AMA #9: Covered Call ETFs, Currency Hedging, and Bond Misconceptions

(upbeat music) This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, and Dan Bordelotti, Portfolio Manager at PWL Capital. It'd be back. Welcome everyone to episode 379. People will notice that I'm not in my usual podcast studio. Today I'm actually at the PWL Ottawa office, trying to avoid the construction sounds at my house, and then also we had some in office meetings today. Today we're doing an AMA episode has been a while, since we did one. We're back at that today. We've got some good questions, hey Dan? - Yeah, there's some good ones on the list. I know in the past, some of them have been, I think relatively niche or a bit, almost a bit obscure or some of them, I'm not sure they would have really wide appeal, but there's a lot of good questions in here, I think that a lot of people find the answers interesting. - Yeah, I think so. Now before we jump into the AMA questions, I want to read this quote out from John Campbell's new book, John Campbell is a financial economist at Harvard. He was on this podcast back in episode 250, and he is next week's guest, but I got a pre-read copy of his forthcoming book that'll be out pretty soon here, and which is what we talked with him about on the podcast, that's coming up, but this quote is like, I read it and it's like, wow, that in a few sentences perfectly encapsulates the whole financial industry and so many of the problems that we see with it. So I'll read it out. Capitalists respond to the actual demands for their products, not the demands that would exist if people were perfectly rational and truly understood their own best interests. Since people's demands are driven by the benefits they perceive rather than the benefits they actually get, the financial system supplies too many products with exaggerated benefits and too few products with underappreciated benefits. And since perceived costs rather than actual costs drive people's demands, the financial system supplies too many products with hidden costs. Incredible quote, and I read that and it's probably just some recency bias here, but I cannot help think about our recent episode that you and I did down on covered calls and might to accompany YouTube videos. It's like, man, that's such a good example of capitalists responding to what people think they want or need, not what they actually need. And there is this timely article in the Globe Mail that I saw this morning, just related to this topic. The headline is Canadian ETFs September saw a rush of 15 new funds, many targeting income investors and you go through the article and read all these tickers that have come out. So many of them are covered call funds, targeting really niche sectors and really high yields. It's just like, man, they're clearly profitable for the financial companies, which is why they keep coming out and people clearly want them, but it's like so well represented by John Campbell's quote. Yeah, it's really interesting, like how in different industries, I think this can apply not just the financial, like I always think of Apple as a good example and that one of its brilliant strategies was not to respond to specific demands in the market, but actually bring out a product that people didn't know how much they wanted until it was available. And obviously, it's extremely profitable for Apple. What I think for consumers, we benefit from a lot of great technology like that. But when it comes to financial technology, it's very rarely a benefit to the average consumer. It's only a benefit to the company that creates these products. And the financial industry has a lot of, a lot of things you can criticize about it, but you can't say it's not good at exploiting those behavioral tendencies and investors. And the result is just an enormous number of products that cater to biases and the income bias as we're learning is far and away the most obvious one. You mentioned as we're learning, Dan, and I'll just elaborate on that because this is a conversation you and I were having offline. We were taken aback, like honestly, both of us thought covered calls were a pretty niche topic that maybe a few people would be interested in. But the response in the comments and elsewhere on those episodes, talking about really just explaining how covered calls work and why they may not be great investments for long-term investors. The response has been overwhelming, not in a good way. I mean, it's been split. A lot of people have been like, wow, thank you for clarifying this complex topic that I could never understand before. And a lot of people are like, how dare you say anything bad about my 10% yield? I don't think either of us were quite prepared for that. I mean, for many years, we've dealt with the dividend bias. And as we've talked about that length on the podcast and elsewhere, as behavioral biases go, this one is not really that bad. Or I mean, you could do an awful lot worse than build a diversified portfolio of dividend stocks. If it's suboptimal, sure, but is it dangerous? No. And this one I was not expecting. And I think it's because, I mean, covered calls as a technology, as a strategy has been around for a long time. And even covered call ETFs have been around for many years now. But it does seem like they are multiplying, like rabbits. And the number of new products coming out layering on more and more strategies in order to juice those yields, it's really exploiting that bias in a way that I dividend the ETF that pays 4.5% is not doing. No, it's a totally different animal. To your point, portfolio constructed on dividends can still be diversified. It might be a little bit less tax-efficient than one that's not constructed on dividends. It might have naive factor exposures to things like value in profitability and investment factors, which are not bad things to have exposure to. They probably increase your expected returns. Those are all pretty good, except for the maybe the tax-efficiency and being a little bit less diversified than you could be. But all things considered, like you can build a pretty decent portfolio on that basis in the second video that I did on covered calls, which we have not talked about the analysis that I did there on this podcast, because it wasn't covered in the one episode that we did. But one of the things that I did is I looked at withdrawal analysis for five different funds. I took five different covered call funds. And I said, OK, what happens if you're living off the yield? And then I said, let's match those exact cash flows from someone who's investing in the underlying and see who comes out with more wealth. They're spending the same amount in both cases based on the yield of the covered call fund. And let's see who has more wealth after 10 years. In all five examples, the underlying investor, not the covered call investor, had more wealth. So they'd spent the same amount, and they had more left over, which is not surprising. And then the thing that I did that was interesting, we touched on this a little bit in our episode on this topic, then, is I looked at how much high set, how much cash basically would the investor and the underlying assets have to be holding such that the ending wealth of the underlying investor and the covered call investor was the same. And again, we mentioned a number similar to this in our episode. It was on average 26%. So you had to be holding 26% cash and the remainder in equities to match the ending wealth of investing in covered calls. Now, we talk about is that detrimental-- I mean, man, holding a 30% cash allocation for a long-term investor is like, that's one of the worst things that you can do. That's very different from investing in dividend stocks. For sure. And then the transparency is another part of the issue. If I buy a dividend stock, I pretty much know what I'm holding. If I buy a covered call ETF, especially one that uses leverage and these other kinds of embedded strategies, I mean, the average retail investor has absolutely no clue what's going on under the hood. I'm sure you had to do a lot of work in order to figure out yourself. And if you can't figure it out, the average retail investor is going to have a pretty difficult time, too. There are some crazy examples. I think the way they're marketed is-- it's like what you just said. If people knew exactly what they were buying, and they want it great fine, it's like John Campbell's quote. If people knew what was best for them and they still want this thing, I have no problem with that. But you look at the literature marketing these things, and it's like, here's the yield of this product, and here's the yield of the TSX. Don't you want the higher yield is kind of what's suggested? But that's just-- we talked about this in our last episode on Covered Calls. The relationship is inverse. That higher yield indicates a lower expected total return. It's really a difficult thing for investors to understand why these things are detrimental to them. But I think it's really important, because I mean, if we just go back to that 26% in cash example, that's really detrimental on expectation to a long-term investor. Anyway, this was not supposed to be an episode on Covered Calls. I'll have more to say on Covered Calls. I think we'll have to do at least one more podcast episode, because I've done two YouTube videos on that topic that we have not talked about on this podcast. So we'll probably do one more. But it's a fascinating topic. I didn't realize-- I understood the financial product aspect. I didn't realize how interesting the psychology and investor biases were when it comes to Covered Calls. So it's a much more interesting topic than I realized when we set out to start talking about it. So I'll be hiding under my desk for that one. Maybe I can get Ben Wilson to do it with me. People got a kick out of Ben Wilson. He made fun of me a couple times in a couple of different ways. And people seem to thoroughly enjoy that. I enjoyed that very much, actually. I'm quite happy that I work in a different office away from your lentil-based lunches. I have not been eating that recently. You switched to cabbage. Had a salad today, and I am not gassy at all. I'm glad we're talking about this again. That's good. It's good to know. right so the. We'll start with this first one here. This is from the Thunder Down Under. They have two questions. Are tax credits from domestic equity dividends already priced in? An interesting question. And then the second question is hedging equities toward currencies of commodity-based economies of bad idea. And they're asking you about the Australian dollar specifically. So on the tax credit question, there is a whole literature on that. I mean, that's like super nerdy to the point where I think it's too nerdy for this podcast. To dive into that literature in any meaningful detail. But the short answer is that dividend tax credits and dividend taxes more generally do seem to be at least partially priced in. And the way that they are priced in depends on the composition of investors in that market. Like what is the marginal tax rate of investors in that market? That affects the way that dividend taxes are priced in. Just to back up and sort of get oriented here, I guess what we're talking about, I mean, he's talking about the Australian market, which maybe there's a similar tax credit. It's similar. I've got something, but in Canada, quite famously dividends from Canadian companies are taxed more lightly than dividends from foreign companies or from interest, et cetera. So the question is about if investors in Canada know that if they buy a Canadian stock, they will receive favorable tax treatment on the dividends. Is there inherently a higher price on that stock because of increased demand presumably? Well, yeah. Does the benefit of the lower tax rate on the dividend go away because the price of the stock is bit up to reflect that? Not sure how one would measure that without a control, but so there are different ways to measure it that some of the studies have looked at things like tax changes and how that affects asset prices is one way. The interesting thing is that not everybody investing in Canadian stocks is benefiting from that tax credit in the same way. Sure. And you have to think about the overall mix of investors and that I guess weighted average is going to end up reflecting in the price. So if you as an individual are more sensitive or stand to benefit more from that tax credit than the average investor in Canadian stocks, it's still in that benefit to you. It's a very, very nerdy question, but I guess that's kind of what we're here for. And one of those questions that sort of interesting from a theoretical point of view, but how would it affect your investment strategy? I don't know. Well, I guess you could say that the argument if it were completely priced in the argument for a home country bias for a Canadian investor maybe diminished could be a practical implication there. But I don't think that's the case because not everybody investing in Canadian stocks is going to benefit from that tax credit in the same way. So I don't think it's fully priced in. And then currency hedging, I have comments on this. I hope you do too, Dan, because you have had some great blog posts on currency hedging that have definitely informed my thinking even though we actually use currency hedging in our portfolios, which is something that you've said maybe doesn't always make sense. So currency hedging is the idea of entering into a transaction or a contract to eliminate the effect of foreign currency movements on your foreign investments. As an example, if you want to invest in a US stock but you only want to gain or lose based on that company's performance or that index is performance but not based on the US dollar because US assets are priced in US dollars. So even if the company does well, a falling dollar can drag down its performance for Canadian investors. Currency hedging is the concept of entering into a transaction to eliminate the effect of foreign currency movements on your foreign investments. So as an example, if you want to invest in a US stock or a US stock index, but you only want to gain or lose based on that company or index's performance but not based on the currency on the US dollar, you've got to think about US assets are priced in US dollars. So even if a company or the index does well in US dollar terms, a falling US dollar relative to the Canadian dollar can drag down its performance for Canadian investors. Now hedging similar to Australia is a big question in Canada for similar reasons. There are pretty strong opinions on both sides. The Canadian dollar does often tank when the world gets scary, which makes hedging a little bit less attractive in those cases because the Canadian dollar value of un-hedged foreign assets increases. So like in a great financial crisis, type situation kind of all assets go down, but so does the Canadian dollar, which means that foreign assets don't go down as much in Canadian dollar terms. So that's kind of an argument to, hey, maybe we shouldn't hedge because the Canadian dollar tends to go down when everything else does. But then there are periods, longer range periods like 1990 to 2000, where a dollar invested in the US stock market turned into just over six Canadian dollars, but only $4.64 in US dollar terms. And then you look at another period like 2000 to 2010, and it was the opposite effect. A dollar invested in US stocks in US dollars grew to $1.14, but in Canadian dollars, it actually shrank to 79 cents. So hedging would have been good there. Rough period doing best in stocks either way. You can get these contracted periods, these short periods, where everything tanks and so does the Canadian dollar and that actually makes not hedging look pretty good. But you can get these big, long, impactful currency movements that can affect the local value of foreign assets and can have pretty significant positive or negative impacts on local consumption. Like I think that's one of the reasons when you look at Scott Cedarberg's research with Ajahn and Michael, they kind of run that bootstrap model to find the optimal portfolio in historical data and they find a pretty big home country bias. They didn't have a definitive reason for why that was, but they suspect it's related to currency, to these long periods of currency movements that can really affect local consumption. I don't know, we split the difference and do a partial currency hedge. I don't think that there is a perfect answer. Yeah, those are my thoughts. There's no question, there's no perfect answer. There's a couple of different ways to approach the question. One of the interesting parts about this question is, it really is a bit of a different conundrum for Canadians and Australians because our currency is closely tied to commodity prices. It's a different question if you're a US investor. And as you said, the US dollar is often kind of a safe haven or at least historically, I don't know if it is anymore, but during market turmoil, people kind of flock to the US dollar, US bonds. And that drives up the value of the US dollar and being unhaged actually helps you as a Canadian but doesn't help you as a US investor. So I would say that if you read sort of academic literature about this currency hedging work and it's from a US investor's point of view, it's not going to be very helpful for you as a Canadian or a Australian. My understanding, because you said we'd done some writing about this earlier and at the time, I don't know if this is changed, but historically, volatility on diversified equity portfolios from a Canadian point of view anyway was actually less volatile if you removed all currency hedging. So if your goal of hedging is to reduce the volatility caused by currency fluctuations, it didn't work, at least in the period that we looked at. And so an unhaged portfolio was actually the less volatile. I think the other question is more of one of practice rather than theory. And that is at the fund level. Currency hedging is not very precise. And I think it depends on who's doing it, but certainly there were ETFs for a very long time that use currency hedging. It's done using forward contracts and they are upbid often once a month. And it's just not enough. So if you have these sharp currency movements in between those maturity dates of the contracts, it doesn't do a very good job of actually doing what it's supposed to do. Somebody compared it one time to try and stick handle a puck with a baseball bat. You can do it, but it's a bit ham-fisted. Now again, I think there are probably funds that do a much better job than others. So if you can do it with a lot of precision and very little cost, then the argument for it is stronger. And then the last thing that's kind of related is that there had been a number of ETFs using currency hedging that have distributed some really large capital gains during volatile periods as a result, specifically of updating those currency contracts. So it adds kind of another tax liability that has nothing to do with the actual investment. So for all of those reasons with our clients, we don't use any currency hedging, except in very specific clients, specific situations. So we just go with a totally un-hedged equity portfolio. The tax efficiency, when I thought it through, it should be a wash in the long run because when the forward contracts are banking the losses, those can be used to offset future gains. There can be some periods where there are gains, I don't know. We only use or primarily use dimensionals products and they do have hedge products that have been pretty good, both on precision and tax efficiency. But I think those are all totally valid reasons why it can make sense to not have a currency hedge. I thought that the point you touched on Dan that well, the hedge, not the currency hedge, but the downside hedge piece, like being un-hedged has been good when stocks go down, largely because the US dollar is a safe haven asset, you've kind of corrected yourself and said it has been. That's had been true historically, but we don't know the future. And that's one of the things where I've looked at this in the past and I've talked to the folks at Dimensional and been like, look what has happened in the past when stuff has gone down. It's been better to be un-hedged. And they've been like, well, yeah, that's been true historically, but we don't know what the future is going to look like. And then we get a year like this year where the US is doing a bunch of stuff that nobody expected and the US dollar is not doing so hot. That's exactly it. I mean, you can only work with the data that you have that situation might change in the future. So it's true of all practice. I mean, it's useful, but it's limited. I'm pretty sure Merstatman has a paper, he's a behavioral economist, where he basically says, to minimize regret, you can split the difference, but he doesn't think there's a perfect answer either. I actually don't dislike that default at all. It's just like, if there are two totally reasonable strategies, and you're really torn about which one, and it's easy to implement a strategy where you do both, it is the strategy of least regret. That is another topic where we've talked about our differences in implementation on factor tilting. Currency hedging is another one where we do different implementations, but I think we can both see the logic in what the other one's doing. And over the course of an investment lifetime, it's not likely to make a big difference one way or the other. It shouldn't. In theory, currencies don't have expected returns, so the hedging or not hedging should not affect the expected return. They can affect the actual outcome, especially over shorter periods of time, but yet to your point, it's not something that you expect to make a big long-term difference. All right, that's good for that one. Do you want to read the next question? Sure, so this next one is from JA. The question is, can you help me wrap my head around using bond funds when they lose nominal value in environments with rising interest rates, even tips, compared with individually held bonds held to maturity? Is this just a cost of liquidity? Okay, so my default on bond questions is to talk to Ray. Ray works with me on our research team, and he was in a former life before coming to PWL many years ago. He was a fixed income portfolio manager, so his bond knowledge is quite strong, both theoretically and practically. Ray gave me some written answers, and I'm going to just read them back. So Ray says, whether held as individual securities or packaged in a mutual fund or ETF, the price risk of bonds is the same. It's just the investment vehicle that varies. Bond prices fall in reaction to rising interest rates because the opportunity cost of owning bonds increases along with interest rates. When you buy a bond, you're purchasing a set of fixed cash flows. Since the cash flows are fixed, they cannot adapt to higher rates. They are fixed. To stay in equilibrium, markets must adapt. Therefore, markets adapt to higher interest rates by lowering bond prices. Very nice explanation. Yeah, I think this is a really interesting question. It comes up a lot, I think, with clients' idea that people say, "I kind of understand how a bond works, but I don't understand how a bond ETF works." And as this question sort of implies, it's like, why would I hold a bond fund when I can hold a portfolio of individual bonds? So when you step back and you think, like, those must be the same, at least on any given day. If I hold 100 individual bonds or I hold an ETF, that holds 100 of the same bonds, my exposure is exactly the same. As Ray says, the vehicle is different, and so your experience is going to be different. The way I tried to explain it to clients is, what you need to remember with bond funds is they typically have a target duration. I don't want to get too much into bond jargon, but if we look at it in terms of the term of the bond, because I think it's more intuitive, if we say the average term to maturity in the bond fund is 10 years, and I hold that bond fund for a year, it's still 10 years next year. But if I buy a 10-year bond and I wait a year, then the term on my bond is now 9 years. So the exposure is the same on any given day. The difference is that the underlying holdings in the bond ETF are evolving. So again, it's not a perfect example, but I try to say to people, it's like buying a 10-year bond, and then every day selling it and buying another 10-year bond, and continuing to do that, so you always own a 10-year bond. Which is kind of what's happening inside the bond ETF, not exactly, but it's being rebalanced to its target duration. So that is fundamentally different than buying a 10-year bond and waiting five years. Now you have a five-year bond, buying an ETF with an average term with 10 years, waiting five years, you still have an average term of 10 years in the fund. So your exposure to the bond market is different when you hold a bond versus holding a portfolio of bonds that is constantly evolving. So I think that's the part that people have a hard time with, and they have no maturity date. If I buy a bond and I hold it to maturity, I know exactly what my return will be. If I buy a bond fund and I hold it for five years, I don't know what my return will be. So there is a lot of uncertainty there, and I understand why it's frustrating to people. Part of it is just practice. I mean, like if you're going to hold bonds as a significant part of your portfolio, it's pretty difficult to build a diversified bond holding piece by piece. It's just much easier and certainly less expensive, because the markups on bonds, especially for retail investors, are really high. In many cases, it's just so much more practical for you to purchase a diversified bond portfolio by way of a fund. But you do have to get used to the fact that they can be volatile. This idea that bonds provide low volatility and security was blown out of the water in 2021-2022. Even for those of us I think in the industry who were taking a little bit off guard by just how volatile those funds were in those couple of years. And I really came to appreciate how much clients absolutely despise volatility and fixed income. They get it in equities. We all know that's part of the deal. No one was comfortable with the idea that, oh, I just lost 10% on my bond fund, because it's not going to come back quickly the way it does with equities. I don't know if we found people being that upset about that. The thing that we showed people right away, we did an emergency update to our financial planning assumptions when all that stuff happened. And we would show people in their financial planning projections that the fact that it's weird to think about, the fact that bond prices went down has actually improved your financial plan. Because the duration of the client's liabilities were longer than the duration of the bond. And again, not to get too technical and bond jargon here. But the result of that is that the effect of interest rates on bonds was less dramatic than the effect on liabilities. When you go and update someone's financial plan and they've got whatever, 20 years or 30 years or 40 years out in the future that we're projecting, the fact that interest rates went up, that bond yields went up, was a net good thing for them. Because of the duration of their liabilities relative to the duration of their fixed income portfolio. Maybe it's because the portfolios we use are all wrapped up into one security. So it's harder to see what's going on in terms of which asset class is down. Yeah, that's one of the benefits of those balanced funds is that you're only seeing the bottom line rather than each of the individual components. That is definitely one of the important things I think investors and bonds need to remember is that when bond prices fall, your expected return goes up. That's right. It has to. By definition, that's why the price falls because the yield goes up or whatever is causal is up to you to decide. But it's kind of similar to a stock. Like sometimes people will say, oh, it's dividend stock that I like. The price just fell. So the yield went up. It's a buying opportunity. Well, it's not exactly the same with bonds, but it's a pretty similar principle. I'd say it's even more mechanical with bonds. With stocks is a lot more noise. But with bonds, the yield goes up. The expected return goes up. Price goes down. Expect the return goes up. It's pretty mechanical, at least in nominal terms, I guess inflation can still get you up a lot of that. Should we care on this? This is a multipurpose question. Yeah. I was going to say, so he's got another project that says, if using funds, which I prefer, what is the best empirical method of duration match when most funds have fixed duration ranges? I shares as a series of fixed date maturity, U.S. Treasury, and tips funds in the U.S. But is there a way to accomplish this with typical bond funds? So this one probably needs to be unpacked a little bit too, right? We were saying like a typical diversified bond fund, at least in Canada now, the average duration is around eight years or so. I mean, it changes from time to time, but I think that's about right. So if you need the money in four years, I would say to somebody, that's not an appropriate bond fund for you, because it is possible, unlikely, but possible to the fund could lose money over that period. If you need all the money, I think that's an important distinction. If you have $100,000 and you need $100,000 in four years, putting it all into a bond fund with the duration of eight years, probably doesn't make sense, but if you need $1,000, it's probably okay. Yeah, that's fair. So, but even I would say that, you know, you could make a pretty good argument if you are drawing down your portfolio on a regular basis, and that includes selling some bonds from time to time, like as you're in retirement. You know, a bond fund with a really long duration may not make sense. It could, but it's certainly going to be more volatile. If you value the stability of the bond fund, you could very reasonably choose a fund with a shorter duration. So, I guess, to answer the question, it's basically, the sooner you need the money, probably the lower the duration of the fund should be. If you have a very long or indefinite time for Eisen, then you can certainly go ahead and use a fund with a longer duration. But, make sure there's various opinions on that as well. For sure, if you look at the lifecycle model framework, you would take. your risk-free asset would look more like tips, like long-term tips, which are super volatile, but they're hedging your consumption in real terms with their coupons. But in that case, to your point, Dan, you're not planning on selling them. You're planning on living off the coupons, which is a whole other thing, is that even feasible based on yields at that time. It's a liability matching framework for consumption, instead of an asset-only portfolio framework for consumption. Anyway, that's probably beyond the scope of this question. The raised comments on this one were that once you've determined the duration of your liabilities, you can match them with an appropriate mix of short, mid, and long maturity ETFs. Bond ETF durations are typically disclosed on their website, so you can basically take a fun to look at the duration and match that to the duration of your liabilities. And if you need to build a ladder of those things to match your liabilities, you can do that. And then as the duration of your liabilities varies over time, you'll adapt by modifying your mix of ETFs. Again, that is a liability matching way of thinking about your bond allocation, which is not the only way to think about it. To your point, Dan, you might also build a portfolio of stocks and bonds that you're planning on selling down over time. And in that case, you might favor shorter maturity bonds, instead of duration-matched bonds for your fixed income allocation. And we should get to the last part of this multi-part question. So the questioner says, "Is this an uncommon phenomenon driven by recent inflation coupled with a sustained inverted yield curve, or did we just become accustomed to bond price behavior in a long-term regime of decreasing and then very low inflation?" Apologies for the long question. So again, kind of just an unpack, I guess when he says, "Is this an uncommon phenomenon?" And I think the questioner is referring to the tendency for bond prices to have declined over the last few years, following a period of what, 30 years, where they mostly ticked upwards with a few hiccups along the way. Is this something we've just are starting to understand, or has something fundamentally changed? I mean, it's probably both. The behavior of bond prices in response to interest rates is physics, right? Like that doesn't change. But what changes is the fact that as these indicated here, I mean, we went through a period from what like 1980 to 2008, where interest rates basically went from kind of making up the numbers here, but it's something like 15% to 2%. In not a straight line, but pretty trending decline. So that is a phenomenal environment for existing bonds, right? I mean, you bought them when they were yielding 15% and current interest rates are 2%. That bond has gone way up in value. And that, of course, has been a long time since we've seen a sustained decline in interest rates. And so if you invested during that period, 80s and 90s, early 2000s, you got accustomed to pretty tidy capital gains on bonds. I have seen a heck of a lot of the head recently, I guess we have. When I say recently, I mean very recently, but there was certainly a period three, four years ago where it just went in the opposite direction. That was the fastest increase in interest rates, I think, on record. Was it not in 2021, 2022? We had at least in Canada, I think the overnight rate went up 400 basis points in 18 months or something like that. And it was just not what anybody would have expected. And it's an uncommon phenomenon. Nobody including the bond market, which is why we saw what we did with bond prices. Ray has some pretty interesting comments on this one too. Bond prices will almost always drop in reaction to unexpected interest rate increases, which is kind of I guess what I was just talking about. Here I'm referring to central bank interest rates. However, the negative correlation between interest rates and bond prices is not perfect. Central banks control interest rates for overnight money. That's the very short term rate the financial institutions lend to each other at. Meanwhile, bonds have majorities ranging between one and 30 years due to this maturity mismatch. If rates rise at the same time as inflation expectations are revised downward, bonds may appreciate. So that's I guess kind of what I was talking about earlier where there's this mechanical relationship in nominal terms, but inflation expectations can also have an impact on bond prices. And there's a couple of key words in there too when Ray says unexpected interest rate increases because we get this question all the time. There'll be a central bank announcement and there's this overwhelming consensus that they're going to raise or lower interest rates and people think maybe we should wait before we make this bond purchase. And the answer is if the consensus view is already pressed in. And we've seen it before where everybody expects the central bank to do something and they do the opposite. Well, for sure that's going to affect bond prices, but we've seen it a lot where interest rates will be raised and then bond prices would go up on that day or the day before people like isn't it supposed to be the opposite. It's like no, this was not a surprise. So there's no effect. And then the other really important point that he makes here is often misunderstood central banks don't control bond rates. Central banks control overnight rates with other shortest of short term rates. They have an effect on five year, 10 year bonds, but it's certainly not a direct correlation. And as he notes, there are periods where the central bank will raise or lower interest rates and the price of longer term bonds will move in the opposite direction from what was expected because there are other factors. So is it any wonder after what we've just been talking about that investors find bonds so confusing? And it's just because they are confusing by their very nature. We have one more bond question later that speaks to this kind of recent phenomenon of, hey, maybe bonds aren't as safe as we thought. So we will come back with a few more comments on that one. You're so good at unpacking that stuff, Dan. I read Ray's statement and then you unpacked it and it's just makes it so much better. I've heard these questions from investors so many times, right? And they're very good questions. So you know, it's important. I think that we we have some answers prepared when we get them. Okay, I'll read this next one from Maxime. Why market cap waiting between countries and sectors is a good default except maybe for transaction costs. For example, why not equal weight between US developed and emerging market countries? What's your view on that? I'm happy to jump in on this one. So I guess this is sort of you rebuilding a portfolio and you want it to be globally diversified. If you're US investor, then you're looking at US stocks foreign developed and foreign emerging markets as you're kind of three equity asset classes. Why not just hold one third in each one? You could do that. I mean, it wouldn't be the worst decision, but I don't think it would be a very defensible one either. If your goal is again, I'm sort of presuming that you're a passive investor, then typically what you want your portfolio to do is represent the investable universe. So if the US now is more than 60% of the global stock market and you know, emerging markets is, I don't know, 7% something like that. Why would you hold equal amounts of both? This makes kind of as much sense as saying, well, I want to build a diversified stock portfolio. So I'm going to have an equal allocation to every stock. Well, I mean, if one stock is 10,000 times bigger than another, why are you waiting them equally? The market cap default makes a lot of sense. I'm not saying it's the only way to do it, but I think it is a good default assumption. We talked about it. I think that a previous podcast was like, start there. If you want to make some changes, then think them through very carefully, but that should be the starting point. That was a pharma quote I think that we were talking about. As Pharma says, I don't remember the exact quote, but he basically says, start with a market portfolio. That should be your starting point. And if you want to be different from that, you have to have a very, very good reason. Pharma's logic for that is that the market portfolio is what the market has decided. The allocations of the optimal portfolio are every asset has been priced based on its specific characteristics and how they fit in with the rest of the assets in the global portfolio. And it's like, who are you to make a decision or to make a discretionary call about why something should be over or underweighted relative to what the market has determined? To your point, Dan, that doesn't mean you can't do that and doesn't mean that there can't be good reasons to deviate. But I think you have to have a good reason. And I don't know if why not equal weight is a good reason. It's a reasonable question. But you said the word defensible earlier, Dan. I don't think that it is very defensible. You can start to do stuff like you might get more exposure to certain types of stocks by doing that. Like maybe if you do an equal weighted global portfolio and you look at its characteristics, you may say, oh, look at that. I've got a value tilt. That's fun. But you could have just built into value tilt and kept the geographic weightings the same. It's similar with individual stocks. If you built an equal weighted individual stock portfolio, you're going to end up with a bunch of implicit tilts toward smaller companies, toward cheaper companies. But again, if you wanted those tilts, you could target them directly without introducing these massive over and under weights relative to market cap weights. I like FOMAs quote on that, which is really start with a market. You know what the quote is? You have to talk yourself out of the market portfolio. That's a good way of putting it. Yeah. Okay. So I mean, the rapid up, I would say is there's nothing to say that you can't deviate from it. But the question specifically asks, why is it a good default? And I think we addressed why should be the default. The market has priced it as the default. And if we trust market prices, which we do, inherently because of the way that we approach investing, which, listen, listen to the market. I don't have notes for this next question because I didn't know what to say, but we can try it. I don't know if I have an answer. - You read it? - Yeah, you read it. This is from Scott, and Scott says, over the last six years of the podcast, what information has influenced your approach to clients and/or client investing and how? Such a big question because we've had hundreds of podcast conversations among each other with Mark Begraf and Cameron and Dan, and now Ben Wilson more recently, and with many, many guests that we've had. So to say, what has influenced your approach in small ways, all of it? I think I learned something either a new way to think about something or a new way to communicate something every time you and I do an episode together, Dan. So it's hard to say how much has that influenced the way that I interact with our advisors and our clients? Probably a lot incrementally when you add it all up, but it's really hard to say this one guest or this one episode really changed the way I think about something. A common answer to this question is, well, the Scott C. Daburg episode, because that was impactful, and I think that changed the way a lot of people. I've got some comments later about a conference that I was at recently where that paper was discussed. That made a lot of people think, "Huh, maybe there's a different way to think about asset allocation." But I did a video years ago where I talked about the same kind of stuff, at least in principle, that for a long-term investors bonds might actually be riskier than stock. So that wasn't necessarily new. So anyway, I find it's a really difficult question answer just because there's so much information, and I think it does all incrementally change how we talk to clients, how we think about portfolios, but to put a pin in it and say, "It's this one thing, change this exact thing." I think that's for me at least, very, very challenging. The scope of subjects that the podcast has covered over the years is pretty vast. I would say this is a bit of a more recent C bias because, of course, I've been participating in the podcast for a lot less than six years. But I will say the rent versus buy go around that we did most recently, that really highlighted the extraordinary benefit of the forced savings of being the homeowner. I think that was really influential for me and how I approached that question. We were sort of saying at the time like, "That's kind of the conventional wisdom that your dad tells you." And it turns out though that it's really easy to back that up within paracolevidence. So that kind of folksy wisdom, this idea that buying a home is a forced savings plan, has really, really profound impact, I think, on homeowners, and probably tips the balance in the rent versus buy equilibrium for most people. Yeah, and I'll go back to the Scott Cedabird data too. I've certainly not changed any clients' asset allocation as a direct result of that, but the conversation has come up more. And I think that it's easier to talk to clients. In fact, I have had a few clients independently bring it up in review meetings. Hey, I just heard about this data that says, "I should be 100% stocks." That's what they got out of it. It's like, "Year 40% stocks." Now, I don't think that's going to work for you. It is a great sort of opening conversation, right? Because we said, "Yeah, the data is pretty clear." This idea that holding half the portfolio in bonds is, quote unquote, "safe" depends on how you look at that question. And sometimes I think maybe our role should be to encourage conservative investors, maybe to take a little bit more risk, as long as it's well within their comfort zone, that can actually have a pretty big benefit on their long-term projections. So that was a pretty big one. That was. And even if I said that it sounds like a ridiculous thing to say, I already knew that. That's not what I meant to say. But the ability to communicate it, and having the data to support that this can make sense in here's how, and here's how the relative risk of stocks and bonds change over time. Those are all super powerful tools that we did not have before Scott and Michael and Ajahn did their paper. The rent versus zone one is also interesting. Eli Bracha, who we had on as a guest on that topic, talked about that in one of his papers, where he said that something like it turns out that the conventional wisdom on home ownership was right, but for the wrong reasons. That's right. Like people say that you should buy a home because home prices go up, which is not true. I mean, it has been true, but that's not the reason that home ownership has been successful, because other assets also go up. But the behavior aspect and the forced savings that is for a lot of people very important. And to your point, Dan probably does tip the scales. And empirically, like if you just look at homeowner and renter wealth, obviously, there's a lot of confounding variables there that we've talked about in the past, but homeowners are wealthy than renters. There's one paper that controls for a lot of other confounding variables and finds that there is still a slight advantage for homeowners in terms of wealth. Anyway, those are good ones, Dan. I find it hard to say, like, I've really changed my thinking on this one thing. Maybe I'll try and keep a diary of things I've changed my mind about as we go through future podcast episodes. Maybe you just need to be war open-minded, then. Are you trying to sell me uncovered call funds right now, Dan? I am. That's a profound influence on. Do you want me to read this one? You read the last one. Yeah, you take the next one. Okay, so this is from AVUV. They say, do you recommend using horizons now global X ETFs in corporations or non-registered taxable accounts for favorable tax treatment, or will the government eventually come after this? This is a really interesting one. I know, Dan, you had just not looked at these years ago. And back then, the concern was that the government would come after them, which did happen. And global X/horizons was very well positioned to deal with that. They were basically prepared for it. When that happened, they were able to switch. This is a type of mutual fund of an ETF that uses a swap structure instead of owning assets outright to gain exposure to underlying assets. In a way, it's a little bit different from just owning the asset. They use a swap contract or a series of swap contracts on the underlying index. They used to have a very specific structure that allowed them to be extremely tax-efficient. The government said in a budget, this is not cool anymore, but the fund company was able to switch the structure of their funds from a trust to a corporation, a mutual fund corporation. And using that corporate class structure, they had been able to continue so far their tax-efficient structure, although it's done in a very different way. Now, the tax efficiency is coming from a different source than it used to be. All that to say, the government coming after this, I don't think is the issue any longer because the corporate class fund structure is very, very common. It would be a much bigger deal for the government to say corporate class funds are no longer cool. So that government coming after it already kind of happened. The fund company, GlobalX, switched into a corporate class structure, which is still going today. The issue under the current structure is the potential for some pretty severe tax inefficiency in the event that the mutual fund corporation ends up with net taxable income inside of it. Now, again, this gets pretty technical. I guess a lot of these questions can get pretty technical if we let them. But basically, they're using these total return swaps on indexes to capture the returns of the index. All of that derivative income, all of that return from the swap is taxable as regular income inside of the fund corporation. That's the total return of the index. So you think about if you buy a Canadian equity ETF or say a US equity ETF, you're going to have a capital gain, you're going to have some foreign dividends. If you own that in your taxable account, maybe you can defer the capital gain, maybe not, but it's going to be taxed relatively efficiently. Anyway, and then the yield on US stocks is pretty low, but that dividend you're going to pay tax at your full tax rate on in the swap structure, the full amount of the return, the capital gain portion, the dividend portion is fully taxable derivative income inside of the fund corporation. The way they've been able to deal with it so far is that the fund corporation, which has a whole bunch of different fund share classes in it, has had a big pool of losses of income losses that they banked in past years, like in during COVID and think probably 2022, where they were losses available, they can realize their swap contracts, realize those income losses and then bank those for the future to offset income gains. So I said that those swap contracts produce income, which could be very tax inefficient, but if they have losses to offset that, then there's no tax. They can offset the losses, the gains with the losses. The problem that we see is that that loss pool, that big bank of losses they have to make sure that they're not paying tax link come inside of the fund. I guess one more point to make here is that if in that event of net derivative income inside the mutual fund corporation, the tax rate can be quite high and especially high when you compare it to paying tax on capital gains and dividends in a taxable account. So as that loss pool carries on and gets smaller, which it has been doing, we look at that and we're like, maybe this thing can keep going, maybe they can realize some more losses if there's another big downturn. If they can, that's great. Good for them. I think global X is a very interesting financial company. If anyone can pull it off, it's them. But that loss pool has been decreasing. I think for an individual investor who looks at that and says, I'm cool taking that risk. I don't mind. I feel like I could get out of the product if I thought it was going to become an issue. Hey, like that's fine. I think that's the position that Mark Soath takes. Him and I did some work on this together where we kind of pulled them apart. Did some analysis? Did what did we call fire drills or something where we looked at like in this worst case scenario, what does it actually look like? And so Mark is a very smart guy and I believe he's still using some of these products for PWL as an institution with billions of dollars and thousands of dollars. of clients, I don't think it makes sense for us to say we're going to put money into this thing, because if it does get to the point where that loss pool, because it's reported once a year, so in between those reportings, you don't know what the loss pool is, you don't know what the net income position is. So it could happen that you get hit with this big tax bill inside the fund, which is important. It won't show up in your tax return. It will decrease the net asset value of the fund. And we just, it's just not a risk that we're comfortable with. So in summer, we don't use them for some pretty technical reasons. We see that there are some risks there that we're not comfortable with, but that doesn't mean that nobody should use them and smart people like Mark Soath, who's written a series of great blog posts on this topic, are more comfortable with those risks. I don't know much to add to that. My position is exactly the same. I mean, I know a lot of DIY investors use them as long as they understand how they work and what the risks are. I think the risks are relatively small. I mean, these are not funds are going to blow up. They're funds that may become tax, more tax inefficient than you think. If you're comfortable with that, that's fine as advisors who work with many clients and work with a small number of funds that we may hold tens of millions of dollars or more, just like per advisor. The idea of taking on that risk, something where to occur with one of those funds. I mean, the consequences are really magnified. Again, you could probably argue about this, but I feel that the tax efficiency of them might be not as great as people think, especially as you mentioned, for example, for the US equities. If you're buying like an S&P 500 swap and it characterizes all of the income as capital gains, okay, so over the last 10 years, the indexes had double-digit returns and like a 1% yield. So yeah, that dividend yield got characterized as a capital gain, but how much did that move the needle really compared with? How'd you just held a conventional S&P 500 fund? Which, by the way, significantly cheaper? Because there are swap fees and whatnot built into those funds. So I think that they can be useful funds for people to understand and use them properly, but I don't find them so compelling that we would be willing to take on that risk as asset managers. I could see it more for like the US equity example is great because it has been so tax-efficient in a tax book, just a regular US equity fund. But if you look at international developed equities and emerging markets with yields or higher fixed income, where you've got the higher coupons, maybe the argument gets stronger. I would agree with that. The other interesting thing there is, so the way that it works with a fund corporation is that if there's net income in the fund, if there's too much income in a year that they can't get it out, they can't offset it with losses, there's nothing that they can do. The fund has to pay tax at a relatively high rate inside the corporation, and that tax bill gets allocated pro-rata to the funds that generated the income. Like it's up to the mutual fund board to allocate that income in a way that's fair, which is a pretty, I don't know, murky concept. What is fair? Who actually has to take that liability? You mentioned that these funds could become tax inefficient. I think the challenge is if that happens, it will happen. It won't be like, oh, these have become tax-efficient. I'm going to get out now. There will be an income tax liability inside the fund while you own it, and it will reduce your net asset value. And that's how you'll know about it. That's how you know that it'll be too late to do anything about it. It could affect the tax efficiency of having been holding that fund previously. That's where we're just not comfortable. We don't want to wake up one day and be like, oh, well, we thought we were being tax-efficient, and it ended up actually being pretty tax inefficient because we just took this big hit to our net asset value based on this income tax liability inside the fund. I prefer transparency in virtually all industrial products, and this is a good example of. I think it's a reasonable reason to avoid it. There's too much uncertainty, and clients don't necessarily understand it. And as an advisor, yes, it's our job to explain things that clients don't understand, but I'm not so confident in these that I would really go to back too hard for them. I don't know if a lot of advisors understand them either. I mean, Mark Soth and I planned to eventually do a money-scope episode on those products because they're complex and it took him and I a lot of chatting and modeling to figure out exactly what is happening and what could happen. All right. Can I read the next one for you? Sure. Because I'm certain this went up to you. Okay. This is from Anthony. He says, at which interest rate would you consider taking a personal loan to invest in stocks for the long term? I think it's a reasonable baseline assumption that the equity risk premium sits on top of the risk free rate. I think that's just kind of basic finance. If you think you're a good candidate for leverage, if you're like, I am someone who should be borrowing to invest. That's something that should be evaluated very carefully. And I'm to be clear, not saying that you or anyone should be using leverage. But if you believe for presumably good reasons that you are a good candidate to be using leverage, I would only be deterred from borrowing at unusually high borrowing rates. There's this great chart from Dimson Martian Stanton in their global returns yearbook showing that the equity risk premium has been positive, even at above 9% real interest rates globally. But the one thing is that it's pretty compressed at that point. So you look through what we'll put the chart in the video. It's a little dated, but not that bad. You want me to? Yeah. It's not too bad. A few years old. But it shows the historical interest rate break points and the real stock and bond returns above that level of interest rates. And that equity risk premium has been positive all the way through, but it does start to get meaningfully smaller at really, really high interest rates. If I thought I was a good candidate for borrowing to invest, I don't know if I'd have a specific like, this is a low enough rate for me to invest. I don't think that's right way to think about it. I think if you are a good candidate for leverage, it's generally safe to believe that leverage makes sense, regardless of the interest rate. Environment in less interest rates are extremely high, which is something that we have not seen in countries like Canada, the US in a very, very long time. I'm not going to argue about that. Leverage is not a strategy that attracts me at all, and I never encourage my clients to do it. Personally, I'm not really comfortable with it at any meaningful interest rate, but that's a 100% of personal response. There's nothing to do with any analysis, but I just feel, I don't know, investing is risky enough and is hard enough to focus on the long term without layering in that extra level of risk. I like getting back to kind of the home ownership question is like leverage on an asset that isn't priced daily is a lot easier to get your head around. I think just behave eerily. Nobody worries that their house goes up and down and value every year, and so, or even, honestly, every year. So borrowing to purchase a home doesn't cause most people a lot of stress. Borrowing to buy a 100% equity portfolio, that's going to cause a lot of people some behavioral issues, and it's just too easy to abandon it at the wrong time. There are some products out there in Canada right now. They're not daily leverage. Like we did an episode years ago on like the 2X daily leverage products. Those are interesting and they, when stocks go up, they will still tend to do better, just not 2X better over long horizons because they give you 2X daily exposure to the asset reset, reset every day. And that results in something called decay, which basically just means that your long term return is not multiplied by 2, typically. But there are some products in Canada right now that are using a 25% leverage, so 125% leverage ratio. So it's like 25% more exposure to the asset than just owning it without any leverage. And it's not daily reset. So there's like a sort of floating range around 125 that they allow it to run through. So you don't have that same leverage reset decay issue. And I think 25% is modest enough that it's not like totally insane. And it's also modest enough that the product is less likely to blow up on implementation in a crazy market scenario. Those are kind of interesting. I don't know. I haven't written it down yet, but I've been thinking about a video or a podcast episode on investment strategies that beat the market, which is a loaded term, or a loaded phrase. But I think there are lots of interesting ways to think about that. And leverage is one of them. And if I were going to do that using a product that has it embedded, I think Robert Merton talked about this when he was on Rache Reminder 2, features like that are better embedded into financial products where people don't have to do the implementation themselves. Anyway, that's totally unrelated to this question, or at least somewhat unrelated. But I think those products that have modest built in leverage are pretty interesting. One of those times when lack of transparency might actually be helpful. Well, I shouldn't say, I mean, obviously you need to understand how it works, but you just don't have to have the actual job of implementing it. Yeah, and I think that can help with behavior probably too. All right, next one. From Taylor, we have what have you found to the most fulfilling and most frustrating parts of your career working in finance? It's a really interesting question. For me, I think it's really hard to beat total strangers who feel like they know you coming up to you and telling you that you've changed your lives. That's what happened at our recent podcast meetups at NBC. It happens online almost every day through various media, like whatever LinkedIn, Twitter, messages, all like I hear from people from all kinds of different platforms, even podcast reviews. You think about the permanent model of human flourishing. Those factors are positive emotion engagement relationships, meaning and accomplishment. I think that communicating ideas in a way that makes other people live better lives or feel like they're living better lives is checking a lot of those boxes. So for me, that's very fulfilling. Frustrating, I think a lot of people don't want to be helped. But not only do they not want to be helped, they're furious that I would dare to try and help them. When I wrote that down, I was thinking down about our covered call episodes where it's like, I think I'm putting out good information that's combating genuine misinformation that's hurting people. And some people are very angry with me that I would do that. It's strange, Jake. As like you said, there might be people just kind of read it and say, "Oh, I don't agree with that. I'm just going to keep doing what I'm doing." They're perfectly free to do that. But to get so angry about it, I mean, unless they could demonstrate that they're lying or you're fundamentally wrong about some piece of fact. Not sure where the anger comes from. I would say my answers are pretty similar to yours. I'd say the most fulfilling ones are for sure the days when a client expresses gratitude for helping them reach an important goal. There's nothing to me better than working with a client who is thinking about retirement really nervous about whether they can do it. And then we have that review a year after they've retired and they're so pleased. And they say something like, "I just would not have been able to make this leap without plan you guys put together for us." That is a real impactful experience. Look, there's a lot of bad actors in the industry and a lot of our clients have come to us after some really brutal experiences. And it's really gratifying to me when they come and they say, "I just don't worry about this stuff anymore. It used to cause me so much grief. Now I feel well looked after and I trust you and your team. That's really important to me as well." The big frustration is kind of the flip side of that, which is, "I think this is getting better." I mean, I've been in this role as an investor advocate for a long time. I think things have improved over the last 15 years or so. But there is still so much BS coming from some of those bad actors I was talking about. Just recently we had one. We're talking with a prospective client and they're brought up some objections with their advisor and they were just lied to, flat out about fees, about performance. And even after these years, there's still smoke blowing out of my ears when I hear that stuff, I get so angry because it's just so unfair to treat people like that. I mean, look, if you want to leave an advisor or you had a bad experience, fine, it's just business. But I don't have any patience at all for the kind of flagrant lies that I still see and hear from people in the industry. And I know for a fact it isn't just ignorance. It's intentional deception and ad-zoo patients for help. No, that's definitely frustrating. All right. Next one. I'm going to read a more neutral question. So this is from an anonymous questioner and the question is VEQT, which is Vanguard's all equity ETF is now almost five years old. And most of Vanguard's asset allocation ETFs are almost six. Do you still think these are good choices for DIY investors? How have they performed against benchmarks and also just in general as investment options in your opinion and analysis? Yeah, so I think this question is old enough that it actually is more than five years old now. These questions are still from our initial bank of AMA questions that we're slowly working through. So VEQT is the Vanguard all equity ETF portfolio. It is a single ETF that consists of US, Canadian, international developed and emerging markets ETFs. So it holds a bunch of Vanguard ETFs. They're all held at their market capitalization weights except for Canada, which is held at a 30 percent weight. So it's got a pretty significant home country bias similar to what we do at PWL. We're okay with that. It's a single ticket fund. That's what we call it, which means that you buy one ETF, one ticker symbol and you're getting this globally diversified and automatically rebalanced portfolio. It's pretty great. When I looked at the returns on October 7th, the day before we recorded, which is more than a week before the episode comes out, this fund had returned 13.52 percent annualized purchase since inception in February 2019, which is pretty great. It has slightly underperformed the Canadian market. It has trailed the US market by quite a bit, largely because international developed and emerging markets have not done so hot, relatively over that period. They still had quite positive returns, just not as good as Canada and the US. That's just part of diversification. You cannot pick winners and those fortunes may well reverse in the future. They have, if you just look at 2025 as a microcosm, they have reversed where Canada and international markets have outperformed the US. That's just why we diversify. We don't know what's going to do well when. We start with the market portfolio. As Fama says, you can talk yourself out of the market portfolio. This is a pretty good representation of that just with the home country bias. To answer the listener's question, I think the VQT has done exactly what it said it would do. Another interesting thing in Canada, you and I were talking about this briefly before we started recording, Dan, is that it's had the Vanguard effect of bringing many competitors to the market with similar products. We had this big wave of massive innovation in the Canadian ETF marketplace where everybody made these super low cost, globally diversified, internally rebalanced asset allocation funds. Versus sweet stuff. Each company has their suite of all the different asset allocations. I think that's been a super positive innovation for Canada. You can't really go wrong with these products, in my opinion. Yeah, I think it's probably the last significant innovation in the Canadian ETF space. Nothing has come out since these asset allocation ETFs that has even approached the importance of these funds. I think that they have fundamentally changed the options for do-it-yourself investors. It was a big factor for me as when I started my blog so many years ago, people became quite obsessed with the details of the model portfolios that we were coming up with. Because you had to build a portfolio from scratch. You had to know which ETFs to use for each asset class and you had to figure out what's an appropriate waiting for each one. Those were decisions that ate a lot of people up and they just, I think, was a lot of misdirected energy, but I understand the confusion. If you believe that Vanguard has designed smart portfolios and they put out a great white paper when these first came out, I'm not sure how easy it is to still find, but they went through the decisions that they made when they built these funds. They're so thoughtfully designed. You can quibble with them and I shares and BMO have come out with their own families and the allocations are all a bit different, but really at the end of the day, as you said, you can't go too far wrong with them if you match them with your risk tolerance. They're fantastic. Not just for DIY investors. I use them with my clients, not in every portfolio, but certainly they can be a very useful fund. I can't say enough about them. I think they really have been a true game changer for Canadians as well. I know what kind of availability there are for similar funds in other countries, or maybe listeners can share. It's not the same. Canada is pretty unique with these products. There's more target date funds, I think, in the US, but we're kind of a market leader with these suites of asset allocation products, which I think is great. That's surprising to me, but happy to hear that. We finally got out in front of a trend instead of trailing it by 10 years. I think in the US, it's a lot easier for firms and even for individuals to build their own models using software platforms because the trading systems and the technology platforms are so much more robust there. In Canada, Vanguard really said, "Okay, trading is a hassle in Canada. Trading still costs 10 bucks a pop back then." Let's make a product that makes all that go away. That ended up being a really, really nice innovation. We use them too. Not the Vanguard ones mostly. We use dimensionals version of these, but we use them extensively across our clients. I think that idea of having one product that's internally rebalanced, they tend to be pretty tax-efficient so far, at least, for that reason. It's a really nice way to build an investment product. Okay. Good for another bond question. Oh, yes. Can't be too many bond questions. Okay. They say, "Anonymous says, can you discuss bonds? Bonds have not been behaving like they didn't pass decades. They do not balance the ups and downs of stocks like professionals say they should in our portfolios as a 60-year-old who has recently retired. It's difficult to follow a typical portfolio recommendation. Are there any other ways you would recommend to balance our risk with regards to bond like investing other than a dividend portfolio, etc. as in GICs or other appropriate alternatives?" Love your podcast. Thank you, appreciate the time, effort and expertise you share so gracefully with us. As we talked about earlier, it's a bit of a misconception that bonds do always zig when stocks zag that had been true for a lot of recent history, except up until really recent history where bonds kind of tanked at the same time as stocks. But if we go look back through history, the stock bond correlation, go back to like 1900. I've got data for the UK and the US for this. But the stock bond correlation has gone through periods with fairly high positive correlation, which is contrary to the more recent sort of post-1980 experience of typically negative correlation. But that correlation is historically unstable. I think no correlation is stable. finance. If anyone tells you how good their correlation is or their lack of correlation is, that's a red flag. Bond should still have volatility reducing effects a lot of the time in a portfolio, but they come with their own risks. I mean, Bond's reduced volatility, but I would argue that you trade that for the risk of future consumption. Stocks are volatile, but they're higher expected returns, make them pretty good at putting food on the table, the same amount of food on the table. I'm trying to make an inflation reference there for many decades in the future. GICs that listener ask about are not volatile because they're not priced, but they don't solve the future consumption risk. Now, the fact they're not volatile is itself a good argument, as you and I have talked about, Dan, for using GICs in some cases. But the listener is really asking for what is the true risk-free asset? The true risk-free asset for retiree is an inflation index perpetuity. But you know the funny thing about an inflation index perpetuity is that its market to market value is extremely volatile because it's basically a very, very long-term bond. It just shows that it's what is risk? What risk is it that you're trying to hedge? And the answer to that question is going to define what asset is risk-free. Volatility is just all that much more difficult to handle if you're a retiree and you're drawing down your portfolio. It's really a behavioral question more than anything else. And this is why I think that the GICs, for example, can be really useful for investors like the one answer asking this question because clearly they're not attracted to the volatility of bond funds. They point out correctly that you cannot bank on this idea that bonds are going to go up when stocks go down. And if you want to set aside a certain amount of cash flow, high interest savings count, and a ladder of GICs can do that. And all of the volatility in that portfolio is going to be on assets that you don't need to tap for at least five years or so. And so this is not magic. It doesn't reduce risk in any fundamental way. But it definitely reduces volatility and it reduces anxiety. And I think that there could be a lot of value in that. So some mix of short-term bonds, which are a lot less volatile than longer-term bonds, a GIC ladder to manage your three to five years of cash flow and a little bit of cash for your really short-term needs. And then everything else in the portfolio can be as volatile as it needs to be. You're not going to be focusing on it on a day-to-day basis the way you would if the whole portfolio was exposed to that kind of daily volatility. I asked Scott Sederberg if he would run a simulation through his model with three years of cash in bills. Keep a constant three years of future expenses in cash. And let's see how much better or worse off that makes you. I don't remember the specific percentages. He frames everything as if the baseline is that you're saving 10% of your income to achieve whatever the outcome is, how much do you have to save with this alternative portfolio to achieve the same thing? And it was not a whole lot different with the cash there, which is really interesting. And it was much better having three years of cash plus equities than it was having for example a 60-40 portfolio. To your point, Dan, if that is behaviorally going to make you better off, I don't think the long-term costs are actually that bad. It's really interesting because I often thought about this, not in terms of actually implementing it with clients, but just on an academic level. It's almost the exact thing that you said. So if we agree that this kind of 100% equity portfolio looks really attractive in the Sederberg models, yeah. What if you just had three years of cash flow and it could be a GIC ladder, it could be T-bills, whatever, some extremely non-volatile asset and everything else in stocks. Remember, if you have 1 million versus 10 million, but your annual expenses are the same, those are two really different portfolios because in one case we're not talking about a percentage, we're just talking about a number of years of cash flow. What would that look like? I think it would be the worst portfolio construction ever. At certain intervals, you sell enough stocks to top up your three-year cash wage. Just as an academic exercise, I think it would be very interesting. It sounds like you kind of had the same light bulb just thinking, what would this look like? At least initially in your discussion, you said, "Look pretty good." It does look pretty good. It's because I was talking to one of our portfolio managers about this and they said exactly what you just said a minute ago that basically if you have that cash, I had previously said that the cash wage doesn't make sense. There is a paper showing that it's a camera, what the title of the paper is, but it's something funny about it being a behavioral trick. It's not actually making you better off. But then one of our portfolio managers said that clients who have that cash, they actually really don't care about what's happening in their portfolio. That's actually pretty interesting. That's why I ask God to run it. It is very interesting. It's another example I think of sometimes academics call things behavioral tricks and that's like an insult. It's not a behavioral trick. It's something that is comforting to an anxious investor. That's not a trick. That's why you build a diversified portfolio. It's perhaps just exploiting a behavioral tendency, but even exploiting has negative connotations. It's a tool. It's addressing a behavioral anxiety. That's not a bad thing. That's a good thing. It's a tool that you can have a new toolkit to manage the very real behavioral aspects of investing. All right. Should we move ahead to our after show here? Sure. So I have just two quick notes on a couple of things that I spoke at recently that I'll put links to, well, I'll explain. I was the practitioner discussing for Scott C. Dabricks presentation at the four corners 2025 index investing jamboree in Washington, DC. I was a couple of weeks ago at the time of recording. The conference was super, super cool. There were two papers presented and then there was a practitioner discussing and an academic discussion for each paper. I would highly recommend four corners to anyone and either academia or practice that is interested in research related to index funds, which is what this conference is about to check it out. You can go to their website. We'll put a link in the show notes. There were 11 past Russian reminder guests at the conference, which was super cool. Need 11. Yeah, it's crazy. It's just because I think we tend to be interested in people who are doing index fund related research and this conference is for people who are doing or interested in index fund related research. And so there's just this massive overlap in our podcast interest and the conference interests. So that was cool. I'll try and go to all future conferences for sure now that I kind of know, know about it. And then the last week I was on a national seniors day panel in Toronto with Richard from the plan bagel Mira, Malaysia and Matthew O'Neillaju from the Ontario Securities Commission and Brett Chang, who founded the peak, which is a business newsletter in Canada. As a cool experience, we discussed a ton of issues, financial security across demographic groups, investing for retirement and also managing retirement withdrawals and the state of investment advice in Canada. We are there for almost two hours as an hour and 45 minutes. That was all recorded. So we'll put a link up to that if people want to check it out. That's it. Couple of reviews real quick. We have a few reviews from Apple podcasts to read under SEC regulations. We are required to disclose whether a review, which may be interpreted as a testimonial was left by a client, whether any director, indirect compensation was paid for the review or whether there are any other conflicts of interest related to the review. As reviews on Apple podcast are generally anonymous, we are unable to identify if the reviewer was a client or disclose any such conflicts of interest, which wouldn't exist anyway because paying for reviews would be super weird. Although I'm sure it's been done elsewhere. Yes, we wouldn't do it. I'm sure other people do, which is why there are regulations around it. Do you want to read the first review, Dan? Sure. So the person says mandatory education for young professionals and it's from a reviewer calls themselves forgotten bear. This is the single best source of investment-based financial wellness advice out there. Then at all regularly invite debate with a focus on academic evidence balanced with experience to give you enough to learn not only what is likely your optimal action plan, but also understand the uncertainty inherent in this. This has dramatically impacted me over the last few years. A change from wealth advisor-based active management that I didn't understand with helpful complexity, whole life insurance, etc. to a passive self-managed process with some of that complexity maintained, but now understood has built my family enough security to be able to pivot mid-career and adjustment things were not working well. I now teach these skills to our medical residents and strongly suggest this podcast for them for ongoing learning and maintenance of competence and behavior. Religion figured this out a long time ago, weekly quiet listening and reflecting on your values and advice begets good behaviors. This is the same. Might be the first comparison of the podcast to religious observance. Thank you very much. There are many comparisons that could be made. Next one says realistic and professional financial podcasts from the barren investing in finance you'll learn the proper in air quotes way to invest and one of the hardest lessons is learning to follow it. I actively invested, wrote for seeking alpha about stock analysis and did a well with tremendous work. This podcast in my own experience helped me realize that meeting the return of the market and focusing on other parts of life was a better return of investment for my time. Worth while listening for anyone including assisting professionals with staying on the path of investing while focusing on the rest of what brings us happiness. Excellent podcast could not recommend more. One more to round the soap. It's headed. Favorite podcast. It's from Chris Harrison 007. This podcast changed my life. So there you go, Ben. There's one of your fulfilling moments in your career. I started listening as a senior in high school, and it was the reason I chose to study finance in college. I stumbled upon Ben's common sense investing videos on YouTube, awesome, by the way, which led me here. I love the reason episode I'm covered calls. Which would be very interested to know Ben's take on buying long term call options or leaps on indices like the S&P 500 that are deep in the money. Would this be okay as a portion of a portfolio for someone like me in their early 20s with a very high risk tolerance? In my own dodgy back tests, I found this strategy performed especially well with implemented under democratic administrations in the USA. But maybe less of a review than a question. That nice review, but also a question that something we can talk about in a future episode. Last thing real quick before we go, I had mentioned in a recent episode that we were planning some meetups in Montreal and Toronto sometime in November. We've decided not to do that. Just due to time constraints on our end, but we are definitely still looking at doing meetups across North America in 2026. So nothing, nothing for the rest of this year, but look out for 2026. Anything else, Dan? No, I think we're good. Awesome. Hope everyone enjoyed the AMA and thank you very much for listening. See you next time. [Music] [Music] [Music]