May 21, 2020

Episode 99: Andrew Hallam (Millionaire Teacher): How to be Wealthy (and Happy)

May 21, 2020

We often talk about better planning, reduced spending and a consistent long-term strategy on the show and today we have a guest who not only gives that advice himself but clearly lives it too! Andrew Hallam is the author of the new book Millionaire Expat in which he details some strategies for what has been called geographic arbitrage, or moving to another part of the world in order to maximize your financial independence! His earlier book, Millionaire Teacher took a similar approach to education abroad and he has built out his philosophy from there. We hear from Andrew about his definition of wealth and why so many people who earn a relatively large amount of money can never be called wealthy. Andrew lays out the researched correlations between happiness and money and more clearly between debt and misery. He also shares how he has approached spending, saving and budgeting in his own life and relationships before we get into some more technical investing topics such as the benefits of index funds and why many advisors try to persuade clients away from them. Andrew weighs in on finding the right advisor for your needs and when to seek out help with your portfolio. The last part of the show is spent on the topics of education and expatriation. Andrew is a strong believer in leading by example for your children to learn about money matters and he explains his reasons for moving abroad and the gains he has accrued. For all this from a wonderful guest, tune in today!

Key Points From This Episode:

How Andrew defines the term 'wealthy' and why it does not depend on income. [0:03:43.2]
Links between spending and happiness, and debt and misery. [0:06:51.4]
How Andrew and his wife have managed their own values around spending. [0:11:55.1]
Benefits and costs of borrowing; could you handle it if interest rates doubled? [0:13:32.7]
Andrew's thoughts on index investing and why it is a good idea. [0:19:06.5]
Common tactics that financial advisors use to steer clients away from index funds. [0:22:40.4]
Advice for staying steady for the long term, through market volatility. [0:25:45.6]
Considering the place of investing in gold and the 60/40 portfolio model. [0:27:46.7]
Ignoring all the false information that gets broadcasted and sticking to the data. [0:35:05.0]
Why to only consider certified financial planners and how much this cuts the options down. [0:39:53.7]
Going it alone versus using professional advice; average reactions to volatility. [0:41:22.3]
Education for the younger generation and Andrew's advice for parents. [0:45:18.8]
Who could benefit from moving abroad and the idea of geographical arbitrage? [0:49:56.1]
How Andrew defines success in his own life! The importance of relationships. [0:54:01.2]

Read the Transcript:

So to start, can you explain to us and our listeners how you define wealth?

Well, if we're looking at financial wealth, I'm assuming, yeah, obviously wealth and health is really wealth and relationships and such, but we're talking about financial wealth. I said what I figured to me seemed like a reasonable benchmark or bar with respect to wealth, it's what I would often see as people that would make X amount of money were often considered wealthy and I thought I was crazy that was. I'd see articles in Forbes magazine or fortune magazine and they'd be talking about people that earned above certain threshold being wealthy. I thought, well, that was fascinating because I've met a lot of people who make, one in particular that I'm thinking of right now, a guy who after taxes he makes about $8 million a year. It sounds quite extraordinary because he lives in an income tax free jurisdiction and he makes an absolute fortune, but he's not wealthy he's poor.

So the reason I say he's poor is that if his salary completely dried up, he has enough savings to live for about a month. So he looks like he's wealthy and he's an extreme case, but he is representative of so many people that we see around us on a daily basis. Your neighbor who might drive that brand new Tesla, who lives in that really big house, who you know might earn $500,0000 or $600,000 a year. But unless that person can survive, actually thrive, without an income, then that person isn't wealthy at all. So I know when I wrote Millionaire Teacher, I said something like this. I said, "All right, let's assume that in Canada the median household income let's just say it's $70,000 a year. So my definition of wealthy in that respect would be someone that could end up spending double that, so $140,000 a year index to inflation for the rest of their lives and never work for it." So that was my definition. I'd be curious to hear what your definition is, I know you guys are asking the questions, but how do you guys define it?

I completely agree when I read that or re-read, I read it for the second time, that section of your book. I just think that's such a perfect definition. People, like you said, with cashflow are not necessarily wealthy if they're spending all of it and don't have savings. I guess the tricky part in defining wealth is what the discount rate that you use is to determine the number that you're just talking about. Like how much would you need to have to be able to sustain two times the median household income. Do you use the 4% rule do you use the 2% rule? Anyway, that's a pretty nuanced discussion for another time maybe.

Yeah, for sure, for sure.

I link it back to happiness because a lot of people just want to make more to buy more stuff, which means you need more wealth to continue to be able to have that stuff. Some few people take the time to link it back to their own happiness. So I have a question for you about that perspective and how do you coach people to get perspective around how much is enough and where is that level of happiness?

It's a really good question that you're asking because I think that many people will pursue certain things believing that it will make them happier, like a new car or a bigger house. But when we look at happiness studies, this is what I love, that there are people in universities that study happiness full-time. It's really cool to look at what is it that they're actually finding? What they've found is that say a car, you buy a brand new car and for a moment it's like a sugar fix. You feel really good about it, you feel happy about it. Or a brand new phone, you're jazzed you've got the greatest, latest iPhone 11 or iPhone 55 or whatever it may happen to be. But after a really short period of time, it becomes just another phone, it becomes just another car.

So at Michigan State University did a really cool study on people with vehicles, different types of vehicles to see, all right, were people that were driving BMWs any happier or did they enjoy their driving experience anymore. As great studies do, they asked all kinds of questions so people didn't really know what it was they were looking for. But at the end they found that there's much like a heat on a treadmill, does a quick sugar fix, but generally the actual driving experience for somebody with a seven series BMW is really no better in terms of how they feel about it, how happy it makes them versus somebody who drives a ten-year-old Honda Civic. So it's much the same for material items, but for experiences, this is where money can actually help you. If you are spending money on something that will augment an experience, so it might be a trip that you're taking with your family or with your loved ones so you can spend time together building memories. These are the things that actually build people's levels of happiness.

So now when it comes back to part of that original question is all right, we have an income, we want to save it for the future, here are the certain things that we know, statistically based on studies, don't increase levels of happiness. And they're often these material things. And what happens then is too most of the people that are buying a brand new car today are borrowing money to do it. So one thing we do know is that there is a direct correlation between debt and misery. So you've worked to purchase something, it won't augment your lifestyle, and doing so you've undercut your level of happiness by going further into debt. So it's this broad perspective that I try to give people when they're trying to figure out how to live for today while also living for tomorrow. So if you can cut back on a lot of those material things that won't augment your levels of happiness, you can use that money to invest for your future, to buy yourself financial independence at an earlier time, which will allow you potentially to spend more time with people that you love.

That of course makes a ton of sense. I think one of the challenges practically that people have is that their neighbor just bought a new car and they maybe feel embarrassed about their old Toyota that they have in the drive way. How do you think people should approach that issue of wanting to live frugally but having to deal with the fact that probably a lot of the people around them are spending and maybe even spending not their own money or going into debt?

It's an awesome question and probably an unanswerable one. But the one thing that talking to my wife and she would look at people with better things than what we had. She's actually rewired a lot of her thinking in that respect too because one, also I've shared with her the happiness studies two, I've also shared with her the studies on all right, what's the most common type of car for rich people? What do they typically buy? Most people that drive Maseratis and Porsches and BMWs, many of them are rich but most of them are not, they're just people with big salaries and big debts, and debt equals misery. So when my wife sees somebody now driving a Ferrari, she often wonders, how long is it going to take them to pay for it and what's the depreciation rate of that thing? So how much does that person losing on a month to month basis just by owning it in terms of depreciation?

So I think the psychological aspect here, Ben, is a really tough one for people to get their heads around. And that's something that only they can really struggle with and conquer on their own. But I think too helping them to understand that broader perspective can help them to conquer that, keeping up with the Jonese's type concept.

You mentioned your wife rewiring her thinking. I think one of the things that we often see is one spouse in the relationship gets really bought into this idea of being frugal and saving for financial independence while there the other spouse is not as bought in. How have you guys navigated that?

It's funny. She probably really won't mind me answering it this way, but when we first got married, I remember asking her, "So, where's all your money? Where is it?" She didn't have debts and she did have some savings, but she earned more money in terms of her income than I had earned over my working lifetime significantly, but she had significantly less. What she ended up doing, I think it was in part probably through helping me with... Obviously, she would listen to me jabber on about investing and behavioral economics and wants versus needs. I didn't actually lecture her, and that was a nice thing. I think she came from a foundation of frugality where her family was somewhat frugal as well. So for her, it wasn't that much of a transition.

Today, ironically, she's the frugal one, I'm the one saying, "Hey I want that basket of organic blueberries and I don't care how much it costs." She's the one putting the brakes on a lot of things. So it's come full circle where now I'm really wanting to relax a little bit and her new year's resolution for the past two years in a row has actually been to spend more money, and she's [crosstalk 00:13:05]. I'm lucky I don't have a spend thrift wife for sure.

Right. So Andrew, I'd like to go back to your comment about there's a correlation between debt and misery. Over the past few podcasts we who talked about the benefits of borrowing, especially in the low interest rate environment to invest, the ability to grow the assets, and then have a low cost of borrowing. How do you square those two sides of the equation?

Well, I guess how easily manageable is it? And if the interest rate rises, let's say the interest rate doubles, could you still really handle that? If we're looking at credit card debt and consumer debt, we're looking at interest rates of 18% per year. I often ask that question, double it, can you emotionally handle paying 36% a year on a depreciating asset? Well, that's insanity.

When it comes to something like an asset that can appreciate, we're looking at a different story now. So we're looking at, let's say it's a home or let's say it's a rental property. Now, over time, that's going to create income for you, it's going to also create some capital gain potentially if you do choose to sell it. But interest rates right now are historically low, so if you're borrowing and I come back to that asset test, and it's just super simple. My mom is not an economist, but it's just something my mom drove into me when I was really young. She said to me, "Andrew, if you're going to borrow to do anything or to buy a house or to do anything, could you handle it if the interest rate doubled?" So for me, that's my asset test. I don't know, what do you guys think about that?

I think about the other side which is, can you handle it at the market dives? Let's say your stock portfolio is down 30% or 40% and you still have that full liability on the books, I could see that causing a lot of stress. But you don't really know until you live through that, how you're going to react because the hard part is there's always a story that happens at the time that the markets go down, be it the coronavirus, be it 9/11.

Yeah, always, always.

It always feels like this crisis is different. So I was just curious on your perspectives on that part.

I'm a pretty wimpy investor so like for me, I wouldn't personally borrow money to invest in equities. But that doesn't mean that's right nor wrong, that's really up to somebody's level of tolerance for risks. So it wouldn't suit me, but I'm not saying that it shouldn't suit anyone.

I think that's like when Cameron said we've discussed the benefits of leverage on the podcast, that's true. But I think I would qualify that by saying that we've discussed this statistical benefits but we've also been, I think, pretty open about discussing why most people probably wouldn't want to do that. But your comment about the correlation between debt and misery in the context of boring to invest, I just find that interesting. It relates to what Cameron was saying about living through a downturn while you also have the debt.

Yeah, I think it's so, for most people, not for everybody, but for most people not owning any money leads to a really nice solid night's sleep.

Right. One of the things that we've observed in practice is people who pay off their mortgages and tell us that they're thinking about borrowing back against the house to invest because they know it's a basically smart thing to do, we always say, "Okay, well let's get the mortgage paid off and then we'll make the decision about reborrowing afterwards." And not once has someone come back and said, "All right, I'm ready to have a mortgage again."

Oh, that's interesting, that's really interesting. So what do you guys recommend for people when they come to your question of, we see it longterm statistically, yeah. If you're looking at a diversified portfolio of index funds, you're looking at longer-term returns there, then you really would be paying in terms of the interest on a loan. Where do you guys stand with that when you have a client that comes to you and says, "I'm interested in doing something like this?"

Well, we've, I wouldn't say shot ourselves in the foot, we've put ourselves in this position where because we have talked about this in the podcast and a lot of our clients listened to it, we've been getting a lot of questions about leverage. As of now, nobody's implemented it, I think we're approaching it extremely cautiously. I'm actually in the process right now of modeling using three different simulation techniques. I'm doing a Monte Carlo simulation, of bootstrap using historical US data, and a rolling historical period just to give people context for the potential outcomes of using leverage versus not. That's maybe one of the ways that will help people frame the decision. Like, look, you could actually end up much worse off by doing this as opposed to just investing like you would have otherwise. So I would say we're approaching it very cautiously, but with a view of this being a statistically good decision.

Yeah. I think that's really good because you then have people, once they're informed, they're able to really make that rational decision and an educated decision on their own with their personal money. Then they can ask themselves if then does it reflect their tolerance for risk?

Yeah, it's actually been an interesting exercise because you look at the Monte Carlo, which is I think how most people would think about looking at the potential range of outcomes, levered looks amazing. But as soon as you factor in the skewness and the fat tails of the real distribution of stock returns using bootstrap, all of a sudden it looks terrifying and there's negative outcomes and stuff. So anyway, cautiously is how we're approaching it.

Which is realistic, absolutely.

Yeah, exactly.

Absolutely.

So the audience of this podcast I would say is, I don't know, an intermediate level of investor on average. I don't think we're a beginner level personal finance podcast. So they're generally bought into the idea of index funds, at least conceptually, although there are probably still people listening that have actively managed funds in their portfolio. But I don't think that the message of why index funds make sense can be repeated enough. And you did such a good job explaining it in your book, so can you just explain why indexing is a good idea?

Well, as I like to look at William F. Sharpe's published piece in a Stanford based published piece called the Arithmetic of Active Management. What it of course indicates is that if the market moves up, let's say 10%, in a given year and the typical actively managed fund before all fees would have returned about 10% per year because we represent the market, all of us represent it. So all the index fund investors, all of the actively managed fund investors. So on aggregate, we know that if the market moves up 10 before all fees, that's what the typical active manager would have moved or earned in stocks that year. So say if the US market went up 10, so anyway.

So right now you're looking at, okay, well, your odds of beating the index are 50%. You're right in the middle, so you're going to get 10% as the market return and 10% was the aggregate return of professional fund managers before fees. Then we know that, well, let's just say roughly, it's not statistically exactly like this, but roughly half of the money would have beaten the market and half of the money would have underperformed the market. Then we added investment fees, then we look at things like survivorship bias, and we ended up getting up to a point where over a 10 year period or longer you're going to get 85% to 90% of active fund managers after fees under performing a risk adjusted equivalent portfolio of index funds, low cost index funds.

The interesting thing is, of course, so many people will say, "Well, here's a fund that's actually outperformed market over the last five years or the last 10 years. So I'm going to be investing in that." I like looking at SPIVA's persistence scorecard where you'll look at funds that have outperformed during one time period, rarely outperformed during another. You can take an example too of... It's wonderful marketing but you have [inaudible 00:21:06] American funds in the US. It's a great actively managed fund company, fees are quite low, and they're touting that, "Hey, you don't think you can be an index? Well, we have beaten the index." Well, they've been around a really long time and what they did was they really understand early on like Warren Buffett and Benjamin Graham did Dor Wan did. They understood early on that if they could tilt towards the value factor, cheaper stocks, cheaper stocks typically ended up outperforming the market.

So in the early days they ended up getting this really nice advantage. Well, now, so many people understand that long-term value and small cap will outperform a general market cap based index. So now we understand that bur back of the day we didn't. So when you look at those long-term charts of how American funds have done relative to the index, and you start to say, "Hey, let's look at the last 15 years." It's a completely different story because it's become more and more competitive, it's become tougher and tougher for an active manager to actually beat the market because we know so much about these factors that historically have out performed. So that's my explanation, whether it makes sense or not.

No, that's a good explanation. Our listeners, I think again, on average will definitely hear the message about factors because that's something that we talk about quite a bit.

You've also written a fair amount about advisors you've come across, can you talk about some of the things that financial advisors say to keep people away from index funds?

They'll do all kinds of things too. I'll tell you what they would do right now. So if we were going to be looking at a financial advisor, you just met them. So often they'll say something like this, "Hey, look, here's one of our model portfolios and here are the returns from the last six months of the S&P 500 index. Well, we've trounced them." So one of the things that they'll do is they'll say, "We can protect you during market drops." What they'll do in that respect, and I saw this and I'm sure you guys have seen this a lot, is they won't compare apples to apples. When it's convenient for them, they'll compare apples to oranges. So they'll say something like, "Okay, here's our actively managed portfolio." And it might include bonds, US stocks, Canadian stock, so it's got a whole mish-mash within it. They'll compare it very conveniently to a US stock market index after the index itself has had a drop.

And the whole point here is that smart investors don't build portfolios with a single index fund, they diversify across various asset classes. So a lot of these people, that's one of the strategies is they'll say. "We can end up beating the index, here's an example of it." Or they'll say, "Index funds are dangerous because your money will fall prolifically when the market falls." Or they'll say, "Look, we've found these actively managed funds that have beaten the index, these are the funds that will get you in today." They're hoping that their investors don't understand the reversion to the main concept whereby fund that wins during one time period is typically not going to be the fund that wins during the next time period.

So variety of tricks that these people will use, some of them will say, "Well, Warren Buffet has beaten the index so we can too." And unless you're actually looking at Warren Buffet when you're staring at the face of your financial advisor, one, that isn't likely to happen two, even Warren Buffet knows it, so he's instructed that his estate would be half of his wife when he passes on is going to be invested in a portfolio of low cost indexes. We know full well that this guy has access to money managers that we don't have access to, but he knows statistically his wife's money will outperform about 90% of them with the index portfolio.

Not to mention that Buffet's gone over a decade trailing the S&P 500 index. Not that that matters, he might come back, but as of today.

It gets tougher and tougher to beat the market, doesn't it?

Yeah. So when we're recording this, and the episode will be released in the future, so who knows what will be happening then, but as of the day that we're recording, the US market's down almost 8% in US dollar terms for one trading day, which is crazy. Like we were just talking about or you were talking about with index funds dropping with the market, maybe you have some bonds in your portfolio to temper that. But how do you think an index investors should approach market volatility so that they can stay in their seats and maybe not worry too much?

I think that they need to recognize that if they're purchasers, if they're actually adding money to the markets, so they're at least five years away from retirement, they're adding their money. When the market drops and their dollar cost averaging, so they're adding the same amount of money every month, it allows them to buy a greater number of units. Volatility can be actually cool because if you take a period of 10 years where markets are really volatile and you take the historical returns of the fund during a given volatile time period, and let's say the investment fund ended up averaging, I don't know, 7% per year, somebody who actually dollar cost averaged into that fund was able to buy fewer units when the fund price rose and a greater number of units when the fund price dropped.

So in essence, they're time-weighted or money weighted return can actually end up being higher than the funds return itself just through that process of closing their eyes, putting the money on autopilot, and buying every single month. That isn't always the case obviously, when the markets are continuing to rise there isn't necessarily that lovely advantage, but during volatile periods, I think it's really great.

There's a quote in your book from William Bernstein I think that was something along the lines of, "Young investors should get down on their knees and pray for a long extended bear market."

I still do. I'm 49 and I still have an income and I really enjoy seeing market crashes. I know that I should be sensitive to how other people feel about them. But I do know that if somebody is adding money to the markets and they're actually upset to see the same thing they're buying be reduced in price, if that actually upsets them, then they don't have the correct perspective on what it really means to be a long-term investor.

What do you think about the role of gold in a long-term portfolio?

So it depends, doesn't it? It's one of those things that obviously... Okay, long-term gold doesn't make any money, people really think it does. If you bought yourself $1,000 worth of gold in 1801 and you sold it today, you'd basically keep pace with inflation. Gold long-term is not a big money maker, so that's one thing. I think in my book I looked at what $1 worth of gold would got you if you invested in 1801. And I figured that today if you sold those proceeds today, you could just maybe fill the gas tank of your minivan. Whereas if you put that $1 in US stocks or if you earn the return of the US stock market in 1801, you really would be looking at something in excess of $10 million. So as a asset class, it doesn't make money long-term.

However, there are examples where gold moves up and down a lot. So it was often one of those things, it's a bit like a mattress, when people lose money in the stock market or when the stock market drops, I shouldn't say when they lose money because you only lose when you've sold, but after the stock market drops, many people sell stocks and stuff money into mattresses and things like gold. They really shouldn't, but gold often moves in firstly to riskier asset classes. Often when riskier asset classes rise, gold dips a little bit. So one of the interesting things that Harry Browne, when he created the permanent portfolio, he looked at taking a portfolio whereby you have the stock market exposure, cash, short term bonds, story long-term bonds and gold and roughly rebalancing that once a year.

So a quarter in gold, a quarter in long-term bonds, a quarter in equities, and then a quarter in cash or more pragmatically a short-term bond market index. It reduces volatility, it does reduce volatility, but long-term, it won't enhance returns. When you're looking at all of the back tests and you go through rolling 10 year periods, it's just another portfolio. So, okay. It might be more or less volatile, but again, it doesn't have a history of outperforming something really simple like 60% equities and 40% bonds. So if for some people it helps to color their inner nerves, and I have seen some financial advisors who have said, "You know what? We're going to do this, we're going to follow this model just to keep you calm." I can see that as a benefit for some, but it doesn't necessarily augment the long-term returns to the investor. Where are you guys at on that?

I was curious to ask you, you mentioned the 60, 40, are you suggesting 60, 40 isn't dead?

I don't think so because funny thing about people when they talk about say 60, 40 portfolio is dead, they'll say, well, bond interest rates are really low right now. The two key words that they're talking about are right now. What they're implying is that right now means the future and nobody can see the future. So that's the thing we have to be so, so careful about. Even when you're looking at something like looking at the sustainable withdrawal rates and people saying, "Well, you know what? Maybe 3.5% inflation adjusted withdrawal rate won't work in the future because bond interest rates are low right now." The right now component, fixating on that, I think are probably two of the most dangerous words that investors could use.

Our view on gold is a similar to yours, maybe a little bit more aggressive, but maybe you were holding back because you didn't know our view, I don't know, we don't think it belongs in portfolios. But we've talked about that in the podcast and I've done a YouTube video on it, and it's one of those things where people are extremely passionate both for and against, which I find interesting. You mentioned the data on gold going back to the 1800s. If you look further back between the 15th and 17th century, there was a period referred to as the price revolution where there was massive inflation in terms of gold, I guess, for 150 years and gold just got decimated in terms of its value. So I think for the data it's easy for us to look at, it's been an okay inflation hedge. But if you go back further, that has not always been true.

You know whats it's funny too about gold is people that do end up liking it and thinking it's really good, like any other asset class, they get into it at the worst possible time. Why does it become popular in 2009? That's the crazy thing. You're looking at, I remember looking at financial magazines and the headlines would be protect your money now, and there'd be a padlock there with your money inside it. They were telling people to buy bonds and to buy gold. It's smart investing as you guys know it, it isn't about out thinking anyone else. Smart investing is about remaining diversified and rebalancing back to the original allocation, not based on somebody's forecasts because we have reams of evidence suggesting that forecasting doesn't work. Yet you turn on CNBC and there you've got somebody out there talking about where stocks are headed or where bond revolt is headed over the next year or six, and it's all crazy stuff.

I do wish that we could teach this in school, is to show kids, "Hey, let's pick forecasters. Let's see what are the top economists saying this year?" And I would like a multi-year personal finance course where really we're starting in the eighth grade. @Okay, everybody, here's what we're going to do. We're going to watch CNBC, we're going to go January 1st or whatever it is and we're going to look at top economists and what their forecasts are for the next year. Then 12 months from now, we're going to see how they did." CXO Advisory has done some neat stuff on this where they've tracked gurus, leading economists who claim that they would know where certain asset classes were going. They updated that I think in 2017 and found you might as well ask a five-year-old.

There is a media report or a little special type thing from, I don't remember, I think it was one of the Nordic countries where they compared some professional stock picking gurus to some fashion, Instagram people to, I think a gull named gull ross, where they had a grid on the ground and they just let them poop in a square, and gull ross actually won.

Hey Felix, the cat won that too. The Observer published something pretty interesting in the UK Observer and asked a bunch of leading economists and an astronomer and a five-year-old and a cat named Felix. I think the cat won and the previous year, it was a five-year-old.

So animals are good at predicting the future I guess.

I think we should start following where the cats poop and such.

I thought the gull ross example was so funny, just because of the name gull ross, gull ross wins. I'm probably butchering the name.

I love it.

What about other stuff? Gold's easy to pick on, but there are lots of things like peer-to-peer lending is a newer one that has these crazy high returns. It seem they're supposed to be safe and investment newsletters that claim to be making these crazy returns if you follow their picks, how do you think people should process that? How should they stick to their index investing strategy when there's stuff like that being shown?

Then that's the hard thing, isn't it? They just really need to ignore it and understand that it's all a big, giant marketing machine to extract money from them to get people to pay membership fees. So we know that when we look at all of these newsletters, they're horrific when we look long-term at their results. But people will claim what they want, and there are always going to be people who are going to try to take money from your wallet and stuff it into theirs, whether that's a Ponzi scheme or this newsletter from some forecaster that figures that they've got some key to is peer-to-peer lending and this is how much money we've made. It's not realistic and most people that get into schemes like that ended up really being sorry for it later.

So how do you contrast that to solid financial advice? And what do you think about the financial advice business in general?

It's rife, as you guys know too, it's rife with conflicts of interest and that can make it really tough. You have the people that, most of the people providing financial advice, here's the challenge for you guys. This is the hardest part of what your business is because I don't know if you guys are familiar with Alexander Pope's essay on criticism, where he has this fabulous quote where he talks about the Pierian spring. To drink from the Pierian spring is like drinking from the spring of knowledge where shallow drops will intoxicate the brain, but then drinking deeply will sober us again. So what I'm coming to here is that it's very easy for me or anyone else, a financial writer, to say, "This is easy, toss your financial advisor out the window, fire them, build a low cost portfolio of index funds." To an extent, that's the shallow droughts from the Pierian spring of wisdom. Because now what happens is people say carte blanche, this is it, all financial advisors are bad, they will all sell highly costly products and they really don't do any true wealth management or financial planning.

In about 99% of the case, that's true, and that's what's really hard. You walk into typical bank here in Canada and you are going to get fleeced, you're going to be convinced to buy actively managed products by somebody that in most cases isn't even a certified financial planner. So they've taken the Canadian securities course and they've got a license to sell. I've talked to some of them and they've said three weeks, three week intensive course, and now they're selling RRSPRSPs to Canadians. Super dangerous, really irresponsible, makes a lot of money for the banks. But here's the challenge for you guys, you have firms that do full financial planning properly, you have firms and they're few and far between, but they'll charge... First of all, they won't believe in forecasts, they believe in diversification. They'll put people into portfolios of low cost vanguard I-Shares or DFA funds, so low cost index funds. They'll bounce back to the original allocation. But you will also work with them on a completely different level, like financial or a family CFO.

So I have a friend in Thailand who's a financial advisor, and what she does is she becomes part of the family, she's an extension of that family in a lot of ways. So when she has her quarterly meetings with her clients, she's asking them to go over what their spending budget is, for example all kinds of decisions about whether we can afford this house or not. She gives them to the best of her ability really objective advice and she builds all of our client's portfolio of index funds. She helps them with things like a estate tax planning, she helps them at things like obviously tax advantaged platforms. So you're looking at, is it best for you at this point to put this particular money into an RRSP or a TFSA. Obviously she's in Thailand so she's not dealing with that, she's an American who deals with expats, but you guys do something similar to that.

So what I do write about in my book Millionaire Expat, is I said, "There's a lot of value in this whole wealth management process if it's done properly. But most financial advisors, I believe, are just one step short of charlatans or used car salespeople." That's why in a position like yours, is a really, really, really tricky position to be in because most people don't understand the differences.

You mentioned a few when you gave an example, but can you just talk explicitly about the specific qualities that you think people should be looking for if they are going to make the decision to hire a financial advisor or a wealth manager?

Yeah, certified financial planners, for sure. They should have an approach whereby they don't forecast at all, ever. No decision is ever made based on what they think the markets will do or what some guru thinks the markets will deliver. They built the first five portfolios only of index funds or DFA index funds. I think that in itself, if you've got those three components in line and they don't charge excessive fees like more than, maybe it's a retainer fee or no more than say 1.25% on total assets each year. Preferably they can lower that too as the investors base increases. Then I think these are great hurdles to be looking for. I think once you establish these components, you will cut out 99.562, exactly percentage of Canadian financial advisors.

The point about how easy it is as a financial writer to just say fire all advisers is an interesting one. I think one of the most interesting anecdotes about that is Dan Bertalotty, who I know you know, he used to say that in his writing and he made the full circle transition to becoming a financial advisor. But I think you wrote about how he learned through experience that some people can do this on their own, but a lot of people really have trouble executing and staying disciplined and sticking to the plan and not using forecast to make decisions.

Yeah, and I too. It was like bringing back to that Pierian spring of knowledge, I was there with Dan. Dan and I were drinking it and we're going, "Okay, let's have a look at this." Well, nobody needs a financial advisor, nobody, everybody's good to go on their own. But then I think in both cases and for different reasons, we continue to dig a little bit to learn a bit.

So I'm on a couple of Facebook forums and one couple of that I'm moderating and got thousands of members and most of them are overseas. It's really interesting that when I post something about, "Hey if you have the right financial advisor, not only is there the financial planning benefit, but statistically speaking, they can help work as a gatekeeper to stop you from doing silly things." So sure, it's pretty easy to build a portfolio of index funds, but to ensure that you don't do something silly with it over the next 30 years when markets go crazy, headlines are trying to scare the bejesus out of you every single day, that's their job, they'll try and scare you as much as they can because fear draws more eyeballs and eyeballs draw more advertisement dollars, and it perpetuates the widespread ignorance.

Now, this is the kind of thing that when I post this, I get absolutely slammed by the same communities that love my book, read my book, but have a hard time accepting that, you know what? You might not be capable of doing this on your own. What I really like looking at guys is the, and here's an example that I've used when I've posted this as a possibility, especially for high net worth clients with all kinds of potentially complicated tax issues. But when I've said things like this, I say, "Look, if we take the period from 2003 to 2013, you really had two volatile periods there, you had two market volatile periods that would have tested you." If you look at Vanguard's index fund investors, say their S&P 500 investors, most investors with Vanguard USA are DIY investors, they're doing it on their own. Well, the returns of the index over that time period was say something like 8% a year. The average investor, during that same time period averaged something like 5.5% a year, they underperformed the market by about 2.5% per year.

Wow, I hadn't heard that one, that's interesting.

It's unbelievable. What it really does show is that the average person during volatile periods can not, as much as they might think, they cannot harness their emotions. It's much like how are you guys going to respond if you lose the use of your legs or if you get cancer? You can answer that question until it's actually happened to you. I get a kick out of it when I see people that do it on their own and they go 100% equities. They say, "Well, long-term is that over last, whatever, 30, 40 year period going 100% equities will outperform a portfolio that's more balanced." The bottom line isn't how the asset classes perform, the bottom line is how well can you perform? Can you harness your emotions such that and what portfolio would allow you to stay in the game and not end up doing something silly? The studies do show that most investors do end up shooting themselves in the feet. It's very easy when the market's going up, but markets don't always go up.

No, they do not.

So at home I spent a lot of time helping my kids make what I think are smart decisions with their money. I know you're a big proponent of educating younger people on investing in money. Do you have recommendations for parents about how they can do the best possible job with their kids?

I think everybody's going to have a different view, I think, on this. But what I believe is that kids should have their own skin in the game. When I say that, I'm not really a big proponent of parents giving their kids money to start their investment portfolio. Okay, maybe to start it. Okay, here's a little bit and we'll get it started. So they might have portfolio interest, something like that. But I think the most important thing is for the kids to understand that money doesn't grow on trees, that they have to work to earn it, and it has to be their personal money that they're adding to do it. Because that does two things I think, obviously it gives them a solid foundation in terms of the concept of deferring gratification, knowing that I should be saving something for the future, whether that's just a portion of their allowance or whether that's 70% of their allowance, regardless of what that is. To get them trained early on to recognize how important it is to be saving for the future and to not have money gifted to them.

I think that's one of the things that's really challenging for especially wealthy parents. Wealthy parents tell me, "My kid's 18, I can open an account in their name now and I want to give them $100,000." And I say things like, "Well have you ever seen or have you seen any of Thomas Downey's work on economic outpatient care?" And they're like, "What does that mean?" Well, when you give something to somebody, you give them money, you can actually end up weakening them because they don't build the own muscles. It's like doing pushups for your kid hoping your kid's going to get stronger. Your kid really needs to be able to build their own financial muscles, roll up their sleeves, and get that work ethic started early. At least that's my opinion, but where are you guys standing on that?

I think that's a really good way to look at it. I think it was Charlie Munger that I heard say this, I'm not 100% sure about that though. But if you are wealthy and you make your kid live as if they were poor, that can cause pretty substantial problems for them because they'll feel resentment. But that doesn't mean you have to give them money, it just means that their lifestyle, the child's lifestyle has to be commensurate with the family's wealth. That's separate from giving them money to do whatever they want.

Take them to Hawaii.

Right. I agree with you, the data is pretty clear on what happens when... You have the example in your book of the three generations, families tend to lose any wealth. By the third generation, families tend to lose any wealth at the first generation created.

Yeah, that's fascinating. You look at the Forbes 400 and you think, "Well, it must come from old money." And most of the people on the Forbes 400 are first or second generationally rich not first, not fourth, or fifth. It happens, but it's pretty rare. It's typically as you say, one generation builds wealth, the second generation maintains it, and third generation typically squanders that because they haven't acquired the tools of acquisition.

And there are extreme examples. I think it's the Vanderbilt family that there's been a book written about where extremely wealthy, like the wealthiest family in the United States at the time, during the gilded age. And today now you can't find a wealthy Vanderbilt.

Yeah, it's fascinating, isn't it? It's whenever anything comes really easily to people, whether it's an NBA basketball player who's making millions of dollars a year. As we know, most of them ended up filing for bankruptcy within five years of their retirement. It's really similar for professional soccer players, professional football players in the US, and it's not too dissimilar to lottery winners. When something comes easily and quickly, it typically gets squandered.

Yeah, exactly. So your second book Millionaire Expat is fantastic as a resource. So I read through it, a lot of it didn't apply to me because I'm not an expat, I live in Canada. But it's so detailed nuance for anybody that is an expat, I'm sure it's extremely useful. I can't imagine there are many other resources that are that comprehensive out there, but anyway. You're also living as an expat, in one of the sections of the book you talk about the benefits of living in lower cost of living countries. So as a last question, I just wanted to ask, what do you think for Canadians who are currently working in Canada, do you think it's worth considering planning to spend a part of retirement, or like you're doing, a big chunk of retirement in lower cost living countries?

If somebody has a tolerance for other cultures, they're curious, when they go somewhere they don't complain about why it's not the way it is at home, they're willing to embrace parts of other cultures and people in other cultures, if that jazzes them, then what many people call geographical arbitrage is a fantastic thing. Because you could do financial planning for somebody here in Canada and you might be able to figure out that, "Hey, at age say 65, you can retire." But at the same time, that same person might be able to retire at 59 if they spend six months a year down in Ajijic Mexico, where the costs of living are significantly lower and the weather is significantly better, I would recommend the winter months obviously. But I think this is a fabulous opportunity for the right type of person, yeah.

It's a big deal. Like you mentioned, the financial planning, the purely financial planning applications can be huge. Are there any, you've lived this so I'm asking from your personal experience, are there downsides? Me as a Canadian who's lived his whole life in Canada and the US, it seems scary to go live in Mexico for example, are there any downsides to doing this?

If there are, I haven't seen them yet. So it's something I love doing, so last six years. I'd say, you know what? Probably what fascinated me was reading a book by a couple of writers, they write for international living and they wrote this book called The International Living Guide to Retiring Overseas on a Budge, I read it and I was fascinated by it. Now, these guys, keep in mind, International Living is a huge cheerleader for living overseas in low cost locations. So they're not always going to be the people that are weighing up all the pros and cons, they're just going to be bombarding you with all the pros. But I have to say that when I check out places like Mexico and I see the costs, one thing that many people will ask is what about the safety? So you have the safety issue of a place like Mexico.

And generally speaking, of course, the media will end up freaking us out with concepts of we're going to get kidnapped, beheaded, shot, whatever. Typically, the violence in places like Mexico is cartel on cartel, they're not typically after tourists. So a lot of these expat communities, like Chipilo is a really great area just South of Guadalajara. My wife and I have spent several months there. If you're getting things like dental work done, it's a fraction of what it costs in Canada, major upside. But if you want the same kinds of things that you're used to here in Canada and you want it to be exactly the same and for the locals to think exactly the same way you think and your neighbors back at home think, that's a major downside. For people like that, don't go, you got to stay at home. But if your mind is flexible and you're willing to embrace these different cultures, I think most Canadians will find that they're a much more open and far more beneficial both financially, culturally, and socially than most Canadians would ever imagine.

It's really interesting to think about it. I hadn't thought about it a ton until I read the book. The clients that we have that include this type of thing in their financial plan are generally people that are from whatever lower cost of living country they're planning to retire in. But in terms of Canadians born and raised in Canada or they spend most of the life in Canada, I don't think it's something that most people think a whole lot about.

And that makes sense, doesn't it?

It does, yeah.

Geographical arbitrage, that might be the term of the interview. So Andrew, my last question for you, and I'm very curious for your answer, how do you define success in your life?

Success for me personally. Great question because I speak to students about this a lot. For me, I tell them that success relates to one thing and one thing only, relationships, your relationship with yourself and your relationship with other people. Do you have people that love and respect you? The only way to have people love and respect you is to give love and respect. To me, that's success. Probably not the answer you're looking for, but I know-

Oh, it's a great answer.

The other stuff is all icing on the cake. Obviously you do need shelter, obviously you need food in the belly, obviously you need access to medical. Once you have all that, you have enough. And if you can have all that in perpetuity, you have enough, that's enough. Then success comes entirely from the relationships that you forged, and the only way to nurture that is to give love and respect to other people.

That's an amazing answer. Andrew's been great to get to know you a bit and introduce you to our listeners. We're so grateful to have you on our podcast.

Thanks. It was great chatting with you guys, really enjoyed it.