Guest User

July 2, 2026

Is VEQT Costing You? (& Other Questions) | #416

Guest User

July 2, 2026

In this AMA episode, Benjamin Felix, Dan Bortolotti, and Ben Wilson tackle a wide range of listener questions covering portfolio construction, diversification, active management, pensions, fiduciary duty, and short-term investing decisions. They examine whether breaking apart all-in-one ETFs is worth the complexity, why global diversification remains the default despite long stretches of underperformance, and how investors should think about risk when they have defined benefit pensions or short-term financial goals. Along the way, they discuss the limits of active management, why simplicity often beats optimization, and even reveal their favorite board games.

Embed Block

Enter a valid embed URL or code.

Key Points From This Episode:

(0:01:12) Whether investors should replace asset allocation ETFs with individual component ETFs to save on management fees.

(0:01:40) Why simplicity has real economic value—and how small fee savings compare to behavioral costs.

(0:05:38) Portfolio drift, rebalancing discipline, and the hidden costs of managing multiple ETFs.

(0:06:08) How recent fee reductions narrowed the cost gap between VEQT and its component funds.

(0:06:51) When using individual ETF components may make sense for larger portfolios or asset location strategies.

(0:11:16) The hosts share their favorite board games—and why poker has surprising parallels to investing.

(0:15:01) What true diversification actually means beyond simply owning the S&P 500.

(0:16:07) Why the global market portfolio remains the logical starting point for most investors.

(0:19:46) Addressing claims that modern index funds have become "too concentrated."

(0:21:52) Why active managers tend to lose their edge as assets under management grow.

(0:22:15) Diminishing returns to scale and the efficient market for manager skill.

(0:27:03) How defined benefit pensions should factor into portfolio construction and risk capacity.

(0:33:53) Understanding fiduciary duty for Canadian portfolio managers and financial advisors.

(0:37:17) Why publicly holding yourself out as a fiduciary carries legal and ethical implications.

(0:39:22) Can individual investors outperform active funds by picking stocks themselves?

(0:42:32) Why time, effort, and research alone rarely translate into market-beating performance.

(0:45:04) Why international stocks have lagged U.S. equities—and why diversification still matters.

(0:47:10) The role of valuation expansion in explaining decades of U.S. outperformance.

(0:50:05) How to invest money earmarked for a home down payment over a three-to-five-year horizon.

(0:53:31) Applying the same time-horizon framework to RESP investing and education savings.

Read The Transcript:

Benjamin Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, Dan Bortolotti, Portfolio Manager, and Ben Wilson, Head of M&A at PWL Capital.

Dan Bortolotti: World Cup edition. Not sure how far along we'll be by the time this goes to air, but it's the talk of the town these days.

Benjamin Felix: Yeah, especially for you. Not hearing a whole lot about it out in rural Quebec.

Dan Bortolotti: It's causing a little congestion here in Toronto, for sure.

Benjamin Felix: I can imagine.

Dan Bortolotti: With the rickety temporary stands that they put up at the stadium.

Ben Wilson: Yeah, exactly. I'm not sure I'd want to sit on those for $3,000, but we'll see how that goes.

Benjamin Felix: All right, so we're back with another AMA episode. It's been nice to get a few of these out because we hadn't done them in a while. This will be the second one in the last little bit, so that's good.

We still have like, I don't know, 300 unanswered AMA questions. So if we have not yet gotten to your question, we are working on it.

Dan Bortolotti: We should be there by the next World Cup.

Benjamin Felix: I think we do have some good ones today though. Let's jump into it. One of you guys want to read the first one?

Dan Bortolotti: I'll take the first one. Is there a point at which you think it would be worthwhile buying the individual component ETFs of an asset allocation ETF instead of the single ETF? For example, the four ETFs within VEQT, specifically for the lower fees.

By my calculation today, that would save 14 basis points. So good question. We'll also revisit at the end, whether in fact the fee difference is 14 basis points.

Benjamin Felix: I do have some comments. Simplicity to me is huge. It's like one of the most important things in investing, especially if you're DIYing it.

So I was just thinking about like, how big of a deal is 14 basis points? When you're comparing an ETF that has whatever, a 10 basis point fee to a 24 basis point fee, that's proportionally significant, but how significant is it in dollar terms? So I just did some quick modeling.

I started with a $1 million portfolio today and I invested $10,000 per year for 30 years. I had the baseline portfolio earning 7% per year. I found at the end of 30 years, you've got $8.6 million. Ignoring taxes, just a very basic model. If you instead earned 7.14% per year, getting those extra 14 basis points, you'd have $8.9 million at the end. So around $300,000 in ending wealth, or if we discount it back to today's dollars at 7%, it's just over $40,000 in present value terms.

So I mean, those are dollars. That's real money, whether it's a lot of money or not is a little bit subjective. But I think the other side of that is you have to consider the trade-offs.

Like this person in my little model has a million dollars to invest today. They've got a 30-year horizon. Presumably they have other stuff going on in their life.

We've seen and heard that it's kind of easy to get off track with an investment plan when you have to make decisions about rebalancing and investing new money. Those are common stumbling blocks for people. It's not always easy to rebalance into the asset class that's declining.

If you get a big pile of new money, it's not always easy to decide how to invest it and to actually take the action to get it invested, which can have an opportunity cost. I guess that's true, whether you're doing the individual ETFs or the asset allocation ETF. Although even this question of, oh, now I've got more money.

Should I now switch to component ETFs? That could itself be a stumbling block. We know from Morningstar's Mind the Gap report, where they measure the difference between fund returns, the returns that investors in the funds earn.

That consistently shows that allocation funds, which manage a bunch of different asset classes within a fund, they tend to have lower return gaps compared to single asset class funds. The biggest gaps are in sector funds usually. That opportunity cost of not implementing perfectly and not implementing diligently can be high.

Then there's other opportunity costs too. If you're spending time researching and tinkering and thinking about your portfolio, that's time that you could have otherwise been spending investing in career skills or enjoying leisure time or spending time with your family. Those are harder to quantify costs, but they're real costs to think about.

It really comes down to the trade-offs between the dollar cost of the basis points, a bigger portfolio, the dollar costs are going to be different, but the trade-offs might also be different for the other parts of your life. Is that trade-off, what is it going to cost? Then the time and mental overhead that it's going to save you or cost you.

Ben Wilson: I think the mental overhead here is a big one. The amount of time that you have to think about it depends how much you value your time, but compounded over many years. In this scenario, your 30-year scenario you're looking at, if you're earning less today than you are later, the present value of your future earning ability becomes more expensive over time as well.

It's hard to actually pin down what that cost is and that cost could mean something different to different people. The other thing I thought of here is the cost of portfolio drift as well. As you're rebalancing or the frequency of rebalancing can lead to more costs.

By chance, it could make you somewhat better off if market goes in your favor, but you're more likely to be costing yourself more by having your portfolio drift away from your target asset mix by not having a disciplined rebalancing strategy.

Benjamin Felix: That becomes like a risk management question where you might end up better off, but you might end up taking more risk than you had planned to, which like you said, could be good or bad. I think the bigger issue is analysis paralysis and not investing if you have a big lump sum of new money, not investing or if you're whatever, maybe a bonus or just your regular savings. If that takes you longer to invest because you have more stuff to think about, I think that's probably the big opportunity cost issue there.

Now, we're talking about 14 basis points. The other interesting thing is that this question, as I said, we're behind in answering our AMA questions. This question was sent a while ago, and since then, the fees on VEQT specifically have come down quite a bit.

It's management fee, which is different from the MER, was cut from 22 basis points to 17 basis points, effective November 18th, 2025. That puts the MER, which includes a couple of other costs, at about 19 basis points. That's not published yet, but just running the numbers quickly, it'll be around 19 basis points once they update the MER.

I looked what it would cost to reconstruct this portfolio from its components. It's about 15 basis points. Now, we're talking about a six basis point difference, which obviously changes the trade-off. What do you think, Dan?

Dan Bortolotti: For me, this question is not hypothetical because I use VEQT in a lot of client portfolios, but I also use the component parts in other portfolios. What are the criteria for making that decision? It's the ones we hit on already.

I would say that in an account where your goal is to hold all of those asset classes all the time in that proportion, so VEQT is roughly 30% Canadian stocks. The US and international varies, but it's around something like 45 US, 25 international, something. Then international is broken down between developed and emerging.

You've got four different components. If your goal is to hold equities in those components all the time for the long term, and it's some, let's put it this way, if it's a $2 million purchase, I'm going to be buying the individual components. If it's a TFSA, say, where a lot of TFSAs are in the ballpark of $150,000 to $250,000 these days, depending how they've been invested, that's a place where I use VEQT frequently.

You just never have to rebalance that account. The important thing here too is if you use some kind of asset location strategy where you want to hold different asset classes in different account types, then you're going to need to hold the individual components. If you were planning on holding all four of them in a single account, as I said, as a long-term holding, VEQT is going to be a very useful fund and certainly worth that few basis points in my opinion.

I guess the other thing I would say is let's remember too that if you hold all four components, how often do you need to rebalance in order to stay at exactly the same components or the same targets that VEQT uses? I don't know what the answer is, but frequently no one's really going to do that and you shouldn't do that, right? You're not going to rebalance every month.

Over time, I think what you'll find is if you just hold the four components and you only rebalance say once a year, that six basis point difference can disappear or it can be magnified just by good luck or bad luck. It's not really fair to assume, that's the only way you can do it if a long-term comparison you assume that the six basis point difference continues every year. In practice, it won't be that.

It'll be more or less depending on a number of things that you can't control. Like you've been, well, both of you, I value the simplicity and if you can just for a single account where you have a long-term equity holding, you want to hold all four asset classes anyway, it's hard to get better than just holding VEQT.

Benjamin Felix: One difference between you answering that question and a DIY investor answering that question is that you are, this is your job to implement the portfolio and rebalance and all that stuff. You're not going to have the same biases that an individual would have about, should you invest this new money or not? You've got that more professional perspective, so that's just a big difference where you can look at it and say, yeah, we're going to save the six basis points.

We are implementing the portfolio, which is I think quite different from a dude managing his own portfolio.

Dan Bortolotti: I mean, obviously, I'm subject to the same kind of anxiety about markets as anybody else, but we have a process. I'm not going to not rebalance because I'm jittery about it. We have a process that we adhere to, so that implementation gap is probably a lot smaller if you have a portfolio manager at the wheel.

Benjamin Felix: Likewise, for investing new money, you're not going to have that same analysis paralysis.

Ben Wilson: I also find it interesting how the question was asked. It almost implies that once you get to a certain level of net worth, that you need to make it more complex and go to components, but what you said originally, Ben, there's a lot of value in simplicity. That's Dan kind of highlighted.

If you take an asset location approach, it's a bit different, but if you have the same asset mix across all accounts, having VEQT, whether you got a million dollars or five million or 10 million, is a scalable solution. Could you optimize in different ways? Possibly, but taking the VEQT approach across all of your accounts could be a very worthwhile, simple solution.

Benjamin Felix: It's also interesting to think about the opportunity cost of time relative to your overall situation. If someone has a $10 million portfolio, we can show, yeah, the dollar cost of those few basis points gets a lot larger, but the person with a $10 million portfolio, I would guess, places a high value on time and wants to be doing stuff other than rebalancing their ETF portfolio. I'll ask the next one.

What are your favorite board games? What are you playing these days? Do you think there's a correlation between board game hobbyists and personal finance enthusiasts? That's from Mark H. What do you guys got?

Dan Bortolotti: I highlighted in my notes here. I mean, hands down, best board game has to be Hungry, Hungry Hippos and has been for a long time. I think that there's a very distinct correlation between that game and personal finance enthusiasm. So that's my two cents.

Ben Wilson: I don't know if there's a correlation. I'm big into board games. I've been playing less than I used to because of young kids, but my kids are getting to the age where they're starting to get into some of the more fun strategy games.

Some of the favorite board games I play are Disney Villainous. You guys may not have even heard of that one, but it's a cool strategy game. You're basically one of the Disney villains and you're trying to carry out your evil plan, playing your own game and ticket to ride.

You're basically building train routes across different geographies and Scotland Yard is a cool cooperative game to escape the police in London. But board games, there's a lot of strategy board games. There's a lot of high level thinking.

So maybe there is some correlation to finance enthusiasts. There's a lot of finance enthusiasts that are nerds and finance people tend to be nerds. There might be some correlation there.

Benjamin Felix: Interesting. I don't play board games. Never really did growing up.

We have some board games we've gotten to try playing with our kids, but between kids' activities and us being busy with the rest of our lives, we just have not gotten into it. I play computer games with my kids sometimes. Not strategy games though.

We play like Counter-Strike and Unreal Tournament. Very old first person shooter games, but they're super, super fun still. We also have a basketball hoop in our house, so we play a lot of basketball.

Board game time usually gets absorbed by shooting hoops and playing American one-on-one with my two kids.

Dan Bortolotti: I want listeners to try to imagine Ben's kids playing basketball against him. You've got to have what, a five foot advantage on all of your kids right now?

Benjamin Felix: Yes. They often comment that this is not fair.

Dan Bortolotti: It's totally not fair.

Benjamin Felix: I tell them that they'll never be scared of a shot blocker their own age.

Dan Bortolotti: To add some seriousness to this question, I don't know about board games, but one of the things I think that there is definitely a correlation is poker and personal finance. I don't know if you guys are poker players. I was pretty heavy into it for a while.

It's a fascinating game and it's something that you really can't get good at unless you have some facility with basic math, probability, statistics, things like that. There is some overlap, I think, the skills and interests that you will see among personal finance enthusiasts. My guess is a lot of listeners and members of the community in that are probably in some level into poker, but we'll see.

Benjamin Felix: Yeah. Both involve decision-making under conditions of uncertainty.

Dan Bortolotti: Exactly. Annie Duke was on a past episode and she's a great example of someone who has crossed over in those two sorts of fields, A, as a professional poker player and B, as someone who studies decision-making. You can learn a lot about decision-making with imperfect information, which is a useful skill as an investor by studying and playing poker.

Ben Wilson: For sure.

Benjamin Felix: Ben, you want to read the next one?

Ben Wilson: In the context of the stock market, I always hear diversify, diversify, diversify. What does diversification actually look like? It can't just be buying something like the S&P.

At what point can someone say they're actually diversified without owning the entire market? What does high-risk versus low-risk diversification look like, if that's possible? It's from Matthew.

Dan Bortolotti: What jumped out at me was, how can you say you're actually diversified without owning the whole market? My response would be, why not own the whole market? It's not really that difficult to do anymore.

Speaking of VEQT or other similar products, it's not literally the entire market, but it's pretty close. If you want a globally diversified equity portfolio, it's not so hard to get that anymore. Maybe that's the starting point.

If you want to become less diversified, you almost have to work harder to do it. That's the first thing I would say on that level. It's certainly not owning the S&P.

It's being globally diversified. That's just so easy to do today.

Benjamin Felix: It's such an interesting question, because defining diversification is actually hard to do. Some people would argue that the US market is not diversified because it's so concentrated in a few stocks. That's not necessarily the right way to think about it, though.

It's a claim that has been made, and some people say, maybe you should equal weight. Does that result in more diversification? It's a complex thing to define.

I always come back to what Eugene Fama has said on this podcast when he was on, is you have to talk yourself out of the global market portfolio. Like you said, Dan, owning all the financial assets that are readily available to investors at a low cost is really the baseline. I specified low cost.

We talked to Gene Fama about that too, about how I asked him when he said that, well, what about private equity? He said, well, the fees and costs are pretty high, and we don't actually have a great estimate of what the expected return of that asset class is. I don't know if it belongs in that portfolio, but that's the baseline.

Start with just the global market portfolio. Private equity, just as an example, maybe you exclude because of the fees and costs and uncertainty about its expected returns and dispersion across managers and all that kind of stuff. Other than that, if you want to hold more stocks than the global market portfolio, because the global market portfolio has stocks and bonds in it, okay, if you have a good reason to do that, you adjust accordingly.

If it makes sense for tax, risk management, or currency exposure reasons to have some home country bias relative to the global market portfolio, okay, that can make sense too. If we look at the S&P 500 as an example, it makes up a large portion of the global market cap. It's like 80% of the US market.

The US market's roughly 60% of the global market. It's a lot of the market, but it's still a relatively small slice. It's by no means the majority of the overall stock market.

S&P 500, just following that example, is more diversified than a single stock. I think nobody would disagree with that. It's probably more diversified than lots of other country indices.

If you made me choose, I might choose the S&P 500 over the S&P TSX, the Canadian index, just because the S&P 500 is more diversified. I don't think that's something anybody would disagree with. Although the S&P 500 has a pretty rich valuation right now.

Maybe I wouldn't choose it at the moment if I had to choose, but from the diversification perspective, probably. To your earlier point, Dan, we don't have to make that choice. Owning the global market is so easy to do.

I don't really know why you would try and do anything fancy to get yourself more diversified than that. This is a discussion that comes up in the Rational Reminder community quite a bit about whether tilting toward small cap and value stocks as an example increases your diversification. It comes up maybe once a year where people start debating whether factor tilts increase your diversification.

I don't think they do. It doesn't change the opportunity set that you're investing in. It does give you access to more sources of expected return.

I would call that increasing the reliability of the outcome, but I don't think it's diversification. Anyway, it comes back to the point I made earlier that what even is diversification? Hard to define, but let's start with a global market portfolio and talk ourselves out of that, which will probably result in something that looks pretty similar, hopefully, to the global market portfolio, but maybe with some specific tailoring to your specific situation.

Ben Wilson: As you move away from the global market portfolio, you're arguably getting into more of an active management approach. Don't need these geographies or these industries. I want to focus on certain parts of the market.

What is your rationale and what evidence do you have to back that up? Be hard to challenge that against just having some version of a global market portfolio.

Benjamin Felix: One of the common arguments from active managers is that index funds are not diversified anymore because they're so concentrated in a few stocks. Again, it comes back to what does that mean? We did an episode a while ago on whether concentration is actually an issue.

There's actually a recent paper in the Financial Analyst Journal that made very similar arguments to what I had said. It's not obvious to me that having a few large companies that are themselves broadly diversified and are probably relatively safe companies compared to a whole bunch of small caps combined as an example. Not obvious to me that that's a bad thing or that it's under diversified, even if it's sort of concentrated in a few big names.

Then what's the alternative? Active managers say, well, the index is concentrated, therefore you should be active and then they underperform. The Canadian SPIVA report where S&P compares active funds to index returns for Canada.

The most recent one was, as always, it was just egregious. The proportion of active managers outperforming the index is minuscule. It's crazy.

Dan Bortolotti: Yeah, especially in the US market now too, it's been so difficult to outperform because the S&P itself or similar indexes have done so well, it's very, very difficult to outperform them. Yeah, over shorter periods, sure. Over longer periods, it's always, always difficult.

There's been a lot of work too, of course, on what number of stocks you need in order before diversification tops out. Years ago, people used to say like 30 or 40 stocks was all you needed. I think that's been debunked, but do you need 12,000 like there are in some of these total market funds?

Not if your goal is simply to keep standard deviation to a minimum, but again, why not hold if you can buy a single cheap product that does it? If you had to assemble a portfolio like that manually, of course, you're going to choose a much smaller number. These are decisions that we don't need to make anymore because the products are there.

Benjamin Felix: All right, next one.

Dan Bortolotti: I'll take this one. You frequently mentioned that outperformance by active managers tends to happen when the AUM is low and that it's no longer possible when there's a large influx of funds and investors.

Why is that the case? Why can't outperformance continue to happen when the funds grow large, assuming the manager is truly skilled? That question is from Victor. It's a good question.

Benjamin Felix: It is a good question. It actually ties into one of the questions we have later too. The simple answer is what's called diminishing returns to scale in active management.

It's not a complicated thing to think about. As a fund gets larger, it's harder to move the needle with good ideas. If you're a skilled manager and you're good at finding good stocks to buy, or whatever the case may be, it's harder to find opportunities that are actually going to move the needle with a larger fund than it is with a smaller fund.

If you're managing $100,000 and you can whatever, analyze penny stocks, I'm not suggesting you should do that. If you can do that successfully and pick winners, cool, you can turn your $100,000 into $200,000. If you tried to do that with a $2 billion portfolio, the market just doesn't have the capacity.

Those opportunities are not there at that scale. That's the idea of diminishing returns to scale. Warren Buffett has talked about this with Berkshire Hathaway.

He's said that if he had a million dollar portfolio, he thinks he could still beat the market. Berkshire, as we talked about in a recent episode, has not been able to outperform the S&P 500 for years. It's something that Buffett has talked about openly.

That applies both at the fund level and interestingly at the industry level. As the active management industry as a whole gets larger, the same kind of thing happens. There's a 2015 paper from Lubos Pastor, who was a guest on this podcast back in episode 124.

We talked to him about this. That paper's scale and skill in active management. They show empirically that a fund's ability to outperform passive benchmarks declines with increasing scale at both the industry and fund level.

It's a real thing. One of the cool theoretical papers on this is a 2004 paper from Jonathan Berk, who was a guest in episode 220. We talked to him about this paper and the logic behind it and further research that he's done on this topic.

Their 2004 paper, it's Berk and Green. They describe that there's an efficient market for manager skill. Just like we think about there being an efficient stock market, they argue that there's a similar mechanism for the market for manager skill and that investors will identify skilled managers based on their past performance and allocate to those managers up to the point where the manager can no longer beat the market.

Just like how if you can find a good company before the market recognizes it as being good, you can outperform by picking that stock, but you have to pick it before the market prices it as being good, at which point you just earn the normal return for the amount of risk that you're taking. Their paper argues that the same thing happens in the market for manager skill, where if you can identify a skilled manager before they have had their good performance, before the market recognizes that they're skilled, you can expect to earn alpha, you can expect to benefit from their skill. In an efficient market, by the time you know that the manager is skilled, they've had so many assets dumped on them that their fund becomes large and they have that diminishing returns to scale issue where they can no longer earn alpha.

Instead, the investors in their funds earn returns in line with the risk that the fund is taking while paying active management fees. They would likely just be better served using an index fund or whatever it is, a factor fund that has the same kind of factor exposures as that active manager with a lower fee. That's the issue, diminishing returns to scale and an efficient market for manager skill.

Instead of stock prices getting bid up in this efficient market, active managers get flooded with assets up to the point where the benefits of their skill are realized by them, the active manager, because they're now charging fees on a larger pool of assets, but their investors are not benefiting from the skill. It's actually interesting. Just like a good company in the stock market, like a really good business like Google or NVIDIA, or whatever, they get really big because they're good companies, because they're profitable, they've got low discount rates because the market perceives them as not being risky, good growth prospects and all that stuff.

You end up with a big stock. It's similar in the market for manager skill, where a really, really skilled manager that's really good at identifying opportunities in the market, they can command a larger fund before they have a negative alpha, at which point assets would leave and things would go in the other direction. Skilled managers do benefit from their own skill by being able to manage larger funds, but the investors in the funds don't get to benefit.

I love this model because it's like, we don't have to say active managers are not smart or skilled, they are, but they're in a competitive market for manager skill and investors have a hard time benefiting, unless they can identify winning managers before the fact, just like with picking stocks.

Dan Bortolotti: It's interesting because that there's such a strong theoretical basis for that. It's an intuitive argument. I think we all understand it at that surface level, but the fact that there's that sort of empirical data and theoretical argument behind it is compelling.

Benjamin Felix: I love it. Because like I said, it's easy to say, well, active managers are just dumb. They're not smart.

I think that's wrong. They are smart, but they're competing with other smart people and investors are competing to benefit from their skill. You get an equilibrium where investors don't benefit, but managers do.

I'll read the next one. Portfolios are comprised with some allocation of equity and fixed income, stocks and bonds. How should defined benefit pension plans be treated in this context?

They ultimately become an annuity, but in terms of portfolio construction, can they be treated as fixed income? Your TFSA could be 100% equity, like in XEQT, that's the iShares equity asset allocation ETF, and then the pension would be the fixed income component. Furthermore, does having a defined benefit pension increase one's risk appetite?

Say an individual's risk tolerance suggests they should have a 40% equity, 60% fixed income portfolio, would having a defined benefit plan shift the makeup to 60% equity, 40% fixed income? And that's from Freakin Fresh. That's their name in the Rational Reminder community.

Dan Bortolotti: I really like this question and it's one that I got from clients many times. I guess my first comment on it would be, I often hear people say, well, my pension is like fixed income. I said, well, I don't think that's a helpful way to think about it, at least not in terms of portfolio construction and management.

Let's say, for example, I'm working with a client and they have a million dollars in their TFSA, RRSP, whatever, and they have a DB pension. Our target asset mix is 50-50. Let's keep it easy, right?

They have 500,000 in stocks, they have 500,000 in bonds, GICs. Well, how am I factoring in the DB pension? Am I taking the present value of their DB pension, which is A, not necessarily easy to calculate and B, not very useful.

I can't rebalance by selling half of their pension and deploying it in a different way. It's just not really a useful framework for thinking about this. If we use what the framework for discussing risk appetite, which is Larry Swedroe's ability, willingness, and need to take risk, which I really like using, you could look at it and say that a defined benefit pension plan, it increases your ability to take risk because you've got this potentially stable source of income that will be there even if markets crash, so you have more ability to take risk. You have less need to take risk, presumably, because you've got this guaranteed income source as well.

If you will, they kind of cancel each other out. Now, really, the main variable is your willingness to take risk. That is temperamental.

That is not really about the numbers here. When the person asks, for example, does having a defined benefit pension increase one's risk appetite? Well, as I said, it increases your ability to take risk, but that doesn't mean you're going to react to stock market volatility any differently.

Potentially, I suppose it could. I can hear an investor saying to themselves, well, yes, the market crashed 20%. I lost how much money in my portfolio, but at least I have my pension.

It can increase your willingness, I suppose, to take risk in some way, but I think at the end of the day, you have to put this into the software and you have to just include it as part of a financial plan. If you see that the presence of a pension increases your likelihood of reaching your retirement goals with a less risky portfolio, then you have the option to reduce the risk in your portfolio. By the same contrast, you also have the option to increase it if your thought process is, well, I want to maximize my estate, for example, and I'm willing to tolerate a bit of volatility because all of my main expenses are met by my defined benefit pension plan.

Maybe it's a long way of saying it, but see the pension in context of your financial plan and not think about it as a fixed income asset because I just don't think that that's a helpful way to frame the question.

Ben Wilson: I agree with most of what you're saying, Dan. It comes down to risk capacity, not risk tolerance. Like risk tolerance is almost a state of mind, like how much willingness you're able to take on in your portfolio and having a pension may not change your perspective on how your portfolio goes up and down.

That being said, I think it also comes down to investors' individual circumstances. Like I've had clients where their pension covers all of their regular expenses, therefore the portfolio is just for any ad hoc expenses or possibly even just earmarked for the next generation. So then if there's a case like that where you're talking about there's a different objective for your portfolio, that gives you the ability and maybe the willingness to take on that risk because you're no longer looking at it as I need this money to cover my retirement needs.

I'm more than covered. In some cases, people are actually saving money from their pension income and not spending it all. So that gives them the ability to take on more risk in their portfolio.

Or on the flip side, if everything's covered and people have a more conservative risk tolerance, they may say, no, I actually want to take on less risk in my portfolio because I know that I'm covered. It gives you the flexibility on both sides of the equation.

Benjamin Felix: It is an interesting question. It comes up a lot, especially being in Ottawa where we are lots of folks employed by the government who have those types of pensions. We do a behavioral risk tolerance assessment on our clients when we're figuring out how to invest their money.

If someone comes back as a very conservative investor with the risk tolerance questionnaire, maybe it was affected by the fact they had a pension, I don't know. But if it spits that out, we're not going to say, well, no, you should take a whole bunch more risk because your pension says you should. That behavioral piece is not going to change.

Ben Wilson: Interestingly, this is just anecdotal, but what I've seen is people with pensions tend to have a bit more of a conservative risk profile anyway. Maybe that's because their portfolio tends to be smaller than someone that has to save it all on their own. They may actually be more inclined to maintain a smaller allocation to equities in their portfolio because they've built this habit of contributing to their pension and they feel comfort with that.

Benjamin Felix: There could be even a selection bias where people who choose to build a career at a place that has a defined benefit pension may be more risk averse in general.

Ben Wilson: Very possible.

Benjamin Felix: You want to read the next one, Ben?

Ben Wilson: Yes. Next question. I'm confused about how fiduciaries work in Canada.

I've seen in one of your videos in a brief clip explaining that Canada does not have a statutory fiduciary standard for financial advisors. However, PWL Capital website homepage Q&A outlines fiduciary duty for their clients. Does a fiduciary duty exist at the firm level for companies registered as portfolio manager?

Does this apply to individual advisors registered as advising representatives or is this something that a court determined in a legal dispute? Would love to see you expand on this in a future AMA episode or a dedicated video. Love the podcast.

Looking forward to see how you guys grow with OneDigital. This question is from Phil.

Benjamin Felix: It is a good question and it is one of those tricky ones where there's not like super, super clear guidance on it, but there was a discussion paper from the Canadian securities administrators back in 2012 that I think did a really nice job discussing the issues and outlining what probably applies. PWL's client facing advisors are typically registered as portfolio managers through CRO, which is one of the regulatory bodies here in Canada. If they're not themselves registered as portfolio managers, they're going to be supervised by a portfolio manager.

We have some folks who are associate portfolio managers, for example, which is one step before becoming a portfolio manager and they will be having a portfolio manager sign off on everything that they're doing. Then the other important piece here is that PWL's client accounts are discretionary accounts. If you are a portfolio manager, you can manage discretionary accounts, which means that as the portfolio manager, you can make changes to the accounts without calling the client for permission in order to keep the portfolio in line with their investment policy statement.

That discretionary piece ends up being really, really important to this distinction or definition of whether the fiduciary standard applies in Canada. As the question said, we do not have a statutory fiduciary standard. There's no specific law saying that portfolio managers must act as fiduciaries, but based on the setup, based on the fact the accounts are discretionary and there's a high level of delegation and trust, the courts would interpret PWL's portfolio managers as having a fiduciary duty to clients.

Again, that's outlined in lots of very nerdy detail in that 2012 consultation paper from the Canadian Securities Administrators. The other interesting thing about this, about the fiduciary duty idea as it pertains to financial advisors, is that saying that you are a fiduciary will more than likely result in courts holding you to that standard. If you say you are a fiduciary, you will be expected to act in that capacity.

Ben Wilson: To add some context there, the question asked about manager versus advising representative or registered representative. I think the case you're describing is if someone is not a portfolio manager where you're held to that standard based on the portfolio manager code of ethics and you're a registered representative with either CRO or an ICPM firm or even an MFDA advisor, you could hold yourself out as a fiduciary advisor partly as marketing, partly as just like I'm going to do the best thing for my clients. This is where you're saying the courts could hold you to that standard if you hold yourself out as being a fiduciary.

Benjamin Felix: Yeah. One of the financial planning associations in Canada that issues a designation, they recently came out with this where their designation holders have to say that they are fiduciaries from a financial planning perspective. It's just interesting to think about what does that actually mean? Because there's no law saying they're fiduciaries, there's no way for the credentialing body to really enforce it other than taking away the credential.

But I think that what it does create is that if you are saying, I'm a fiduciary, I'm acting in your best interest or I'm committing to act in your best interest, you will be held to that standard when push comes to shove. PWL does something kind of similar, I guess. We do have the portfolio management piece, the discretionary piece, which highly likely does hold us to that standard, but we take the additional step of getting independently certified as acting in a fiduciary capacity for our clients by an organization called CFEX, the Center for Fiduciary Excellence.

We're audited annually by them to keep that certification, but I think it also does what I just said where we are saying that we're held to that standard, we are being audited by a third party to verify that we are acting in that capacity. I think that does further hold us to that standard. This will date itself because it refers to Mark.

Hi, Ben, Mark, Dan, and Cameron. First, I just want to say thank you for being such an incredible source of information. You've truly changed our lives and my family and I are grateful.

Question, Ben has made some powerful reasoning as to why index funds outperform active managers. However, some individual investors may feel that active managers are, maybe individual active managers are not constrained by investment mandates and larger capital size. Given this, is there a strong argument that individual investors, even educated ones, should still stick to index funds and not pick individual stocks?

Ben's recent videos on index funds are extremely informative, but comparing just to active managers, actively managed funds might not be the whole picture given their constraints. Thank you. Best wishes on your recovery and treatment, Ben. Best, Michael.

Ben Wilson: That also dates yourself back to when you're going through cancer treatments.

Benjamin Felix: It sure does. As I mentioned earlier, this is an interesting question because we just talked about diminishing returns to scale in active management. Talked about Buffett's comments on the same topic.

If an individual investor managing a small portfolio does not have that diminishing returns to scale issue because they're not attracting capital from investors, maybe they do have a shot at being a persistent winning active manager for their own portfolio. In theory, Buffett does say in his 2016 letter to shareholders that there will be some successful active managers. There are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches, but he also says that in his lifetime, keeping in mind that Buffett's been around for a while, even in 2016, and he's in the investment world as deep as he can be, or he was, in his lifetime, he has identified early on only 10 or so professionals that he expected would accomplish this feat. Buffett doesn't think there are many folks out there who can do this successfully. That's one piece.

Then the other thing is when you look at studies that have gotten access to individual investor accounts and asked how do individual investors tend to perform, they don't tend to perform very well on average. There are a few, I mean, to Buffett's point, I guess, but I'd say it comes down to conviction, risk management, and investing in the right things at the right points in time in your life. If you really think that you're one of the few investors who can beat the market consistently by picking stocks, and you have the capacity to absorb the downside, if you end up underperforming, maybe, hey, shoot your shot, and this is a piece that I don't think people tend to think about as much.

You've got to manage the trade-off between managing your portfolio. If you've got a $100,000 portfolio and you're spending all your time trying to pick stocks, you got to manage the trade-off between that and investing in other things like career skills or starting a business or just enjoying your life. Then the last thing I'll say on this is that anecdotally, and this is very anecdotal, and it's from me spending lots of time reading personal finance stuff online.

There are tons of stories online from people who tried picking stocks. Maybe they were successful for a period of time, but they eventually realized that between the time commitment and often the poor performance relative to the market makes them realize eventually that they should just be investing at least most of their money in index funds. I'm sure there are people out there who have been successful at picking stocks, but most people probably won't be.

That has to be part of the consideration when you go into it.

Ben Wilson: I think it comes down to the question that we've talked about before. Is it a question of skill or luck? There's no doubt there's a lot of smart investors and portfolio managers out there, but there's a lot and you're competing against each other and there's all this information.

What's going to give you the information edge over the market? Is someone that has a successful track record picking stocks, a skilled manager or more skilled than someone else, or did they just happen to get right by chance because they were in the right place at the right time? It's hard to know that for certain in any given case, but the statistics indicate that it's more likely luck-based than skill-based.

Dan Bortolotti: Yeah, there has to be some percentage of active individual investors out there who will outperform just by luck. It's impossible to distinguish those from the truly skilled ones, but I just wanted to go back to something that you had said, Ben Felix, about this idea of having enough time to do the research. I hear this a lot.

I feel like it implies that if you work harder at it, you will somehow have more success. Look, that might be true. Clearly, being a thoughtful investor who does their research is better than being a thoughtless person who throws darts, but this idea that if I only had more time, I would be more likely to beat the market.

I mean, when you look at the enormous percentage of professional money managers who failed to beat the market, do we believe that any of them failed because they didn't have enough time to do their homework? For sure, costs are part of it, as the questioner did mention. There's no question.

Before costs, more active managers beat the benchmark than after. Yes, they can have constraints in terms of too much capital, as we've already talked about, but there's also an extremely important factor, which is it's really hard to do even if you have a reasonable scale and your fees are very low. Let's not give people the impression that if you just had several hours a week to research stocks, that you would somehow have a better than average likelihood of outperforming because I just don't think you would.

Ben Wilson: An analogy that I just thought of is like a hockey pool. People that participate in the hockey pools, there are some that are experts on the sport, know all the players, all the ins and outs of the team and who's more likely to win, but there's things that you don't anticipate there, whether it's injuries or drive or just by chance, the goal goes in. Often, the people that win hockey pools are not the most knowledgeable in the sport.

It could be just someone that literally threw darts at the wall and picked these are the teams that are going to win and end up picking the right choices to get the Stanley Cup.

Benjamin Felix: Doesn't throwing darts actually beat a lot of investors, Dan?

Dan Bortolotti: There have been some famous, at least jokes about it. I'm not sure how much involved dart throwing, but it does feel like that.

Benjamin Felix: The Wall Street Journal has done stuff on that where they've actually done it. I'd have to go and read what the results were. Maybe we can talk about that in a future episode.

Dan Bortolotti: I'll take the next one. What are the reasons for underperformance of international stocks for such a long time? For the last 30 years, the US market return was 7.96% inflation adjusted and ex-US international market return was just 2.37%. 30 years is a pretty long time horizon for any person. The last 30 years includes a lost decade for US stocks as well.

Psychologically, it's very hard to stick with international stocks. PS, I'm already international diversified and not planning to switch. This question is from DJ.

Benjamin Felix: It has sucked not being 100% in US large caps, that's the one of the costs of diversification is that you always own whatever is losing at the time. This question is a really interesting time capsule. This is one of the benefits of, even though I feel guilty about not answering so many people's AMA questions, it's kind of fun answering questions from the, well, not too distant, but distant past, more than a year ago in this case.

It's kind of fun because the context of the question is often different from our current context, which makes discussing the question, I think in many cases, more interesting. This was submitted in March, 2025. Since then, the iShares MSCI ACWI ex-US ETF, that's all country world index, excluding the US ETF.

It's a US listed ETF. It has outperformed the iShares core S&P total US stock market ETF by just under 10 percentage points annualized. Staying in your seat is important.

That's a big difference over a short period of time, it turned around relative to when the question was asked. The other relevant data point that I think speaks more directly to the question is one of my favorite posts from Cliff Asness from a while ago. It's a 2021 post that he did based on 2020 data.

It's a little bit dated now, but at the time, he showed that while the US stock market had just crushed the rest of the world, as it continued to do for years afterwards, using the EAFE index to proxy for non-US developed market equities, a lot of that performance difference was explained by increasing valuations for US stocks. Cliff shows that from 1980 to 2020, the US outperformed EAFE by 2.1% per year. When adjusting for the change in relative valuations, the return deferential shrinks from an economically significant 2.1% per year to 40 basis points. A big portion of that performance difference was explained just by US valuation multiples expanding more than international developed, excluding the US stocks. Cliff explains that the victory of the US market over the EAFE for the last 40 years is almost entirely coming from it getting relatively more expensive, from the US market getting relatively more expensive. He's using the Shiller CAPE ratio, which is a measure of how expensive stocks are relative to their real 10-year trailing earnings.

At the time, was 33.77. At the time of recording now, it was 41.54. The US market has continued to get more expensive. Now, Shiller CAPE is not a perfect predictor of future returns by any means, but there's theoretically and empirically generally a relationship between current valuations and future returns and expected returns. When stock prices are really high, future returns will tend to be, now it's very noisy, but it's still a relationship that exists.

The point of Cliff's post and the point that I think it's important to make in answering this question is that when returns come from multiple expansion, it's hard to infer that the outperformance should be expected to persist. Stock prices went up relative to their fundamentals. Even if fundamentals got better, if a lot of that return came from increasing valuations, you might not expect that extreme positive performance to persist in the future.

Now, maybe that would have seemed like a crazy thing to say even back in March 2025, when the US stock market was crushing, but we've since seen a big reversal with ex-US stocks outperforming. The future, of course, is uncertain, but you have to be diversified. Something's always going to be sucking.

There have been periods, like the question mentioned, the lost decade where Canadian investors for 14 years were flat in US stocks. The lost decade was longer than a decade for Canadian investors because of the currency portion of the return. We've talked about this before.

There were many Canadian investors who were like, who would ever invest in the US market? Why would I diversify outside of Canada? There's always going to be a market doing that, right?

Ben Wilson: Looking back to March 2025, a lot of people in a similar line of questioning would be thinking, why would I use a factor tilted portfolio like broad market index funds have been crushing for the last decade? Why would I do that? You look now, only takes one year of really good returns to flip the annualized return going back many years.

Benjamin Felix: You got the next one?

Ben Wilson: Yeah, I got the next one. I'm sold that the right asset allocation for a long-term investment horizon like retirement is a diversified equity-heavy portfolio, provided you can stomach the volatility.

What should you hold if you're saving for a down payment over a three to five-year horizon? I'm currently holding a 25% allocation to equities with the rest in GICs. Is this sensible?

What would you hold? Big fan of the show guys. Question's from Gerard.

Benjamin Felix: It's always a tricky question. I think it depends almost entirely on how certain the down payment need is. If you know for certain that you're going to need $100,000 in two years, six months and three days to buy the home of your dreams and you have no other sources of liquidity, you should probably use GICs to exactly match the date when the funds are needed and earn as much interest as you can over that period.

On the other hand, if you think you might maybe, if the time is right and the house is right, buy a house sometime in the next five or so years, if it's a pretty uncertain objective and you're happy continuing to rent if the timing isn't right, you could choose to take more risk with a down payment if it's a more flexible cash need. I think the same is true if you have lots of liquidity. If you have a $10 million portfolio and you might need $100,000 down payment at some point to buy a house or a cottage or whatever, I would not worry too much about what the market is doing when you need the cash in that case, because the liability of that cash need is so small relative to the overall portfolio.

Personally, when we started thinking maybe we would look to buy a house, I didn't touch my portfolio. It was 100% in equities. We did not make any changes until we put a deposit down.

We found a house, committed to buying it and at that point, we took the amount that we would need for our down payment out of equities. Leading up to that, before we had selected a house and committed to buying it, we were super flexible on the timing. Like we were sort of casually looking for the right house and figured if we found one, we would do something, but we're also super happy in our rental situation and there was really no rush.

Now, I'm not saying that's what everybody should do. Someone might hear that and be sad because they want to buy a house when the stock market's down. I'm just saying that's what we did, but I think it really comes down to how certain the goal is and how fixed the cash need is and how significant it is relative to your overall liquidity.

Ben Wilson: I think the flexibility is key though and the emotional aspect is pretty high when it comes to searching for a home. Some people have very specific needs or wants when it comes to a house and if the perfect house comes up on the market, if you know for certain, I'd be willing to pass up the best house if the market's down by X percentage points. You need to make that distinction up front, but if you think you will do that and then the perfect house comes up and the market's down 20%, you may be able to still afford it, but you could be making a decision that locks in some amount of losses.

You got to take that into account. There's opportunity costs for sitting in GICs or high interest savings account, but there's also comfort in stability when you know for sure we are going to buy, the timeline is uncertain, but if something came up in three months, we would jump on it. I think you got to evaluate how flexible you want to be versus how much you want to optimize your market returns.

Dan Bortolotti: The uncertainty of the goal, the reason I'm thinking about this is this issue has come up with RESPs, for example. Now, the goal there is more certain. If I have a child, I'm pretty confident they're going to go to university at a certain age and I'm pretty confident what it's going to cost, but to your point about what other sources of liquidity you have, if I've scraped and saved for my RESP and I don't have a lot of other cash available and I put that in triple leveraged NASDAQ and I lose 60% of it six months before my kid's going to go to school, they might not be going to school, whereas for most of our clients, they're going to have other sources of cash and so they could probably afford to take a little more equity risk in their RESPs even when the kid's only a couple of years away from school because if they do happen to have a downturn, they can make a smaller withdrawal from the RESP and make up the difference with other cash.

I do think that you have to consider your overall net worth and your overall liquidity before you consider that decision about whether you want to put all of your short-term savings in cash and GICs.

Ben Wilson: The RESP is a really interesting example because you gave the example of one child, but if you have multiple children in a family RESP, that further extends your time horizon. You could cover the first child's expenses from other sources, but leave it in the RESP to grow and take it out in the next child's name.

Dan Bortolotti: Yeah, that's a good point.

Benjamin Felix: Some of it. You got to manage the grants though. They can't all come out.

Ben Wilson: The grants need to be managed for sure, but on the growth portion, you've got more flexibility.

Benjamin Felix: RESPs are definitely another one of those tricky middle time horizon asset allocation questions. All right, we do have one review from Apple Podcasts. Under SEC regulations, we are required to disclose whether a review which may be interpreted as a testimony 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. As reviews are generally anonymous, we are unable to identify if the reviewer is a client or disclose any such conflicts of interest and we would never pay for a review anyway. This reviewer says, best personal finance podcast, absolutely best personal finance podcast, research based, avoids hyperbole, marketing, et cetera. Please keep it up. Thank you. That is from Lumen in the United States.

Dan Bortolotti: Excellent.

Benjamin Felix: That concludes our AMA. Anything else for you guys to add?

Dan Bortolotti: I don't think so.

Ben Wilson: There's lots of good questions, fun conversation.

Benjamin Felix: Well, good to see you guys and thanks everyone for listening.

Dan Bortolotti: See you next time.

Disclaimer:

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, and they mostly get on really well with each other. 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. Occasionally we tell you not to buy crappy investments in the first place, but that’s not the same thing as telling you to sell them.

This communication is distributed for informational purposes only; the information contained herein has been derived from sources believed to be “truthy,” but not necessarily accurate. We really do try, but we can’t make any guarantees. Even if nothing we say is fundamentally wrong, it might not be the whole story.

Furthermore, nothing herein should be construed as investment, tax or legal advice. Even though we call the podcast “your weekly reality check on sensible investing and financial decision making,” you should not rely on us when making actual decisions, only hypothetical ones.

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. It might not apply at all. Honestly, you can probably ignore most of it.

All market indices discussed are unmanaged, do not incur management fees, and cannot be invested in directly. Which is a shame, because it would be awesome if you could.

All investing involves risk of loss: including loss of money, loss of sleep, loss of hair, and loss of reputation. 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. If it were, it would be much easier to be a Leafs fan.

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. No one should be surprised if they have all since recanted. Neither OneDigital nor PWL Capital has any obligation to provide revised statements and/or opinions in the event of changed circumstances.

Is there an error in the transcript? Let us know! Email us at info@rationalreminder.ca.

Be sure to add the episode number for reference.