March 5, 2020

Episode 88: Market Drops, Biological Age, and FIRE any Time

March 5, 2020

Welcome back to the Rational Reminder Podcast everybody. Today we are using the opportunity to have a bit of a philosophical discussion about a bunch of things related to your retirement and the financial planning that goes into it. We touch on the all too obvious topics of the coronavirus and last week's market fluctuations before we scan the last ten years for any notable data points on fluctuations and the years with the biggest dips. We look at life expectancy and how this affects a retirement planning strategy. In British Columbia, drug use among younger generations has brought down life expectancy estimates, while improved health care has extended them in some regards. This leads to a few comments on biological age and how knowledge of yours should play a big role in your personal strategy for the end of your life. The last part of the episode is spent considering the current state of the discourse around the FIRE movement and what has grown out of it. We can see that it is not uncommon for large portions of the aging population to be happy to carry on working, and that the idea of getting out of the workforce as soon as possible may only be attractive to certain kinds of professions. For all this and a whole more from Cameron and Ben, be sure to tune in!

Key Points From This Episode:

The amazing new documentary on Herbalife called Betting on Zero. [0:02:54.5]
Market drops last week and the story that accompanied the volatility. [0:06:14.9]
Biggest and average drawdowns in recent calendar years. [0:10:03.3]
Coronavirus impacts and questions about buying stocks now when they are low. [0:14:20.2]
Conversations about the market drop and aggressive response strategies. [0:20:06.8]
Data findings for historic cases of market timing from the last century. [0:25:12.3]
Historic relations between the market and health pandemics. [0:30:22.1]
Life expectancy's huge role in long term financial plans and retirement. [0:32:31.8]
Changes in average life expectancies in British Columbia due to drug use. [0:37:40.7]
The importance of biological age when making sound financial decisions! [0:41:02.5]
Working longer into old age as a means to make retirement easier. [0:44:31.5]
The five-factor model for happiness and what it means for your retirement. [0:49:50.5]
Bad advice of the week! The last time we will talk about deferred sales charges! [0:54:57.5]

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: You'll be very happy to know, based on a lot of feedback last week that I think we solved what that clicking sound was in the background.

Ben Felix: Knocking I think-

Cameron Passmore: It's more knocking. Someone called it a clicking, and we actually have a table that we record this at which had a few loose batteries in the tray. We're assuming it was the batteries knocking back and forth. So, hopefully today has no clicking or knocking in the background.

Ben Felix: Hopefully, but we didn't hear it when we were recording last time.

Cameron Passmore: No.

Ben Felix: I heard it in the audio afterwards but while we were recording it, I didn't hear it.

Cameron Passmore: Our producer tried to take it out as much as he could, but that was the best we could do. So, we apologize for that noise and hopefully it doesn't happen again. I noticed you are not carrying your 80 pound backpack back and forth to home now.

Ben Felix: It's heavier than that. Yeah, it's scary in the ice.

Cameron Passmore: How much is it?

Ben Felix: I haven't weighed it but it's over 80 pounds for sure.

Cameron Passmore: It's pretty brutal.

Ben Felix: I'll carry it home eventually once the ice is gone.

Cameron Passmore: Another update, one of the most common questions I get, believe it or not is did the raccoons ever come back to my attic? It's so funny how people heard that and remember it. So, I get it all the time and I'm peering out my window last week, I noticed oh no, one of the soffit has been punched out again. So, a raccoon broke into my attic again. I had all my soffits secured. I thought they were all secured with screening and the screws, but they didn't do one area for some reason, the company didn't do it. Of course, a raccoon busted in there.

Ben Felix: Is that included in the 1% estimated maintenance costs for running a home?

Cameron Passmore: No, I paid for it last year with lifetime guarantees. They came back and put on a new one way door to make sure that he or she is out and then they'll come back and fix the soffit up.

Ben Felix: Interesting.

Cameron Passmore: It's actually good service. But do you see why it's expensive to get this done? To do it properly, and humanely, which of course they do, it's a lot of work. And to go up and inspect my attic and the crawlspace and put the insulation back in place, it's a fair job.

Ben Felix: Guaranteed for life though.

Cameron Passmore: I believe it is.

Ben Felix: That's pretty cool.

Cameron Passmore: Pretty cool.

Ben Felix: But the returns are back.

Cameron Passmore: But the Raccoons are back. Anyway, anything to add on this episode?

Ben Felix: No, a lot of it was pretty philosophical discussion about life expectancies and what does retirement really mean and how does that affect financial planning decisions. We talked a little bit about the coronavirus, obviously.

Cameron Passmore: Markets volatility, market timing.

Ben Felix: Could not talk about that.

Cameron Passmore: No. Anyways, we'll let you have a listen.

Ben Felix: Welcome to Episode 88 of the Rational Reminder Podcast.

Cameron Passmore: I know you have not seen this documentary, but we watched one on the weekend called Betting on Zero. Incredible, incredible documentary about Herbalife which is a company that markets nutritional products like weight loss shakes and supplements. Anyways, it's a company that's been accused of using multi level marketing techniques and-

Ben Felix: Isn't that what they do? Accused of, isn't that the business model?

Cameron Passmore: Well, that was my interpretation, and John Oliver did a great expose on them a few years ago. It was back in 2012 that hedge fund manager Bill Ackman thought that it was a pyramid scheme and put on this billion dollar short.

Ben Felix: It's a big short.

Cameron Passmore: That's a big short, expecting the market to plummet once this information became public. It ends up that on the other side, Carl Icahn jumped in and was long on the stock, and he was in like also big time. You get this war of the titans of the investment world fighting over Herbalife. Herbalife was quite adamant that it was not a multi level marketing type scheme. It sure looked like it to me based on how they presented it. They were growing like crazy around the world, especially targeting communities who may not have had high incomes, and people didn't understand how the business world necessarily worked and maybe didn't understand how it might have been multi level marketing.

Ben Felix: Well it's the classic MLM motive, right? That's how those businesses tend to play out.

Cameron Passmore: That's how it works. Anyways, the story is about how these two huge managers were on each side of the bet with big dollars.

Ben Felix: So, what happened?

Cameron Passmore: What happened was the Federal Trade Commission came out in 2018 and fined Herbalife $200 million, but it was somehow they never called it a pyramid scheme. They paid the fine, the stock is trading about the same. I think Ackman, from what I can tell, he was at one point down because the stock went up when he had the short on, he was down $700 million. I think he got out pretty much even, whereas Carl Icahn I think made a pretty good return off his investment in the shares. Ackman is completely out... I since learned he's completely out of the stock and it's still trading and the company is still going on, but I think they've changed their business practices.

Ben Felix: It's not an MLM company anymore?

Cameron Passmore: Not to the extent that they would get into trouble, but I don't know, today.

Ben Felix: Wow.

Cameron Passmore: But to see the vicious fight between these two investors, and to watch the company defend it, with Michael Johnson, who was a former head of Walt Disney International, pretty polished guy at the head of this company, he was making like $90 million a year leading this company around the world and they were adamant that it's not an MLM type scheme.

Ben Felix: I guess that's an explicit story, maybe, about how information gets into prices?

Cameron Passmore: It suer do. With that kind of money, that's certainly a lot of information in those prices.

Ben Felix: Just on the Disney thing, did Bob Iger step down?

Cameron Passmore: He's still on the board, I believe, but he stepped down as head of Disney. It seemed to be rather sudden. He announced that he was supposed to step down next year, but it took effect immediately on announcement last week. I have not been able to see any more details.

Ben Felix: I saw that headline, and I remembered because you talked about him recently in the podcast.

Cameron Passmore: It's still a great book. Anyways. Other news this week-

Ben Felix: Yeah, I can't believe we didn't lead off with this news. That's probably what everyone's hoping to hear, maybe not because it's the Rational Reminder Podcast.

Cameron Passmore: Plus, you look back in two years time, you may not remember this anyways.

Ben Felix: Yeah. Market dropped, if people didn't notice.

Cameron Passmore: A little bit.

Ben Felix: A little bit.

Cameron Passmore: Now, we're recording this on Monday the 2nd, so the market was up today, a lot. But it may not stock tomorrow. But yeah, last week was quite something.

Ben Felix: Yeah, some big back to back drops, some pretty red days.

Cameron Passmore: But do you notice there's always a story to go with the drop?

Ben Felix: Of course.

Cameron Passmore: It's almost like the story is more terrifying than the actual numbers.

Ben Felix: Of course.

Cameron Passmore: It's always this time is different.

Ben Felix: Of course, that was the problem is that this time it is different, was supposedly, that's how it feels.

Cameron Passmore: But still for the week, the Dow was down 12%.

Ben Felix: That's a bad week.

Cameron Passmore: It's a bad week. S&P was down 11%. A few days there are 1,000 point drops. I happened to be traveling last week and checking in periodically on my phone to see where the market was at. It wasn't as bad as 2008, but it just reminiscing, being away from the office on a business trip, and still checking. It's like, oh my gosh, it's down again. Just have that same feeling that we haven't really had.

Ben Felix: But are there big drops? It's not like they were a little incremental, getting lower and lower. We had days with pretty substantial drops. If we keep having days like that, it would get obviously pretty bad.

Cameron Passmore: But you can see, it could get through another week without you down 25%. That's a fairly good drop.

Ben Felix: Who knows what happens? Like you said, we're recording this on Monday 2nd, who knows what happens next, by the time the episode comes out? But market volatility is always going to be there.

Cameron Passmore: And a ton of investors in the market today have never seen this kind of volatility.

Ben Felix: Yeah. Which is interesting to think about. But it's also an interesting anecdotally where I've had many conversations with people who I consider to be exceptionally irrational and well educated on the financial markets, and they're also freaking out, which is like-

Cameron Passmore: Based on the quantum or based on the story?

Ben Felix: Oh, it's always the story. If it's just based on the quantum, this was nothing.

Cameron Passmore: Imagine if you didn't see on the news that the market was down 1,000 points, like your house. Can you imagine getting a statement on TV that your house was down 1,000 points today?

Ben Felix: Well, that's what... There's a website in the states that does that, people freak out about it.

Cameron Passmore: Or is it been a lot of talk? The Twitter beat will be followed on how I wish I had private equity that wasn't marked to market. I wasn't down at all last week.

Ben Felix: That's what people are saying. My private equity is doing great.

Cameron Passmore: Did you do a little bit of research on how bad is it?

Ben Felix: I wanted to put the drop that we had into context. So, I built a model portfolio just with index, this is not index funds. So, no fees. Rebalance monthly, one third Canadian, one third US, one third international stocks, no emerging markets, just one third each in Canadian, US, international developed. I used monthly returns. We mentioned those 12% and 11% drops for US stocks. Those were based on weekly returns, I use monthly, just a little bit easier to work with that data set and easier to get that data.

Cameron Passmore: Your data was current to the end of last week?

Ben Felix: Yeah.

Cameron Passmore: Awesome.

Ben Felix: Yep. Using monthly returns, month end data, the 2020 drawdown, drawdown being the peak to the trough.

Cameron Passmore: So, the peak of this year to the trough of this year, not-

Ben Felix: So far.

Cameron Passmore: ... January 1st, to the end of February.

Ben Felix: Correct. Well, it ends up being that anyway because we only have two months of data, but we're going to talk more about drawdowns, and the drawdown is the peak to the trough. The drop for 2020 was 6.8% for this portfolio. So, not terrible. Canada did not have as much of a drop as the US. I think international actually had the biggest drop of the three. But anyway, on average 6.8%, so not too crazy.

Cameron Passmore: Then you compare this to the calendar year drawdowns over time.

Ben Felix: Yeah. On average, this is going back to 1970s where I had data, and on average, there was intra year. It's important to describe actually. I built a little algorithm thingy in Excel to pull the data for the maximum drawdown within each calendar year. From January to December in each calendar year, what was the biggest intra-year drop?

Cameron Passmore: Okay, peak to trough in a calendar year.

Ben Felix: But I'm not looking at, or we're not looking at drawdowns across multiple calendar years.

Cameron Passmore: Right.

Ben Felix: An average, intra-year drawdowns 8.65%, on average.

Cameron Passmore: Right.

Ben Felix: With a standard deviation of 7.26%. If we say the drawdown so far this year was 6.8%, that was not as bad as the average drawdown, and well within what would be considered normal based on a normal distribution of outcomes. Not crazy at all. The last decade was uncharacteristically good in terms of not having a ton of big dropouts. From 2010 to the end of 2019, we only exceeded the historical drawdown twice.

Cameron Passmore: So, it was only twice a bigger drawdown than 8.65.

Ben Felix: Correct. That happened in 2011 and 2018. Keeping in mind, these are month end numbers.

Cameron Passmore: Right. There's a little bit of smoothing going on here, and you're washing out some volatility, which still is meaningful.

Ben Felix: I looked at what happened in years where we did have drawdowns of various magnitudes, what did the year end up looking like? For years where there was a drawdown of 6.8% or greater, that's the drawdown that we've seen here, based on the month end data, the portfolio still returned 2.38%.

Cameron Passmore: On average.

Ben Felix: On average.

Cameron Passmore: For the year.

Ben Felix: For the year. 50% of the time, so 50% of those years, there was a negative return. On average, 2.38%, but in about half, in 50% exactly by year, there was a negative annual return in years where we had a 6.8% rate of drawdown.

Cameron Passmore: So, 6.8 or worse drawdown.

Ben Felix: Correct.

Cameron Passmore: Okay.

Ben Felix: If we carve some of those out and say, what about only 10% or greater drawdowns? In that case, on average, the year finished, if there was a 10% or greater drawdown within a year, the year on average finished with a -2.4%, return, and 67% of the time, in those cases, it was a negative return for the year.

Cameron Passmore: Interesting.

Ben Felix: Meaning obviously, the difference was still a positive return. Negative on average, but still not guaranteed to be a negative-

Cameron Passmore: In the average negative is not terribly negative.

Ben Felix: No, not bad at all. Then I carved out the 20% or greater drawdowns. In those cases, for the year, the portfolio returned almost -15% for the year and in 83% of years, it did have a negative return.

Cameron Passmore: That's a little more painful.

Ben Felix: A little more painful. But we're also not there with the current drawdown. If we look at past years that have looked somewhat like this year, on average, the outcome's still been positive.

Cameron Passmore: How many times, do you know, where there are -20% or worse drawdowns? Was it a meaningful number?

Ben Felix: I have the data but I didn't write it down.

Cameron Passmore: Well, it didn't happen a lot of times.

Ben Felix: Not a ton.

Cameron Passmore: Okay. Now, can we draw actual inferences from this data, or is it just interesting, but potentially not statistically telling?

Ben Felix: No, there's no real statistical relationships that we can see here. Other than that, what we've seen this year is very normal. I guess, statistically, that means within one standard deviation of the average.

Cameron Passmore: If you have the ability to look at the data and not know the story behind the data.

Ben Felix: Yeah. Well, that's the tricky thing is we have this coronavirus-

Cameron Passmore: Do we know that was the cause? Some people were writing last week that this was the perfect excuse for people to clean up their portfolios and do some selling.

Ben Felix: Do some loss harvesting and rebalancing stuff?

Cameron Passmore: Hey, I'm just telling you some of the stuff I was reading.

Ben Felix: Yeah.

Cameron Passmore: We have a few calls from people last week wondering if they should be investing now, which it's a great instinct.

Ben Felix: Yeah. Well, I think we've had two things. We've had, maybe people who invested recently. It's kind of funny, you think through over time, you'll have cohorts of people that make decisions at the same time. So, we'll have a cohort of clients that just happened to invent varying amounts of money, but in some cases, large amounts of money right before a drop like this, and you have cohorts who just happen to invest right before really good markets. It's funny to see the different experiences that people can have just based on the random outcomes.

Cameron Passmore: But the market is basically back to where it was last fall.

Ben Felix: Yeah. The thing that I was thinking about in terms of making investment decisions based on this type of volatility is well, we know market timing is not a good idea in general, and we'll talk more about that in a second. But with the data set that I had for this portfolio that we're just talking about with the drawdowns, I use that to build out a little, I guess, a market timing model.

We took the exact same data set, starting 1970, and we modeled three different scenarios. One scenario, where we invested arbitrarily at the beginning of January, $1,000, every year. That's the first benchmark model. In that case, based on the returns over this time period, you end up with $1.33 million.

Cameron Passmore: So, $1,000 a year for 49 years. Okay.

Ben Felix: With the returns that this portfolio got over that time period.

Cameron Passmore: Right.

Ben Felix: That's a baseline. Arbitrary, you get your bonus every year and you invest that, and that's your savings for retirement.

Cameron Passmore: Yep.

Ben Felix: Then I looked at what what if, because I had this drawdown data that I created, which was actually pretty hard to create, it's harder than you think to find the lowest in a big 600 roughly data points for this data series. To find the lowest drop, peak to trough in each calendar year was hard.

Cameron Passmore: You had to program it, or you had to go find-

Ben Felix: Well, "programming" in quotation marks. It was Excel in cell programming.

Cameron Passmore: Okay.

Ben Felix: But still hard to figure... Anyway, because I had that done, I was like, hey, I can use this to build a little market timing model. So, I made another scenario where instead of investing arbitrarily in January, we waited and invested with perfect foresight or because we have all the data obviously, invested at the worst possible times. Right before each drawdown is when we made our contributions.

Cameron Passmore: At the end of the drawdown, the low point.

Ben Felix: Well, I did both. But right. For the worst one, it was at the high point. So, right before the drawdown.

Cameron Passmore: Yes, I got you.

Ben Felix: Worst possible timing for the investments. Instead of ending with 1.33 million, which is what the arbitrary January 1 investor earned, they ended with 1.15.

Cameron Passmore: If you invest at the high point for the year, okay.

Ben Felix: Worst time to invest within each calendar year.

Cameron Passmore: Yep.

Ben Felix: Then I figured, okay, what's the best possible outcome? If you invested within each year at the trough of each drawdown, you ended up with 1.39 million.

Cameron Passmore: All three scenarios are pretty good.

Ben Felix: That's what I'm saying, exactly, that people worrying about... Assuming you don't have a long time horizon, and if you don't, you shouldn't be in all equities anyway. But the impact on timing decisions are far outweighed by long term market returns.

Cameron Passmore: So, the annualized return for the whole portfolio for that period was 9.5%.

Ben Felix: Yeah.

Cameron Passmore: You drop off the 10 best months-

Ben Felix: This is the thing, is that in our timing model, it wasn't really a timing model, because you're still mostly invested most of the time, which I guess is why the numbers are so close.

Cameron Passmore: Sure, all you're really doing is shifting.

Ben Felix: Timing your contributions.

Cameron Passmore: That 1,000 bucks over time becomes less and less meaningful, I'm guessing.

Ben Felix: Which is what you think about though, if you think about people who were panicking about the downturn recently, in a lot of cases, they're worrying about investing one of their many future retirement savings contributions.

Cameron Passmore: But if you have your whole retirement portfolio in there, and you see it go down by 10%, if you happen to be all equity, that's painful.

Ben Felix: Yeah.

Cameron Passmore: It went down by more than you save for many, many years early in your savings life.

Ben Felix: Yep. No question. No question about that. Yeah. If we made the assumption that you are not going to stay fully invested with the money, and just time the contributions. If we say that you're going to time the whole entire portfolio, where it gets really tricky is that missing a few of the many months of returns. I think it was 602 months of returns that I was looking at, I stripped out the best 10, not the best 10%, the best 10 of 602, and the annualized return drops from 9.5% down to 7.7%.

Cameron Passmore: That's the month, and I bet you it's probably days of those months that really made the big difference.

Ben Felix: Yeah, that's probably true.

Cameron Passmore: Because I've heard stats like a handful of days over savings lifetime can have a huge impact.

Ben Felix: Yeah. I thought it was just interesting to see that over the long term, if you're investing your savings, a drop like this doesn't make a huge difference.

Cameron Passmore: Right. But one question that does come up a lot when things like this happen is I think it tests people's dedication or devotion to their asset allocation mix.

Ben Felix: I had, more than usual, which is... I'm not a veteran like you are, Cameron, but I've been around here for seven, almost eight years now. This is the first time, which is interesting, because it wasn't even... In 2019, I guess we didn't really have bigger magnitude drops for 2018, sorry. Yeah, this was the first time that we had multiple phone calls. I used to brag in the past that we never had clients calls when the market dropped, I guess the market hadn't dropped that much.

Cameron Passmore: It hadn't. It's true, it had not dropped that much.

Ben Felix: But this time, I got not a ton, maybe five people that wanted to talk.

Cameron Passmore: You could even back the drop in late 2018, there wasn't the story to go with it.

Ben Felix: Yeah, that's a good point. Interesting.

Cameron Passmore: The story is different, it's a compelling story to worry.

Ben Felix: Yeah, that's interesting.

Cameron Passmore: It's a very compelling story to worry.

Ben Felix: But what I found most interesting is that of the conversations that I've had about the market drop, most of them have not been about going to cash, not been about getting more conservative, they've been about getting more aggressive.

Cameron Passmore: Yes.

Ben Felix: I don't know if that's because people have heard us talking about leverage, I don't know what it is. People are listening to the podcast too much, they're getting too rational. But I found that fascinating. People are saying, should we take the bonds out of the portfolio and go 100% equities now? Or should we start using leverage now?

My response is, your risk preferences haven't changed just because the market dropped. Maybe that's not true, maybe they have.

Cameron Passmore: More people just trying to be opportunistic.

Ben Felix: It would have been good.

Cameron Passmore: First day, that would have been great, you're up, whatever 5% today.

Ben Felix: As of Monday, who knows what it's going to look like by the time this episode comes out.

Cameron Passmore: It's one day on the 2nd of March [inaudible 00:21:55] days left to go.

Ben Felix: But in general, I don't think... We say this always when we're talking to people about asset allocation is that you don't want to change your asset allocation based on external factors, like what the market is doing. You base it on life circumstance changes. If you're getting closer to retirement, that's a reason to change your asset allocation. If you inherit a bunch of money, that's a reason to change your asset allocation. But the market dropping 10% over a couple of days, not a reason to change your asset allocation.

Cameron Passmore: That's not a reason. No, definitely not.

Ben Felix: No. Just on being opportunistic, when the market drops, in other words, when valuations fall, when yields rise, that's not a reliable signal to time investment decisions.

Cameron Passmore: Now, that being said, if you had a severe, severe drop, like back in 2008, where you're down 40%, 45% on equities, if you believe capital markets will survive-

Ben Felix: Expected returns are higher. But I guess that means you had cash on the sidelines, and you missed all the returns leading up to it.

Cameron Passmore: Exactly. You have to time to get the cash.

Ben Felix: But we've talked, I think on the podcast in the past about the Shiller CAPE, which is Robert Shiller's market valuation measure, the cyclically adjusted price earnings ratio. That's historically been of the market timing metrics out there, the most reliable one, still probably not reliable enough to time investment decisions, but the most reliable one.

The people at AQR, Cliff Asness, and those guys, they they did a paper a few years ago on using the Shiller CAPE to time investment decisions. You can say this about investing cash, you can say it about changing your asset allocation to be more aggressive, starting to use leverage, those are all asset allocation decisions, investment decisions, that people might base on the market being, 'low'. he air quotes are actually really descriptive of their paper, because they built a market timing model, but what they did in their model that was unique or differentiated their research was they based prices being high or low, only on backward looking history, at the time that that market timing decision was being made.

You can build a market timing model today using all of the historical data. We know based on the full set of history, what was high in terms of valuation, what was low.

Cameron Passmore: Okay.

Ben Felix: But the point in their paper, was that at a given point, if we're in 1960, you don't have all the data out to 2020 to say whether stocks were cheap or expensive in 1960. You only had the data going backward leading up to that point.

Cameron Passmore: Okay.

Ben Felix: That makes the Shiller CAPE, as a market timing tool a lot less effective. If you sort future returns based on valuation, with the full data set, it's monotonic. When valuations were lower, future returns were higher. When valuations were higher, future returns were lower when you have the full data set to look at that. When you don't have the full data set, when you sort based on valuation using only historical data, it's a lot less reliable.

Cameron Passmore: Interesting.

Ben Felix: Anyway, there's this hindsight bias built into the idea that you can time the market based on the Shiller CAPE. They correct for this in their model, and they did find... They looked at data from 1900 to 2015, and they did find that the market timing model added a little bit of value. But the interesting part was that from 1900 to 1957, it did better than the market.

Cameron Passmore: This is time to get in and out.

Ben Felix: Yeah. They are using leverage on the getting in end, getting more aggressive, and then going into risk free assets on the safe end, when it was 'overvalued'. They found that for the first period, stocks were cheaper, and they were invested most of the time or leverage most of the time.

Cameron Passmore: That's because in general stocks didn't do great in that period overall?

Ben Felix: Well, they were overexposed to stocks. It's because stocks looked cheap relative to history.

Cameron Passmore: That's what I mean. So, it looked cheaper.

Ben Felix: But you think about every time period moving forward, stocks look cheap, relative to the past. From 1900 to 1957, stocks just looked cheap for that time period. Then from 1958 to 2015, their model underperformed the market, because over that time period, stocks were generally expensive.

Cameron Passmore: The model is telling them to reduce their exposure to stocks as time went by, even though markets kept on doing well.

Ben Felix: Markets were doing well, but stocks looked expensive.

Cameron Passmore: Is that suggesting that expensive things can get more expensive?

Ben Felix: Well, for sure, that's the problem, and that's that hindsight issue with using the Shiller CAPE to time the market. People haven't been talking about Shiller CAPE as much with this little market correction, it's all been all about the coronavirus, but it was maybe in 2018, everyone was worried about valuations being too high. People still talk about that today. It's one of the go to market timing talking points.

Anyway, in this AQR paper, they suggested that this doesn't really work. The reason being valuations can drift to appear to be relatively expensive or cheap compared to the past for extremely long periods of time. We could have a full 50 years where relative to the past, stocks look cheap or expensive.

Cameron Passmore: Right. You also think of that year of falling interest rates over much of that period. So, it makes equities look more attractive, even though they're more expensive.

Ben Felix: True. The other big market timing tool that people talk about is the US yield curve. That's come up too in this whole coronavirus, market decline debacle.

Cameron Passmore: 10 year treasuries in the US hit their lowest point ever last week, 1.3%, 1.2% some incredibly low number.

Ben Felix: Yeah. The US yield curve inverted late last year, and within six quarters, a US yield curve inversion is usually followed by a US recession. They've been nine US yield curve inversions, including the one that happened in 2019, and seven US recessions since 1966.

Cameron Passmore: Every listener knows there's a but coming.

Ben Felix: Well, the but is just that you can't use that to time the market. Again, similar to the Shiller CAPE, it seems like because it's such a reliable predictor of recessions, it seems like that would be a really good market timing tool. Fama and French did a paper on that last year, where they, similar to the AQR paper, they built a market timing model, that reduced equity exposure when the yield curve inverted, and they did it globally, too, it wasn't just the US. There's three different portfolios from the perspective of US investors.

There was the US, world excluding US, and the world including the US. They found that... Here's a quote from them from their paper, "The results should disappoint investors hoping to use inverted yield curves to improve their expected portfolio return. We find no evidence of the yield curve inversions can help investors avoid poor stock returns." What do you expect?

Cameron Passmore: Good enough for me if it comes from them.

Ben Felix: Yeah, if it comes from them, but if they did the analysis, they're not just saying it, I guess that's why they're so credible.

Cameron Passmore: They go on to say the simplest interpretation of the negative active premiums we observe is that yield curves do not forecast the equity premium.

Ben Felix: Yeah. This interpretation implies that investors who try to increase their expected return by shifting from stocks to bills after inversions just sacrifice... I love this, just sacrifice the reliably positive, unconditional expected equity premium. Such a Fama-French thing to say. My takeaway from that is that... Fama has written papers on how the yield curve does forecast economic conditions. They're not saying that's not true, it is.

Cameron Passmore: You said stock returns.

Ben Felix: Right. Fama has done some notable papers on that exact topic, that the yield curve does, in fact, forecast economic conditions or economic activity. But like you said, Cameron, just it does not forecast stock returns or the equity risk premium. So, trying to use it to time the market, probably not a good idea, like anything, including the coronavirus.

Cameron Passmore: There's not a single listener surprised by this.

Ben Felix: I think that it's still useful for people to hear it.

Cameron Passmore: Oh, I agree

Ben Felix: Who said that? Jonathan Clements maybe said that his job was to... No, it wasn't Clements, it was Jason Zweig, his job is to say-

Cameron Passmore: No, it's Clements.

Ben Felix: Is it Clements?

Cameron Passmore: It was Clements. There's 20 stories to learn how to tell different-

Ben Felix: You're right.

Cameron Passmore: ... 30 years of journalism.

Ben Felix: Yeah.

Cameron Passmore: Yep.

Ben Felix: It was the same thing here. It's like the market declined, should you panic? No. But maybe why should you not panic? Maybe that's the part that's useful to hear, a counter story to the doom and gloom story. There's not enough data to say anything conclusive. Who knows what the future is going to look like. But there have been a couple of pandemics, real designated, is that the right word? Pandemics, where we have stock returns to see what was going on. Again, there's no statistical reliability here.

Cameron Passmore: This is just simply observation.

Ben Felix: Yeah. But it's still interesting. From 1956, 1958, the Asian flu killed an estimated 2 million people, and there was a big cohort in the US that died from that, too, I don't have the number. Not in the millions, it was in the many tens of thousands. Over that time period, 1956, 1958, the US stock market... I only had S&P 500 data for this, I don't have great data, really pre-1970 for other markets. Over that time period, 2 million people died, and the S&P 500 returned an annualized 10.87%.

Then in 1968, flu pandemic killed 1 million people, not a million in the US, a million including some in the US. Over that one year, 1968, the US stock market returned 11.08%.

Cameron Passmore: Data points.

Ben Felix: Based on that data, there's maybe a pandemic factor that we should be trying to exploit. Pandemic sounds funny.

Cameron Passmore: No, there's nothing funny about it. Onto our planning topic this week.

Ben Felix: Yeah, ties right in with pandemic.

Cameron Passmore: Yeah, this is one I've been looking forward to for a long time, we've been kicking this idea around to talk about, which is life expectancy, and this comes up all the time in our financial planning meetings, and often to eye rolls from clients in the office.

Ben Felix: Oh, I'm never going to live to be 96.

Cameron Passmore: It's the opinions people have or other people, I'm going to live to 120, I'm sure of it. Founded on opinion, not necessarily-

Ben Felix: What's anecdote, usually.

Cameron Passmore: Anecdote, exactly.

Ben Felix: My uncle died when he was 65, and my dad, whatever, whatever.

Cameron Passmore: Anyways, you just don't know. It's one of those risks when you look out into the future, things are unknown. You don't know how long you're going to live, you don't know what returns are going to be, you don't know what inflation is going to be.

Ben Felix: Those are the big ones. When you think about what are the main inputs to financial planning, of the ones that you don't have any control over, like, taxes are a big input, but you have some control, some control over taxes.

Cameron Passmore: Some.

Ben Felix: Spending is a big input, and you have a fair amount of control over spending, most of the time, unless it's medical stuff, I guess. But the big ones we have no control over are how long we're going to live, what market returns we're going to get. Oh, and that's a fascinating one. We're not talking about market returns, just a side note. I wish I pulled the data point for this, but in one of Wade Pfau's books, he talks about a cohort of retirees. I don't even remember what the dates were, but it was like two years or one year apart where people retiring in one of the years was able to spend, I wish I had the data, but way less than the people that retired just a couple of years before them.

That market returns piece is huge. Just based on when you retire, based on nothing else, if you saved the exact same amount, just based on the returns that you got while you were saving, and when you're retired, you might end up being able to spend way more or less than somebody in a slightly different cohort. Lifespan, market returns and then inflation, of course, which is part of market returns, I guess.

Cameron Passmore: But same goes for life expectancy. I may have used this story before, and I forget who said it on Twitter. But if I told you have a 10% chance of the plane you're getting into of crushing, you would never take that plane.

Ben Felix: Right.

Cameron Passmore: But I say, you have a 90% chance you'll make it to your destination, you still wouldn't take it, right? But if you tell people in meetings, look, you have a 25% chance of living to 96. "I'll never live that long. Why would I plan on that?" Well, it's nowhere different than the plane example. There's a statistical significantly chance that you do live that long.

Ben Felix: Maybe people think too, that they have a safety net in their family, which isn't fair to the family, but maybe that's one of the things people think.

Cameron Passmore: That may be true. They'll live with their kids.

Ben Felix: But from a planning perspective, the kids would have preferred the parents to plan around that. Maybe that's a cultural thing too.

Cameron Passmore: We thought it'd be interesting to share with you how we look at this and how we plan for this in our planning and some things to consider when you do your long term retirement planning.

Ben Felix: That has huge impacts on decisions. What you're talking about, if someone doesn't plan to live to that 10% outcome, they may run out of money. But on the flip side, and this is why people will roll their eyes when we talk about this, on the flip side, if you plan to be 120 when you die, or you plan to die at 120, it means you're going to spend way less, which also kind of sucks. Because if you die at 90, having spent way less, and not enjoyed your money, that's not a good outcome either.

Cameron Passmore: The standards that we follow is from FP Canada, and they suggest that we use a projection period where the probability of living longer than planned is 25%. So, plan to live the age that you have a 25% chance of living to. Based on Stats Can tables, a 60 year old has a 25% chance of reaching 94, if you're male and 96 if you're female, which almost every day we see people shocked by those numbers.

Ben Felix: Oh, every time we go through a financial planning exercise, people are for sure, shocked. Just for as a point of interest if we scale that back instead of the 25% chance, the 50% change on average, a male's 89, and a female's 91.

Cameron Passmore: Which I think is what a typical life expectancy would be 50-50 chance, right?

Ben Felix: Yeah, absolutely.

Cameron Passmore: What blew us away, we just double checked the numbers earlier, is that back in 1971, those same figures were 77 for a male and 81 for a female to have a 50-50 chance. Incredible the difference in life expectancy in just less than 50 years. Incredible jump.

Ben Felix: Which is part of this issue, this issue of planning is that you think about past generations where the retirement plan was to work until you're 65. maybe retire for 10 years, depending on the time period. In the past, it was maybe even shorter than that, and then you die, and that's it.

Cameron Passmore: The side note in the life expectancy is that we just tripped over in the data was the life expectancy is slowing now, especially in BC, due to people overdosing and drug use.

Ben Felix: That is very sad. The thing that I find staggering about that is when we look at mortality tables, that might be pushing down average life expectancies, because the younger population of males, particularly in BC, like you said, are dying sooner. But on the longer end, older people are living longer because of improvements in cancer and cardiovascular disease treatments.

Cameron Passmore: Yeah, I think that's one of the fastest growing cohorts is the people that are really old because you've dodged so many bullets by time you get to be that age.

Ben Felix: But again, if we're looking at the FP Canada mortality table that they get from Statistics Canada, that might be misleading. Because on average, sure, but then there's this whole cohort of young people that are dying from drug overdoses. If we take those out of the data set, then maybe the average life expectancy is a lot longer.

Cameron Passmore: No doubt.

Ben Felix: If you're not a young person using drugs, then you would not fall into that cohort. Anyway, long life expectancies is a thing to plan for, for sure. There's another really interesting concept that Moshe Milevsky has written about, just in trying to figure out if your chronological age... Your age in years, as we normally calculate time might be different from your biological age. Your mortality expectations might be very different than your chronological age would predict.

Cameron Passmore: Based on where you live, based in your lifestyle habits, it's also called your inner age, I believe.

Ben Felix: You did a little calculator to see where you-

Cameron Passmore: Exactly, yeah. I'm actually 13 years younger, my biological age.

Ben Felix: Wow.

Cameron Passmore: It asked what country you live in, part of the world you live in, exercise habits, alcohol consumption, how much you sleep as well was in there, how much stress, how much happiness. I just did a little online tool, and yeah, I'm actually 40 years old, biologically.

Ben Felix: Interesting. Interesting, but also there are huge financial planning implications to that finding.

Cameron Passmore: Just added 13 years to my retirement.

Ben Felix: Right. But it also puts you in a position where there might be, like we talk about annuities all the time, we still don't do a whole lot of them because I think they're intimidating for people. That's like what Allison Schrager that was on recently, said, as an economist she loves annuities, but everybody else hates them. But anyway, if you have a biological age that's a lot lower than your chronological age, that almost makes annuities like an arbitrage.

Cameron Passmore: It's exactly what it is.

Ben Felix: The insurance company is willing to sell it to you based on your chronological age. If your biological age is much less than that-

Cameron Passmore: Because they have a large enough population, they know in a population-

Ben Felix: Milevsky even says so in his paper, he said... We'll talk with the paper in a sec, but he even says that, insurance companies are going to have to be very careful about underwriting this, they might have to start looking at the biological age as well.

Cameron Passmore: Fascinating.

Ben Felix: It is fascinating. He did a paper... Now, a note about Milevsky, his papers are dense. They're mathematically heavy, to the point where I can't really get through them properly. Fama-French's papers is one of the things I like about them is that they're so clearly written, and the models are so obvious in most cases. Anyway, Milevsky wrote a paper in 2017 titled Retirement Spending and Biological Age. They explained that the paper is inspired by the growing body of medical literature that has identified biomarkers of aging, which, practically speaking, offer better estimates of expected remaining lifetime and future mortality rates. That's a big statement.

In really simple terms, what their paper was trying to figure out is, he uses the example of the 4% rule, which is based... Now, the 4% rule is a disaster. We're going to talk about that in next week's episode with Wade Pfau. But assuming the 4% spending rule, it was designed based on a 30 year retirement period. Say based on your chronological age, you're going to follow the 4% rule. If you found out your biological age was materially different, it would mean spending less.

Cameron Passmore: Yeah. 4% will drive you to a higher spending.

Ben Felix: Right. In the paper, Milevsky says that your biological age and you've noticed this anecdotally, Cameron, your biological age can diverge by as much as 10 to 15 years, right in the middle, from your chronic chronological age.

Cameron Passmore: I think that for some reason, it said mathematically the most it can diverge is 24 years. I don't know where that came from. But I saw that in the notes, a survey that I did.

Ben Felix: Milevsky in his paper is saying, it's not just like, oh, this is interesting. Milevsky is saying that in order to make rational financial decisions, you need to know your biological age.

Cameron Passmore: To do it properly, it should be a medical checkup of some sort.

Ben Felix: The big ones-

Cameron Passmore: An online survey is not the right way to do it.

Ben Felix: No.

Cameron Passmore: I'm not suggesting a date that does, I'm not suggesting there's validity. I'm just happy I'm 13 years younger, which is one podcast episode.

Ben Felix: The thing that Milevsky talks about in the paper is telomere length. I don't know much about that. I don't know anything about that. But from what I could find, just in reading about his research on this is that the telomere length seems to be something that there's a strong indication that it might be predictive of mortality, but it didn't seem like there was anything conclusive yet. Everything had these little disclaimers of, it seems like-

Cameron Passmore: Okay.

Ben Felix: But anyway, that was one of the new inputs, like why is this becoming more interesting as a science? That was one of the big ones. But I think that thinking through the planning decisions that this would impact is why it's important. You just think practically. We talked about annuities, that's an arbitrage. Another angle, I guess, on buying annuities is deferring CPP and OAS. You're effectively buying more annuities by funding your consumption with your portfolio.

Cameron Passmore: Let the CPP pay you for a long time, if you're going to live a long time.

Ben Felix: But you can only do that if you have a biological age, that's much lower than your chronological... What if your biological age was 10 years more than your chronological age, then you're not going to differ CPP.

Cameron Passmore: Of course not. That's not my point.

Ben Felix: Right, and you're not going to buy an annuity. I think another big one is asset allocation, where if you've got a really young biological age, you might stay more aggressive in your portfolio. You think about rules of thumb, the 100 minus your age in bonds rule of thumb, which age, that should be the answer to that statement. I think that one of the big takeaways from all of this, and there was an article from Rob Carrick recently that spoke to a lot of these points really well, one of my main takeaways was the concept of retiring at age 65, your chronological 65, might not make a whole lot of sense.

Cameron Passmore: Which we've said often.

Ben Felix: We talked about some financial planning decisions, like keeping your portfolio more aggressive, maybe buying annuities, maybe deferring CPP to deal with these long life expectancies. But then you'll layer on top of that, the idea of a biological age and what if you're even younger? Now, you've got a really long life expectancy, and maybe you're actually even younger than your chronological age says you are, it becomes really hard to fund very long periods of consumption with risky assets, like stocks and bonds, which is why maybe annuities are interesting. But what's the other thing that you can do? What's the other lever that you can pull?

Cameron Passmore: To work a little bit longer.

Ben Felix: You can work a little bit longer.

Cameron Passmore: So many people enjoy the work. So, it's not the end of the world to work longer. We have many clients that work well beyond 65.

Ben Felix: Enjoy it.

Cameron Passmore: Have some that work way, way beyond 65 and love it, just love their careers so much.

Ben Felix: It's almost divisive, because you think about the whole FIRE movement, which we'll talk more about in a second. But a lot of the perception there seems to be that you should want to stop working as soon as possible. Anyway, let's talk about what Carrick had to say before we talk about FIRE. Carrick wrote this article, It's Time to Stop Acting Like Retirement Past Age 65 Is a Failure.

Cameron Passmore: I couldn't agree more. When you get a job you love to do, that you don't feel you have to get away from, I think the whole retire at 65 goes back to when people were doing jobs that were much more labor intensive... I get, if you're doing heavy labor, you're beat by age 65. No labor in our jobs. There's also quote in the article saying that later retirement is not a novel concept. Stats Canada numbers show that over the past 20 years, the average age of retirement rose to 64.3 from 61.

Ben Felix: Rob was pretty passionate about this, on the critical of society for-

Cameron Passmore: He talked to us two years ago in the interview when he was here, how much he loves what he does as an example. Why don't find something you love doing, keep on doing it.

Ben Felix: He says that, our thinking about the retirement age has been slow to adapt to the realities of society today. He talks a lot about advice too, where people aren't really giving the advice to continue working. Again, that sounds divisive, because the whole FIRE movement says you should try and stop working as soon as possible. For us as financial advisors to be saying you should plan to work longer-

Cameron Passmore: But it has a huge impact on the plan.

Ben Felix: Huge.

Cameron Passmore: Five more years of saving, five fewer years of drawdowns.

Ben Felix: Even if it's not five more years of saving, you can have a saving retirement where you stop saving, but earn enough to fund lifestyle. That has a huge impact.

Cameron Passmore: Well, that happens often.

Ben Felix: Yeah.

Cameron Passmore: I'll carry my weight until I have to draw in five or 10 years for example.

Ben Felix: Yeah. John Chevreau, who we had Episode 35, he was a guest on this podcast. He wrote a book called Victory Lap Retirement, where he talks about this, just this idea of scale back, maybe drawdown on some of your portfolio to start funding some lifestyle expenses. But also keep working and earning an income, doing things that you enjoy doing.

Cameron Passmore: You want to talk FIRE?

Ben Felix: Yeah.

Cameron Passmore: We interviewed last week, the producer of the movie Playing with Fire, Scott Rieckens was on. What a great interview comes up. I think it's in three or five weeks.

Ben Felix: Yeah. That was a great conversation. He'd already opened our eyes about FIRE, well, your eyes, I still haven't watched the movie embarrassingly. His explanation of what FIRE means to him is, it gave me a lot of clarity. I don't know, what did you think?

Cameron Passmore: Totally, man, it's the whole point of the movie, right? Once your values are clear, your decisions are easy. He's got this buffer, he talked about where he's not as stressed about money, he just loves to do what they're doing.

Ben Felix: That's a powerful statement. Once your values are clear, the decisions are easy.

Cameron Passmore: That was a breakthrough, he talked about between him and his wife, it's fascinating. Everyone knows I love the movie, but I thought the interview was really interesting.

Ben Felix: But in the context of this conversation that we're having about long life expectancies and maybe lower biological ages than chronological ages, this idea of working longer, you can almost borrow a lot of the ideas that the FIRE movement has developed for people who are not retiring early, if someone's retiring at a normal age.

Cameron Passmore: For sure. That was so interesting when you opened his eyes up to the PERMA model for happiness, Martin Seligman's model. He hadn't heard of it before, but it totally dovetailed into the FIRE movement.

Ben Felix: I haven't seen Canadian data on this. I've seen US data because Larry Swedroe talked about it in a book that he wrote on retirement. It's a book that he talked about when he was a guest on this podcast. But he talked with the data in the US where a male's age 65 or something like that, were the most likely to be depressed. I don't know if those are the exact statistics, but the spirit of it was like that. It's presumably because they're bored, and people retire and don't know what to do with themselves. So, they get sad. But yeah, the PERMA model I thought was, for FIRE in general, but for this discussion in particular, I thought it was perfect, but PERMA is a five factor model, not surprising model.

Cameron Passmore: nly you would call it a five factor model.

Ben Felix: It is, it's a five factor... That's what it is. I didn't call it that. But the factor are positive emotion, engagement, relationships, meaning and accomplishments. I think when you look at-

Cameron Passmore: These are the five components that lead to happiness?

Ben Felix: Correct. This is a scientific model of happiness, which is amazing that, that exists. But I think of the five factors, when you think about engagement and meaning, you can get those doing, I guess, all sorts of things. But doing work that you love, it's got to be one of the best.

Cameron Passmore: Well, he gets all of them, right? Accomplishments, engagement, relationships, it's all there.

Ben Felix: But the key is, and this is the whole FIRE philosophy is not having to work for a paycheck.

Cameron Passmore: Work for these five reasons. Right, money is not one of these reasons.

Ben Felix: Correct.

Cameron Passmore: We've talked about that before. Once you get beyond, is it Daniel Conom's number, $70,000 or $80,000 of income, beyond that there's marginal increase happiness. No matter how much money you make, water is pretty much the same that we're drinking, cell phone is pretty much the same.

Ben Felix: But now you think downstream. Say people agree, yeah, that does make sense. I'm going to plan to work... Maybe not doing what you're... Now, I struggle with this a little bit, because I really like what I do when I come to work every day, and I walk to work, which is also awesome. Some people might hate their jobs, and they might want to do something different as soon as they can. But if you can find something that you love doing, that you can get paid some money to do, the downstream retirement planning implications are massive.

Like we were talking before about how much of an impact it can have, if you decide to work a little bit in retirement, it doesn't just mean you can spend more, it doesn't just mean you can retire earlier, it also means that now, as a younger person, maybe with a family and all that stuff, like I have, I get it, kids are expensive, you can choose if that's part of the plan, to plan to work in the future, you can choose to spend more of your income now. That's a big practical implication for a lot of people.

You think about in the context of the whole retire early movement, and we talk about criticizing the 4% rule for the retire early crowd, because it's not designed for a 30 year retirement period. But if you're going to work and earn an income, you might not need to draw that much, you might need 1% for the portfolio to supplement your income.

Cameron Passmore: You might be thankful to have that if your biological age is 13 years younger.

Ben Felix: Yeah. I don't think it's unreasonable at all to think that the whole concept of retirement is changing based on societal changes. The FIRE movement has been a big deal. Just this idea that you don't need to spend money to be happy, and if you actually save your money to get freedom of your time, you can be happier. That's a big deal on its own. But then you layer on top of that, maybe there's a bit of a shift in how people are seeing money and the relationship people are having with money. You layer on top of that, these longer life expectancies, and then this idea that you might be way younger or older than your birthday would tell you. You put all that together, and the idea of full stop retirement starts to sound kind of crazy.

Cameron Passmore: But if your values are clear, and this was one of Scott's point, him and Taylor's wife sat down and listed out the 10 things that give them the greatest pleasure, and all of them were basically free; going for walks, walking with their daughter, playing in the park, reading.

Ben Felix: Yeah, I guess that's the other side of this, too, is that we can talk about the idea of working into retirement, but like you just described, spending only on the things that really make you happy, many of which might be free.

Cameron Passmore: Make sure you're in sync with your partner.

Ben Felix: Right.

Cameron Passmore: He said until his eyes opened up to this, they'd never had these kinds of discussions. Anyways, on to bad advice of the week.

Ben Felix: Do you think our discussion on longevity was coherent?

Cameron Passmore: I think it was.

Ben Felix: It's a lot of pieces. It's a lot to think about. Living longer, your real age being different from your birthdate age. It's a lot to think about. Practically, it's like someone who's retired and not working, maybe they could be working, but I guess if that wasn't part of the plan, maybe they're not set up to be doing that. But someone who's younger and still saving, if they decide that it is part of the plan to have the skills necessary, whatever to earn and income in retirement, I think the thing that's mind blowing to me is that they could choose to plan for that, and therefore save less now and not shoot for early retirement, whatever that might mean to somebody.

Cameron Passmore: But you still have to be responsible because bad things happen to your health sometimes. If you don't have enough saved up, make sure you have adequate insurance for your surviving spouses, et cetera.

Ben Felix: Is that a savings burden or an insurance burden? A combination, I guess.

Cameron Passmore: Exactly.

Ben Felix: It's a big topic to discuss.

Cameron Passmore: Okay, bad advice of the week, and this will be the last time I think we're going to talk about deferred sales charges.

Ben Felix: Are they relevant anymore?

Cameron Passmore: Well, they are. You haven't seen the stories-

Ben Felix: I did see them.

Cameron Passmore: The OSC, Securities Commission has introduced a series of restrictions on the use of deferred sales charge funds, which is different than the rest of the country, which just blows me away.

Ben Felix: It is weird.

Cameron Passmore: The rest of the country is banning DSC funds outright effective summer of 2022. However, the OSC has planned restrictions instead of an outright ban. They're going to ban using DSCs to investors who are over the age of 60 years old. Makes sense? Sure, but it shouldn't be everyone. They're banning the use of leverage in DSC purchases.

Ben Felix: Makes sense.

Cameron Passmore: Does that still happen really, or it should be banned there? Capping the account size at $50,000, I guess they're saying smaller clients with perhaps newer advisors can still use DSC funds.

Ben Felix: It's capped at $50,000.

Cameron Passmore: Yep, account sizes.

Ben Felix: You can't DSC a big account anymore?

Cameron Passmore: Correct.

Ben Felix: It's better.

Cameron Passmore: Yeah, I remember back in the day hearing of trades, million dollar trades getting 5%, you get 50 grand, write a million dollar ticket-

Ben Felix: Next day or something too, right?

Cameron Passmore: Well, it shows up right away.

Ben Felix: Crazy.

Cameron Passmore: Banning sales to investors with an investment time horizon that's shorter than a fund's redemption schedule. The schedules are usually five to seven years. However, they're planning on limiting the redemption schedule to three years and require the clients can redeem 10% annually without paying redemption charges, and they want to mandate hardship exemptions.

The OSC says the proposed rules intended to address negative investor outcomes by limiting the circumstances in which mutual funds with a DSC option can be sold and by giving clients greater flexibility to redeem these investments without penalties. Unbelievable to me. I just saw, just before we came into the studio here, an electronic journal that you and I get, WP, which is Wealth Professional. There's quotes in here that just frankly, blow my mind-

Ben Felix: What is it, comments or quotes from an article?

Cameron Passmore: They're quotes from advisors in an article.

Ben Felix: Wow.

Cameron Passmore: "If you're a new guy that just graduated from the CSC course, and you're looking to get into the business, you won't be able to survive," said one advisor.

Ben Felix: Does one graduate from the CSC course? Serious question.

Cameron Passmore: Another quote goes on to say the ban is going to deter a lot of younger guys from getting into the business. If you fast forward 10 years from now, when the old guys retire, not me because I'm biologically 40, when the old guys retire, there won't be enough young people coming into the business. This is just nonsense.

Ben Felix: Good. It might sound harsh-

Cameron Passmore: The business is very different than when DSC came out back in the '90s. It's very different. That's when the independent channels are just being created. But now there's no need for someone to be starving and living off a DSC.

Ben Felix: Other than the pure economics where it's really hard to start off in this business, but other than that, the barriers to entry are very low. I was making a joke about graduating from the CSC, it's not hard. The information is good, and you're probably going to be better at giving investment advice after writing the CSC than before. But it's very basic.

Cameron Passmore: But is it up to the industry's funds to pay for new people starting out in the industry? Is that their job?

Ben Felix: No, it's what I'm saying the economics-

Cameron Passmore: Why isn't the product's job to pay for the people to get in the business?

Ben Felix: That doesn't make sense.

Cameron Passmore: Here's a thought, if you're going to start up a new business like any other business, how about go have a bunch of capital so you can carry yourself until you're viable in a fee-based world or join another practice where the enterprise is already going?

Ben Felix: Yeah, that's what I mean about the economics. But the problem is, well, the economics are hard. The solution for the young advisors that are trying to make it on their own, the solutions are DSC, insurance, permanent insurance. That's what pays the bills.

Cameron Passmore: That was also mentioned in the article. It'll force more people to sell more insurance.

Ben Felix: Which is crazy. Obviously, I'm biased, but I think that the model that we have of an established business that's fee based, that has employees that have no sales incentives or performance incentives or anything like that. We've made a very deliberate decision to be on... Everybody's on a fixed salary. But that structure to me is so obvious. Any professional services business is structured the way that this is, why should it be a sales organization just because we're in the investing industry?

Cameron Passmore: That's the last time we'll talk about DSCs.

Ben Felix: Is it?

Cameron Passmore: Yep.

Ben Felix: I don't know.

Cameron Passmore: That'll be it. Anything else?

Ben Felix: Nope.

Cameron Passmore: Thanks for listening.