On this episode, financial planner Ed Rempel tells us how to easily outperform investment and robo advisors. (Hint: it’s simpler and easier than you think—no tricks or secrets required!)
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Hello listeners. Welcome to Explore FI Canada, where we sit at the roundtable with Canadians and share their thoughts ideas and personal journeys to financial independence.
Hello again, listeners. Welcome back to Explore FI Canada. Money Mechanic is with you on the show today, and my co-host Chrissy is out here on the West Coast as well. Hello, Chrissy.
Hello, Money Mechanic. How are you doing?
I’m doing well, thanks. It’s another lovely day, the dogs will soon be bugging me to go outside. So, you know they’ve gotten used to their lunchtime walks. Have you been doing that with your dog around the neighbourhood there?
Yep, for sure. We have our lunch, then we take her out for an hour, me and the boys. And sometimes my husband comes along as well if he’s not too busy with work.
Nice! So, before we get into our show today; we’ve got a very interesting guest on the show, so I’m sure our listeners are going to get lots of value from what he has to say. Before we get into that though, we’re just making a little public service announcement.
And saying our farewell to Ryan, who’s been a co-host from the beginning on the show. And he brought lots of great content to the show, and did some great online meetups, and yeah, so we just want all our listeners to know that he has moved on from the show.
But we will continue pursuing the roundtable discussions in Canada. Chrissy?
Yes, we’re sad to announce that Ryan has decided to leave. He is hoping to spend more time with his daughter, who’s still very young. So we wish him all the best, and I’m really happy for him to be able to have more time to spend more time with her and his wife, and perhaps more little Ryans down the road.
Ha ha, more little Ryans.
Yeah! We wish him all the best!
Yeah, for sure. And of course, listeners can always catch up with Ryan’s writing over on his blog, CanadianFIRE.ca. I know he’ll still be producing some content over there. Check that out and hopefully, in due course, we’ll have Ryan back on for an update on how his FIRE journey’s goin’!
Yep, I look forward to that! I hope we can convince him to come back on the air. He’s not too… he won’t be too busy to come and talk to us again.
For sure. Alright, with that out of the way, without further ado, we’d like to introduce our guest today, is Ed Rempel. And he is a financial advisor, not just any financial advisor, he’s your financial advisor, Chrissy.
Yes, he is! And I have spoken about Ed many times, so we’re excited to finally bring him on the show.
Yeah, welcome to the show, Ed. Nice to have here.
Thanks for having me.
Yes, and we we’ve been wanting to bring you on for quite a while because all of our listeners know I’ve spoken about you many times you are our financial planner, and you’ve given us a lot of great advice over the years. And we’ve been very happy working with you.
So I’d love to give our listeners this opportunity to learn more from you and hear what you have to say, particularly in this environment that we’re in right now. We, we’d love to get your feedback on all kinds of things, including one of the topics that we’re going to talk about today, which is long term thinking and bonds.
Yes, thank you’re you’re a pleasure to work with as well, Chrissy.
So I’d go ahead and give us just as a little short pitch for our listeners so that they if they haven’t read your blog yet, and maybe haven’t listened to all the praise that Chrissy puts out for you, just fill us in. Just a little background.
Alright, so I’m a I guess I’m a fee for service financial planner and a blogger. I really and I really enjoy blogging. I think the difference in my case is, is is just experience. I’ve been around for 25 years and nearly 1,000 financial plans.
And by doing that, I just gained a whole level of insight, which is what I actually love writing about in my blog, and it’s given me an what I call an unconventional wisdom. I think much of what most people, you know, know about finances, that all the conventional wisdom is either not optimal or often doesn’t even work.
But I’ve learned over the years, you know, what, what, actually what actually works in finance. And that’s all the things that I love to write about in my blog. And yeah, so I have a practice that’s focused on financial planning, where we start out by writing a comprehensive plan.
And I think most people don’t actually realize the the, the importance of it, but when you have a plan, it’s much more valuable when you think actually, it gets you to thinking the right way you know exactly what strategies to use and what to focus on and where you’re going long term. And it makes a big difference in what you do and in how you invest
Yeah, that leads us into today’s conversation. You’d sent us some information about how to easily outperform investment advisors and robo advisors. And I think it’s a good time to talk about this topic right now.
Because if people had engaged in long term thinking with their financial planning, this would just be a blip in their investment journey. And there would be no need to panic at this point. So can you go into that a little bit how you think people can easily outperform investment advisors and robo advisors?
Okay, so I think the bottom line is, is by thinking long term, we’re always thinking about what kind of investment will outperform long term. So I find what for investment advisors and robo advisors, they tend to they tend to think short term for fewer reasons.
So what does that you know, for example, don’t have the the in depth relationship that we have with clients. So all they have is the investments so they’re always worried about losing clients in if the market goes down, so when you’re talking to investment advisors, they’re always talking about getting a reasonable return with less risk.
And with less risk is code for investing in bonds, it’s so they tend to always have, they always tend to have, you know, typically they’ll have a 6040 portfolio or 40% of your money’s in bonds. And most of the even robo advisors will rarely do anything with less than 20% in bonds.
And, you know, bonds were historically good when interest rates were much higher. But from today, you know, you’re getting a one or 2% yield for the next 30 years. And I guess the way I tend to put it is with bonds is, you know, heads you make nothing and tails, you lose money.
So with bonds, the optimistic view is that rates stay where they are, and you make one or 2% a year for the next 30 years, which may not even keep up with inflation. And if rates rise, then you actually lose money.
So you think why would somebody buy such a crappy investment at this point in time? And it’s I get it just you know, the conventional wisdom, you should have some bonds and you’re and you’re trying to reduce risk.
But you know, your investment advisor, they are always focused on reducing risk. And if you look at the time we’re having right now, you know, during this pandemic, a lot of people are panicked, oh my god, try sell when it’s gone down.
And, you know, the first week, you saw lots of panic selling, I’m thinking, who is selling, you know, because it’s, if you think long term, it just changed what you do. So 25 years from now, the market is going to be four to eight times higher than it is today.
And so the market is down 20 to 30%. You getting in 20 30% cheaper, it’s gonna be way up down the road. That’s all you need to know, right and have some good investments. But the short term thinkers are panicked thinking about what where’s the bottom of the market?
Is it you know, what you get in market timing stuff? And of course, what are you focused on that they end up owning a bunch of bonds and sitting in cash and they just, they just missed a whole lot of the return.
Yeah, you wrote about that in your most recent article here, where you’re talking about this COVID-19 problem that we’ve been having going on for a little while here. And you mentioned that to me, you know, you want to be fully invested through the entire bull markets, right?
And that gives you the long term growth in the stock market. And the bear markets, these are the buying opportunities to buy more at lower prices. And I see a lot so many comments out there of is this the bottom? Should I buy it now? Should I hold cash? Should I dollar cost average?
And these are kind of all they become investor psychology questions more than they become actual financial decisions. And I like the way you wrote about some of those things in this the time horizon, and that the most recent article there?
Yeah, thanks. Yeah, you know, short term, I have no idea what’s going to happen. I don’t think anybody, we’re just kind of all guessing. But we know what we know what it’ll do long term. It’s funny all the people trying to guess where the bottom is.
Most likely the bottom was three weeks ago. It’s I find it’s when you’re the people trying to think short term, believe it or not, they usually miss the bottom not by days, but usually by by months or years.
And it’s interesting how when you miss the bottom, you’re you’ve waited until the market stabilizes, climbing up again, but you’ve missed the days of the biggest gains in the market. It’s in starkly proven that that’s what happens to a lot of people. Yeah, the biggest gains are usually right after the biggest losses like the next day.
Right. And the big the biggest months up months are, you know, right after the biggest, biggest down months, you know, so the biggest bull market in history actually was 1933 to 36. The market went up like 400% in four years, but it’s because it was right after the biggest down period.
Right. Yeah, makes sense. So getting back to this, this, the statement that you made that you can easily outperform, and I like that you should use italics in there for easily. And you sent us a graphic overlaying a total return index.
With a popular everybody listening probably understands or knows what the Canadian Couch Potato portfolio looks like. You also included a dividend index in there. And it was undeniable that the returns of the total return were a lot larger.
And I agree with what you’ve already discussed today about having that bond component or using a larger bond component for some of the robos. And advisors definitely adds a drag to those portfolios. But also one of the things when I looked into it was that it talks you have to look at your global allocation. Do you want to comment on that as how we as Canadians maybe have too much home bias that effects our total return over time?
Yeah, I think it’s it’s surprising the things that actually make a difference. So yeah, I can compare the Couch Potato you know, the most aggressive of their five. I took dividend investing basically took the most popular dividend Investing ETF in Canada.
And I took a robo advisor and I again, I took their more most aggressive portfolio and I compared it to what I call total return in investing, which is just the MSCI world index. So just just get into full index return. And of course, the index was, you know, four or five, four to 6% per year higher than any of the other methods.
And I read a lot of you know, a lot of blogs and there’s always I think the two most popular styles recently had been in dividend investing and index investing which one is better and they have all these theoretical things, but the actual difference is usually nothing to do with that it’s it’s its exposure to the to the two biggest drags in the last decade have have been bonds and and being in Canada.
So Canada’s you know, bonds corresponding even interest rates came down a little bit last decades but so bonds that okay the last decade but probably better than they’re going to go into forward, and Canada had a notice of a bad decade. But you would expect those two to lag all the time anyway.
So for example, you can take your dividend investing index, the biggest factor is dividend investing tends to win because it’s tends to be 100% equities, well indexers to typically put you know, 25% Canada 25% US 25% international 25% in bonds. Now you got 25% in bonds and that’s the really reason you’re lagging.
So, but the issue with with dividend investors is often they try to have you know, Canadian companies especially if it’s non registered because of the lower tax, but anyway, they picking companies one by one, they want to pick familiar companies in Canada here. So you end up with so much in Canada, that that it tends to lag. So Canada actually led the global stock market by 6.3% a year in the last the last 10 years.
That is shocking and I did not realize that drag until you sent us this chart. It’s from Morningstar, I believe. It shows how the Canadian Couch Potato portfolio, the aggressive one, which is 90% equities, 10% bonds. It’s the dead last… performed the worst!
Yeah, that was 80/20. Yeah. So…
Oh, is it 80/20? Okay.
Yes. And yeah, it’s some in Canada, but most of it is just most of it is the bond allocation is dragging it way down.
And I think this discussion is going to be very interesting to our listeners, because there’s been so much talk and use of all the Vanguard all in ones everybody’s into their their VBAL or the VGRO or whatever it is, at this point, and after doing some prep for this interview, and reading through what you sent, I had to have a look at my own portfolio and why am I holding Why am I holding VGRO and VEQT?
And, you know, I should be changing that getting rid of some my Canadian allocation and the bond allocation and maybe choosing XAW and we don’t have to go down a discussion here about what investments anybody should hold. That’s not the purpose of our show.
But it made me think about how much Canadian exposure I have and what would be appropriate within my portfolio. So I think it’s definitely something that hopefully our listeners can take away from this conversation and maybe just have a look at that.
And it’s a personal decision, of course, or maybe you and your investment planners decision is how much Canadian exposure is appropriate. And I’ve looked and I’m definitely far too high when I look at the total return index, and I thought that strategy of the total return investing trying to capture that global and appropriate go global proportion is something that I’ve definitely not focused on enough.
So I appreciate that at least during this interview, so that it’s opened my eyes up a little bit. And I take it when you do your long term planning that’s how you work together with your clients to figure out these these portfolios.
Yeah, yeah, we don’t we try to avoid picking you know, sectors are countries which want to get the global growth and but you know, if you invest globally Canada’s only 3% of the world stock market. So anything over 3% is an overweight position.
And, you know, in my opinion, the TSX 60 is, you know, 75% in three sectors and almost all of the other sectors, there’s only like one or 2% in it. So to me is the TSX 60 should not be a core holding for anybody. It’s a financial services and resource sector. Right?
So and it’s, and you’d expect that it’s going to have a lot, it’s going to have a lower return than, than the blood, the global index most of the time, except when oil is doing well, you know, and when oil goes up a lot then of course Canada has because a few good years and.
But otherwise, it tends to lag. So but there’s no traditional thinking that over in Canada, so somehow we’re safer. And you know, every country in the world has this home bias, they tend to have 80% of their money in their own their own country.
And I actually a funny story was about 10 years ago, there was a financial collapse in Iceland. When the stock market collapse, and we found out that 80% of the money invested by people in Iceland was in Iceland stocks and my first thought was, they were Iceland stocks? I can’t even name one.
What are they put their money in? And but it’s like every every country that they do it and to me it’s it’s just as illogical in any country to put you know, 80% of your own money in your country.
How would you talk to someone to help them overcome this home country bias because it’s so ingrained in us to have at least a third if not more, in Canada? How can someone overcome that bias?
Yeah, I don’t know. Sometimes some things you have to do, logically and not emotionally. Because there’s a if you go with your gut, there’s a feeling that oh, you know, our, our local bank, I know it that safer than, you know, a similar bank in the States or in Australia, and.
But why would it be they’re all kind of, you know, banks are most mostly the similar other banks, a lot of other banks grow faster than ours, you know. So, but a lot of I think it’s the gut feeling that familiarity makes it safer.
But if you just show people that, you know, the difference that you get from much longer term, you know, for much broader investing, you know, incidentally, in Canada, if you take the TSX 60, and take the average size of the company, it’s smaller than the average company in the emerging markets index.
We are, you know, we’re a midsize resource-focused index. It’s, you know, it’s not something you I think, if you look at it that way, you know, if, if somebody told you here in Canada that they have 80% of their money in Australia, you think, why would you do that? That sounds dumb, right?
Australia is actually a lot like Canada, like a similar size and mostly banks and resources and you know, similar kind of thing. You have to use a short answer because isn’t it? You have to think logically about it. There’s some things that you can’t. The human gut isn’t really built for investing.
Well, I like the way you explained it. And as far as getting it to a more actionable level, should Canadians take it to the extreme of having only 3% Canadian, because that’s what is reflected in the world economy?
Yeah. Now, I’m not saying what anybody else should do different people in different situations. But I’m just giving an example of you know, the conventional wisdom and how people tend to do it a certain way.
And what actually is an example of what actually works if you just invest 100% in global equity, and forget about, you know, focusing on looking for dividend income or focus on, you know, traditional three or four sectors or having oil in Canada, or you just get a more accurate way of a more broad way of thinking.
And that’s why it’s kind of that’s why I say it’s easy It’s easy to a poor, most most investment advisors and even all the robo advisors.
And I guess this is why in our, you know, in the financial independence or the FIRE community, we’ve heard so much discussion coming from the brain trust in the US where they just talk about investing in VTI, which is the total market index is the best in the whole world. Just put everything there. And I’m done kind of hands off, and don’t play with things.
Yeah, a lot of sense there.
Yeah, totally. So going back to sort of where we’re going here with we’ve talked about, and I think it’s interesting that people need to understand how they measure their returns, because they need to understand that their Canadian bias is going to have an impact on their overall portfolio returns and also that bond component is going to have an overall impact on their returns.
So just something that I got from reading through what you sent us was understanding that I’m measuring my returns, again, something of a similar portfolio structure and stuff of looking at going, Oh, why am I underperforming the global index?
And it’s it’s about understanding why you are underperforming what you’re expecting your results to be. So I think it’s interesting when your statement holds true is you can easily outperform traditional models, because when you start breaking it down into these chunks, that’s where it starts, you start to see the the underperformance.
Okay, good. I’m glad I got that right. Let’s, let’s talk a little bit more about you mentioned earlier about risk. And I like what you put risk in quotes, because so many of us think of risk as the traditional, like you said, it’s a short term risk.
My money is risky in the stock market, but because I’m an owner of a business, that and I hopefully or that business has long term expectations of profits. That’s not actually my risk. Right. You talk about it’s your if your plan is long term, the bigger risk is not meeting your investment objectives over the long term.
Yes, exactly. So for your investment advisors risk is, you know, the risk is that Oh, the market might decline this year or that, or next month is something that’s the risk. And it’s all short term thinking. Right? You know, so if you have… part of how a financial plan helps you, so you make a financial plan that you’re going to retire in 20 years and live for another 30 years after that.
And in the plan, you have an average, let’s say 7%, or 8% rate of return built into your plan, then risk risk is that your, you know, your 50 year return is less than 8% or 7% a year. So, and interesting is when you think of it that way, then adding bonds actually makes your portfolio more risky.
Because the more bonds you have, the less likely you’re going to get that seven or 8% long term return, right. So but for most investment advisors, they think bonds make a safer because it reduces the short term volatility.
But it’s, it’s I think, as a financial planner, by thinking long term, we just have a completely different and more effective definition of risk. And that’s what helps us helps us to, you know, to get a much better return for our clients.
I was really interested to see how you related having a bond component as actually, you could almost look at it as an additional management extent expense ratio added entrepreneur folio, because you’re going you’re sacrificing some of the potential gains from an all equity portfolio.
So it just made me look at it from a different perspective, I’d never thought of before that I’m actually sacrificing potential gains. And that’s actually like adding a cost to my portfolio by having 25% bonds. So that was something interesting, I hadn’t thought of before.
Yeah, it’s funny that people will, you know, they’ll dump a high-fee fund, but then they’ll go to a robo advisor or a traditional portfolio, and they have 25% in bonds. And so that’s 25% in bonds.
We expect it to lose your long term return by somewhere between one and a half and two and a half percent a year. That’s so it’s probably as you know, all the money you save from a lower fee. who’s lost because you have 25% in bonds?
Mm hmm. Now you even mentioned a quote from Warren Buffett where he says bonds today are return-free risk. If things go well, you get 2% per year for 30 years or zero after inflation, which I think is something that you mentioned in your article about bonds is that people ignore inflation, they forget about that. And that is a component which makes bonds very, not a sensible choice in a long term portfolio.
Yeah, interestingly is, you know, bonds have had many year periods of time where they lost money. When I’m talking about money, I’m talking about purchasing power. So for example, if the last time interest rates were this low, was like around 1950.
And if you had enough money to buy two cars, and you put it into a 30 year government bond, and when the full 30 years got all your interest, at the end of that period, you could only buy one car, so you lost 50% of your purchasing power after 30 years.
Bonds do that sometimes when you have a period of, you know, rising rates plus high inflation, they tend not to keep up. So however stocks, I’ve actually never had that issue stocks, you take any 30 year period, stocks have always had a good rate of return, even after inflation.
So what’s the worst, the worst? You know, people tend to over because they think short term, they think stocks are much riskier than they are. You can mean stocks are risky short term, no question and even medium term.
But I think what people miss is long term stocks are actually actually much more consistent. So you know, the lowest the worst 25 year period calendar period for this, the S&P 500 in the last nine years, was 7.9% a year 8% a year.
That’s the worst 25 year period. That’s fascinating. So it’s actually you know, so you, people are worried about the ups and downs but you know, if you’re in for a long term, you It’s surprising how consistent that is.
So since we’re on the topic of bonds, I’d like to get your opinion on something with the recent crash that we had. It was quite big. Some people would say that their their bonds would have helped cushion that if, for instance, they were retiring, or they recently recently retired or were planning to retire very soon that if they had a bond cushion that would have helped that.
What is your response to that? If someone had instead been 100% equities, they would have seen a bigger drop. But what is your response to someone who said if I had more bonds, it would have helped?
Well, short term it would’ve helped. Except I don’t know, corporate bonds actually got nailed a lot too. But, but generally, if you have government bonds in the market falls by 30%, your your bonds will will cushion it will cushion the fall.
But you probably would have had lower lower returns to start with, and maybe you wouldn’t have reached your goal in the amount of time that you wanted.
Yes, because I think it’s easy. It’s different Chrissy, when you look at it when you look at it long term, because, you know, if you’re just retiring, you’ve got probably 30 years in front of you. The average Canadian couple, if you take whichever one lives the longest lives 32 years in retirement.
So it’s a long, it’s a long term thing. So I have a study that I did on my blog about the 4% rule. So So this is, you know, if you’re retiring, the question is, how much money can you reliably take out of your out of your portfolio and not run out of money?
So 4% rule says, if you have a million dollars, you can take 4% of it, oh, that’s 40,000 a year and increase it by inflation. And it should last as long as you do. So I studied with the actual numbers of stocks and bonds of inflation over the last hundred and 50 years.
What I found is the 4% rule works 97% of the time, if you have between 70 and 100% in equities, but the more you have in bonds, the more often you run out of money because bonds actually a significant period of time where they were they lost money after inflation.
But stocks didn’t. So it’s you know that it’s a difference when you’re looking short term versus long term. Even if you’re just retiring today, and you’re, you know, 60 or 65. And but you’re investing for the next 30 years, bond stocks are still a safer long term investment.
That’s it’s such an interesting concept for people to wrap their head around. And I’ve got a question that’s along, I mean, we’re still along the same lines here. But the view that if you have, I’m just going to use just grabbing numbers out of the air here, if you had a 30% bond allocation in your portfolio, 70% stocks.
My the traditional thinking in my head is that when we see a market crash, your your portfolio percentages now change due to the value of each of those assets. So the idea is to use that available cash in the bond side now to purchase equities at the lowest price.
And conversely, when we see market highs where equities are really high, we’re moving some of that money out. So effectively, we’re buying or sorry, we’re selling high and buying low, and in a bit of my head is like, Okay, well if we eliminate bonds from our portfolio and go hundred percent equities, do we obviously we don’t rebalance anymore.
We just continue to purchase equities the whole time. But in my mind, we lose that opportunity of taking a larger lump sum and buying at lows or selling at highs is is that kind of that logic not apply when you just decide to go hundred percent equities and dollar cost average for a long term plan? Can you speak to that a little bit?
Well, you can do it somewhat even if you’re 100% in stocks, you can you know, when the market is low, you can just invest a bit extra, do your RRSP contribution early, or you could even buy switch over to some more aggressive stocks while the market’s down. There are ways to do it with with just stocks as well.
Right if you’ve got extra cash that you can deploy at that time for sure.
Right. Yeah, or you, you know, do investment ahead of time for what you have done later on. But But, you know, Money Mechanic, I think a bigger factor is yes, there is a bit of, there’s a bit of gain by buying more low.
But there’s a bigger factor is just the drag of having, you know, 30% in bonds over the next 30 years. So that 30% is gonna make hardly anything. So the other 70% has to make all the make all the return. So I’m a guy that likes to study everything.
And I guess one example of that is, is the cash cushion. So a lot of people think when they retire, they should keep two years worth of investments in cash. So the idea is, whenever the markets go down, then they’re gonna stop withdrawing from their equities, and they’re just gonna live off the cash until the equities bounce back. Right?
So it’s a way to, to avoid having to cap to sell stocks when you’re down. So there’s a perception that it should actually stop you from running out of money. So of course, I’m a math guy, so I went and tested it, the last 150 years.
If you had, you know, zero cash or one year cash or two year three year I went to how many years cash has the least chance of running out of money. And the lowest chance of running out of money was zero cash.
So there was once you got to 2% cash or more, like with 1% cash, it worked out basically the same. But interestingly, it was there never was a case where you would have run out of money being 100% of stocks, but having some cash wouldn’t have made you also run out of money over a 30 year period.
But there were times where holding the extra cash was a drag on your return. And you ended up running out of money before the 30 years was over.
All right, well, I find it really interesting that we’ve touched on some subjects that a lot of us especially the Do It Yourself investors, maybe we just don’t dig deep enough into these topics and it’s excellent speaking with someone like yourself at that does do the math and dig into the research on these.
And I do love that your blog is Unconventional Wisdom, because too many of us are trapped in these traditional ways of thinking. And I think we’ve shown today in the episode that bonds may or may not play a part in your portfolio.
And if they do, then you need to understand why they’re there and what your expected returns are on them and also our global allocations and things like that. So one of the things that I think we’re guilty of, and I know I’m guilty of it and Chrissy you’re not, which is awesome.
But many of us in the FI or FIRE space are sort of avid DIY investors, and we read a lot and we educate ourselves but speaking with you just today and in general reading some of your stuff.
I think there’s a lot of value to be had for working with a planner such as yourself and one of the lines that I caught a couple times you say that you try and pay for yourself, and just maybe speak to the DIY people out there even just like myself of what value you can bring to a long term way of thinking?
Yeah, I usually try to pay pay for myself entirely by recommending a top portfolio manager that should be able to do as well after fees as you would otherwise say what we’re trying to do is match or beat the index after all fees including mine.
So in that case, all the financial planning advice is truly value added. Because if not the even if you get a lot of valuable advice from a financial planner, but but if you’re not sure, if you think you may have got a lower return than you got otherwise, then you’re never quite sure how to how to compare that are you really better off.
But I think what most people don’t realize especially baby do it yourselfers is the plan has a much bigger effect than you think. It changes your thinking to long term and very often it changes what you do. So for example, a lot of people debate should you use our RRSP or TFSA?
Well, so we look at, you know, the tax guy. So look at what’s your biggest factor is? What’s your marginal tax bracket today? And what’s it going to be after you retire? Now, if we’ve done a financial plan, we actually know those numbers. So we know clearly which one of those is better and exactly how to do it.
And, you know, we try to make a plan to you know, use up your RRSP room over your over your career. And another big factor is when you think long term, you often do different strategies that you would otherwise like we have we’ve had a fair number of people that, that do leverage as a strategy.
You know, borrowing to invest is a risky strategy, but can be very effective for the right people who will stick to it long term and it can ride through the ups and downs. You know, you borrow at a low rate, and it’s all tax deductible and you invest in equities for the long term.
It can work really well and surprising how well it can work in a financial plan. But again, if you’re thinking short term, you think oh my god, it’s risky. And, and yeah, so it’s, it’s not something you should do as a short term thing.
It’s, it’s, you do it long term. So I find when you’re, when you have a financial plan, you know exactly how much you have to save for your future, you know, I have to save whatever is a thousand, fifteen hundred a month.
I need to make 8% a year and I have to do this strategy. And so you know exactly what you have to do to get to have the future you want. And that that alone makes it valuable. Then when we get to the investing side, it’s the same thing.
It makes you think long term about what’s the investment that’s going to give me 8% a year over the next 20 years. And I’m not worried about you know, so it doesn’t matter if it goes up and down this year, if there’s a market crash, you know, there’ll be a market crash or a downturn every two or three times a decade or whatever it is, whenever they are, they’re just buying opportunities.
But we’re just in here for for the next 20, 30 or more years. And what our goal is, you know, is is based on our life is to make that long term rate of return. So you know, a good analogy is if you ever tried driving, where you’re looking immediately in front of a car.
So you’re gonna look right in front of the car and try driving that way, what you find is you keep weaving back and forth and you’re actually much more likely to, to not see something coming down the road and hit something.
So when you drive you’re looking ways down, you’re quite a ways down closer to the horizon. And why do you do that because you find you just drive much more effectively, that way and it’s it’s the same thing when it comes to your personal finances, your planning, and also your investing.
And being your client as, my in laws also have their own financial planner, I can speak to how important the advice aspect of it is and also how stabilizing it can be to have a professional who knows what they’re doing, who can keep guiding you long term…
It just gives you that bit of confidence, that peace of mind so that you can stay with your long term plan and you don’t panic because you know, this person has learned and studied and done the research to know how to guide you along this path.
And if they’re telling you something, you know you can trust them and then you yourself can sleep well at night because you don’t have to think about it. You know that someone’s helped you and they’ve told you.
Most financial planners I think would try to help educate their clients into why their plan is a certain way and why they’re taking a certain approach. That to me is so important to have that that knowledge and have that confidence backing you and that’s how I can stay the course even though the markets are rocky right now it It hasn’t fazed me one bit.
Yeah, it’s interesting is sometimes just one little factor actually pays for everything. Like I give an example if you’re some of the Do It Yourself investor, and in this time, you know this, this panic you actually sold then I would suggest to you that it’s worth having an advisor.
Because if you panic and sell once and take a 30% loss, you know, if you had an advisor, they would have encouraged you to to stay invested, and that’s 30%. So that’s the 1% a year over the next 30 years, you just divide your… pays for 30 years worth of advice, just by keeping you invested once, you know?
We call that the big mistake, if you the biggest mistake in investing is to sell or invest more conservatively after a market decline. And it’s also probably the single most common mistake.
Definitely agree with that. Chrissy, our co-host Ryan had sent us a couple questions, and I actually think we’ve covered them fairly well in this discussion with Ed, do you feel that we need to specifically focus on any of those ones that he had here?
Ah, one that’s kind of interesting is the question about simplicity.
Ed, a big reason why a lot of people especially in the FI community, they choose robo advisors. Now, they’re a relatively cheap option compared to if you were to work with a full service planner.
But the biggest reason why people choose robo advisors, I think, is for the simplicity. So how would you address someone like that, who says I just want simplicity and it’s easy to dump money into a robo advisor? Is it worth it to trade off possible returns for that simplicity?
Well, if you want simplicity, you can also work with an advisor who can just kind of do everything for you.
And you can invest directly from your bank just just with a with an advisor just like you do with a robo advisor. So you know, the interesting thing is, for my long term clients, I charge 1% a year, and you know, less if you get to larger accounts, and most robo advisors charge half a percent.
And there’s a perception that I’m expensive and robo advisors cheap, but I’ve given all this advice for 1% and the robo advisor has really all they’ve given you as a is a platform to enter things there’s really no advice and their and their fee is half of my fee.
Yeah. So it’s it’s basically you’re getting a portfolio that’s rebalanced, and you don’t get any advice and you don’t get a plan with that, typically.
Yeah, but consequent… but they also have like even the most you go to a robo advisor and ask for 100% equity portfolio and they’ll always fight you they wouldn’t have at least 20% bonds. Well, if you’re paying half percent of fee plus you have 20% in bonds, you’re going to underperform my clients.
Right. And just to be clear for the listeners is that you obviously from our discussion today but from other lists we read as you advocate for hundred percent equities portfolio. In case in case anybody listening was wondering, it’s…
Okay, let me make that clear. I’m not saying everybody should do that.
No, but I’m saying that’s the the model that you’ve been working with
That when you think long term and you get educated that the market does, does, you know stocks do well long term if the asset class with the highest rate of return, you still have to have the risk tolerance to be able to stick with it.
Because if whatever you do, if the first time it goes down you have… any time if you panic and sell when it goes down, then what you had was too risky for you.
You know? It that’s still that’s still the case. But when you think long term, I find very often people can take a much higher allocation. And a lot of our clients have 100% equities. And they can tolerate it because they’ve got that long term vision.
Well, I’m going to I’m going to suggest to all the listeners that are here today to read your article about bonds, because that was an eye opener for me. And for people that are thinking that there just a safe way to store money and you’ll get a constant interest payment.
It is so important to realize that that’s been in the last, you know, 25, 30 years of a decreasing rate environment, and we’re not in that there’s not much room for rates to go any lower. So it is a really interesting thing to conceptualize, I think when it when we start talking about risk and long term planning.
And I think this whole pandemic is probably given a lot of people pause to go, maybe, maybe I don’t understand the risk of short term and long term of what I have in my portfolio.
Right, yes. I mean, bonds have a different risk, like, you know, it’s stocks tend to have short term risk in bonds and have long term risk, like the risk of bonds tends to be permanent losses.
Yeah. Which is interesting.
Losses of inflation over many years. Or if they do have a loss, you don’t you don’t get it back, because because you know that they did, because it doesn’t pay. But, you know, incidentally, if you look at the major countries around the world over the last hundred years, there are a few countries that have had a more than 99% loss in their government bonds over the last hundred years.
And that’s because they had a period of hyperinflation and wiped out the bonds. And that’s true in Germany and Italy and Japan, and Brazil. So I think five or six of the biggest 16 industrialized countries in the world have actually lost if you would have bought the government bonds 100 years ago, you’d still only be down 99% of your purchasing power today 100 years later.
And I think people really struggle to understand how inflation impacts their money. Because you technically, you look at the account, and the money’s still there, but it’s just it’s not worth anything anymore. So that’s the that’s the conceptualization of seeing what loss means in that sense.
Yeah, I think like a lot of younger people today, were never around when we had high inflation and high inflation, 70s and 80s. You know, inflation was, you know, 10, 12, 13% a year. So we’re used to seeing things go go way up.
And so when you when you look through that environment, then you see what happens. But even even when rates are low, you know, with two or 3% inflation, over a 30 year retirement, your cost of living is going to double or triple over during your retirement.
And so it’s you know, you’re trying to fund this whole thing, but but you need this rapidly rising income. And bonds are actually not good for providing a rising and they’re good for providing a flat income.
Return free risk!
Well, we could keep going. And we could get more tactical because this is absolutely fascinating, and I’m really enjoying it, but we should probably wrap up. There’s lots for our listeners to get their heads around in this episode.
Chrissy, do you want to any parting topics that we want to cover quickly before we let it go?
No, I think just to wrap it up, we just go through the main points where we’re discussing how bonds and heavy allocation to Canada are a drag on your portfolio. And the way to have a great long term plan is to think long term. That’s the number one thing if you think long term, it helps to put everything in perspective. And it really guides you in the right direction.
I think I’ll just add to that as well that you can go to a fee for service planner like Ed and get and sit down and get a very well written comprehensive plan and still do things yourself. It’s having that plan that makes the difference. So it’s been great chatting with you, Ed, we really appreciate all your insights.
So let us know I mean, anything you want to finish off with and also let our listeners know where they can find your wisdom. Your unconventional wisdom.
I couldn’t get that I couldn’t get that URL. But sort of a final thought is, you know, when you when you think long term smart Investing is clear. And you know, we’re in a, we’re in a down period. Now, this is a buying opportunity. And, you know, anyone who’s thinking short term may debate with me. But when you think long term, it’s really obvious. It’s a buying opportunity.
Yeah, for sure. Definitely. as well. I will continue to lock myself in doors for the next little while. And I wish our listeners I hope everybody’s safe and well out there. And just absolute pleasure talking with you add, I may be consulting with you in the future, if I can convince myself.
It’s hard to let go the DIY investing, but it’s worth it.
I know. But I’ve just, yeah, well, at least, like I said, this discussion and prep for this is… it actually made me look a little deeper and realize that, although I’m fairly well on track, I could definitely make some adjustments for longer term planning. So that’s been I really appreciate that. Thank you, Ed.
Yeah, it’s been fun talking to you guys. I’ll be glad to be on here. On your podcast anytime.
Oh, we’d love to. Lots and lots more we want to talk about.
‘Kay, thanks a lot Ed, nice chatting with you.
Alright, talk to you later.
Transcribed by Otter.ai
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Below is the Morningstar chart we mentioned on the show (click here to download the PDF.)
- About Ed Rempel
- Ed’s recent article: Covid-19: Making Wise Investment Decisions during the “Great Pause”
- Canadian Couch Potato model portfolios
- Ed’s article about bonds: The High Risk of Bonds
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