Becoming a Rational Investor w/ Ben Felix #1076

Episode Transcript
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Speaker 1 (00:00):
Welcome to How to Money. I'm Joel and today I'm
talking becoming a rational investor with Ben Felix. Okay, So,

(00:25):
as a guy who's six feet six inches tall, it's
always a little disconcerting to stand next to someone who's
taller than me.

Speaker 2 (00:33):
I'm not used to looking up at people.

Speaker 1 (00:35):
But I'm not in the same room with Ben Felix today,
and I'll gladly deal with that discomfort to chat with him.
He's six foot eleven, he's a former basketball player unlike me,
and he's one of the clearest voices in finance and
investing today. Ben is the co host of the Rational
Reminder podcast and he runs a killer YouTube channel full
of thoughtful, evidence based investing advice. He's a CFA, he's

(00:57):
a CFP and basically an alphabet super credentials after that,
but more importantly, he helps regular people understand the why
behind their investing decisions. So Ben, thanks so much for
being here today. I appreciate it.

Speaker 3 (01:10):
Oh thanks for the invitation and for the very kind introduction.

Speaker 1 (01:13):
So my first question, I'll get to that first, and
then I have another question about your height. But we
drink a craft beer.

Speaker 2 (01:18):
On the show.

Speaker 1 (01:19):
Most of the time, we spend outrageous sums some people
would say on good craft beer, but we're still being
thoughtful about our investments for the future. What do you
like to splurge on that some people might also think
is a little outrageous.

Speaker 3 (01:31):
Probably things related to health and physical activity, Like I
have a pretty expensive mountain bike which I had to
have custom made because of my height. As you as
you know it. I don't try away from spending money
on good food. I don't actually drink any alcohol, so
I don't spend money on that. Yeah, stuff related to
health I have. I don't know if people will know

(01:52):
what these are. I have Norma tech boots, which are
like these airbag boots that you put on after you
play sports to help you recover more quickly.

Speaker 2 (01:58):
Oh, I have seen them.

Speaker 1 (01:59):
Yea.

Speaker 3 (01:59):
Yeah. So I'm thirty eight in a couple of weeks here,
so when I play a basketball game the next day,
I'm more sore than I used to be. But the
airbags are the normal tech boots help. So I don't
know stuff like that health related, physical activity related stuff.
I'm more than happy to splare John.

Speaker 1 (02:16):
How often do you get asked about your height and
whether or not you played basketball? And does it always
happen when you're at the grocery store? Is what it
always happens for me.

Speaker 3 (02:27):
If I'm out in public or in a place that
I'm not usually I get asked pretty close to one
hundred percent of the time about my height. If I'm
you know, if I'm at a place where I know everybody,
I don't get asked. But yeah, anytime in a new location,
grocery store or whatever, out in public, it's yeah, it
pretty much happens all the time.

Speaker 1 (02:45):
When you get asked. Though at least you can be like, yeah,
I was a great basketball player. When I get asked,
I can be like not really, and so it's even
more shameful.

Speaker 2 (02:53):
I think for me. Your first degree ben was in engineering. Yeah.

Speaker 1 (02:58):
Do you think that's had an impact on how you
think about money and investing? Kind of taking that engineering
mindset into how you think about finances?

Speaker 3 (03:05):
I think so. I remember when I first came from
engineering into finance. I did an MBA. I went to
Northeastern University in Boston actually, and then came back to
Canada to do an MBA in finance, and I started
that program, wasn't really far into it yet hadn't taken
too many finance courses, And I started doing an internship
at a local investment company, and I remember being shocked

(03:30):
really at how unscientific a lot of the work was.
When I came from this engineering background, where everything's scientific
and evidence based, and it took me a while to
figure out that there is a way to apply that
type of thinking to financial decision making and investing. But yeah,
I don't know if I would have arrived at that
place as quickly if I had not come from an

(03:52):
engineering background.

Speaker 1 (03:53):
Why do you think the approach to money is often
so unscientific? Why is there less engineer mentality when it
comes to finances typically.

Speaker 3 (04:03):
Yeah, Well, a lot of it has to do with uncertainty.
It's really hard to say what is optimal in investing.
Whereas in engineering, you can engineering engineer something with a
pretty tight tolerance. You can use scientific principles and test
things and we can pretty definitively say yes, this is
the optimal way to design this whatever aircraft part or
something like that. It's not that simple with investing because

(04:26):
there's so much, so much uncertainty, and you can always
find whatever a stock that's performed better than the market,
or a fund manager who's performed better than the market,
which makes it really easy to say, well, hey, this
thing is better, that's what I should invest in, But
that unfortunately does not predict how something's going to do
in the future. And I think that leads to a
lot of really really difficult, difficult pieces of information for

(04:50):
people to interpret, because I can say, you know, it's
really hard to beat the market, but then someone can say, well, no,
this fund manager beat the market for the last twenty years,
what do you mean? And I think that type of
information just makes it hard for people to really understand
what the evidence about investing says.

Speaker 1 (05:07):
It's like, we'll look at Warren Buffett, bam, come on,
don't you get it right?

Speaker 3 (05:10):
I made a video on that because that comes up
so often exactly. That's the kind of thing. Those anecdotes
make it really hard for people to believe what the
evidence says.

Speaker 1 (05:20):
So it seems to me that in recent years conversations
about investing have become more normalized like it used to
be that and I still think in some ways money
is a taboo topic, but especially when it comes to investing,
there's just been a lot more interest and gen Z
seems to be more like fluent when it comes to investing.
I think the pandemic was part of that stimulus tracks

(05:41):
and just kind of general democratization of investing apps, and
some of that's good, some of that's bad. But like,
if someone were to ask you why they should be investing,
what would your response.

Speaker 3 (05:54):
Be, Man, it's a way to put your money to work.
And maybe that's a cliche thing to say, but when
you invest in something that has a positive expected return,
it takes a huge amount of the load off from
how much you need to save to fund your eventual
future where you don't have to where you're not working
your retirement, if we want to call it that your

(06:15):
financial independence. So if you don't invest, if you just
hold cash, for example, the amount the proportion of your
income that you need to save to fund your eventual
financial independence is much much higher than if you're taking
your savings and investing in something with a positive expected
return like the stock market. So that's the biggest thing
I think is that it helps to grow your wealth

(06:37):
for the future. And there's other stuff too, like if
you're not investing, there's a good chance you're actually losing
money to inflation, so we at least need to combat that.
But I think the biggest thing is taking some of
that load off, some of that savings burden off, so
that you can live your life today and let your
money grow by investing in positive expective return assets for

(06:58):
the future.

Speaker 1 (06:59):
Maybe some of the silver lining of the insane rate
of inflation we've seen in recent years has been helping
people understand the reality that inflation exists and maybe pushing
us more towards investing. Like, I don't know if there
is a silver lining that might be it.

Speaker 3 (07:15):
Yeah, I mean, if you look look through history, the
biggest risk to long term investors has really been inflation.
Like it's been that that's what has caused retirement portfolios
to fail more often as opposed to poor stock returns.
It's really poor real stock returns adjusted for inflation, and
it's been more high inflation than low stock returns that

(07:37):
have caused a lot of that pain.

Speaker 1 (07:39):
Speaking of inflation, that's like, I feel like that's something
we hear more and more concerned. Affordability is like the
top issue politically, and it's like one of the top
issues if you're instead of talking about the weather, you
just talk about how high prices are now. Right when
you just run into someone randomly out and about as
an advisor, what are maybe some of the biggest questions
and concerns that your clients are currently bringing into meetings

(08:00):
right now.

Speaker 3 (08:01):
Right now, it's not so much about inflation. I think
everyone's aware of that. Everyone knows that prices of stuff
have gone up. Everyone also knows though, that asset prices
have gone up. Like, yes, inflation has been high, but
the stock market has also been nuts, So that's not
coming up as much. The thing that's coming up most
right now is concerns about an AI bubble. I'm not
saying that we are in an AI bubble. I'm also

(08:22):
not saying that we're not. I can't predict what's going
to happen in the future, but that's what's coming up
most often. As you know, market returns have been so good,
stock prices, particularly for a handful of stocks in the US,
are so high, and they're also such a large proportion
of the market. I'm really worried about that and what
that's going to mean for the future of my portfolio.
So that's probably the conversation that we're having to have

(08:42):
with people most often right.

Speaker 1 (08:43):
Now, when when you talk about like savings rates across
the world, Americans like typically come up at the bottom
of the pile. We don't have a very high savings
rate on average. I think how to money listeners would
be like highly advanced in that regard, right, saving a
decent chunk of their income. If you were to talking

(09:04):
to a client and they were like, I don't like okay,
I can agree that I should be investing, and it
makes sense. I need to grow wealth for my future
and that just saving it isn't going to cut it.
What should the average savings or an investing rate be?
What should people be shooting for? Do you have advice
on that? Is there like a rule of thumb?

Speaker 3 (09:20):
There are rules of thumb. I don't think that there
is a universally ideal savings rate. People love rules like
just do this, but I don't think it. I don't
think savings rates are one where we have those. There
are ones that are decent, like ten percent of your
net income. That comes up a lot. I think that's
a pretty useful guideline. There are, of course more extreme

(09:41):
versions too, like fifty percent of your income. If you
want to reach fire, financial independence, retire early. I think
the main issue with either of those rule of thumb
approaches is that any or any universal prescription about a
savings rate is that everybody has a different financial situation.
Everyone's got different goals, they've got different preferences, and there's

(10:04):
there's a there's a concept in economics called utility, and
I don't want to get to jargon here, but I'll
try and explain what that means. It's basically a way
to quantify the satisfaction that you get from something. So
in economics they say utility, and that means it's a
way to put a number on how much satisfaction you're
getting from a thing, in this case, from spending spending money. Again,

(10:27):
some jargon here, but I'll talk through it. Spending money
tends to have decreasing marginal utility. So that means that
the more the additional satisfaction that you get from more
spending tends to decrease with each dollar of spending. I'm
gonna I'm gonna build on this and hopefully it makes sense,
but it's it's an important concept. Uh So, more spending,

(10:48):
less marginal utility, but the satisfaction that you get from
lower levels of spending is really high. And that's the
spending that you you know, you're paying your rent or
your mortgage, you're buying groceries, you're treating yourself to whatever,
a coffee or a meal out from time to time.
That spending has really really high utility, much more so
than you know, buying your whatever, second second Lamborghini. So

(11:11):
that's the concept of marginal decreasing marginal utility of spending.
And then the other important related topic here is is
something called time preference, which is basically, like all else equal,
it's better to have what you want now rather than later,
and even even more so when we account for the
fact that you don't know if you're going to be
alive in the future, which is kind of a dark
thing to think about, but it's a it's a fact.

(11:34):
Now economists can model all of this stuff quantitatively to
figure out exactly how much someone should be saving over
time based on their specific circumstances, goals, and preferences. And
I think what gets really interesting here. So we talked
about or I mentioned the ten percent or fifty percent
of your income rules of thumb, But when when economists
take this concept of utility and model it out, model

(11:58):
out the optimal amount of save for people in different circumstances.
Some of that research actually shows that young people should
not be saving at all due to the marginally utility
of spending today when they're young and when they've got
a lower income.

Speaker 1 (12:12):
That is that the paper from Was it from Yale?
Was it James Choi that wrote that paper about.

Speaker 3 (12:17):
No, this one's not James Choi. It's I can't remember
the author's names to the Journal of Retirement, Okay, I
can send it to you. But it says it's something
about how this life cycle model shows that young people
shouldn't be saving at.

Speaker 2 (12:32):
All, which is so interesting.

Speaker 1 (12:33):
Like as someone who sees the impact of time in
the market, and when I think about the dollars I
invested when I was twenty one, twenty two, twenty three,
they were harder to part with because I had less money,
but I was like creating a habit. And I was
also like, the return on those dollars invested at a
really early age is far superior than dollars that I'm

(12:56):
going to invest in the next decade.

Speaker 3 (12:58):
Totally, and that and that's the train off that people
have to balance and that's the trade off that this
utility based model is trying to balance. It's showing that, Hey,
even though what you just said is absolutely true, the
habit thing I think is important. I'll come back to
that in a second. Even though what you just said
is true, compounding is important, time in the market is important,
but the utility gains that you're going to get from

(13:19):
that early consumption when you have relatively little income, are
actually going to outweigh the utility you'll gain from the
compounding that's going to fund your future spending, at least
when you're younger. And then eventually you do have to
save probably a higher proportion of your income to catch up,
but when you're doing that, you probably have a higher
income at least based on this model. And for lower

(13:41):
income people, it's also interesting because government pensions are going
to cover a lot of their future spending, so social
security in the US, Canada Pension Plan and old age
security in Canada, so they may not need to save
that much either. So again, those sort of rules of
thumb ten percent of your income, they're not going to
make sense for everybody. Now, the habit thing I think

(14:01):
is really important because while everything that I just said
is true in an economic model. If people listen to
this podcast and say, oh, well, I'm a young person,
I don't need to save at all, they might just
never start saving because they never built the habit.

Speaker 2 (14:14):
That's a real risk. Yeah, it's a real risk.

Speaker 3 (14:16):
So I don't know. I think building that habit to
save early does make a lot of sense, and it
might lead to a little bit of budget discomfort. But
if that means that you're actually going to save for
the future later as well, it's probably worthwhile. So yeah,
I guess it's a little bit more nuanced than you know.
Here's the rule of thumb. I think people do have

(14:37):
to think about the utility or the satisfaction that they're
going to get from spending as opposed to saving today,
but they also have to trade that off with their
desire to build wealth for the future. So like we
don't use a you know, save ten percent of your income.
We use a full financial projection model where we can show,
you know, if you don't save now, here's how much
you have to start saving later to meet your lif

(15:00):
long term goals, and then people can make decisions based
on that information as opposed to a rule of thumb,
which I would call like a pretty blunt instrument for
a pretty important long term decision.

Speaker 1 (15:09):
Does part of that projection have to deal with people
their desire to maybe switch careers and earn less in
the future. They're like, yeah, I'm working this job, and
yeah I'm making great money, but my goodness, I don't
want to be doing this forever. And so if I
save and invest more now, I feel like I can
take the pedal of my foot off the pedal a
little bit and be comfortable earning less in the future.

Speaker 3 (15:31):
For sure, if that's what somebody wants to do. If
someone if someone says they don't love what they do
but they're making a ton of money, then that becomes
more of a financial independence retire early type conversation or
a coast fire conversation where it's like, hey, how much
do you have to build up in savings now so
that you can chill out later but still earn some
income but chill out and not keep the pedal to
the floor. So we definitely have those conversations. We also

(15:52):
have conversations with people who absolutely love what they do
and don't envision retiring ever, So there's a gain and
very different conversations. It would lead to very different savings rates.

Speaker 1 (16:04):
I saw this recent survey. It found that millionaires value
their therapists more than their financial advisor, and then a
decent chunk of them are thinking about firing their advisor.
What do you think that says about the financial advice
industry as a whole.

Speaker 3 (16:19):
I mean, I can tell you that that's where things
are going more toward that those types of conversations, as
opposed to, you know, picking the right stocks or investment
funds or whatever. I think that that was the historical
value proposition of financial advisors, that hey, we're going to
identify the best stocks or we're going to pick the
best fund managers. The evidence continues to mount though, that

(16:41):
that approach to advice is probably not productive and probably
making people worse off rather than better. One of the
things that I like to say, kind of tongue in cheek,
but also like pretty seriously is investing as a solved problem.
We kind of know what good investing looks like, at
least in broad strokes, even if we don't agree on

(17:02):
every little detail. We know that broad diversification matters, low
costs matter, tax efficiency matters, acid allocation matters. So again,
not everyone's going to agree on precisely what the optimal
portfolio looks like. But in those broad strokes kind of like, Okay,
if you can get that at a really low cost,
you're way ahead of most people. Now you can get

(17:22):
that at a very low cost using index funds on
your own, in a brokerage account or through a robo
advisor that kind of does some of the legwork for you,
but for really really low fee. So that service, like
good quality investing, has been commoditized. It's available to super
super low cost. And again, we know that it's really

(17:44):
hard for people to beat the market, and I don't
think that anybody should be paying for the attempt to
do so because the evidence is so overwhelming. The financial
advice industry knows all of this, and the model has
really gone toward what I would wealth management, which is
the integration of financial planning and investment management and a

(18:07):
large component that is behavioral, like the therapist type function.
I mean, there are even professional designations for financial advisors
now that are it's called the financial therapy credentials, because
it's so widely recognized that this is becoming such an
important part of what we do. As a practitioner, I
can tell you that a lot of the conversations that

(18:27):
we have with clients are like a lot closer to
a therapy session than to what you would imagine a
financial advice session would be like, because so much, so
much of a financial decision is emotional. It's about trade
offs between about trade offs between now and the future,
and it's about how to deal with money and relationships

(18:48):
and yeah, so that's that's all really important. So I
think it kind of follows from that that financial advice
has has shifted. It is in the process of shifting.
A firm like PWL. We use low cost investment funds,
but we do focus on financial planning, focus on having

(19:08):
really really close relationships with their clients, which again leads
to sort of that therapist type relationship in many cases
as you're talking through important financial decisions. So I think
that's great to hear that people who are not getting
that type of relationship from their financial advisors are considering
parting ways, and I think that they should. But I

(19:30):
think that there is still a model that works. I
know from our firm specifically, we have grown a ton
since I've been here for twelve years and we've grown
a ton and continue to grow. So there's at least
for what we're doing, quite a bit of demand for
that more. I guess you could call it holistic approach. Yeah,
I guess there's other stuff too, Like people make mistakes

(19:54):
when they're left to their own devices, they get nervous,
they get distracted. They want to invest in AI stocks
or in old or whatever has gone up recently, and
having a sounding board or a person to talk to
I think can be pretty valuable from that perspective as well.

Speaker 1 (20:08):
I mean that's what There was a Vanguard study many
years ago about the value of financial advisor, and they
found the average person with a financial advisor experienced much
greater returns, not necessarily even because they were invested in
the hot new fund, but because of the behavioral coaching
that they received from their financial advisor. So a two

(20:30):
and a half forget if it was two and a
half or three point percentage better returns, but it was
significantly better returns for people who had a financial advisor
versus people who didn't.

Speaker 3 (20:39):
Yeah. I don't put too much stock in that Vanguard study.
I think they oversell it, but in principle, I think
that it's generally correct, and I know again from my
experience as a practitioner. We have a ton of conversations
with people who when some asset has gone up recently,
like it's AI right now, it's been you know, cannabis
stocks in the past, Crypto, what else was there? Clean tech?

(21:01):
Like all these things happen, and all of a sudden,
asset prices in some sector of the market go up,
and then a lot of investors are like, oh, I
want to invest in that, and so they come to
us and talk about it, and we usually explain to
people why it probably does not make sense to do that,
and that usually ends up saving them a whole lot
of money, because people want to invest in stuff after
it's gone up, not before, and usually there's some level

(21:24):
of reversion to the mean and prices come back down.
So I think that matters. The other thing we see
is when markets go down, some people do get very nervous.
Every market decline is unique, but it's also not like
market declines have been happening for hundreds of years. As
long as we have data for asset prices, there have

(21:44):
been just extreme asset price drops. It happened from time
to time, so that part's always the same. They usually recover.
It's more likely to have a recovery than not after
a big decline. But everyone feels different because it's happening
for a different reason. I mean, COVID is such a
good example where we all lived through that, and that
was crazy. The world was shutting down. We're looking around

(22:06):
like we have no idea what the future is going
to look like. And so again in that case, we
had conversations with people who were like, I really don't
feel comfortable. I want to get out of the market,
and we would have conversations about listen, this is what
has happened in the past when crazy things have happened
in the world, and here's what we think we should expect.
And as we all know, markets were covered and staying

(22:26):
invested was the right thing to do, as it typically is.
So those are those behavioral things which is not quite
the therapy idea, Like that's a different type of behavioral
coaching that happens with financial advice, but I think it
is super valuable. And then one other thing that I
would mention here is owning stocks is hard for some
of the reasons that I just mentioned they're volatile, they

(22:48):
go up and down in price a lot from day
to day, which makes them hard for some people to own.
And to the extent that an advisor can make someone
more comfortable with a riskier portfolio. And there are academic
there are academic papers on this that could offset a
lot of the cost of advice. Which is kind of

(23:08):
a weird thing to think about. But if if you
would have been in a portfolio of fifty percent stocks
and fifty percent bonds, but with the guidance of an advisor,
you feel comfortable being in a I don't know, seventy
percent or eighty percent stock portfolio that that can be
really really valuable in the in the long run.

Speaker 2 (23:26):
So that's a good point.

Speaker 1 (23:28):
Are There's a lot more I want to get to
with you, Ben, including I want to talk about alternative
investments as those become more popular. What role do they
play in our investing portfolio. We'll get to that and
more right after this. All right, we're talking about Ben
Felix talking about rational investing. Ben, let's let's talk about

(23:51):
how someone builds a portfolio maybe that they can stick
with over the long run because it's easier, it's cheaper,
than ever to invest right, whether that's through your four
oh and k at work of people automatically opted in,
whether that's through a low cost brokerage firm, whether that's
through one of the new fangled you know, online places
like robin Hood or in one or something like that.
But it's also easier than ever. The easier thing is good,

(24:14):
but in some ways it can be bad because it
can be easier to take on outsize risks or you know,
go all in on the hot ai stock because you
saw someone tweet about it. Does that worry you for
DIY investors and especially for younger investors, Like it's easier
to get in, but it's also easier to make a
big mistake.

Speaker 3 (24:31):
Yeah, I think ease of access is great. Making investing
more accessible to people is great. But I suspect and
I've I've got reasons to have these suspicions that will
if you look at if you looked at a cross
section of DIY investing accounts, my hunch is that it's

(24:52):
a bit of a disaster. I think that we know
what good investing looks like, but I don't think that's
what a lot of people do. And I think that
the brokerages are part partially to blame, maybe more than partially,
because they do they incentivize or gamify taking wild risks,

(25:12):
using option strategies, all this kind of stuff. And if
you're a novice investor who doesn't know any better, doesn't
spend a ton of time reading about this stuff, and
your brokerage is saying, well, hey, you can trade options now,
I think that's you know, if you don't know why
you shouldn't do that, you might do it. And the
evidence on that shows that people tend to not do

(25:35):
so well when they trade when they trade options. So
I agree with you that easy access to financial markets
is incredible and we're living in this golden age of
investing where you can buy the market, you can buy
all of the stocks that exist in the world basically
or a very close approximation for a very low cost,
and you can do it super easily and a nice
user interface like all that stuff is incredible. But yeah,

(25:57):
I think I think that there's also a lot of
room for error, and there's a lot of incentive for
some of these platforms to induce people effectively to make
to make errors because they're profitable for the institutions.

Speaker 1 (26:15):
Yeah, Yeah, do you worry too that? Maybe even just
think about how well the stock market's done over the
past fifteen years, And yeah, twenty twenty two was one
of those outlier years where not so hot, but overall,
even corrections have felt like a blip. It's like the
COVID correction. Was it lasted, it was so short term.

(26:36):
How do you behaviorally for investors? Has that left them
maybe unable to deal with a meaningful or a prolonged
correction that might be coming in the near future, that
they just assumed that stocks are just a far better
version of a highal save music account that just continues
to add money.

Speaker 3 (26:53):
I do worry about that. I think you're right. There's
a whole generation of investors who have basically seen stocks
go up, and when they've seen them go down, they've
recovered really, really quickly, which is not what always happens.
If you look back through through history, there can be
declines that take quite a long time to recover from,
especially when you account for inflation. So if we have

(27:15):
one of those, which I can't say that we will,
if history is any guide, there probably will be another
prolonged decline. Yeah, I think that it could be difficult
for some investors to stick to whatever strategy they have
and remain invested. I think if you're properly diversified, that
helps a lot. I would worry more about people invested

(27:38):
in single sectors that have gone up, like maybe it's
the mag seven or AI stocks or whatever, which similarly,
they've they've done really really well for a really long
time and haven't had a whole lot of big, big corrections,
especially not long lasting ones. But there have been cases where,
you know, and I'm not necessarily drawing a parallel here,

(28:00):
although there are some parallels, but if you look at
the dot com era where tech stocks in US large
cap stocks more generally had a crazy run and then
dropped and then didn't really recover for twelve years, that's plausible.
And again I'm not predicting that. I'm not saying that
the current market is exactly like that. I think that

(28:22):
there are meaningful differences. But that's a tough period to
live through as an investor, and we, just as you mentioned,
we have not had one of those for basically a
generation of investors.

Speaker 1 (28:32):
How can someone prepare themselves so if they let's say
they are a lot of DIY investors listening to the
show who are like, I'm trying to stay diversified, keep
it low cost, keep putting money in like clockwork every paycheck.
I'm not necessarily planning on hiring a pro to help
coach me through it.

Speaker 2 (28:47):
How do I.

Speaker 1 (28:49):
Get prepared so that when or if something terrible happens
in the market it's a prolonged downturn, Like my portfolio
looks like it's cut in half, God forbid, how do
I make it through?

Speaker 3 (29:02):
Yeah? So I think that it's the preparation starts now
and it's really being diversified like that is. It's famously
called the only free luncheon investing. So I mentioned not
being all in one sector. I think all being all
in one country probably doesn't make sense either. I know
a lot of US investors and a lot of international
investors only invest in US stocks, which is the market

(29:25):
that's done the best over the last twenty or so years.
And that's you know, that's a tough place to be
if that one market. And I know it's a big market.
I know it's special in a lot of ways. I
know it is it's self diversified. I understand all of that,
but it is possible, and it has happened historically for
one market to have a prolonged period of low returns.

(29:49):
And again, I'm not saying I think that's going to
happen to the US, but I think that investors have
to be prepared for the fact that it could happen.
How do you prepare for that while you diversify your portfolio,
you own stocks outside of the US, and I think
that's really the best way to prepare for it.

Speaker 1 (30:06):
Yeah, I mean you're Canadian. I'm guessing you're not one
hundred percent exposed to Canadian stocks because you live in Canada,
but a lot of US investors are. And in some
ways you can kind of understand it, right as like
the powerhouse economic powerhouse of the world, and when you
look at yeah, returns over the past twenty years in

(30:26):
just the investing environment of the United States. I mean
even like Jack Bowell famously was like, yeah, you don't
need an international exposure, and you can understand the rationale
for that. But do you think that the US investors like,
what should allocation look like? What does diversification look like
when you live in a country that has also produced

(30:47):
such massive economic prosperity and value for investors.

Speaker 3 (30:51):
Yeah, so the US has been a great place to invest.
Don't get me wrong. I think having some level of
home country bias is reasonable for a lot of interesting reasons.
Like I think owning stocks in your local currency is
not a bad thing. The tax treatment of local stocks
local to whatever country you live in tend to be

(31:13):
tends to be better. Like I know in Canada, for example,
it's it's more tax efficient to own Canadian stocks than
non Canadian stocks, So that's there's tax efficiency. Cost efficiency
tends to be lower to own stocks in your home country.
Another really interesting one. And then Eugene Fama, who's a
Nobel laureate economist, he talked about this when he was

(31:35):
on our podcast, and when he said this, I had
not heard this argument before, but I think it's very interesting,
which is that in times of turmoil, of global turmoil,
geopolitical conflict and war and all that kind of stuff,
foreign investors don't tend to get treated very well, and
so owning stocks in your local country from that perspective,
can be a lot safer. So there's another another interesting

(31:58):
reason to own or to overweight home country stocks relative
to the market, and this is a thing that pretty
much every country. I think it probably is every country.
If you look at how in local investors allocate their portfolios,
having a home country bias is extremely common. I think
it's pretty much ubiquitous. And you can look at that

(32:19):
and say, well, people are making a mistake, which is
maybe true to an extent if it's extreme. But you
can also look at it and say, maybe there's some
economic rational for why people are doing that. So I
think the truth is probably somewhere in the middle. So
here in Canada, we do allocate about thirty percent of
our portfolios at my firm, and a lot of investment

(32:39):
products also do this. About thirty percent or roughly a
third of the portfolio is in Canadian stocks when Canadian
stocks are about three percent of the global market. So
it is a big overweight, but it's what we do
and we think it makes a lot of sense. There's
a couple academic researches, one academic research paper, one paper

(33:00):
from Vanguard that suggests that that level of home country
bias in Canada is reasonable for the US. It's obviously
different because the US is like sixty three percent of
the global market cap, so a home country bias might
be seventy percent or seventy five percent or something like that.
But I do still think having diversification beyond that outside

(33:22):
of the US is important.

Speaker 1 (33:24):
We're seeing more like alternative investment options for investors, which
I think is just another potential hurdle to overcome, and
often it just like seems super sexy. Oh, you can
invest in wine or whiskey or arts, like there's all
these ways to investge in these really cool ways or
little sliced up bits of real estate deals on different websites.

Speaker 2 (33:46):
How do you?

Speaker 1 (33:47):
And it seems like alternative investments are set to become
more widely available even inside of retirement accounts. Is this
a fun investing outlet for people or is this something
that they should avoid completely. I'm curious where you fall
on investing outside of the stock market.

Speaker 3 (34:03):
Yeah, so alternatives like there's collectibles like you mentioned wine
and art and all that kind of stuff. The big one, though,
and the one that is being considered for US retirement accounts,
is or I don't think maybe it's maybe that legislation's passed.
I'm sure I don't follow the US market as closely.
That's private assets, so private equities and private credit is

(34:25):
what they're trying to put into US retirement accounts. I've
spent a lot of time looking at these products and
reading the literature on these products. I don't think that
the juice is worth the squeeze. There's a couple of
arguments in favor of them. One is that they perform better.
The other is that they're imperfectly correlated to publicly traded assets.

(34:47):
On the correlation point, I think the big problem is
that they do have a low correlation. If you go
and look at a private equity fund and compare it
to a public equity fund and say are the correlated,
they're not going to correlated. But it's not because they're
materially different assets. It's because the private equities aren't traded.
They're not valued every day like public assets are. When

(35:09):
you adjust for that, when you desmooth the returns of
private equities, they're going to look a lot more similar.
Like fundamentally, there's still stocks, it's still the same thing.
They're just not priced. They're not priced daily. Private credit
is similar. When you benchmark these things against risk appropriate
public securities, they don't tend to be very compelling, So

(35:33):
you can show, yeah, hey, private equity over some periods
has done better than public equity, but that's not because
it's special. It's because it's taking more risk, and so
if you compare it to risk your public equities, a
lot of that outperformance tends to go away. So those
two arguments, correlation and outperformance, I don't think they're very strong.

(35:56):
And then the other big issue in private markets, for
you know, someone who's listening to this podcast, and for
a lot of investors is adverse selection. Private markets are
pretty small, Like if you look at how much of
the overall market is investable private assets, investable private assets
is pretty small. There's lots of non investable stuff like

(36:17):
the dry cleaner on your street or whatever. You can't
invest in that, but investable private equities pretty small, and
there's a lot of people that want to invest in
them right now, although that's declining a little bit, but
for the last whatever five or ten or so years,
that ASID class is really picked up steam. And the
problem is, if you're a typical investor listening to this podcast,

(36:38):
you're probably not at the front of the line to
get an allocation to the best private fund managers. You're
probably at the back. Yeah, and you're probably not even
in the line for the best fund manager. So you
get the allocations to funds that nobody else want it.
That's the adverse selection.

Speaker 2 (36:53):
Issue, sloppy seconds of a source.

Speaker 3 (36:55):
Sloppy seconds. That's that's right, And so that's problematic for
obvious reasons, but even more so in private markets when
you look at the dispersion in returns between the worst
and best funds, it's massive, massive, And so even if
we can look at the data and say, hey, on average,
private assets have done well, maybe they've even done a

(37:16):
little bit better than public markets, depending on the benchmark
in the time period, but you can't invest in an
index in the way that you can with public markets.
You can't invest in, you know, the private market. You
can invest inough fund or maybe a couple of funds
if you have enough money and you take a ton
of manager risk there where there's a good chance, especially
if you're you know, listening to this podcast, it's a

(37:38):
normal person, there's a good chance you invest in one
of the not so good private funds, and that can
be really damaging to returns. And then the other thing,
and this one's brutal and I don't know. I don't
know if it's appreciated enough. Is liquidity or illiquidity. A
lot of these things are illiquid just by their nature.
If you invest in a fund and the fund goes

(37:59):
and invest in a private company, you can't just go
and sell a private company tomorrow if you want to.
And so what can happen and what has happened is
if investors want their money out of these funds, that
the fund manager will will and can say no, sorry,
the fund's locked, and you don't get to get your
money back out. That's like, if you're a really long
term investor and you understand the risks, it's not the

(38:21):
end of the world. But for most people who may
need liquidity and may end up realizing, oh shoot, I
actually did need that money, it's not so nice to
have it locked up.

Speaker 1 (38:32):
So it sounds like a lot of issues with investing
outside of public markets. And then when you look at
even some of the websites where people can directly invest,
like the fees can be incredibly high, and the returns
man the way they make them look on the front
page can look incredible, But you dig a little bit,
a little bit deeper and especially real estate falling on
hard times. Man, just to see all of the individual

(38:55):
investors who are like, I feel like I need some
real estate exposure, and so they're going to these webs
sites to feel like they've got part. And it seems
like this brilliant move to have diversification. I heard Ben
talk about diversification. I should probably have some real estate
exposure in my portfolio. And it ends up like completely
biding the dust, eliminating all their capital, or at least

(39:17):
at the minimum, providing paltry returns. And the thing that's
baked in for good is the high fees, even if
you do have solid returns that you have to overcome
in order to compete with what's happening inside.

Speaker 2 (39:31):
Of your low cost index.

Speaker 3 (39:32):
One man, I didn't. Yeah, So when I'm talking about returns,
I'm talking about net A few returns tend to be
you know, call it similar to public markets. But that's
net of you know, by some estimates, like somewhere between
five and seven percent that you're paying to the manager
in order to get those returns that are similar ish
to the public markets. So yeah, there's a paper on this.

(39:56):
I don't remember the full title, but it refers to
private equity as the billionaire factory, and it's basically showing that, hey,
private market private equity investors have gotten roughly the same
returns as public equity investors, but private equity fund managers
have become exceptionally wealthy because they they they actually performed
really well before fees, but the managers extracted all of

(40:19):
that value for themselves, and the fund investors were left with,
you know, not much, if any value added.

Speaker 1 (40:25):
So basically we're in the wrong line of work we
should be. If you want to be a GP, that
should be fund. All right, you got more to get
to with Ben. We're going to talk about investing versus
debt payoff. Well, you know, if you want to be
a smart investor, which takes precedence. We'll get to that
and more. Right after this, I'm talking with Ben Felix

(40:50):
talking about rational investing. And Ben, you've said at one
point recently I saw you say that total market index
funds are a great choice for most people, but not
all people. Why are total market index funds not the
ideal choice for everyone?

Speaker 3 (41:06):
Oh? Man, that's a that's a question that's like super
complicated to answer properly. But I'll try. So it's like, okay,
it's like the the in theory, the optical portfolio for
the average investor is the market, so that means owning
all assets. The theoretical market portfolio is everything everything that
can be owned, and the idea is that all assets

(41:28):
get priced such that their weight in the market portfolio
for the average investor is optimal based on the you know,
preferences and needs of the average investor. So you can
infer from that. Okay, the average investor, it's not feasible
to invest in literally all assets, but total market index
funds give us a pretty good approximation of all tradable assets,

(41:49):
at least the ones we would want to invest in. Now,
technically private assets are included in the market portfolio too,
but for all the reasons we just talked about, I
don't think that they that they need to be there
for for most investors. So we start from there. If
you're the average investor, you should just own the market,
which you can do through low cost index funds. Okay, great,
what if you're different from average, that's where you could

(42:10):
be in a different portfolio that is not a total
market index fund portfolio. But that's where it gets a
little bit complicated, where it's like, Okay, if you're not
exposed to the same non portfolio risks as the average investor.
So say you've got safer human capital or more of
your wealth in financial assets and not exposed to non

(42:30):
portfolio risks, then you can maybe take a little bit
more risk in your portfolio than the average investor, which
might mean tilting toward riskier parts of the market. I
kind of mentioned that are alluded to it when I
was talking about private equity as well. If you look
at all the stocks in the market, there are stocks
that are riskier and have higher expected returns and stocks

(42:50):
that are safer and have lower expected returns. When you
own the market, you own all of those things, typically
more of the safer stocks because they tend to be
more valuable. But if you want to be or if
you're in a position where you can be different from
the market portfolio, then you can tilt towards some of
those riskier stocks to hopefully increase your expected returns. How

(43:12):
to do that and which stocks are tilt toward and
all that kind of stuff that it gets super nerdy,
super fast, and I think for most people, like we
talk about this quite a bit on our podcast, but
for most people, like for most people listening, it's probably
too nerdy and it probably complicates things more more than
it's actually worth.

Speaker 1 (43:30):
What are your thoughts on Target day funds? Is like
a one stop shop investment choice. They become more popular.
We're seeing more people funnel assets and to those saying,
I think I'm going to retire in probably like twenty sixty,
maybe I'll just one hundred percent shovel my money every
paycheck into one of those with fang Garter for Delhi
or something that's low cost.

Speaker 2 (43:50):
How do you feel about those?

Speaker 3 (43:51):
Yeah, So if it's a good, low cost target date fund,
I think that there are much worse things that you
could invest in. I don't think they're optimal. Unfortunately, if
that's what you're going to invest in, you're never going
to think about it, and that's going to keep you invested.
That's great. If it makes you behave well, that's great.
But there's a decent amount of research showing that they're

(44:15):
probably not optimal for long term investors. They're probably not
taking enough equity risk, which kind of like we talked
about earlier with a financial advisor convincing you to take
a little bit more equity risk. If a target day
fund results in you taking less equity risk than maybe
you should have or could have, the cost of that
in the long run can be significant. It could be

(44:36):
really really Is.

Speaker 1 (44:37):
That particularly true for investors in those first the first
decade or two, like in your twenties and thirties. Is
it that there's too much bond exposure for younger investors
inside of those target date funds.

Speaker 3 (44:49):
It's not even just in the first ten or twenty years.
The whole glide path. It continues to get more and
more conservative with a higher allocation to bonds over time,
and the cost of that, even for a retiree can
be pretty significantly. You have to remember a retiree, a
typical retiree has twenty or more years to live in
retirement and over horizons like that. Stocks, while they're more volatile,

(45:12):
they historically at least have not been They've been really
good at maintaining purchasing power, and bonds have, even though
they're less volatile, been less good at maintaining purchasing power.
So that's why I guess the main issue with target
date funds is you probably could have higher expective returns
and a better expected outcome all the way through retirement

(45:34):
by taking a little bit more risk than what a
target date fund would prescribe. However, if it's like you're
you don't like thinking about this stuff, which probably isn't
true for people listening to this podcast, but if you
really just want to invest in something and never thinking
about it again, and I think this is an important
and the idea of the target date glide path is

(45:56):
comforting to you because you feel like whatever it's going
to adjust as needed over time, therefore you don't have
to think about it. There's a lot of value in that,
So I think there could be better allocations, but behaviorally,
I think they're incredible tools.

Speaker 1 (46:08):
Speaking of behavior, there's the question that comes up all
the time when someone's trying to make progress with their investments,
but they're also trying to do other good things with
their money.

Speaker 2 (46:15):
Pay off debt.

Speaker 1 (46:16):
Let's say, how do you think about that perpetual question
of paying off debt versus investing more. It's obviously pretty
clear cut if you've got high interest rate credit card debt,
but it's less clear cut when you were talking about, oh,
I've got my student loan it's at six and a
half percent, or Yeah, how do you help clients and
people think through that conundrum?

Speaker 3 (46:36):
Yeah, I think a lot of it's behavioral because we
can go and model out, you know, this is the
optimal debt paydown strategy that's going to maximize your wealth.
But usually when we do that, people will say, nah,
I don't want to pay it off, or they'll say no,
I really don't like debt. I just want to pay
it off as soon as possible. So I think when
you're on that the cases where you're kind of on
the verge where it really makes obvious economic sense, or

(46:58):
where you're in a position where it's could or could
not make perfect economic sense to pay off debt, I
think a lot of it comes down to behavior and preferences.
Where some people just really don't like having debt, they
should pay it off. Some people are totally comfortable with it,
and if it's economically beneficial to keep it, they should
probably keep it. But it's again super individual and more
based on I think preferences than economics. At that point, what.

Speaker 1 (47:20):
Would you say is maybe the simple, simplest but most
underappreciated habit that leads to better financial outcomes for people.

Speaker 3 (47:29):
Yeah, so, I you know, on the assumption that you've
set up your investment strategy in something that's good, and
I know good is hard to define, but you know,
say it's a portfolio of low cost index funds, and
maybe it's a target date fund. Whatever, it's a good,
low cost, evidence based strategy that you are comfortable with
once that is set up. I don't know if it's

(47:50):
a habit or an anti habit, but not looking at
your investments, not checking them every day, is a really
really important behavior for investors to practice. There is evidence
that more frequent checking leads people to take less risk,
which is not great. Like it's maybe important to mention

(48:10):
that risk is in investing. Taking the right kinds of
risk is a good thing. Taking the wrong kinds of risk,
which I would say, like picking an individual stock or
picking one cryptotoken, that's the wrong kind of risk. Taking
the risk of the stock market and investing in a
diversified portfolio of stocks that is a good risk. You
want to take that to build wealth in the long run.
People who check their portfolios more frequently will tend to

(48:32):
take less of those good kinds of risks because they're
a little bit more nervous.

Speaker 2 (48:37):
Yea, so that's a big one.

Speaker 1 (48:39):
All right, last question, humans were emotional beings. I I
am thrilled, Like I love emotion right, crying in a
good movie, this time of year, getting together family and friends, laughter, Like,
emotions are wonderful. Your podcast is called Rational Reminder. You're
keen on rational thinking. What role should or should emotions
play in our investing habits, or or like should they

(49:01):
even play a role at all?

Speaker 3 (49:02):
Yeah? So I don't think you can ignore your emotions.
Like I just talked about the debt preferences thing. Some
people have strong feelings about debt and they should use
that as a guide when they're making a decision. But
I also don't think that you can let you let
your decision. Your emotions make your decisions for you. So
you can't ignore them, but they can't dictate your decisions either.
The reason that we called our podcast the Rational Reminder

(49:23):
is that we wanted to be explaining what a rational
person would do, basically, like what is the economically optimal
thing for someone to do in a certain situation. Once
you understand that, I think you can make an informed
decision based on your feelings about what you want to do,
but you need to understand the trade off that you're
making in order to make a good decision. If you

(49:44):
don't understand the trade off, the economic trade off that
you're making, and purely make decisions based on feelings, I
think that can lead to bad outcomes.

Speaker 1 (49:52):
Ben Felix, this has been awesome conversation. Thanks for joining me.
Where can my listeners find out more about you and
your podcast?

Speaker 3 (49:58):
I probably just a Google search or of whatever, an
AI search at this point. I guess my name Ben Felix,
and you'll find my podcast my YouTube channel. I'm on
other social media too, but those are the main ones.

Speaker 1 (50:10):
All right. We'll link to it all in the show
notes up on our side as well. Ben, thanks so
much for taking the time.

Speaker 3 (50:14):
Thanks so much for the invitation.

Speaker 1 (50:16):
Okay, Wow, talking with Ben Felix is it's amazing the
reference material he has stored in his brain, different studies
about investments or the impact of financial advisors, even the
Vaguard study I brought up and he's like, yeah, that's
not my favorite, And so just the amount of knowledge

(50:37):
he has in the way he's able to disseminate it
to normal folks is impressive, so was so glad to
have him on in his podcast. Really, in the work
he does, it gets down into the nitty gritty. So
if you're the kind of person who's like, how to
money feels like one oh one to me, I'm ready
for three oh one. Well, Ben's podcast is YouTube channel

(50:59):
is well well worth digging into. Just a treasure trove
of intelligence help you understand investing at a much deeper level. Man,
My big takeaway from this one was I like what
he said the anti habit of not checking your portfolio,
And it's one of those things like as you start
to invest more and you feel like you're doing the

(51:21):
right thing and you're excited to check on your progress. Well,
the more you log in, the more likely you are
to make changes or to maybe feel like you can
rest on your laurels. I mean, there's all sorts of
reactions you can have from checking your portfolio that many
of them which are not helpful. And probably maybe it's

(51:41):
a good idea, and now's a great time to set
a calendar reminder right to check in once every six months,
and maybe the goal is every time you check in
on your portfolio, you're ramping up your contribution amount, whether
that's like adding a little bit to your monthly roth
IRA contribution or you're ramping up your four one K

(52:02):
contribution by one percentage point or something like that. I
don't know exactly how you want to do it, but
I love the idea of having a calendar reminder so
that it's never on your brain, like maybe I should
just jump in there and check out my investments, what's
going on? Or I feel like the market was rippen
last week, let me see where I'm at, or market
wasn't doing so great, wonder how much money I lost,

(52:22):
and just avoiding that sort of emotional response, or like
you think, you know, logging in more often is going
to create more emotional responses. And what Ben is preaching,
what he's all about, is for all of us not
disclcluding emotion from how we invest including it in the

(52:45):
proper way, but thinking about, well, what would.

Speaker 2 (52:47):
The rational approach here be?

Speaker 1 (52:49):
And I do think the rational approach, or what's going
to help us stay rational for longer is just putting
those numbers in front of our face less being pleasantly
surprised the next time we log in that not only
have our contributions, but also market returns have increased our
net worth and it's a wonderful thing to see. But
I do think having our finger on the pulse all

(53:10):
the time can lead to some potential bad decisions. And
that's something that's really important. When we're talking about, you know,
being an investor and staying in it for the long haul.
That's going to be a really it's going to allow
us to do that in a crucial way. So I
hope you found this podcast helpful. I hope it allows
you to think about your own investing and how you

(53:35):
plan on handling the bumps in the road that are
sure to come. Whether that looks like hiring advisor because
you realize, oh man, that sounds like that's what I need.
I need somebody to kind of hold my hand because
I don't think I would be able to stomach a
massive portfolio drop, or whether you're like, no, that means
I need to put my investing thesis down on paper

(53:57):
and I need to post it somewhere in my house
so that I know why I'm investing, what I'm investing for,
and then I'm staying the course even when things do
get difficult.

Speaker 2 (54:05):
And by the way.

Speaker 1 (54:06):
If you are looking for an advisor, howdomoney dot com
slash advisor is a great place to turn. Thanks, as
always for joining me on today's episode. We'll see you
back here on Friday for a fresh Friday flight. Until
next time, best friend Out,

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Becoming a Rational Investor w/ Ben Felix #1076