The Rational Reminder Podcast

Welcome to another episode of the Rational Reminder Podcast! Today’s main topic is how to pick an actively managed fund to invest in despite funds of this type producing lower returns than passive ones! Before getting into that, we hear a few updates on Ben’s research into dollar-cost averaging versus lump-sum investing, discuss the factors that influence choice making found in an amazing new book by Sheena Iyengar, and touch on an OSC report on QuadrigaCX being a big Ponzi scheme! We get into our main topic next, introduced by the point that while Peter Lynch managed the Magellan Fund so well, none of its investors made any money out of it. We talk about the decrease in popularity of actively managed funds and Ben attempts to find out if it would be possible to sketch out a framework for picking one despite this. He does this by firstly defining active and passive investing and then tracing the evolution of the definition of Alpha (excess risk-adjusted returns) found in different key papers, where at each new contribution to the definition, the window for actually achieving Alpha gets smaller. Finally, we end with a framework but you’ll find out how it falls short of being able to narrow the definition of a sensible actively managed fund to invest in down beyond a certain point. From there, we get into some amazing OAS clawback retirement hacks that could earn you a lot of extra income and wrap up with a glance at the bizarre upsurge in Robinhood investors in now-bankrupt Hertz since the pandemic!   Key Points From This Episode: Updates about Ben’s work, fans of RRP, and brilliant upcoming guests! [0:00:40.1] Discussing The Art of Choosing and its meditations on factors that impact choice. [0:05:11.3] Findings of an OSC report about QuadrigaCX being a Ponzi scheme. [0:11:00.6] An article on Peter Lynch and why Active Fund Management doesn’t work. [0:14:53.4] A framework for picking an active fund; defining active/passive investing and Alpha. [0:20:40.9] An evolving definition of Alpha showing active fund management doesn’t often produce it. [0:24:11.3] Findings of a 2017 Vanguard paper that help identify Alpha in actively managed funds. [0:36:20.3] When an active fund is less bad: it is low fee, low turnover, and invested in small-cap value stocks. [0:43:43.3] Adding a criterion to active funds to invest in: those that aren’t that big. [0:44:46.3] The last piece to consider when finding an active fund: active share concerning your belief in the manager. [0:46:29.3] How Ben’s point about active share ties back to investors not doing well under Peter Lynch despite him being a great active fund manager. [0:48:57.3] This week’s planning topic: OAS secrets for the high net worth. [0:52:11.3] Bad advice of the week: the Robinhood investors buying bankrupt Hertz shares. [0:58:08.3]

Even though we learn that money is merely a means of exchange, a store of value, or a unit of account, it’s so much more than this. Money captures so much of what we grapple with like hope, joy, fear, regret, and envy, yet it’s widely surveyed as being the least spoken-about issue when compared to religion, mortality, and marriage. Dr. Brian Portnoy, the author of The Geometry of Wealth, joins us today to share his view on wealth, which moves past the conventional understanding of accumulation. We kick off the show by discussing some of Brian’s research findings around the way people avoid talking about money. From there, we move onto his idea of funded contentment, which he hopes will get people to think about the different facets that go into a contented, joyful, and meaningful life. While this is a purposely loaded concept, Brian conveys the message in a simple, clear way to show that building wealth requires an assessment of many aspects of life. Then, we move onto how Brian believes financial crises affect people’s financial wellness. Although there are certainly immediate devastating effects of these crises, Brian takes it a step further, sharing a conceptual view of how these shifts intersect with people’s financial plans. After this, we turn our attention to adaptive simplicity and how it relates to goal-setting. We round the show off by discussing how the financial management industry is changing, and what Brian hopes the role of the advisor will increasingly become. Be sure to tune in today!   Key Points From This Episode: Learn more about Brian’s rationale for comparing money to Lord Voldemort. [0:03:31.0] Why money — contrary to what we’ve learned — is a qualitative, not quantitative. [0:05:58.0] What Brian hopes to get people to think about with his ‘funded contentment’ idea. [0:06:44.0] How the shapes Brian uses in Geometry of Wealth relate to the journey of achieving wealth. [0:08:36.0] The three-step process to achieve funded contentment. [0:09:22.0] Unpacking priorities and decisions and how they intersect with building wealth. [0:10:54.0] The importance of calibrating planning with purpose and where people fall short. [0:13:50.0] Where people in America are in their financial wellness journey. [0:15:43.0] The four corners of the square: Exploring investment expectations and how people view this. [0:17:37.0] Brian’s practical and conceptual takes on how financial crises’ impact on financial wellness.[0:21:12.0] Why Brian disagrees that volatility is not a great measure of risk for a long-term investor. [0:29:13.0] ‘Adaptive simplicity:’ What this is and why it’s key in financial planning. [0:32:15.0] How to set financial goals, which are static, when being flexible is key. [0:35:17.0] Why Brian believes — despite his hedge fund experience — that investors can’t plan for mark-beating returns. [0:38:47.0] The role that hedge funds could play in investors’ retirement strategies. [0:42:47.0] What investors can do to understand if they can manage their own retirement. [0:45:34.0] How reframing the financial advisor relationship to a coaching one helps. [0:49:15.0] What the future of holistic financial advice should look like, according to Brian. [0:54:53.0] Insights into Brian’s firm, Shaping Wealth, and the work that they do. [0:55:37.0] Brian’s definition of success in his own life. [0:58:02.0]

We kick off today’s episode of the Rational Reminder by discussing when Ben will be publishing his new model portfolios and a quick look at some of our upcoming guests and resources you might want to take a look at. We have been on a roll with our guests lately, and we are certainly not slowing down anytime soon. From there, we look at some of the headlines, such as CDIC developments and the myths around inflation. Next, we move onto to listener rapid-fire questions. Some of the topics include the difference between leveraged ETFs and traditional ones as well as a small-cap investment strategy for an investor with a 30-year plus investment timeline. We then turn our attention to the core topic of the show, dollar-cost averaging versus lump-sum investing. Ben presents an overview of dollar-cost averaging along with some of the perceived benefits. We dive into his analysis of dollar-cost averaging versus lump sum investing in equity portfolios over select 10-year periods across various countries. We discuss the results based on a range of factors and variables. The crux of the argument is that dollar-cost averaging is not as compelling as it’s often sold to be. While there are psychological benefits, the empirical evidence shows that there are not real ones. We wrap the show up with a look at how the pandemic is likely to shape the annuities industry and retirement planning. Tune in today!   Key Points From This Episode: Find out when the new model portfolios will be up. [03:10] Some books to look at ahead of upcoming guests. [05:04] Ben and Cameron’s takeaways from Tobi Lutke’s appearance on Invest Like the Best. [05:43] Current affairs, including CDIC changes, Michael Kitces recent publication, and inflation. [09:07] Rapid fire questions: Leveraged ETFs versus traditional ETFs and size as a risk factor. [13:47] How a small cap value investment strategy could work for an investor with a long horizon. [23:07] Why Ben and Cameron don’t talk about implementing the profitability factor with a dedicated ETF. [25:05] A brief explanation of dollar-cost averaging and the rationale behind it. [29:54] Find out more about Ben’s dollar-cost averaging versus lump sum investing analysis. [31:49] The results of Ben’s analysis and some key takeaways. [36:44] The worst 10% of lump sum outcomes versus dollar-cost averaging – the results. [41:26] Two things people look at to try to predict positive outcomes and its influence on lump sum investing.[50:36] How high stock prices influence lump sum versus dollar-cost averaging outcomes. [53:36] Japan vs the US: How Ben determined if the Japanese market is expensive. [56:37] Three key outcomes of the pandemic on retirement planning. [1:00:03] How the annuity industry can encourage its products with decreasing life expectancy. [1:02:05] Bad advice of the week. [1:06:16]

Who better to have on the Rational Reminder Podcast than Professor Ken French? Ken has been a massive inspiration to us and has remained a guiding light for sensible, evidence-based investors over the last few decades! His work with Eugene Fama stands as the seminal work on the subject of passive investment portfolios and we are so delighted to have him on the show today as we talk through some of his thoughts on a variety of subjects. This conversation was recorded near the beginning of the coronavirus outbreak on this side of the world and although Ken does mention the crisis, the situation has developed considerably since then. We start with the basics, with Ken giving us some helpful definitions and perspectives on asset pricing models and active management before we dive into the current market volatility and familiar topics such as risk tolerance and equity premiums. We also get the chance to hear Ken's reflections on a number of his papers, home-country bias, and the value of a good advisor. Some listeners may be surprised to learn that Ken still relies heavily on a financial advisor of his own and he explains exactly what functions this person performs for him and why he values their help so highly! We also discuss better strategies for long-term portfolio allocation, sustainable investing options and more, so be sure to join us for this very special episode, it is not to be missed!   Key Points From This Episode: Ken's description of asset pricing models and their importance to investments. [0:02:37.2] Reasons why most people should ignore and avoid actively managed options. [0:04:50.7] Why the same rules that apply to mutual funds apply to hedge funds too. [0:08:36.3] Reasonable approaches to the market volatility we are currently experiencing. [0:11:01.7] The potential impacts of the move away from active into passive investments. [0:18:22.2] Realistic expectations for collecting a positive equity premium. [0:21:12.8] The probability of negative premiums and the most helpful time horizons. [0:25:25.5] Findings from the Fama and French paper, Value Premium. [0:28:47.4] Better and worse ways of measuring value and Ken's personal preference. [0:34:06.7] Factoring in the 'momentum effect' and keeping it in perspective. [0:37:36.1] Defining and evaluating home-country bias. [0:41:06.5] Ken's view of buybacks and the possible penalization of companies administering them. [0:43:50.4] Environmental and sustainable investing and how this can play into a strategy. [0:46:02.7] Who should business management work for? Shareholders or corporate stakeholders? [0:49:25.5] Ken's valuable relationship with his own financial advisor! [0:52:41.8] The most important factor that Ken considers in his investments: the unexpected. [0:54:27.2]

We often talk about better planning, reduced spending and a consistent long-term strategy on the show and today we have a guest who not only gives that advice himself but clearly lives it too! Andrew Hallam is the author of the new book Millionaire Expat in which he details some strategies for what has been called geographic arbitrage, or moving to another part of the world in order to maximize your financial independence! His earlier book, Millionaire Teacher took a similar approach to education abroad and he has built out his philosophy from there. We hear from Andrew about his definition of wealth and why so many people who earn a relatively large amount of money can never be called wealthy. Andrew lays out the researched correlations between happiness and money and more clearly between debt and misery. He also shares how he has approached spending, saving and budgeting in his own life and relationships before we get into some more technical investing topics such as the benefits of index funds and why many advisors try to persuade clients away from them. Andrew weighs in on finding the right advisor for your needs and when to seek out help with your portfolio. The last part of the show is spent on the topics of education and expatriation. Andrew is a strong believer in leading by example for your children to learn about money matters and he explains his reasons for moving abroad and the gains he has accrued. For all this from a wonderful guest, tune in today!   Key Points From This Episode: How Andrew defines the term 'wealthy' and why it does not depend on income. [03:43] Links between spending and happiness, and debt and misery. [06:51] How Andrew and his wife have managed their own values around spending. [11:55] Benefits and costs of borrowing; could you handle it if interest rates doubled? [13:32] Andrew's thoughts on index investing and why it is a good idea. [19:06] Common tactics that financial advisors use to steer clients away from index funds. [22:40] Advice for staying steady for the long term, through market volatility. [25:45] Considering the place of investing in gold and the 60/40 portfolio model. [27:46] Ignoring all the false information that gets broadcasted and sticking to the data. [35:05] Why to only consider certified financial planners and how much this cuts the options down. [39:53] Going it alone versus using professional advice; average reactions to volatility. [41:22] Education for the younger generation and Andrew's advice for parents. [45:18] Who could benefit from moving abroad and the idea of geographical arbitrage? [49:56] How Andrew defines success in his own life! The importance of relationships. [54:01]

We spend the bulk of today’s episode considering whether Wealthsimple’s use of long bonds and low volatility stocks is really protecting their clients’ downside, and summing up recent arguments by Cliff Asness and AQR leveled against critiques on value investing. Before that, we kick things off with thoughts on why Elon Musk aims to have no possessions, before looking at the links between empathy and the theory of relativity as well as some productivity secrets in recent books by Charles Duhigg and Shane Parrish. Next up, we briefly address a bunch of listener questions on factor tilting, and ETFs concerning COVID-19, the Smith Maneuver, and more! A final listener question about Wealthsimple’s claim mentioned above leads our hosts to wonder whether volatility and drawdown are good measures of risk. Ben made a few models to help answer this question which tested consumption models as another possible measure and brings up an interesting point about the significance of considering long bonds from an expected return or a risk parity perspective. From there, we move to the investment topic of the week – the historic state of value investing. This is a contentious topic with recent papers by Cliff Asness and AQR both weighing in and you’ll hear Ben and Cameron distill the main points from both. We hear about medium-term odds being on the side of value, and some great arguments showing common critiques leveled at value investing to be premature. Finally, Cameron takes us through the psychometric profiling side of measuring risk tolerance before telling listeners why they shouldn't make investment decisions based on reckless critiques. Tune in to get it all!   Key Points From This Episode: A reminder to comment on the new comments section on the RRP website. [0:00:44.2] Why Elon Musk ways he intends throw away his possessions. [0:04:36.1] New books about productivity and the links between science and empathy. [0:07:08.2] Factor tilting: being aggressive versus non-aggressive. [0:12:43.6] Is there a benefit in capturing size premium using a combination of ETFs? [0:16:54.2] How to adjust RESP asset allocation as kids get closer to school age. [0:18:46.2] What ETFs are best to use while implementing the Smith Maneuver. [0:22:36.2] Has the role of bonds ETFs changed in light of COVID-19? [0:24:12.2] Thoughts on Wealthsimple’s claim to have protected their clients in this downturn. [0:28:34.2] Critiquing long term bonds: is volatility/drawdown a good measure of risk? [0:33:28.2] Ben’s model testing consumption objectives as a measure of risk. [0:36:28.2] Portfolio topic of the week: the historic state of value investing. [0:42:22.2] Considering Cliff Asness’s paper about whether value investing is dead. [0:46:05.2] Considering AQR’s paper addressing critiques levelled at value investing. [0:54:04.2] Planning topic: the psychometric approach to measuring risk tolerance. [1:05:50.2] Bad advice of the week: don’t make investment decisions based on predictions! [1:10:14.2]

In this engaging discussion, seasoned journalist Greg Zuckerman delves into the world of investing with a focus on renowned figures like Jim Simons. He explores how covering elite fund managers has shaped his own investment philosophy. Greg sheds light on the success of the Medallion Fund and the unique algorithmic approach that drives it, emphasizing the significance of luck and limiting fund size. He also critiques the idea of relying solely on the advice of hedge funds, urging investors to adopt long-term strategies and question market efficiency.

The economic effects of the coronavirus pandemic have been unprecedented and the seismic shifts have caused numerous unforeseen challenges. While no-one could have predicted the enormity and speed of the current crash before it happened, several signs indicated that an economic contraction was on the horizon. Today’s guest, Ben Rabidoux, President of North Cove Advisors, a boutique research firm, is here to share some macroeconomic trends and what they tell us about the state of the Canadian economy. His research expertise includes Canadian housing, macroeconomic trends, and household credit. We kick off the episode with some listener feedback as well as a listener question, where we discuss how to incorporate unvested stock options into your personal financial planning. There are several ways to go about this and numerous factors to consider, so it’s important account for them all. Ben then dives straight in, giving us an overview of the economic landscape before the sudden upheaval. He sheds some light on population growth and its relationship to economic growth. As a great deal of the economic gains was coming from non-resident growth, the crisis is likely to change this. We also talk about personal debt and HELOC loans. Coming into the recession, the household debt service ratio was incredibly high, with interest rates at an all-time low. Ben walks us through how these vulnerabilities might pan out and what could happen with HELOC debt. Along with this, we also discuss the relationship between housing and economic growth, with some truly astonishing data from Canada, the changes that are likely to happen with rental supply, and Ben’s take on some personal finance topics. This show was an incredible overview of some of the larger forces at play, and it went a long way to paint a clearer overall picture. Be sure to tune in today!   Key Points From This Episode: Useful listener feedback and personal updates from Cameron and Benjamin. [0:01:50.0] Data points about the increase in value of the top five S&P 500 stocks. [0:03:46.0] A listener question about factoring company stock options into financial planning. [0:06:04.0] Learn more about Ben, the work he does, his research focus, and his clients. [0:10:22.0] Find out Ben’s take on active management vs index investing. [0:11:20.0] The state of the Canadian economy prior to the COVID-19 pandemic. [0:12:05.0] Canada’s recent explosive population growth and where that’s headed. [0:14:09.0] Consumer and corporate debt-level, the source, and important takeaways. [0:16:13.0] Why it’s difficult to draw parallels between the situation today and Japan in 1990. [0:03:43.2] How different Canadian regions’ employment has responded to the crisis. [0:22:59.0] Housing trends and the state of housing in Canada before coronavirus. [0:24:20] The direct and indirect way that housing affects economic growth. [0:27:48.0] Housing supply, construction activity, and rental market changes in Canada. [0:31:06.0] What the data is saying about real estate prices across all market segments. [0:36:57.0] Some of the economic shocks are temporary and will snap back quickly. [0:39:34.0] The economic conditions in Canada’s previous housing downturns. [0:41:16.0] Ben’s take on the Bank of Canada’s QE programme and how he thinks it’ll work. [0:44:07.0] Renting vs buying: Why Ben thinks there’s no generic answer. [0:47:53.0] Why landlords are often willing to charge rent that makes them a loss. [0:51:29.0] Ben's advice for building resilience to economic shocks. [0:52:47.0]

The recent film, Playing with FIRE details the particulars of the FIRE Movement in a way that is accessible, informative, and impactful. Both Cameron and Ben were hugely impressed with the film and the argument it makes for the framework of FIRE. Today we are joined by the producer and star of the film, Scott Rieckens, to discuss the movie and his own journey to reach financial independence. In much the same way that the film does, Scott makes a compelling and inspiring argument for the central philosophy of the movement, emphasizing what many of us will agree are the most important part of our lives and the way we can think about these to maximize our health and happiness. We discuss values and decision making, and how the FIRE perspective accounts for psychological and emotional changes to what is meaningful in your life. Scott explains the reframing that occurs with the system and the important aspects of it, especially those that matter in an introductory setting. We talk about communication and upkeep, the 4% rule, and the individual nature of your own financial strategy. Ultimately the ideas of FIRE are just ways to think about what is really important to you and your family and they provide a way to focus and enhance these. For this truly inspiring and potentially life-changing discussion, be sure to listen in with on the Rational Reminder! Key Points From This Episode: Scott's own understanding of FIRE and what it comes to mean in his life. [0:04:25.4] The initial connection that Scott had with the FIRE movement before making the film. [0:05:23.2] Shared values and finding common financial ground in a life-partnership. [0:08:50.8] Mental changes that Scott and his wife, Taylor, made in response to the ideas of FIRE. [0:11:57.5] Reframing your decisions and the necessary information to do this. [0:18:01.9] Social changes and the impacts of the philosophical alterations Scott made. [0:22:48.1] How Scott has communicated these ideas to his daughter as she has grown older. [0:29:51.4] Scott's complete gratefulness for his new relationship with money. [0:33:23.8] First steps to take in the process toward financial independence. [0:37:27.4] Getting a grip on the '4% Rule and how it can guide your decisions. [0:41:39.6] Increasing income versus decreasing spending and adjusting accordingly. [0:46:41.2] Applying these ideas to something beyond our selfish needs. [0:51:05.4] The multitude of things we can all do with more time in retirement! [0:56:05.4] Comparing the changing definition of success for Scott. [0:58:11.4] The information that is now available for a framework for happiness. [1:01:55.4]

When it comes to the question of whether the economy affects the stock market, it’s not about whether the former is in a good or bad state, but how that relates to what the market was expecting. In today’s episode we get into predictions about labour economics during COVID-19, the relationship between the market and the economy, and how to make decisions that suit your risk tolerance. We kick things off by reviewing insights Edward Lazear and Gerard O’Reilly gave in a recent webinar. They spoke about how the current crisis relates to past events from the perspective of labour economics, and what empirical data is saying about stock returns and the economy. A talking point here is the idea that recessions are defined by committees, and always long after they have either begun or ended. This leads to the topic of whether there is a relationship between economic data and stock market performance. We find many examples of cases in the short and long term where no correlation can be found between the two, and cases where the market starts to recover before the economy. We discuss how this speaks of a fundamental difference in the analytical methods of economists versus investors, not a rigged market. The first group assesses past information while the second invests based on where they think things will go. We talk about what happens when GDP is good but not as high as expectations were, and how per-share earnings growth can only keep up with GDP if no new shares were issued. We then switch to the concept of risk aversion and discuss the differences between system one and system two thinking, before moving into a comparison between two methods of analyzing risk. Tune in for your weekly reality check! Key Points From This Episode: Having a baby and getting a drone license; updates from Ben and Cameron. [0:00:18.2] Great new Netflix shows and books Cameron has been getting into. [0:03:44.6] Predictions about labour economics during COVID in Lazear’s webinar. [0:06:28.3] Implications around recessions being defined by committees after the fact. [0:10:35.2] Predicting future growth based on great performance in financial markets recently. [0:13:45.8] Pent up demand post-crisis; why the government should keep businesses afloat. [0:16:25.0] Gerard O’Reilly’s observations about financial markets in recessions. [0:21:51.2] Lazear’s stabilization predictions, and why inflation isn’t a threat in slack markets. [0:26:09.1] State Street’s ETF rebalance and failed hedge fund rebalancing bets. [0:28:40.6] Is the market rigged? Forward-thinking markets vs backward thinking economies. [0:33:30.7] Market expectations and the effect economic news has on future stock prices. [0:38:21.8] Lead vs lag in when recessions get defined compared to when they begin. [0:38:46.2] How component-based vs automatically rebalanced portfolios are faring. [0:43:44.1] Why yield curve inversions forecast economic activity but not equity premiums. [0:44:25.7] Research that compares GDP growth and stock returns long term. [0:48:01.9] Slippage: per-share earnings growth can only keep up with GDP if no new shares get re-issued [0:54:00.0] How efficient the market is in pricing new information, not the other way round. [1:01:50.3] Determining risk tolerance; unintended consequences to risk avoidance. [1:02:41.2] Why using a GMO point is more effective than psychometric risk profiling. [1:06:18.5] The dollar terms and percentage terms shown on the Riskalyze risk slider. [1:09:15.7] Five methods of appraising one’s risk tolerance. [1:13:02.2] Bad advice of the week! Rebalancing your portfolios. [1:15:36.2]