Benjamin Felix

We are very glad to welcome the mayor of Ottawa, Jim Watson, to the podcast and although we are not strictly talking about investing and our usual topics, we do think it is a great and insightful conversation that you will enjoy, no matter where you are from.

This is Episode 32 of the Rational Reminder Podcast, with Cameron Passmore and Benjamin Felix.

Today on the show we are joined by Steven Leong who is the Head of Canada iShares Product at BlackRock. Steven is here to talk about single decision ETFs, the new XGROs and XBALs from BlackRock and whole lot more.

Today we are joined by a friend, hero, and a legend in the field fact based investing. Larry Swedroe is here to discuss his latest book, some of the timeless concepts he has been espousing for many years, and to give out a few golden nuggets of advice for your finances and retirement.

I’m afraid this might hurt a little, but I do it out of fondness for your Common Sense Investing. Repeat after me: Dividends do not matter.

Another year under the belt. 2018 seemed to mirror 2017 in the news headlines. Trump, Bitcoin, and marijuana stocks were top of mind for much of the year, with the addition of trade agreements (or a lack thereof), and a dash of market volatility that had been missing in 2017.

Welcome back to The Rational Reminder Podcast! Today we are riding solo with no guests and just going over some recent developments, in-house news, and gearing up for some more great shows in the pipeline.

Today on the podcast we are very excited to welcome Brad Steiman who is the Canadian Head of Financial Advisor Services for Dimensional!

Most investors accept that small-cap stocks have outperformed large-cap stocks over the long-term. This “size effect” was the first market anomaly to challenge the single-factor, capital asset pricing model. Unfortunately, as I’ll explain in this post, I’m unaware of any funds currently available to a DIY investor that DO properly apply the small-cap effect.

In the first episode of the Rational Reminder Podcast for 2019, we welcome Robin Powell. Robin is a journalist and content creator who has dedicated the more recent part of his career to helping spread the word on research backed investing and turning the tide on the history of investment advice.

In this episode of the Rational Reminder Podcast we welcome Robin Powell. Robin is a journalist and content creator who has dedicated the more recent part of his career to helping spread the word on research backed investing and turning the tide on the history of investment advice.

This is Episode 26 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest, David Goetsch, writer and Co-Executive Producer of the Big Bang Theory.

This is Episode 25 of the Rational Reminder Podcast with Cameron Passmore and Benjamin Felix.

If you’re hoping I’m going to tell you how to successfully pick winning stocks, you might as well shift your attention elsewhere. Instead, I’m going to show you the evidence on just how risky it is to even try.

This is Episode 24 of the Rational Reminder podcast, with Cameron Passmore and Benjamin Felix.

This is Episode 23 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest, Glenn Cooke.

In this bonus episode of the Rational Reminder Podcast, Benjamin Felix and special guest Robert Little briefly discuss the Yield Curve.

This is Episode 22 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest, Shopify co-founder Daniel Weinand.

Diligently saving for retirement is by far the most sensible thing you can do to achieve a comfortable retirement. After all, if you haven’t saved enough to begin with, how you invest it will only take you so far. That said, it’s also worth considering what taxes and optimal investing can do to the savings you do accumulate.

Episode 21 of Rational Reminder is focused on the question of investing in real estate. It is still a common conundrum for investors and even those who may not consider themselves active investors, whether to buy or to rent a property.

This is episode 20 of the Rational Reminder podcast with Cameron Passmore and Benjamin Felix.

Do you have a mortgage? A lot of Canadians do. What about an investment portfolio? With any luck, you’ve got one of those too. So, when does it make sense to use some of your investments to pay off your mortgage? This is a frequently asked question.

This is episode 19 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest Shane Parrish.

This is Episode 18 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest Mark Sutcliffe.

This document provides the performance data for Dimensional Global Portfolios for October 2018, as compiled by the Passmore & Felix team.

I’ll admit it. When I list all the ways investors have no control over portfolio performance, it does not make me the life of the party. I’m more the party pooper, telling investors they shouldn’t chase after hot holdings, dump declining ones, or jump in and out of the market based on whims and emotions.

This is episode 17 of the Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and very special guest Dan Solin.

This is episode 16 of the Rational Reminder podcast, with Cameron Passmore and Benjamin Felix.

Fees are important to investors. In most cases, lower fees increase the likelihood of a positive long-term investment outcome. Index funds globally have seen enormous growth in the past decade. That growth (and the competition to capture it) have resulted in fees literally going to zero on some index funds.

This is episode 15 of the Rational Reminder podcast, with Cameron Passmore, Benjamin Felix and special guest PWL President, Brenda Bartlett.

Here’s are two trick questions: Are you normal? Am I normal? Common sense tells us it’s impossible to answer either without also asking: Compared to what? For example, check out this image of the Passmore & Felix team on our newly updated website.

This is Episode 14 of the Rational Reminder Podcast, with special guest Martin Parizeau.

This is Episode 13 of the Rational Reminder Podcast, with Cameron Passmore and Benjamin Felix

This document provides the performance data for Dimensional Global Portfolios for September 2018, as compiled by the Passmore & Felix team.

Do you really need life insurance? If you struggle with this question, you’re in good company. It doesn’t help that insurance agents are often perceived as pushy sales people who stand to make larger commissions if they sell more expensive products.

This is episode 12 of the Rational Reminder podcast, with Cameron Passmore, Benjamin Felix and special guest Doug McKenzie.

This is Episode 11 of the Rational Reminder Podcast with Cameron Passmore, Benjamin Felix and special guest Robb Engen of the Boomer and Echo blog.

This is Episode 10 of The Rational Reminder Podcast, with Cameron Passmore and Benjamin Felix.

Since well before my time in the financial services industry PWL Capital has been one of the strongest advocates for improving the experience of Canadian investors. Not only has the firm been an advocate, we have been leading by example.

I think that the term “factor investing” has been diluted by the onslaught of new, poor quality, factor-based products in the investment product market place.

What is the 4% rule? In what ways can it be useful to your retirement planning, and what are its potential flaws? All good questions for today’s Common Sense Investing video.

This is Episode 9 of The Rational Reminder Podcast, with Cameron Passmore, Benjamin Felix and special guest Carson Brown.

Rob Arnott, the founder of Research Affiliates, was on the Masters in Business podcast a while back. He said something that, to me, was fascinating. He criticized Dimensional Fund Advisors for starting with market cap weights to build their products.

If you go to any online community related to money you will find people talking about their desire to learn about investing by researching and selecting individual stocks. They understand that this is risky, they will say, but they will only try it out with money that they can afford to lose.

This is Episode 8 of the Rational Reminder Podcast.

This document provides the performance data for Dimensional Global Portfolios for August 2018, as compiled by the Passmore & Felix team.

Everyone likes to believe they’re smart consumers. That’s probably why the term “smart beta,” also known as “factor investing,” is so hot right now. “Stupid beta” probably wouldn’t attract many takers. So what is factor investing, and are you smart to use it? That’s what today’s post and related video are all about.

This is Episode 7 of the Rational Reminder Podcast

The fixed income component of the Dimensional Fund Advisors global portfolios has been low to-date in 2018, and also for the past 12 months. It is down 0.51% year-to-date at July 2018, and down 0.27% for the 12 months ending July 2018.

We may have just witnessed the longest bull market in US market history. There is some disagreement on the definition of a bull market, but no matter how it is defined it is clear that the S&P 500 has been rising without too much interruption for a long time.

Episode 6 of the Rational Reminder podcast.

Episode 5 of the Rational Reminder podcast.

The nonsense of trying to come out ahead by picking stocks or timing the market has long been one of my recurring themes. So, if you’ve stuck with me so far, you probably already know to avoid these sorts of active pursuits.

Mortgage debt is a normal thing to have in Canada. Based on 2016 census data, 61.7% of Canadian families own a principal residence, and 57.3% of those families had a mortgage.

Charley Ellis was on the Capital Allocators podcast with Ted Seides last week. Charley has been in the investment management business since the early 1960s. Today he is one of the most vocal proponents of index funds as the most sensible investment for most people. I write often about why index investing makes sense.

In Episode 4 of the Rational Reminder podcast we discussed the following. After a successful launch, the podcast will live on! Thanks for the support and feedback.

Episode 3 of the Rational Reminder Podcast

First things first: If your long-term investments are not yet globally diversified, they almost certainly should be. Robust evidence and common sense alike support the wisdom of managing your risks and expected sources of return by investing in both Canadian and international markets.

Episode 2 of the Rational Reminder Podcast

I am far from being a long-tenured veteran of the financial services industry. In 2007, when the last big drop in financial markets began, I was studying mechanical engineering on a full athletic scholarship. I have no recollection of worrying about the market; all of my expenses were covered as long as I met my athletic and academic obligations (which I did).

Amazon has been on a tear. Its market cap is expected to reach US $1T before Apple, though Apple is still ahead at the time of writing. Headlines have been focusing on this massive growth. It’s almost as if massive, successful, and innovative companies are a new thing.

This is the first episode of the Rational Reminder podcast.

2018 has seen modest returns for Canadian and International stocks, both coming in a bit under 2% in CAD at the end of June. US stocks have seen stronger returns, a little over 7% in CAD, driven mostly by currency. These numbers might seem low after years of double digit returns.

The Dimensional Fund Advisors International Core (DFA295) and International Vector (DFA227) equity funds offer exposure to the global equity markets, including emerging markets, excluding the US and Canada.

There was a small uproar when the Canadian Securities Administrators decided that they would not move forward with banning embedded commissions. Rob Carrick commented: The dream of creating a standard of transparent, client-focused service in the investment industry died Thursday.

The Dimensional Global Portfolios have relatively short track records in Canada. However, these funds follow rules-based indexes which have longer histories. Where fund return data […]

Value stocks in the US have not fared well for the last decade. The value premium, or the performance difference between value and growth stocks, has been about 3.5% in the US going back to 1928. More recently the value premium has been negative for 7 out of the past 10 years in the US. We are currently living through 1 of 13 10-year periods going back to 1928 where value has underperformed growth.

There is more to being wealthy than having a high income. Cash flow can come and go. Ben Carlson recently had a post citing research from Thomas Hirschl at Cornell.

The holy grail of investing is finding assets that are imperfectly correlated with each other. Adding assets that behave differently together in a portfolio improves the expected outcome.

Investing in index funds is obvious once you subscribe to the idea, but getting there is not always easy. The majority of Canadians still invest their money in actively managed mutual funds. From what I have seen, the acceptance of index investing typically follows four stages.

Usually, “active” is a good thing. An active lifestyle means you’re making the most of your day. Your yogurt needs active cultures to do its thing. Active listening is the best way to engage with one another. In fact, I hope you’ll give an active listen to today’s Common Sense Investing post and video.

A piece titled The Psychology of Money written by Morgan Housel made its rounds on the internet in June. It was an excellent collection of 20 flaws, biases, and bad behaviors that the author has observed when people deal with money. I did not fully agree with flaw number 10.

The Dimensional Global Portfolios have relatively short track records in Canada. However, these funds follow rules-based indexes which have longer histories. Where fund return data […]

The 4% rule, or the 25x spending rule (1/25  = 4%) are often cited as safe spending rules for retirees. The 4% rule originated in William Bengen’s October 1994 study, published in the Journal of Financial Planning.

As appealing as it may seem on paper to become a high-flying real estate mogul, I can offer a number of reasons why cracks begin to show if you take a closer look. That’s exactly what I’ll be doing here, and in my accompanying video. 

Bayes’s Theorem was developed by a French mathematician, and is named after Thomas Bayes, an English minister in the 18th century. Bayes earned his name on the theorem with a paper titled An Essay toward Solving a Problem is the Doctrine of Chances.

It is increasingly well-understood that low-cost index funds will, on average, beat actively managed mutual funds for average investors. I think that there is still a perception that large institutions like pension funds and endowments, with access to the supposedly best money managers are able to outperform.

The Dimensional Global Portfolios have relatively short track records in Canada. However, these funds follow rules-based indexes which have longer histories. Where fund return data […]

Risk is more than an important part of investing. The whole concept of a financial market exists on the basis that taking risk can result in financial gain. If you do not take risk in financial markets, you expect very low returns.

One of the most common questions that I am asked is “should I invest in real estate?” Even more common than this question is the matter of fact statement that real estate is a great investment.

The new passive income measures for Canadian Controlled Private Corporations eliminate five dollars of the small business limit for each dollar of passive income over $50,000 earned by a corporation or its connected corporations.

Being bombarded with data, headlines, and predictions presented as being impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors.

“You’ve got to have money to make money,” or so the saying goes. Maybe that’s one reason loading up on dividend-yielding stocks is so appealing to so many investors. There’s just one problem: Dividend stock investments don’t really work the way most people think they do.

When you take your car in for a tune-up or yourself in for a check-up, you expect your mechanic and healthcare provider to know more than you do about their respective areas of expertise.

The Dimensional Global Portfolios have relatively short track records in Canada. However, these funds follow rules-based indexes which have longer histories.

To continue my ongoing series on alternate investments, let’s take on one of the most alluring alternatives of all today. I’m talking about hedge funds.

In my last video, I gave you several solid reasons why home ownership may not be all it’s cracked up to be, at least from a financial perspective. Still not convinced? I’ll show you some actual numbers, so you can see for yourself how an “investment” in home ownership might compare to cozying up to some decent index funds instead.

In 1931, Alfred Korzybski, an engineer, philosopher, and mathematician, presented a paper to the American Association for the Advancement of Science. In the paper, he introduced the idea that the map is not the territory. In other words, a model of a thing is not the thing itself.

Heads or tails? Chocolate or vanilla? Rent or own? While the first choice is literally a coin toss and the second is personal preference, you may be surprised to learn that whether it’s better to rent or own your home is not the foregone conclusion most people assume.

Canadian eligible dividends are tax efficient for taxable Canadian investors. This is one of the reasons that the mystical dividend investing strategy continues to have a cult-like following. As attractive as the tax rates on dividends are, dividends do still produce taxable income. A dividend-focused strategy will likely have most of its return coming from dividends.

Do you remember the tech craze of the 1990s, when it seemed as if every dot.com start-up was a sure bet? A few of them, like eBay, are still with us today. But hindsight has made it crystal clear that not every e-flash in the pan was built to last. Investors who loaded their life’s savings into the run-up learned this lesson the hard way.

It doesn’t take an expert to tell you the flip of a fair coin gives you 50/50 odds, heads or tails. What if I told you most market gurus fare even worse than a coin flip when it comes to making accurate financial forecasts? Would you continue to pay attention to their “expert” calls?

Remember that bridge your mother warned you about – the one everyone else was jumping off of? If you ask me, it’s an adage worth its weight in gold, especially as it applies to the current bitcoin craze.

Do you remember the first time someone used “text” as a verb, as in: “Why don’t you text me?” It’s amazing how recently that was, and yet how rapidly it’s gone global.

Similarly, most of us had never heard of bitcoins, blockchains and cryptocurrency until 2017. Today, it seems like it’s all anyone ever TMs about. Unfortunately, the splashy, overnight success stories have been rushing far ahead of any sensible understanding of the subject. Let’s fix that today.

2017 flew by. Headlines continued to be dominated by Trump, Bitcoin, and marijuana stocks, while the market as a whole steadily chugged along. Steadily enough for the S&P 500 to post a perfect year – a full year with not a single negative month (in USD). Canadian and International indexes did post some negative months, but completed a great year overall. Even bonds pulled their weight despite ever present concerns about rising interest rates.

When you watch a magic act, it’s fun to be fooled. Even though we know it’s just a sleight of hand, it’s still entertaining when that torn-up card reappears out of nowhere.

“You’ve got to have money to make money,” or so the saying goes. Maybe that’s one reason loading up on dividend-yielding stocks is so appealing to so many investors. There’s just one problem: Dividend stock investments don’t really work the way most people think they do. 

When you fly, it’s nice to enjoy the perks that come from a preferred status – cushy seats, exclusive lounges, tasty treats … or so I hear. It’s only natural to assume that “preferred shares” would likewise enhance your investment experience. But have they actually delivered as the name suggests? The short answer is: Not so much. Their inherent structure tends to create far more potential risks than expected rewards.

Asset allocation requires investors to determine the appropriate allocation of each asset class – Canadian equities, US equities, International equities, fixed income – in their portfolio.

Do you need more yield? High yield bonds might be the answer. But not actually. Bonds are typically held in your portfolio for stability, but high yield bonds are risky enough that they should not be relied on for that purpose.

If you’re worried that currency fluctuations might hurt your returns, then hedging can seem like a pretty good idea. It’s a shame that there is no evidence to back that idea up. Time and again it has been shown that currency hedging does not have a material impact on the long-term risk and return characteristics of an equity portfolio. So – should you hedge?

I almost feel sorry for them: Active managers warning us that we’re going to break the market if too many of us stop playing their beat-the-market games, and embrace common-sense, index-fund investing instead. To be honest, their warnings strike me as an act of desperation, like the cry of the horse & buggy industry when Henry Ford came along.

How often does anyone, especially the government, give you something for nothing? Canada’s Tax-Free Savings Account, or TFSA, is the rare exception. Introduced in 2009, your TFSA lets you save and invest after-tax assets that then grow tax-free.

In past videos, I’ve been covering the benefits of using passively managed index funds for your stock/equity investing. But what about bonds/fixed income? Since interest rates essentially have nowhere to go but up, could an active manager protect you from eventually falling prices?

As reported in a 1988 New York Times exposé, in the 1950s, “independent researchers began publishing major studies on the health hazards of smoking.” How did the cigarette companies, respond?

By now you have heard about the proposed tax changes that will affect Canadian business owners. You likely have an idea that these changes will affect your retirement. In this blog post I am going to quantify that effect.

“Tactical” is a great word, isn’t it? It sounds smart. It sounds hands-on. It sounds like you’ve got everything under control, come what may.

Too bad, it’s such a bogus idea when it comes to investing.

As I described in my last video, not all financial advisors have the range of credentials and experience you might expect from someone telling other people how to invest. So it’s no surprise that the investments they recommend may also be less advisable than common sense would prescribe.

Have you noticed all the new-fangled titles for the same old jobs? Your receptionist is now a director of first impressions, and your technician is found serving up repairs at the Genius Bar. There’s even a new name for your development coordinator: director of getting sh*t done.

Are you seeing your investment returns through rose-colored glasses? Most investors are … and it’s often because their advisor has provided them with a skewed view.

This paper offers analysis to compare the efficacy of an incorporated individual paying personal tax on salary and dividends in order to utilize their RRSP and TFSA as opposed to retaining earnings in their corporation for investment.

This paper offers analysis to compare the efficacy of an incorporated individual paying personal tax on salary and dividends in order to utilize their RRSP and TFSA as opposed to retaining earnings in their corporation for investment.

There’s no doubt about it: Losing money hurts. Even the fear of losing money is unpleasant. The financial industry is well aware of this, and sends out its sales force to peddle a comforting idea. It’s called “downside protection.” It’s supposed to allow you to continue enjoying the market’s expected returns while simultaneously dodging its correlated risks.

This paper explores Canada’s culture of home ownership, and offers financial analysis to support renting a place to live as a viable alternative for building long-term wealth.

In my last video, I talked about some of the challenges that active managers face in outperforming the market. It boils down to their relatively high fees, and intense competition from other managers.

The data is in and, for fund managers who are still trying to “beat” the market, the numbers are still not on their side. As talented as active players often are at slicing and dicing the data, and as mightily as they may try, there’s considerable evidence that passive players continue to have the last laugh. Why is that? As usual, it has a lot to do with common sense.

First, the good news: At the end of 2016, 11.3% of Canadians’ investment fund assets were held in index funds and similar passively managed products. That’s a start. But compared to our U.S. neighbors at 34% of the same, we’re slow on moving away from over-priced, underperforming actively managed funds and into index funds.

The truth is easier to keep track of than a pack of lies. That’s just common sense. So is most of investing, even though many in the financial industry would have you believe otherwise. To help you separate financial facts from sales-oriented fiction – and then invest accordingly – I am pleased to host PWL Capital’s newest YouTube series: Common-Sense Investing.

Fidelity has a massive billboard up in Toronto to promote one of their portfolio managers, Will Danoff. Danoff has managed the U.S. based Fidelity Contrafund since 1990; it is the largest actively managed fund in the world managed by a single person. The Contrafund has performed well – well enough to beat its benchmark, the S&P 500. Benchmark beating performance attracts assets. It also gives Fidelity the opportunity to advertise to the world how great their star manager is. The problem for investors is that an active manager posting strong performance numbers, even over long periods of time, does nothing to indicate for how long that performance will persist.

Canadian mutual funds have performed poorly over the last ten years, according to a new report from Standard and Poor’s. The data shows that most equity funds in Canada have failed to match the performance of their benchmark index. In 2015, Canada was found to have the highest mutual fund fees in the world. It should come as no surprise, then, that more Canadian funds have trailed their benchmarks than comparable funds in other developed countries. Domestic Equity and US Equity funds in Canada fared far worse than funds in those same categories in the U.K., Japan, Australia, and the U.S.

A staggering majority of Canadian mutual funds have underperformed the index over the past decade. This data comes at a time when U.S. investors are pulling billions of dollars out of active funds managed by stock pickers, instead favouring low-cost passive index funds. Canadians are not following this trend, adding roughly equal amounts to both active and passive funds in 2016.

The big Canadian banks have come under fire recently for their aggressive tactics and, in some cases, claims of unlawful behaviour by stressed employees chasing sales targets. Most of the media attention has focused on customers being pushed to increase credit limits and overdraft protection, or apply for a more expensive credit card. But there is another product that banks have been aggressively selling for years while only attracting a bit of attention: High-fee mutual funds.

Do you ever wonder what it’s like to be a smart investor? Chances are that you do; most Canadians own investments that underperform the market. If a financial advisor says that they know when to buy gold, they may be perceived as smart, and their clients will likely listen to them. The ability to predict is associated with investing intelligence. This approach to investing is known as active management – figuring out which stocks or assets will do well, or knowing when to get in and out of the market. As intelligent as it may seem, there is no evidence to support its efficacy.

The beginning of 2016 had most people thinking that we were in for a rough one. There were some negative months to start things off, and a few more throughout the year, but all things considered 2016 was a great year to be in the market. That is not the story that you may have heard from the media, who were warning us to sell everything back in January. Despite Brexit and Trump, US and International markets continued to climb through December, and the Canadian market hit its highest 1-year return since 2009. Even bonds pulled their weight with a modest but respectable return.

Academia points to some ways of investing that are likely to have better outcomes than others. The idea that value stocks will outperform growth stocks over the long-term is generally accepted by researchers and practitioners. The same is true for small stocks outperforming large stocks.

Actively managed investment strategies are not inherently bad, they just introduce a different kind of risk to the investment experience. A well-diversified passive investor chooses to own the market as a whole, taking on market risk. An active manager is making a promise to not own the market as a whole, but to instead select a subset of securities within the market that they believe will perform better than the market. The additional risk added by not owning the market as a whole is called active risk.

The investment product landscape is a mine field. The most dangerous products on the market are the ones designed to appeal to the fear and apprehension of investors; active management promises higher than market returns and lower volatility, segregated funds come with various guarantees, and principal protected notes are pitched as offering upside potential with no downside risk. In reality, all of these products enable financial companies to charge additional fees for a sense of security.

Research has shown that small cap, value, and high profitability stocks have higher expected returns than the market. They also exhibit imperfect correlation with the market. Building a portfolio that tracks the market, and then increasing the portfolio weight of small cap, value, and high profitability stocks increases the expected return and diversification of that portfolio. From a human investor’s perspective, the problem with higher expected returns is that they are expected, not guaranteed. And that imperfect correlation?

This common question usually arises when one spouse has retired while the other is still working. The spouse that has retired has no income, and they see these years as a good opportunity to make RRSP withdrawals before CPP income and RRIF minimums bump them up into a higher tax bracket. Knowing that you can earn up to $11,474 of income without paying Federal tax, it seems like an obvious decision. Take $11,474 out of the RRSP at a 0% tax rate, contribute it to your TFSA, and when you take it back out of the TFSA in the future, you won’t pay any tax. Seemingly the perfect move.

In Canada, it is currently up to the investor to ensure that their interests are truly being put first when they are receiving investment advice. Most Canadian financial advisors are held to a suitability standard, rather than a best interest standard – meaning that as long as their advice is suitable, it does not have to be in the best interest of the client. Conflicts of interest are generally subtle, and they are ingrained in the way that many Canadian financial advisors do business.

Dan Bortolotti’s April 1st post about Dr. Molti Fattore’s data mined index strategy was an April Fool’s joke, but the beauty of the post was that it could have easily been true. Some ETF providers were likely drooling at the thought of a “factor lasagna” that they could package and sell for 0.75%.

It may be a flaw in the name. The government-intended use of the registered retirement savings plan is clear, retirement, but the tax free savings account is less commonly viewed as a long-term savings vehicle. I often meet investors who are using their TFSA to trade individual securities; the TFSA is their ‘play’ account. They are likely acting under the influence of their own overconfidence bias, imagining the large tax-free profits that they are going to make when their bet on a stock pays off, and not considering the significant negative consequences of taking unrecoverable losses within the TFSA. An unrecoverable loss occurs when a security loses its value and never recovers, something that can easily happen when trading individual securities.

On March 2nd, 1962, Wilt Chamberlain scored 100 points for the Philadelphia Warriors in a 169 – 147 win over the New York Knicks. This set the NBA single-game scoring record which still stands today. The game was not televised, in fact, no video footage of the game has ever been located. The stadium was only half full, and no members of the New York press were present. Audio recordings do exist, but only of the fourth quarter.

It is common for Canadians to make last minute RRSP contributions in order to claim the deduction and receive an immediate tax refund. While satisfying, using the RRSP deduction in the same year that a contribution is made can be suboptimal if a person’s tax rate is increasing from one year to the next. This can be illustrated with two cases.

It’s easy to imagine that when markets are declining everyone is selling their stocks and hiding cash under their mattresses. Sensationalist news reports will often reference increasing cash balances as nervous investors rush for the exits. While this perception is common, it misses half of the story; for every seller there must be a buyer. Cash isn’t piling up everywhere while everyone waits on the sidelines. For each nervous seller running for the hills, there is a level-headed buyer capturing the equity premium.

It is becoming common knowledge that Canadians pay the highest mutual fund fees in the world, and are often receiving advice from commissioned sales people selling expensive actively managed mutual funds rather than fiduciary financial advisors acting in their best interest. Index funds and passive investing have gone mainstream on Canadian personal finance blogs and media outlets, giving the impression that we are becoming sensible investors. The data tells a different story.

In Morningstar’s 2015 Global Fund Investor Experience Study, published in June, Canada scored a C+ based on four categories: Regulation and Taxation (C), Disclosure (A-), Fees and Expenses (D-), and Sales and Media (B). As usual, the category that stands out is Fees and Expenses.

Imagine having $1,500,000 of cash. With a long time horizon, and no immediate needs, you decide to invest $500,000 in a globally diversified portfolio* consisting of 80% stocks, and 20% bonds. It is March 1, 2000. Within days, the dot com bubble bursts, followed by the terror attacks of September 11, 2001. By the end of September, 2002, your invested portfolio has dropped from $500,000 to $480,724.

In a recent paper, Heaton, Polson, and Witte set out to explain why active equity managers tend to underperform a benchmark index. It is commonly accepted that the driving force behind active manager underperformance is high fees, however new research suggests that there may be another culprit.

In answering this question, the first thing to note is that interest rates could remain where they are currently, or go lower. There are already instances of negative bond yields across the globe. However, for discussion, we will assume that interest rates have nowhere to go but up.

First off, in the U.S., everyone is investing in passive funds. Massive inflows into passive funds and outflows from active funds have continued in 2015. The story is not the same in Canada.

Expected returns stem from the idea that investors need to be paid a return for taking on the risk of owning securities. No investor would own securities without having the expectation of returns, and as the securities being owned get riskier, the investor will expect increasingly higher returns.

I often hear the phrase protect your downside. It’s the sales pitch that a large part of the investment management industry thrives on, and it plays to the myopic loss aversion that most investors exhibit. Myopic loss aversion is the tendency of investors to evaluate their portfolios frequently with greater sensitivity to losses than gains, causing them to act as if their time horizon is much shorter than it actually is.

When people have corporations it is common for them to retain all earnings in excess of their living expenses inside of their corporation to avoid paying personal tax.

When an individual owns a small business corporation, common advice tends to be that they leave all dollars in excess of their living expenses inside of the corporation to defer paying personal tax.

When an individual owns a small business corporation, common advice tends to be that they leave all dollars in excess of their living expenses inside of the corporation to defer paying personal tax.

Back in August of 2014, I wrote a post titled Is it time to get out of the market? At that time, the Shiller Cyclically Adjusted Price Earnings Ratio, or Shiller P/E, a price earnings ratio based on the average inflation adjusted earnings from the previous ten years, stood at a level of 25.09 (vs. a long-term mean at that time of 16.54).

A mutual fund can be structured as a trust or as a corporation. While most mutual funds in Canada are structured as trusts, it is common for financial advisors to pitch their clients on the merits of corporate class funds. When mutual funds are structured as trusts, each fund is its own separate entity.

As an independent wealth management firm, there is no question that some of PWL Capital’s most aggressive competition comes from the Big Bank brokerage houses: TD Waterhouse, BMO Nesbitt Burns, CIBC Woodgundy, Scotia McLeod, and RBC Dominion Securities.

When the average Canadian sets out to find a financial advisor, a firm like PWL is probably not what they have in mind. This should not come as a surprise. With the vast majority of Canadians’ invested assets continuing to be invested in expensive actively managed mutual funds, it is clear that we have not collectively caught up with the evidence.

Fixed income securities play an integral role in almost every investor’s portfolio. It is common to see a fixed income allocation mostly denominated in the investor’s home currency, as foreign currency denominated bonds can add unwanted volatility to a portfolio.

A large refund from the CRA is not as exciting as it may seem when you receive the cheque; it is a sign of poor tax planning. People earning a salary have tax withheld from their pay throughout the year, and if the amount of tax withheld ends up being greater than the actual tax owed at the time of filing, a refund from CRA is the result. How can this be a bad thing if you’re getting the money back in your pocket when you file your return?

In an unexpected but welcome turn of events, Jim Cramer has announced that he will give up on claims that he is able to predict the future to produce market-beating returns, and move all of his money into low-cost index funds. After years of preaching individual stock selection as the smartest approach for every investor with enough time to do the research, Cramer has said that he became curious about the consistent inflows into index funds. Taking a brief pause from his Bloomberg terminal to pick up some peer-reviewed academic journals, he was quickly overwhelmed by the amount of evidence in favour of index investing.

The large brokerage firms in the United States have had their blunders, most notably the 2008 financial crisis that almost crippled the world economy. These firms have massive conflicts of interest with their clients, and they put forth great effort to cover this up through advertising.

In a recent (subscription only) article for the Globe and Mail, Andrew Hallam discussed his observations on DFA Canada’s performance. He noted that while DFA’s U.S. domiciled funds tend to beat the market, most of DFA Canada’s funds have underperformed comparable ETFs over a trailing five year period.

The notion that premium bonds are highly tax inefficient has been written about extensively by Justin Bender and Dan Bortolotti. In a recent blog post, Justin used his after tax rate of return calculator to demonstrate the tax efficiency of the First Asset strip bond ETF (BXF). BXF was in a league of its own in 2014 with a tax cost ratio 33bps lower than its closest peer – the tax cost ratio can be thought of as an additional MER that the investor pays in taxes. Justin compared ten short term bond ETFs, and BXF had the highest before and after tax returns of the set. The DFA Five-Year Global Fixed Income Fund (DFA231) was not included in Justin’s ETF comparison.

Dimensional Fund Advisors is a little known fund company that has gained notoriety over the past few years, but is still far from being a household name. This is by their own design; they do not market their products, and they are very selective when it comes to allowing advisors to use their funds. The advisors that do successfully go through Dimensional’s training and commit to their strategy are submitting to the idea that nobody can predict the future, so investors are best served when they focus on what they can control.

A distinction must be made between volatility and risk. Volatility and risk are very different things, but when stock prices exhibit volatility, investors (long and short-term) tend to perceive risk. What is often overlooked by long-term investors is that avoiding volatility over long periods of time can be the biggest risk of all.

Principal Protected Notes are investment vehicles governed by complex contracts that are not regulated or reviewed by any securities commission. In most cases, the contract offers investors the opportunity to participate in a percentage of the price increase of an underlying group of assets (stocks, bonds, an index) over a set period of time while being guaranteed to receive their initial investment back at the maturity date. The pitch is that this is an opportunity for investors to participate in the potential upside of some assets, with none of the downside. This is a great story. It’s so good, in fact, that Tony Robbins advised his millions of readers around the world to take advantage of this type of investment vehicle.

A structured note/structured product/equity-linked note is a financial derivative with a return at maturity that is linked to some underlying asset or group of assets. The linked asset tends to be some stocks or a stock market index. Structured products are popular because they play to investors’ behavioural biases, and they are profitable for financial institutions. These products are notoriously complex.

Investors looking for yield in a low-interest rate environment will often turn to preferred shares. Preferred shares can be a good tool for taxable investors due to the Canadian Dividend Tax Credit, but for non-taxable investors they are significantly less attractive. In situations where tax efficiency is not a benefit, preferred shares pose risks that are not worth taking.

“Investors love risk when stocks skyrocket, and hate it when they tank.” It is commonly accepted that there is risk involved in investing, but investors do not always know how to define it. In a recent white paper, PWL’s Raymond Kerzerho and Dan Bortolotti set out to help investors understand what risk is, and how it can be managed through a disciplined approach. In reality, the vast majority of investors choose to take risk management shortcuts like principal protected notes, hedge funds and guaranteed income products. These products “are often guilty of implying that you can achieve equity-like returns with bond or GIC-like risk,” which can be harmful to the long-term success of an investor.

On January 21, the Bank of Canada cut its key interest rate by 0.25%. Here are our observations about this bold monetary policy move.

Dear Active Fund Managers: Please do not give up!

We know that 2014 was an especially difficult year for you, and though it was not the first difficult year that you have endured, it was surely the most public. Do not allow yourselves to feel discouraged from headlines like “The Decline and Fall of Fund Managers” and “The Triumph of Index Funds”; maybe your bets and predictions will be more accurate in 2015.

2014 was a strong year for financial markets, capping off a six-year-long bull market that could make anyone look like a star investment manager. As an investor, there are important areas to evaluate beyond positive investment performance to determine the worth of a relationship with a professional financial advisor.

If an investor believes in the long-term performance of equity markets, why would they not use leverage to invest in equities, amplifying their long-term returns?

Ideally, a leveraged ETF gives investors the opportunity to participate in amplified gains and losses as compared to the market.

Kyle Bass became instantly finance famous when he called the sub-prime mortgage crisis and made a handsome profit for the clients of Hayman Capital Management […]

Index investing, passive investing, and market-based investing are synonymous terms for an investing approach that has seen a steady increase in popularity over the last decade.

Tony Robbins’ new book, MONEY Master the Game: 7 Simple Steps to Financial Freedom, is full of great stories, knowledge, and ideas that can help people kick-start their financial future. He discusses disciplined saving, and debunks the financial services industry for the average person.

RDSP accounts are eligible to receive funds from the Government of Canada to assist disabled persons in long-term saving. Both a contribution matching grant and an income tested bond can be paid to an RDSP, based on the beneficiary’s family income.

With the ever-declining number of defined benefit pension plans in North America, the ultimate goal for most investors is a well funded retirement. The idea that a lifetime of disciplined saving and investing leads to a comfortable retirement is generally accepted, and the accumulation of a significant nest-egg should be viewed as an achievement.

Making smarter investment choices is one of the key elements in building up adequate retirement savings. People are constantly inundated with sales pitches for investment opportunities from banks, insurance companies, and their friends and relatives. For an individual with limited investment knowledge, this can be intimidating.

Markets, especially Canadian markets, took a tumble through September. The S&P/TSX was down 11.2% from September 3rd to October 15th, prompting Canadian news headlines like Forty-Day Freefall, and Market mayhem: what’s driving the global economic breakdown.

PWL Capital uses index funds and exchange traded funds to gain exposure to thousands of stocks and bonds for a very low cost.

The SPIVA® U.S. mid-year Scorecard came out on September 8th. This is a set of data prepared by S&P to show the percentage of active fund managers that have unperformed their benchmark index over the previous one, three, and five year periods.

Jason Zweig once wrote that “good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.” This statement is true in practice.

Investors and institutions try to categorize investment managers into one of two groups: active or passive. It is important to define what is meant by these respective labels.

We are in the midst of a long Bull Market. Robert Shiller popularized the idea of Irrational Exuberance when he explained that people get overly excited about stocks when stocks are doing well, bidding prices up to an unsustainable level.

Buy low, sell high; it would be an easy path to investing success if people knew how to control their own behaviour. Investors may know that they want to buy low, but there is no way to determine when low has happened.

To understand the importance of benchmarking, it is necessary to understand the concept of economic profit. Economic profit is found by subtracting opportunity costs from accounting profit. Imagine quitting your job and investing $200,000 to start a business.

SPIVA Canada Scorecard 2013

A couple of months ago I saw John Wilson, CEO of Sprott Asset Management, speak at an alumni dinner; we both graduated from the Sprott School of Business at Carleton University. Despite our common education, we come from different schools of thought on investing.

Capital markets are a highly competitive platform where millions of buyers and sellers are able to weigh new information and voluntarily enter into transactions.

Financial advisors throughout Canada are terrified. The Client Relationship Model (CRM2) is coming quickly, and it means that advisors will be obliged to disclose their fees and charges to clients. The non-disclosure of fees has been a quiet issue for years in the Canadian financial services industry.

This is the story of two financial advisors, Brian and Adrian. They both took different paths to enter their career, and they are motivated by different things.

What’s the first thing that comes to mind when you think about an investment professional? They must be able to pick the best stocks, the best industries, and the best geographies to invest in over a given time period.

If a bookie presented you with the opportunity to bet on a basketball game between the Raptors with a 5-0 record and the Bobcats with a 0-5 record, which team would you bet on?

“Asset location” involves finding the most tax-efficient account type for each holding in a portfolio.

Investors demand higher returns for taking on more risk. Small stocks and value stocks have exhibited performance that exceeds that of the broad market over the long term which can be explained by the increased riskiness of these asset classes above and beyond the risk of the market.

The growth of algorithm based investing services in the US has raised questions about the future of the professional financial advisor.

The promotion of Michael Lewis’ new book has caused a significant amount of discussion in the media around whether or not High Frequency Trading (HFT) causes harm to the integrity of financial markets.

At the end of a recent meeting, a client asked me if I ever wonder why everyone in Canada isn’t knocking on PWL’s door.  The conversation usually goes that way when people hear the story of our investment philosophy and business model, but it isn’t something that I wonder about.

Financial professionals are obligated to offer their clients a suitable investment, but there are many things that can affect which suitable investment your advisor will recommend.

Today I received an email from a former colleague that continues to work with actively managed mutual fund providers to serve his clients.

The current low-yield environment has made it very easy for investors to question the value of holding bonds in their portfolios.  With interest rates staying low as long as they have, concerns have surfaced around frustratingly low yields, and the fear of rising interest rates decimating the value of bonds.

How hard can it really be to beat the market? If I say that all available information is included in the price of a security, it follows that someone had to act on the available information in order for it to be included in the price.

Every now and then we get a question from a client that results in some head scratching. Recently we were asked about the use of a joint prescribed annuity as a tool in an investment portfolio, simple enough.

Growing companies that have been increasing in price are often seen as great opportunities by investors. 

Wealth creation takes place when cash flow is steady, there is time to recover losses, and risk is tolerable.​ It’s not uncommon for the ability […]

In 1991 William Sharpe wrote an article in the Financial Analyst’s Journal titled The Arithmetic of Active Management.

The price of a security reflects all available information. Practically, the price of a security is governed by the bid-ask spread that exists when people buy and sell it.

In a recent academic paper written by Lubos Pastor (Booth School of Business) Robert F. Stambaugh (The Wharton School) and  Lucian A. Taylor (The Wharton School), the size of actively managed mutual funds, the size of the actively managed mutual fund industry, and the skill of active mutual fund managers were studied to determine how they affect the performance of actively managed funds.

At PWL, we often cite efficient markets as one of the building blocks of our investment philosophy.