The Rational Reminder Podcast

How we are handling the situation as a firm, investing through a crisis, historical comparisons, and more.

It's not unreasonable to assume that a desirable retirement equates to having the financial freedom to meet one's lifestyle and personal goals. The more efficient a person is with their assets, the higher the likelihood of this, which is why sensible retirement income planning is so necessary. Today's guest is Wade Pfau and he is arguably one of the main thinkers in the retirement income space at present – a more readable Moshe Milevsky if you will. This podcast is usually devoted to high-level discussions about portfolio investment so it was an honour to have Wade join us and have a similar kind of conversation but rather about retirement income planning. Retirees face some unique risks when it comes to strategies for asset management, insurance, and investments, which means they require tailored strategies, and today Wade weighs in on some of the different approaches we see out there. The topic of probability versus safety-first approaches, and the potential wisdom in amalgamating the two as a means of preparing for retirement, crops up a lot in this discussion. Wade talks about the four L's of the safety-first strategy, how it recommends building up a base of savings that act as an income to reach higher legacy in the long term. He suggests that people need to account for longevity risk more and argues for the efficiency of assuming that you will live until the average oldest age. That way you don't end up throttling your lifestyle by saving unnecessarily during retirement. In our discussion, Wade also shares valuable insight into low interest rates versus expected returns, the ineffectiveness of the 4% rule, annuities and deferred annuities concerning mortality credits, and different types of buffer assets. Tune in for all this and much more on the topic of retirement planning from one of the greats in the field today!

Key Points From This Episode:

• Notes on Wade Pfau, a leader in retirement income planning research. [0:00:43.0]
• Unique risks faced by retirees: longevity risk, sequence of returns risk, etc. [0:04:03.0]
• Retirement now vs 20 years ago: low interest rates and retirement length growth. [0:05:16]
• Safety-first retirement: build a floor and then spend more over the years. [0:06:31]
• Contractual protections (annuities) and probability vs safety-first approaches. [0:08:25]
• The four Ls of the safety-first method: longevity, lifestyle, legacy goals, liquidity. [0:12:18.0]
• Why to go for stocks/equities rather than stocks/bonds. [0:12:18.0]
• What the low interest rate environment means for expected returns. [0:16:57.0]
• The ineffectiveness of the 4% rule when applied internationally. [0:18:47]
• How people don't properly account for longevity risk in retirement planning. [0:23:27]
• A way of covering basic needs so that higher legacy can be gained later on. [0:25:05.0]
• Strategies for buying annuities and deferred annuities at retirement. [0:28:57]
• How mortality credits from an annuity allow you to spend more in early retirement. [0:30:43]
• Mortality credits in relation to immediate and deferred annuities. [0:33:25]
• Better net incomes at the end of retirement through reverse mortgages. [0:34:36]
• Buffer assets such as reverse mortgages and permanent life insurance. [0:37:12]
• Safe savings rates in relation to historical data, bull markets, and mean reversion. [0:44:39]
• Asset accumulation conceptualised separately from the retirement plan. [0:44:39]
• Wade's idea of a successful retirement: meeting safety-first goals. [0:48:39]
• And much more!

Welcome back to the Rational Reminder Podcast everybody. Today we are using the opportunity to have a bit of a philosophical discussion about a bunch of things related to your retirement and the financial planning that goes into it. We touch on the all too obvious topics of the coronavirus and last week's market fluctuations before we scan the last ten years for any notable data points on fluctuations and the years with the biggest dips. We look at life expectancy and how this affects a retirement planning strategy. In British Columbia, drug use among younger generations has brought down life expectancy estimates, while improved health care has extended them in some regards. This leads to a few comments on biological age and how knowledge of yours should play a big role in your personal strategy for the end of your life. The last part of the episode is spent considering the current state of the discourse around the FIRE movement and what has grown out of it. We can see that it is not uncommon for large portions of the aging population to be happy to carry on working, and that the idea of getting out of the workforce as soon as possible may only be attractive to certain kinds of professions. For all this and a whole more from Cameron and Ben, be sure to tune in!

Key Points From This Episode:

• The amazing new documentary on Herbalife called Betting on Zero. [0:02:54.5]
• Market drops last week and the story that accompanied the volatility. [0:06:14.9]
• Biggest and average drawdowns in recent calendar years. [0:10:03.3]
• Coronavirus impacts and questions about buying stocks now when they are low. [0:14:20.2]
• Conversations about the market drop and aggressive response strategies. [0:20:06.8]
• Data findings for historic cases of market timing from the last century. [0:25:12.3]
• Historic relations between the market and health pandemics. [0:30:22.1]
• Life expectancy's huge role in long term financial plans and retirement. [0:32:31.8]
• Changes in average life expectancies in British Columbia due to drug use. [0:37:40.7]
• The importance of biological age when making sound financial decisions! [0:41:02.5]
• Working longer into old age as a means to make retirement easier. [0:44:31.5]
• The five-factor model for happiness and what it means for your retirement. [0:49:50.5]
• Bad advice of the week! The last time we will talk about deferred sales charges! [0:54:57.5]

You can't get anything good out of life without taking a risk, and this holds true in the world of investing too. Depending on the situation, people are willing to either pay more for high-risk or risk-free, and matters become more complex because the term 'risk-free' means a different thing to everybody. Today's guest is economist Allison Schrager, Senior Fellow at the Manhattan Institute, author of An Economist Walks into a Brothel, and long time collaborator with Nobel laureate, Bob Merton. Allison is an expert on risk and she joins us in this episode to speak about this topic in relation to retirement and retirement finance. We talk about the idea that while risk has been given conventionally bad associations, it can be more accurately understood as a probability distribution between the future occurrence of both potentially good and potentially bad things. Allison shares her opinions about how both young and old people should approach risk, and stresses the importance of having clearly defined goals and a good financial advisor. She shares her thoughts on managing systemic vs idiosyncratic risk, why the retirement crisis is not all doom and gloom, and the laddered bond portfolio she developed with Bob Merton. Joining this episode, you'll also hear Allison speak about how misinformation causes people to be hesitant about annuities, the connection between risk management in surfing and investing, and why investing in education is smarter than investing in a house. Allison covers a whole lot more risk-related topics in this episode too, so don't miss out on it.

Key Points From This Episode:

• Allison's definition of risk: as a probability distribution. [0:02:54.0]
• The idea that the word risk pertains to both good and bad things. [0:03:57.2]
• Relativity of the term 'risk-free' and its fundamental connection to price. [0:04:20.0]
• Probability of, and skill in, taking risks depending on how they are presented. [0:05:11.0]
• The value of having a clear goal in mind as far as managing risk. [0:07:19.0]
• Strategies for managing systematic vs idiosyncratic risk. [0:09:20.0]
• Value adds advisors can give for managing systematic risk. [0:10:01.0]
• Retirement goals in the current crisis and Allison's work with Bob Merton. [0:11:51.0]
• The retirement problem as a problem of income, not wealth. [0:12:17.0]
• A duration matching laddered bond portfolio as a risk-free retirement plan. [0:13:18.0]
• Why 401(k)s are wealth focused compared to defined benefit plans. [0:14:43.0]
• Statistics around retirement age casting the retirement crisis in less of a bad light. [0:15:19.0]
• Why people are scared of putting their retirements into annuities. [0:17:08.0]
• Misinformation that people are given that make them bad at retirement planning. [0:17:53.0]
• Similarities between risk and mitigation in surfing and market investing. [0:19:39.0]
• Idiosyncratic and systemic risks faced upon purchasing a house. [0:21:26.0]
• An argument for investing in education over homeownership. [0:22:24.0]
• Why time diversification is a fallacy in Allison's opinion. [0:24:00.0]
• Pros and cons of investing in mostly bonds or mostly equities. [0:24:52.0]
• The ultimate riskiness of 60/40 portfolios and other products too. [0:27:04.0]
• Thoughts on the new trend of adding private equity to portfolios. [0:28:40.0]
• How the global shortage of safe assets could have an economic impact. [0:30:31.0]
• Advice for pre-retirees: have goals, have a good financial advisor, and plan. [0:32:12.0]

Let's say you make a choice that had you chosen differently, things would ostensibly have turned out more favourably. Later on, a similar situation comes up and you make the choice you think you should have made previously in the hope that the result you wanted before will come true this time around. This is called counterfactual thinking and it forms the main topic of our discussion in today's episode. First publicized in a fascinating paper called The Psychology of Preferences, Daniel Kahneman and Amos Tversky explore the abundance of instances where humans employ irrational 'what if' thinking in their processing of recently made decisions that resulted in an undesirable outcome. People tend to think back and wish that they had made a different choice, irrationally thinking that if they had, things would have worked out better. This idea, of course, has applications to investing in stocks with particular implications due to the utter randomness of the market. This is a mind-blowing discussion about human irrationality with links to many leading papers that research this principle in relation to different situations. Outside of our main discussion, we also touch on why you should think twice before buying a condo, the utter absurdity of the Robo-Advisor business model, monthly posted DVD accounts and the surprising birth of Netflix, and finally, the ambiguity of Vanguard's partnering with HarbourVest.

Key Points From This Episode:

• The story of Netflix's origin starting by renting DVDs out by post. [0:02:30.0]
• Life expectancy, annuities, and Wade Pfau's ideas on Safety-First retirement planning. [0:04:56]
• Investor/insurer reluctance and why you shouldn't buy a condo. [0:07:23]
• The Robo-Advisor financing crisis and eventual merge of software and humans. [0:11:28]
• Counterfactual thinking and how it affects investment patterns. [0:17:40]
• The central role closeness of a related incident plays in 'what if' thinking. [0:21:21]
• Contrast effects: winning $50 feels good unless you could have won $100. [0:24:42]
• Causal inference effects: rectifying a past problem by acting its solution in the future. [0:27:37]
• Investor preferences reflecting counterfactual thinking and attachment to stocks. [0:31:27]
• The effect the end of WW1 had on people to blind them to the coming depression. [0:36:00]
• How there is no proof that if we acted differently a desired set of realities would result. [0:40:22]
• The randomness of the stock market and how mastering it is thus impossible. [0:41:34]
• Tools for beating counterfactual thinking: document your original rationale, etc. [0:43:19]
• Jason Zweig's tips: lightning rarely strikes twice, and only gamble 10% of your money. [0:44:17]
• Bad or good advice? Vanguard's partnering with HarbourVest. [0:47:32]
• How private equity valuations used to be low, resulting in high expected returns. [0:50:09]
• And much more!

The financial advice industry has always been a place of change, and yet certain old practices hang around for decades. Our guest today, Dennis Moseley-Williams, is all about moving things forward for the good of the client and the advisor. The basis of his understanding is the characterization of the economy as one fundamentally built around experiences. Applying this lens to the financial sector means that advisors need to think about how to provide more than just a service to their clients, they need to stage an experience and a process of curated growth and learning. In our conversation, Dennis unpacks the evolution up to this point, showing how each step requires adjustments and progress from providers and the space that opens up due to technological advances must be filled with something of value. We discuss communication, fulfillment and happiness and Dennis makes a strong argument for the role of the financial advisor reaching beyond the bank; he believes it should include all important areas of life. The last part of the episode is spent thinking about ways that willing advisors can offer the most to their clients and how to pitch and scale these businesses in the smartest ways. For this fascinating chat with a truly innovative thinker and gifted speaker, be sure to join us!

Key Points From This Episode:

• Dennis' explanation of the experience economy and trends in the financial services industry. [0:04:04.4]
• How Dennis found himself in the world of finance and investments. [0:07:07.7]
• The evolution of the skillset needed for good financial advice. [0:09:38.2]
• The five stages of experience and the lasting impact of a meaningful experience. [0:14:40.7]
• What the experience economy means in terms of finding good financial advice. [0:18:52.9]
• The space created by new tech advances and what will fill it. [0:23:35.6]
• Better communication in today's economy; physical and virtual experiences. [0:31:41.5]
• Differences between big and small business; pitching your offer for those who care. [0:33:29.3]
• Red flags and green lights for investors in the search for the right advisor. [0:38:12.2]
• The place of technical financial know-how and its decreasing value. [0:42:31.7]
• How an advisor can fill the space left by the church. [0:48:31.3]
• Happiness and fulfillment; putting funded contentment at the top of the list. [0:54:47.8]
• Dennis' hopes and predictions for the future of financial advice. [0:59:00.2]
• A highly differentiated and relevant offer — the recipe for success. [1:01:35.5]
• Connecting clients and allowing relationships to grow out of advice. [1:04:02.6]
• The question of scale; the care and caution that goes into growth. [1:08:39.9]
• Dennis' own definition of success in his life! [1:10:54.6]

On today's episode of The Rational Reminder, we once again cover a host of topics. We begin with Cameron sharing his thoughts on a book he recently finished, The Ride of a Lifetime, and some of the lessons he took away from it. We then tackle three listener questions, where we cover Mawer and index funds hypothetically driving prices. Then, in the portfolio portion of the show, we turn our attention to value premiums. Fama and French recently released a paper on the topic, and Ben is naturally very excited to share his assessment on it. We unpack how value has performed in the US, unexpected big value findings, and other takeaways from the paper. After that, we explore the total cost of ownership in our planning section. These are expenses that you incur when you begin investing. We shed light on some of them and the effect they have on your investments. Finally, we end the show with Tim Nash's take on our assessment of sustainable investing in episode 82. His insights offer an interesting perspective on the topic. While we can't say we're fully on board with his active position, it's certainly a fascinating viewpoint. Don't miss out on today's jam-packed show!

Key Points From This Episode:

• Takeaways from the audience's reception to episode 83 on cryptocurrency. [0:00:52.0]
• Insights and lessons from The Ride of a Lifetime, which Cameron recently finished. [0:04:13.0]
• More about Mawer: Data about and insights on how the company has fared. [0:08:48.0]
• What would happen if index funds could hypothetically drive prices? [0:22:34.0]
• What's interesting about the timing of Fama and French's new paper, The Value Premium. [0:25:46.0]
• The thesis of Fama and French's paper and what they found over measured periods. [0:26:49.0]
• Why Fama and French used how value did relative to the market. [0:29:17.0]
• How value performed between 1992-2019 and a surprising finding about big value. [0:31:04.0]
• Ben's takeaways from the Fama and French study. [0:33:18.0]
• Conclusions from Fama and French's 2019 paper, Volatility Lessons. [0:36:37.0]
• How other countries performed on market-wide value versus the market. [0:38:30.0]
• Clarifying the confusion around the management expense ratio and some empirical data. [0:40:00.0]
• The conflict of interest inherent in commission-based products. [0:42:39.0]
• What the trading expense ratio is and how it works. [0:43:47.0]
• Things similar to fees: Cash drags, large cap against distribution, and withholding tax. [0:47:50.0]
• 'Bad advice of the week': Globe and Mail [0:48:48.0]
• An overview of Tim Nash's services and his take on Ben's ESG presentation. [0:54:00.0]
• Tim's critique of the assumption of lower returns when it comes to equity. [0:57:07.0]
• Why externalities are so important with ESG even though they are glossed over. [0:58:12.0]
• There is so much that we don't know about ESG because it's all so new. [1:01:45.0]
• Why Tim believes we should invest in the green companies even with the current market structure. [1:06:08.0]
• Ben and Cameron's take on Tim's insights. [1:09:32.0]

The last ten years have seen so much said and done in the cryptocurrency space, and yet the future of bitcoin is still somewhat unclear. For Michael Sonnenshein however, bitcoin and the crypto market still offer the freedom and possibilities that have long been espoused as their greatest values. He joins us today to talk about his role at Grayscale Investments, how Grayscale fits into the larger Digital Currency Group family and how he envisions the wide-open future possibilities for bitcoin. We discuss some basics for the bitcoin conversation and Michael does a sterling job of setting out the lay of the land at present. From there, we turn to the role of Grayscale in dealing with bitcoin which can also be bought directly. Michael then takes the opportunity to compare bitcoin and gold; showing how they overlap and then bitcoin improves on the benefits that gold investments have historically provided. The last part of the conversation is spent addressing the safety of bitcoin and how time is showing its resistance to shocks and is earning bitcoin its place among other highly trusted assets. For all this and more fascinating insights into a big part of the future, join us on the Rational Reminder today!

Key Points From This Episode:

• Michael's description of Digital Currency Group. [0:03:28.4]
• A basic explanation of bitcoin and what defines a digital currency. [0:08:09.2]
• What will happen when the maximum amount of bitcoin has been mined? [0:11:29.0]
• Affecting the value of bitcoin through the altering of its decimal places. [0:14:04.2]
• The usefulness of Grayscale when it is possible to buy bitcoin directly. [0:15:21.4]
• How bitcoin differs from and improves on gold investments. [0:19:11.7]
• How digital currency fits in portfolio management and who it really suits. [0:21:30.0]
• Thinking about the expected returns question in regards to digital currencies. [0:23:30.3]
• The high amount of institutional investments through Grayscale and deciding on allocation. [0:29:00.5]
• Bitcoin's response to shocks and its rising reputation as a place of safety. [0:33:36.7]
• Why Michael is worried by impatience in regards to digital currencies. [0:34:42.5]
• How bitcoin can impact under-resourced populations through it non-reliance on infrastructure. [0:36:49.3]
• How Michael defines success for Grayscale and himself moving forward. [0:39:07.0]
• And much more!

Welcome to this week's episode of the Rational Reminder! Today, we get stuck into a commonly asked about investment topic – socially responsible or sustainable investing. The show kicks off with Cameron sharing some fantastic insights he gained from a book he recently finished, The Undoing Project. We then delve into the CalPERS story that was in the spotlight at the end of 2019. After that, we move the planning portion of our show, where we tackle the topic of sustainable investing. Many prominent Canadian pension funds have said that sustainability will be a core part of their investing going forward. We explore why sustainable investing has to mean lower returns, how this kind of investing effects social change, and what the amount you need to give up to feel good about your investments is. We also look at the subjectivity of ESG ratings and how this relates to your values. Ultimately, sustainable investing is about balancing the continuum of views and values, how closely they can be matched, and how you can do that in a diversified way. The sustainable label may not meet your expectations of sustainability which is why finding the balance can prove to be challenging. We round off the show by sharing our thoughts on how to restructure your portfolio when it comes time to live off of it. You don't want to miss out on this interesting show, so tune in today!

Key Points From This Episode:

• A book Cameron recently finished and how he applies these lessons to his work. [0:01:08.0]
• More about the CalPERS story that broke in December 2019. [0:05:50.0]
• Insights into active managers and actively managed funds. [0:07:40.0]
• Vanguard is the first asset manager to surpass the six trillion-dollar mark and other stats. [0:10:30.0]
• Portfolio topic: The growth of socially responsible investing in North America. [0:12:10.0]
• The main considerations to account for when looking at socially responsible investing. [0:14:09.0]
• Two main sustainable investing strategies: negative screening and ESG integration. [0:15:01.0]
• The relationship between ESG and expected returns when controlling for common risk factors. [0:17:13.0]
• The importance of ESG risk factor – where does the negative premium come from? [0:19:45.0]
• Differences between exclusion and investor tastes and their influence on expected returns. [0:21:40.0]
• Why the dispersion of preferences in the ESG industry is so important. [0:25:14.0]
• Does sustainable investing lead to positive social returns? [0:27:05.0]
• Two ways the lack of diversification of ESG investing hurts investors. [0:30:25.0]
• Understanding the trade-off between values: do all companies use the same ESG filters? [0:31:42.0]
• The two major problems of not having consistent ESG rating metrics. [0:33:54.0]
• Two things to consider when the time comes to live off of your portfolio. [0:36:47.0]
• Deciding how to change your asset allocation and figuring your safe spending rate. [0:39:05.0]
• Why selling shares rather than receiving dividends does not make you worse off. [0:42:23.0]
• Final thoughts on spending income and dividends. [0:45:06.0]
• 'Bad advice of the week'. [0:46:03.0]

On today's show, we are joined by Kim Melanson who is a local lawyer in Ottawa. The bulk of the conversation is spent on the particulars of drafting a will and the considerations that have to go into this process. Kim also reminds just how important it is to have an up to date will, something many of us have heard but many of us do not act on! She talks about good times to update your documents and the ins and outs of naming guardians and executors before discussing inheritances, donations, and probate. We then turn to a few different types of wills, namely mutual will, mirror wills, and dual wills. Kim weighs in on the topic of 'will kits' and services that make the writing of a will appear a little easier. We also talk about some common errors that are made in the realm of estate planning before turning our attention to family law. Kim answers our questions common-law relationships, domestic contracts, divisions of assets and more, so for all of this from a true expert on Ontario legal matters, be sure to listen in with us today on the Rational Reminder Podcast!

Key Points From This Episode:

• An important legal disclaimer about today's show. [0:02:21.9]
• What happens if you die in Ontario without a will? [0:03:13.6]
• Reasons that every adult needs to have a will. [0:05:34.7]
• How often to update a will throughout the course a lifetime. [0:07:32.7]
• Best practices for the naming guardians and executors. [0:08:34.6]
• Kim's recommendations for allocation of inheritances, donations, and probate. [0:14:14.4]
• Understanding dual wills, how they work and when they make sense. [0:19:14.3]
• Considering the use of 'will kits' and where these services might fall short. [0:21:39.6]
• Mutual and mirror wills; managing and policing of these documents. [0:23:19.1]
• Common and important errors made in estate planning. [0:25:19.4]
• The definition of a common-law relationship in Ontario. [0:26:50.6]
• Approaching the conversation and weighing the utility of domestic contracts. [0:30:48.6]
• The Family Law Act ruling on the division of assets; exclusions and subtractions. [0:34:54.4]
• Kim's own definition of success and her hopes for a positive impact. [0:36:36.2]