Interest Rates, Optimal Asset Location, and Reverse Mortgages (EP.72)

Today on The Rational Reminder Podcast, we talk about the relationship between asset allocation and outcome, the ins and outs of reverse mortgages, and finally, life insurance (or lack thereof) in Canada. However, we begin by sharing some interesting points covered in a recent Barry Ritholtz interview with Eugene Fama and David Booth for his Masters in Business show. We talk about how Booth started the first index fund and discovered the value factor, and quote some of Fama’s classic perspectives on behavioural finance and market bubbles. On the topic of asset location, Ben shares some of the findings of his recent research. He weighs in on his surprising discoveries about how to go about investing stocks and bonds in RRSP and taxable accounts to get the maximum yields. One of his main takeaways is the concept of putting bonds in your RRSP to intentionally trick yourself into a more aggressive portfolio. Regarding reverse mortgages, we begin with some definitions and explanations of why they might be beneficial, and then cover the question of whether or not they are the symptom of a ‘debt-addicted’ society. Finally, we end off by discussing a recent study by Policy Advisor which found some shocking facts about how Canadians are drastically underinsured. For all this and more, join us today!

Key Points From This Episode:

• The difficulty of predicting stock returns based on rate changes. [0:02:27.0]
• Discussing the Barry Ritholtz interview with Eugene Fama and David Booth. [0:05:44.0]
• Booth started the first index fund and discovered of the value factor. [0:07:43.0]
• The fact of bubbles only being such in hindsight according to Fama. [0:08:51.0]
• Efficient markets aren’t necessarily rational. [0:09:18.0]
• The reason for risk-based and behavioural explanations for asset prices. [0:09:34.0]
• The value premium does not fluctuate in cycles according to Fama. [0:09:47.0]
• Considering the role of expected return in making investment decisions. [0:10:21.0]
• Ben’s video on market efficiency in relation to Fama’s perspectives on the matter. [0:10:36.0]
• Jim Simons and the mystery of the success of Renaissance Technologies. [0:11:35.0]
• How lead generation and aggressive sales shut Planswell down. [0:14:25.0]
• Vanguard is restructuring its fees and lowering its VXC. [0:17:02.0]
• Why pre-tax asset allocation doesn’t affect expected outcomes. [0:18:11.0]
• Bonds in an RRSP give a better expected outcome than in a taxable account. [0:20:56.0]
• Ben’s model endorses investing 75/25 in both the taxable and RRSP accounts. [0:21:20.0]
• Why putting stocks in an RRSP gives a great expected outcome. [0:23:40.0]
• What the highest yielding asset classes currently are. [0:23:54.0]
• Why a more aggressive portfolio as far as asset location is good. [0:28:29.0]
• How after-tax wealth remains the same through three different location strategies. [0:29:03.0]
• The pretax drawdown difference between all bonds and all stocks in an RRSP. [0:29:25.0]
• Future outcomes can still be detrimental to an initially optimal asset location. [0:30:29.0]
• It is important for people to think of their asset allocation in after-tax terms. [0:31:17.0]
• Drawing on reverse mortgages to fund retirement spending. [0:32:39.0]
• ‘Reverse mortgage’ refers to extracting money from a paid-for house. [0:33:22.0]
• The benefits of reverse mortgages vs regular mortgages. [0:33:42.0]
• When you take income from a reverse mortgage, it’s not taxable. [0:35:13.0]
• You can borrow more money out of your reverse mortgage as you age. [0:35:45.0]
• Are reverse mortgages the symptom of a debt-addicted society? [0:37:13.0]
• A Policy Advisor study finds that Canadians are drastically uninsured. [0:39:15.0]
• Shocking statistics on the underinsurance of Canadians. [0:40:15.0]
• And much more!