A (1:57)

I mean, should we jump into the first question?

B (1:59)

Let's go. I'll read it out. Should I overweight my country's stock market? Does the idea that you earn your income and own property in that currency make it a good hedge to avoid your own country's stock market? The country is uk, by the way, but historical returns do not predict future Returns?

A (2:15)

Yeah, I think housing's a tricky one because housing hedges your housing costs. But it's not really an asset in the sense that it's a stock or a bond in your portfolio. You're not going to rebalance your housing position. At least most people don't, because it's a big illiquid asset. But it also behaves differently from other assets because of that hedge property. So I don't know how much owning a home would affect your home country bias and your financial asset portfolio. I don't know if you guys have thoughts on that.

B (2:44)

Is the price of your house subject to the same economic risks as the local stock market?

A (2:48)

At a fundamental level, to some extent, probably yes. But how correlated are they actually going to be? I don't know. But then the house also serves a different purpose in that it's a hedge against your future housing costs. It's not a traded asset that you're going to consume in the same way that you would consume from stocks and bonds. I think it's just a little bit different on income. I think we talked about that in the last AMA episode in Scott Cedarberg's most recent paper. I think he did look at how an income that's correlated to your home country stock market would affect your home country bias and it would reduce it. But I think they still do find that it's optimal to have some level of home country bias. We at PWL do about a third in Canada and that's supported by Scott Cederberg's paper, at least in the base case, not including the correlated income piece. Then there's also some research from Vanguard and we've replicated that research using a longer term data set showing that the minimum volatility portfolio is about 30% in Canada. But the thing I say about home country bias is it's not a hill that I'm going to die on because any simulation is super sensitive to the specific past returns. If we went and ran the numbers for, I don't know, Austria or Italy, the data would say, no, don't do any home country bias.

B (4:02)

Yeah, exactly.

C (4:04)

Yeah. There's a couple of ways to look at this, right. And we've certainly get the question a lot right, especially when Canadian returns are lagging U.S. returns. Why are you guys more than 3% Canada? Because that's the market cap. There's a number of reasons. As you said, the minimum volatility portfolio, there's some cost and tax advantages, typically to home country equities. I mean, certainly there are in Canada. I would say it's cheaper to own Canadian equities than international equities, maybe less so US But I think the one that sometimes gets ignored is the behavioral reasons. And you just simply hear a lot more about Canadian stocks and the Canadian economy. If you are investing in this country and during any period where they do outperform, I think the FOMO is going to be stronger. And that might not be the best reason to overweight your own country. But I think you do have to acknowledge that it just is something that's in the news a little bit more. It's a little bit more availability bias. And unless your home country's stock market is extraordinarily small or badly diversified, you can make a pretty good argument for overweighting your home country. I think. I don't know where Canada falls on that spectrum. It is a relatively small market and it's not that well diversified. But it's, I think, a sort of 30% allocation in the equity pieces. Not unwarranted.

B (5:26)

Yeah. It's interesting because if you think about the net present value of all your future income, like your human capital, all in your local currency, plus the value of your home in local currency, plus, say, one third of your portfolio in local currency, it would appear from that perspective to be a massive overweight to your local currency. Which I think if you're going to be spending in that local currency, especially through retirement, is not necessarily a bad thing. But I think it depends on how you think of all of those components together and what their purposes serve too.

A (5:51)

Right.

C (5:52)

Yeah. Let's remember too that the home buys question has become, I think, a bit more of a minor issue than it used to be. There was a time, not so long ago when a lot of Canadian investors anyway, had basically all of their equities in Canadian stocks. The number was something in the order of 80%.

B (6:09)

It was a requirement. Right. For the RSPs.

C (6:12)

For the RSPs it was. And I think there was just a huge bias to local stocks. And now that, of course, international investing is so much easier than it used to be. And some of those initial papers that looked at home country bias were written specifically to discourage people from holding 80 or 90% of their equities in their home country, not reducing it from 30%.

B (6:34)

I think it's still pretty high, too. Just going from memory, you see articles from time to time that surveys, and the average, I think, is still over 50% for investors.

A (6:42)

I did a tweet on this a while ago based on the Vanguard paper, and it was 50%. Canadians allocate more than 50% of their portfolios to Canadian stocks. So it's come down from the 80% or so. But yeah, it's still high.

C (6:53)

It's still way out of whack.

B (6:55)

Yeah.

A (6:55)

And higher than forgetting the behavioral piece, which I agree is super important. It's higher than what a model or a research based model would suggest is kind of optimal. But again, not a hill I die in. If someone said that they really wanted to be market cap weights for all geographic regions or all countries, fine. If someone wants to be 100% in Canada, I'd probably push back quite a bit harder on that one. But between market cap weights and 30% or maybe even a little bit higher than that, it's probably fine. I'm going to read the next one because I'm curious on both your answers to it because you guys are spending more time with clients than I am. What would you recommend for a high net worth of mid 7 figure individual with a stable job and investments already in a diversified portfolio of index funds to grow their money, what should they do to get more out of their money? So they've already made it, they're in a good stable position. What else should they be doing?

B (7:44)

Yeah, it's such a hard question to answer. Right. It's like there's just so little information in that comment besides the balance of your assets. All right. We don't know how they're allocated and net worth is an important figure, but at the same time it is not the determining figure and what you should necessarily do next. Right. Like is that a 9 1/2 million dollar house and a $500,000 portfolio or are they renting and they have $10 million liquid? Is it all tied up in a business? So there's a lack of information there and it depends on their spending, what their needs are. Right. Like mid high seven figures might be more than enough, it might not be enough. Right. Like it really just depends on the individual. And I think a lot of people listening to this might be kind of shocked by that. But I've had clients spending 5, 6, $700,000 a year. They've got tons of charitable intent or they're just high spenders and they have a very expensive life. So it's very difficult to determine without doing like a full on analysis and a full financial plan as to what the next most important thing to do is. But with a net worth that high, I mean we just think about like the core six financial planning topics. We're looking probably in Estate planning, we're looking probably at insurance and we're looking at retirement planning and of course we're looking at tax. Right. But beyond that, it's very difficult to save with that information.

C (8:53)

Well, I get this question a lot and again, we're reading a little bit into the question because we don't know the details, as you said. But for example, a typical question I will get from a high net worth client is, let's say my portfolio is already $5 million and I feel like I'm going to be continuing to earn, I'm going to be, continue to adding to the portfolio. I need to be more diversified than just a portfolio of stocks and bonds. And so I respectfully push back against that a little bit because I think we need to take some stock here of what exactly a diversified portfolio really is. I mean, if it is a truly diversified portfolio, you're probably holding stocks in 10,000 companies in 40 different countries. You want to get more diversified than that. I mean, it's very difficult to do that. And what is your representation of the global liquid investments? If you own just a simple index fund portfolio, like it's, I don't know, upwards of 80 or 90%. If you want to dabble in things like private credit and even real estate, which is fine. I mean, I'm not dismissing any of those things, but you don't need any of those. And the idea that you can get more out of your money by diversifying further than a globally diversified index fund portfolio, I don't think it's true. It's just really about how much FOMO can you deal with? How much behavioral bias do you have to contend with if you're sticking to just a plain vanilla portfolio? And if you're okay with that, I'm okay with that. Just with nothing less than a diversified portfolio of index funds.

B (10:35)

Yeah, no, that's a great point. And I think a lot of people with net worths in that neighborhood get pitched a lot of stuff as well. Right. Like it starts to open up what I refer to as access classes instead of asset classes. And I apologize to whoever told me that term because I love it and I use it quite a bit and I cannot remember, I don't know if it was Rob Engin or somebody else. And I just think it's a brilliant term. Right. But they believe that now they have access to things that they didn't have before or that normal people don't have access to. And so there's a kind of level of prestige, I think that goes along with certain types of tax plans and insurance plans and this type of thing, private equity, private credit, you know, real estate. These types of investments that are typically difficult for lower net worth investors to get into. But to your point, Dan, like, what is that actually doing for you beyond a globally diversified low cost index fund portfolio? And the answer in most cases, and obviously, Ben, you've done tons of work on these types of asset classes, but in most cases, like, you're not really getting more out of your money, you're just doing more, paying more.

A (11:28)

Yeah, I thought about the question the same way that you did, Dan. I liked your answer though, Mark, about how we don't actually know what their situation is. The premise is basically, I've made it, what should I do next? And I liked how you answered it in terms of have you actually made it? We don't know enough about your situation to determine that. Let's start there. And then thinking about the financial planning stuff that they should probably be looking at as opposed to the investment stuff. I interpreted the question the same way as Dan, that I've got an index fund portfolio, but I feel like I've made it. What should I do next? Basically, I feel like I should get fancier with my portfolio. What should I do?

C (12:02)

One of the challenges Nowadays, whether it's ETFs or diversified funds, there is a tendency to think of them as kind of one investment, when in fact it's a wrapper for thousands of investment. So if, for example, the same person with a four or five million dollars portfolio held individual securities, they could have hundreds of individual securities and feel extremely broadly diversified. They would actually be less diversified than if they held one or two broadly diversified index funds. So there is really a tendency to look at the incredible variety of investments that are held within a diversified fund these days and think of it as a product instead of what it really is.

A (12:48)

And not everything should be held. We asked Fama about private equity as being part of the market portfolio. If we believe markets are efficient, you should hold the market portfolio. Shouldn't we have private equity in our portfolios? And his answer was, it's not obvious that the performance has been good because we don't really know what the performance is. And that's a big problem. If we're thinking about market efficiency and the market portfolio, then it's not obvious that we can access that asset class at a cost that makes sense to do so. So maybe you just don't need to own it. Even if it is, it exists. Therefore it's part of the market portfolio. That doesn't mean that you have to own it. DFA does similar stuff in they look at the total market portfolio, but then they look at certain types of small cap stocks and they say, no, we're not going to own those because they're junk, as AQR would call them, so you don't have to own everything just because it exists. Similar idea with crypto and stuff like that. I agree with what both of you guys said though, that at a certain point people feel like they need something more and that could be a prestige thing, it could be a social thing, it could be meeting some other need. And we see this a lot, we get a lot of requests for stuff like that. But I agree completely with what you said, Dan. You don't need anything else to be more diversified. And in most cases I'm going to say that most cases when you try and do other stuff to try and increase your return to try and get more out of your money, most of the time you're probably going to make yourself worse off rather than better. It's like every investment decision has a distribution of outcomes and when you start getting into fancier stuff, those distributions start to get less and less attractive. All right, next one.

C (14:15)

It's a multi part question. Let's see if we can get through it. So a reader says, I'm working with an investment advisory company who handles my entire portfolio. I'm invested in ETFs in a risk ratio that matches our profile and goals. People I know are directly working with advisors who are day trading and providing returns far greater than my portfolio. So there's three questions here. One, I wonder if I should split my portfolio and allow 20 to 30% to be handled by a different investment firm who trades to grow my overall portfolio more aggressively. Number two, when does it make sense to use a stock trading strategy that is actually working versus an ETF portfolio strategy? And number three, all this activity around Bitcoin and the blockchain has me worried about what impact this could have on the wider securities market and consequently our ETF GIC investment portfolio. Boy, I'll just start by saying this sounds to me like a listener who is not really very content with the strategy they're using. They clearly have a lot of misgivings about whether they're doing the right thing. So that's a problem to begin with. And we can break down the individual questions, but that's my initial reaction.

B (15:28)

Yeah, I had a visceral reaction. I mean, we don't know what's actually going on. But this is super common, especially after a year like we just had where markets are up 30%. Right. Like everyone's a genius in a bull market. Like yes, there's people posting on Twitter. What are you talking about? Like 10% returns. I got 140% this year. Like you're going to capitalize the entire global GDP in like 17 years with returns like, like these are not sustainable returns. And like, look, I'm 40. My investment plan goes out to age 95. My financial plan, I got a 55 year time horizon over which I need to generate investment returns. The probability that you're going to get those types of returns annualized over that time frame is virtually nil. Like technically maybe a non zero chance, but like virtually no. So one, those types of returns are going to be aggressive day trading typically. And Ben, you've looked into this more than I have, but day trading typically loses money, especially over longer time horizons. You don't actually know for sure, like for certain what the returns of your friends are because oftentimes they're not actually sure and they're being sold to and they might see returns over a particular time frame, but they're not extending that to the full time frame. And I'm just talking about question one here, but like personally I would have absolutely no interest in pursuing that type of strategy. There just isn't good evidence to support that that's a good way to manage money over long periods of time. Yep.

A (16:47)

I think you have to fundamentally understand what's happening in their account. Like assume that they're getting market beating returns. Just make that assumption. What is the strategy, how often are they trading, what are the trading costs, how much risk are they taking and how are they measuring risk, all that kind of stuff. I remember years ago I had a client, it wasn't about day trading, but I had a client come to me and say, my friend or my neighbor or whatever, they outperform me by this much. What the heck man? Why didn't I match their performance? I was like calmly like, all right, well let's dig into it, let's understand what they have. So he showed me what their holdings were and my client was in a 40% equity portfolio and their friend was in a 100% equity portfolio over a period where stocks did really well. And I was like, well they're taking a lot more risk than you. And we set the portfolio up this way because you didn't want to take a lot of risk. I explained that and they were like Oh, I understand now. Okay, well, I feel better. That was the end of the conversation. But you have to understand what's actually happening there. And then also, is it real? What explains it? Is it luck? Are they investing in something that just did well? Is it a scam?

B (17:45)

Yeah, I thought about that too.

A (17:47)

Are they actively being scammed by a pig butchering scam or whatever that you're about to get sucked into? I think those are all important questions to dig into. But I agree with what you said, Mark, that if it's a typical day trading style strategy, the probability that's going to do well in the long run.

B (18:01)

Is very, very low or even above zero. Right. I think the studies that you looked at, I think there's a study in, I want to say South Korea of day traders and something like, I don't know, you'll remember the stats better than I do, but a very, very small percentage of them actually had positive returns over the entire timeframe. Not market beating returns, but returns above zero.

A (18:19)

Yeah, yeah, it's a tough game. I'd be very careful allocating any meaningful portion of a portfolio to something like that.

C (18:26)

Well, again, it starts from a premise, right, that if you work with an active investment strategy, then in most situations you will outperform the market. It's just a classic sort of core and explore idea, right? Well, I'm going to index part of my portfolio, but then I'm going to actively manage another part. And it's like if you start from the premise and all of the evidence points here that most active management does not outperform the indexes, then whether you allocate 5% or 100% of your portfolio doesn't change the fact that it does not have positive expected value over time. So you can do it if it helps you scratch the itch, right? And that's the term I use for people like, look, if you absolutely must, if you will leave 95% of your life savings alone and actively manage 5% and that will satisfy you, go ahead. But don't start from the premise that that's the part that's going to outperform. Because if that's the part you think is going to outperform, then you should do it with a hundred percent of your portfolio. So I think at some point you need to have confidence in the strategy and that comes over time. And one of the best ways to take apart something like this is just get the specific information. Whenever I hear people say, you know, oh, my sister or my neighbor is outperforming I'm like, over what period? What did they hold? Show me the returns. If you can't do that, it's just a vague throwaway statement. So you just really never know until you see the data. And then there may very well be outperformance over a short period. Right. Somebody just loaded up on five US Tech stocks over the last couple of years. Of course they outperformed, but you have to look at the risk commensurate in that. So it's a challenge. And if you don't have confidence in the strategy, it will fall apart pretty quickly. So the best way to get confidence in the strategy is read more, listen more, learn more, and sooner or later you will come to understand that it's just what gives you the highest probability of success.

A (20:26)

There's an important piece of their second part of their question. When does it make sense to use a stock trading strategy that is actually working versus an ETF portfolio strategy? We did an episode on Warren Buffett recently and we talked about this kind of principle, that when a strategy has worked well in the past, capital will tend to flow to that strategy, which makes it very difficult for that strategy to continue outperforming in the future. That's just a fact of how active management works in an efficient market for manager skill. So they say a strategy that is actually working, I think that has to be reframed to a strategy that has worked in recent history.

C (21:01)

Past tense. Yeah.

A (21:02)

Right. It's really hard to say that that strategy is going to continue working well in the future. I love the example of Renaissance Technologies Jim Simons fund that has just an insane track record of performance. Although I've heard some people in academia be pretty skeptical of how real the results are. But anyway, assume they're real. They had to cap their fund. They kicked out outside investors. They capped their fund at, I think, $10 billion, and they boot out all profits every year. And they keep the fund at that size because they're doing something say they're doing does work. They're not letting anybody have access to it. And there's only so much of that, whatever they're doing to go around, which is why they have to cap the fund. So the idea that your friend found somebody that's cracked the code and is willing to share with everyone is. I mean, it's kind of preposterous.

B (21:47)

Yeah, I'd be skeptical. And I think your original point then makes a lot of sense. Right. We don't know what this individual is they mentioned in the comment or in the question I'm invested in ETFs and a risk ratio that matches our profile and goals. So you got to start there. And so if that is a 4060 portfolio and this person is day trading over the counter pink sheet penny stocks, there's just absolutely no way that you should allocate even a single penny to this strategy because it's far, far beyond your risk tolerance even for the equity portion of the portfolio. So that alone could just explain the outsized returns, if there are any. The third part of this question is all activity around Bitcoin and the blockchain has me worried about what impact this could have on the wider securities market and consequently our ETF GIC portfolio. And they mentioned GICs right there. Right? So we know it's not 100% equity portfolio. They have a GIC portfolio as well. So we know just from that comment alone that the risk profile of this individual is not 100% equity. But to answer that question, I think it's tough to answer because I'm not really sure what the implication is there. I mean, look, at the end of the day, if Bitcoin is successful, it's going to find its way into a global market cap weighted portfolio regardless. Right? Like if companies start holding Bitcoin on their balance sheets, you're going to have exposure to those stocks. Or if blockchain companies, or if mining companies become very, very large, you're going to have increasing exposure to it. So you might not own the Bitcoin directly, but you will indirectly have exposure to the performance of those assets over long periods of time, just organically, if it's successful.

A (23:08)

Do people still care about blockchain technology?

B (23:11)

I don't know. I don't think so. I was reading about this last week. Remember Long Island Iced Tea company? Remember they changed their name to Long Island Blockchain and their Stock shot up 400% or something like that, and then they basically went to zero and got delisted a year later. That was the last time I heard of blockchain being cool. Maybe it has applications, I have no idea, but I think it got hyped up pretty hard. And they're like, oh, this is just a really expensive spreadsheet. There's better ways to do this.

A (23:35)

It's a database. We already had those. Wait a second. Yeah, I don't know, man. Does Bitcoin's success come at the expense of other assets? I don't know. I probably agree with you, Mark, that if it became that obvious that, I mean, Microsoft just voted by some Ridiculous ratio.

B (23:54)

It was like 97 to 3 or something.

A (23:56)

I think it was 99 point something percent.

B (23:58)

Oh wow. Really?

A (23:59)

I think anyways, there was a shareholder proposal for Microsoft to take some of their cash pile and invest it in Bitcoin. And their shareholders basically unanimously voted against that proposal. But if it became so obvious that holding Bitcoin is necessary for economic success, I think companies will start doing it and the index equities in general will start to reflect that if it made sense to do so. Microstrategy is going to be an interesting kind of microcosm of how that plays out, I guess. Although they're doing it a little extra.

B (24:29)

Yeah, there's some interesting financial engineering going on there. What do you think, Dan? Anything, dad?

C (24:35)

No, not on the Bitcoin side and we'll get to that a little later. There is another question about how we answer questions about Bitcoin from clients. So may I have a little more to say about that?

B (24:45)

Okay, I'll read the next one. How should Canadian investors adapt their investment strategy if the United states imposes a 25% tariff on Canadian goods?

A (24:53)

I mean, the main thing that I would think about there is that to the extent that's going to have an effect on asset prices, it's already happened. And if the probability of it actually happening increases, it'll be reflected in asset prices as we get closer to that. So unless you have a very specific prediction on whether that's going to happen, you probably don't need to do anything to try and get ahead of it. And even if you do have a specific prediction, that doesn't mean you're going to be right. It doesn't mean you can trade on it. I probably wouldn't do anything now. I mean, if we could have predicted that would happen a while ago, we could have shorted the Canadian dollar maybe, but it's already happened. Canadian dollar has already fallen relative to the USD. I don't think there's much to do there.

B (25:31)

Yeah, I agree. There's always some kind of economic news that looks like a signal and most of the time it's noise. And to your point, it's priced in very, very quickly. So even if you predict this correctly, you can't predict the market reaction to it. B, you might not predict it correctly. So at the end of the day now you're just making an active decision based on some frame of view based on a bet that you're going to make on a, the binary event happening like yes it happens or no it doesn't. And Then how the market reacts to that. So I haven't done anything with my own portfolio. I haven't even looked at it.

A (25:59)

Neither have I. Yeah.

C (26:01)

If you're going to adapt your investment strategy to every piece of economic news like that, it's a very slippery slope and pretty soon you're just becoming an.

B (26:10)

Active well, then you're just day trading, making massive returns.

C (26:13)

Right, exactly. So I mean, it's tempting, but I mean, the boring answer is do nothing. Tune it out. Carry on.

A (26:20)

Yeah. All right, I'm going to read this one. This is a good question for both of you guys. When does it make sense for a not yet incorporated high income professional, so probably a physician, maybe a lawyer or something like that, to borrow to max out a tax free savings account and front load our ESPs. So not yet incorporated, they've got a high income, but maybe not high enough to max all the accounts out. Should they borrow to max out all the registered account room?

C (26:44)

So why is the not yet incorporated part fundamental to the question? Like if the person had no plans to ever incorporate or was already incorporated, would it fundamentally change our answer to this question?

B (26:58)

So there might be an implication there that once they're incorporated, they wouldn't use these accounts because they would just defer tax through their corporation. Like I've seen people with that mindset that once I incorporate, I'm going to leave everything in my corporation, pay myself the minimum salary I need to meet at my objectives and I'm going to use the corporation as my taxable vehicle. That could be it. We don't know.

C (27:15)

Okay. And not use a tfsa.

A (27:17)

We wouldn't agree with that.

B (27:18)

No, we wouldn't agree with that. Oh, I mean, I certainly wouldn't. It creates a massive concentration risk from a tax perspective and we just saw that come to life with the new capital gains inclusion rate changes. Right. So that's a good question though. And so borrowing to invest. One, if you borrow to invest in registered accounts like TFSAs and RESPs, the interest that you pay on that loan is not going to be tax deductible. Whereas generally speaking, if you borrow to invest in a non registered account, you at least get a deduction for the interest paid. So a high income professional assuming top tax bracket, and if we call it 50%, is losing the tax deductibility of that by using it to Fund RESPs and TFSAs. Borrowing to invest alone is a fairly contentious topic. I know there's some research out there on the kind of life cycle investing that suggests that younger people, people should kind of smooth out their savings that way by borrowing to invest. But there's a cost and there's a risk. Right. I don't know. When we do plans for people, I don't think I've seen a plan where it's like, look, the only way that you're going to meet these objectives is if you go and take a loan right now and put it in your TFSA and do the same for your resps.

C (28:17)

Right.

B (28:17)

Like we can just backfill those accounts later as your income goes up or your other debts get paid down and your cash flow situation improves. Or if you incorporate, we can look at other strategies. But I can't think of off the top of my head a scenario where it would be obvious to me that borrowing to invest in those accounts is optimal. I'm not saying it doesn't exist, but that's not something that I would generally look at for somebody like that.

C (28:39)

Yep, I would agree with that. Never seen a situation where I would have recommended it and have never recommended it to a client.

A (28:45)

Yep. We even looked at cases where in the debt swap scenario where someone has a taxable investment account that's sufficient to pay off something like their mortgage loan. And so we explained them well, hey, if you paid off the mortgage with taxable account and then reborrowed to invest, it would make the interest deductible. People are like, oh, that's really exciting. And you go through the mechanics of it and load it up in financial planning software. And what we found typically is that the difference in the long term outcome is really not that significant. That's between just paying off the mortgage completely, I mean, versus leaving it in place, whether it's tax deductible or not. In theory, there's cases where leverage is optimal and maybe it makes sense for young people to borrow to invest sometimes. But unless you're using a lot of leverage, the impact in the long run, it's not that crazy and you're taking a whole much more risk.

C (29:31)

Yeah. And let's assume too that if you're going to borrow to invest, you better be investing in something that has a much higher expected return than the interest rate on the loan. And so you basically need to be 100% equities now for a TFSA for the long term, that might be entirely appropriate. Most people are not going to go 100% equities in an resp. At least not after the beginning. It depends how old your kids are or whatever. So yeah, if you're going to borrow to invest in a 6040 portfolio, it doesn't look very good. Your expected return has to be much higher.

B (30:03)

Yeah. Now there's the grants, which is interesting, but in this case they're talking about front loading the resps. So that's obviously so you won't.

C (30:09)

Yeah, you can't front load the grants, Right?

B (30:11)

Yeah, exactly. So those grants have to be kind of captured over time. But it's a good point now too because your cost of borrowing is not the interest rate that's posted today. Like every loan in Canada is variable to some degree mostly because even mortgages are usually five year fixed mortgages. I think there are 10 year mortgages. But you are going to be subject to interest rate risk over the life of that loan and you might have a prediction that rates are going to stay stable or come down. That might not be true. And if rates right now on even like a secured line of credit on a home or probably in the neighborhood of still 6% even with the interest rate cuts. So for a TFSA, that's your hurdle rate before you're even profitable. Right. So you're taking on a guaranteed cost for a variable outcome. And I just don't think that's a great trade off in a lot of cases. Yep.

A (30:56)

I would say that in like financial theory it might make sense to lever up the 6040 portfolio, something that I've always kind of struggled with. But we do the same thing as you Dan, where if someone comes to us and they have say it's a 6040 portfolio and they want to borrow to invest, the first thing we would do is say, okay, well let's look at if we just changed your asset allocation to be more aggressive, like treat the leverage as a negative position in bonds. Let's net that out and just map out your expected financial outcome in that scenario. And typically increasing the equity allocation looks about the same in a projection as adding leverage.

C (31:28)

Yeah, no, that's a great way to frame it. The idea that the bonds, you're basically a lender and if you're going to be a lender and a borrower, maybe you net that out and just put the difference in equities.

A (31:38)

Yeah, that's one of the scenarios that we'll model out when we're talking to people about or when someone approaches us about leverage.

B (31:45)

The other comment I'll make there, Ben, you mentioned sort of a debt swap or an asset swap where you convert non tax deductible into deductible debt. And I've Gone through this with many clients over the years, and in every single case, they never borrowed the money back to invest because the feeling of getting rid of the debt was psychologically so empowering. And it happened to me personally, I did the same thing. I had non deductible debt and I went to pay it off and borrow it back. And once it was paid off, I just never got around to borrowing it back. So I was kind of like, you know what, like, just minimizing my required fixed monthly costs by not having that debt payment, even if it might not be optimal on paper. Just felt good enough. Right. So people thinking about borrowing to invest might actually feel different once they have interest payments that they have to make on those loans. And they might decide, you know what, like, I don't like this at all. And they may pay it off quickly, which is obviously a good thing. But I think you don't know until you've actually experienced being leveraged and having an aggressive portfolio what that feels like.

A (32:37)

Yep, I've had that conversation many times and I have seen people actually take the leverage. But I would say in the vast majority, probably 90% of cases, it's the exact same thing that you just described, where we're like, okay, here's the strategy. And they're like, that's really smart. Let's do it. And then you pay off the loan. And we're like, okay, the next step is to reborrow so we can invest. And they're like, yeah, no, I'm kind of feeling good without the. I've had a couple people who are just like, hyper smart, like too smart for their own good. Arguably that's like, no, this is optimal. We must proceed. And then they've been fine. I've had one case that I can think of where they reborrowed and then their financial situation changed in a way that made the leverage really uncomfortable. And it was like this was one of the risks. They ended up being fine. But yeah, always an interesting conversation.

B (33:22)

Okay, next one.

A (33:23)

I'll read it. Assuming it is an issue, is the problem with index funds that they overvalue individual stocks or overvalue the entire market? Is the solution to switch from the s and P500 to a total market index? Why? The answer is yes.

C (33:40)

Yeah, this is a pretty common question. And I would say if you're going to talk about a cap weighted index, I think you have to say that cap weighted index, overweights, overvalued companies and underweights undervalued companies, it can't Overvalue all of them. And then the second part of the question, I mean, S&P 500 is not an ideal index, but it's not a terrible index. And it doesn't solve the problem one way or the other. But I'm sure you guys have more advanced way of approaching it.

A (34:09)

It's one of the big questions that we talked about with Mike Green and Randy Cohen about is there a cross sectional impact which is like is it affecting individual stock prices or is it a market wide impact? And that's one of the things that Randy was kind of pushing Mike on. I don't really know if we got to a good conclusion there, but there's like in one world, adding money to an index fund has a disproportional effect on larger stocks. A flow into the index has a disproportional effect on larger stocks because they have lower price elasticity. That's the argument anyway. And so every time new money flows into the index, it has a bigger price effect on the larger companies. And then as there's more indexing that gets exacerbated further. That's the story anyway. How true it is is another question. Or how worried we should be about it. And then the other alternative is that money flowing into the index just pushes the whole market up and affects valuations all the same. I don't know what the truth is. I don't know if anybody does. There's different research and different opinions on this, but there's no. This is factually what is happening. This is a pretty new area of serious research. There are some papers coming out that suggest different things, but I can't conclusively say this or that at the moment. Is the solution to switch from S&P 500 to total market. If you believe in the cross sectional story, if you believe that flows are disproportionately overvaluing the larger stocks and that's going to continue to be a problem going forward. S&P 500 is like 80% of the US market capitalization, mostly in the largest companies in the US market. In that cross sectional story, in the event of outflows, the opposite would be true. Where large companies would be disproportionately affected in the other direction. Their prices would go down more so than smaller companies. So if you're worried about that, if you're worried about flows reversing, then yeah, I mean, Total Market could be a solution. I would argue Total Market's a better solution anyway. Why the S&P 500? I don't think there's a great argument for that. Yeah, that's kind of where I'm at on that. We don't know is it cross sectional or the total market effect from indexing? We don't know the answer conclusively. People should probably be total market instead of S&P 500.

B (36:17)

Regardless though, and this is largely a US phenomenon, is it not like a US equity phenomenon? I mean, in theory, I guess it would affect every country. But the overvaluing of US Stocks, how expensive stocks are is largely a US Story right now. If you go out to other developed and emerging markets, the stocks of those countries are not quite as expensive as the U.S. right.

A (36:36)

No, another phenomenon. I have some notes on this for the after show, but one of the discussions in the Raft reminder community right now is is the small cap value premium a thing of the past? And there are people showing data from the last 18 years in the US that hey, this thing's dead. And that's basically because large cap growth has done so well pushing up the US market. And small cap value being a relatively small portion of that hasn't really kept up. But if you look internationally over the same 18 year period, small cap value has done great and large cap value has not been so crazy like it has in the US So I think indexing is bigger in the US market. The other interesting thing though is that as the US market has become increasingly important relative to other markets, like it's 65% of global market cap right now, which is crazy because 11 years ago it was, I don't know, 35%. It's crazy how much has changed. And even though other countries aren't indexing as much, to the extent that they are like global cap weighted indexing, they're allocating increasingly more to US stocks, which could further be affecting the issue. Anyway, there's so much speculation on this topic, lots of strong opinions. I think for now it's safe to assume everything's going to be okay eventually.

C (37:48)

Question 7 When to buy a house in Canada or how to think about buying a house in general? From a personal finance perspective, we should do a whole episode on rent versus Buy.

A (37:59)

That's a good idea.

B (38:00)

That is a good idea.

C (38:02)

Where to begin with this one?

B (38:03)

20 years ago, I guess.

A (38:04)

Yeah, I can take a quick crack at it. I don't know. I think probably the biggest point that I've always wanted to make on housing is that renting isn't throwing money away. That's super important for people to understand. It doesn't mean that renting is always better. But I think people start from the premise that renting is always worse and that leads them to make certain housing decisions like buying a house when maybe they're not ready to buy a house or buying a starter home with the idea that they're going to climb up the property ladder over time. And I don't think those are always good financial decisions. It doesn't mean renting is always good. And people have different reasons for why they don't want to rent. But I think that's starting point is renting is a perfectly reasonable financial decision. And when you model it out, renting can work out just as well as owning. But when should you buy a house? I think you have to expect to live there for a while because there is price risk in real estate that can be pretty substantial. There's also really high transaction costs. So if you're going to live somewhere for two years, personally I would say that you probably shouldn't be buying. If you want to live somewhere for 10 years or longer, it probably makes a lot of sense to buy. I think there's also real financial challenges for people who want to buy a house now that real estate prices are so high that the cost of a down payment is pretty significant. And that can pose a challenge and then might change the equation on when it makes sense to buy or whether it makes sense to buy. What do you guys think?

B (39:24)

I don't think there's a good rule of thumb for this either. Nick, Ben, we've talked about this before, but I hate owning real estate. And if I could get a 99 year or a perpetual one way lease on a property, I would just never, never own real estate again to make it somebody else's problem. But just the costs and the maintenance and everything else alone are a pain. But there is a lot of utility from owning a home and you can do what you want with the home. And to your point earlier, you're kind of hedging against future housing costs. I think there is some utility there, but it also depends on the kind of viewpoint that you have. Like a lot of people think that the next logical step after getting a adult job is they must now buy property. It's like it's been laid out for them as the pathway to success is you must now buy property. And I just don't think that's true. And a lot of that comes. I think there's a lot of cultural aspects behind it. A lot of that comes from how you were kind of raised and how this issue is addressed in your family. But also I think it presupposes that that will get you a good return on your money. And it might and it might not. Right. To your point, and as we've discussed in the past, very few people properly account for all of the costs of owning a home. And once you factor all of that in, it becomes much less obvious that this is some pathway to wealth. It's really just the leverage playing out over time. Right. You've leveraged a very, very expensive asset that's not very liquid, not very volatile because you don't see the price very often. And it's a forced payment mechanism to pay a mortgage. So if you can overcome all that, then I think buying a place or renting is just totally fine. I just don't think there's a rule of thumb unless they're talking about what economic conditions should exist. They're making a kind of housing market timing question. But I don't think that's a reasonable way to look at it either.

C (40:55)

Yeah, I think you have to look at this one. I mean, we've talked about it so much, but I mean, if you can distill it down, it comes down to if you purchase a home that you can comfortably or at least with only a slight amount of discomfort, afford and you enjoy living in it, it's the right decision for you and your family. It's a great decision. If you buy a house because you think it's an investment and it's something that you must do or you will be left behind, you're probably going to be making a poor decision.

A (41:23)

I will say that. And we have a question on this somewhere in here today. I'm going to mention it now that when I modeled this out for the episode that we did earlier this year, one of the things that really jumps out is that you have to do a lot of right to be a successful renter financially to match the wealth of an owner in the long run. So you have to have low fees, you have to be well behaved as an investor, not buying it when things have done well, not buying Bitcoin at the peak after it had a run up, or not buying US stocks after they've had their best year in a long time. All that kind of stuff, you have to save with a lot of discipline. So low fees, discipline saver, well behaved as an investor. And that's not always easy for people to do. So if you don't trust your own ability to do those things, to be an emotionally consistent investor and to find Good low cost investments, which is easier said than done, especially for people that aren't listening to this podcast, then buying a house maybe is a pretty good idea for the average person that's not that financially literate. Buying a house is probably not not a bad idea. And that's the question that I was talking about is what have you changed your mind about in 2024? That's definitely something for me. All right, next one. It's a variation of one that we had earlier.

B (42:38)

Well, I'll read it out and then we might get through it quickly. But I'm nearly 34 and saving for retirement. With my long time horizon, what would be the best way to increase my risk exposure? I own a condo and have access to a line of credit. So leverage is an option. But are there other options I should consider?

A (42:53)

Yeah, it's another one of those cases of people get into a comfortable situation. I mean, in the last AMA episode I talked about how I am a terrible angel investor and I've gone to zero on two different investments. But I was in the same kind of position where I was like I was feeling pretty comfortable and I had some extra money kicking around at the end of the month for the first time ever. And people are like, yeah, I want to take a lot of risk because they imagine all of the wealth that's going to come from doing that. But you've got to be very careful. The types of risk that you take my example is an extreme one where I invested in two companies, ended up going under and that sucked, but I took a lot of risk. It could have also paid off. I think that applies just more generally where if you borrow a bunch of money to invest in some risky thing that it could work out. It probably won't, but it could. And if you think about the risk of just owning the stock market through index funds, that's a risk with a positive expected return. You're probably going to get a good long term outcome. Not guaranteed, but probably. I don't know, I feel like maybe tilting towards small cap value stocks has a positive expected return. But again, it could suck for 20 years like it has for the last 20 in the U.S. i don't know. And then leverage too. Leverage is a double edged sword. If you borrow to invest in something, it could make you worse off.

B (44:04)

It's a really good point, right, because you can take more risk, but that doesn't necessarily mean that you should expect higher returns. You can take more risk by reducing diversification in your portfolio and buying one stock, but that's not increasing your expected returns necessarily over the long run, it's increasing your risk. But what are you getting for that increase in risk? We don't know what the risk level is. I mean, assuming they're 100% equity, the really important thing that people forget is that although risk and return are inextricably correlated and you cannot separate one from the other, that doesn't mean by taking more risk, you get higher returns. You might expect higher returns over very long periods of time if you take risk, smart risks, but you are certainly not guaranteed higher returns over any time frame by taking more risk. So I'd kind of just maybe push back if this was a client of mine saying, like, why do you want to take more risk in the first place? Are you trying to increase your returns? And if so, what do you have now? And are there risks that we can take that would allow you to increase your expected returns over the long run? Or are you already in a great portfolio and maybe those dollars should actually be spent on paying down the mortgage on your condo or something? Right?

C (45:06)

Yeah. That would be my first question to someone who asked this is, are you already 100% equities? Because that's number one. We touched on a little bit earlier, and it seems obvious to us, but I think there are a lot of people who might have a portfolio that's 60 or 70% equities. And then talk about, I want to leverage, I want to take more risk. Okay, let's take more risk and go 80, 90% equities, go 100, start from there and then ask yourself, too. This is a question that I talk to young investors a lot, especially those who have quite a bit already saved. Why do you want to take more risk? Well, I want to increase my rate of return. Okay, so let's have a couple of projections here based on what you're saving now and what your expected return is currently. And then ask yourself, is that going to be enough money for you when you retire? And my guess is most of the time it's much more than they imagined and much more than they will need. And then you just say, well, why do you want to take more risk in order to achieve a goal that isn't even really a goal? Right. Usually this is done with just a kind of vague idea that I want better returns, not I need to reach X number of dollars by retirement, and I'm going to fall short unless I take extra risk. So if you try to tie that risk appetite to a person's actual life goals, sometimes There's a mismatch where you can say to somebody, listen, you can accomplish all of your financial goals and just take a moderate amount of risk. Why do you want to jeopardize that? Why do you want to introduce the possibility that you might fall short of your goal when you don't need to?

A (46:43)

Yeah, that's a great point. What are their goals? What are they actually trying to achieve by taking more risk? I think that it is super common for people to, because they're in a position to do so, to think that they should be taking more risk because it'll give them more wealth. But for what? I think getting to that, for what is super important. I agree. In a lot of cases, it'll completely change how somebody's thinking about it.

B (47:03)

I got into this exact argument with somebody on Twitter yesterday. They were quote, tweeting somebody like, I think Nick Maggi from Rich Holtz Wealth. And Nick's post was saying, maximizing your 401k, which is kind of the equivalent of a group RSP here in Canada, is not always the optimal decision. And the post he was referencing was a Reddit post where this individual shoveled as much money as possible into the 401k but then was unable to buy a home because that money is essentially locked away or pre tax. And this individual was saying, you know, Nick Munchley is an idiot. The 401k would have ended in higher terminal wealth. I'm like, no, no, that's not what it's about. Like, optimizing your terminal wealth is not the name of the game. It's achieving your financial objectives. So you can't say that the optimal use of these dollars, if the goal was buy a home in five years and you recommended to this person to put it in an illiquid account where they were unable to meet that goal, you have now failed your client and given them poor advice. So I don't think it's about optimizing terminal wealth. Your story, Dan. Why are we increasing returns in the first place if we're able to meet all of our objectives on this path? Why are we trying to optimize for terminal wealth when taking more risk just increases the dispersion or the probability that you're not going to meet those goals?

C (48:08)

Terminal wealth is a really interesting one because, I mean, if you're really crass and you phrase it to a client, is your goal to die with as much money as possible? I've never met anybody who's told me that that's a financial goal and yet occasionally that is a metric that people will use in financial planning. It's like, I get it. If leaving a large estate is an important goal for you, and it is for many people, fine. But I wouldn't start from the assumption that most people's number one goal is to have as much money as possible the day before they die. So yeah, to your point, terminal wealth is only one of many possible financial goals and it's rarely the most important one.

B (48:48)

And often it's not even really the goal. Right. Like, if you probe further, like, I want to die with as much money as possible. Why is that? Well, I want to make sure that my kids are taken care of. Okay, that's your goal. You want to make sure that your kids are taken care of. It's not about dying with as much money as possible. So now we can look at options for what does that mean? What is taking care of your kids? Is it allowing them to purchase a home? Is it creating an annuity income for them for life after you pass away, such that their basic needs are met? Like, we can math all that out, but it doesn't necessarily mean optimizing terminal wealth. Right? And so I think people have trouble creating meaningful financial goals. And it's just so easy to anchor it to like some number, like, I'll retire when I have $5 million. Why is that the number? Like, well, it just sounds nice. In my head, I talk to this guy on Twitter all the time. He's like, 10 million that I'm done. Like, why? Why 10 million? She's like, I don't know. It just sounds like a great number. I mean, sure it does. But like, is that too much? Is it too little? Like, we just don't know. So setting smart goals in the first.

A (49:35)

Place won't be enough when he gets there? No, for sure the gold pulse will move. I've seen it, seen it a thousand times.

B (49:40)

Yeah, I've done the same personally.

A (49:43)

If we were actually to answer this person's question though, they could increase concentration in high expected return assets. So if they're 60, 40 stock bond, they could increase their equity weight so they're taking more concentrated equity risk. They could add other sources of expected return, so they could invest in riskier stocks. Although even defining what that means is kind of tricky. There are many, many different ways to say that these stocks are riskier than those like value stocks, small cap value stocks. Then there are tons of other ideas, research based ideas with varying levels of research supporting them. I think it gets pretty tricky pretty quick. Could take completely other types of risk outside of the stock market. They could use other asset classes like we talked about earlier, private equity and private credit. I don't think those are a great way to do it because the costs tend to eat up most of what's there. And then they could use leverage. Between those two things, between increasing portfolio concentration, adding other sources of expected return and using leverage, there's probably some optimal combination of all of them. If you really wanted to have the highest expected return possible. Theoretically, it's probably like some equities, some other sources of expected return levered up to some optimal amount. I think getting that right is really hard. That's probably the answer they were looking for, but it's also probably not what most people should do.

B (50:59)

Yeah, or maybe they have some skills, they could start a business or something. Right. Like there's other ways to look at risk, but that kind of risk is very difficult to quantify too. Right. Because it's just such a big known. A lot of businesses fail. We also don't know what skills they have. Would they have to give up their job to do that? And is their job a source of income that they need to make their mortgage payments, in which case that risk might not be worth taking. But I agree with you otherwise.

A (51:18)

Yeah, next one's pretty similar, but let's try it. I work with a lot of younger clients that have high incomes and are looking to save aggressively and retire early and take on the risk. If you were to play this out and actually give them factual based advice, how would you do it? For example, would you just encourage larger small cap value allocations?

B (51:35)

Yeah. So there's a post that was circulating on Twitter that was a quote from Reddit. And I think many people get obsessed with the concept of fire financial independence, retire early, and when they get there they're just really bored. And so this post on Reddit was this guy who's 40, I think he had something like $2.6 million in liquid assets, no kids, wife is still working full time, 9 to 5 job. And this guy's retired and all he does all day is sit around eating THC edible candy and playing video games. And his wife is just so disappointed and is calling him a loser and stuff. He just kind of doesn't really know what to do with himself anymore. And this, I guess is probably not his ideal view of retirement. When he was starting his fire journey, maybe in his mid-20s or something like that, I don't think he was probably like, yeah, I want to sit around all day and use drugs and sit on the couch and play video games. That's not usually everybody's goal. So I think a lot of people who have this expectation of what early retirement might look like just need to be very careful with that because it's not always as rosy as it seems. I totally get the desire for financial independence, right? Like you want to be in control of your calendar. You want to hit that point where you have a work optional lifestyle, and that's fine. But I think to answer the question, we already largely answered it, right? Like, how is the portfolio set up now? What reasonable risks can you take that are going to increase your expected rate of return? And is there anything else that you can do to increase your total portfolio value over time? Like can you save more? Right. But I don't know that like somebody who's already doing that. 100% equities, saving everything they can. There's not a ton that makes sense to me that would jump out is go do this thing now.

C (53:07)

It's a tough thing too. Like if you're talking about somebody who is saving aggressively and wants to retire early versus someone who is saving aggressively and wants to retire later. If your goal is to retire early, meaning, I don't know, five, ten years from now, regardless of your age, you got to be careful about how much risk you take with your portfolio. You don't want to be in 100% equities three or four years before you retire. So those goals might be incompatible. Usually young investors have the risk capacity. They can go 100% if they want to because they have a very long time horizon. But early retirees don't have a very long time horizon, at least to the retirement date. Of course, they need to make their portfolio last for a lot longer, which is why, I don't know, this then becomes a difficult asset allocation decision, doesn't it? Because on one hand, you need to make your portfolio last for 50 years instead of 30, which means you should probably be more aggressive. But if you're more aggressive, then it's harder and harder to draw down the portfolio during those negative years. So, yeah, I mean, I don't know. Fire is a difficult financial planning question for sure. It's got a number of problems as well as the lifestyle issues which you touched on. Mark doesn't appeal to me, which is good because I'm no longer young, but it never would have. I can't imagine Having retired at 40 and not had that to do for the rest of my life or my career. I don't think I'm so focused on work that it's my whole identity, but it's certainly something that gives me purpose.

A (54:42)

Listen to this, Dan. I'm going to argue that you actually did fire because you did the same thing as so many of the fire people did, is that you left one career and then started giving other people advice on how they can too retire. That's literally like every fire blogger out there leaves one career.

C (54:59)

I work twice as much now as I did when I was 30.

A (55:02)

So do the fire people. Yeah, maybe they travel around, they write books, they blog however many times a week. It's no joke. I always found that funny about the whole concept is that so many of the influencers, at least in that space, and maybe there are people who actually follow the principles without being influencers, but so many of the influencers say, yeah, I retired early, I quit my job, but then meanwhile they're making however much money by doing something else, a different job.

C (55:26)

It's not retirement, it's just a career change. I think you're right about that.

A (55:30)

And in a lot of cases, and maybe there are people that are very quietly actually retiring early and we just don't hear from them because they're doing things that they love. Maybe there are people like that, but.

C (55:38)

You don't because they're on the couch.

A (55:41)

Those aren't the ones you hear from. I will say on this one too, actually, that in that fire space, there are a lot of pretty wacky investment ideas that have come out of there to try and deal with the problems that you were talking about. Dan, I've seen all kinds of weird strategies with funny names that are supposed to solve those problems, but I think typically they probably exacerbate them as opposed to solving them. But yeah, it is for sure a hard problem.

C (56:05)

All right, move on to the next one. All right. Given the potential benefits of rental properties for portfolio diversification and income generation, how should Canadian investors balance their allocation between traditional retirement savings vehicles like RRSPs and TFSAs and real estate investments to create a more robust retirement strategy in the face of economic uncertainties expected in 2025? I think we could drop that final clause from the question and just say, to create a more robust retirement strategy in general. I'm not sure that the answer is going to change based on the fact that it's 2025.

A (56:44)

I think we've talked about in past episodes that buying direct investments in real estate is in many ways buying yourself a second job and you can maybe earn extra income by working that job. But it's work. It's no joke. If you're just building a diversified portfolio of real estate assets, I think you can just do that through real estate investment trusts. If you look at the evidence on. Does private direct real estate investment perform better than REITs? No. Publicly listed REITs tend to perform better. I don't think you're gaining much other than maybe access to leverage and maybe an avenue to exercise your human capital to earn some income, which is unique to direct investment compared to a reit. But I don't find real estate investing to be a particularly attractive asset class or job.

B (57:31)

I hate it. I sold my rentals worst. I had two and we held for four, maybe five years. And I just got to a point where I was just like, why am I doing this? This sucks. This is awful. I hate it. I hate the stress of it. And it is work. And I had property managers, but then you're just managing the property manager who's managing the tenant. You're still communicating a lot of. You still have to make decisions, you still have to pony up money. There's just still problems with it. And I was like, what are we doing? I just liquidated everything as soon as I could after I made that decision. So, yeah, it's just not obvious to me that there are de facto benefits to owning rental properties. Especially to your point, Ben, when you can just go out and buy a very, very low cost, liquid, no work portfolio of rentals in like three clicks, right? Yeah. You're not going to get the leverage which can work for and against you. And you could, in theory go get leverage against that position. But I don't think it creates a more robust retirement strategy. People don't understand the risks of rentals. Every time I talk to somebody, they factor in zero vacancy rates in their projections. Like, really? There's never going to be a month where there's like a tenant turnover. And yes, we have very, very high rental demand in Canada. But to assume that you're perpetually never going to have a zero cash flow month, I think is. Is just bad, bad planning.

A (58:42)

It could be vacant for reasons other than not being able to find the tenant. There could be a problem with the unit that you have to take a couple months to fix or whatever.

B (58:48)

Yeah, that guy I was talking about earlier who wants 10 million, he owns something like 14 or 15 rentals and he has some really, really bad tenants. And a few of them have absolutely. I think he's kind of like a slumlord, to be honest. Like, I don't think these places are, like, the nicest places in the nicest areas, but, like, just some of the nightmare stories told me about. And he sent me pictures. Like, then it's just absolutely trashing the place and, like, the cleanup and fixing costs and everything. Like, so that's work. But there's also, like, a massive financial and economic risk that most people just totally discount and just go, oh, real estate goes up. I should buy real estate. That's the extent of their analysis.

C (59:21)

I'd just add two things to that. Like, just to focus on the specific question when this person has asked, how should Canadian investors balance their allocation between traditional retirement savings vehicles and real estate? I mean, number one, max your RRSP and TFSA before you even think about buying real estate. I mean, that would be my first reaction to that. So I would not, for example, purchase a rental property instead of investing in an RSP and a tfsa. It would have to only come after those accounts are maxed. And the last thing I would say about this one is, I still personally feel exactly the same way as you guys. I would never buy real estate as an investment. I have zero interest in it. I'm not convinced that it has a higher expected return than a more liquid portfolio. But one of the things I have come to understand over time in talking to people is that, remember, we do this every day. But there are a lot of people out there who find investing in equities, in particular, completely alienating, confusing. You will even hear comments like, the stock market is just a big casino. So it's people who are clearly not comfortable with investing even in a diversified equity portfolio. And so for those people, I understand it. If somebody said to me, the idea of investing in the stock market just terrifies me. I want something that I can understand, like buying a condo and renting it out and generating income. I'm not going to argue with that. I mean, that's a behavioral argument. It's not a mathematical one. But I respect that it's a legitimate position for people to have.

B (60:55)

Yep, good stuff. Next one. I'll read it out. What do you think is the most overlooked behavioral bias or misconception about investing that continues to harm individual investors even among those who consider themselves financially literate? It's a great question.

C (61:08)

I think it's an easy question for me. Overconfidence? Yeah. I mean, I don't know if it's overlooked. I mean, I guess people who are overconfident overlook at themselves. I think most of the rest of people realize that especially people who consider themselves financially literate are most likely to be overconfident and just start to think that you know more than the market. This is really easy. All of these decisions are easy to carry out. And then you realize you don't necessarily know as much as you thought you did. So that continues to haunt everybody, I think, to some extent.

A (61:43)

Yeah, mine's related. I was going to say a bias for action. People feel like they should do something and they have to do something. When the market changes, when the tariff thing or bitcoin goes up or US Stocks outperform Canadian stocks, people feel like they have to do something. And that's usually the wrong time to do something. And usually doing something is wrong in general, but especially after some big thing happens, responding to it right afterwards is not usually the right thing to do. That bias for action, I think is huge. And people who know more, in a lot of cases, not in all cases, but in a lot of cases, people who know more will suffer from it worse because they'll think they understand what's going on or they will understand what's going on. And that seemingly makes it more obvious that they should do something. But usually doing nothing is really hard, but it's usually the wisest thing to do in investing.

C (62:32)

Have you guys heard about the study that they did about soccer goalies on penalty kicks? It was to demonstrate this idea of action bias. And I may not be summarizing it as accurately as I should, but the basic idea was most soccer goaltenders would have been best if they had just stood on the spot for a penalty kick. But if they just stood on a spot and the shooter kicked it into the corner, they would look like a fool. Why didn't you dive? So they dive on every shot. And anybody who's ever watched a penalty kick or a shootout has seen half the time you dive in the opposite direction. And once it looks ridiculous. Sometimes when you dive to the right and they shoot to the left, but you say, well, he had to do something. Right. And so there's that action bias in there as well. And yeah, you know, to your point, it feels often like doing nothing when you have a long term buy and hold strategy. But the way I like to frame it to clients, I said, we're not doing nothing. We came up with a thoughtful long term approach and now we're sticking to it with discipline. That's not nothing. That's the opposite of nothing.

B (63:40)

Yeah, I mean, doing nothing is action. Right. It is a decision that you are Making. And this is why I always tell people, don't check their portfolios, because every time you do, whether you're consciously doing it or not, you're making a decision to buy, hold or sell. And the more you look at your portfolio, the more interactions you're giving yourself where you have to make this buy, hold, sell decision, right? And people don't do well with that. And I think, to summarize my thoughts on it, I think recency bias, which plays into the other two, but I think recency bias is a really, really dangerous one too. Right? We all have clients who just, why should I not go 100% US stocks? Why should I not go 100% Bitcoin? Why did you not own this asset class that did the best last year? Right? People have a really, really difficult time looking far back in the past and looking far into the future. Like, I think we tend to live our lives in these one or two year kind of goalposts, if you will. So it's really, really difficult to understand that you have maybe a very, very well diversified, very evidence based, logic based portfolio when you see stuff like, oh, Bitcoin's up 104% last year. Why didn't do that? And I've lost a client over that in the past where it's like, you had a balanced 6040 portfolio, but the S&P 500 was up 20% last year. Why didn't you outperform the S and P? It's like, okay, well if you're going to benchmark to whatever went up the most last year, then you're just going to be continuously disappointed for your entire life. I'm sorry, there's nothing we can do about that. So I think recency bias plays into that a lot. One quick aside, your story about the soccer penalty kickstand I found really interesting. There's a book, and I can't remember what it is, but it talks about how in the NBA if your three point throws were. And Ben, you might know about this, but if you did like the granny style, like underhand, the percentage of making the three point shot goes up like by a huge amount. And so it's actually way better to shoot that way, but nobody will do it because it's just so embarrassing to do, right? And I think there was one coach who like tried to get, I think it was a women's team, actually like an Olympic U.S. women's team or a college team to start shooting that way. And they were practicing that way. And then when they went to play Their first game, nobody shot that way because they were just so embarrassed to actually look kind of foolish in shooting that way. So just funny.

A (65:38)

That's hilarious. Probably free throws, not three point shots.

B (65:41)

Or maybe it was. Yeah, yeah, I think you're right. I think it was. Yeah, I think it was free throws. I don't know much about basketball.

A (65:46)

That's funny though.

C (65:47)

Ben, have you ever thrown a granny style three pointer?

A (65:49)

In my life? Probably yes. In a game? No, never. And I would be pretty embarrassed to do it. I'm a decent free throw shooter. I don't know if my percentage would be better with the granny shot unless I started practicing with it. All right, next one. What percentage of your personal portfolio is allocated to stocks and what influenced that specific allocation decision? Personally, I'm 100% in stocks. What influenced it? It was already at that level before the Scott Cederberg paper that if anything increased my conviction in that. At least for now. Why was it there? I don't know. Young enough I could take equity risk. Very comfortable with stocks and how markets work. Not at all concerned behaviorally. I think I have the capacity. So my behavioral loss tolerance is there. I can handle volatility. I have the capacity to take risk and yeah, I guess that's it. I'm very comfortable where I am with 100% stocks.

B (66:47)

Do you ever expect to change that allocation as you get older?

A (66:50)

Honestly. So when you look at the Scott Cederberg research, it would suggest that nobody should ever hold bonds throughout their entire life cycle. I'm not saying that's what people should actually do, but that research does support that. I don't know, I think about it sometimes. I think I would be comfortable carrying on the way that I'm set up now. But I'm not anywhere near retirement so it's kind of hard to think about it.

C (67:11)

Mark, you're triple leveraged obviously.

B (67:14)

Tqq, baby all day. It's up so much too. It's by far the best performing position that I have over the past whatever it is, six months. I'm talking about recency bias and we talked about FOMO and stuff. You just kind of look at it sometimes you're like maybe there's something there. Right. But otherwise, yeah, no, I'd say 100% stocks. My liquid like RSPs, CFSA, non registered portfolios and Dan, my kids resps are all 100% global equity. I do have a bit of bitcoin. That's not a recommendation. I'm just saying I do have some bitcoin and I've had it for a long time. It started as a totally meaningless amount of money. But because of Bitcoin's performance, since I think about it in 2016, 2017, it has become something I think like 3 to 5% of my overall portfolio doesn't include the value of my home. I'm just talking about investments. But for me that's just purely speculative. And I don't really think about that as part of my portfolio because in my head it could go to zero at any time. But otherwise, yeah, I don't anticipate ever not being 100% equity for my investment portfolios. But older Mark might feel totally different about that.

C (68:15)

Older Dan feels different about that.

B (68:17)

Yeah, When I first saved my first $50 biweekly pack at my first job, it was with 60, 40 portfolio and I knew very, very little. And then I eventually increased it to 80, 20 and then to 100% equity. So I didn't always have 100% equity that developed over time.

C (68:34)

Yeah, I think it was sort of the same. And when I started saving and investing, I just used a traditional balanced portfolio. And I've never moved away from it. And going back to the point about earlier about the terminal wealth and take as much risk as you need, I'm perfectly content with the expected return on a balanced portfolio. I don't think I need any more. And it wouldn't enhance my life to have higher investment returns at the cost of greater volatility. And I think the other part of it is too, you have to always be considerate of what you do for a living. And our business and my income is intimately tied to stock market returns. And so if my personal portfolio was also 100% stocks and you guys are in a similar situation, that would be more risk than I would be comfortable with.

A (69:24)

One more question, then maybe two, because this one's going to be quick. Do you believe in bonds? I put that one in there because I thought it was a funny question. Now, I've never actually seen a bond personally, so I'm pretty sure they're real, but I'm not 100% sure because I've never actually seen one other than on a computer screen. What do you guys think? Are bonds real? Do you believe in bonds?

B (69:44)

Are they a myth? Do I believe they exist? I do believe they exist. I haven't seen one, but I do believe they exist. I don't know. It's a tough question, right? Traditional sort of financial models in theory are all just invest in bonds up to your risk tolerance, your risk capacity It's a non correlated asset. It's going to reduce expected returns and volatility somewhere on a sliding scale from 0 to 100% in equity, the rest should be in bonds. And that just makes sense. It's intuitive, it's easy to accept. And I think once you start looking at other research like Cedarberg stuff or anything that really points out that inflation is largely the biggest risk that a lot of people are going to face, especially in retirement, personally I think the argument for bonds mathematically becomes a lot less compelling. I think from Dan you just touched on this. But behaviorally I think there's a good argument for in some cases why bonds might make sense. I don't own any bonds, I don't expect to, but I do believe they're real and I do believe they serve a purpose in a portfolio, depending on your risk capacity and profile. But I do think it's very worthwhile to point out to people who are buying bonds that over the long run inflation is really, really dangerous and bonds can't hurt you there.

C (70:51)

So that's an interesting. Because it comes up a lot, right? And a lot of people will say the history shows us that equities have a far greater expected return than bonds and so bonds don't make any sense. But bonds were never in a portfolio to enhance return. So the question becomes, I guess a, Are you comfortable with the volatility of 100% equities? To which the corollary question there that I will say to clients, how would you feel if you lost half of your life savings in six months? Because this has happened before, it will probably happen again. And if your answer is I would not be comfortable with that, then what do you do? So how do you reduce volatility in a portfolio if it isn't with bonds? And I'm not saying that there are no other ways, I'm just saying how would you do it? I don't know. GICs and cash, something like that. I don't know if that's a fundamentally different risk profile than holding bonds. But I do think we have to ask why are bonds in the portfolio? They're there to reduce the volatility of an equity portfolio. That's like 90% of the reason this idea. They generate income. Okay, they do, but I'm not sure that that's primarily why they're there because equities can generate income too. Lots of other investments can generate income, but they are a way of dampening volatility and they do have historically some negative correlation with equities. So if you're not going to use them, what are you going to use instead of assuming that you're not 100% equities?

A (72:21)

It's super hard to think about because I agree they've in many cases had low correlations with stocks, but they've gone through periods of high correlation and it's kind of varied through time. The stock bond correlation, it's this moving thing. And then the other really interesting thing that I find about bonds is that they for sure reduce nominal volatility. But if you compare real drawdowns, like in real terms, adjusted for inflation, a portfolio of stocks and bonds can, can have drawdowns that are about as bad as equities, or at least pretty close, because bonds tend to get hit really, really hard during periods of high inflation. So you can have that. But to your point, Dan, you don't see that. You might feel it, but you won't really see it in your portfolio. So I think from the perspective of sticking with it, bonds do still help. Then the other thing that I find really interesting about it is just for a long term investor, one of the things that really matters is how stock returns or asset returns in one period are related to asset returns in another period. With stocks, when you have a period of really bad returns, it tends to be followed by a period of better returns. More often than not with bonds, it's actually the opposite. If you have a period of really bad returns, it tends to be followed by more really bad returns. I think that's driven by inflation. Again. So stocks have negative auto correlation in returns, which makes them less risky at long horizons. Bonds have the opposite, which makes them more risky at long horizons. So it's really hard. I've got a video that I've been working on on sequence of returns risk, which is the idea that a volatile portfolio is risky because if you get a bad sequence of returns, if you get a bunch of bad years in a row, it can really damage your ability to fund your consumption in the future. If you're spending from that portfolio, this is an important piece of that. And so it's like, okay, so we add bonds, but the problem is because of their positive autocorrelation sequence of returns, risk can actually be worse in bonds than in stocks. For someone who's spending down their portfolio in retirement, I don't have the answer, but I think it's not as straightforward as it's often framed as bonds just being a less risky asset, they're a less volatile asset in nominal terms, that is True, but that's not the end of the story. It's a topic that probably doesn't get enough attention in general. Okay, last one. What have you changed your mind about in 2024? I'll go first. I really do think doing the modeling of historical outcomes for renters and owners in Canada over the period 2005 to 2024, and then playing with sensitivities around savings rates, investment returns, investment fees, I was like, man, it's really sensitive to all that stuff, and most people are probably going to screw it up. I think it's important to be able to tell someone that and be like, listen, if you're not going to screw this up, if you're listening to this podcast and you're super disciplined and you're going to have low investment fees and you're not going to time the market and all that stuff, renting is a perfectly viable option, and you'll probably have a good outcome, or you've got a good chance of having a good outcome. But if you're not listening to this podcast and you're just the average person with low financial literacy and you're subject to all the same behavioral errors that people make without having the knowledge to combat them, buying a house is probably a pretty good idea. I don't think I've ever said that everyone should rent, but I've been a proponent of renting as a viable option for housing. I think for a lot of people, owning is probably better because you have to do a lot of stuff right to be a financially successful renter.

C (75:36)

I hate to parrot the same thing, but I would say that that is the one idea that stuck with me the most over the last year or so. And just specifically focusing on this idea that for as long as I can remember, the folk wisdom was that buying a home is forced savings. And it always seemed like something that was trite. You know, that was just something people said to encourage you to buy a house. But again, like you said, once you looked at the analysis and you realized that forced savings is incredibly valuable because unforced savings, which is what renters or people who don't own a home must do, is just way harder. And I think looking at that and thinking it through really reinforced just how true that is, just how much it's important to put people on a track where they basically have no choice but to save. If you're investing in the markets and you're doing it voluntarily, it's way more difficult.

B (76:31)

I didn't learn anything this year, so I don't have a good answer.

C (76:34)

You're just too stubborn to change your mind about anything. That's right.

B (76:36)

I'm a grumpy old man now. I don't change my mind about anything. It's tough. I didn't pre read that question, so I didn't have a response prepared for it. And I think I'm sure I've changed my mind about a ton of things this year. I just don't know that I can put my finger on anything that was like, really jumps out to me from like a financial planning standpoint. I've talked about this a little bit before. I was quite against bitcoin for a number of years. I bought Bitcoin in 2017 and I started buying it and then I was like, this is really dumb. And then I listened like to the crypto series event that you guys did, and I was like, yeah, it has absolutely no utility. I don't like this at all. Then I started kind of dunking on bitcoin Twitter a little bit. And then they were like, well, have you done any research in it? And I was like, well, maybe not as much as I should. So you recommend me all these books and I'll go read them. I did read a number of books and I thought they were very, very fascinating. And so I haven't gone from a full disbeliever to a bitcoin maximalist or anything like that. But I'd say on that spectrum, I did kind of move where my position is. And again, that's not a recommendation to anybody. But after reading certain. And I think, Ben, you think the books that I read are absolutely ridiculous and they're just a joke and they're all wrong. But they're very well crafted stories and I enjoyed them very much. And I started just thinking like, I might be wrong about this. So that's probably one of the bigger attitude shifts I had. Again, not a recommendation.

A (77:45)

The books aren't wrong. They're just bitcoin is an ideology more than it is anything else. And so if you believe in the ideology and if you agree with the ideology, then bitcoin's really interesting because it expresses a certain way of thinking about the world and social interaction and economic interaction. I mean, that's kind of cool. And the fact that bitcoin did that is kind of cool. I think that makes it inherently a good thing. And I think all the talking points in support of bitcoin are ideological and they're not true or false. They're just a way of thinking about the world. And if that's how you think about the world, bitcoin does solve some pretty cool problems in some pretty cool ways. And clearly a lot of people at the moment think that that's worth something.

B (78:28)

I agree with exactly that. That's why I think it's actually interesting, is because my own worldview could just be wrong. And I don't really realize it. And we don't know how things are going to change in the future. But to your point, if you start from the premise that the world works a certain way, then it's a really, really interesting asset. And so for me, that's also the main risk of it. Right. Is like, what if the way that bitcoin sort of ideologues think about the world, what if they're really, really wrong? Then this thing has very little actual value over time. And I just don't know if I'm right or wrong on anything. And so I was like, you know what? Maybe I should just own a little bit and hedge my own stupidity.

A (78:59)

I had some for a bit, too. Not a recommendation either. But when I thought about it, the amount that I had wasn't tiny, but it was enough where if it 10x, it wouldn't change my life. And I was like, what am I doing? This is not even worth the time to have in my head that I own it. So I got rid of it.

B (79:16)

Has it 10x'd since then?

A (79:18)

No.

B (79:18)

No. Okay, just curious.

A (79:21)

All right, we have a few more great questions, but we gotta move on here to the after show. We'll save these remaining four questions we had set aside for today for a future episode. Let's go to the after show. We got a couple reviews here. I'll read the first one. We can just each do one Maybe Shaped My Worldview is the headline. I started my investing journey in April and came across the rash reminder after finishing the Canadian Couch Potato podcast. That's cool. I spent the next four months listening to every episode, with each episode building on what would be my worldview on investing. The podcast keeps me centered when the human in me starts to waver. And I'm thankful every time an episode comes up. And that's from Kevin the Loaf investor. It's kind of a variation of the couch potato, I guess, from Canada.

B (80:04)

That's awesome. I'll read the next one. Incredible information available on demand. Ben, Cam and Mark consistently deliver thoughtfully crafted podcasts that are a joy to listen to. As a Canadian cpa, this show not only helps me make decisions, but also inspires me to think more creatively about how to make an impact as I approach financial freedom. Thanks to PWL Capital for having the long term vision for producing this content. I had not heard of PWL and now I hold your organization in high esteem by Simply Jackson from Canada as well.

A (80:32)

That's pretty cool. They haven't even got to the Dan area yet of rational reminders.

B (80:36)

That's what I was thinking too.

A (80:37)

Just wait.

B (80:38)

Still we get reviews that are just like Ben and Cameron. But now more and more my name's starting to sneak in there. So you can just kind of tell that people are. Either they don't like me or they're just going through the back catalog and haven't caught up yet. Right. So Dan, your reviews are coming soon. Yeah.

C (80:49)

Then the reviews are going to take a turn, I think to the one star.

A (80:53)

I doubt that.

C (80:54)

All right, well, let's read the next one here. So thank you for a life changing podcast. It's difficult to add anything new to the glowing reviews. After listening to three or four of your episodes in the summer of 2023, I paused all other content starting from the beginning and last month I have come out on the other side, including reliving Covid quarantine through your show. I fired my financial advisor who did the standard. I picked the best stocks and went with a US advisor who is much more aligned and and references you. I agree that the podcast and overall financial literacy makes for a better client. My advisor and I spend less than 10% of our time together speaking about the market. We focus on specific actions to increase happiness and satisfaction and to reduce risk so my family and I can live our best lives. I appreciate the Canadian content. It's nice to hear how other countries deal with universal problems such as mortgages, education and old age income. Cheers from Russ in the usa.

B (81:52)

Amazing.

A (81:52)

That's pretty cool. Yeah, a couple good reviews.

B (81:55)

You're at episode 339. Now to go back to the beginning, that's a project I want to do as well is actually go back to the very beginning. I've been basically a listener since the very beginning, but I haven't caught up and especially when I joined, I stopped obviously going back and listening to the podcast. I'm a few episodes behind myself, but I do have a plan to do that and it just seems like such a massive undertaking. It's a pretty long podcast and some episodes are an hour, two hours in some cases at 339 episodes. So you're talking easily three to 500 hours of content. That you need to get through. And the average person works what, 2,000 hours a year? Call it 50 weeks at 40 hours a week. So it's like taking a part time job. It would take you a year at two and a half hours a day basically to go through all that. It's insane.

A (82:39)

Yep. I'm always very impressed when people say that they've gone back and listened from the beginning. It's like, man, that's a lot of content.

B (82:45)

And this person did it in the summer of 2023. Right? This person did it in just over a year. They started in the summer of 2023 and in a year and a half, so they've listened to probably an hour and a half a day on average.

A (82:55)

I did that with one podcast, the Bitcoin uncensored podcast, which you can't get. It's not on any of the podcast platforms anymore. I downloaded it all. I found a random link buried somewhere in a Reddit post to a Dropbox that had all the episodes in there. I learned a ton about Bitcoin from listening to that incredible podcast. Highly recommend it. That's the only time I've ever done that though. Okay, good reviews real quick. In the RationalModer community, there's been a pretty good discussion on small cap value stocks and whether the premium has gone away. I think the main point being made is that for the last 18 years, small cap value in the US is kind of dead. So should we even care about this anymore? I would say the main counterpoint is that over that same period, international developed and emerging markets have actually had a pretty significant premium. But there's lots of interesting discussion on Is that international premium just due to country over and underweights in small cap value relative to the cap weighted market? Is it due to industry overweights? Does that matter? If you're nerdy enough to care about small cap value stocks, Pretty interesting discussion. Maybe worth checking out. Other than that, Happy New year. Welcome to 2025. Hopefully you enjoyed the AMA episode. We'll be back with a guest next week and then we'll kind of be back into the routine of things after that. We actually recorded this in mid to late December so that we'd have a bit of a holiday. But yeah, I guess that's it. Anything else from you guys?

B (84:20)

I don't think so, no.

C (84:21)

Looking forward to a full year with you guys this year.

A (84:23)

Yeah, yeah, likewise.

B (84:25)

It's gonna be great.

A (84:26)

All right, thanks for listen.