A Planning Checklist, Portfolio Concentration, and Leverage (EP.80)

For our very first episode of 2020, we kick things off with some quick updates before sharing Cameron’s ten best financial planning strategies for the new year. After laying out some statistics about the great asset class returns that 2019 saw, we get into the wonderful listener questions we have been receiving over the break. Our first topic is about buying versus leasing cars, and Ben shares his thoughts on some of the reasons he recently converted to leasing. Our second question is about using credit to invest in a TFSA and acts as a great segue into our main topic for today’s show: implementing leverage in an investment portfolio. We discover some fascinating outputs given by a Monte Carlo simulation that compares the reliability of expected returns between diversified and concentrated investment portfolios. Surprisingly, the concentrated portfolio, while unpredictable, actually produces higher returns, even in its worst iterations. We start to think of concentrated portfolios as just another form of leveraging after comparing IUSV to VLUE ETFs, and then move on to the idea of time diversification as it relates to implementing leveraging in Lifecycle investing. As always, we end off with our bad advice of the week, with the 60/40 stocks and bonds model taking centre stage, so hop on and join us for the ride!

Key Points From This Episode:

• Different corporate cultures and the value of instilling one in your workplace. [0:05:55.0]
• A top ten list of strategies for financial planning in 2020. [0:08:48.0]
• Asset class returns from 2019 which were very high across the board. [0:15:34.0]
• Market unpredictability and why to buy a second-hand car but lease a new one. [0:19:18.0]
• When to use your unsecured line of credit to invest in a tax-free savings account. [0:22:49.0]
• Three things that structure a belief: values, biases, and models. [0:24:51.0]
• Ben’s model and expected returns of diversified vs concentrated portfolios. [0:27:49.0]
• When concentrated portfolios work well: if high performing stocks are chosen. [0:34:01.0]
• Ways to achieve higher factor exposure with IUSV vs VLUE ETFs. [0:35:47.0]
• How unexplained portions of returns are the costs of leveraging via concentration. [0:40:40.0]
• Why investing using leverage creates ‘time diversification’ and higher yields. [0:42:47.0]
• Ways for young people to leverage their savings: concentration, derivatives, etc. [0:42:47.0]
• Time decay on leveraged ETFs and other reasons for leveraging not being a joke. [0:50:52.0]
• Why ditching a 60/40 portfolio denies market efficiency by increasing risk. [0:55:36.0]
• And much more!