Benjamin Felix

August 21, 2018

Episode 6: Asset Location

Benjamin Felix

August 21, 2018

Key Points From This Episode:

Subscribe to the podcast on iTunes! [0:00:28]
Wealthsimple’s new no-commission trading platform [0:01:55]
Do individual stocks ever play a role in a financial plan? [0:03:42]
Can behavioural coaching be scaled? [0:04:53]
Being aware of conflicts of interest [0:07:45]
Wealth and happiness are not always connected [0:13:30]
If you buy an R8, you’ll want a McLaren next [0:15:36]
Retiring does not mean doing nothing [0:16:49]
How do you retire without a financial plan? [0:17:14]
The 4% rule is false! If you want to retire early [0:21:28]
Asset location is hard to do, and might not add value [0:26:53]

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.

Cameron Passmore: All right. Another week and this is episode six, going along pretty well so far.

Ben Felix: That it is.

Cameron Passmore: Had some good feedback, which we really appreciate and love to have people, if they are listening on iTunes to go ahead and give us a rating, which would really help.

Ben Felix: Yeah. You kind of spoiled our announcement. We're on iTunes now. You just kind of threw it in there casually.

Cameron Passmore: That's all right.

Ben Felix: It's kind of exciting. So we're on iTunes. If you are listening and enjoying the podcast, you can now subscribe so you can get updates and you can also rate and comment a review of the podcast so that other people can find it.

Cameron Passmore: So the big news this week comes from the Felix household, which is very exciting.

Ben Felix: Yeah. Baby number three.

Cameron Passmore: Baby number three, little girl.

Ben Felix: Arrived on a Sunday, 10:07 AM.

Cameron Passmore: Fabulous news. Your parents were in town.

Ben Felix: Parents are... My mom's still in town helping out. Yeah. So it was my wife's mom.

Cameron Passmore: So speaking of being in town, you come from Vancouver Island.

Ben Felix: Yeah.

Cameron Passmore: So I'm heading off there next week for some client meetings, which is, I mean, a beautiful part of the country, a lot of fires going on out there now, so friends I'm staying with mentioned that their smoke alarm keeps going off from the fire.

Ben Felix: No way.

Cameron Passmore: So this is no joke, but...

Ben Felix: Where on the island are you going?

Cameron Passmore: They're going to Victoria, actually. So you're just slightly North, right?

Ben Felix: I don't remember growing up having any issues with fires. We did used to go annually to the Shuswap, which is a lake in the Okanagan there were always, I think every time we went, there would be big, heavy smoke from fires. But on the island, I don't remember there ever being an issue.

Cameron Passmore: So I guess that whole area from Calgary all the way through Lake Louise and whatnot is all lots of smoke in the air right now.

Ben Felix: Yeah. I believe it.

Cameron Passmore: Anyways, so yes, we're on iTunes, which is exciting. And the other news this week, which you wanted to take off the top was Wealthsimple's announcement of new zero commission stock trading.

Ben Felix: Yeah. I don't think we can do a show today without talking about that. Everyone seems to be pretty excited about it. We think it's kind of silly, but what Wealthsimple has basically announced, they haven't released yet, they've announced a beta for a new product that is zero commission stock trading. So you can go and buy whatever two shares of Apple without any cost. So that, for whatever reason, people are excited about that. That type of service exists in the US currently with Robin Hood, which is... I mean, if you look online, the discussions around how Robin Hood is being used, people aren't using it to buy and hold long-term. It's definitely being used, at least it's being talked about being used online as a major way to speculate.

Cameron Passmore: Mainly small accounts, I would guess.

Ben Felix: Oh, absolutely. I mean, that's the whole point is you can trade a couple of shares without any cost, right? Like right now you're going to go and buy a few shares of a stock because you're going to have... It's going to be an odd lot, so you're going to have additional costs through that and you're going to pay whatever a five or $10 commission. And if you're placing a small trade, it just doesn't make sense.

Cameron Passmore: But it's so strange. Wealthsimple being a robo advisor that promotes passive structured long-term diversified type portfolios, which we agree with in large part, it just seems strange to have an offering going after this kind of the market.

Ben Felix: They addressed that on their website, in the FAQ, which I read. So a quote from Wealthsimple. "If you're looking to grow your savings over the long-term, a diversified low fee portfolio that has rebounds regularly like the ones, Wealthsimple's automated investing offers is the smartest way to do that." So we agree with that.

Cameron Passmore: Check.

Ben Felix: Completely. But, so this is again quoting Wealthsimple, "but that doesn't mean there's no place for buying and selling individual stocks so long as it's done responsibly as part of a holistic financial plan." So that part I don't agree with at all.

Cameron Passmore: I don't know how you can be both. I don't know how you can believe the first and believe the second.

Ben Felix: Yeah.

Cameron Passmore: If you believe the first, you're basically saying all information is in the price of the stocks, therefore picking individual stocks is adding risk that you're not compensated for.

Ben Felix: Correct. If people want to buy individual stocks because it's fun, that's one thing. But for Wealthsimple to say that it can fit into a holistic financial plan, I just don't see a world where that makes sense. Yeah, because what you just said is absolutely right.

Cameron Passmore: Just imagine. They have $2.5 billion and 100,000 customers, so $25,000 average account size. Just imagine the transactions and the questions that must... I mean, we manage in our team a little less than half that amount of assets for a fraction, like for 600 odd families, so there's obviously no comparison. We know how many questions people have and how much….

Ben Felix: With more licensed advisors on our team, right?

Cameron Passmore: Right. Far more.

Ben Felix: Wealthsimple has nine, I believe, it's nine licensed advisors.

Cameron Passmore: Right.

Ben Felix: Last time I checked anyway. Michael Katchen, in an interview, did say that they're launching this product because customers are asking for it, which is fair enough. I can imagine somebody who's opened an account with Wealthsimple, They've never talked to anybody, they probably don't even know... They might know they're investing in ETFs, but they probably don't even know what that means. So people with relatively low knowledge who don't have access to advice want to buy individual stocks. That makes sense to me, that makes Wealthsimple's problem of behavioral coaching or their inability to provide behavioral coaching to all of their clients, this new stock trading platform is only going to exacerbate that.

Cameron Passmore: And it must also mean there's going to be cross selling coming up.

Ben Felix: Well, they said that. So in that same interview that I mentioned just now, Katchen said over the next 24 months they're launching, I can't remember what number he said, but it's a bunch of new products.

Cameron Passmore: Mortgages, credit cards, lines of credit. Who knows what sort of services might [crosstalk 00:05:43].

Ben Felix: And of course they have to. They're not making any money.

Cameron Passmore: Right.

Ben Felix: They're not.

Cameron Passmore: Yeah, bwause they're not getting the sec lending revenue on the back end of the ETFs, I wouldn't think. That that covers the ETF management fees.

Ben Felix: Maybe. So with Purpose, there's something going on there because why do they have Purpose products in there? Like those are not low cost, total market ETFs. Som Seif is on their board of directors. They have the products in there. I bet there's something going on.

Cameron Passmore: But we don't know.

Ben Felix: But we don't know. That's total speculation. I just wanted to ask you based on that. So what we were just talking about, do you see any situation where, as part of a financial planner, it makes sense to own individual stocks?

Cameron Passmore: If you get a sense of enjoyment out of it and it's worth it to you, that would be the only one, but there's no rational reason to think that you know, more. And I thought about this this morning listening to a great podcast interviewing Charlie Ellis, legendary Charlie Ellis.

Ben Felix: We talked about that last week.

Cameron Passmore: He went on... This podcast is unbelievable, talking about how the volume of information and technology and people in the business has changed since he started back in the sixties. Back then, like we said, you could go visit a company. Now you can't, unless they share the information with everybody. There's hundreds of thousands of CFA's either have their designation or coming up, so the chance of having an information edge is ridiculous. And to think that someone who has a small account dealing with Wealthsimple has an information edge makes no sense to me. But if you enjoy it, fine. Or if you're going to build an ETF portfolio on your own, fine. But there's no margin in that. So I don't understand.

Ben Felix: I read something a while ago just on having an information edge, and it's like, even if you did have an information edge, you can't use that edge in isolation because somebody else might have a different edge somewhere else.

Cameron Passmore: Right.

Ben Felix: So even if you do have unique information unique to you, which some people might have, that doesn't mean somebody else doesn't have something different that's going to counteract whatever information you have.

Cameron Passmore: But I'm guessing most of the people listening to this agree with us.

Ben Felix: Yeah, probably, but we also know that a lot of people we know were excited about Wealthsimple's new offering.

Cameron Passmore: Yeah. So this week we were talking a bit in the office about conflicts of interest and there was a neat article that came out talking about this and to kind of follow the food chain up to see who owns the firm that is giving the financial advice. So I thought that was a pretty interesting article.

Ben Felix: Yeah, I think... It made me think back to what we talked about last week with, we were talking about how it sometimes might make sense for somebody to pay off their mortgage and increase their equity allocation in their portfolio to end up with the same risk and return characteristics while eliminating debt. So I started thinking about that advice and, if we give that advice, it reduces our revenue because that means someone's taking assets out of their portfolio that we were charging fees on and they're using it to pay down their mortgage. So if we were conflicted and we were acting based on that conflict, we wouldn't give that advice. And then I started thinking about the other side of it. So if they go and ask their mortgage broker, "should I do this?" That means if they pay off their mortgage completely, that means the mortgage broker is not going to get commission on a renewal. So on both sides of it, you have people who are conflicted to not give the advice that we were saying might make sense.

Cameron Passmore: And there's conflicts everywhere. I think it's to be aware of the conflict and in the end, trust the people you're dealing with, but to always make sure you understand, follow the money, understand who is being paid for what here.

Ben Felix: And there are conflicts everywhere and there are all sorts of different ways that you can pay for financial advice. So I just mentioned mortgage brokers, they're earning a commission. Insurance advisor, they're earning a commission. Someone selling mutual funds, commission. Those are all obvious conflicts of interest because they want to sell you the most expensive product so they can make the biggest commission. But even if we think of our business, we charge an asset based fee, so we're charging our clients directly, we're not earning any commissions, but we get paid more the larger the portfolios.

Cameron Passmore: Right.

Ben Felix: So like the thing I just mentioned, it's in our best interest. Now we act as fiduciaries, so we would act in the best interest of our clients in all situations, but it is in our best interest to grow the portfolio as large as possible even if something like paying down the mortgage might make more sense. Now, like I said, we would act in the best interest of our client, which is what we've been doing. And it's actually interesting. People have been, and I've been surprised that people would pick this up, but every time I've explained that you should take some of your portfolio and pay off your mortgage, people have said like, they've noted "that's not in your best interest to give me that advice" and they really appreciated that. I thought that was interesting.

Cameron Passmore: However, it is in our best interest because they go away happy and that builds a reputation. This helps to grow the practice and grow the number of clients. So it is. And again, if you look to the bigger picture of our firm, so we're privately owned, it's an advisor owned firm. We're not owned by some other private equity firm or something that has a demand on a certain amount of profitability. I'm not saying we're not profitable. That's not the point. The point is you don't have a larger entity demanding a large return on equity out of this practice. So that makes a huge difference.

Ben Felix: Yeah. You sent me that article about there's a company in the States that all they do, their core business, is acquiring financial advice firms, rolling them up into their entity, and taking a percentage of their profits forever.

Cameron Passmore: Yeah.

Ben Felix: And that's a huge business and they're toying with an IPO or they're going public. What was it?

Cameron Passmore: They just went public a couple weeks ago.

Ben Felix: They just went public.

Cameron Passmore: This is Focus Financial. So they're an aggregator in the US of firms like ours and probably larger than ours and they're rolling up to help people who are on the verge of retirement in this business to monetize they've grown.

Ben Felix: So that's like Cameron's about to retire and Focus comes in and says, "we'll give you X amount of money for some percentage of your future profits."

Cameron Passmore: Correct. Yeah. And so far that's never been an objective of the firm and the author, is not saying necessarily as a bad thing. It's just something that makes him wonder, are there conflicts that are going to happen with these changes that have happened? So it's just an awareness thing. I think that's our main point is to be aware of who owns what and who's paying what.

Ben Felix: We think with that situation, so say you do retire and you did sell and you got a bunch of money and you go and you're happy, then the team is here still doing the same thing, but we're now whatever percentage short on the revenue we had before, which means we have to increase revenue to make our situation the same.

Cameron Passmore: Correct.

Ben Felix: Yeah. That's tough. That'd be tough. Very interesting.

Cameron Passmore: Which is a good segue into the next topic we thought we'd talk about, which is the whole Financial Independence Retire Early, or F.I.R.E. movement.

Ben Felix: That does tie in. You're right. Yeah. So F.I.R.E., Financial Independence Retire Early, I think it often tends to focus on minimizing expenses as much as possible. So if you read Mr. Money Mustache, it's all about living extremely frugally, like to the extreme, although he's softened up a bit, if you read his more recent stuff, anyway, so minimizing expenses, saving a ton of your income, which is the other side of minimizing expenses, and the thing that I think is kind of funny, and a few people online have commented on this, but a lot of the people who are writing about financial independence are writing what the F.I.R.E. movement, they are doing so, so that they themselves can retire. So it's kind of this funny little loop where people are writing about retiring early so that they can themselves retire early through the revenue from their blog. I always find that kind of funny. And it's they're everywhere. F.I.R.E. blogs are everywhere, maybe more so in the States, but they're huge. It's like a whole industry.

Cameron Passmore: Interesting feedback loop.

Ben Felix: It is an interesting feedback loop.

Cameron Passmore: An echo chamber, I guess.

Ben Felix: Yeah. It's probably more of an echo chamber.

Cameron Passmore: But how do you know you're going to be happy?

Ben Felix: Well, so that's the thing that I always find interesting with the F.I.R.E. bloggers is that it's like, okay, you're doing a job that you're miserable doing so you started this blog to help you retire early, but now you've got a blog so that you can retire early. So you're just going from being whatever you were before to being a writer. So you're not retiring, you're just finding a job that you're happier doing, which happens to be writing in that case.

Cameron Passmore: And we've talked about happiness over the past podcast, and this is something I've been talking a lot more with clients about lately just around this financial freedom, but I think the whole word retirement is becoming antiquated.

Ben Felix: Oh yeah.

Cameron Passmore: And it kind of goes back to if you worked on the railway or in the coal mine, just something where you were exhausted at the end of your career, that's not the case for many people anymore.

Ben Felix: If I say to someone, when do you want to retire? They're almost offended. Oh, I don't want to retire. I just want the ability to not have to work for someone every day if I so chose.

Cameron Passmore: Right.

Ben Felix: Yeah.

Cameron Passmore: And that comes up all the time. So we're really kind of morphing away from this word, retirement. It's all about freedom.

Ben Felix: Doing something that you'd prefer to be doing, which in a lot of cases may not be financially viable. Like if you want to, I don't know sew pillows or something, you maybe can't make a living doing that, but maybe if you save up enough money, that's something that you can do.

Cameron Passmore: Sew pillows?

Ben Felix: I don't know. I pulled out a random example. I don't know where I got that from.

Cameron Passmore: I mean the example, this week I listened to... Everyone knows I'm a big fan of Barry Ritholtz, his Masters in Business podcast, and he had an interview last week with Leon Cooperman, who I had never heard of before, but he's a very successful hedge fund manager of Omega in New York City and fascinating guy, net worth now is somewhere between three and $4,000,000,000.

Ben Felix: Wow.

Cameron Passmore: And much like Bill Gates, he has what sounds like he claims to be a very simple lifestyle. He enjoys doing what he does. He goes to work every day. He's in his 70s. He takes a train in to his office and he spends six and a half months of the year in Florida and works out of his house there, but he's figured out what makes him happy. And it's not about stuff. It's not about acquiring stuff. I mean, right now he's donating a lot to hospitals and to charities and education for kids and whatnot, which is fabulous, and he signed the giving pledge, but he said, "other than that, I drive a simple 12 year old car and I'm in a relatively simple place where I live," and he just loves what he does. It's the game of investing that he enjoys. So it's to figure that out as opposed to rushing to build up enough money so that you have freedom, but you get there and it's like, "Oh my gosh, what am I going to do?"

Ben Felix: Yeah, it's that adaptability thing, but you're right. There are super wealthy people like Cooperman. Warren Buffet, I think, is similar. Gates is similar in the sense that he's doing crazy philanthropy. I don't know what his lifestyle is like, but you look at Vanguard Founder, John Bogle, they're all guys who live relatively simple lives. Their wealth is not what is making them happy. They found what is making them happy and doing that. Yeah. So that's all really interesting. There are athletes like that too. I know there's some NBA players and NFL players who, for whatever reason, have found, like a lot of those guys would go and blow all their money because they think that's going to make them happy, but there are some pro athletes who, I don't know if it's the way they were raised or what, but they're making millions of dollars, but they live extremely simple lives.

Like I know, Kawhi Leonard, he is driving some old beat up vehicle. He's making millions and millions of dollars every year, but he doesn't care. That is not want to know what makes them happy. I was talking to somebody about their dream car recently and they wanted to buy an Audi R8. That's a pretty cool car. I think we looked it up. It was $180,000 new. But then I said like, "you get the R8, then you're going to want a McLaren."

Cameron Passmore: It's all about adaptability.

Ben Felix: And they said, "yeah, you know what? You're right." Yeah. It was an interesting, interesting conversation. So just in the context of not worrying about money and retiring and all that kind of stuff, what do you think about the service that we provide in the context of somebody who is getting closer to actually being retired and drawing down their assets?

Cameron Passmore: Well, I think about an experience we had with clients a couple times this week where, I mean, one in particular said he wanted to retire in a certain amount of dollars per month, had never done the math, is getting tired of his job, has other interests, lots of other hobbies, and said, "if I could get X, I think I'd do it." So we ran an interactive plan like we do and loaded up all the data and all the assumptions, inflation rates of return, and then we actually went and stress tested it, which we always do to see how statistically confident are you in having enough based on different scenarios, and it ended up that he had enough by a long shot. It was a safe assumption. And I really struck him like, "wow, I can do this," but you could see the stress come over him.

Ben Felix: Because he doesn't know what he's going to do?

Cameron Passmore: Well, we basically effectively pushed him over the edge and said, "you can do this. You said you wanted to do this. You can do this." So after the stress, which was brief, it's like, "wow, I've got the freedom." You could see the freedom and his face was an amazing experience.

Ben Felix: That's so interesting.

Cameron Passmore: It was huge value to pull it all together. I mean, we do this multiple times every single day with the team here, but more and more people are getting to that point where, "my gosh, I am of the age where I might want to do something different." Maybe not. Like someone yesterday, they're retooling to do another career.

Ben Felix: Wow.

Cameron Passmore: But they didn't want the pressure to have to bring home X dollars per month to make ends meet. Well, now they have enough that if it doesn't work, they'll be fine, but they're so excited to be able to get this new, this new profession going.

Ben Felix: Yeah. I've seen a couple of people do things like that, where they go in into a... Like I know one person who retired, they're getting a monthly income from their portfolio, but they've gone on to be a handyman in their community. Like got a business card and they're out doing handyman work for people around the neighborhood because that's what they wanted to do and they enjoy it.

Cameron Passmore: We have another one who could afford to get a cottage and other stuff, younger couple, because that's what many of their friends in similar situations were doing, and they said, "that's really not us. So do we get a big house in town?" They almost bought, but they said, "that's really not us either." And now they said, "Well, let's figure out what makes us happy as a couple." So they figured that out, figured out what the monthly amount is, then we basically reverse engineered the plan to see is there enough, and there is enough. Now he has no desire to stop working, but they know that this has done. They have financial freedom, tick, that gives them great pleasure and they carry on from there.

Ben Felix: The planning is so helpful. Like it's all based on assumptions, obviously, so you've got to take it for what it is, but it's so helpful. I went through a situation recently where the couple realized that they're going to get a much larger inheritance than they originally thought. So we incorporate that into the plan and then they start thinking, "well, maybe that means we can give a bunch of money to our kids before we pass away, like while we're still alive," which they were planning on doing anyway, but it's like, "maybe we can do way more." So we modeled that and it's like, yeah, they're still fine, but then we ran the Monte Carlo, and if they gave the larger gift of the kids prior to getting the large inheritance they're expecting, the plan blows up 40 percent of the time.

Cameron Passmore: Wow.

Ben Felix: So they realize, okay, so we can do a smaller gift now and then if we do get this inheritance that we're expecting, then we can give a larger gift then. But just that clarity, it's like, yes, you can do this, but not right now. And if we didn't have the Monte Carlo just on a straight line basis, the plan looked fine. But as soon as you run the Monte Carlo you see, okay, we need to change the way we're thinking about it a little bit.

Cameron Passmore: And someone asked me this week, "why did you call this a rational reminder?" And this is a great illustration. Like here you've got a meeting of planning that is totally rational, sensible, practical, pragmatic, meeting up with a rational evidence-based philosophy on investments. It's just such a natural fit, and [inaudible 00:20:56], most client conversations are more about the planning and their situation because people know that we've figured out how to deliver a sensible investment approach.

Ben Felix: Yeah.

Cameron Passmore: So it's not about picking funds or picking stocks or predicting the markets at all.

Ben Felix: That's the value. I had a conversation with somebody that was interested in PWL recently and they asked, "so why would I deal with you guys as opposed to dealing with one of the robo-advisors, because it's a similar investment philosophy and obviously the robo-advisors, in most cases, charge a lower fee?"

Cameron Passmore: Not a ton lower, but it is lower.

Ben Felix: Yeah. Well it depends on the amount of assets too, right? For larger accounts we're in a lot of cases even cheaper than the robo-advisors. But anyway. But the answer to the question, how are we different from the robo-advisors, is that with us, you get real expertise and you get someone, a team, who know you, your situation, your goals, know about your family, and then we're able to pass that through, that knowledge through, to all the advice that we're giving. And I think there's a ton of value in just having someone with that knowledge base, even just for continuity for the family assets. I just wanted to throw in, because we were talking about the F.I.R.E. movement, and I would feel irresponsible if I didn't mention something that we wrote about a while ago.

The F.I.R.E. movement, for whatever reason, I don't know the specifics of why it's built around this, but the F.I.R.E. movement focuses really heavily on the four percent rule. So the four percent rule was created by a guy named William Bengen, who was a financial planner himself, and he basically did a bunch of historical analysis to see what percentage in the first year of retirement, what percentage of the portfolio could you spend such that you wouldn't have run out of money in the worst year or the worst 30 year period in US market history.

Cameron Passmore: And that dollar withdrawal stays the same through time adding inflation each year.

Ben Felix: Adjusted for inflation.

Cameron Passmore: Correct.

Ben Felix: Right.

Cameron Passmore: So it's not four percent of each year's balance. If it goes up, it's not four percent the next year.

Ben Felix: Correct.

Cameron Passmore: Stick that first four.

Ben Felix: Four percent in the first year adjusted for inflation going forward.

Cameron Passmore: Right.

Ben Felix: So anyway, he found that in that worst year, four percent was the number that allowed you to not run out of money. And based on that, he said, "okay, four percent is a safe withdrawal rate." Now that was done, I don't remember when he wrote that paper, but it was a while ago, quite a while ago, and people have stuck to it as a rule to live by. Now, the problem with the F.I.R.E. movement is that it's talking about retire early.

Cameron Passmore: Early. The E.

Ben Felix: The E, yeah. Now Bengen was talking about a 30 year retirement period. So he was thinking, okay, you retire at 65 and you live, let's say at the long end, until 95. Let's see how much you can spend. If someone's not retiring at 65, if they're retiring at 35 or 40, the four percent rule does not apply.

Cameron Passmore: Way too high.

Ben Felix: At all.

Cameron Passmore: Yeah, like you'll run into money. So the spending, the safe spending rates get substantially lower the earlier that you want to retire. The other thing with the four percent rule is that Bengen used US stock data. So SMP 500. And obviously there's huge sample bias. If you're just looking at the SMP 500, we know now, looking back through time, that's been the best performing asset class. US stocks have been the best performing asset class of all the equity asset classes. So basing a safe withdrawal rate on that, on the best one, I wouldn't say is a sensible thing to do.

So what do you usually tell people, younger people, safe withdrawal rates?

Ben Felix: Depends on when they want to retire. It depends on the asset mix. It depends on... yeah, all sorts of different factors. But I think as opposed to giving a rule of thumb, what we would normally do is use the Monte Carlo analysis to actually model it for each individual person, and that allows you to say with a lot more basis, this is how much you can spend.

Cameron Passmore: But it's well below four.

Ben Felix: Oh yeah.

Cameron Passmore: I mean, some days, your people say, "I've got a million dollars. If I can make five percent, that's 50,000 a year, I'm safe with that."

Ben Felix: Yeah.

Cameron Passmore: Well that doesn't take into account taxes and inflation.

Ben Felix: I'm just pulling up the blog post I did a while back. So if we look at... Okay, so what we did with this blog post is we did a Monte Carlo simulation for someone retiring. They're using a 50 percent stock, 50 percent bond portfolio, and we basically replicated Bengen's analysis using Monte Carlo as opposed to using historical data. And for a 30 year retirement, we found a 3.5 percent safe withdrawal rate. So not that far off of four percent, really, but as soon as you get into more years of retirement, so if we say, what about a 55 year retirement, your safe withdrawal rate in the first year drops to 2.2 percent. So if you're retiring and expecting to spend on your portfolio over 55 years and you're using the four percent rule, that's risky, I guess, is the way to put it.

Cameron Passmore: And even if you push the Monte Carlo to 99 percent, which is just below any chance of having to readjust your income, we've had a couple lately for younger people that got down to below 2 percent.

Ben Felix: Wow.

Cameron Passmore: Yeah. That what the planning software showed us.

Ben Felix: It depends how conservative you want to be really.

Cameron Passmore: Well, this person wanted to be conservative and wanted to make sure we pushed it to 99 percent, which normally go to 85 percent, but we went to 99 just to show him what it would take and that's what he wanted. "Tell me what I'm super safe at." And he's a young guy.

Ben Felix: And that we should explain what those percentages mean that you're spitting out because it could be confusing, I think. So if someone, usually the one that slows me down, if you have...

Cameron Passmore: Well, there's only so many people listening that have actually have gone through this experience and they know about the Monte Carlo.

Ben Felix: That's a fair point. But if we look, the Monte Carlo runs a thousand simulations and the percentages Cameron was talking about were the number of, or the percent of simulations that were successful. So if 99 percent success rate, that means 99 percent of the 1,000 trials, you never had to adjust your spending. So that's pretty good.

Cameron Passmore: Right. It doesn't mean you run out of money one percent of the time. It just means that one percent of the time you had to adjust your spending for the remaining years of retirement.

Ben Felix: So last thing I want to talk about before we finish off here, a new video on my YouTube channel, Common Sense Investing, came out on Friday. So we're actually recording on Friday, that's today, but you won't hear this until next week. New video is on asset location. It's a topic that I've always found pretty interesting, more so because of the way that other people seem to perceive asset location. So asset location is this idea that you can hold certain asset classes in certain account types, like holding bonds in your RSP, in order to increase your after-tax wealth. Now, when I started in the financial services industry, everything that I read seemed to point to, yes, this is obvious, you should do it. Here's how much value it can add.

Cameron Passmore: And you being you wondered if that's true.

Ben Felix: Well, the problem was that because we're using the DFA global portfolios, which we've decided are the most efficient vehicle for us and for our clients for a lot of different reasons, by nature of using that product, we weren't doing asset location. And so we did some pretty detailed analysis to figure out should we change, do we need to change what we're doing, because this is suboptimal. Obviously, if we're acting in the best interest of our clients, we need to determine stuff like that. So we dug into it pretty deeply and did build a pretty cool model actually with an intern that we had at the time.

And with the model, we were able to show that unless you can accurately predict future returns, which obviously you can't do, unless you can predict that, asset location is questionable in the amount of value that it can actually add to your after tax returns. And in a lot of cases, it might actually make you worse off than just holding the same mix on all of your accounts. So we had that result and it was kind of like I felt a little weird pushing that out into the world because everything else out there, people were saying basically that what I'm saying was wrong.

Cameron Passmore: And this also ignores the fact that it's virtually impossible to manage money and rebalance with the sub-asset class that [inaudible 00:28:57] portfolio. So if you have four different accounts, whatever, 10 to 14 asset classes each, it is virtually impossible to rebalance dimensional [inaudible 00:29:06] portfolios.

Ben Felix: Right.

Cameron Passmore: So you're ignoring that.

Ben Felix: So, that's one of the reasons that we use those products. Now, what we had to figure out was does that automatic rebalancing outweigh the asset location and basically what we determined in that paper that it does. But like I said, at the time, nobody else was saying that. Everyone else was saying you should be doing this. And since then, there's been a whole bunch of stuff that's come out from... Michael James came out and wrote a big post basically slamming a bunch of people, saying that they're getting asset location wrong. So that was interesting because you have all these people who are supposedly experts and Michael James writes a pretty sensible blog and he showed this is why these people are wrong. So all these experts are incorrect.

And then John Robertson wrote another post where he outlined all of how asset location works, including having to take into account after tax allocation, which is a whole other topic. And John Robertson concluded that, "well, maybe in my opinion, it's probably better just to hold the same mix and all your accounts." So I'm thinking, okay, there's a little bit of momentum building around the idea that we had. And then recently Justin Bender, PWL colleague, who has been in my eyes anyway, and maybe my perception was wrong, I don't know, but in my eyes Justin's been sort of the champion of asset location strategies. And if you read his blog, I don't know what percentage, 50 percent of the questions from readers on his blog are about asset location.

Cameron Passmore: Yeah. They love it.

Ben Felix: For whatever reason, right? So Justin came out with a blog post last week, and, I mean, you read it. What did you think?

Cameron Passmore: I mean, I agree with the quote and...

Ben Felix: I haven't read the quote yet. Let me read it. So Justin finishes his blog post with this line. "So again, I encourage most DIY investors to simply hold the same mix in each account type." I read that and I was like, "excuse me?"

Cameron Passmore: That's what you've been saying. That's what your data found.

Ben Felix: Now Justin is saying DIY investors, so there's still an indication that maybe they're adding a little bit more value by locating assets.

Cameron Passmore: I'm just like, to me I'm in practical role. The practical reality is it's so hard to do. It is so hard to implement. There's not great software available in our industry. And as people who manage a team that manages a fair amount of assets, this would be a logistic nightmare to do it anywhere near as effective. Well, it's impossible to do it like DFA does.

Ben Felix: That was one thing we said in the paper when we wrote that. I said that one of the big downsides of asset location is that if you're an individual, it makes it way more complicated for you to do, which is a drain on your brain resources and your time. And if you're a firm then trying to optimize asset location results in, like what you're saying, a logistical nightmare, which inevitably adds costs, which inevitably have to be added, passed on to the client.

Cameron Passmore: Especially when you don't trade blindly. We don't make money movements without knowing the client situations. We're conscious about triggering gains. We know clients have capital loss carry forwards. There's all these other things that are always... So it's not just as simple as black boxing everything.

Ben Felix: Yeah. Anyway, so we've had that view for a few years now after writing that paper. To see Justin kind of jumping on that bandwagon, yeah, I was surprised, but also felt pretty good.

Cameron Passmore: Anything else on your mind this week?

Ben Felix: No, that's it.

Cameron Passmore: Talk to everyone next week.