Benjamin Felix

August 14, 2018

Episode 5: Rethinking Mortgage Debt

Benjamin Felix

August 14, 2018

Key Points From This Episode:

Checking your credit [0:02:37]
Optimizing your credit score [0:04:08]
Investing vs. paying off your mortgage [0:06:34]
Asset allocation [0:08:25]
Reframing mortgage debt [0:09:11]
Are we in a tech bubble? [0:21:06]
The rise in the US market is backed by fundamentals [0:22:04]
How the largest Canadian pension funds invest [0:24:14]
Skewness in VC returns [0:28:37]
It’s still really hard to beat index funds [0:29:55]

Read the Transcript:

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

So this is episode five of the Rational Reminder podcast, and we thought we'd take a second just to talk about who we are and why we're doing the podcast, just for any new listeners that may not have heard our introductory episode.

Cameron Passmore: Just amazing. This is the fifth one already. Time just screams by.

Ben Felix: Well, we're doing a one a week, five weeks, a little bit more than a month that we've been recording episodes.

Cameron Passmore: And you mentioned it in the newsletter last week, right?

Ben Felix: Yeah. Yeah. That was, we talked about in our last episode, how we've gotten some good feedback. We did push it out in our Rational reminder newsletter to a couple thousand people and a lot of good feedback came back from that.

Cameron Passmore: I'd love to have questions as well, so we can answer listener questions.

Ben Felix: Yeah, definitely. So Cameron and I, just as a real quick introduction, we both work for PWL Capital. Cameron is a portfolio manager. My title here is associate portfolio manager. Cameron's been in the financial services industry for...

Cameron Passmore: 27 years almost.

Ben Felix: 27 years. And I'm going on my seventh year in the industry.

Cameron Passmore: Yes. You were two or three when I started.

Ben Felix: Seems like a long time to me.

Cameron Passmore: So last episode or two episodes ago, you mentioned you were looking at cars. Any update on that?

Ben Felix: Yeah, so we looked at, we're leasing a new Subaru, which we're going to do. Just test drove it, pretty awesome. For anyone listening that doesn't know me in person, I'm just about seven feet tall. So it's not always easy to find a vehicle, but I was actually amazed at the leg room in the Subaru ascent. So that was a nice surprise. That was my biggest concern, was that I wasn't going to fit in it.

Cameron Passmore: And also people that don't know you should know that you're not the biggest fan of debt.

Ben Felix: Yeah. I mean, I don't have a ton of debt. I've been lucky. I paid for school with athletic scholarships. So I've never had to take on any student debt and I'm a renter.

Cameron Passmore: So leasing a vehicle is a whole new thing for you.

Ben Felix: Well, yeah, it's kind of like rent, I guess. They're both sort of debt. It doesn't show up on the balance sheet as debt, but still. It's still an obligation.

Cameron Passmore: So, I mean, we had a lot of feedback about leasing versus buying and it had gotten me to think that as you go through the leasing process, you have to, or the dealership will do a credit check on you. So recently I helped a friend check their credit out. They didn't know what their credit rating was, never thought to check on it, had no idea. Heard about it before, but didn't know how you do it. And so I was showing them how easy it is to use an app called Credit Karma. So karma with a K, super simple app, I know you do yours regularly.

Ben Felix: Yep.

Cameron Passmore: And I've done mine a number of times. And in fact it updates you monthly what your score is.

Ben Felix: I think it's a weekly actually.

Cameron Passmore: Is it weekly?

Ben Felix: Yeah.

Cameron Passmore: So I know mine, it tells me when I go in and says like "It will be updated on," whatever, "the 15th of the next month." So it's an interesting statistic to see. It matters a lot. And you can also go through and see your complete credit history, any credit card you've had, any line of credit, any sort of debt at all shows up on this list.

Ben Felix: Yep. I check it every week. I check it mostly for fraud detection. Just if somebody opened a credit product in my name. My score doesn't change that much week to week. But just checking to see if anything's changed in my credit file, I find to be pretty helpful. It makes me feel good anyway.

Cameron Passmore: It also, like mine has a spelling mistake. There is an entry with a different spelling of Cameron. So I see there's two different people linked to that. So it is a good way to check to see if anyone else is taking advantage of your credit at all.

Ben Felix: The other thing that's really cool about it is that it shows you bit by bit why your score is what it is. And for me, that was really helpful in learning the different things that you can do to improve your credit. So stuff like minimizing your credit utilization. So that's if you're, I think it's around 30% utilization, is where you start to get in trouble.

Cameron Passmore: 30% of?

Ben Felix: Of your total available credit.

Cameron Passmore: Credit.

Ben Felix: If you're using that at any time.

Cameron Passmore: Opening up extra credit cards also hurts your credit rating too, doesn't it?

Ben Felix: So if you get a hard check, that means if you go and open up a credit card, they do a hard check on your credit file? That reduces your score because creditors will start to wonder why you're applying for so many credit products. But if you do have multiple credit cards or multiple credit products, that can improve your score. So having a good mix of credit products, like having credit cards, lines of credit, maybe a vehicle loan, having that mix is viewed as a positive thing. So if you go and apply for 17 credit cards, that's going to hurt your score.

But if you have a credit card, a line of credit, a vehicle loan that helps you score, but the big thing is utilization. So if you have a credit card with a $5,000 limit and for most of the month, it's at $4,000, your credit utilization score is very high and you're going to get dinged for that. So a couple of things you can do is you can pay off your credit card weekly, pay off the balance weekly, or you can open more credit products. So if you have a $5,000 limit credit card, and a $20,000 line of credit, even if you never use it, your utilization is going to be lower.

Cameron Passmore: I know mine, I missed a payment for a very small amount, 50 bucks or something. When Costco switched over to the MasterCard, I just forgot. And I was on an email with an old email address or something. So I completely missed it, but it was a very nominal amount. And I know after that my credit rating went down.

Ben Felix: Oh yeah. Yeah, definitely, it definitely would. I have all my credit cards up for automatic payments.

Cameron Passmore: Shocking.

Ben Felix: I use the Tangerine credit card and it just pays the full balance every month. I don't even use the, I had the capital one, the Costco one, after they switched from Amex.

Cameron Passmore: Yep.

Ben Felix: I don't even use it anymore because for some, they have automatic payment available, but for some reason tangerine bank account is too many digits to fit in there. And there's no... I tried calling them. They can't fix it. So I just don't use it because I'm like, it's not automated. I'm not going-

Cameron Passmore: You're not going to use it.

Ben Felix: I'm not going to risk missing a payment if I forget about it.

Cameron Passmore: So speaking of credit, you're working on a new blog post this week, which was fascinating, complicated, but fascinating talking about mortgages. So a question we get all the time is people have homes, mortgages, and a portfolio. Should I pay off the mortgage or should I leave it invested? Should I borrow against the equity in my house and invest? And you've done some really interesting analysis on this. So we should, I think it's worth slowly explaining this to clients and to listeners so that they can get a grasp of kind of the metrics and rules of thumb around this.

Ben Felix: Yeah. So it is a bit complicated, you're right. And we'll do the best that we can to talk through it. But as you mentioned, the question is, do I keep my portfolio intact and leave my mortgage as is making the regular payments to pay it off over whatever it is, 25 years? Or do I take a big chunk of my portfolio and use that to pay off the mortgage all at once and just be done with it. So this is something that we talk to people about.

Cameron Passmore: Now, your analysis, as soon as there's no emotional biases, like some people are hardwired to want to paid for house. Other people are hardwired to have as big a portfolio as possible. So you're ignoring that. You're just applying pure, straight mathematical logic to the decision.

Ben Felix: Yeah, yeah that is what it is. But now you say that, I've had this conversation with clients so that this is the first time I've written about it, but I've been thinking about it for a while and talking to clients about it for a while. And every time that I've told someone, "It might just make sense to pay off your mortgage," I have not had one person say, "Oh, that doesn't sound like a good idea." People actually jump.

Cameron Passmore: Really? Behaviorally people love it. A paid for house?

Ben Felix: Yeah. So anyway, the advice that I think is sort of standard across the financial services industry, but it's also kind of the common thinking that I think people have about this question. And that goes, the story is that because you probably have a higher expected return on your portfolio, you should leave your mortgage as is, pay it off with the regular mortgage repayment schedule, so that you can keep as much money as you can invested in a portfolio that has a higher expected return. Now that's true even with a conservative portfolio. If we think about a 50% stock, 50% bond portfolio, the expected return is still going to be higher than what you're paying in mortgage interest.

Cameron Passmore: Definitely.

Ben Felix: So that argument seems very logical, but it's a little bit more complicated than that. It requires thinking about detaching the mortgage debt from the house asset. So we want to think about the mortgage and the house as one package. And the portfolio as another completely separate package.

Cameron Passmore: Well, people are totally comfortable having a mortgage on a house.

Ben Felix: That's right.

Cameron Passmore: Whereas most people are not comfortable having a debt attached to their portfolio.

Ben Felix: But there is, pretty well other than maybe some rules around how margin debt works versus how mortgage debt works. There's really no difference. It's debt, and it's on your balance sheet. Whether it's attached to the house or the portfolio, doesn't really matter. Other than stuff like margin calls, which you don't have with a mortgage. But if we eliminate that as a difference, there's no difference between mortgaging-

Cameron Passmore: Because if you have a paid for house, you can still go and mortgage it and take the proceeds and invest.

Ben Felix: That's right. So-

Cameron Passmore: Which makes it interest deductible.

Ben Felix: That's correct, right. Right. So if you make the decision, "Well hey, I've got all this cash that I could use to pay off my mortgage, but I'm going to choose to keep my mortgage and invest." If you decide to do that, then there's the thing called the Smith maneuver, where you do that, you go and pay off your mortgage with the cash you have-

Cameron Passmore: Sell your portfolio, pay off your house, bore that amount back, and invest.

Ben Felix: Right. So then take a home equity line of credit against the house. And now it's no longer a mortgage. Now it is a loan for investment purposes, which makes the interest tax deductible, as long as you have the intention of earning income, which is a bit of a gray area, I guess when you're talking about ETFs and mutual funds. But anyway.

Cameron Passmore: So let's do a real example.

Ben Felix: Yeah. So we'll walk through an example. If we take someone, we'll just imagine a person and they've got a $500,000 home with a $400,000 mortgage, and they've got a $900,000 investment portfolio that's invested in a mix of 50% stocks and 50% bonds.

Cameron Passmore: So net worth is a million dollars. They have a hundred thousand of net home equity, 500 value, 400 mortgage, and a $900,000 portfolio.

Ben Felix: Correct. So their net worth is $1 million. Now they're in a position where they can make a choice. They could choose to keep the mortgage, kind of like what we've been talking about, continue making payments with their employment income or whatever income source did they have, and leave their portfolio invested. So that's option one, which is, I think what most people think is the smart option. Option two, is that they could sell $400,000 of their $900,000 portfolio and use that cash to pay off the mortgage completely. Now, there are a couple of things, a couple of details that we're going to ignore. So to pay off a $400,000 mortgage and a lump sum, there would probably be penalties. To sell $400,000 of the portfolio, there would probably be tax implications, but we'll just ignore that for the sake of the example. And then-

Cameron Passmore: So in that example, you end up with a half a million dollar portfolio and half a million dollar home? Fully paid for.

Ben Felix: Right. So net worth-

Cameron Passmore: Still a million.

Ben Felix: Still a million bucks. Exactly the same. Now, if we fast forward one year, so we think about those two options, and we fast forward one year, it's going to look a lot more attractive that the net worth of this person is going to be higher if they keep the mortgage and the larger portfolio. So we're assuming a 50/50 portfolio on both sides, one side with the mortgage, one side without. One year later, the larger portfolio and the mortgage is going to result in a greater net worth than the smaller portfolio and no mortgage.

Cameron Passmore: Expected, not guaranteed.

Ben Felix: Yeah, right. We're assuming an expected return for the portfolio. And the reason for that is simply that because the $900,000 portfolio is earning a higher expected return than the cost of the mortgage, you're getting that delta between the mortgage cost and the expected return on the $400,000.

Whereas on the other side, with the $500,000 portfolio and no mortgage, you're not getting that additional growth. So I think that's a common way to think about it. Do you agree?

Cameron Passmore: For sure.

Ben Felix: So I think the problem is, that's not an apples to apples comparison. If we think about the $900,000 portfolio, only $500,000 of it is your own money. The rest is the mortgage debt. So that's kind of what we were talking about, detaching the mortgage from the home, and just viewing it as part of the overall balance sheet. So the $900,000 portfolio is really employing 45% leverage. Now, if we told someone to do that with a margin loan, they would think that we were nuts, but with mortgage debt, 45% leverage, somebody's perfectly comfortable with. Now another way to think about this, and I think it's a decent way to think about it, is that so that $900,000 portfolio is 50% stocks, 50% bonds. So $450,000 in stocks, $450,000 in bonds. Now the 45% leverage is kind of like being short bonds.

Cameron Passmore: Right.

Ben Felix: So if you're short bonds and long bonds at the same time, you have no bond exposure.

Cameron Passmore: Net zero bonds.

Ben Felix: Right. Now, in this case, it works out that-

Cameron Passmore: Just because you own bonds on one side, and you owe someone money on the other side, which is effectively a bond owned by the bank, effectively. They cancel each other out.

Ben Felix: Right. So you've lent money to a company. So you've bought bonds on one side and you've sold bonds on the other side. So you're net neutral in the fixed income portion of your portfolio. So now we've got this $900,000 portfolio with 45% leverage. And that leverage is really just offsetting your fixed income exposure. So while it looks like, in your account statement, it looks like a 50/50 portfolio, it's really more like a 95% equity portfolio. 95% equity, 5% fixed income. That's scary, I think to people, to say, "Well, I've got a 95% portfolio," but they would never view it like that because that's not how it shows up on the statement.

Cameron Passmore: Therefore...

Ben Felix: So if we rewind and go back to the example that we just laid out with those two decisions, and we compare the 50/50 portfolio with the mortgage, just like exactly the same example that we talked about before.

But on the other side of the example, where we're paying off the mortgage, if we instead of keeping the 50/50 portfolio, if we-

Cameron Passmore: And a paid for a house.

Ben Felix: And the paid for house, so no mortgage. If in that side of the example, we increased the equity allocation to 95%. And then we, again, fast forward one year based on some expected return assumptions, the net worth ends up being exactly the same. So now on one side, we've got a larger portfolio and a mortgage. On the other side, we've got a smaller portfolio, no mortgage, but we're also taking more equity risk.

Cameron Passmore: So do you think clients would be able to withstand more volatility with a paid for house? A bit of an emotional question going on there too I think.

Ben Felix: It's a very emotional question. And I mean, that's not a question we can answer. That's a question for-

Cameron Passmore: I would think absolutely, if you have a paid for house, I think emotionally people would be able to withstand more volatility.

Ben Felix: Yeah. And even if you think about it, and you're going to laugh me, if we don't think about it from an emotional perspective. If we think about it from a sequence of returns, Monte-Carlo type perspective. If you've got a paid for house, you no longer have those cash flows going out, you're no longer short fixed income. So you've actually decreased the risk of your situation and you can withstand more market volatility because you're withdrawing less from the portfolio.

Cameron Passmore: Exactly.

Ben Felix: Well, I guess that's assuming they're retired. If the debt payments are coming from income, it's not as much of an issue, although there is still a human capital risk, but anyway, we could go down a long rabbit hole with that. So now in line with what we were just talking about, if someone is listening to this example and says, "Well, geez, I'm about to retire or I'm 10 years away from retirement. I would never be in a 95% equity portfolio," I think it helps to think about it another way.

So in both cases, you've got a $500,000 home. So you've got $500,000 in real estate, which you own. Right, and that's that piece of it. Now, if you're keeping the mortgage and investing $900,000, that's, as I mentioned before, effectively investing $500,000 of your own money and borrowing $400,000 as a mortgage. So you've got this leveraged investment. Now, if we think about that leverage investment in the worst 12 months of the financial crisis, a 50% stock, 50% bond portfolio lost 20.58%. So that's a big drop, but not nearly as big as a more aggressive portfolio. So a $900,000 portfolio in the financial crisis lost $185,220. In our example, only $500,000 of that $900,000 portfolio is your own money. So if we take a $185,220 loss on a $500,000 investment, which is what you've made, because the rest is not your money, that is a 37% loss.

So it's not really a 20.58% loss, like you'd have on the portfolio because you're investing less of your own money. It's actually a 37% loss. And, you paid 3% interest on your $400,000 mortgage. So your total loss in '08, '09, with this leveraged portfolio, ends up being a little bit more than 39%.

Cameron Passmore: So interesting.

Ben Felix: Right.

Cameron Passmore: So the loss is basically the same?

Ben Felix: Well, that's the thing. So now the alternative is what we're talking about is owning the 95% equity portfolio, which is what I think people would think is scary. So if you own that portfolio through the financial crisis, you lost 38.92% and you had no additional interest costs. So as an investor, as a rational investor, and I know behavior is important, but as a rational investor, you should be almost indifferent between the two situations with a slight preference for the riskier portfolio, because it gives you a slightly better outcome and does not have that guaranteed interest cost.

Cameron Passmore: But if someone came to you with a paid for house and a portfolio, would you let the fact that their house is paid for drive parts of their asset mix? I really had that conversation with someone, it makes you think that perhaps you should. Because in this case, you're saying, "Oh, because you have a mortgage, you can take on more risk." But if someone didn't have the mortgage, would you say "You should take on more risk?" Because that's really just a shell game we're doing here.

Ben Felix: We talk about it with pensions, right? If we say someone has a pension, they've got a guaranteed income. Then part of the conversation is often, "Well, you could take more risk if you wanted to, because you have this guaranteed source of income." Owning the house is not quite the same because it's not cashflow coming in, but it's also security that you're not going to have to have cashflow going out for housing costs. So at the end of the day, owning a house and having a pension, from a cashflow perspective is pretty much the the same thing. So in either case, I think you could justify a higher equity allocation.

Cameron Passmore: And you're right, who doesn't want a paid for house? So very interesting. Great, great blog post coming out next week I believe.

Ben Felix: Yeah. Yeah, so I think at the most basic level, the takeaway is that if you have a portfolio that is not 100% invested in stocks and you also have a mortgage, it probably makes sense to at least give consideration to the idea that "Hey, maybe I should take the"... it's kind of like taking the fixed income out of your portfolio and using that to pay down a chunk of your mortgage. So you end up with a riskier portfolio, less mortgage debt, but your expected return stays the same or even slightly improves with the added bonus that you no longer have guaranteed interest cost.

Cameron Passmore: Yep.

Ben Felix: Yeah. So anyway, I think it's an interesting discussion that we've been having more and more ever since we learned about this way of thinking, which I think is pretty interesting.

Cameron Passmore: So what you want to cover next?

Ben Felix: I mean, it's kind of old news these days, but the idea that we might be in a tech bubble keeps coming up with evaluations of particularly-

Cameron Passmore: Yeah I know, Batnick and Carlson talk about this a lot on their podcast. Almost every week, they're talking about on the Animal Spirits podcast.

Ben Felix: It's hard to miss. It's hard to miss really.

Cameron Passmore: It's really a non-story.

Ben Felix: Who knows, I mean, it's historical, I guess, in the sense that a company reached a trillion dollars in valuation, but yeah, I don't know. I saw a really interesting stat on Twitter. I did not take a note of who tweeted it so I apologize to whoever that was, but during the .com bubble, Microsoft had a market cap of 605 billion. And if we adjust for inflation to today, that is a very close to a $1 trillion valuation. It's price to sales ratio at that time was 32. Today, Apple has an actual market cap of 1 trillion and it's price to sales ratio is four.

Cameron Passmore: Mind blowing.

Ben Felix: Yeah.

Cameron Passmore: Boggling.

Ben Felix: Crazy. If the same price to sales ratio applied to Apple today, as it did to Microsoft in 1999, so that's that 32, price to sales of 32, then Apple's valuation today would be 8 trillion. Now, obviously that was tech bubble time. So that's not the same situation as today, or we hope anyway. Yeah, and the other thing that's been talked about a lot is the valuation, the price earnings of the S&P 500 and how the price has gone up so much since the financial crisis, how can it keep going up?

And I saw some really interesting stats on the returns of the S&P 500 for the last 10 years, but the fundamentals have been backing that up. So well, returns have been about 10% a year. Dividends have also been increasing about 10% a year. And earnings have also been increasing about 10% a year. So yes, we're in a bull market. Yes, prices are going up, but the economy is also doing really well. Companies are actually doing well. And that's one of the reasons the prices have been going up. Yeah, so those are some interesting stats to talk about.

Cameron Passmore: As you said last week, the big companies in the S&P 500, Facebook, Apple, Alphabet...

Ben Felix: Netflix.

Cameron Passmore: Netflix, those are the big ones. The percentage that represented the market is not out of kilter with historical norms.

Ben Felix: Correct.

Cameron Passmore: It's in that 15, 16% range, which is totally normal.

Ben Felix: Correct. In terms of market cap. One of... I saw, and I haven't dug into this at all, but I saw a New York Times article talking about profitability concentration. So now we're not just talking about market cap, but it's the concentration of profits, corporate profits are getting more and more concentrated. And that has some interesting implications for wealth equality and all that kind of stuff that I, like I said, I didn't dig too much into that story. I skimmed it and it didn't seem actually too exciting.

Ray, Raymond, our PWL capital's director of research sent me a pre copy of a really, really interesting analysis that he does every year.

Cameron Passmore: A bit of a teaser?

Ben Felix: Yeah, it is I guess. I don't know if he's going to publish it or if he's going to use it to teach his course, but anyway, [crosstalk 00:24:21] he sent it to me. Yeah. He sent me an advanced copy. So he looks at the largest Canadian institutional investors. So these are all huge pension funds, CPPIB, OMERS, HOOP, PSPIB, OTPP, CDPQ and BCI. So lots of acronyms, but those were all the largest pension funds, like-

Cameron Passmore: And a pension plan, Ontario municipal employer, employees in Ontario, Ontario teacher's pension. The case that they pull in Quebec, the BC pensioners, I believe?

Ben Felix: No no no, it didn't dig into-

Cameron Passmore: That is one in Alberta, the pension in Alberta.

Ben Felix: Yep. So they're huge. And when we say huge, they have 1.4 trillion Canadian dollars in assets. That's more than the whole entire Canadian mutual fund industry. So it's a serious amount of assets. The average ten-year return of all of those pension funds together, 6.4%. Average weight in private assets, so that's not publicly listed stocks or bonds, 37%.

Cameron Passmore: Staggering.

Ben Felix: I thought that was amazing too. A lot of private assets, which I would be scared to touch.

Cameron Passmore: So it could be venture capital, private equity-

Ben Felix: Infrastructure, all that.

Cameron Passmore:... direct owners of an infrastructure.

Ben Felix: Yeah. But the problem, problem, I mean, it's not a problem because it's part of the reason you expect a higher return, but it's illiquid and it's marked to market. So when we're talking about returns for these things, a lot of it is marked market not realized return.

Cameron Passmore: Exactly. And non-traded return.

Ben Felix: Right. So it's kind of scary, but whatever, I guess. So big chunk and private assets, average MER 0.53%.

Cameron Passmore: Expense ratio.

Ben Felix: So I mean, I guess lower than the mutual fund industry, still. It's a little bit more assets.

Cameron Passmore: Yeah. But the CPP is still hovering on 1%, which is so high for such a massive portfolio. And they used to be all indexed, I believe a number of years ago. And I remember Andrew Corn wrote an article, which we should dig up for the show notes, talking about how that has shifted over time and how their expenses have gone up dramatically.

Ben Felix: Yeah, I think the article was titled CPPs, active management strategy is a crock. It was pretty, yeah.

Cameron Passmore: Let's dig it up.

Ben Felix: Yeah, we can find it. So CPPIB is the largest fund and it does have the highest MER of all these funds. So the biggest one has the highest expense ratio.

Cameron Passmore: And the highest amount of private assets.

Ben Felix: 48% of the CPPIB is in private assets. Staggering, really is. Interestingly, and this doesn't necessarily mean anything, but it is still interesting. HOOP has the highest ten-year return at 9.5% per year on average. And it also has a lowest expense ratio at 0.29%. And it also has the lowest amount of private assets at 25%. So best returns, lowest expenses, lowest amount of private assets. Does that tell us anything?

Cameron Passmore: Highest US equity maybe? If you look underneath the covers.

Ben Felix: I didn't dig into it that far. Possibly. Now, just as a point of interest, the Canadian couch potato, 75% equity, 25% fixed income portfolio over the same 10 year period returned 6.41%.

Cameron Passmore: So that's a simple three index fund portfolio.

Ben Felix: Three index fund portfolio with expenses of 0.15%, 15 basis points. Comparing that to the much more complex pension investments that have all the private stuff and a higher expense ratio. And the return has been actually the same, which is... it is what it is.

Cameron Passmore: And this is a question I got today from someone saying like "None of my net worth has gained a certain level." Isn't there more than this index strategy? Isn't there other stuff that we can do?

Ben Felix: Sure, sure. There is. Yeah, you can try it, but you never know what you're going to get. And when we're talking with these big institutions and we're talking about private investing with them, they can really get a nice cross section of the private equity markets. Whereas if you're a person, you're either going to go through a fund where you're going to pay a ton of expenses, or you're going to make a couple of investments where you're going to maybe get a good result, maybe not on average, who knows.

Cameron Passmore: Plus if you've got something hot, are you going to go to some individual investor, or are you going to go to a big pension fund?

Ben Felix: Yeah. Well, that's one of the challenges, right? When we look about-

Cameron Passmore: Deal flow must be so hard as an individual.

Ben Felix: For sure. We look at venture capital returns and the skewness is insane. I found one chart from correlation ventures, which is a data-driven VC firm, but they looked at 21,640 transactions between 2004 and 2013. And these are only realized transactions. So they're looking at going out of business, being acquired, or going IPO. So out of those 21,640, the returns were between zero and one X. So that's either you're getting your money back or you're losing everything. 65%. 65% of the 21,640 venture investments were either zero or one X. So yes, you can get good returns, but more than likely you're going to lose, or not gain anything. The other big bucket there is one to five X return. So you're getting your money back or getting five X, which is great, if you can find it. 25% of the investments return between one and five X, and then you start getting into the five to 10 X, 6%, 10 to 20 X, 2.5%, 50 X, 0.4%. So yes, there are high returns out there. Are you going to get them? Probably not.

Ben Felix: And just on that thread of institutional investing versus index funds, there was another good story. And we've seen stories like this in the past, but the Carthage college, which is a University in Wisconsin with $120 million endowment fund, they posted an 11% investment return over the last 12 months using solely index funds for their portfolio. And that outperformed all of the other endowments of all sizes over the same time period, which had a meeting return of 7.4%. So again, not the first time we've seen this, but index funds of performing more complex. Private investments, same old story.

Cameron Passmore: Basically letting capitalism work for you. You can do it so easily and affordably with index funds. There's no reason not to.

Ben Felix: That's it. We'll be back next week.

Cameron Passmore: You bet.