In this episode, Ben Felix and Dan Bortolotti take on 10 of the biggest myths in personal finance and investing. From the idea that young people should save every possible dollar to benefit from compounding, to assumptions about economic growth, dividends, index funds, valuation ratios, stock picking, bonds, gold, and homeownership, they examine the subtle details that can make conventional wisdom misleading.
Ben and Dan explore why personal finance is often about balance rather than absolute rules, why spending decisions can be just as important as saving decisions, and how investors can confuse familiar stories with useful financial principles. Along the way, they discuss consumption smoothing, marginal utility, total returns, diversification, valuation, risk, inflation, and the trade-offs between renting and owning.
They also announce a new podcast initiative: future episodes featuring PWL clients discussing their experiences and the impact that financial planning has had on their lives.
Key Points From This Episode:
(0:00:00) Ben and Dan return to the podcast and discuss recording from PWL’s Montreal office.
(0:00:34) A new podcast initiative: PWL clients will join future episodes to discuss their experiences with financial planning.
(0:01:44) How greater clarity about their finances can affect clients’ important life decisions.
(0:04:56) Introducing the main topic: 10 of the biggest myths in personal finance.
(0:05:50) Myth #1: You should save as much as possible when you’re young to maximize the benefits of compounding.
(0:08:20) Why the marginal utility of consumption may be highest when income and living standards are comparatively low.
(0:10:52) How health, skills, and experiences can also compound over time.
(0:11:57) Why aggressive saving habits can sometimes lead to an inability to spend accumulated wealth.
(0:13:03) Helping retirees identify what they actually enjoy spending money on.
(0:15:01) Why spending and saving decisions can become emotionally charged and feel irreversible.
(0:16:56) Saving as deferred consumption—and why the answer for most people is some balance between spending now and saving for later.
(0:18:16) The life-cycle model and the idea of smoothing consumption across a lifetime.
(0:19:49) Building a saving habit while also learning to spend thoughtfully.
(0:20:35) Myth #2: Economic growth is good for stock returns.
(0:20:56) Why economic headlines can influence investor psychology and investment decisions.
(0:24:38) Why strong economic growth does not necessarily translate into strong stock returns.
(0:24:38) Myth #3: Dividends explain a large percentage of historical stock market returns.
(0:27:18) Why the source of a company’s return does not make one component inherently more valuable than another.
(0:30:23) Myth #4: Index funds only give investors average returns.
(0:30:23) Why an index fund can outperform most active investors.
(0:32:40) The difference between average performance and the performance of the average investor.
(0:35:57) Myth #5: Future market returns are always low when the Shiller CAPE ratio is above 40.
(0:35:57) What the Shiller cyclically adjusted price-to-earnings ratio measures.
(0:40:51) Why valuation can contain information about expected returns without providing certainty about what markets will do next.
(0:42:50) Myth #6: Warren Buffett proves that investors can beat the stock market by picking stocks.
(0:42:50) Buffett’s extraordinary career, the importance of his early performance, and the difficulty of using exceptional outcomes as a general strategy.
(0:45:43) Myth #7: Bonds and cash are safe investments.
(0:45:43) Why reducing stock exposure does not eliminate investment risk.
(0:49:29) The distinction between short-term volatility and other risks, including inflation and purchasing-power risk.
(0:53:25) Myth #8: Gold is an inflation hedge.
(0:53:25) Why gold’s long-term preservation of purchasing power does not necessarily make it a reliable hedge over intermediate periods.
(0:55:54) Myth #9: Gold is the one true currency.
(0:55:54) The long-running debate over what money is and who should control it.
(1:00:08) Myth #10: Renting a home is throwing money away.
(1:00:08) Why paying rent provides housing while allowing renters to retain capital for other purposes.
(1:07:30) Why simple rules of thumb can sometimes be useful even when they are not financially optimal in every situation.
(1:09:18) Wrapping up the 10 myths in personal finance.
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: Good to be back with you, Ben. It feels like a long time.
Ben Felix: It has been a while, Dan. It is very good to see you. Good to be back recording.
Dan Bortolotti: Yeah. You're in a different location today.
Ben Felix: This is my first time recording from our Montreal office. First time ever.
Dan Bortolotti: There you go. Some fresh space. Let's get into today's topic.
Ben Felix: Real quick, before we jump into the topic, we have a new idea that we're going to be trying in the podcast.
We just want to give listeners a heads up to know it's coming. We're going to have some PWL clients on the podcast to talk about their experience with PWL, stuff like the planning work that we've done for them. It's interesting, and this is probably going to sound hyperbolic, but I don't think it is, how working with PWL has changed their lives.
That's something that we knew, but when we started reaching out to clients to ask if they'd be interested in doing this, a lot of them, they've agreed to do it. A lot of them have come back with points that they want to discuss that were even more interesting than I think we had anticipated, just in terms of the impact that working with us has had literally on the trajectory of their lives. I think it's going to be really neat.
As you can imagine, there's a whole legal and compliance angle that we have to sort out, but we're working on that right now. You can be sure there will be a new disclaimer for those episodes, but we think it's going to be a lot of fun and hopefully interesting for listeners to hear. This is something that has come up in comments in the Rational Reminder community in the past that people would love to hear client stories and client experiences, so we're going to make it happen.
Dan Bortolotti: Yeah, I'm not too surprised, frankly, that people have said that it's had a profound impact on their life. I think, especially if you're coming from a situation, maybe you were working with an advisor or an advisory firm that left a really unpleasant taste in your mouth and really set you back in your financial goals to be able to come to a place that's a better fit and delivers a higher level of service. For sure, it would change your life.
Ben Felix: I think some of the feedback that we're seeing is around clarity in making important life decisions and people realizing that there were things that they could have been doing with their lives that they were not doing because they didn't have clarity on their financial situation. Anyway, we'll see.
Dan Bortolotti: Yeah, it's going to be interesting for sure.
Ben Felix: I do want to mention also real quick that July 2026 was the biggest month ever for Rational Reminder podcast views and downloads. That's audio downloads and YouTube views combined. They hit 385,000, which breaks our previous record. Just kind of neat and wanted to say thanks to everyone for tuning in and making that happen.
Dan Bortolotti: That's exciting. Big number.
Ben Felix: It's a big number. I remember when we first launched the podcast and we got like a few hundred downloads and we're like, wow, that is amazing.
Dan Bortolotti: We've come a long way for sure.
Ben Felix: Yeah, pretty cool. I keep saying real quick, but last thing here, I was on a couple of other podcasts recently. I was on the Iced Coffee Hour podcast.
When this comes out, I think that will have come out the previous Sunday. I was also on the Investi podcast, which is a Montreal based podcast that is usually a French language podcast. They made their first ever exception for me to do an English episode.
They gave me a little bit of grief for that, but that's okay. That was a really fun conversation, so that was neat. That's actually why I'm in Montreal right now.
Iced Coffee Hour is based in Las Vegas, so I actually went there to their studio to record, which was a very cool experience. Investi as well is a in-person studio, so they do all their recordings in person. Makes me want to do our own studio, Dan. I don't know how we'd work the logistics on that one with you and I living in different cities.
Dan Bortolotti: That would be a challenge. It's interesting though that some of these podcasts are actually asking guests to travel across the country, across the continent to do a live recording in an era where certainly it's quite possible as we've demonstrated to do it remotely, but it's a different feel, I think. You have a little bit more control over the audio and video for sure, but I think it's probably quite a different feel.
I'm sure you've found, Ben, being in the studio or sitting across the table from the person interviewing you rather than doing it online.
Ben Felix: For sure. I mean, listen, when we have guests on this podcast, we will chat with them for a bit beforehand, but when I was in Las Vegas for the Iced Coffee Hour podcast, we played a game of pool before recording and just kind of hung out. They said that's their tradition.
They always do a game of pool. I was a lot better than I thought I would be. They asked me if I'd ever played before. I was like, no, I'm terrible. That was pretty good.
Dan Bortolotti: There you go. You never need to use the rake. You can probably reach all the way to the pocket on the opposite end.
Ben Felix: That's true. Yeah. We'll see. Maybe one day there will be a Rational Reminder Studio. Maybe we'll put it right in between Ottawa and Toronto or something. I don't know.
Dan Bortolotti: Yeah. We'll drive to Kingston every week to record it or something.
Ben Felix: All right. Onto our main topic. This is a topic that listeners may have seen me talk about in a YouTube video.
It's a video that I posted a few weeks ago now. It performed quite well. A lot of people watched it.
A lot of people had a lot of things to say about it. I'm excited to talk through the points and get your perspectives, Dan. Tons of comments on the YouTube video.
There's a whole thread in the Rational Reminder community talking about this video. It's kind of set up to be a topic that will generate lots of discussion. The topic is the biggest myths in personal finance.
Dan Bortolotti: There's so many, I think, misunderstandings and let's call it misleading advice. It's mostly there's a grain of truth in all of them, but there's usually this subtle point that's missed. Yeah. I think all of us can benefit from getting off on the right foot and not falling prey to any of these when we start our investing journey.
Ben Felix: I tried to think through like what are the most persistent myths in personal finance that like you said, Dan, that lead people to make financial decisions that we might evaluate as bad if we had more information about the decision that was being made. One example, and this one's probably the most controversial one, at least based on the comments on the video, is you should save as much as possible as early as possible to benefit from compounding. That is like foundational personal finance advice that a lot of people agree on.
I would say that it's at least incomplete and I'll explain why and we're going to debunk nine more myths kind of like that one to hopefully help listeners make better financial decisions. I did talk to James Parkyn, who's one of PWL's co-founders, about myth number one. We had lunch together today and I'll share, he had some interesting insights on this one.
The first myth is that you should save as much as you can when you're young to benefit from compounding. This is, as I said, it's just taken as an absolute truth in personal finance and it sounds reasonable. Like you said, Dan, like a lot of these myths, it does have elements of truth.
A longer time horizon certainly makes compound interest more powerful. To be completely clear, compounding is definitely an important tool for building wealth at long horizons, but the strategy of saving as much as possible as early as possible neglects what I think is an even more important consideration, which is that when you're young, your income is typically at its lowest point throughout your life and will likely steadily rise over time as your career progresses before tapering off as you approach retirement.
That statement turns out to be one of the most controversial pieces of this. Again, judging from the discussion that stemmed from this video, a lot of people said, we don't know that your income is going to rise over time. There's a lot of pessimism and a lot of it seems to be related to AI right now, but there's a lot of pessimism about whether we can expect our incomes to rise over time and whether we're even going to have jobs in the future.
I mean, it's a fairish point, I guess. I think a lot of long-term decisions require a little bit of optimism. Otherwise, you'd behave very differently.
Dan Bortolotti: If you were truly pessimistic about some of these things, you wouldn't save at all. And honestly, I have heard that response from some young people. What's the point of saving? I'm not going to be able to retire anyway. That's a sad thing to hear. You've got kids, Ben, mine are older than yours. And that is not a place where you want to be when you're in your late twenties, early thirties, but it's a real fear. So we can't dismiss it.
Ben Felix: The premise of this myth is that when you're young, your income is low, your standard of living is probably at the lowest that it'll ever be throughout your life. You grow up, you have your parents taking care of you, but then you're at this point where you're a young adult. Maybe your parents are supporting you less and your living standards are just at their lowest compared to your eventual peak earning years and your retirement, at least in a typical economic life cycle of a human.
That stage of life, early on in life, the marginal utility, the amount of additional satisfaction you can generate from each dollar that you spend on improving your standard of living is at its highest. The marginal utility of consumption is at its highest when you're at this stage in life. And so you think about an additional $5,000 spent at age 25 might mean living in a safer area, in a nicer apartment, eating better food, healthier food, maybe more vegetables, maybe organic produce, I don't know, whatever, berries, stuff like that.
It might be getting a better education, driving a more reliable car, forming core memories. This is what I talked to James about at lunch is that he looks back and he was a pretty aggressive saver, but he looks back and a lot of his friends who are now older, getting closer to retirement age, they have all these fond memories of all the traveling they did when they were in their twenties. He doesn't have that.
And he looks back now and he's like, I kind of wish that I had done that, which was a pretty interesting comment for him to make. And that's stuff that does stay with you forever. Those core memories that you look back on, you don't get another chance to do stuff like that because you're only young once.
So then if we take that same $5,000 at age 45, and this is the interesting part, even when you account for potential investment growth in the interim. So even if you had invested that $5,000 at age 25, at age 45, it's going to yield a much smaller increase to your standard of living. If you're saving as much as you possibly can when you're young, when your income and standard of living are comparatively low to later in your life, you're sacrificing more of what matters when you can least afford it.
And this is a line that Nick, the writer that I've been working with at PWL wrote, which I think is very good. This is a great line. He says, "you're effectively robbing from the poor, which is your current lower income self and giving to the rich, which is your higher income future self."
Another way to think about this, I wrote this one. I think it's pretty good. Is that "money is not the only thing that compounds over time."
People worry about if you invest now, think about the compounding, think about the exponential growth and how much more you're going to have later, which is true. However, skills, experiences, and health as some examples also compound over time. And so I think focusing on only wealth accumulation misses the bigger picture of living a good life.
Dan Bortolotti: When you say health compounds over time, I mean, for most people, it deteriorates over time and it's the same point, right? Which is enjoy your money when you are young and healthy versus saving it so you can spend more when you may not be able to be as active with the funds.
Ben Felix: Everyone's health does deteriorate over time, but poor lifestyle decisions when you're young can lead to deteriorating health at a much quicker pace over time. If you eat poorly through your twenties because you want to save money, so you're living on ramen noodles and that gives you cardiac problems or vascular problems or whatever when you're in your forties or fifties, that's a problem that compounds and there's not a whole lot you can do about it 20 years down the road. But if you'd been eating kale instead of ramen, you might not have had the same health outcome.
Dan Bortolotti: It's a good point. I mean, certainly I would never recommend to someone that they make a TFSA contribution instead of eating properly. I don't know, superficially, maybe that seems like a responsible decision, but it certainly isn't if you take the long view.
Ben Felix: I did get lots of criticism for this point because people say, well, you should save as much as you can even if it means making sacrifices. To me, that seems pathological. The other really interesting thing about this that has come up in some discussions that I've had since making this video is that people who have this mentality and don't want to spend money because they want to accumulate wealth, they can end up with a lot of wealth and an inability to spend it because they're so anxious about wanting to live frugally and wanting to save even when they've surpassed any amount of wealth they could ever need, they still can't spend it because they've had this mentality.
Dan Bortolotti: I think that's a chronic problem that wealth advisors see. I mean, obviously, look, we are not seeing a cross-section of the population. We're working with people who are on the well-off side, of course.
This is not a problem that affects everyone, but it is a problem that affects people who save aggressively and invest wisely over time. They end up in the position that they had hoped they would be, and they're not able to enjoy it. I see it all the time.
Ben Felix: Which is fascinating.
Dan Bortolotti: It is, but it's not really that surprising, I think, when you think about it because if you spend your whole life nurturing and developing a specific habit, it's a bit naive to think you're going to be able to just flip a switch at some point and become a spendthrift. It's just no longer in your nature.
I will say that one of the most important jobs I think I do with my clients is to try to get them to think about that a little bit differently once they are in or close to retirement. We do the projections. It's 150% funded retirement.
We tell them, look, you can spend as much as you want realistically, and you're not going to run out of money because the chances of you depleting your portfolio are remote. Now we have to think about what do you truly enjoy spending money on? Because just to tell people spend more money is insulting and unhelpful, but to help them say, and I was working with a client recently who was like this, they have really felt now they've enjoyed some luxurious travel, flying business class, and staying in nicer places and found we love this.
That's how they spend their money. I mean, to bring all of this back full circle is I think you should try to enjoy some of those experiences when you're younger too, because there's nothing more sad, I think, than looking back on your life and regretting not doing things that you wish you had done, especially if you're at the age where you know you're never going to do them now. Certainly I work with people who, they get into their late seventies, let's say, maybe a bit older, and travel is just not a thing they're going to do anymore.
They just, I'm done. I'm not getting on a plane anymore and having my knees broken by the person in front of me. I don't have to tell you this, Ben.
For those people who, if they didn't travel when they were younger and they kept saying, I'm going to put this off until I'm retired, there's a little bit of regret there.
Ben Felix: Yes. I've been thinking a lot about this. I started writing, I haven't had time to put a ton of time into it yet, but I started writing a video that follows from this about why spending decisions are controversial because people have polarizing views on, or the views on this are polarized about whether you should spend or save.
We actually talked to William Bernstein about this in last week's episode, I think, would have come out last week, about this. Well, not about this specifically, just about spending profiles. But I think to your point, Dan, the reason that this is such a lightning rod of a topic is that the decisions are irreversible.
People who have spent their lives saving can't go back and have experiences. People who have spent their money on experiences can't go back and save. You're talking to people at a point in time who have made irreversible decisions and then they look back and it's like, if I'm saying, well, you should have spent more, if someone's saying, well, you should have saved more, you can take that very personally because it's something that you have decided to do that you cannot now undo.
It gets harder and harder to undo over time because of compounding. Anyway, I think it's very, very interesting topic, like the psychology of spending. I think in that video that I'm still conceptualizing, I think I'll go into another thing that you just mentioned, Dan, which is, what should you spend money on?
You've nailed it, Dan. It's one thing to say, well, you should spend more money. But I think people hear that and they imagine that's going to give young people listening, and this may be true, that's going to give young people listening the excuse, the justification to go and blow money on frivolous crap.
That is a real concern. But I think that there's a much higher, more useful level of advice if we can say, here are the things that you can spend money on that will probably improve your life, that you probably won't look back on and regret. And for those things, it might make sense to save a little bit less.
Dan Bortolotti: I mean, at the end of the day, right, saving is just about deferred consumption.
Ben Felix: That's exactly it.
Dan Bortolotti: So, you ask yourself, do I want to spend money now while I'm young, or do I want to save it and have more money to spend when I'm older?
And I think the answer for that most people is both. Some balance of the two of those. But if you fall down too hard on one side or the other, that's where you run into problems.
There's no question you can go the opposite direction. You can spend all your money, make a really high income, save nothing, and find yourself in your 60s with very little in the way of savings. And now what are you going to do?
You're going to work until you drop. But to me, you could probably argue that the person in that situation might be happier than the person who amassed a huge fortune that they will never enjoy. Like so many things in personal finance, it's about finding the right balance.
And the right balance is different for different people. Your decisions just have to be thoughtful. But it's not really helpful for people to be judgmental about other people's choices.
As long as those choices are thoughtful, then I think that's all you can do.
Ben Felix: It's a topic where it's very easy to come across as judgmental when you say you should save. People feel that and they become defensive and that's why it's such a lightning round topic. Anyway, we're going to spend the whole hour just talking about this one.
Dan Bortolotti: We should move on to number two.
Ben Felix: Just to support this idea. It's not just Dan and I spewing our opinions on this topic, although we have also done that.
This concept comes from one of the best supported models in economics, which is called the life-cycle model. And the fundamental premise of the life-cycle model is that people want to maintain a consistent standard of living throughout their lives. And that consistent standard of living is really key to the model.
It suggests that you should aim to roughly even out your standard of living across high and low income years over your life. So that's a concept called consumption smoothing. Because income typically starts low, as we've talked about, when you're young and rises throughout your career, you're saving strategy in the life-cycle model should match that pattern.
Which means that you save what you can early on without sacrificing your quality of life. Or even, this is pretty common with students for example, you go into debt early on, you strategically use leverage and then increase your savings over time as your income grows. Stuff we haven't, well we briefly talked about this.
There's topics like risk management, like what if your human capital is risky? What if your income is not going to go up over time? Yes, there's a whole other thing to unpack there.
Habit formation, man, it's a double-edged sword. Because habit formation is like if you never start saving, you might never save. But if you never start spending, as we talked about, you might never spend.
You said it Dan, you said the word, this topic is all about balance. To be clear, I'm not saying people shouldn't save. I'm saying I think that these decisions need to be more thoughtful than pressuring young people into saving as much as they possibly can.
Dan Bortolotti: The habit is so important. Maybe you set up and you save a certain percentage of your income. And when you're young, maybe that's 50 bucks a month. Is that going to make a huge difference to your retirement portfolio?
Probably not. But if you're always used to saving 5% of your income, and then when you get a raise, you not only increase the dollar amount, but as you start to get a bit more surplus, you increase the percentage as well. And the good habit is there.
But you also have the habit of thoughtfully spending what you earn. If you can do both of those things, then you're headed in the right direction.
Ben Felix: So that's the myth that young people should just put their head down and grind it out and save as much as possible. I think we've said enough about that, but I think it's a myth.
Dan Bortolotti: Agreed.
Ben Felix: Okay. The next one is that economic growth is good for stock returns. This one's fascinating.
The news media love to highlight economic data and investors love to follow it. They seem to really care about it. Things like GDP growth, unemployment levels, retail sales, the ever coming recession, that recession, it's coming.
Dan Bortolotti: It's just around the corner.
Ben Felix: Any day now. And I think economic news really do tend to affect the psychology of investors where they really do get worried about this stuff. I can't tell you how many times I've had people ask whether they should do something, get out of the market, get into the market, delay investing the cash they have or whatever due to some economic headline or some economic expectation, like the war or the recession or whatever.
The other side of this is that investors will look at a sector like AI today, it's been pretty turbulent, or a country like China 15 years ago is another really interesting example. They'll look at those things and just imagine how much economic growth there is going to be and they'll infer from that expectation, that economic growth expectation, that high stock returns are going to follow and therefore they want to invest in that thing. Now, I don't know what the future of AI investment returns are going to be, but investing in China 15 years ago, despite its incredible economic growth, has not gone very well for investors.
We've talked about this in past episodes. The problem is that the stock market is not the economy. The stock market is pricing forward looking expectations, which include economic expectations, but stock prices represent expected future cash flows generated by real businesses.
By the time you're reading about economic news or economic headlines, hearing about the growth potential of a market or an industry, it is highly likely that those growth expectations are already reflected in stock prices. Historically, if you look at the data on this, it's been true at both the industry level and the country level. You can have massive industry growth without incredibly high stock returns.
You can have shrinking industries, like railways are a good example, where the industry has gotten smaller, but the stock returns have been very, very good. The same thing at the country level, and there's good data on this too, where the countries with the highest economic growth tend to counterintuitively produce lower average stock returns. It's not a statistically significant finding, but we can say pretty confidently that there's not a relationship.
Not necessarily that there's an inverse relationship, but that there's not really a relationship.
Dan Bortolotti: I mean, there's a lag, let's put it that way, between what happens in the economy and what happens in the stock market. I've made this point with people before when they talk about good companies versus bad companies and why I only invest in good companies. It's like, well, what makes a company good?
Obviously, we're talking about earnings, profitability, and things like this. The point is everybody knows these things already, and so it stands to reason in an efficient market, people are going to be willing to pay more for the quote unquote "good companies," and they don't want to buy the supposed "bad companies." When the results come out, turns out if the bad company was bad, but not as bad as people thought, or the good company was good, but not as good as people thought, those stocks are going to behave in the opposite way most people have expected.
Your knowledge is not necessarily any insight here. Whatever you think about the relationship between the economy and the stock market, the market has already thought about it much more deeply than you have and has much more information and has already absorbed it, so it's time just for a bit of humility about it.
Ben Felix: It's pretty hard to compete with the collective knowledge of the market, even if you're really, really smart. It's hard to be as smart as everybody combined together mashed into the price of a stock.
Dan Bortolotti: I think, too, the idea of the coming recession, for example, is humans by nature, I think, are very often pessimistic. I think the stock market often reacts on fear that turns out, again, not to be totally unfounded, but perhaps not as bad as people thought, and if that's the case, the result is usually good stock returns, not poor ones.
Ben Felix: So interesting. Just another thing that causes people to behave badly with their investments. Okay, the next myth, I find this one so interesting because it's true, but it doesn't mean what people think.
Dividends explain 40% or whatever, some large percentage of the stock market's historical returns. This one's often used, and I've seen this many times in my own content where I talk about the irrelevance of dividends, this argument's often used by dividend investors to explain why focusing on dividends is so important. Its fundamental premise gets causation backwards, and that's the main issue here because it is true that dividends make up a large portion of returns, but whether they explain them, I think, is the core of what I'm calling a myth here.
When a company pays a dividend, its returns are not increasing. They're changing in character from capital to income. The amount of the dividend income that you receive reduces the capital value of the stock you own roughly one for one.
It's not actually going to happen mechanically on the dividend date, but the value of the company is decreasing by the amount of the dividend. That's tautologically true. So you end up with less capital and a dividend payment to make up the difference, but the only thing that's changed is the characteristics of what you own, but not your return.
What actually matters is the underlying fundamental characteristics of the companies, not whether they pay you a dividend. Now the fact that companies pay dividends splits total market returns into a combination of capital and income, but it's not correct to say, and this is the main issue here, it's not correct to say that dividends deliver or explain stock market returns. At best, they describe them.
I think that word choice is very important. An interesting example is if we look at a dividend focused ETF and a buyback focused ETF, both of them have similarish factor exposures, which is like the underlying company characteristics basically. Companies that pay dividends and companies that buy back stock are both returning capital to shareholders.
Those are two different ways to return capital to shareholders. It makes sense that they would load on value profitability and investment factors, which basically just ways to describe the broad characteristics of those groups of companies. So it's like companies with lower prices, more robust profitability, and more conservative investment than the stock market average.
Now despite those fundamental similarities, this could just be specific to this time period that I'm looking at, but it's still interesting. The companies focused on buybacks have a lower dividend yield and they have outperformed the dividend payers. So if dividends were like the thing that was responsible for higher returns, we would expect the dividend portfolio to outperform, but in this case, it was the buyback, which has a much lower dividend yield, that actually outperformed.
Dan Bortolotti: Especially after tax.
Ben Felix: Oh, yeah. We didn't even talk about taxes.
Dan Bortolotti: This is a funny one because I like to turn it on its head and you say, well, if dividends explain 40% of the stock market's historical returns, so we should focus on dividends. I'm like, why aren't we focusing on the other 60%? That must mean the price appreciation explains 60% of stock appreciation, so we should favor that.
I mean, it's a strange way to frame the argument. You're right. I mean, we could talk forever about the dividend behavior that it influences, but it's just a different way of describing a return.
Different companies, because of their nature, their growth opportunities, their maturity, are going to deliver their returns in different ways. At the end of the day, if you ignore tax, a dollar is a dollar, and if you don't ignore tax, a dollar of capital, a gain, is more tax efficient than a dollar in dividends. I mean, look, you buy a diversified portfolio and you get both.
Buy an index fund that holds the total market, you get all the dividend payers, and you get all the ones that don't pay dividends, and it's the best of both worlds. You don't have to be ideological about one or the other.
Ben Felix: I agree with that. You've heard that myth, too, though, right? It's not just me?
Dan Bortolotti: Oh, no, all the time. Yeah, and people make graphs, like this is the stock market without dividends. It's just totally misleading because, again, you could do it the opposite way, do a graph that shows returns based only on dividends and ignore price appreciation, and it's worse.
Ben Felix: Yeah, that's funny.
Dan Bortolotti: It's just a strange way of framing. It seems to me you've decided that you like the idea of a steady stream of income, and now you're looking for ways to rationalize it.
Ben Felix: Right. That makes sense.
Dan Bortolotti: Yes, it is true that if you take a dividend and light it on fire, your returns will be lower than the stock was before, but if those dividends were reinvested by the company, we don't know what the performance would be like.
Ben Felix: Yeah, that's one of the other ways that I've tried to describe this to people is that if we compare the total returns of an index to the total returns of an index minus spending 2% a year from the portfolio, the one that's spending money is going to look worse, but that's because you spent the money.
Dan Bortolotti: It's interesting, too, philosophically, when a lot of people will say that they like dividends because it keeps companies honest, which there's probably some truth to that, I think, but then the idea is that when the dividends are paid out, then they set up drips and reinvest them. It's like, if you didn't trust the company to spend the capital responsibly, and you wanted it to be paid out to the shareholder, and then you immediately pay tax and then give it back to them, doesn't sound like the smartest strategy to me. Not to say that dividend reinvesting is wrong, just that it would have been better had the dividend not been paid, taxed and reinvested, if it was just simply reinvested at the company level, all other things being equal.
Ben Felix: Such a funny topic. Next myth is that index funds only give you average returns. This, surprisingly, is still a myth.
I've been talking about this stuff for 13 years. You've been talking about it for longer, Dan, but this one still keeps going, though. I think this is typically the setup for telling you that some other investment strategy is going to give you above average returns by being different from the index.
I think for two reasons, index funds deliver returns that are much higher than the average fund that tries to beat the index. One reason is the skewed distribution of individual stock returns. We know empirically that most stocks perform poorly, while a few perform incredibly well.
You're far more likely to pick a losing stock than a winning one, and missing the big winners makes it very difficult to match the return of the overall market, let alone beat it. That's one issue that an actively managed fund is going to have in beating the index. We know, again, empirically, we know – and this is pretty crazy – before fees, most, I guess a bit of a narrow majority before fees, but still a majority of actively managed funds underperform the market.
It's for this reason. It's because of the skewness of individual stock returns. Then the other issue that exacerbates it is fees.
The average index fund fee is a fraction of the average actively managed fund fee, which shifts the whole distribution of expected fund returns in favor of index funds. We look at the data, it's exactly what we see. The vast majority of actively managed funds underperform indexes and index funds by a wide margin.
Using the SPIVA report, the asset-weighted average actively managed U.S. equity mutual fund in the U.S. returned an annualized 9.41% for the 20 years ending December 2025, trailing a U.S. equity index ETF by well over 1 percentage point annualized, which is a lot over time. The crazy thing, and this is pretty interesting, I think, is that the index fund would easily be in the top quartile of actively managed funds. I'm going to say that no, index funds don't just give you average returns.
They give you top quartile of returns and they do it without taking on the risk of future underperformance. I love this stat, Dan. Do you know what percentage of top quartile actively managed funds remain top quartile five years later? Zero.
Dan Bortolotti: I think I can guess, yeah.
Ben Felix: None of them. To me, that's crazy. That's, again, SPIVA data. I've seen other research that looks at three-year selection periods of funds and finds that the portfolio built out of top performing funds over the past three years tends to go on to underperform pretty significantly.
Losing funds actually tend to do better. Anyway, just the previous winners don't tend to go on to keep winning. Based on some research, they might even lose.
You take the index fund, they keep on trucking along, delivering the market's return, which, as we've mentioned, is way above the average actively managed fund. This came up on the Investi podcast that I did recently. That doesn't mean there won't be outlier active managers, even over long periods of time.
The way that I explained it to those guys, because they asked about this, they're like, well, there's still fund managers producing alpha, so there must be alpha out there. I was like, even if, and I'm not saying this is the case. When I said this, we all laughed about it.
Even if active managers were just randomly picking stocks and had no strategy, then we laughed with that. It seems like in some cases, that's actually what's happening, but it's not. Active managers are intelligent people.
They're doing their best to beat the market, but if they were just randomly picking stocks, there would be a right tail. There would be outliers that even over long periods of time, get lucky in the case of random selection and outperform the index, even at a long horizon. But that doesn't mean that you can rely on them to continue beating the market in the future, which is the big challenge of picking an active manager.
There's other issues there too. The luck issue is one. The other issue is that there's an efficient market for manager skill, where if there is a truly skilled manager, they will attract capital up to the point where they can no longer beat the market.
It's a tough one, but all that to say, index funds, give you much more than average returns.
Dan Bortolotti: Certainly over the long term. I think some part of this is just maybe a misunderstanding about the term average, because a cap weighted index fund gives you essentially the market average, weighted average of all stocks in the market. That much is true, but to interpret that in a way that says, if you invest in index funds compared to other investors, your returns will be average.
It's just transparently not true. Another part of it comes down to the fact that index funds are never superstars in a given year. There's never going to be a time where an index fund is the number one performer in a lineup.
It might be top quartile, in fact, it frequently is top quartile, but it's never going to be in the top 1 or 2%. And so that feels average to people, I guess, or mediocre. But if you are in the top quartile, but you never come first over the long term, you're going to be pretty close to coming first.
I mean, if you take a group of a hundred random investors and one of them just buys the market for 40 years, it's a pretty high probability that that person is going to be maybe not number one, but certainly not average in that group. Nowhere close to it. It's all about time horizon, I think, in this case.
Ben Felix: We do see that. The distribution of active fund returns gets worse and worse and worse the longer you go out in the horizon.
Dan Bortolotti: That's right.
Ben Felix: The next one that is coming up quite a bit right now, although it has been for a while, because the CAPE ratio has been high in the US market for a while, the myth is that future market returns are always low when the Shiller cyclically adjusted price earnings ratio is above 40. That's dot-com bubble level. CAPE, cyclically adjusted price earnings ratio for the US market.
For anyone that's not aware, the Shiller PE, the Shiller cyclically adjusted price earnings ratio, is a measure of stock market prices scaled by trailing 10 year smoothed real earnings. A way of measuring how expensive stocks are relative to their fundamentals. It's anchored in historical earnings, which tend to be a pretty good predictor of future earnings.
When the number is high, the CAPE ratio is high, you're paying more for expected future earnings and your expected returns are mathematically lower. There's some truth to the myth, which, as you said earlier, Dan, there's a bit of truth to all these things. I'll explain what the truth is, but I think the real myth is the level of conviction that's often ascribed to the data and how the information is used.
Kind of like the last myth we talked about, this is coming up a lot right now. It's used to sell some other investment product or to discredit index funds, more generally. You need to be active right now because of market valuations.
You need to be in private assets right now because of market valuations, stuff like that. If you only look at the US stock market, so we only look at historical data for the US stock market, there has been a pretty reliable relationship with very few data points, but still a pretty reliable relationship. I mean, but still, that's a big but still.
We don't have much data of the US stock market. Historically, when US stock market valuations have been as high as they are now, which has really only happened around the dot-com era, we have tended to see pretty low future returns. That's really following the dot-com bubble, we had the lost decade of US stock market returns.
If you look at all the starting points around the dot-com bubble where the CAPE ratio was high, the future returns were all low, but that was one period in history. If you look more broadly, there's still been a bit of a relationship. Periods where CAPE has been high, yes, returns do tend to be lower.
It seems scary. I don't think there's enough US historical data to be sure that high CAPE ratios mean there will be low future returns. The data are just too noisy.
The future is too uncertain. We don't know what's going to happen. It's possible that future earnings will be really high and that markets will never crash.
Earnings will catch up to valuations. It's possible the CAPE ratio gets even higher than it has been in US history. US history is not world history.
The small sample problem is a tough one because we can't create more historical data to test. One thing that I've done is look at countries outside of the US. It's not perfect because cross-country CAPE ratios aren't necessarily comparable to each other, but I think it's still an interesting exercise.
I looked at 10 developed markets from 1982 through the end of 2024 and I sorted the 10-year future stock returns on their starting CAPE ratio. Now the relationship, we'll hopefully put a graphic up in the YouTube video here. The relationship is still there.
Having higher starting valuations does lead to lower realized returns on average, but there can be periods where future returns are still high when the starting CAPE ratio is around 40, which is that level where everyone starts freaking out a little bit. Market timing is really, really hard. Canada has one period, I think, where the CAPE ratio starts at 40 and then goes on to have really strong returns because the CAPE ratio got higher.
Eventually, there was a correction, but just because the CAPE is high doesn't mean that it's certain we'll have low future returns. Another problem with operationalizing these data, with taking, okay, the CAPE is high, therefore I should do something, is highlighted in a 2017 paper in the Journal of Investment Management. It's from the folks at AQR.
The author showed that while there has clearly been a relationship between stock market valuations and future stock returns, a valuation-based market timing signal based only on the historical data available at the time, meaning that as in real life, the timing strategy does not know what future market valuations will be, which of course we don't. That strategy produces lackluster results. The authors explained that the reason is that market valuations can drift up over time.
What was expensive in the past becomes normal or at least less expensive in the future, leading the market timing strategy based on historical valuations to be under-invested in stocks during periods of strong performance and rising valuations. I do think it makes sense to be aware of market valuations. To be clear, PWL Capital does use them when we develop our expected returns, which we do twice a year, and we use those for financial planning process with clients, but we do not use the CAPE ratio as a market timing tool or as a reason to invest in private equity or private credit or actively managed funds.
Dan Bortolotti: I've always liked the way PWL has used that in expected returns because as you said, we don't want to use valuations as an excuse to be market timers. So when people say, U.S. stocks are really expensive right now, we say, correct. You are correct.
Does that mean we should underweight them going forward? We can't do that because it implies that that is somehow going to lead to a better outcome when we know that trying to time the market in such a way is more likely to backfire than anything else. So what do we do is we, in our plans, say, no, we don't expect stock returns in the future will be as high as they have been in the recent past because we're gumming in at higher valuations.
So it's not that you're ignoring the problem or pretending it doesn't exist. You're just acknowledging that there isn't a heck of a lot we can do about it outside of A, diversifying across various regions because the CAPE ratio is not that high in other countries. So we have Canadian and international stocks in the portfolio as well and we rebalance those appropriately.
And also to just acknowledge that yes, returns might be lower in the future and we should probably prepare for that. Acknowledging that we will never know what returns will be in the future. So I just think it's a sane, balanced way to deal with the high price of stocks.
Ben Felix: And there have been recent periods where if we had reduced our exposure to US stocks because valuations were high, we would not have looked very smart in hindsight.
Dan Bortolotti: We could have been having this conversation five years ago. In fact, people were having this conversation five years ago.
Ben Felix: That's right.
Dan Bortolotti: That markets are overvalued. The next five years are going to be muted returns. It might happen.
We just don't know by how much and we don't know by when. So the only thing you can do is stay invested and stay disciplined.
Ben Felix: All right. Next myth is that Warren Buffett proves that you can beat the stock market by picking stocks. We've talked about this before.
Buffett did beat the market through the entirety of his career as a professional investor, largely due to incredible early performance. He did not beat the market or a Vanguard US stock market ETF for more than 20 years leading up to his retirement as the CEO of Berkshire Hathaway in January 2026. Now, while that is true and that's still surprising to people, which is interesting, Buffett and his highly quotable investing wisdom, which he had a lot of, I love Buffett's thinking on investing.
They're often used to justify picking stocks as a viable investment strategy for casual retail investors and for active fund managers. But Buffett himself was a huge advocate of investing in low cost index funds due to the challenges with beating the stock market over long periods of time, as we talked about earlier for actively managed funds. In his 2016 letter to shareholders, he acknowledges that there will be some successful active managers.
He says there are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches. But he says that in his lifetime, he's identified early on only 10 or so professionals that he expected would accomplish that feat. I think he does say that there might be a few thousand out there in the world that he hasn't met yet, but still a pretty small number.
He concludes that section of his 2016 letter with the bottom line, "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low cost index funds." People quote Buffett on, you should be concentrated.
You got to pick good companies at great prices and all that kind of stuff. They'll quote those things to justify picking stocks, but they won't quote Buffett telling you to just sit down and invest in index funds.
Dan Bortolotti: Which he's been saying for what, 30 years?
Ben Felix: A long time.
Dan Bortolotti: Yeah. I think the first quote from his shareholder letter where he basically says, the average person would be better off just buying a Vanguard fund was like in the 90s. It's very selective about what people listen to. I have never heard Buffett say, you should be a stock picker like me. He's too humble to say it, but what he's thinking is, you're not me.
Ben Felix: Yeah.
Dan Bortolotti: I don't think your performance is going to be like mine. It's also, to your point, the outperformance came, and this is not to say anything bad about Warren Buffett. I think we both agree. The man's a genius.
Ben Felix: 100%.
Dan Bortolotti: But so much, the fact that he was a genius allowed him to outperform early on in his career when markets were perhaps a little bit less efficient and research tools and the tools available to other people in the market were not as great as they are today.
I think the market has only gotten more efficient over time, and even he would admit it's not so easy anymore. There's no easy profits out there, perhaps like there once were if you were in his position.
Ben Felix: That's another one. These are all things that always come up. It's fascinating.
Next one is an interesting one too. I'll be curious in your thoughts on this one, Dan. The myth is that bonds and cash are safe investments.
When investors get nervous about the stock market, they'll often consider moving into bonds or cash to reduce risk. I think this also happens around retirement where retirees will hold large cash allocations or a ton of bonds to, in their perception, reduce risk. Same thing with cash wedges and different equity glide paths that have heavy fixed income allocations, all that kind of stuff that's designed to reduce risk.
I think that the safety of bonds and cash are, broadly speaking, misunderstood. They certainly tend to be less volatile than stocks. This means they don't fluctuate in value as much as stocks when you log into your investment account every day.
Volatility is a measure of risk. It's an important measure of risk. Volatility sucks for a lot of reasons, but what really matters to long-term investors is being able to put food on the table throughout retirement or go on a cruise or whatever.
There's the 2025 paper, Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice, which is Scott Cederburg and co-authors' paper. Scott's been on the podcast a few times to talk about it. They use block bootstrap, a method for simulating hypothetical data from historical data to simulate a million investor life cycles for an American couple who save and invest through their lives and then follow the 4% rule to spend from their portfolio in retirement.
Their historical data source for the simulations includes 39 developed countries with data as far back as 1890 through 2023. It's like a huge data project. It's super interesting.
They've got 2,600 years of country month return data. They establish, and this is the main headline finding, an optimal 100% equity portfolio allocated to approximately 33% domestic stocks and 67% international stocks. They came to that conclusion by testing basically all possible allocations to domestic stocks, international stocks, bonds, and bills.
They also tested a target date fund setup. They tested a 60-40 portfolio. It's all these different portfolio designs.
They evaluated them on wealth at retirement, retirement income, conservation of savings through retirement, and bequest at death, like how much you leave to your heirs at death. I think illustrating the risk of bonds and cash for retirees, they show that bills, which are basically cash or basically like a high interest savings account or something like that, functionally at least, the balance 60% domestic stock and 40% bond portfolios and the target date fund all produce less wealth at retirement, a lower income replacement rate, a higher probability of ruin based on 4% rule of spending, and less wealth at death than the all equity portfolio. There's other research on this too that I didn't include in the notes here, but similar findings. The main idea is that bonds and cash feel safe because their value is relatively stable, but they open up a whole other type of risk that's likely more damaging than volatility for long-term investors, which is really the erosion of purchasing power over time.
Now, real quick, to be fair, in Scott Cederburg's paper, they do find in the optimal portfolio where they optimize it every year of the life-cycle, they do find, assuming fixed spending, that there is an optimal allocation to cash at retirement that declines over the first, I think, six or seven years. It's not like we were saying cash never makes sense. Now, should you plan for fixed spending that never changes in regard to some market conditions?
That's a whole other question. They do test that, that cash allocation goes away if you allow for variable spending. Anyway, main point is that cash and bonds feel relatively safe because they're not so volatile relative to stocks, but they introduce a whole other type of risk that I think can be more damaging in the long run.
Dan Bortolotti: Maybe.
Ben Felix: Yeah, fair, fair.
Dan Bortolotti: Here's my take on this one because this research, which is amazing, by the way, and it's a fascinating finding.
I mean, I don't have any issue with the research or what it found, but what I think it potentially ignores or it minimizes the importance of volatility in investor behavior. You're never going to sit in front of a client and say, you should be 40% bonds because your return is going to be higher because it's transparently not true most of the time. I'll tell you an anecdote.
I had a client who's quite conservative call me and say, hey, I watched this video on the Scott Cederburg and say, what do you think about 100% equity portfolio? Would that be appropriate for me? I said, are you comfortable losing 50% of your investments in say six months?
That ended the conversation instantly. No, and I'm not joking because he said, of course not. I said, well, if you're going to be 100% equities, you need to be prepared for that.
That's not ancient history. That happened in 2008. I just think the vast majority of people are just simply ill-equipped to stick to their investment plan in the middle of a downturn like that.
If you make a big move in your asset allocation, which is typically sell low, that is potentially permanently damaging to your portfolio. I think we just have to accept that nobody is adding fixed income and cash to a portfolio because they're trying to improve returns. They're trying to make the ride a little smoother.
As long as they can get where they want to go, as long as they can meet all of their financial goals with a bit of a buffer, with a more conservative portfolio and sleep better, there's nothing wrong with that decision.
Ben Felix: No, I agree with all of that, 100%. Reminds me of John Cochrane in one of his papers has a made up dialogue where someone has been told to invest in an inflation indexed perpetuity, which is the risk-free asset for a long-term investor. You're going to get guaranteed inflation indexed income for the rest of your life, forever.
The person who has decided to invest in this asset, because it makes sense for them, is trying to explain to their wife why their portfolio is down 50%. It's not going very well. It's kind of the joke.
Even though it's a very safe investment, but it's mark-to-market value is very volatile, which makes it very hard to own and not seem risk-free at all for someone who doesn't deeply understand the mechanics of the asset that they own. To be clear, stocks are not an inflation index perpetuity. It's just an interesting example.
Dan Bortolotti: It certainly gives you the highest likelihood of a bigger number some period down the road. If your only goal was to maximize estate value, and I appreciate the research went beyond that. It also said about meeting all of your spending goals during retirement.
I think one of most people's goals as well is not to live in terror of stock market declines.
Ben Felix: Yeah, to sleep at night.
Dan Bortolotti: If you don't need to take that much risk, if you can achieve all of your financial goals with a more conservative portfolio, you have to ask yourself why you would want to increase the risk.
If you want to do it, fine, but I would think that most people are simply not temperamentally equipped to do that.
Ben Felix: We see that. If you look at all PWL clients as one portfolio, I think we're about 70% equity, 30% fixed income. Most people are not in 100% equity portfolios for the reasons that you described, Dan, which is interesting because we'll have conversations about these data. For all of the reasons that you just described, people will still not go into100% equity portfolios, which is the right thing for them to do.
Dan Bortolotti: I agree.
Ben Felix: All right, next myth. Gold is an inflation hedge. I think the idea that gold is an inflation hedge comes from two main sources. One is the fact that gold has actually roughly held its value in real terms over extremely long periods of time. The other is the fact that for a brief period of time in history, some major currencies, including the US dollar, were backed by gold and attached to the price of gold.
Some people just can't let go of the idea that gold is money and that money should be gold. We'll talk about each one separately. It is true, although there are some people with what seems to be very deep knowledge of what I'm about to say who were disagreeing with it in the comments on one of my videos, which is interesting on itself.
Anyway, we'll take it for what it is. Roman centurions were paid about the same in gold 2,000 years ago as US army captains are paid if their wages were converted to gold today. That's pretty cool, but the issue is most people don't have 2,000 years to wait and gold has been highly volatile in the intermediate term, far more volatile than inflation, making it very difficult to use as a hedge for anyone with a normal lifespan.
Who knows what the next 2,000 years are going to look like? We say that. It's like, yeah, 2,000 years, gold held its value.
Is it going to hold its value for the next 2,000 years? How the heck do we answer that question?
Dan Bortolotti: Now that the correlation has been exposed, it's going to break down.
Ben Felix: 2,000 years, that's a long time, Dan. We're probably going to be colonizing space and there's lots of gold up there. I don't know.
Dan Bortolotti: Yeah, we might not be around.
Ben Felix: We won't be. I don't think.
Dan Bortolotti: Well, I don't mean us personally. I just mean our species, but is that actually true? Because I've heard this story too.
I'm talking about the Roman centurions being paid because I've heard people say too that a nice man's suit has been roughly the same in gold for centuries. I'm like, I don't know where the data comes from. If it's true, it's super interesting.
I love that as an idea, but I'm a little bit skeptical about whether it's true or not.
Ben Felix: I think it's very approximately true, but the person in the YouTube comments, I don't remember exactly what they said, but they were talking about the number of troops that a centurion commanded compared to an army captain. They're like, well, no, it's not equivalent because of this, this, and this. I was like, oh man, this person clearly knows, but I don't know.
It's a rough approximation, but it's in one of Cam Harvey's papers. I don't know. It's at the very least an interesting example, even if it's only approximately true.
At least based on that one YouTube comment, which like how credible is that? They made a pretty compelling argument that there were enough differences between the two for it not to be a great comparison.
Dan Bortolotti: I want it to be true.
Ben Felix: It's a good story. That's one. Gold has actually maintained purchasing power over long periods of time, but it's so volatile in the intermediate term that it's not a good inflation hedge.
The next one is super interesting. I find this topic fascinating. Gold as the one true currency, I think is very ideological.
There's been an ontological debate about what money is going back thousands of years. It really comes down to who should control money. This is such an interesting topic for that reason.
If money is a thing that rises out of the free market as the most convenient intermediate good in trade. This assumes that everyone barters. An economy starts because everyone's bartering.
Everyone's trading stuff with each other. Over time, because it's a hassle to barter because you don't always have what other people need, the market determines some intermediate good that everyone agrees is a really good medium of exchange. That thing is intrinsically valuable for that reason.
It should be left to the free market to control its supply and to assign its value. That's the commodity theory of money, that the market figures out what money is and assigns its value and whatever. Then on the other hand, and this is the other theory of money, if money is an abstract idea based on mutual trust that ultimately relies on an authority to mediate it, the state, the final authority, the ultimate authority should almost definitionally play an important role in how money is created and distributed.
That's the credit or state theory of money. Those are two slightly different theories, but similar principle. If you want to believe, and this is the part that I find fascinating, if you want to believe that the government should have no role in money, then viewing gold as the one true measure of value makes sense.
Again, that's very ideological. We are not going to settle this ontological debate, which goes back to at least Aristotle's writing thousands of years ago and was also hotly debated in British Parliament in the 1800s during the bullionist controversy and the Bank Charter Act debates. At the very least, we can say that gold being the true measure of purchasing power and therefore a perfect inflation hedge comes from one theory of money and one relatively short period in history where major currencies were using gold to anchor the value of their currencies.
The international gold standard operated for only about four decades before World War I and the US dollar's last formal link to gold ended when Nixon suspended gold convertibility in 1971. Today, gold is still held as a reserve asset by central banks, but it plays no role in how monetary policy is conducted or in how mainstream economic theory explains the value of money. All that to say that empirically, based on the volatility of gold and theoretically, there's really little basis to believe that gold is an inflation hedge.
Dan Bortolotti: It's a store of value and I think it can reasonably be expected to stay one for the foreseeable future, but this has been brought up to me very directly by clients who say things like, if we think inflation will be higher in the future, should we add gold to the portfolio? I think there's tons of evidence for this that yes, there's a big difference between an "inflation hedge," quote unquote, over centuries and something that will actually buffer you in the medium term in a portfolio. If inflation spikes, gold will go up.
It's inversely correlated to inflation. That's just not true. You can just look back to the 80s and 90s to see that during periods of very high inflation, at least in Canada, gold was a terrible investment.
There are other times where gold has done extremely well during periods of very low inflation. It's just not behaving in this way that maybe makes intuitive sense and it's pretty easy to demonstrate that.
Ben Felix: I think that's true. One of the challenges is in the view that gold is the true money, people might say that, well, inflation is measuring the wrong thing because gold is the one thing. That's where it starts to get almost conspiratorial. Well, not almost, that's conspiratorial.
Dan Bortolotti: Probably not going to settle that one today.
Ben Felix: Yeah, yeah, yeah. We did our best. We'll leave it there.
Next one, we'll just do this quick because we've beaten it to death so many times. Renting a home is throwing money away. Listeners really know our thoughts on this.
Dan, you and I have done some of my favorite episodes on this topic where I don't know what else can be said really, but it also can't be said enough. When you rent a place to live, you're paying rent in exchange for a roof over your head and keeping the capital you would have alternatively used to buy a home invested in other assets like the stock market, for example. When you buy a place to live, you're investing your capital into a real estate asset and saddling yourself with three costs that people often fail to fully account for, which are property taxes, maintenance costs and depreciation and the cost of capital.
When you add it all up, both logically and empirically, we've done this work using historical data, renting and owning are approximately financially equivalent. In other words, if renters are throwing money away, owners are also throwing money away. With equivalence, financial equivalence as a baseline assumption, there are lots of other things to consider in deciding whether renting or owning make sense for any individual person.
Again, that's stuff that we've talked about ad nauseum in past episodes.
Dan Bortolotti: There's only so much more we can say about it. The one takeaway I had from our long discussions, I think I will always remember, is this idea that if you compare owning a home to renting and investing the difference, renting can look very good. But if you compare buying a home to renting and spending the difference, then homeowners frequently look better.
The fact is, most people, given that choice, are not likely to save and invest wisely with their surplus. If you can do that, and many people can, then do it. But if you want the discipline of paying off a mortgage, which you will almost certainly never miss a payment, then you get rewarded for that.
Ben Felix: Yep. It takes away, you're right. The premise of the financial equivalence is not just that you actually save, it's also that you don't invest in high fee actively managed mutual funds.
You don't invest in crypto. You don't invest in options. You don't invest in prediction markets.
Dan Bortolotti: If you did those things, then renting would definitely come out in front. The idea is they're both good choices if your other choices are good. In other words, they are not the determining factor.
The choice to rent or buy is not a choice between success and failure financially. There's a whole lot of other corollaries that have to be considered there as well.
Ben Felix: Yeah, that's right. The last one to bring us home here, Dan, is this is a fascinating one too. Debt is always a bad thing to have.
I think a lot of people, both individuals and some high profile professionals, are highly averse to debt of any kind for any reason. Now, there's no doubt a psychological benefit to being debt free. I think it's like the other side of income investing.
I was thinking about that when I wrote this. It's like when you buy dividend stocks, you feel good because you have cash flow coming in. When you pay off debt, you feel good because you don't have cash flow going out.
I'm not saying that's a mistake. There's something to be said for that. Not having to make payments is psychologically freeing in the same way that having cash flow from an investment is psychologically freeing.
The other thing here is that paying off consumer debt, like credit cards and a line of credit that you use to take a big vacation that you couldn't afford at the time, is almost certainly good advice. Not all debt is created equal. In theory and empirically, you can make a pretty good argument that people with high and stable future human capital and low financial assets today should – and to be clear, I'm not saying people should actually do this.
This is theoretical for now. We'll talk about it more in a minute. The theory says people should borrow to invest because their human capital is bond-like and their ideal lifetime equity allocation is almost certainly much larger than their available assets.
There is a 2013 paper in the Journal of Portfolio Management, Diversification Across Time, that argues that this is what people should do. In that paper, they explain that a leveraged life-cycle strategy, meaning a strategy that starts with a leveraged stock allocation and gradually decreases leverage to ultimately become unleveraged near retirement produces better retirement outcomes. They link their findings to foundational research from Paul Samuelson and Robert Merton, which recommends investing a constant fraction of wealth in stocks throughout your life based on your risk aversion.
The argument here is basically that if you have a few hundred thousand dollars to invest today, but your expected lifetime wealth is in the millions of dollars, you should probably invest to get as close as possible to having your lifetime intended equity allocation to stocks as soon as possible. Whatever. It's theoretical.
I think the most interesting part of the paper is that the authors claim that by taking that approach, you're actually taking less risk by diversifying across time. Instead of having your maximum equity allocation near retirement, you're getting it sooner in your investing life-cycle. They do a bunch of modeling in the paper.
I hope we can have one of the co-authors on at some point to talk about their work. They argue that people have too much invested in the stock market later in their life and not enough early on. They say that an initially leveraged portfolio can produce the same mean wealth accumulation with a 21% smaller standard deviation than an unlevered approach.
Leverage needs to be used judiciously. I'm super sensitive about saying people should use leverage because it's a very risky thing to use. I think it's just an interesting point that yes, paying off debt is good, but leverage can have a place, at least in theory, in the life-cycle.
The other place that I think this myth shows up is in home ownership, which we just touched on. Owning a home outright is the lowest risk way of paying for housing. If you can pay for a house in cash, have no mortgage, there's not a whole lot somebody can do to make you leave that house.
You own it, it's yours. You have to pay your property taxes, maintain the house. The bank's not going to come take it away.
What I think people don't recognize is that it's also the most expensive way to own a home. If we do a side-by-side comparison of an owner with no mortgage and a renter, the renter will almost always come out ahead. It's a lot closer when the owner has mortgage.
Then the reason is pretty straightforward is that the cost of borrowing from the bank is a lot lower than the opportunity cost of having equity in a home rather than invest it elsewhere. That's a counterintuitive thing and it's should you pay off your mortgage or not is a bigger question, but it's just an example of having debt is not always necessarily a bad thing.
Dan Bortolotti: In the context of a mortgage, it's definitely not a bad thing. For most people, taking a mortgage that they can comfortably service to live in a home that gives them great satisfaction is a great financial decision. Whether if you pay off your mortgage, you should then re-borrow to invest, I don't know.
Ben Felix: I wouldn't. I wouldn't do it personally.
Dan Bortolotti: I wouldn't do it personally for sure. Would I advise my kids when they're getting started in investing to lever up as much as they're allowed to? Of course not. I think there's a reason why banks aren't going to lend money to people at that age in that stage of life either.
There's just too much behavioral risk here. The research again, it's fascinating. It's interesting on an intellectual level, but it doesn't translate into real world advice for most people I think.
Ben Felix: The myth might end up being better advice than the actual optimal thing to do, which is, it's kind of funny.
Dan Bortolotti: Yeah, sometimes you do the right thing for the wrong reasons. I think that is often true in finance as well. There's other types of good debt. I mean, I think student loans are a good example.
Ben Felix: Great point.
Dan Bortolotti: You're investing in yourself. If taking on debt at that stage of your life means you're going to be prepared to earn more in the workforce, very good use of debt. Not all debt is created equal, clearly.
Ben Felix: Paying off debt always is probably better advice than don't worry about debt, but it's useful for people to understand that there is an argument that you could strategically use debt throughout your life for the right reasons if you manage it properly and if you behave well and it can improve your situation as opposed to the blanket statement that all debt is bad.
Dan Bortolotti: Yeah, if you had to pick an extreme, I'd rather say all debt is bad.
Ben Felix: I agree. If you had to pick.
Dan Bortolotti: You don't have to pick an extreme. I will say too, I have never worked with anyone who has regretted paying off their mortgage and not re-borrowing. Never.
Ben Felix: I've told this story many times. I think you have too, Dan, where we've worked with lots of clients where we explained to them for tax reasons in Canada, if you have enough taxable assets to pay off your mortgage, it can make a lot of sense to pay it off and then re-borrow and you end up in the exact same overall asset allocation, but your interest becomes tax deductible.
That's pretty cool, but when we've given that advice, people are like, oh, that's really smart. Yeah, let's do that. They pay off the mortgage and then we're like, now the next step in this financial planning is to take a loan out and reinvest.
They're like, yeah, no, no, I'm pretty happy without a mortgage. It was a good idea, but.
Dan Bortolotti: Yep. I'm quite happy to be debt free and I'm going to keep it that way.
Ben Felix: All right. That's the last of our myths.
Dan Bortolotti: Well, I hope we busted them all.
Ben Felix: Yeah, I hope so. Hopefully people enjoyed the discussion. We do have one review from Apple Podcasts to read and under SEC regulations, we're 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 other conflicts of interest related to the review.
As reviews, including this one, are generally anonymous, we are unable to identify if the reviewer is a client or disclose any such conflicts of interest. This review says, "My favorite investment podcast. I recently discovered this podcast. It is my favorite investment podcast by far. Intelligent discourse based on recent data and papers translated in a way that investors can understand. It hits me right at my level." And that is by Thomas, who is in the United States.
Dan Bortolotti: Excellent.
Ben Felix: That is all we have. Anything else, Dan?
Dan Bortolotti: No, I think we're good. I hope everyone enjoyed that lesson or episode, I should say. And like I said, it's good to be back with you.
Ben Felix: Yep. Thanks everyone for listening and definitely good to see you, Dan.
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Papers From Today’s Episode:
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Links From Today’s Episode:
Stay Safe From Scams — https://pwlcapital.com/stay-safe-online/
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