any investor to understand before they begin investing. Behavioral biases come in two main forms, errors in cognitive reasoning called cognitive errors and feelings or emotions that affect decision making called emotional biases.
Taken together, investors are really fighting an uphill battle to make good long-term financial decisions in the face of uncertainty and their own psychology. That's the issue and then I've got a couple pretty good quotes I think that address that, just about investor discipline. We've got famous late investor and fund manager, Sir John Templeton.
He said the four most expensive words in the English language are this time is different. This is really just a powerful reminder that regardless of the objective realities of a situation, narratives can easily sway people's investment decisions during extreme market conditions. When we have extreme positive returns, investors will clamor for explanations that not only justify the accompanying high stock valuations, but also justify their continued increases.
Like at the peak of the dot-com bubble, people thought valuations would keep increasing because the words this time is different. Same as ARK when the ARKK ETF was just going through the roof and valuations were wild. It was the same thing, same kind of narrative, this time is different.
Now, in both of those examples, many of the investors were buying stocks at historically anomalous valuations that haven't been seen since. As I mentioned, they were literally saying the words that Templeton is cautioning against, this time is different. The internet changes everything.
AI changes everything. Robotics, whatever else the ARK thing was about. That's on the positive side.
Returns are good. I think the same thing happens when markets decline. Investors create narratives about why markets will not recover this time because of whatever is causing prices to decline or why they'll go down further.
If you think about COVID, how many times did we hear unprecedented? Too many times. An unprecedented number of times.
Dan Bortolotti: It's so funny that you said that because when I first read the quote from Templeton about this time it's different, it's like you don't have to even use those words. You can just say it's unprecedented because I've been hearing this in so many contexts. In April, we heard it.
People called us about the Trump tariffs and then you and I did some client communication on that front. And it was the same sort of thing. This has never happened before.
COVID, it's unprecedented. We've never seen anything like this. And I guess it's true, we have not seen this specific circumstance before.
But every market Rational is caused by something that is unprecedented. And if we're going to react and change our investment strategy just because current conditions have not been exactly the same as this in the past, then you're doomed to be changing courses constantly.
Ben Felix: Yeah. We have a quote that addresses that exact point in a minute. I think that what you just said is really important to acknowledge that when we do see extreme asset prices on either side, increases or decreases, it usually because something is different.
The underlying cause and the accompanying narratives, they're always unique, which is why they cause asset prices. We have never seen this before. And so asset prices do change because of that new information.
But what doesn't change is the reality that valuations matter, at least eventually. Like in COVID, valuations drop, expected returns increase. During the .com bubble or the arc thing, valuations go really, really high. And then eventually they come back to earth. Valuations are kind of the closest thing to gravity in financial markets. They don't predict returns as well as physics predicts the kinetic properties of an object in motion.
But ignoring valuations on the basis that this time is different, as Templeton expressed in his nice quote, generally an expensive mistake. Now one way to stay, and this is the point that you brought up a minute ago, Dan, about changing strategies. One way to stay grounded through periods of extreme market conditions in either direction is to have a lot of conviction in your investment philosophy.
This is a quote from David Booth, co-founder of Dimensional Fund Advisors. He said, the most important thing about an investment philosophy is you have one that you can stick with. Now the insight on this one is really deep.
This is one of my favorite quotes. Financial markets have generally rewarded long-term disciplined investors, but many, if not most investors sabotage their own returns by moving in and out of investment strategies or styles at precisely the wrong times. Even an objectively suboptimal, and I'm going to take a shot at dividend investing here, even an objectively suboptimal investment strategy like dividend focused investing might be the optimal investment philosophy for some people if the dividends help them to stay disciplined and stay invested.
Dan Bortolotti: I would argue that that is the main value of dividend investing. I think we agree that it's suboptimal, but it's not a poor strategy if it's something that you can stick with. I mean, you could do an awful lot worse as an investor than buying and holding dividend stocks over decades.
Yeah, it doesn't need to be perfect. Nobody's investment strategy is perfect, but that is certainly one that has some behavioral advantages.
Ben Felix: The hard thing about sticking with an investment philosophy is that any investment strategy, no matter how well-founded its underlying philosophy is, can appear to be wrong or even stupid for long periods of time. Now, this probably ties back into the caution about this time is different too. I think ARK is again a good example.
It's actually a really interesting example. When ARK was on its big tear, when everyone started hearing about it, I heard from lots of previously disciplined index investors who were considering abandoning their entire index fund investment philosophy because the ARK narrative was so strong. Its manager, like Cathy Wood, she was taking direct aim at index funds in a lot of her commentary and a lot of the ARK literature.
She had called index funds the most massive misallocation of capital in history. She'd said that index funds are basically overweighting the old dying companies, which are at risk of being disrupted, while underweighting the companies that are going to disrupt them, which is what ARK was focusing on. She was really taking direct shots at index funds, which was interesting.
Now, for a while, and this is why it's hard for people to ignore stuff like this, it seemed like she was right because ARK just went to the moon. It was crazy. Completely smoked market cap weighted index funds.
Then eventually ARKK, the main fund, and I think most of those funds did eventually come back to earth, which is what tends to happen with funds like that. The thing is, when you look at the timing of it, anyone who bailed on their index funds to chase ARKK's returns after the fund had posted its big returns, which is when everybody became aware of it, they got burned. Morningstar had a post on this a while ago where they looked at the dollar weighted returns of investors in that fund.
Most investors by weighted by dollars lost money because they piled in after the good returns and ate all the bad returns. That's typical. The interesting thing is that investors in ARKK who truly believed in that investment philosophy and stuck with it from before Cathie Wood was all over the financial media when she was basically an unknown fund manager, if they stuck with it from then, right through its eventual Rational, which wouldn't have been easy, through until now, they've actually done fine.
They've roughly matched even slightly outperformed SPY, SP500 ETF. I'm not condoning the ARKK strategy to be clear. My point is that conviction in any investment strategy, any investment philosophy, it's going to be tested over time.
The tests are hard, like going through ARKK's decline would have been pretty rough, I think, but as long as the philosophy leads to reasonably well diversified and low cost portfolios, I think having an investment philosophy that you can stick with through good times and bad is far more important. Like you said, with the dividend strategy, Dan, it's far more important than having the perfect investment philosophy. I do think that the well diversified and low cost qualifier is important.
Some strategies like trading zero DTE options or yellowing single stocks, those are likely to lead to bad outcomes. If it's low cost, well diversified, and you can stick with it, it's probably okay.
Dan Bortolotti: I think one of the most amazing findings that I remember coming across was in Meb Faber's book. I think it's called Global Asset Allocation. He sort of tucks it away near the end of the book, but what he did was he back tested a whole number of model portfolios, well-known ones, the Yale University one, and just a basic 60-40 Vanguard portfolio.
Some had commodities, some had real estate, some had alternative asset classes, and he tested them over about 40 years. What blew me away was that the variance in the portfolio performance over that full period was less than a percentage point. He admits in the book too, he goes like, this shocked me.
I thought that they would be similar, but I didn't think they would be that similar. This is exactly the lesson. The point is nobody would have stuck to any one of those model portfolio, I shouldn't say no one, but only the most disciplined investors, whatever.
Because during every decade, he looked at, like I said, 40-some years, there were 10-year periods where some of them got absolutely smoked, and others did phenomenally well, and then the reverse would happen. If you just stuck with one and held it, you did fine, but almost nobody does that. They move, as you said, from whatever's hot to whatever's not, and back at the wrong time, and we just cheat ourselves out of the benefits that come from long-term discipline.
I got one here that I just took from the sage himself, Warren Buffett, and the quote is, the stock market is designed to transfer money from the active to the patient. If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. You have to be prepared when you buy a stock to have it go down 50% or more, and be comfortable holding it.
The 50% number is what jumped out to me, and this is something I've used even in risk discussions with clients, because unfortunately, it doesn't apply just to a stock, it applies to the market in general. An individual stock can go down more than 50%, but we'll often say with clients is, any equity allocation that you hold, even if it's very broadly diversified, you need to be prepared for the possibility that it could fall 50%. It did in 08, 09.
This is not ancient history, and a lot of people are pretty shocked by that, because they seem to think a bad bear market is 20%, and it's like, no, it can be a lot worse than that. If you're not comfortable with that kind of volatility, and let's face it, many people are not, then you need to have a more conservative portfolio. Simple as that.
Ben Felix: Yeah. That's actually the direction I want to go next.
After settling on an investment philosophy, one of the most fundamental decisions that investors need to make is how to allocate their portfolios, like you were just saying. How much in stocks versus bonds? How much in the stock market of each country?
Which stocks within each country? Bill Sharpe and Eugene Fama both have great simple quotes that offer, I think, a pretty good starting point. Bill Sharpe said in a talk once in the early 2000s, I think, the global market portfolio is a good place for you to start.
That stems from Sharpe's work on the capital asset pricing model, which implies that the optimal risky portfolio for all investors is the global market portfolio combined with risk-free assets or leverage, depending on their risk tolerance. That's an interesting starting point there. What is the gold market portfolio?
That's another interesting question. State Street estimates that it is about 45% public stocks, 21% government bonds, 9% investment grade corporate bonds, and then a whole bunch of other stuff makes up the remaining 25%. There's gold in there, high yield bonds, I can't remember, private equities in there, a bunch of stuff.
Now, we asked Fama about this when he was on, private equities in the market portfolio, should we actually invest in that? Fama's answer was something like, it's not super obvious we should because we just don't have good data on how that asset class behaves and the fees are really high. Just because the global market portfolio is there, it doesn't mean that we actually have to invest in that, but it's a really good place to start.
Then Fama's quote drives this point home. He says, you have to talk yourself out of the market portfolio. His point, it's like the private equity example I just gave, is that there can be good reasons to be different from the global market portfolio, but it's important to be clear on what those reasons are and why they apply to you specifically.
Another good one there is home country bias, which Fama has long been an advocate for. There are lots of reasons that we've covered in past episodes for why home country bias can make sense for an investor. That's, again, a good reason to be different from the global market portfolio.
I think that as a starting point is a really nice idea because it takes a lot more conviction in whatever your strategy is to talk yourself from the global market portfolio into a portfolio of three stocks than it does to talk yourself from the global market portfolio into a globally diversified portfolio of public stock and bond index funds.
Dan Bortolotti: Yeah. You could probably split that a little bit further, right? In the sense that I'm sure nobody is suggesting that most people should start their asset allocation decision at 45% stocks.
I mean, it might be higher or lower, depending on a lot of factors. So given that the risk qualities in stocks and bonds are dramatically different, I think you can feel comfortable finding whatever relative mix you want between those two overall asset classes, depending on your specific situation. But once you break it down further and say, okay, if I'm going to hold 60% stocks instead of 45, let's start the discussion with the market cap portfolio.
We can go from there, but we're not going to do 90% US stocks and 10% the rest of the world or some other highly concentrated allocation.
Ben Felix: Yeah, that makes sense. Even the stock bond piece is interesting. Why is the global portfolio so heavily weighted toward non-stock assets?
Dan Bortolotti: Yeah. No, it's a good question. I remember reading this number before, but I don't recall what it was.
What proportion of businesses are publicly traded versus privately owned? It's only a small portion of them are publicly traded. The market portfolio, as you said, private equity is in it, but- Investable private equity.
Exactly. That doesn't mean every individual small business on the globe, which is clearly uninvestable. It really depends on how you break it down.
But yeah, I was a bit surprised too that it's only 45% of the market portfolio by that measure.
Ben Felix: Well, I love that quote that you have to talk yourself out of the market portfolio. If you just take that as a starting point, and if you're going to be different from that, you have to have really good, factor tilting is another good one. If you say you want to have factor tilts, great, but you tilt away from the market portfolio.
You don't buy the 50. Well, some people would say that you can do this, but I would say you have to have a lot more conviction if you want to buy the 50 stocks that load most aggressively onto the factors that you want exposure to. You really have to believe that you have the right factor mix to be that aggressive with your tilt as opposed to just slightly tilting away from the market portfolio.
Now, even investors with a solid investment philosophy and asset allocation, and this comes back to the behavior stuff we mentioned earlier, they still often get nervous about market corrections. They'll consider maybe going to cash to avoid the correction or delaying investing new cash until after the crash has happened. I see that a lot.
Fund manager Peter Lynch said, far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves. I love that quote. It reminds us that while market downturns can hurt, and they for sure do hurt in the short run, the opportunity cost of not investing is typically far more expensive.
Dan Bortolotti: This one is absolutely true and really insightful. One of the things that I've always liked to say to clients, because every now and then you will hear them say, I've got some cash, but I'm going to wait until it feels like a better time to invest. I'm saying, I'm going to stop you right there.
It never feels like a good time to put a big chunk of cash into the market because if the market is strong, then you're going to fear it's got to come back to earth. This can't last forever. If the market is weak, you will convince yourself that it's going to get weaker.
I've seen this so many times that I have lost count. I say to people, if all you can bring yourself to do is dollar cost average, then do it. It's imperfect, but it's not a bad situation.
If it prevents paralysis, then it's a very good strategy. If you think that you are suddenly going to feel great about putting a large amount of cash into the stock market, yeah, zero chance of that happening.
Ben Felix: Yeah. I've said before that if you feel really good about an investment, it's probably not a good investment.
Dan Bortolotti: I think that's good advice.
Ben Felix: You're probably about to get scammed or you're about to invest in something that has a low expected return. That's the thing, investing is inherently risky. It is that fact that results in positive expected returns.
Historically, at least, it has resulted in positive realized long-term returns. The problem is that investors are myopic. They worry about short-term fluctuations, even if they are themselves not short-term investors and they're loss averse.
You get myopic loss aversion, which makes it hard for investors to take a long-term view. Economist Jeremy Siegel, who wrote stocks for the long run, he said, fear has a greater grasp on human action than does the impressive weight of historical evidence. I love that one.
I'm probably going to say about all these quotes, but I love that one because I can tell you as I've done in many episodes over and over and over what the historical data tell us about market Rationales and recoveries, but that's not going to be helpful when there's fear in the air. I think investors need to mentally prepare for those bad times, those fearful times. They need to, to your point earlier, Dan, they need to hold assets that they're not going to panic sell, even when things are not working out as they had expected.
I think a big part of that is that market declines are never abstract numbers on a screen. You don't just look at your account and say, oh, it's down 20%. Huh?
Would you look at that? There are these psychologically challenging times that stem from deeply emotional and uncertain events. The COVID-19 pandemic wasn't just a market decline.
It was potentially the end of life as we knew it. I remember it because it was wild. The great financial crisis was similar.
It seemed like it was the end of the financial system as we knew it. Everything was falling apart. Society was potentially falling apart.
Crazy stuff like that. People were worried about civil unrest because of all the asset price declines. It's never just like, oh, well, the market came down.
It's a scary thing happening. Narrows like that cause many investors to get out of the market in anticipation of worse things to come. We know, and this comes back to Siegel's point, we know from the historical data that long-term investors, even those who endure, and I might even go as far as saying especially those who endure, market declines tend to be rewarded with positive long-term returns.
I think that's it. One of the reasons that investors struggle to stick with risky investments is that they don't really understand risk. I've got some good quotes on that.
Dan Bortolotti: Yeah. The one thing I would add to this, and I don't for a second mean to suggest that that's coming through in the quote or in any of the commentary, but I do feel that some people, whether they're advisors or market commentators, tend to be a bit too dismissive of that fear. We all understand that, yes, markets will come back, or historically markets have always come back, but when you're dealing with people who have genuine anxiety about putting their life savings at risk, I mean, certainly we as an advisor have to take that really seriously and can't wave our hands and say, oh, the market will come back.
Don't worry about it. I feel that often people are too dismissive of the conservative nature of some investors, and then it's really important for us to say, listen, I get it. I was afraid during COVID.
I was afraid during the 08, 09 crisis too, and there's nothing wrong with that. The only thing that's wrong is if you don't match that risk tolerance that you have with your portfolio. If you feel that way, but you're still 90 or 100% stocks, that's a problem.
As long as you understand that in yourself and you say, look, I get it. Intellectually, everything you said makes sense, but I'm terrified of the market all the time. Then it's not only okay, it's essential for you to reduce your allocation to risky assets.
Ben Felix: Yeah, I think that's true. I remember we talked about this in a previous episode, but I remember Jordan Tarasov had those client cases where he had a similar difficult conversation where the client was very concerned. Jordan found that keeping them in their current asset allocation as opposed to making it more conservative would add more lifetime value to their financial plan than any financial planning strategy that he could come up with.
Because he had had that asset allocation conversation, and then subsequently had done a bunch of financial planning work around some other decisions they were making. He noticed that all of these other strategies that he was looking at, tax-related strategies, withdrawal sequence strategies, and things like that, none of them could add as much expected lifetime value as maintaining their asset allocation. I remember Ken French, when we had him on, he talked about exactly what you just said, Dan, that you learn a lot about yourself in a market decline.
If you learn that you can't handle as much volatility or downside risk as you thought, and you're really uncomfortable, that can be a great – Even though everyone says, well, you shouldn't change your asset allocation when a market downturn happens. Ken French said, I don't think that's right. You shouldn't try to time the market, but if you learn about yourself and realize that you were in a portfolio that was too aggressive, it's actually a great time to make a change.
Dan Bortolotti: Yeah, I agree. Of course, you need to make a note of that, because then when the market recovers – No, but if people will, they'll come back and say, you know what? I'm more comfortable with it now.
Let's go back up to 70%, 80%. I was like, nope. As an advisor, that's where I would push back and say, no, I agree with the decision to go down, because you demonstrated you don't have that risk tolerance, but we're not going back up now, because now we're just playing the game.
The analogy I like to use is, if people are afraid of flying, you can say to them, statistically, flying is extremely safe. In fact, it's more safe than driving a car, and it will get you where you're going faster. That has zero resonance with anyone who's genuinely afraid of flying, and you just have to respect that.
Ben Felix: Yeah. On this topic, a bit of a tangent here, Dan, but we had a conversation with not a software provider, an intellectual property provider. Maybe it's the best way to describe them, but for a new risk profiling process that I think could be really, really interesting for PWL.
That's something I mentioned that on the podcast, because one of the co-founders will, assuming things progress the way that I think that they will and should, the co-founder of that company will come on to talk about risk profiling and their academic work on that topic, and then we'll talk about this tool that we're looking at.
Dan Bortolotti: Great.
Ben Felix: Should give us more precision around estimating what people's actual risk tolerances are. Now, we're talking about risk of volatility, which is how risk is often discussed, or maybe the magnitude of short-term declines in asset values. I think that's how people tend to think about risk.
That's how most, even academic papers, they talk about volatility as risk, or maybe as downside. I think regulators look at volatility as risk and as downside, but those are probably not the best measures of risk for long-term investors, which makes this weird tension between regulation, behavior, and what's actually best for long-term investors. There are some really great alternative definitions of risk that I think can help people think through long-term decision-making, as opposed to getting caught up in volatility and downside.
Charles Ellis, who's been on this podcast, he wrote Winning the Loser's Game. He said, risk is not having the money you need when you need it. Such a simple definition, but it captures the fact that risk can either manifest as the inability to fund short-term liquidity needs, which highlights the importance of planning for near-term expenses, for example, not investing money you need tomorrow to pay your rent or whatever, or risk can manifest as the inability to fund long-term consumption, which captures the importance of saving and earning sufficient long-term returns to fund your inflation-adjusted spending in the distant future. I like that definition because it really captures both of those things in one simple sentence.
Dan Bortolotti: Yeah, it is interesting how often risk and volatility get conflated as though they're the same thing. Ellis' quote really hits on it. You have a portfolio that's 100% GICs, well, there's no volatility.
Is that risk-free? Of course not. There's all kinds of risks inherent in a portfolio that conservative and that illiquid, but it isn't captured in even risk tolerance questionnaires and things.
Ben Felix: Exactly, yeah. I like that quote. Then William Bernstein, who's the author of multiple books and also actually a past guest in this podcast, he makes the second point from what I just said about Ellis' quote in this definition where he defines long-term risk, specifically long-term risk as the probability of running out of money over the decades, which to your point about GICs, Dan, depending on your spending rate, I guess, you probably have a higher probability of running out of money in a portfolio of GICs than you do in a portfolio of stocks and bonds or stocks and GICs. Bernstein's separating long-term risk, which I would say is what really matters to long-term investors from short-term risk, which is less impactful in the long run, but it's also the thing that gives investors sleepless nights.
Yeah, so I think that contrast between the two types of risk and how they can affect long-term decisions is really important and I like how these quotes highlight it. The tricky thing about this, or the funny thing about it, is that aversion to the short-term risk, to volatility and downside, likely exposes investors to more extreme long-term risk, like my GIC example just now. It's taking on the risk of more volatile risky assets with higher expected returns that allows investors to expect the higher long-term returns.
Morgan Housel has another past guest. Wow. He's got a great quote on this.
He says, volatility is the price of admission for higher expected returns.
Dan Bortolotti: Yeah, it's nicely said. I mean, we've said it before, right? The reason that stocks have high expected returns is specifically because they are so volatile.
If they weren't so volatile, the returns would not be as high. I mean, it's very simple, but difficult for people to really take to heart. The one I've got here is along the same lines and the quote is from Ken Fisher.
This is from his book, Debunkery. The quote is, normal annual returns are extreme. It is hard to get people to accept the degree to which that is true.
I think we need to unpack it here. The context of what he means here is, and I've used this quote when I do talks and things like that, and I speak to audiences and I say, so let's just set it up. The numbers that he uses in the book are the average annual return on US stocks.
This is an arithmetic average, I think, but from 1926 through 2009 was 11.7%. I said, okay, let's round it down to 11. If we say that normal is somewhere between 10 and 12 in that range, what number of times in the 84 years in that sample was the annual return on stocks somewhere between 10 and 12%? No one gets this right because people say, I don't know, a third, a half.
If they're really pessimistic, they say a quarter. The answer is five times. There was five calendar years in that period where stocks were between 10 and 12%.
Most other years, they were more than 20 up or losses of more than 10. That's the volatility we're talking about. That's why it's so important to stay invested because if you get out at the wrong time and you miss the double digit gains, it's not like you missed the 10 or 11% return.
You might miss 25 or 30 on the rebound. I don't think anybody truly appreciates. You sometimes will hear investors say things like, I want a slow and steady return from stocks.
I said, well, you will never, ever get that. You will most likely get a very good long-term return. It will not be slow and it will not be steady.
I don't think people truly appreciate the extent of that volatility and that's why I love that quote and those numbers. I find them shocking every time I read them.
Ben Felix: It might suck for long periods of time. We said earlier, it can be easy to bail on a strategy because it sucks for a while, but you look at US stocks that had a lost decade of returns. That was a lost decade of returns.
That's 10 years.
Dan Bortolotti: Yeah. Along the way, even if it was a lost decade, let's say it was a zero return over 10 years. It wasn't like, well, it was up one and then down one and up two and down two.
It was like up 20 down 30. This repeat over and over and over with wicked volatility. Then at the end of it, it was net zero.
That is a high price of admission to use Morgan Hussle's terms. You've got to be prepared for that. Going back to the earlier quote about Buffett's, if you're not willing to invest at least 10 years and honestly, the annualized return of stocks doesn't really get consistent until you go out about 30 year rolling periods.
30 years is a long time and most of us do not have that 30 year mindset when we invest.
Ben Felix: It's a challenge. They get more consistent in terms of the dispersion in the annualized return getting tighter, but the magnitude of the difference, if you have a 1% difference in returns over 30 years, the magnitude of the ending difference is massive. True.
There's still a lot of volatility even at longer horizons. A lot of volatility in wealth outcomes, even if it's a tighter volatility or tighter variance in returns. I think framing the risk as the probability of running out of money really does put emphasis on what long-term investors should really be focused on, which is earning sufficient long-term returns to fund their future consumption.
That can mean having to endure the risk. I would say it really does require enduring the risk of higher expected return assets. Stocks not doing that can really impair your ability to meet your long-term goals.
The Scott Sederberg research on this stuff really drives that point home. Even if you have the right focus, even if you do invest in high expected return assets, my large variance in wealth outcomes example a second ago, having the right focus doesn't mean you're going to get the outcome that you hoped for. There's a couple of really good quotes on this too.
Carl Richards, who's an author, he wrote the Behavior Gap. He's described a risk as what's left over when you think you've thought of everything. It's just such an elegant quote.
It really captures the fact that models are not reality. No matter how good we think our models are, the future is unknown and unknowable. That unknown and future is what actually matters.
That's what you care about. You can't predict it. We don't know what's going to happen.
I think theory and long-term evidence can't help to point us in the right direction, but they can't predict the future. That doesn't just apply to investments. I think life in general has a way of throwing curveballs at you, or curveball in my case, I guess, making it hard to plan.
That was a testicle joke.
Dan Bortolotti: I didn't get that one right away, but all right.
Ben Felix: Which makes it hard to plan for everything. I came up with that on the fly. I wasn't planning on saying that.
It just came to me. Economist Elroy Dimson, who I'd love to have on this podcast, he said that risk means more things can happen than will happen. I think every financial plan has to account for the fact that we simply cannot know the range of future outcomes based on what has happened in the past, or based on what we expect to happen in the future.
Now, it doesn't mean we need to tiptoe around and hope that nothing bad happens. It does mean that we need to maintain a healthy respect for the fact that things will not always work out the way that we want them to, no matter how much data we base our decisions on.
Dan Bortolotti: Yeah. I think it's an important point, because we do sometimes get questions from our clients, well, what if we haven't prepared for all of the things that could come down the pipe? It's like, we can't prepare for everything.
We can prepare for risks that seem reasonable. I do think though that it's also worth appreciating that there is an opportunity cost to trying to prepare for everything. If you're going to build an ultra conservative portfolio that would hold up against a risk that is one in 200, well, it means that 199 times out of 200, you will have made the wrong decision and will have compromised your lifestyle in some way in order to protect against the extreme case.
You need to find a balance. It's a bit like saying that before anyone gets on a plane, they should be strip searched completely, because that's the only way we can assure that no one brings a bomb on the plane. Probably true, but would shut down air travel to the point where it would be impossible.
Your financial plan could be similarly impaired if you try to protect against every conceivable risk.
Ben Felix: There's a balance there somewhere. Yeah, definitely. I use another good quote on this from Roger Loewenstein, who's the author of When Genius Failed, which is a book that details the rise and fall of the hedge fund long-term capital management.
We have not had Loewenstein on, but we did have Victor Hagani, who was one of the partners at LTCM. He was on Rational Reminder and he talked a little bit about his LTCM experience. Loewenstein wrote a book about that.
He wasn't part of it. Loewenstein is paraphrasing Eugene Fama's work on fat tail distributions. He says in the book, as Fama put it, life always has a fat tail.
Extreme events happen a lot more frequently than people like to imagine. The world life is not normally distributed. I think that poses challenges for financial models that don't capture fat tails, which is kind of what happened to LTCM.
They had a model that didn't account for how fat the tails were in the assets they were investing in. But I think it also poses challenges for how individuals plan their futures. The nature of risk and uncertainty just make investing and planning for the long-term inherently uncomfortable.
Volatility being the price of admission for higher expected returns is a real thing, but financial product manufacturers and fund managers know that volatility and enduring volatility is a struggle and they'll often cater their sales pitches to those types of concerns that investors have.
Dan Bortolotti: Market linked GICs, we're talking about you.
Ben Felix: That's exactly the example that I have actually.
I said structured notes, but it's the same kind of concept. This one's really important where it's like, okay, we know life has fat tails, so people are worried about the future. We know we can't predict the future.
We know volatility is scary. Banks and financial product manufacturers are like, well, hey, do I have something for you? This is a quote from economist John Cochran, who we've had on the podcast twice.
He says in one of his papers, when having dinner with lions, make sure you're at the table, not on the menu. We know financial markets are extremely competitive. If someone wants to sell you something, whether that's a stock, whether you're buying a stock on the stock market or looking at a financial product, it could be a fund or a structured note or a market linked GIC.
You need to ask yourself, why does this person want to sell me this product? What do they know that I don't? What's in it for them to sell me the product?
What's in it for me as the investor? Are you entering into a mutually beneficial transaction or are you about to be eaten alive by the lions? There are a ton of financial products out there that cater to the fears and biases of retail investors in exchange for ridiculously high fees and costs, putting retail investors, I would argue, on the menu.
Structured products are the most egregious example because they use pretty significant complexity. We had a couple of academics on to talk about structured products and it's hard for them to do the analysis and figure out what does this thing actually contain? What are the underlying payoffs of this product?
Their argument, and I think the academic argument in general, is that financial companies use complexity to shroud high embedded costs, really high, 4% to 5% or even higher.
Dan Bortolotti: It really comes down to one promise that all of these products have in common and that is stock-like returns without the downside risk. Anytime you hear any product advertising something like that, it's impossible. Just so you know.
Ben Felix: Nobody's taking the other side of that trade.
Dan Bortolotti: Yes, exactly. Volatility is the price of admission. You can't sneak in the back door.
Ben Felix: No, there's no back door. That piece is really important to understand because fees and costs are one of the few things that investors can control. John Bogle, the late founder of Vanguard, who is someone that I wish we'd had on this podcast while he was alive.
It's a shame that we didn't. He's got this great quote, the grim irony of investing is that we investors as a group, not only don't get what we pay for, we get precisely what we don't pay for. He's speaking to the fact that in aggregate, investors have not benefited from paying higher fees to active fund managers who aim to beat the market.
Instead, investors have underperformed roughly by the amount they paid in fees. Bill Sharpe has referred to this as the arithmetic of active management. In aggregate, active managers must underperform index funds because both groups hold the market, but active has higher fees and costs.
There is some nuance to that, which we've covered in past videos on how that changes a little bit when you introduce trading, but I think as a model, the arithmetic of active management still has really, really valuable insights and it's more true than not. Basically, unlike other areas of life, in investing, it is really difficult to expect a better outcome by paying higher fees. It's in fact the exact opposite, which makes fees and costs a really important criteria in evaluating any investment.
Dan Bortolotti: It's one of the few activities that we do where you don't get what you pay for. In so many endeavors in life, we think not only how much money, but how much time you put into the activity generally produces better outcomes. When it comes to things like stock picking and investment selection, it's not true.
In fact, as you said, usually the opposite is true.
Ben Felix: Yep. Yeah, I agree. You're right.
Both on fees, but also on time. The more time you spend, I didn't have it in here, but the portfolio is like a bar of soap. The more you handle it, the smaller it gets.
That's another good quote that's similar.
Dan Bortolotti: I hear it sometimes too when people talk about indexing or passive strategy is fine for people who don't have the time to put in the work. This is where you look at institutional investors who use these strategies. I think, do you honestly think that they don't have the time and resources to put in the work?
Of course they do. The point is the work doesn't pay off. I mean, we have just so much evidence showing that that's the case, but it's a myth that will persist, right?
Because it's so counterintuitive.
Ben Felix: Yeah. It makes me think about Barbara and Odean paper. I think it's called trading is hazardous to your wealth, but they found that in retail investor accounts is an older paper and older data set.
Accounts that traded more monotonically lower returns. It's the same kind of thing. The more attention you pay to your portfolio, the worse you do.
Dan Bortolotti: Yeah. There's this apocryphal study. I've never actually seen it, but people have invoked it where they did some study and they found out the best performing investors were people who had died and their estate didn't know that they had an account.
Ben Felix: The fidelity study.
Dan Bortolotti: Yeah. My guess is that's not actually true, but it probably would be true if anyone actually examined the data.
Ben Felix: Yeah. I love that example. I wish the paper actually existed, but like you said, I don't think it's actually real.
Dan Bortolotti: Yeah.
Ben Felix: I doubt it. It's a great story though. John A.
List. We had him on Rational Reminder a while ago. He has a paper on, wish I could remember the details, but it was like people who check their portfolios more frequently tend to take less risk and have lower returns.
Kind of speaking to the myopic loss aversion things. Paying more attention to your investments doesn't seem like a very good idea.
Dan Bortolotti: It's funny that you say that because that is a question I tend to ask clients when we're reviewing an asset allocation. We've been working with a client for a number of years. I'll often say to this man, how often do you check the account?
You get all kinds of answers. I check it every day, sometimes more than once a day. I get people who laugh and say, I literally don't check it until the day before our review meeting.
I have to think about that because people who check it every day and if they have an aggressive asset allocation, then I thought, well, you must be comfortable with volatility because your portfolio is volatile and you are seeing it. If you have another client who might have a fairly aggressive portfolio, but they never check it, they might actually be quite sensitive to volatility. It's not in front of them.
I think you have to treat those situations a little bit differently. It's not to say that you have to change the asset mix of one or the other, but I think those are two different situations. You have the same asset allocation, but you have a client with a very different approach to volatility and risk.
Ben Felix: Yeah, that is interesting. Okay. This next one is generally attributed to Mark Twain, but Dan, you and I were chatting earlier that it's sometimes hard to pin down the actual attribution of these quotes.
Who really said it first? Anyway, this one generally gets attributed to Mark Twain, but it's sometimes debatable about who actually said it first. The quote is, it ain't what you don't know that gets you into trouble, it's what you know for sure that just ain't so.
Investing is a discipline that it's inherent uncertainty and risk, as we've been talking about, contains a huge amount of noise. It's really difficult to be certain of anything in financial markets, other than the fact that there will be a lot of uncertainty. I think anytime that you're sure of something, real estate always goes up.
This crypto token that I found is going to the moon. Tech stocks will always beat the market as they have for a while now, and so on, stuff like that. I think anytime you have that level of certainty, you've got to step back and remind yourself that the only certainty in investing is uncertainty.
In addition to discipline and psychological fortitude, I think successful investing requires a good dose of humility and skepticism. If you go all in on a single stock and end up being wrong about it, you could be setting yourself back permanently. It's not uncommon for single stocks, as we talked about in a recent episode, to drop 60% or more and never recover.
That's actually a pretty frequent outcome for individual stocks. If you start with a total market index fund and tilt a bit toward something like small cap and value stocks, just as an example, being wrong might lead to a bit of underperformance, but the risk of permanent capital impairment or total loss is minimal. I think that humility is important, which leads to the last quote that I'll share here.
Harry Markowitz has paraphrased this saying. He never actually said this as far as I could tell, but it's paraphrasing his work. Diversification is the only free lunch in investing.
Typically, as we've mentioned, volatility is the price of admission for higher expected returns. Diversification is this rare case where adding multiple imperfectly correlated risky assets together in a portfolio can allow you to increase expected returns without increasing risk or decrease risk without decreasing expected returns. Diversification also mitigates the damage if a single investment in a portfolio does not work out.
The downside of diversification, of course, is that it makes it less likely that you'll hit big home runs, but due to the skewness in returns, in individual stock returns, you're far more likely to end up losing than winning with a concentrated portfolio. To me, diversification is a form of humility, really.
Dan Bortolotti: Yeah, it's interesting too that we're finishing with this quote because one of the earlier quotes we had was about how much conviction you need to have in your investment philosophy. I was almost going to jump in at that point because I'm saying that's true, but part of a conviction is what is my conviction in our investment strategy, which is pure indexing approach? My conviction is that we don't really know anything.
It's not so much conviction that I have a lot of confidence in very specific investment choices I'm making. It's almost the opposite. It's recognizing that so much of what we do and so much of the outcomes that we can expect, we really cannot anticipate.
It's almost a confident humility. I know it sounds silly, but it's really getting back to what you're saying is you have to be understanding that because we don't know a lot, the future is unknowable. The only rational response to that is diversification.
I have confidence in diversification, which in and of itself doesn't have a lot of confidence in any specific investment strategy.
Ben Felix: You've got confidence in your lack of confidence.
Dan Bortolotti: Exactly, yeah. I think I've tied myself in knots, but I hope the point is clear.
Ben Felix: Yeah, I know it is.
Dan Bortolotti: I just wanted to round out with one because I went back when we started to think about these telling quotes as early on in my investment education, what quotes really resonated with me. It was John Bogle's book, The Little Book of Common Sense Investing. One of the first really approachable books that turned me on to indexing as a strategy.
His quote was, don't look for the needle in the haystack, just buy the haystack.
Ben Felix: So good.
Dan Bortolotti: Which is just such a great metaphor, I think, for total market index funds. You will always have all of the winners if you buy the total market index fund. That one has really stuck with me over the years.
Ben Felix: That's a very good one. Okay, you got one more after this too. One more quote, this was a ton of information.
Obviously, we went through a ton of different quotes on a ton of different topics. I think it all boils down to a few key principles though. Spend less than you earn, pay yourself first.
Keep enough cash on hand for near-term expenses so you don't have liquidity problems. Invest your long-term assets in a portfolio with expected returns sufficient to meet your long-term inflation adjusted goals, which is really a financial planning question. It's not one that you can answer just by sticking your finger in the air.
You have to really go through and project what your future expected needs are and figure out what asset allocation makes sense for you. Constrained, obviously, by the behavioral stuff we talked about. Choose an investment philosophy and asset allocation that you can stick with even when they don't seem to be working.
I think that point is huge because any investment strategy will go through periods where it really sucks to own and other stuff is doing better, but you've got to be able to stick with it. Like the ARK example, it looked really smart for a while, looked really dumb for a while, but over its full life cycle since it's existed, it's actually done okay. Don't panic when the market drops.
Don't chase recent past performance. Don't try to time the market. Maybe those are all saying the same thing in different ways.
Be prepared for the future to be different from your current expectations. Be aware of the fees and costs that you pay and don't be too sure of anything and diversify broadly.
Dan Bortolotti: I did have one last quote here that summarizes all of those things. This is a really great one from Alexander Green's book, The Gone Fission Portfolio. Early in the book, he just notes, there are several things that will affect your portfolio over time.
Those are the amount you save, the amount of time that you give the portfolio to compound, the asset allocation that you choose, your expenses, your costs, and your returns. If you're listening carefully, you will know all of those are within an investor's control except the last one, and that is investment returns. As he puts it, no matter how proficient you are as an investor, you cannot control your portfolio's annual investment returns.
Yet, this is the factor that so many investors spend their time fretting about. It's just a great reminder, focus on what you can control. We have zero control over what the market will do, but if we control all of those other factors in the portfolio, that's really all anybody can do.
You know, if history is any judge, for the vast majority of people, that is going to work out if you can control those important factors.
Ben Felix: Yeah. That's a great quote to finish on. All right.
That's the end of our most important quotes in investing. If people are listening and have their own quotes that they think we missed in the most important quotes, the set of most important quotes, they can leave a comment on YouTube or look for the thread in the Rational Reminder Community that has a bunch of participation already. We'd love to hear any really good ones that we missed.
I like that topic. It was fun to look for those quotes, fun to talk through it and think about why they're important and kind of relate these fun little sentences that are entertaining to read back to why they're actually so important to good long-term decision-making.
Dan Bortolotti: Yeah. It really distills a lot of wisdom into a very small number of words.
Ben Felix: Yeah, that's right. All right. Let's go to the after show.
We do have a few reviews from Apple Podcast to read. We also have a shiny new review disclaimer that I know listeners have been dying to hear. Actually though, I'm not even kidding.
We had comments in the last episode where I said that we had this new disclaimer, but didn't have any reviews to read. People were excited to hear the disclaimers. One of these reviews, the person actually says they left it so they could hear the disclaimer.
Okay. Everybody ready? Here's the disclaimer.
Under SEC regulations, we are required to disclose whether a review, which may be interpreted as a testimonial, was left by a client, whether any direct or indirect compensation was paid for the review, or whether there are any conflicts of interest related to the review. Now, as reviewers are generally anonymous, we are unable to identify if the reviewer is a client or disclose any such conflicts of interest. I kind of like that.
Like I said in the last episode that I actually kind of liked the disclaimer because we've never paid for reviews. We would not do that, but saying it kind of feels good. I don't know.
Dan Bortolotti: Well, and we've never paid for reviews, but there's no shortage of organizations out there who have done it. I've been asked to do it. You have somebody come over to your house and do a repair and they're like, we'll give you 10% off if you post a great review.
And I've just said to people, I'm not doing that. Just charge me whatever you're going to charge me. But if it was an exceptional service, I might give a review just because I believe in it.
But once you start accepting money for reviews, it completely undermines the entire review process. And so no, I'm not going to participate in that. And glad to hear that we do not hear on the podcast either.
Ben Felix: We don't. Okay. So we have two reviews here.
I'll do the first one. You do the second one, Dan? Okay.
All right. So Levi, who I believe was from Canada says, amazing podcasting community. Hi, Ben, Cameron, and Dan.
Your work on this podcast is absolutely amazing. I got to throw Matt and Angelica and Stephanie and all the rest of the team too. And The Podcast Consultant guys that do all the audio editing.
Okay. Thank you for being the valuable source you are to investors around the world. Truly incredible how many lives you've improved through all of your hard work and dedication.
I also want to give a huge shout out to the Rational Reminder community. There are so many wise and intelligent people who are generous and willing to give their advice for no personal gain whatsoever. Would recommend joining to any finance nerds or people looking for in-depth discussions about episodes and many other topics.
Rational Reminder community is a cool spot. I like it in there.
Dan Bortolotti: Yeah. And very active for sure. And really very civilized discussion.
It is incredible. Yeah. Which is rare.
Okay. So this one is from Great With Money who says, spreading financial literacy for the world to hear. I'm leaving a review so I can hear the fancy new One Digital disclaimer for reviews alluded to in AMA number eight.
This podcast has been a powerful tool for leveling up my financial literacy. Thanks to learning about Scott Cederburg's research, I'm 100% stocks for life, at least until the next bear market. Thanks to learning about Andrew Chen's research, I no longer think about factor tilts.
Ben and PWL are a mighty pro-social engine for disseminating research-backed financial information into a media landscape centered on vibes.
Ben Felix: I like that.
Dan Bortolotti: Sorry about that editorial comment in there.
Ben Felix: It was funny. I laughed. Okay.
I got a couple quick recent contacts here and then we're almost done. Mark Hebner, who's a guest in episode 116, he's the founder of Index Fund Advisors, an RIA in the US. He heard us discussing how many indexes are out there.
I think it was in our episode on the case for index funds, episode 347. I think that was me, you, and Mark, Dan. We were talking about how saying that you're an index fund investor can mean a lot of different things because there are so many indexes, many of which look more like actively managed funds than market cap weighted total market index funds, which is what we're talking about when we say index funds most of the time.
Mark says in that episode that there are around 7,000 indices out there. I followed up saying, I think it's a bigger number, but I didn't have the details. Mark Hebner went and crunched the numbers as he would.
He found, this is crazy to think about. I'd love to dig into what actually constitutes such a big number, but Mark found that there are close to 1.4 million indexes total, only from the major providers. That's not even including affiliated indexes where a fund manager creates their own index to track with their fund.
This is just from S&P Dow Jones, MSCI, FTSE Russell, Crisp, and NASDAQ, the big ones. Crazy, 1.4 million indexes. Again, saying I invest in index funds doesn't really, we know what it implies, but it doesn't actually have a whole lot of meaning because there are so many indexes.
I also wanted to mention real quick, my brother in law, who is a Rational Reminder listener, he had a really interesting observation. He listened to the episode with Alex Edmonds, and then he listened to the episode with Martijn Cremers, who was talking about why he believes that the conventional wisdom on active fund management is wrong, which is contrary to the beliefs of many of our podcast listeners, including my brother in law. He said that he could feel his brain doing the stuff that Alex Edmonds talked about.
He'd feel his brain shutting down and rejecting the disconfirming evidence in support of active management, which was being discussed by Martijn. I just thought that was a really interesting observation. It was not intentional, but it was kind of a neat order to put those two episodes in where Alex equipped people to be aware of what their brain might do if they're presented with disconfirming evidence.
Then they got to test it out with the Martin Kramers episode.
Dan Bortolotti: Yeah. Confirmation bias is something we're all susceptible to, and certainly in the index investing community, we're all guilty of it too, right? It doesn't mean that we won't listen to criticism, but I'm certainly skeptical anytime I hear something that goes against the strategy.
Now, that's because there is also a lot of evidence out there, but yeah, I mean, it would be foolish to claim that we're immune to that kind of bias.
Ben Felix: But I think we're right in having very, very strong priors.
Dan Bortolotti: Yes. That's fair.
Ben Felix: Okay. Last thing before we conclude the episode here, we do have our Rational Reminder meetups coming up in September. So September 15th, it's a Monday.
Cameron and I will be in Victoria, and then Wednesday, September 17th, we will be in Vancouver. I don't think the locations or times are set yet. Maybe the times are, not the locations.
I don't know. But there is a form that will be available in the Rational Reminder community and in the YouTube show notes, and we'll post it on our other socials, like on Instagram and the Rational Reminder Twitter accounts and all that stuff. So if you want to participate in those meetups, it's a Microsoft form.
Fill it out with your information. And then I guess we're creating an emailing list or something, and we'll let you know the details of the event, like where to go and the time and whether there's going to be food and all that stuff. Usually there's snacks and drinks.
They're pretty fun. It's a big, just nerd convention of people that want to talk about the nerdiest stuff you can imagine. But it's for that reason, a ton of fun.
Good stuff. Are you going to be at both of those, Ben? I'll be at both.
I'm going to fly out to Victoria, and then Cameron and I are both meeting a bunch of people in Victoria, doing the meetup, and then flying over to Vancouver, meeting a bunch more people, and then flying back to Ottawa. Great. Yeah.
I'll go a couple of days early to see some family and friends because I grew up on Vancouver Island where Victoria is. So I'll go and visit some people before my meetings with Cameron start. All right.
Dan Bortolotti: Good stuff.
Ben Felix: All right. Anything else, Dan?
Dan Bortolotti: No, I think we're good. Thanks, everyone.
Ben Felix: Yeah. Thanks, everyone, for listening.
Disclosure:
Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, Inc. (“PWL Capital”) which is regulated by the Canadian Investment Regulatory Organization (CIRO) and is a member of the Canadian Investor Protection Fund (CIPF). Investment advisory services in the United States of America are offered exclusively by OneDigital Investment Advisors LLC (“OneDigital”). OneDigital and PWL Capital are affiliated entities, however, each company has financial responsibility for only its own products and services.
Nothing herein constitutes an offer or solicitation to buy or sell any security. This communication is distributed for informational purposes only; the information contained herein has been derived from sources believed to be accurate, but no guarantee as to its accuracy or completeness can be made. Furthermore, nothing herein should be construed as investment, tax or legal advice and/or used to make any investment decisions. Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors. You should consult with a professional adviser to see how the information contained herein may apply to your individual circumstances. All market indices discussed are unmanaged, do not incur management fees, and cannot be invested in directly. All investing involves risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is not indicative of or a guarantee of future results. All statements and opinions presented herein are those of the individual hosts and/or guests, are current only as of this communication’s original publication date and are subject to change without notice. Neither OneDigital nor PWL Capital has any obligation to provide revised statements and/or opinions in the event of changed circumstances.
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