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Investing is a battle against the market's aggregate intelligence, where being smart alone is insufficient. To outperform, you must be smarter and quicker than competitors, who are formidable. The high trading volume and complexity make consistently outsmarting the market a tough feat.
Market crashes and bubbles are more about the accompanying narratives than actual price movements. The fear-inducing stories surrounding market events often lead to poor decision-making among investors. Despite scary narratives, historical data shows that markets tend to recover post-crisis, emphasizing separating facts from emotional responses.
Markets are forward-looking, swiftly incorporating new information. Attempting to time the market based on news or trends is challenging due to the market's efficiency in predicting future outcomes. Successful market timing is rare, with many investors failing to capture optimal returns due to poor timing decisions.
Majority of active funds struggle to outperform the market over extended periods, impacted by high fees and tax inefficiencies. The allure of active management often leads to underperformance and challenges in sustaining success.
The conversation delves into the complexity and nuance of terms like indexing and passive investing, emphasizing the importance of accurately depicting strategies like global market cap weighted indexing for broad diversification, low fees, and reduced turnover.
The episode challenges the misconception that wealth grants access to exclusive and superior investment opportunities, highlighting the high costs, exclusive selling techniques, and limited economic benefits associated with investments like private equity, real estate, and hedge funds.
The discussion highlights diversification as the only free lunch in investing, allowing for risk reduction without sacrificing expected returns. It explains how diversification helps mitigate return variance, reduces the impact of individual stock returns, and addresses the tendency of actively managed funds to underperform due to lack of diversification.
In this episode, we unpack key tenants of investing and the quality of financial advice in Canada's banking industry. In our conversation, we present a list of lessons we have learned about investing, which has been consolidated from contributions by the Twitter community and the Rational Reminder Community. In our conversation, we discuss ways to beat the market, how narratives can impact the economy, and why timing the market is a bad investment approach. Discover why performance chasing is not a successful strategy, why incentives matter, and why economic growth is a poor predictor of investment success. Learn about the nuanced relationship between expected economic growth and stock returns, why wealth does not give you access to market-beating investments, and the effectiveness of investing in low-cost total market index funds. Finally, in our after-show segment, we delve into the quality of financial advice provided by Canada's six big banks, investment strategies, listener reviews, and much more. Gain valuable insights into navigating the complexities of investing and learn why simplicity, discipline, and skepticism towards overly complex or costly strategies are vital for financial success. Tune in now!
Key Points From This Episode:
(0:00:00) Introduction and outline of today’s topic: The Most Important Lessons in Investing.
(0:04:55) Why you cannot outsmart the markets and what it takes to beat the market.
(0:07:47) The notion that "this time is always different" during times of financial upheaval.
(0:10:45) Explore the forward-looking nature of markets and their impact on decision-making.
(0:12:08) Unpack the unreliability of market forecasts for making investment decisions.
(0:14:48) Hear why time in the market beats timing the market.
(0:16:11) Important aspects of funds and why investors should not chase portfolio performance.
(0:19:20) Learn about the role of incentives in the distribution of financial information.
(0:25:09) Common misconceptions about the link between economic growth and stock returns.
(0:27:28) We discuss the importance of good financial planning over portfolio management.
(0:30:51) Uncover the relationship between risk and expected returns in financial markets.
(0:32:33) How the risk-return relationship changes over different time horizons.
(0:34:59) Why fees and taxes matter and the nuances of permanent insurance.
(0:41:55) Find out why there is no such thing as a perfect investment strategy.
(0:44:51) Tailoring your investment portfolio to meet your goals and sticking to it.
(0:46:48) Investigate why there is no such thing as a passive investment.
(0:50:59) Understanding why wealth does not provide access to market-beating strategies.
(0:53:22) Why diversification is the only free lunch in investing.
(0:58:58) Recommendations and pitfalls to avoid when assessing investments.
(1:01:02) What the structure of a financial portfolio looks like for most people.
(1:03:11) The aftershow: the state of Canadian banks, investment advice, and more.
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://twitter.com/MarkMcGrathCFP
The Economist — https://www.economist.com/
ARK Invest — https://ark-funds.com/
The Canadian Investor Podcast — https://thecanadianinvestorpodcast.com/
Episode 257: Giorgio Ugazio (Mr. RIP) — https://rationalreminder.ca/podcast/257
Mr. RIP on YouTube — https://www.youtube.com/@mr_rip
The Money Scope Podcast: Episode 9 — https://moneyscope.ca/2024/03/15/episode-9-taxable-investing-in-canada/
Book a meeting with a PWL Financial Planner —
Books From Today’s Episode:
A Wealth of Well-Being — https://www.amazon.com/Wealth-Well-Being-Holistic-Approach-Behavioral/dp/1394249675
Wealthier — https://wealthierbook.com/
Papers From Today’s Episode:
‘Where’s the Beef?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4035890
‘SPIVA® Canada Scorecard’ — https://www.spglobal.com/spdji/en/documents/spiva/spiva-canada-year-end-2023.pdf
‘2018 Paper’ — https://doi.org/10.1093/rfs/hhy046
‘CBC Article’ — https://www.cbc.ca/news/business/marketplace-hidden-camera-banks-1.7142427
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Listen to the best highlights from the podcasts you love and dive into the full episode