Episode 66 - Talking Inflation, Interest Rates and Market Cycles with Paul Eitelman
We interviewed Paul Eitelman, Director of Global Investment Strategy with Russell Investments. Paul shared his views on transitory inflation and more!
Welcome back to the free lunch podcast with today, Steve Molina taking Greg’s spot and myself Colin Andrews. Steve, good to have you back on the show.
Yeah, thanks for having me.
Last week's episode, we wrapped up our Back to Basics Mini. Greg and I were focusing on market timing, stock picking and market cycles. And it seems like we're always in a market cycle just by the definition of a cycle. And today we're going to spend some time digging into some of that today. Joining us is Paul Eitelman. Paul is the director, chief investment strategist for Russell Investments, and he's joining us from beautiful Seattle, Washington. So welcome to the show, Paul.
Yeah, thanks so much for having me on.
Well, it's great to have you on. It's been a few years since we saw your face in Calgary, but hope to see you back here sometime in the near future
When they're definitely looking forward to it.
Yeah, this global pandemic is behind us at some point. So, Steve, why don't you kick us off?
Thanks, Paul, for joining us. Let's just jump in. Tell us your story. How do you end up where you got to today?
My career has had a bit of an arc to it. I actually started out as an aspiring economist, so I started my professional career at the Federal Reserve in Washington, D.C. in the summer of 2007. And it was a unusual time to join the US central bank. It was right on the cusp of the biggest financial crisis in decades. And I think that was a really fascinating experience for me to be around really smart people like Chairman Ben Bernanke and a lot of the professional economists at the Federal Reserve trying to do our best to kind of save the US economy from what looked to be a really, really bad financial disaster and a lot of strains on the banking system. So I think that was a fascinating experience for me.
A lot of sort of strong foundations around macroeconomics, economic theory, central banking. And then from there, I've transitioned into the private sector as an economist and investment strategist. So I spent three or four years in Manhattan working for JP Morgan. I was a senior economist in the private bank there, helping their ultra-high net worth clients. Think about the economic outlook that could inform sort of prudent asset allocation. And then over the last sort of six years or so, I've seen that Russell Investments. And there I've increasingly transitioned from just doing economics to now also being responsible for our investment strategy in North America. So not only thinking about the economic outlook, but what is our views on the US equity market interest rate strategy and a whole range of things. So that's my arc. It's been a progression of things, but gradually from economics, a bit more into the private sector and markets.
Ok, Steve, I’m going to jump in here for a second. Did something happen between 2007 and 2009 while you were at the US Federal Reserve?
Yeah, I think so. There's only just a couple of months after I joined, the US housing market blew up and we had one of the biggest financial crises in the history of the United States at least.
All right, now its ringing a bell, ringing a bell that you had to go back to those dark days.
Yeah, sorry. Go ahead, Steve.
Well, I’m curious to hear what the difference is from the Federal Reserve days of two thousand seven two thousand eight to where it is today with the current crisis or current pandemic that everyone's trying to deal with. What are your thoughts about that?
Well, I think there are some similarities and there are some differences in terms of the similarities. The Fed is been faced by some really big challenges. Both the global financial crisis and the of the crisis were so severe that the Fed's normal toolkit was not enough to support the economy. So in both cases, they cut interest rates, at least the overnight interest rate all the way down to zero. But that wasn't enough. And so in the GFC, in twenty two thousand nine, for the first time, Ben Bernanke started sort of this novel new experimental monetary policy framework where they started buying assets and specifically Treasury securities on a really large scale as well, with the hope of not just keeping short term interest rates at zero to support the economy, but also influencing longer term interest rates lower as well to help boost consumer activity and business borrowing, et cetera. So that was really experimental and unique and a bit scary for a lot of people a decade ago. But because covid was so dramatic in terms of shutting down entire industries in the US global economy, in the span of just a couple of months, the Fed had to kind of rely on a lot of those same experimental tools again this time around. So. If anything, I think their response was stronger this time for good reason, so not only did they cut interest rates to zero and not only did they launch a quantitative easing program again, but the scale of it was unlimited in scope. So Powell said, I will buy as many Treasury securities as it takes to make sure markets are functioning here. That was a really historic and important backstop for financial markets that were really struggling in the spring of 2020. And they even went a little bit further.
And I think the innovation this time around was extending the support beyond sort of safe fixed income securities and actually buying corporate bonds. And that was an extra really, I think, historic and unusual effort to make sure that the borrowing costs for businesses were manageable during a time that a lot of companies had their revenues dropped to near zero. And so I think at the highest level, what the Fed has had to do is everything they possibly could to make sure that households and businesses could survive to the other side of the pandemic when we had vaccines become available and the economy could start to return to normal again. And I think they've been pretty successful with that. Frankly, in the United States, for example, with the economy, if you're measuring it by real GDP, is back slightly above pre covid levels again. So an almost complete recovery in the United States. There's still a lot of people that I think Chairman Powell would like to get reengaged in the labor market again. So they're going to stay accommodative for a while here. But it was an awful recession and it's been an impressive and an awesome recovery in terms of the speed of growth subsequent to those lockdowns. And so I think that's the difference is unlike the in 2008/ 2009, we had a pretty slow recovery because households had to manage down their balance sheets. They had a lot of debt that they had to work through and economic performance was pretty poor. Today, we're seeing some of the strongest economic growth rates in 30 or 40 years. And so the Fed's accommodative now. But the big question is, when are we going to have to start to change tack because we don't want to generate too much strength and overheating and inflation. And so that transition is happening a little bit faster this time.
Well, listen, I probably jumped ahead in my questions, but if I was a question of just you mentioning you being part of the Federal Reserve back then.
But if I back up for a second, let me ask you this as director and chief investment strategist for Russell, what does that day look like for you?
It's a very sad day, but my primary responsibility is to make sure that we know what is happening in the United States and global economy and what those potential risks and opportunities might mean for our professional portfolio managers. So it's staying on top of incoming data. The new news, what that might mean in terms of risks. So keeping tabs on what's happening with the coronavirus, keeping tabs on what's happening with corporate earnings
Growth, what Federal Reserve officials might be saying and looking for where there might be opportunities or areas that the market could be getting things wrong. And that's a really hard thing to do. We're actually pretty humble about those kinds of activities. And some of the kind of signals and modeling that we look at the most is around other people's behavior. If we're seeing everyone else panicked, that tends to be a pretty interesting signal for us to want to step
In and buy and be investors, whereas in contrast, forcing everyone euphoric and very optimistic about the outlook. Sometimes we might want to lean in the other direction. So it's very much a mix of sort of market psychology, economic data, market data and looking for things that might be at an extreme that we can take advantage of knowing that that's a
Very hard thing to get right, because markets are pretty efficient, even if they're not perfectly efficient.
Actually. Have a comment on that. So this morning when I was leaving the house, my wife asked me, hey, what do you do in your podcast on this week? Because she will often ask me that. And I said, oh, we're interviewing this fellow named Paul Eitelman from Russell Investments. And she said, well, what does he do? Well, he's the director, chief investment strategist for Russell Investments. And she said, well, what does that mean? And I said, well, I guess he sort of follows inflation rates, interest rates, economic headlines and does forecasting based around that. And she said to me that a quarter is that a full time job? I said, yeah, I think it's actually a pretty important one, you know, and I'm not knocking her. She's a social worker. And her day is way different than what your day would be. So can you maybe expand a little bit on that? How the. Headlines that you are tracking these days, because inflation is one that has come up a lot recently. Can you talk a little bit about that?
Inflation is a really big issue right now. It's been incredibly strong and I think surprisingly strong in the last four months or so in the United States and in a couple of the developed markets in the US, for example, we're seeing core inflation rates up around four and a half percent, which I mean, it's a big number. It might not sound like a lot, but central banks want to see two percent inflation.
We're getting almost double their objectives.
And that can be a challenge for a lot of investors is really important for retirees, because if you have a lot of inflation and you hold fixed income investments, that inflation can erode your purchasing power over time is a big issue. And it's been something I've been quite focused on as sort of an economist and a strategist. But we've seen sort of under the surface of the data is a lot of that inflationary strength has been driven by just a couple of categories.
So part of my job is what is this inflation?
Is it noise or is it a signal that we need to take seriously? And because the inflation is so concentrated in just a couple of categories, we think it's more likely than not to be a short term
phenomenon and something that is likely to be stick. So the kinds of inflation that we're seeing just to try to bring that to life a little bit is really in things like automobiles. So because of all these stimulus efforts from the government's stimulus checks, et cetera, people have been going out and buying new cars. That's sort of the cool thing to do. And they've been doing that at the same time that global supply chains are disrupted.
There's a shortage of semiconductors globally.
So automobile manufacturers haven't been able to produce new cars and everyone wants to buy them at the same time. And so you have too much demand for the available supply of cars on the market. Inflation sort of conceptually is equilibrating mechanism to make sure that demand supply imbalance. So when there's too much demand for the available supply, you get inflation. And that's what's happening in the automobile market. It's because of this really strong recovery and because of these supply chain bottlenecks. But it's probably not the kind of inflation that is likely to be long lasting. We're seeing globally a lot of interest for companies to invest in new semiconductor plants, because if you can, you're going to make a lot of money selling semiconductors, car manufacturers and that sort of profit maximizing carrot, if you will, is the sort of factor behind why these things should come back into balance over time. The other areas of inflation are more around the pandemic and the crisis and recovery out of it. And so it's things like airfare prices and hotel prices. And if you think back to the spring of 2020, no one was traveling. Demand for air travel totally collapsed and the airliners had absolutely no pricing power at all. They basically couldn't give away a free flight if they tried. And because the vaccines have been quite effective, we're seeing today now air travel will get that close to pre covid levels again. And with that recovery in demand, they've had a recovery in their pricing power again. And that's inflation. It's prices recovering from something that was near zero to something a little bit more normal again. But as we get back closer and closer to normal again, that really big recovery demand is unlikely to be something that should persist year after year after year. So I guess that's a really long way of saying we really try to go into the hood of what's happening with the data releases, understand what it means for the outlook. And in this specific case, we think it's more likely than not that inflation, which is really strong right now, should moderate back down to something more normal over the next one to two years. And that has important implications for how we might think about investing.
There's this buzzword that keeps floating around every time I pull up a headline or news article and it always references inflation and things being transitory, would you say that's what's going on right now in the world?
Our outlook is that inflation is transitory. And basically what that means is these call it four or five percent inflation numbers are unlikely to be the new normal or outlook, which is it's an uncertain one. I mean, this is I've been through a couple of recessions, but this is my first pandemic.
It's all of our first pandemics.
We never know exactly what the future holds, but our sort of models are telling us that it's more likely than not that inflation will move back down to two percent or slightly less than that in the case of the United States, because. A lot of it's in these concentrated categories that are unlikely to be persistent, and so that's what sort of transitory means to me. It has important implications, if that's right. It could mean that central banks could keep rates very low for maybe a little bit longer.
Well, actually, I've had a lot of people ask me about inflation these days, of course, because they see those same headlines. And I kind of point out that, look, inflation in March of 2020, wasn't it like zero or I mean, there was no inflation. So if it's four and a half percent today or four percent or whatever the number is, but it was zero 18 months ago that what's the true level of inflation? Is that a fair question?
I mean, it's a really important point. So in 2020, we actually had three months in a row of deflation, so slightly negative or declines in prices on a sequential basis. And that was because the economy was collapsing and there was no demand for anything. And that set sort of a low level for the index.
And so you fast forward a year from end
And we're seeing one of the strongest recoveries ever. And similar to what I was talking about with airfares and hotels, demand bouncing back to something a little bit more normal again. So a lot of that inflation is sort of a simple recovery phenomenon. And it doesn't tell me that much about sort of the medium to longer term outlook. It's sort of more cyclical in nature.
Steve, what do you got for us?
Well, it's just going to ask you've touched a little bit on it. What's the lay of the land going forward for the economy and the global stock market? You've talked a little about this great recovery. What should investors look like for the next short term, long term, I guess, next within the next five years?
Yeah, I think there is still some runway here for the economy and financial markets. And some of that is just where we are in the business cycle, where just over a year removed from a recession. And even though the recovery has been impressive, there is still not really any signs of the kinds of macroeconomic imbalances that would let you think about a recession be more likely than normal.
And these things are really hard to forecast. But those kinds of big risks for markets tend to happen when the labor market is fully recovered, when businesses are investing and over investing and getting sort of greedy about the outlook and when debt levels in the economy are really high. And so today we've certainly recovered a long way. But in the United States, for example, there's still six million fewer people employed than there were before. The coronaviruses seems like the labor market still has a decent ways to go here before those kinds of risks start. Emerging business investment, we think, can be quite strong here. Businesses are really confident about the outlook. There was actually a survey recently from the Conference Board that showed CEOs are more confident than they've ever been in the outlook because of how strong the profits recovery has been. And so that should allow some pretty good investment going forward. But we're nowhere near where the US or global economy was in the late 1990s when there's just way too much investment and overinvestment in technology and capital goods.
Again, I think a little bit of room to go there.
And I think what all of that means to me is if recession risks are a little bit lower than normal, that makes it more likely that I can earn a positive equity risk premium. So one of the big things that hurts you as an equity investor is when the business cycle ends, when you have a recession, you have a drawdown of 20, 30, 40 or 50 percent.
And so I wouldn't say those risks are zero for gas in the future is really, really hard. But relative to maybe a normal recession risk of being between 15 and 20 percent in any given year, we think those risks are closer to 10 percent. That's a marginal view. But investing is all about decision making under uncertainty. And if we think those big downside risks are maybe a little bit smaller than normal, having some equity allocations can make sense to them.
I like that quote. Investing is all about decision making during things of uncertainty. So he said something like that. Yeah. Let me ask you this thing of uncertainty. The 10 year US bond yields have been getting a lot of press recently, maybe in the last 60 days or so. And I know they moved from something like one point three to one point four up to one point six. And now they're at about one point to four or something like that. So in that period, it's gone basically from one point three to one point to four. It doesn't sound like a lot yet. It has definitely moved that market and this forecasted interest rate movements. Can you talk about that a little bit?
There's been sort of two waves in the Treasury market. Recently, Treasury yields rose pretty significantly through the early part of twenty twenty one because people transition from being worried about the pandemic, to excited about the recovery, and particularly excited about the prospect of aggressive stimulus from the US government after Biden won the presidency and Democrats won the House and Senate. So that unlocked the possibility of aggressive spending legislation boosting the US economic growth profile. And so under that idea of stronger growth, Treasury yields rose, which is sort of normal market reaction. But subsequent to that, there have been a couple of risks. And it's been hard to totally unpack what has happened over the last couple of months. But we've had, I think, a reassessment of what's happening with the coronavirus where the Delta variant has really spread aggressively around the world and infections. And unfortunately, more severe outcomes have started to rise again, even in countries that are highly vaccinated. And so I think that's created some concern that really exceptional growth that people were thinking about might have some sort of downside risk associated with it. That was, I think, one of the factors behind me stepping back down. The other one, somewhat perversely, was with the Fed starting to talk about the possibility of taking away some of its accommodation. I think investors have gotten a little bit worried that they might not allow as much inflation or overheating or economic strength as they previously thought. And that sort of reassessment around central bank policy maybe was sort of the second big catalyst. But I think it's easier to tell stories after the fact and to know some of these things in advance. So I think those are the two big waves of excitement about economic strength and then
Maybe a little bit of dose of humility and uncertainty as the outlook has gotten a little bit of cloudier here in the last couple of months.
So if you are a retail investor or I guess institutional investor, what do you do during times like this?
Because there's a lot of concern that, well, as the economy recovers, does the party stop and they start raising interest rates? How does a retail investor, I guess, just an investor in general, what are your thoughts? How do you prepare for this going forward?
I think the most important principle is to always have a plan. So forecasting the future is hard and having a strategic asset allocation, potentially with the help of a professional advisor that is well suited to help you meet your desired outcomes under a range of possible economic and market outcomes and forecasts is probably the most important starting point. From my personal perspective with where we are today, I think staying invested is maybe the second most important principle, because if you're just sitting in cash, central banks are forcing you to have a zero nominal return on that cash right now. And we've just talked about inflation being an issue and a risk. And if you're getting a zero return on cash and inflation's four or five percent, your spending power on that cash balance at the bank is gradually eroding over time in that kind of environment. I think it's really important to be invested, whether it's in the equity market or I think even better, a diversified multi-asset portfolio that can weather a range of outcomes. But getting that extra return to help you overcome sort of the inflation hurdle is probably more important than ever right now. With interest rates near zero.
I think we'll all agree with that, that it's better to be invested, stay invested, because one of the things we run into, Paul, is people will say things like when times are bad,
Say, well, I need to get out because I'm scared. And we say, well, OK, so you're going to sell out. And then what?
They said, well, wait for things to get better and then I'll buy back in saying. So let me understand this. You're going to sell at a lower price. Now with the plan of buying back in at a higher price later, does that make sense? And maybe I can let you answer that question.
It's not a good way to be successful over the long term.
There it is. I knew we were talking the truth.
Selling low and buying high is a good way to lower your return outcome. We think if anything, the opposite is better.
If you can, if you have the liquidity and ability when everyone else is panicked and when prices are cratering, that's the best time to step in and buy and take advantage of other people's behavioral mistakes and constraints and challenges during those circumstances. It's usually when sort of things are the darkest that the return opportunities. The greatest,
But on that behavioral side, do you think people are actually capable in general of investing during bad times?
It is really, really hard to do, particularly by yourself and even for us as professional investors. We've built sort of processes around us to help us avoid making those same mistakes. And one of the ones that's I think most important for our philosophy is we have an index that tracks market psychology for us. It's a range of different measures from how investors are positioned, surveys of investor psychology, how bullish and bearish people are. And no single indicator
Is very good. But the sort of composite that we get from all of that information is actually quite helpful for us. So I can be sitting there in March of 2020 not having a clue about what the pandemic means for the economic outlook. But if I know that investors by and large are more panicked than we've ever seen in the history of our index, that's an important ballast for me to say, hey, hang on, if things start going right here, the return potential could actually be pretty significant. And those kinds of insights are important for us not only to avoid the mistakes, but also to try to take advantage of some of those rare opportunity to do present. So I think it is a really huge challenge, particularly for individuals that maybe don't have as many resources as we do in the profession.
That's good. I think we have time for a speed round. Steve? I think so. Paul, you've done all the heavy lifting. Appreciate that. And appreciate your insight on all those things, inflation, interest rates, et cetera. But Steve's going to start you with the really important part of the podcast, and that's the speed round. Yeah. So we've got the speed round that we ask. We go through this every podcast, Paul, and there's no right or wrong answers to us.
But judgment aside.
Well, we will judge you, just not now. Well, we're on the call right now. Exactly.
Judge, later, let's go through this.
What do you do for fun when you're not working?
I like to go hiking. It's a beautiful place in the Pacific Northwest. And I've also taken up during covid side hobby of woodworking, and I'm not very good at it. But I'd gotten some furniture from my house and I don't know, I wouldn't call it high quality furniture, but it hasn't fallen apart when I sat on the edge. So I'd say it's a moderate success.
That's when any books you're reading right now, I'm a little bit of a sci fi guy. So there's a new book called Project Hail Mary from the Sky. And we I don't know how to say his last name, but he wrote The Martian, so I'm pretty into his stuff and other books and I've just started that. So I can't really talk about the story, but I'm pretty pumped about it.
Any shows you're currently watching,
You binge anything, you binge anything.
We've been watching some Bosz on Amazon Prime, which is a detective fiction story. Pretty good. I've been enjoying it. My wife really likes it and I'll usually fall asleep halfway through an episode and she keeps plowing ahead. So she probably has a better read on it than I do. But that's part of the top of the list for us right now.
Well, now I'm going to get into a couple of Canadian specific questions because our audience is primarily Canadian. Although the podcast does get simply around the rest of the world. I'm not sure why some places there are people that listen to it, but how do you spell Saskatchewan?
And by the way, nobody's ever gotten it right, so there's no pressure.
Saskatchewan. Oh, now take your plow ahead and try to plow ahead. S A, c, h. Oh, no, no, no.
Yeah, the first three. Right. That was close, though. Spelling bee for you. Now, seeing that you live in the Pacific Northwest, it must get kind of
Chilly there during the winter months.
Do you ever wear a toque?
Yes, you do. Yes, you do. I guarantee you. I bet you've worn one in the last 12 months that it's a wooly hat with it.
Yeah, that's right.
A wooly hat or beanie, as it's called, in places like Santa Monica. Nice. So what we call it, it's OK.
I've always wanted to go ice fishing, which is a much bigger thing in Canada, but I haven't been able to do it yet.
I'm Canadian and I've never been ice fishing, so I know that it is a thing that people do, but I'm sure I don't know, ice fishing.
I've never been ice fishing. So, Paul, if you end up going, you're going to have to come back and tell us about it.
Yeah, maybe that's just an image of what people.
Well, you're not that far from Canada, right?
Like your short drive, your neighbors. Yeah.
So when you do go to Canada, do you ever wear a bunny hug when you're traveling through Western Canada?
Bunny hug. Probably not.
I guarantee you've worn one at some point. Paul, it's a do you have a hooded sweatshirt that you wherever.
Yeah, of course. Yeah.
So honestly, nobody ever gets those questions. I'll stop it there. But the bunny hug in Saskatchewan is a hooded sweatshirt. That's what it's called. I don't know why. I don't know where it came from, but that's what it is. So listen, you did pretty well. You did pretty well. Thank you for joining us. We really appreciate it. I hope to see you again in Calgary sometime soon, like we talked about at the beginning. And any last words before we let you go?
No, thanks so much for having me. And hopefully I'll do better on the Rapid Fire next time.
Well, in all fairness, like I said, those are very Canadian specific questions that if you asked me a few things about Manhattan, I would probably do not very well myself.
So I have those ready for you next time. Yeah.
All right. And thanks, everybody, for joining us. Steve, thanks for being on the show.
Yeah, thanks, Collin. Thanks again, Paul.
And just a reminder to the listeners, please leave us a review on Apple podcast or wherever you listen to this podcast and we'll see you next time or not. See you, but you'll hear us next time when we get into something probably not as exciting as this one, but hopefully pretty good nonetheless.
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Episode 64 - The Silent Killers…Fees, Expenses & Taxes
We continue the Back to Basics Mini-Series discussing the costs involved in investing. Looking at what fees are charged, expenses incurred, and taxes.
EP.64 - The Silent Killers…Fees, Expenses & Taxes
Welcome back to the free lunch podcast, notice my new inflection.
Are you enthusiastic today, Greg?
Last week we talked about factors of return, a fun discussion. I always like talking about factors of return, actually, especially when people are asked which stocks to buy.
That's right. Yeah. A little bit of a different discussion today.
We're on the fourth of five episodes and our miniseries on Back to Basics. As I said at the first one, it's sort of a lead up to back to school in September. We're going back to basics with investing. And today we're going to talk about the silent killer that is the silent killer of returns. Greg, fees, expenses and taxes, the less you pay, the more you keep, as they say. And that's important to understand, right?
But the capital markets are not charities. There are fees to invest. There are taxes that have to be paid when you make money. But of course, I never quite get that concept of people being upset, of having to pay taxes when they've made money versus not making money. Isn't one side better than the other?
Certainly, but I think it's important to pay the taxes that you need to, but not pay taxes that are avoidable,
Of course, because there's always going to be fees. You just need to know and understand which ones are expected and reasonable and which ones are just dragging you down and to start that off. Greg, I got a little song for us. Maybe I'll play it. Well, we have a little banter here.
You might get this. The cash register sounds familiar. Somebody's paying the fees, Greg.
Sounds like something from the 1970s.
You know this song. I know you know it.
I do know this song. It's kind of like a little digging about my age again.
No, never. I would never bug you about being bald or older. Oh, here we go. Baldor Older.
It's always about the hair, isn't it?
All right. Anyways, let's get into it, OK?
As you mentioned, there are costs to everything that's to be expected. But as our clients and anybody who's listened to this podcast, no, we believe that there are really three things you can control. You can control your asset allocation, you can control your diversification and you can control your costs. Beyond that, your returns and your investment experience overall is going to be determined how the market behaves.
So in the last couple of episodes, we've talked about asset allocation, we've talked about diversification, and today we're going to talk about costs. And you identified three types of costs that are incurred in investment management. And I'm going to break them down. You could characterize these a little bit differently, but I'm going to break them down into three main areas. The first is Fees. And here what I'm talking about is fees for advice. So whether you work with a full service advisory firm like ours, when we're owned by a bank, as many are, whether you work with an independent firm or even a robo advisor, there's going to be fees for advice. And those fees can vary fairly broadly from firm to firm and even within firms from advisor to advisor. So we'll delve into those in just a minute.
There's some marketing out there these days that tries to, I don't know, paint the wrong picture so people don't actually know what fees they're actually paying in some of these places.
Exactly. And so it's really important that people understand the fees. Fees have to be transparent. People need to know what they pay. Any of us would expect that for whatever we're buying. And so that's really critical The second area of costs would be expenses. And what I'm talking about here, those would be the costs of like implementing a specific investment approach. For example, if you buy individual securities, first of all, there's going to be some transaction costs involved. Commissions, if you buy ETFs or mutual funds, there's going to be within those management fees which are earned by the managers of the funds, plus any other costs that are associated with trading custody of securities administration and in some cases, even marketing. So in many cases, people are paying costs for the fund provider to market their own products.
Now, there's been a ton of compression on those expenses over the years, though, in your time in this industry, you've seen them go down dramatically,
Massive compression, which is a good thing. It's good for everybody. It's good for the industry. It's good for investors for sure.
But some of it's been shifted in the U.S. You can trade stocks for free essentially at some of these platforms.
But it's not really free because there's something called order flow that comes into play like the company still makes money somewhere.
The company makes money. And the question is who pays for it? And the answer is probably all of us to some extent, because it's reflected either in costs of the transactions themselves or even impact on trading prices. Those are expenses. And then the third thing, which is not talked about quite as much, but is critically important are taxes. And here, if you're not careful, the government is your partner. They're sharing your returns. So taxes, as you mentioned, can silently eat away at your return. And it's important to know the different investment strategies and approaches can either help to minimize tax or can actually work against you and increase your taxes and therefore reducing your after tax returns.
But at the end of the day, there's going to be taxes collected. You can't do tax evasion. No,
But you can definitely do tax avoidance in the legal areas
And you can do tax deferral. And tax deferral in many cases is basically tax saved. And we'll talk about that a little bit.
I got a question for you. On taxes. We pay a fair amount of taxes, you and I.
Sadly, that's true.
I think I've paid way more taxes in this last year than the last president of the United States paid in the last many years is what I've been reading anyways.
That's right. I don't believe he paid tax at all.
That might be called tax evasion. I'm just throwing it out there.
Well, it's because he's smart and he's using the tax system to his advantage. Yes, of course. But anyway, we won't get too far into that. Let's go back into those three areas of costs that I talked about and go into a little bit more detail. So the first one was advisory fees. Now, when I talk about advisory fees, what I'm really talking about here is a certain type of approach whereby people pay a fee for advice and it's usually a fee based on the. A number of assets being managed, things like that, or in some of our discretionary accounts where clients or investors give us the authority to manage their accounts and make investment decisions for them, and so those would be advisory fees. And we've talked about these a little bit in the past. When you're investing, you've got two basic choices. You can either engage an adviser or you can go it alone. We talked about do it yourselfers as regards to investing as well as other things in life. And that's totally a personal decision and depends on the individual investors’ confidence, ability and time and hopefully ability and time are the most important of those, because we know everybody is confident and in some cases overconfident. And that can actually detract from investment decisions
And people can do it by themselves.
There's a lot of information out on the interweb these days that will actually teach people how to trade and how to invest. But there's a difference there and we'll get into that a little bit.
And again, we're not saying people shouldn't sort of manage their own investments. What we're saying, though, is that it's not maybe as simple as it sometimes seems and that there can be pitfalls that you have to be aware of. And it's not that people can't learn those days just need to have the ability and spend the time to do it wisely.
Just go to YouTube. I'm sure there's a video.
That's true. Yeah, exactly. So the decision to use an advisor would have to be based on a belief that the advisor has credentials, experience and knowledge that's going to assist investors in developing the most appropriate investment strategy and investment plan that an investor can live with. I think it's critical to understand what services exactly are provided for the advisory fee. And so let's talk about some of those services, which include but are certainly not limited to the following. One is understanding everything about an investor's personal situation, which allows the advisor to develop a financial plan that clearly identifies their goals and values, financial position and outlook, tolerance and capacity for risk, which actually are two different things and any other factors that will ultimately help or in fact be critical in developing an appropriate investment strategy and plan. There's a lot in there.
There's a lot
And we've talked a lot over the last year and a half or however long we've been doing these podcasts about developing a plan. And the planning piece is really I can tell you, twenty five years ago, it was really not a big issue because when people came to us, they didn't want to talk about financial planning. They wanted to talk about what was the best stock to buy what's going to go up this year, where should we be. And so there's really been a significant shift in terms of focusing on planning, because it's the old thing. How do you develop an investment strategy if you don't know what the goal is?
The ones that stick out there for me or and we've talked about on a specific episode about planning is risk tolerance versus risk capacity. Those are just two majorly different things.
Just because you have the ability to tolerate lots of volatility, does it mean you have the capacity to withstand it financially?
Exactly. And only the financial plan can identify that if you know that you're not able to withstand a 20 percent downturn in the stock market because that'll derail your retirement plans or whatever other plans you have in mind, then you cannot have an investment strategy that might expose you to that kind of downside risk. OK, also, what else do advisors provide? They understand the full range of investment options available in order to help investors achieve their goals over an appropriate period of time. And so there's literally tens of thousands probably of investment choices. There's three or four thousand mutual funds that you could select, thousands of ETFs, ten thousand individual securities. So really, it's important that the advice includes an understanding and some due diligence on those investment options that are available.
Well, you can drown in the number of investment options out there. I mean, I was reading that there are more mutual funds trading in the U.S. than individual stocks.
In each of those funds owns a variation of stocks.
And I believe the same is true for ETFs as well. So it's crazy. So what else do you get? You get an investment strategy and appropriate products for the portfolio. And one of the things we're going to talk about a little bit later when it comes to taxes is also advising on asset location. So here we're not talking about what's the right asset allocation, what we're talking about, where should the appropriate products go? Do they go inside an unregistered account or inside a registered or tax deferred account? Because that's part of tax minimization rebalancing portfolio on a regular basis, providing coaching, particularly during times of extreme market volatility, because it's important to be able to help investors through those emotionally challenging periods. And of course, as we know, those are the periods when the headlines are screaming. And so. Not only do you have, like, the actual reality of what's going on with the markets and therefore your investment portfolio and therefore your being on track to achieve your goals, you've also got every newspaper if anybody reads those anymore headlines, Any news, just screaming about how terrible things are. So the coaching is really critical. And there's obviously a host of other services that are provided for that advisory fee.
I want to go back to that mention on asset location. Just talk about that for a minute. This one is an important one to me, I know you're going to get in to taxation a little bit later. But I think this fits in well here is that where you hold certain assets, attracts different tax rates, and some of that is beneficial and some of it is not. Typically, when we're working with clients and we figure out their asset allocation because we've done a plan and determine how much risk capacity they have when we're actually investing the money, we want to be very aware of what type of accounts different assets are going into. So, for example, in registered accounts or RRSP or registered retirement income fund accounts, whatever those might be, what would you want to hold there primarily, Greg,
I would want to hold types of securities that attract a high level of tax like fixed income bonds, which attract interest income, and those are taxed at the highest rate.
So then in your tax free savings account, you'd want to hold things that attract the highest expected rate of return because of the long term nature short. And so that would be great.
Well, I would say equities. Yeah, you're two for two, by the way. And I would also say you could also include fixed income in there as well, just because of the fact that you will never pay tax on it And depending on your asset allocation and the available assets, it may force you to look at things outside of the registered accounts. The RSP and the RIF for those as well.
And then everything else is held in your non registered accounts. Equities would attract dividend tax credits and things like that and capital gains taxation. But it's very common when we're going through this asset allocation strategy with clients that in some cases their RSP might be 100 percent invested in bonds and their TFSAs, 100 percent invested in equities. And then everything else is in between. And that's by design.
Yeah. Sorry, I went off on a tangent at all,
But not at all. So what's a reasonable and typical fee for advisory services? Well, you can find fees. And again, as I mentioned earlier, it can differ quite broadly, not only between different types of firms, but even within firms. Different advisors might have different fees and typically the range could be anywhere from half a percent for large accounts anywhere to up to one and a half or even one point seventy five percent for smaller accounts. So that's the range. We believe in our group that a fee of one percent or less is reasonable. And even looking at robo advisors which don't provide a dedicated advisor to understand you or your family situation, those type of advisors will typically charge an overall asset fee of zero point for the zero point five percent, depending on the size of the account. So, again, we're not talking about right or wrong. I'm just saying these are typically what the fees are. And again, the decision you have to make is what do you get for the fees?
Well, and even before we get into that, I got something in the mail a few months ago. It was from one of these robo advisor firms. I won't mention them by name, but it rhymes with health wimple.
And the fee that they quoted when you read through the fine print actually was the same fee that we charge,
For a lot less service. So I found that to be quite interesting to read. Anyways, Russell Investments puts out something every year. It's called The Cost of Advice Report or the value of an advisor study. What they look at are five things. They call them A, B, C, P and T and E stands for active rebalancing of investment portfolios. B is behavioral coaching. C is customized client experience and planning. P is product alignment, and T is tax smart planning and investing. And they actually assign values to each of these areas, these five areas to try to determine, well, what is the value of receiving investment advice Greg.
So they quantify it in terms of potential return.
Now they do it in Canada and they do it in the US. I won't go into the U.S. numbers too much, but the Canadian numbers for the year 2020, do you remember something happening in year twenty twenty that was quite significant in our lives?
Oh, I'm thinking of I just can't put my finger on it. Maybe a global pandemic of biblical proportions.
Yeah. Global pandemic, global economic shut down things that hopefully we won't have to experience again any time soon or to that magnitude anyways. The fee that the assigned to that or the value of advice was two point eighty eight percent per year.
How does that break out?
Well, it breaks out by active rebalancing, added zero point one percent. Behavioral coaching added one percent customized client expense. And some planning added zero point four percent product alignment was zero point seven two percent and tax smart planning and investing was zero point six six percent. The one there that really sticks out is the behavioral one. A full one percent difference is what they've attributed to working with an advisor versus going it alone. That's important because that's one percent per year. So that's a compounding one percent.
Well, it is. And we've talked a lot about behavioral biases and how being human leads us to make either impulsive decisions or decisions based on fear or greed, either of those two. And so just with some coaching and having somebody to talk to about some of these things before making a decision can help in real terms.
Well, it's very easy to say. Yeah, but I knew that that was going to happen. So I did this or I knew this was coming up, so I did that. That's all a bunch of nonsense. I had a meeting a few weeks ago with somebody and they were talking about what happened last year and how well they knew it would come back. So they just knew it was going to be that way. So if they were managing it on their own, they would have invested more.
Sure. And you know what? We all do it. And I do it myself. Despite having been in the business for over twenty five years. I still look back and shake my head how did we not know when we heard that there was a pandemic in China and they were actually like shutting down whole cities? One of our own team members was in China at the time and basically was quarantined for the full four weeks that she was there. And yet how is it that we didn't know that that was going to cause a big problem? Like, of course, we knew that was going to be a problem. We just didn't do anything about it. And that line of thinking is exactly wrong. We didn't know, just like when the market was down. Thirty five percent. Gee, I should have backed up the truck and mortgaged the house to buy stocks because everybody knew that stocks were going to come back up. Well we didn't know that we've been through two Bear markets where the markets were down 50 percent. So when we were only down thirty five percent, there was still another fifteen to go. Of course, we didn't know that at the time. It's just so easy to believe that we knew it at the time because of what we now know.
So the data for the study comes from that historical evidence of what people did and didn't do during different market cycles. It's not data we've come up with. It's data that has been quantified by a bunch of intelligent people that are tracking it. So I got to believe that is real. Probably you could argue, maybe some people might say, well, it's not two point eighty eight percent per year maybe, but it's some percent.
But hopefully it's something. And hopefully that's why investors choose to work with advisors like us.
Well, especially if you just said on average, we believe a fee of one percent or less is reasonable. Let's just talk about the value of that. You're paying one percent or less and getting somewhere around two point eighty eight percent per year in just value of advice.
That's really the hope. You bet. The second type of cost that we talked about were expenses. And these are pretty straightforward to understand transaction fees or commissions. In a transactional account and certainly the way the industry was Twenty five thirty five years ago, basically, the advisor called you up to make a trade. They did the trade and you paid whatever the transaction fee was. And you didn't have a lot of choice when the early days that could have been two percent of the value of the transaction. You do a twenty thousand dollar transaction four hundred dollars, and that's one way. And so when the advisor would call up to sell that stock sometime later, there would be another two percent of the other way. So you're giving up four percent in those days.
So if you're up 10 percent, you paid four percent in transaction costs. You're really only up six percent.
And then you got taxes on top of that.
Right on. So commissions are a part of a certain types of businesses. But again, the good news is those commissions have come down a long way over the years. There's operating costs in mutual funds or ETFs, just the cost of doing business, of doing transactions within the fund of safe custody of assets. There's management fees. So whether you buy an ETF or a mutual fund, there's a management fee which the manager gets paid for selecting the securities that are going in there and as well in the what we'll call advisor class mutual funds. So in the case of transactional accounts where investors are not paying a fee for service, so to speak, or a fee for advice, there are service fees built into those funds, which typically would be anywhere from half a percent to one percent.
And these could be the same for mutual funds that are sold at the bank level. There's this misconception that people don't pay any fees in certain mutual fund structures. That's just not true. I mean, that's right.
There's fees built in even when you buy a GIC.
And people think, well, I don't pay anything to buy a GIC. That's nonsense.
No, exactly. And that's part of life. And again, the key thing here is not that they're bad, it's just that you need to understand what they are. And if you have the ability to minimize them as much as possible, then you want to take advantage of that.
Well, and I think our industry regulator, as much as I like to be hard on them, actually some of the reforms they've put forward are to make those fees transparent.
So that's right.
Client focused reforms coming forward this year.
In a couple of years ago, they introduced. The more transparency in fees and rates of return, which are now reported every December on the year end statement trading expenses we've talked about in previous episodes, the trading expense ratio or TER. Those are the actual costs of trading that are always incurred in mutual funds and ETFs, but not reported as part of the management expense ratio. So it's important to know those.
It seems crazy that the mark is always reported in the T or is not. I don't really understand, but
It's a bit unusual, but it's a fee. And then there, of course, custody fees or RSP administration fees, things like that, which again, typically are more common in transactional accounts than they are in fee based accounts.
So what are the typical expenses that we want to go through?
Well, listen, I mean, there are some incredibly inexpensive investment options. And so some ETFs like the broad index ETFs, whether it's the TSX Composite Index or the S&P 500 index, those can be as little as five or seven basis points. So what?
I mean zero, five percent.
That's right. And as you get into more diversified. So let's say you don't just want the index. Let's say you want to have international funds in the portfolio. Or as we've talked about in the last episode, when we talk about sector funds to get exposure to those, I shouldn't say sector factor funds where you want to get exposure to those factors that give you higher expected returns, those kinds of things that could increase fees to point four or five or even point six percent or higher for an ETF. Now, mutual funds, there's a lot of people who still think mutual funds. Oh, I don't like mutual funds. Their fees are too high and there's no question. Twenty five years ago, mutual fund fees were easily in the range of two and a half to three percent. And there was one well-known fund company in Canada that I won't mention which fees greatly exceeded three percent. And they also had fees to acquire the funds in the first place. So those were the bad old days and those days are largely gone again, thanks to a lot of those client focused reforms that you've been talking about to a point where there's many, many mutual funds and mutual fund providers that provide fantastic market exposure, well diversified strategies and diversification and extremely low costs. And what I'm talking about, there are management fees of about zero point to five percent or twenty five basis points. So extremely low cost for the kind of diversification that you can get now. And the last thing we'll talk about were taxes. And we've talked a little bit about that already. So we talked about asset allocation. So highly taxed types of securities such as bonds you'd want to have and registered accounts, whether there are RSPs or RIFs and more tax efficient securities like stocks can be a non registered accounts and tax free savings accounts. The other thing, though, that affects tax is trading activity. And so when you look at a lot of investors might have non registered accounts where they hold their stocks, but they're doing lots of trading. So they might have turnover over 50 percent of the portfolio, meaning that every year you're replacing half of the securities you own that ends up triggering tax. If you've been lucky enough to be in periods like we have largely for the last 12 years, stocks have largely gone up. And so every time you sell it, triggering tax, you're paying tax. And then the money that's left to invest afterwards is you're after tax dollars.
Now, if you had a very similar strategy, but you were in a different fund structure, you might not be triggering as much or any.
Well, that's right. And so here we're talking about whether it's you as an individual investor who is buying and selling the stocks actively, whether it's your fund manager who's buying and selling the stocks actively, the more turnover, the more tax is going to be payable in the current year when that can be a very significant amount. And even with the preferential tax rates on capital gains, your money that's available after tax to invest is less. And there's other portfolios are mutual funds or funds that have very low turnover by design. And those funds tend to capitalize on all the growth that's available in the markets. But they don't trigger the tax each year, which means that you don't have to pay tax each year and the investment can continue to grow and grow until at some point there will be taxed to pay down the road But as my accountant tells me, tax deferred is tax saved because when you do finally have to pay the tax, it could be 20 years down the road.
And in the meantime, you're avoiding that silent killer.
You're avoiding the Silent killer, while you're deferring it. And when you pay for it, you're paying it with deflated dollars. Inflation does affect all of us. And maybe year to year it's relatively low at two percent. But over a long period of time, it could be 20, 30 percent. When you're paying your tax down the road with those deflated dollars, essentially it's saving you money. So that's it. Those are the silent partners in investing. We've got fees, expenses and taxes and anything we can do to manage those to control them. And most importantly, to make sure that everyone's aware of what they're actually paying, the better it'll be to the bottom line.
Exactly, because there's no point in paying excessive fees or taxes if you don't have to. That's just the point we're trying to make. I know that listen, talking about fees and taxes isn't the most exciting thing out there.
But it is the discussion that many advisers don't like to have because they find it uncomfortable or feel like they're being challenged to defend their fees. And I think for us, it's more a function of, hey, it's your money. You deserve to know exactly how it's being spent and what value you're getting for it.
And if you're working with somebody that doesn't want to talk about it, well, maybe give us a call. We'll talk to you about it.
All right. Well, listen, that was I want to say that was fun, but I mean, it was taxes.
Yeah, really? How fun is that?
But next time we're going to talk about dividends, market cycles and something else and the headlines, headlines, right, and I'm looking forward to that one.
Me too. All right.
See you next week.
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Episode 63 - Back to Basics…Factors of Return
In this episode of Back to Basics, we discussed factors of return; where you can reduce your risk level, but still have higher expected returns.
Welcome back to the free lunch podcast with Greg and Colin and notice how I changed my inflection there Greg?
That's different. I think people are going to notice that
I noticed it. So we're on episode three of her Back to Basics miniseries. And last week we talked about stock picking and market timing. And Greg, recent market movements actually show how difficult this is. Remember back on July 19th when the Dow Jones sold off two percent or roughly a thousand points at one point? Yeah, I'm sure it created some panic out there. But the next day, the market rallied something around two percent back, which I guess is just highlights how difficult it would be to time those events.
It's pretty volatile. Now, the other thing, too, of course, is everyone gets all in a knot. Oh, my God, it's eight hundred or a thousand points. But that's when the Dow Jones is trading at, what, thirty five thousand ish? Just think back in the old days when the Dow was trading at 10000, it didn't seem like that big a no. The market didn't have to go down too many points for it to be two percent. These large numbers make you feel worse than they need to.
Well, I remember that day it was the House of Representatives voted down the bailout package of the global financial crisis 2008. And the Dow was around, I don't know, 11000 points or something. And it went down twelve hundred points at the open. That's a way different number than a thousand points on thirty five thousand. Exactly.
Yes. I remember that day. That was not fun.
No, I think we turned the channel that day. We didn't actually watch some of the strange soaps.
We watched soaps.
Yeah, but this week we're going to talk about factors of return. And we spent a lot of time in previous episodes going through the stuff. But as this is a back to basics miniseries, we wanted to use this as a refresher. And we did a webinar back in June discussing health and wealth. And lots of the material that we're going to cover today was in that recorded webinar. So if anyone wants to watch it, please send us a note and we'll forward up the link right on. So to get us started, Greg, we've got a song by.
I've heard of this band, they’re an up and comer, an up and comer. I wonder if it makes you feel all right when the Dow goes down a thousand points.
Yeah, well, let's get into that. We're talking about the Dow and the S&P 500, things like that. So, Greg, let's get into what is the stock market?
I think that's probably a good place to kick off from. Listen, everyone listening, I'm sure, has some point watched CNN or CNBC or something like that. And they've seen the closing numbers, the Dow Jones Industrial Average, the S&P 500, the TSX,
Those kind of things. And as we've talked, I mean previously, these are all just representations or benchmarks of the markets. And in most cases, they're a small part of the markets themselves, but they're meant to be representative. So the one that gets the most attention is the Dow Jones. Despite the fact the Dow Jones has only 30 components. It's the third largest companies, industrial companies. Originally it was the Dow Jones Industrial Average, but 30 of the largest companies that trade in the U.S. stock markets. So 30 names.
So it's really not that representative of the whole market. And certainly it's a market of large companies. If you move down into the S&P 500, those would be the 500 largest companies that trade in the U.S. market, which also seems like a lot certainly more diversified than the Dow Jones 30.
But every day there's actually about 1600 publicly listed companies that trade on the different exchanges in the U.S. alone.
It seems that, again, 36 100, that's three thousand six hundred companies.
Yet everybody always quotes the Dow 30.
Or the S&P 500 for that matter. So it's really a very small proportion. And of course, that doesn't actually include private companies, companies that trade over the counter or that aren't listed on an exchange. So just as review, I mean, the stock market itself is an auction market where buyers and sellers, they meet and agree on a price. And so for a trade to happen, you actually have to
Accomplish a buyer and seller agreeing on a price. Sometimes you'll hear a day like the 19th when the markets were down
800 or so points. People will say something like, oh, there was more sellers than buyers. And obviously that's not true.
Can you explain why?
Well, there's got to be a buyer for every seller. So if somebody is out there selling their stock in order for a transaction to occur, there has to be somebody willing to buy that stock from them. What probably is true is that there are more people eager to sell than there are people eager to buy. And I think that maybe is more descriptive of how things happen, because the more people that are eager to sell, they might be willing to sell at any price, whereas the buyers might be very specific about the price they're willing to pay.
So one side just more motivated than the other side. But as you say, it's just math. You have to have one for one. You have to have a buyer for every seller or there's no trade.
So one of the things we should cover off to is just looking at the size of the stock markets as a whole, because when we look at some of the details on geography of the global stock markets, it's a big world.
And in fact, when you look at the representation of each country as a part of the global stock market. So if you consider all the stocks that possibly trade on exchanges around the world, then we can look at each country and see what they represent. And in the case of Canada, turns out Canada represents only three percent of the global stock market, whereas the US represents over 50 percent. I think it's close to 54 right now, given how strong the returns have been in the U.S. stock market. So when something catastrophic happens in the U.S. like what we went through with the global credit crisis, starting with the horrible mortgages that were
Being issued in the U.S. and then, of course, leading to a much broader crisis, you can see how that has a pretty big impact given the size of the U.S. market.
So when people talk about the market, wouldn't it be better to actually be talking about the global stock market versus the TSX or the Dow Jones or whatever?
I think it probably would be.
And I think part of the issue there is just its people probably can't relate to it, like the benchmark MSCI, which is the Morgan Stanley Capital International Index of the World stocks. It's not something that people are familiar with. And so they don't know whether the current level is high or low or how to compare that. So unfortunately, people
Just sort of gravitate towards the indexes that they're more familiar with. So you're if you're investing in Canada, the TSX Composite
Or the TSX 60 Index, and if you're investing in the U.S., it'll either be the Dow Jones 30 or the S&P 500
years ago, I had somebody come in and they were quite upset. They said the market is just down so much. And when they were describing this, global stock markets were actually rallying in I said, well, which market?
And they said, well, oil oil's down. I didn't realize oil was the market Greg.
So to your point, which market are we talking about here? That's right, not only is it important to understand what exactly we're referring to or what people are referring to when they talk about how the market is doing, but to really understand that there's a lot going on outside of those particular indexes that we're going to be talking about. I just wanted to mention, too, when we're talking about the importance of different countries as part of the overall market, one of the ones we hear a lot about is China. Some of the emerging markets, China, Brazil, Russia, that kind of thing. China right now only makes up three percent of the world stock market. A lot of people are still interested in investing in China. And I'm not sure if that's going to change a little bit over the next little while, given what's going on politically and the fact that, as we keep pointing out on our Podcast, is China still is a communist country. They're trying to behave or act like capitalists. But there's a lot of reasons
Why shares of Chinese companies you may want to be careful with and certainly anyone that wants to capitalize on growth in China or India or any other places is best to look at some sort of funds or broader way to invest in those types of companies.
It's kind of a paradox, isn't it, to have like a capitalist slant on a communist economy?
Exactly. And I'm not sure in the end
That it can work when a lot of it comes down to governance, because part of the thing that makes investing in the us and Canada a little bit less risky is just the fact that there are certain requirements for listing the companies.
Financials have to be audited carefully and by using a respected or respectable audit firm. And some of those things don't apply necessarily in Chinese companies. Anyway, off the topic a little bit. Yeah. Let's talk a little bit about how big the markets are. So we talked about the fact that the US represents 54 percent of the global stock market. So what does that billion. Well, in dollars it's about 70 trillion dollars.
See that again? That's 70 Trillion dollars. 70 trillion U.S. dollars.
That's right. That's crazy.
So Canada, again, representing only three percent of that.
But I guess still a fairly big number when you're talking about 70 trillion dollars of market capitalization.
Now they're talking about how some of the large cap companies like Apple may be the first one trillion dollar market cap company.
Hard to believe
Now, Greg, are we suggesting people invest in Apple?
Not specifically, no. They could. Yes, of course. I mean, you have Apple products. Don't.
I've invested in many Apple iPhones, computers, laptops.
I love that's investing or spend.
Let's spend the night. Yeah, there's no return expected on those. Anyway, as we talked about a little bit, the size of the global stock markets, that Canada itself is a relatively small part, as are certain other countries, like some of the emerging markets, countries like India and China,
But even like Australia is three percent or something like that. So, again, just and we've been banging people over the head with this point. But just make sure that you're diversified outside of some of these small countries so that stocks. But what about the bond markets?
What about the bond market, the market that nobody talks about? Because there's two main ways for companies or countries for that matter, to raise capital, and that is through issuing stock or by issuing bonds.
Bonds essentially are loans.
We don't have time to get into the intricate details of the bond market today. But let's just say that not all bonds are created equal. So when we have somebody that says, well, I can get a government of Venezuela bond that is going to pay me 10 or 12 percent versus the government of Canada bond, that's going to pay me, I don't know, one point five percent. There's a difference in those bonds. Exactly. So the power of the bond market, though, is massive. So if the stock market was worth over 70 billion U.S. dollars, the bond market is worth approximately 130 trillion U.S. dollars.
So that again, that's a bigger number, Greg. That's almost double.
So 130 trillion dollars. Yet nobody talks about the bond market. And you got to ask, why is that? So I'm asking you, Greg, why don't people talk about the bond market like all they ever talk about when you turn on the news? Is the Dow Jones, is this the TSX? Is that the price of oil is here? The Canadian dollars’ worth this, but nobody really talks about the bond market.
Yeah, it's not exciting and it's harder to relate to because the bond market is so much less volatile than the stock market. People talk about the bond market around the edges, so they'll talk about inflation and they'll talk about interest rates and they'll make general comments. Interest rates could be going up. That could be bad for bonds, but nobody knows
What that means. It sounds smart, though. Yeah. When you say, gee, something could be bad for stocks, you envision stocks going down 20 percent of something is bad for bonds. Maybe they'll go down a couple of percent, maybe three, maybe four. But there's just so much less volatile. That's just doesn't make for interesting commentary on the business news. Well, a few weeks ago, the U.S. 10 year Treasury moved from one point four or five to one point six, and that caused a big uproar. And it's like 15 basis points and may even be a big number in bond world. But in stock world, it's barely a blip. It's less than what happened on the stock market last week, but that power of the bond market can't be discounted. I mean, it's literally led to the end of wars. It's just a huge market. And the difference is that it's not an auction market. So buyers and sellers aren't meeting on a centralized exchange to trade bonds. Bonds are primarily traded between institutional bond desks.
So finding out the true price of a bond would be very difficult for a retail investor to get to because it's as we said, it's never reported. Actually, that's not true. Recently it has been because that U.S. 10 year Treasury, it got up to like close to two, I think, a week ago, and then it fell to one point one eight or something like that within a few days.
The bond market has been puzzling people because everyone's been so concerned about inflation. And yet interest rates, as measured by the U.S. 10 year government bond or the Canadian 10 year government bond. The interest rates on those are the yields have actually been going down,
But it's not sexy.
Nobody's talking about how they picked up 40 basis points over the US 10 year Treasury on a trade. So, Greg, instead, what do we hear about these days? We hear about things like and we've talked about these in the past, Bitcoin, Ethereum, Dogecoin. Last year it was weed stocks. This year, this last 12 months, it's been short squeezes on companies like AMC Theaters, GameStop,
One of them you and I looked at the other day, Dillard's. I didn't realize Dillard's stock was up like I can't remember hundreds of percent in the last year and you've got these people bragging about how they have diamond hands on this Redit Wall Street bets forum and diamond hands for those that don't know means they hold the stock and they're not going to sell it no matter what. That's diamond hands. This is really sound like investing, but it sounds like collecting. That's right.
if you give it and sell the stock now. So let's be clear. There's investing and they're speculating or gambling. And when you're participating in a short squeeze with your diamond hands, this isn't necessarily investing. It is probably speculation at its best. So being part of something like Dogecoin isn't investing great digital dogecoin was created as a hoax.
I heard that. Yeah. And then a bunch
Of celebrities got on board and now it's worth money somehow, but there's no intrinsic value to it.
Anything can be worth money if people are willing to pay for it.
The problem is linked to the consequences of investing in something that you don't really understand and not understanding what the potential outcomes could be. So that's an issue.
Well, now let's get into so we know what the
Size of the markets is. We know the markets are huge, 70 trillion dollars minimum, possibly more by now. And so since stock markets were first created, basically investors have been looking to crack the code. And what I mean by crack the code is like find that magic formula that allows them to predict what's going to happen in
The future with stock
Prices based on what's happened in the past. That means looking for patterns in stock returns. Last time we talked about using fundamental analysis techniques like Benjamin Graham developed in the 1930s to try to figure out what stocks are trading below their intrinsic value. That's what Benjamin Graham was all about. And by doing that and finding stocks that were trading below their intrinsic value, we was able to do well by investing in those stocks and waiting for everyone else to realize that the stocks were undervalued. But we also talked about how the speed of information flows and the sheer numbers of people using fundamental analysis has made it harder, if not impossible, to actually gain an advantage. I mean, the whole idea of fundamental analysis was to gain an advantage against the other guy. And so when you go into the market as a buyer or a seller that, you know something that the other guy doesn't know.
Was 90 years
Ago, 90 years ago. And these days
There's probably not a lot that's not known by everybody who will take the time to actually get that
Information. Well, actually, I would
Even say because of high frequency trading and things like that, even if you don't know the information that's causing the change to price, whatever it is, it's being traded automatically because of high frequency trading and other AAII like trading
Let's approach it this way. First of all, let's talk about the growth of a dollar.
Conversation will lead us into the discussion of factor investing, which is
One of the things we wanted to cover today. Well, we're 18
Minutes in and now we're finally getting to factors
Of return. Well, that was a long
Is good, though.
So let's talk about the growth of a dollar. So let's say if you didn't want to take any risk and you had invested fifty five years ago, which puts us back to what, about nineteen seventy or so or sixty five, fifty five years ago, you would have invested in US Treasury bills and U.S. Treasury bills are known as the risk free rate. So the rate that the US government pays on its short term Treasury bills is risk free. You know, you're going to get your money back. The US government will always pay you
Back unless they fail, unless they fail, which is highly unlikely
At this point. So how would that have worked out? So your one dollar would have grown to twelve dollars over that time period?
That's not bad, 12 times your return. That's right,
And that's with taking zero risk.
But let's say you were willing to
Take the risk of the stock markets. And in this case, we'll talk about the S&P 500 just because that's a well tracked index.
Well, your one dollar fifty five
Years ago would have grown to two hundred and eight dollars
Today. That's better.
So 208 is better than 12. OK, that's why you're the kind of advisor you are.
I can do math.
This is what we call the equity premium. OK, so there's a risk premium. There's a risk to investing in stocks compared to Treasury bills.
And that risk
Has in the past, in the last 55 years, allowed your one dollar to grow to two hundred and eight dollars. So what if we told you that not all companies are created equal?
And when I say equal doesn't mean better or
Worse, it just means different. So when you look at the market as a whole and let's talk about the whole U.S. market. Thirty six hundred stocks or so, there's large companies, most of which are represented by the major indexes. We've talked about the Dow Jones 30 or the S&P 500, but you can break the rest of them down to midsize companies and eventually small
Companies and micro even.
That's right. So what if you took that one dollar fifty five years ago and invested it in small companies over the same 55 year time period?
And we said that just in the S&P,
Five hundred the large stocks that one dollar grew to two hundred and eight. Well, in small companies that one dollar grew to seven hundred and ninety dollars.
That's a better number, calling you up
Looking for your math, your math smarts on that one.
So that seven hundred
Ninety dollars, that difference, that massive outperformance of small companies over the large companies is basically what's called the size premium.
I want to talk about that just for real quick. Second, it's really easy to understand if you look at two companies, it doesn't matter where they are, ones like a smaller company and ones a large market cap company. Well, a smaller company just has more room to grow as room to capture more market share and grow. And that's basically what that size premium is showing you.
Exactly. That's the size premium. And the work on the size
Premium began back and
I believe in the early 1980s.
And since that time, the
Size premium has been confirmed not just by other
Authors who maybe did research on the size
Premium, but just it's been proven to be the case around the world.
Size premium has been
Seen in all the global
Stock markets, not just the US market, the Canadian market, the international markets, even emerging markets. You see that size premium
And you might ask, well, why is the
Size premium exist? And I think there could be many reasons. But one of them you can't ignore is just the whole basis of capitalism, and that is that small companies probably are inherently more risky than investing in large companies. And so for investors to allocate money to a small company that's a riskier company, they expect a higher return.
And we're not telling people to allocate money to individual small companies
Because of absolutely right that
It also comes down to something called cost of capital, which is just what does a company have to give up if they're issuing stock or if they're issuing bonds, for that matter, what do they have to give up to attract capital? And a smaller company is going to have to offer more. And so the cost of capital to that small company becomes the investors return.
So it makes sense if you just think about it intuitively, that
Small companies should have higher expected returns. And as we saw in that result, that basically has worked out that way.
What's the last premium we're in talk about today?
Well, let's talk about price. What we're talking about price is not the dollars per share of a company, but we're talking about is the
To something. So let's say how was the stock priced relative to its book value? So if you look at what is the company worth, when you add up all of the assets and subtract all the liabilities, that's kind of its book value. That's what it's worth. And if you could look at price relative to that, then you're going to get a number. So price to book value might be, let's say it's 20 times. So the stock is trading at 20 times its book value. Well, if you divide up the market as a whole and looked at each individual company and their price to book value that they're all trading at, again, just
Like size, you're going to get a whole
Range of companies trading at very high prices relative to their book value, maybe 30 times or more for like high growth technology companies maybe, or things like that. And you could get companies trading down at eight to 10 times their book value.
So in market terms,
We call those either value companies, which are companies that are trading at low prices on a relative basis relative to their book values or high prices, which would be called the growth companies.
And I think people would be more I don't know, they're more used to hearing things like price to earnings ratios that show that value versus growth company. So a company that's a big growth company might be like Tesla. It's trading at six or seven hundred times earnings.
Yes, that's right.
A company like CIBC is trading at, I think, around.
Times are eight to 10, I think.
One is considered
A growth company and you would invest in it because you expect it to continue on that growth trajectory, whereas the other one might be considered to be just a better value.
Exactly. So the value factor was identified and referenced,
I believe is in the late
80s, early 90s, and in a paper
By Fama and French
That talked about the cross section of stock returns, and that's where they identified the value premium in addition to the size
Premium and certainly the
Premium of investing in stocks relative to bonds. So when we talked about the growth of a dollar, just to recap, a dollar grew to twelve dollars over fifty five years and Treasury bills, that's
The market premium.
No, that's the risk of Treasury bills, yet grew to two hundred and eight
Dollars just by being in
The market as a whole.
That's the market preview. That is
Seven hundred ninety dollars by being in small companies,
Small company size premium.
What about small companies that had a value tilt? So how did that dollar do? Well, two thousand seventy seven dollars, one dollar grew to two thousand seventy seven.
And so that's the price
Premium or the value premium even relative to just small company stocks as a group. So I just want to mention. So these are probably the three most researched and investable factors or they certainly were. Now there's been hundreds and hundreds of factors identified over six hundred. But what they find is that when they look at certain factors, they're all just some sort of combination or variation based
On the main factors that
Have already been identified. So I think one of the things we can talk about and maybe in future episodes we'll talk about other factors, like there's a momentum factor, which is very real. The stocks that are doing well currently tend to continue that performance for some period of time into the future.
But certain academics discount the momentum factor. They say that there's not statistical evidence to support it in the long term.
Well, and it may well be that it's more of a behavioral factor than an actual underlying causal factor, such as
The risk of buying small
Companies or something like that.
So, again, lots of things to talk about, but a lot of people will say, well, I need to pick
Stocks because I don't want to just get index returns. I want to beat the index. And what the factor research has done is shown that while there are factors of expected returns, that when you invest and have exposure to those factors, you end up with a higher expected return than the market as a whole.
It's not guaranteed. It's a higher expected return. That's right.
And so what it does
Say, though, is that
If you had a choice
Of investing only in large companies, let's call them like the S&P. Five hundred companies and you're one dollar guru to two hundred and eight dollars. And there was a chance to expose your portfolio to a group of stocks that grew to two thousand and seventy seven, almost 10 times the amount. Would you not want exposure to that?
Well, I would.
Well, I think so. And I think most people would
Sum up there are factors of return.
They're not generally based on specific stock analysis or maybe even technical trading.
They're really based on
Evidence based research that shows that certain types of stocks can perform better.
And many products in many
Funds are now offering ways to get exposure to those factors.
They're marketing and like it's new, like I see all these ETFs coming out that are factor based
Or something like that
Factor smart beta, smart beta.
It all boils down to the work that was done by Eugene Fama and Ken French as the pioneers in that area, really with the former French factor models.
That's right. And unfortunately, a lot of those six hundred factors or more that have been identified.
In fact, there's an ex
University of Chicago professor
John Cochrane, who has written numerous papers about what he calls the factor Tsou. Just that there are so many factors that you have to
Spend a lot of time and research to
Weed through them. But unfortunately, a lot of companies will use those as ways to market and sell products. Exactly. And I think that's where we need to make sure that we're investing in a way that gives us exposure to what we know to be factors that
Have been proven to be
Pervasive and persistent and as well just kind of make sense.
I want to sum up here just the last three
Episodes we talked
About in the first episode, asset allocation being your most important decision, really. Secondly, diversification. So spread the risk of stock picking is fairly futile.
It can be
Done, but it's pretty hard to do. Market timing, same thing is very difficult. Yep. But that if you have a portfolio where you've already identified the proper allocation
You've diversified your positions and you've included these factors of return, you probably have given yourself a better opportunity of doing well.
You're just playing the odds. You're just putting yourself in the best possible position to benefit from these things.
Well, that was good.
Maybe we'll end it there. But next.
So we're going to get into know your costs so that fees, expenses, taxes, things of that nature, that should be a riveting conversation.
Well, it should be. But I mean, those are your silent partners in investing. So they're sharing your returns. And so I think we're going to talk about that and things are going to cost. There will be costs associated with investing, but making sure the costs are reasonable and right. And so we'll cover that off.
Sounds good. All right. Well, next time.
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Episode 62 - Back to School…Stock Picking & Market Timing
Greg and Colin continue on their back to basics mini-series. Discussing the futility of stock picking and market timing, focus your efforts elsewhere!
EP.62 - Back to School…Stock Picking & Market Timing
Welcome back to the Free Lunch podcast with Greg Kraminsky and myself, Colin Andrews, notice how I changed it up there Greg?
You did? Yeah, that was I think a lot of people are going to pick up on that.
So we're on episode two in our miniseries on the basics of investing. And last week we reviewed the importance of asset allocation and diversification and how those two elements need to be done correctly to give yourself an opportunity to have a successful outcome. I think that's pretty straightforward. You bet. So today we're going to talk about stock picking and market timing. Now, in our last episode, we talked about how asset allocation makes up something like as much as 93 percent of a variation of portfolio returns. Yes, right. And how everything else accounts for less than seven percent. So we're going to spend 100 percent of today's episode talking about something that accounts for less than seven percent on the variation of return.
Sure. And we're going to talk about that, of course, or we're going to start with stock picking. And listen, stock picking is something that many people did for a very long time. And the purpose of it really is to identify companies, to invest in that have the possibility of going up in value by more than the market as a whole, because that's the only reason why you would do that. Do you think you could beat the market?
And there's lots to think they can. True?
Yeah, and probably many have, but maybe not consistently. So there's a couple of different approaches that are used to identify individual stocks. But we're going to focus primarily on what's known as fundamental analysis, and the fundamental analysis, the objective is to determine a company's intrinsic value. Compare that to the current trading price of that company's shares. And if the intrinsic value is higher than the current trading price, then the company would be believed to be mispriced and undervalued and therefore should be bought. And conversely, if the intrinsic value is lower than the trading price of the shares, then they should be sold. So we talked about this in our one of our very early podcast's. Benjamin Graham is known as the father of value investing, and he literally wrote the book on fundamental analysis back in 1934, which was called Security Analysis. And he wrote a follow up book, The Intelligent Investor in 1948. And a lot of Graham students went on to a very illustrious careers in the investment world, and those included people like Sir John Templeton, who founded Templeton Mutual Funds and Warren Buffett.
Now, if he's the father of value investing, does that mean that he named his first child value investing?
That's right. Yes, value investing's Father.
So, again, we're talking about going back to the 1930s, 1940s of a fundamental analysis of stock. And his first book now has been available for almost 90 years. And tens of thousands of well-trained analysts and computer programs have utilized the techniques that he described, a fundamental analysis to research essentially every significant stock or major stock that's traded on any of the world's exchanges. So the success of fundamental analysis historically was based on the fact that not many people were doing it, and therefore Graham and his disciples had information that was not broadly available to the public. So today, any potential advantage from doing this kind of analysis has largely been eliminated by virtue of just the dissemination of information, the Internet, the World Wide Web. And there are now so many people using fundamental analysis as a way to identify stocks that essentially stock prices are now fully reflecting that. And in fact, there was a speech that Benjamin Graham made in 1963. So that's going back a few years. Yeah.
And I'm going to give you a quote. And the way he talks is a little bit different, but hopefully we'll get the message. He says, similarly, take the case where an individual stock is favored by one of my own fraternity of security analysis is because he is optimistic about its future earnings and general prospects. To the extent that investors generally agree this company has good future prospects to that extent, its prospects are also likely to be fully reflected in perhaps over reflected in the market price. So what he's basically saying there is that if everybody thinks that the company is undervalued, then the price will already reflect that because people will have already been buying it. And therefore there's no further opportunity, which sounds a lot like something that we talked about previously. And we'll talk about more in the future. The Efficient Market Hypothesis published by Eugene Fama back in 1965,
The father of modern finance.
Exactly. And we've met modern finance. He's a nice guy.
Yeah, he is.
So in the same speech that Graham made, that previous comment, he also identified something that a lot of people don't think about. But it's impossible for investors as a whole and therefore the average investor to do better than the general market. And that's just based on the fact that basically the market is the sum of all investors’ portfolios and therefore the market itself is the average.
Well, and if you think back to the when did Benjamin Graham first read that 1934.
Yes. Fundamental analysis.
So great in the dirty 30s, right? Yeah, and information flowed a little slower in the 30s, did in the 20s. So how would people have gotten the price of their stocks they owned? I guess they'd get it from the newspaper.
That's right. And it could take a long time to get that information. It would be even harder to get information that companies would publish their earnings reports and things like that. And yeah, news would move very slowly.
Whereas today we get it at the one click.
One click. So I did some clicking around on the interweb and I looked at the top returning stocks for twenty one over the last trailing 12 months. The number one performing stock isn't going to be a surprise Greg,
We've talked about it a few times on this podcast.
We probably need to stop talking about it.
I think so this will be the last time we won't mention it again.
Gamestop is up over 4000 percent in the trailing 12 months
Pretty decent return.
Now, these are U.S. stocks. The stock that came in second for return in the trailing 12 months actually surprised me a great deal. It's Dillard's Dillard's, the U.S. retailer. And I just can't understand why Dillard's stock would be up six hundred and fifty two percent over the last 12 months other than, I guess, going into the pandemic and economic shutdown, their stock would have gone down dramatically.
But I can't understand why it's gone up over 600 percent since
Maybe we'll look into that.
Yeah, and there's a whole list of them. I won't get into all of them, but there's a number of brick and mortar stores. Abercrombie and Fitch is another one. Pitney Bowes, Nabors Industries, Bed, Bath and Beyond is up over 200 percent in the last 12 months. So it seems that if somebody was trying to stock pick, they would be trying to find those names.
That's right. And it's one thing even for professionals who are scanning the entire list of companies that comprise the S&P 500 or the Russell 3000 for the average investor sitting at home who has heard of all brands. And I can tell you that nobody has called me inquiring about it. Stock's up three hundred and twenty one percent. Yeah, a very active corporation, up two hundred and eighty five percent. Techno glass up to one hundred and eighty percent. So these kind of names that a lot of individual investors, particularly picking their own stocks, whether they're Canadian or us, are likely going to miss these. Whereas of course an index investor likely owns most of these names, at least to some extent.
Yeah, maybe a small amount. But in any event, they're there. But picking stocks is a hard thing. It's a hard thing to do. It is. I mean, to pick it is easy, but to pick the one that goes up is hard. Yes. Yes. So just for fun, when my son was eight years old, he's now turning 18. I had him I printed out the Dow Jones Industrial Average and the TSX 60, and I gave him a highlighter. You remember the story? I do. I like telling it. I gave him a highlighter said pick ten names from each list. Didn't tell them why. He just said pick the names. And he picked names like Coca-Cola, McDonald's, Nike, Disney, Wal-Mart, Agrium, Agnico-Eagle Mines, Anapolis, Suncor Energy and the Home Depot. So there's some of the names that he picked up. So just for fun, I benchmarked his picks against our former firm's North American core equity portfolio to which they've picked us and Canadian stocks as well. Now, these are the people that picked that list. They have CFA's and MBAs and all kinds of designations, and their job is to pick stocks. My son, who was eight, obviously, his job was not to pick stocks. No. Now, the analysts that made those picks for that former firm, they're paid lots of money to do that job right Greg.
I would think so.
You know, my son Kailen was paid to do his job.
Not really, no.
Thirty dollars a month. That's what his allowance was.
It's pretty good.
So I've benchmarked his performance versus this North American Core portfolio. Now, in the last one year period, I should mention, there have been no changes to this list at all. They were just picked and left alone, buy and hold, buy and hold. In the last one year period, the North American core guided portfolio, it returned fifty three percent. That's pretty good. And Kaitlyn's picks only returned forty one percent. So they outperformed him in the last twelve months. However, in the last three, five and ten year periods, his picks have far surpassed the picks of the analysts.
As we've talked about last time, one year is not really a reasonable time frame to judge performance.
Right. And so now as he's turning eighteen, this is ten years’ worth of data. The portfolio that he picked has returned seventeen point six one percent per year for ten years.
Have you increased his allowance by seventeen point six percent a year?
We've increased his allowance by one hundred and twenty five percent over ten years. So he's gone from thirty dollars to maybe. I don't know. It is that 80 dollars or something, but nowhere near what was there, so I'm bringing this up and I've brought this up in past presentations just because picking stocks is hard. Now, this kid knew nothing about what he was picking. You just picked names he is familiar with and picked some. He wasn't. Yeah, there was no strategy involved at all.
And I think the point here is not to make fun of people who pick stocks for a living or anything like that. What we're trying to do is point out how difficult it can be and how random it can be. And so there's lots of great companies out there. And any research department, even a well-stocked, well rounded out research department, can only cover so many stocks. And so they're going to typically use their typical basket of names with the TSX 60. Probably most of the names in there are well researched. Of the two hundred and sixty that make up the TSX Composite Index, probably a lot less coverage of those names.
And that's just Canada and that's just Canada. So if you talk about three thousand five hundred stocks that trade in the U.S., there's probably tons of research analysis on the biggies, the apples, Amazon's General Motors, Et cetera.
Dillards, of course, but there probably isn't the coverage on those smaller ones because you just can't get to them. So, again, the point is it's very difficult and there's lots of professionals trying to do it and not a huge percentage of them are successful So let's just talk about a couple of other ways of picking stocks. So we talked about fundamental analysis. Another very significant method that we won't talk about too much right now is technical analysis. And what technical analysts do is they chart the performance of stocks or markets and they look at trend lines based on how a stock has traded. They look at moving averages are relative strength in trading, and they look at different patterns, which they'll call things like candlestick patterns and formations and things. And what they're really looking for is to compare the trading patterns that stock or a market are currently undergoing to previous times. The markets have shown similar patterns and then they make predictions based on if a stock moves through a moving average, then it's likely to keep going to another level, that kind of thing. So it's just another method of attempting to identify stocks that are going to go up or that are mispriced or have some likelihood of a particular direction. And so, again, as we talked about, now availability of information is massive. The gut feelings of stock picking of the past days are gone because there are lots of tools available and do it yourself. Investors at home have access to all the fundamental research, all the technical analysis that professionals have now. And the question is, does that help? And I think the answer continues to be not. Typically, it's a bit of a gamble. So we talked about this a little bit last time. What's the alternative to picking individual stocks? Alternative is to become more diversified, either buy through some sort of investment fund or just holding a massive number of shares that you diversify away that specific risk. And it's interesting, I think we talked about this the last time, but back in when was that 2008, Warren Buffett of Berkshire Hathaway. Most people know the name and Ted Sidey's who's a hedge fund manager, made this a million dollar bet where Buffett was going to select the performance of the S&P 500 and Sidey's was selecting five hedge funds. And at the end of ten years, whoever won basically would win a million dollars from the other party and donated to charity in the end. And before the ten years had even passed in mid-2017, Sideys conceded defeat. The hedge funds returned twenty two percent and the S&P 500 index returned eighty five and a half percent. And arguably, hedge fund managers are among the best because they have full ability to invest in a variety of different strategies and they charge fees of up to 20 percent on performance and things like that.
Well, they're the best. The charging fees
So that's just basically what happened in that particular case and just highlight some of the risks. And again, some of the other risks of stock picking is you can get overly concentrated in one stock or sector. As we talked about last episode, it's the whole get rich versus lose everything risk. And again, the time cost. And this is something that I want to just spend a minute on. There's a time cost of being wrong in a portfolio. So let's say we use the stock market average, whether the composite index or the S&P 500 as our benchmark.
So if you have a small stock portfolio and if you happen to have what the author of this particular paper called a Torpedo stock, the impact of those torpedo stocks, which is the name, would suggest the stocks blow up. The impact on a concentrated portfolio can be fairly strong, apparently heavy. If you only have ten stocks and one of them blows up, that affects. Ten percent of your portfolio, and that could happen in a year when the stock market is doing just fine. Well, that underperformance, it's not just a dollar value in your portfolio. Actually, it could take you years to catch back up to where you would have been had you just been in a diversified portfolio reflecting the stock index. You have to do better than the stock market index for several years in a row just to catch up to where you would have been. So that concept of a torpedo stock or making a big mistake can have a real time impact on your portfolio.
And when we think about portfolios as being basically just a tool for investors to achieve their financial goals, such as retirement or something else that can put a real delay into achieving those goals by just having one blow up.
So what do people do about it?
Well, I guess the only thing you can do about it is try to avoid that by having a well-diversified stock portfolio and focusing on some of the things that you can control. You can control the asset mix. As we talked about last time, you control the diversification, avoid overconcentration and look at all the possible ways to diversify that might actually allow you to have access to some of those factors of higher future returns. So for all of those people that say, well, I don't want to just do as well as the market, I'd like to beat the market, there are a couple of ways that I've have been identified that might help you do that. And they just don't involve picking individual stocks.
So those are the factors of return that we're going to get into in another episode. So won't spend any time on that today. So basically, what are we seeing that picking stocks is hard? Like it's hard to be right over and over and over again. You can be right once. And it could be lucky or you could be right because you actually were right. But then to do it over and over again is pretty difficult.
Yeah. And we're not here to tell people they shouldn't try to pick stocks. And in all fairness, probably most advisors, even if they don't recommend picking stocks, most advisors and most people have one or two individual stocks in their portfolio because.
It's fun, and they appeal to some aspects. So if somebody has a real strong feeling about environmental issues, then they might choose to invest in a clean energy ETF or stock or something like that. Yeah, and that's something that it feels right. But as long as it's not too huge a part of the portfolio, that it could derail your plans if it doesn't work out. I think that's the secret. We talk about this as a zero sum game. And really, when it comes right down to it,
If you believe a stock is undervalued and you're going to buy it, the stock market is an auction market. And in order for you to buy the stock, somebody else has to be willing to sell it. And what that means is that person obviously would have a view that the stock perhaps is overvalued and should be sold. And so here you've got two people with exactly opposing views, executing a trade.
And one of them might be right. But yeah, they can't both be right.
Now, you talk about a zero sum game and we've talked before. It's actually a negative sum game because that doesn't include the fees. Exactly. Those transactions. So whether you're the buyer, the seller read on. All right. Well, it's not stock picking. We're not here to slag it. We're just saying it's difficult. The next part is market timing. Market timing is just as difficult as stock picking, I would say, Greg. Yep. So before we get into it, I wanted to talk about an article in Forbes now back in March of twenty twenty.
So just at the beginning of the pandemic, they identified six reasons market timing is for suckers. These are their words, not ours.
Number one, we always think we can do this successfully make sense. Everybody thinks that they know when to get in and when to get out. Number two, you don't have an edge against the pros. So this has been removed by things like program trading, flash trading, algorithmic trading, things of that nature. Yep. Number three, you need to be right a lot. They're not one time trades like you actually have to continually be right. So if you're market timing to get into a market or get out of a market, well, actually, it's kind of the same thing. Right? You got to be right. When to get in, right? When to get out. Yeah. If you're right, what to sell or great what to buy. Like, there's multiple reasons to be right or multiple times to be right. Number four is you need to be a full time investor. In other words, are you employed in another field? Do you actually have the time to do your due diligence on any trade in that? Due diligence is not. The newspaper from the nineteen thirty four is no number five. Market timing is stressful. It is super stressful. I know this from experience.
Yeah. It's like a roller coaster ride. You know, every time you think it's going to go up and it goes down or vice versa, it creates stress. And lastly, number six, the future is unpredictable. A common argument investors have is that they want to wait for things to get better. So what we've seen is, let's say somebody sold out of the market march of twenty twenty because they were scared. And we said, well, when are you going to get back in? They said, well, when things get better, what doesn't make any sense is sold things low and you're going to buy them when they're higher. Yeah. That's actually contrary to what you want to do, right?
That's right. Yeah, and that's a very it's an understandable, but an emotional response to volatility.
Yeah. And makes it very difficult. So market timing, the way I kind of look at market timing is it's kind of like stock picking, but on a more of a macro level. So rather than is now the right time to buy or sell a particular stock and market timing talks more about is now the right time to be in or out of a particular asset class? And typically IT stocks. We've heard a lot about bonds lately, but typically it would be stocks. So market timing theory is trying to interpret or detect, buy and sell signals in trading patterns and in history. And again, with regards to asset classes, when some of the decisions you make with the help of market timing can bring profits, others can cost money.
When you coming up with acting, let's say, on a series of guesses or estimates or probability assessments to use in your buying decisions and selling decisions is really what it's all about. So the aim in twenty twenty one is the same as the aim was in 1997 when the strategy really gained a lot of prominence. And it's everyone's goal to buy near Willow and to sell near a high end. So a lot of people think that that's going to make a massive difference in the end. And ultimately, a lot of people become disillusioned trying to do market timing because they figure out it's costing the money either real value by having stuff that they own go down or missed opportunities by not being in the market when it's going up.
Well even just recently in the last year, I mean, you think about the Dow Jones, it's what's it, around thirty five thousand points right now? Yes, somewhere around there. Yeah. When it was at 25000 points or was like, oh, jeez, the market's expensive if I want to get in now. Yeah, that's right. Well, if they didn't, they missed out on what does that thirty three percent rate of return.
That's right. And you and I talked a little bit about probability in one of our previous podcast and the markets over the last twenty years. I would say, in fact, the whole time I've been in the business over twenty five years, they've sort of defied probability a lot during those periods. they defied probability with the run up of the bull market in tech stocks, which ended abruptly. But it went on for quite a long time. We talked about in last week's episode how the U.S. market basically had a negative return every year for the first ten years of the millennium. And so there's a lot of things that happen that you don't expect. And it's not because they can't happen is just because you don't expect them, because they're unlikely but still happen. It's like the 100 year flood. So what happens is market timing can pay off sporadically and the results are largely random and successes and failures sometimes come in spurts. So the worst thing that can happen near the start of investing career is you make a bunch of successful timing decisions and that leads you to believe that you've broken the code and that you've got a talent for market timing or whatever and what happens that can get you back into the future timing decisions. And in fact, when you look at it in the last twenty five years, you probably only needed to time the market right. Three times and would have been awesome if you were able to time the peak of the tech market in two thousand. Time, the peak of the real estate inspired stock market run up that ended in 2007 in the US and spotted the pre pandemic peak. Yeah, those are the only three timing decisions that you ever needed to make. It would have rocked it.
So basically, I don't. but let's just go back there for a minute. But that's all hindsight bias,
Because of course, everybody says, oh yeah, I knew that the markets were going to come back or whatever. No, you didn't. Otherwise you would have invested more money in them.
Exactly. And at the bottom of those, obviously, it would have been a great it would have been great to get out at the top. But as you pointed out earlier, you need to make two rate decisions. You also needed to get back in at the bottom. And so what are the odds that you saw the peak of the tech bubble coming in exactly March of 2000 and you knew to get back in and exactly November of 2002, the odds are very low. And so you're never going to be exactly right with those kinds of things.
And in fact, you can often be quite wrong. And if you miss getting back in, then you've missed out on a whole lot of gains.
Well, and we'll spare the listeners that breakdown of if you missed the best one day, five days. Ten days. Thirty days. Yeah. Have a period to see that it creates a significant different outcome.
So what's the goal of market timing? The goal of market timing is to buy low and to sell high. And there is a way to do that. And in our opinion, the way to do that is not by absolutely timing the markets, but by using your asset allocation that we talked about last time as an opportunity to sell high and buy low. And so what do we mean by that? Well, if you go through a really bad market dislocation, like we did in March of twenty twenty or during the global credit crisis, if you had a 60 40 standard 60 percent stock, 40 percent. Bond allocation and stocks went down 50 percent, as they did back in 2009. Well, you would have been offside. Your 60-40 would look more like a 50 50, let's say, or even worse. And so you would have just rebalanced and bought 10 percent more stocks buying at the low and selling your bonds to buy those stocks, selling at a high price. And you would have accomplished the same thing, not with 100 percent of your portfolio, but with part of your portfolio. So unfortunately, a lot of people sit back and wait and they'll say, OK, well, when the market sells off 10 percent, then I'm going to start buying. And you might be waiting a long time for one of those. And so it's just a very difficult thing to do. And if you reach the point of being kind of a long term investor who's investing using a long term process, you can see those market setbacks is something that you just have to live with. And again, the best way to protect yourself against them is to put money into the stock market. Only if you can afford to leave it there for many years.
Not one year.
Not one year.
Yeah. Is one year is not many years. One years, not long term. I don't care who you are.
Let's talk a little bit about the historical results of some of the professional money managers that are in the news these days, Greg.
Sure. There's a guy out there. His name's Bill Miller, currently in the news because a fund that he manages has done quite well in the last few years. Absolutely. Mr. Miller used to run the Legg Mason Value Trust Fund in the U.S. and for 15 straight years, that fund outperformed the S&P 500. There were books written about him, strategies mimicked, trying to mimic. His results were created. But what happened, Greg? We know what happened.
What happened with the global credit crisis? Yeah. The global credit crisis in 2009, the global credit crisis was at its worst. It was March 9th of 2009 was the absolute low. And in that year or during that period, Bill Miller's fund gave back all 15 years of returns. So what happened to Mr. Miller, you remember?
He was fired up like he sucked at his job, right? I was joking, of course, but he was let go. he was rehired by another fund company to run another fund. And what happened to him that year? You remember?
He had the worst performing record in the whole universe and just part.
Well, he was let go of that fund, but now he's back in the spotlight, saying, look, I can do this. I'm a good picker and a good market timer, and he's having some success with it. So I don't mean to be so hard on Bill Miller and his past results, but is just evidence of the fact that here's somebody that that is their full time job. They've been heralded as a genius at one point and then heralded as, I don't know, villain at another point. And it's just really hard. It's really hard to stock pick and market time.
That's right. Yeah, exactly. And because it's such a competitive industry and fund managers live and die by their performance relative to a benchmark.
Yeah. And what have you done for me lately?
Well, listen, should we wrap up this episode of stock picking and market timing?
Let's do that. And I think as a means of wrap up, just the way we talked last time about asset allocation and diversification, what we're talking about here is just it's kind of an evolution of investing because investing started with stock picking and without asset allocation. It was just stock picking and bonds were something that were largely left to institutional investors and things like that. So the market started there, started with Benjamin Graham and fundamental analysis. And as time went on and information became more broadly available, even as long ago as 1963, Ben Graham was seeing that the kind of stuff that he did and wrote about wasn't working anymore.
And that was fifty eight years ago or
Was fifty eight years ago. So that's just it just shows the evolution. And so now as we're moving towards sort of a very different way of investing, we have to start looking at investing as a process, not as a transaction. It's not just a buy or sell, whether it's a stock or the entire asset class. It's a process. And if you can think about investing as a process, then we can avoid some of the pitfalls and risks that we've talked about and hopefully have a better investing experience. And once again, importantly, linking that back to the investors financial goals from their plan.
All back to the plan. We keep saying it over and over again.
Oh, man, it must get old. Let's get tiring. You're listening to us talk about the planning.
All right. Listen, thanks for joining us today on the free lunch. And we'll be back next week with the third episode of our Back to Basics miniseries.
Sounds great. All right.
Episode 61 - Back to School…Asset Allocation & Diversification
Greg and Colin launch a mini-series focused on back to basics for investing. They talk about the importance of Asset Allocation and Diversification.
EP.61 - Asset Allocation and Diversification FINAL.mp3
Welcome back to the free lunch podcast with Greg and Colin. Last week, we discussed how a mutual fund works, the difference between it and an exchange traded fund or ETF. And that's a question we get all the time, isn't it?
Well, more and more these days, because certainly the growth in the ETF side of the investment fund business has really been tremendous.
Yep. And you had a good analogy. You describe the difference between a mutual fund and an exchange traded fund is the difference between what a hardcover book and a paperback.
Right. So the same words inside just the packaging is slightly different.
But it got us thinking, why not do a miniseries on investing basics, revisiting some of the key themes around investing? Because, Greg, we've been hosting this podcast for well over a year now. We've covered a lot of topics,
That's for sure. Yeah, its time has gone by quickly, actually.
Yeah. And as we're in the summer here, and I hate to say it, but we're looking forward to September and back to school and things like that. Already we plan on running five to six episodes of this Back to Basics miniseries, which should align with kids going back to school in September. And Greg, people just getting more learned.
Is learned a word.
Of course it is. Yeah.
Yeah, I like it. So to kick it off, we're going to tackle arguably the most important item when it comes to investing, and that is the importance of asset allocation.
Yeah, right on. And I think as most of our clients know, that when we when we sit down and talk to them, we identify the fact that there are very few things in investing that we can control. And you can't control the how the stock markets or the bond markets perform. You can't control what countries are going to do. You can't control certainly whether or not a global pandemic is going to occur out of the blue.
You mean like the year before we were seen with the upcoming global pandemic?
Exactly. Yeah. But there are a few things we can control. And it all has to do with controlling risk so we can all control the risk in our own portfolios and so we can choose to take on more risk or less risk. That's entirely within our abilities. And so that's really what we suggest people focus on, focus on the things that we can control, and then the rest will just happen. And so the first thing we can control and the most important decision that investors make would be regarding their asset allocation. And so when you think about it being invested in a market, whether it's a stock market or a bond market or whatever, there's certain risks that are just inherent in being invested in those markets. And that's what we call systematic risk and the systematic risk that affects stocks and bonds and so on. But that just exists. And so what we want to do is want to say, well, look, different asset classes carry different systematic risks. For example, stocks may have higher risk or volatility. When we talk about risk, we're talking about volatility then with bonds. And so asset allocation, it really allows us to determine how much overall risk we want to take with our portfolio. And so that's where we get to decide about how much of our portfolio we want to have invested in each asset class, whether it's stocks, bonds, cash or cash equivalents or other alternative investments. So let's move on from there.
Ok, well, let's talk about the basics of asset allocation. The specific claims vary, Greg, but financial professionals in general sort of have this claim that more than 90 percent of the variance of a portfolio is return is directly attributed to the asset allocation rate. So just that mix of how much is in stocks, how much is in bonds and other asset classes. This assertion stems from studies by somebody named Brinson who study this back in 1986. And he states, and I quote, "Investment policy dominates investment strategy, explaining on average ninety three point six percent of the variation in total plan return." So this conclusion, Greg, has caused a great deal of confusion and debate in academic and financial communities. And we hear it all the time.
But what the Princeton study explains is that more than 90 percent of the variability of a portfolio is performance over time is simply due to how it's constructed its asset allocation and in measuring the relationship between the movement of the portfolio and the movement of the overall market. And that's gets back to what you were talking about, systematic risk versus nonsystematic risk. Right. So systematic risk, just the risk of being invested because things happen when you're invested like global pandemics happen.
You're exactly right.
But he finds that more than 90 percent of the movement of one's portfolio from quarter to quarter is due to market movement of the asset classes in which the portfolio was invested. So just what I said. Right.
And if you think about it, then so if 90 percent or more, in fact, a study ninety three point six is due to the asset allocation decision, then what does that mean for the other? The remaining six or seven percent of the variability, where does that come from, that comes from market timing or stock selection, things that are outside of that that big asset allocation decision. So when you think about it, you know, you could spend a whole lot of time on stock selection or market timing to affect six percent of the portfolio. Or you could spend a lot of time on asset allocation and take care of that 93, 94.
One of those numbers is bigger than the other one is a lot bigger. So there are criticisms to the Princeton study. So there are some other academics that said, look, its results are based on bull and bear markets, which explain most of the variation in returns. In other words, a rising tide raises all boats. I've heard that saying before they used up. Sure. Yeah, right. And they assert that perhaps maybe the study doesn't ask the right question, that a more appropriate question would be one that probes the difference in return between funds. So there's academics that argued that Brinson is asking the wrong question and they feel the most relevant question pertains to the relationship between asset allocation and returns, not volatility. That's kind of a head shaker head scratcher, I should say. But what are the implications for an individual investor in the study? And what I'm quoting here is actually some work by a guy named Ibbetson who looked at the impact of asset allocation policy on balanced mutual funds and pension funds. And we can extrapolate from the study that for the long term in individual investor who maintains a consistent asset allocation and leans towards just being invested in the market, whether it be in index funds or just broadly based funds, asset allocation, what Ibbetson says determines guess how much performance, Greg?
You tell me
About 100 percent of performance. So whether it's ninety three point six percent or 100 percent, whatever, that's those are big numbers, right? Right. So regardless of whether one is measured return variability across time or return variation between funds or return amount. So in summary, from these studies, the impact of asset allocation on returns depends on an individual's investing style. So just what you talked about. So if you're a long term passive investor, well, asset allocation is by far your most important decision, right? If you're a short term investor who trades more frequently, investing in individual securities and trying to practice market timing, then asset allocation has less of an impact on returns because, well, there's just lots that can happen in the short term. Right. And you can get it right.
In the short term, you could get it right till you got it wrong, actually.
Yeah, exactly. Well, that's right. You know, and there you're talking about, you know, if people are choosing to invest or like if they're high frequency traders or day traders and they're for the most part, they're not making an asset allocation decision. They're deciding to be 100 percent invested in stocks. So they've actually abandoned the first, you know, sort of key tool that we have to control risk, which is asset allocation. And so they've decided in a sense that we're going to go 100 percent risky or at the risk of using the riskiest asset class, which would be stocks. But then they're looking for market timing and stock selection to try to increase their returns.
Sounds like gambling.
Well, it's a little bit harder because you take a little bit of the of the systematic risk, which is a positive right. Systematic risk is both positive and negative, but it can be positive. But you might actually take some of that out of the equation if you're not being consistently invested.
Some might say, well, yeah, but why do we even want things that are volatile in our portfolios? But you need volatility in order to have return.
So you need that systematic risk of being invested in things that have higher expected returns because they have higher volatility.
Yeah, that's right. I mean, the only thing without volatility typically would be cash investments. And of course, today's cash rate's zero point two percent or something. It doesn't help people, for the most part, achieve their financial goals.
So let's talk about what it means in English, in English. What I like to equate asset allocation or that asset allocation decision to is like a recipe, like baking a cake. I've used this analogy before. You know, in order to bake a cake, you've got to have the right amount of ingredients in order for it to be successful. Right. In order for the I don't know, the cake to bake, of course, and to take it in as asset allocation is kind of the same thing. You have to have the right amount of stocks, the right amount of bonds or whatever the other asset classes are in there to get your desired outcome. But each of those asset classes on their own in the asset allocation decision are different. Just what we talked about, some have more volatility than others. So the less volatility in the portfolio, the less expected return is over long periods of time. Right. The more volatility, the more expected return is over long periods of time. I think that's a pretty fair statement to make. Right. And it's because of the different expected. Rates of return between those asset classes, so I hope that those who have been listening to our podcasts over the last year and a bit kind of get that relationship of risk and reward that you can't have things like no risk and high reward. It just doesn't work that way.
Yeah, and that's not what capitalism is all about. I mean, capitalism rewards investors who provide capital and the riskier the venture, the higher expected return those investors are seeking.
Exactly. But on the other hand, taking on more risk doesn't always align with any form of guaranteed higher returns. You might just be taking on more risk.
Yeah, especially in your time horizon. So what you pointed out or what we talked about is if you're day trading, you're taking on a lot of risk. Greg, are we recommending people day trade?
No, we're not Colin. But I did want to mention one thing, though, and that is that, you know, when we talk about asset allocation, there is no right asset allocation, like some investors may choose to be 100 percent invested in stocks. And so their asset allocation mix is one hundred percent stocks, zero cash, zero bonds. And that may be totally appropriate. For example, if somebody has a large pension and essentially they're receiving guaranteed income for the rest of their lives and possibly the rest of their spouses lives, then they may not need to have fixed income in their portfolio and they may be able to withstand the volatility that you'd get with a 100 percent stock portfolio. So, again, we're not saying that there is one right asset mix for everybody. In fact, the asset allocation has got to be appropriate for each individual investor, not only to, you know, sort of align with their goals of their plan, you know, as we've talked about in the past, but also with their ability to withstand the volatility, just the emotional stress of being in a highly volatile investment portfolio. So, again, the key thing is asset allocation is a determinant of variability of returns and of the actual returns. And then the exact asset mix. That's right for you is right for you based on a number of other factors.
Well, and based on the planning that you've done to figure out what is the right asset allocation for you, because, for example, say, Greg, let's assume that we've got somebody that doesn't have a pension that funds all of their expenses. And let's just talk about general rules of thumb. So general rule of thumb for allocation mix might be your fixed income should be somewhere close to your age is one that is commonly that's common. So in other words, the older you get, the more fixed income you should have because your time horizon changes dramatically. So expected rates of return for fixed income are obviously lower than stocks, but they protect you during sell offs. Can you think of any recent sell offs that we've lived through?
Well, let's see. Maybe back in March of 2020 when stocks went down thirty five percent and government bonds skyrocketed in value.
Yes, that was a risk return trade. So people were selling stocks because they were scared to be quite frank and buying bonds for safety. But anybody that had those bonds going into that sell off, well, they did better than if you had all stocks. Right. So this same trade as occurred in all major crises since I've been working professionally and you've been working professionally. Right. Like it's just always worked out that way.
So the expected rates of return for stocks is higher, but bonds will actually protect you in a sell off. Now, there are various factors of return within the stock market. We've spent some time in those in past episodes and we're going to talk about them specifically in one of the episodes for this miniseries. So I'm not going to spend any time on them today. But for today, we're only going to talk about stocks as represented by our model portfolio. So, Greg, you know that we run model portfolios that range in asset allocation from 80 percent in bonds and 20 percent in stocks all the way to 20 percent in bonds and 80 percent in stocks and everything in between. Right. And if you had to describe why the difference or the different levels of those models, what would you say?
Well, just whatever's appropriate for the client based on their on their plans and their goals and the amount of volatility they want to take.
Right. Because that decision of allocation is based on the as we talked with the planning that goes into determine, well, how much risk they actually need to take on to achieve their goals and each person's goals specific to them. So the so Greg, the planning has to be done first rate, but the decision is not static, as I mentioned, because as we get older or things change in our lives, we might have to adjust our asset allocation, meaning that, you know, when we're younger, we can, in theory, recover from major market corrections, more so than when we're older. And it's just because of a different time horizon. Right.
So I always described it when my grandpa was still alive is my portfolio is actually the same holdings as my mom's portfolio and the same holdings as my grandpa's portfolio. Just our weightings were different.
So let's just talk about what those basic asset classes are now, Investopedia has listed seven different asset classes or basic asset classes that I would think these are pretty well known, but equities are stocks, fixed income or otherwise known as bonds, cash and cash equivalents, which you talked about earlier, real estate, commodities futures and other financial derivatives. Those are all examples of asset classes out there, right?
So for our discussion today, we're only going to focus on three. We're going to focus on cash, bonds and stocks. And again, let's talk about them like a recipe to bake a cake. So we have to have the right amount of each ingredient in order to have that successful outcome. So I did. I looked at our model portfolios and the as I said, they range from 80, 20 to 20, 80 and everything in between. And they looked at how they did over the last one, three, five and 10 years. So, Greg, over the last one year return period, which one year numbers what's the significance of when your numbers? Is there any.
Well, I wouldn't think so. You know, one year is not a long time, and particularly in years that are so volatile as 2020 was with the big downturn in March, it does tend to distort the one year numbers. Right. So if you're measuring, for instance, against a time period just after the big correction, well, then, of course, the numbers today are going to look fantastic. But they're nowhere near repeatable, you know, on an ongoing basis. So certainly the longer time horizon you can look at, the more realistic those kind of numbers are. Right.
But just for argument's sake, let's look at the one year numbers on our models, because anybody that was invested in what we would call a conservative portfolio, which was 80 percent invested in bonds and 20 percent invested in stocks, actually had a pretty good one year number. Greg, you know what that number is?
I do, because I'm looking at it.
What is it?
9.66 Percent. And that's without taking on a whole bunch of market risk, right?
But if you look at that number over a five year period, that model portfolio did four point two seven percent per year. Right. So it just highlights the difference in one year and five year or more. Now, if we look at somewhere in the middle our balanced portfolio, which is 50 percent stocks, 50 percent bonds, what's that rate of return over a one year period,
Nineteen point three five percent.
Now, if somebody came in and complained that they got nineteen point three five percent over the last year, I might have a problem with that. But as you say, that one year is a skewed number. Over the five years, it's done over five percent per year. So it is a pickup in return from four point to seven to five point one seven. But it's not as obvious as the one year number, right?
And if we look at the our most aggressive model portfolio, which is 20 percent invested in bonds and 80 percent invested in stocks, that one year number, it looks pretty healthy.
It does almost twenty nine point seven percent, almost 30 percent. We can
Call that 30, can't
We? OK, we'll call it 30, 30
Percent one year. That's a pretty darn good year. But again, over the last five years, it's done six percent a year.
Yeah, right. And I think that's the thing. So when you when you look at one year, numbers can be very skewed because of the volatility in any particular year. But the longer the time horizon, the more those things get smoothed out. And so then if you compare the 80 percent bond portfolio to the 80 percent stock portfolio over five years, 80 percent bonds did four point to seven, as we talked about, and 80 percent stocks did five point ninety nine. So that's a pick of about one point seven percent or so per
Year per year. That's the important part, is that that's a compounding difference. Exactly. So it's not that our conservative portfolio or in general or 80 percent bond portfolio did four point two seven percent over the last five years. It did four point two seven percent per year for five years. Exactly right. And compounding is a pretty important thing in investing, isn't it?
It's one of the most important things. Right.
So obviously lots of variation on portfolio returns based on the asset allocation model that's selected. And remember, these models own the same positions. They're just in different weightings. But I have to caution everybody, don't put the cart before the horse, because if you just looked at those things, if somebody just came in and said, how did your models do last year? And we showed them the returns, which one are they going to gravitate towards?
Typically the one with the highest return.
Of course, we're all human. We've got a greed factor built in that says, well, why would I take one with less return rate? I mean, why not take the one with the higher return? But these models have to align with your goals. And if they don't, you're in the wrong model. Right. Or you've got just your goals.
So we don't want to put the cart before the horse. You shouldn't really pick your asked allocation before understanding how much risk you need to take to meet your goals. And it can only be done. For some financial planning, so if you don't need to take on more risk than don't, and how many times have we had in the years done planning for people? And it showed that they actually had enough money to fund their life just as is, and they actually didn't need to take on any market risk whatsoever. Most people don't accept that either, right?
No. And I think for a lot of people, it's like, well, I need either I need to stay ahead of inflation. And so you need to make two percent or whatever the number is just to keep ahead of inflation. And so you're not you're not falling behind and just a desire to actually earn money on your savings, you know? And so I think it's very difficult for people to accept zero return. But I think what you find is in people that are, you know, that are lucky enough to be to own securities or wealth of half a billion dollars. For the most part, they don't take a whole lot of risk unless they happen to be tech entrepreneurs
Trying to get into space.
Exactly. Yeah. And it becomes more a matter of protecting it rather than growing it.
Yeah. And I want to just highlight that part just for a second, because the flip side to that is we've had people that have been referred to us over the years, like I had a dentist years ago who was referred to as he came in his portfolio was four hundred thousand dollars, which actually didn't quite meet our minimum. But whatever we want to do some planning with them. I said, well, how much are you expecting to earn every year on this? Four hundred thousand dollars? Do you know what he told me? One hundred thousand dollars a year. So he said, what do you think? And I said, well, what are you going to do after year for? Is it what do you mean? I said, well, if you're spending a hundred thousand dollars a year and you're starting with four hundred thousand, you're going to be out of money in four years. So what are your what are your plans after you're for? It wasn't the answer he was looking for and he decided to go elsewhere. But, you know, so the point I'm trying to make if you need to take on lots and lots of risk to meet your goals, like more risk than you think is reasonable, you might want to adjust your goals. Right. So, Greg, let's just wrap up this section here with one final statement. Am I recommending our model portfolios if they match your potential clients asset allocation based on the goals identified in their financial plan? Of course you are. Of course. Why wouldn't we? We're biased. We think we do a good job.
Exactly right. Well, let's spend a few minutes now talking about diversification, which is a little bit it's sort of like the asset allocation discussion, but just a little bit more detailed. So I talked about asset allocation being, you know, kind of like the first tool, you know, in our toolbox as a way to control risk in the portfolios. And I now want to talk about sort of the second key element of risk control or risk management that we use, and that's diversification. And so in the case of asset allocation, we talk about reducing risk by including a number of different asset classes in the portfolio. And so what that does, obviously, by adding any other asset class to a stock portfolio, it reduces risk by diversifying those asset classes from each other. So now when we talk about diversification, we're talking about diversifying within each asset class. OK, so within stocks,
Because we've already addressed the asset allocation piece rate, how much stocks and bonds, et cetera, et cetera. But what you're seeing within
Stocks, within stocks, how do you diversify and reduce risk? Yeah, and or I should say, how do you reduce risk? The answer is diversification. So let's talk about that. So what is it? You know, and we all grew up with the old adage, you know, don't put all your eggs in one basket, which is, you know, it's an it's a pretty brilliant concept when you think of it. You know, the concept being if you drop the basket, you break all the eggs. But if you have a number of baskets, then even though you may drop one, you're not going to you're not going to break all the eggs. So diversification, what we're trying to do is smooth out what we call unsystematic risk events in a portfolio. OK, so the positive performance and some of the investments may neutralize negative performance in others. OK, so we talked about systematic risk. That's just the risk of being invested in an asset class like stocks. Unsystematic risk is risk that comes from being in a type of stock that experiences a bad result, even though it's still a stock. So the stock market may be doing well, but a particular company may fall on hard times, or you might find out that the particular company is actually a fraud or some other such thing.
Well, let's spend a minute on that unsystematic risk today. Could explain GameStop. Sure it could, right?
Yeah. And it just so happens that most of the risk in GameStop has been positive for many people who bought GameStop when it was trading at four or five dollars a share and it's now worth one hundred and whatever, ninety dollars a share, whatever it might be. However, there are people that paid as much as four hundred and sixty dollars for GameStop shares and they're now down, you know, two thirds or three quarters. And so that's unsystematic risk because during the time that GameStop both went up and went down, the overall market was doing relatively well. So that kind of highlights the difference between unsystematic risk and systematic risk. So why would you want to diversify? Again, it's to not only smooth out those risks, to ideally totally eliminate unsystematic risk, because in a sense, what you can do, like unsystematic risk, is the risk. We just talked about the sometimes called specific risks, other specific risk of being invested in a company or a sector of the economy that experiences a bad time when other the rest of the market is doing fine or the rest of the economy is doing just fine. So we want to we want to do that by including many, many, many securities. Right. So if you own one security, one single stock, you obviously have a massive amount of specific risk. If you own 50 stocks, you have significantly less specific risk. Right now, if you look at the markets, though, the market might include anywhere from six hundred stocks or it might include three thousand or four thousand stocks like the U.S. And so while a 50 stock portfolio is better from a diversification standpoint than a one stock portfolio, a thousand stock portfolio is even better because you're virtually eliminating all of that specific risk now within stocks, though.
So just thinking about stocks is a lot of ways to diversify and so you can diversify just by owning more stocks. But the thing is, you also want to include more different stocks. So, for example, one of the earliest ways of. Diversifying stocks was by doing it geographically, so, you know, as Canadians, we tend to own a lot of Canadian stocks, whether owning them directly or in a in a fund of some kind. But it's a big world out there. Canada represents only three percent of the world's stock market capitalization. And so if you only invested in Canada, you'd be limiting yourself to three percent of the world's opportunities in stocks. No. And so you've got the rest of the world out there. The U.S. is probably fifty four fifty five percent of the world. And then the balance is made up of international stocks and emerging markets. You know, and there's a lot of reasons for owning all of those. For example, I just took a quick look at returns for two different decades for the Toronto market. So the Canadian stock market, the US stock market, as measured by the S&P 500 and the international stock markets, measured by what they call the EFFI Index, which is just everything outside of North America. And it's interesting, you look at the period from 2000 to 2009, very good year for Toronto or for Canada, five point six percent annually during that period compared to the US market, which is actually down to zero point nine percent during that time per year, per year.
I was going to say per year
For 10 years. Yeah. And the international markets, in fact, were down one point seven percent per year for that entire time. She's now, if you looked at that, you might say, well, you know what? Why would he ever own anything other than Canadian stocks? They did so well in the subsequent ten years, from 2010 to 2019, the Canadian market did six point nine percent per year, still pretty good. The US market, thirteen point six percent, double what the Canadian market did and the international markets, eight point three percent, again, compared to Canada at six point nine. So going into each of those decades, nobody had any idea of how things were going to perform. You know, you just had to make your bet and so you could make a bet. And if you bet on Canada for the first 10 years, you would have been right. But you would have had to then make a switch in 2010 to bet on the US or else you would have been wrong. And so our approach is really to say, look, I'm not going to be exactly right, but I'm going to cover all these bases. I'm going to be well diversified across geographies. And that way I don't really care which geographic area does the best because I'm invested in all of them and I'm going to benefit from all of that.
I'm spreading my risk, that's all. Exactly.
Yeah, exactly. So one other discussion that I'd like to revisit and one we've had before is this concept of the get rich versus lose everything portfolio. You know, we've talked about that before and it's just the concept of holding concentrated positions. So if you own any individual stock, there's really two extreme outcome possibilities for that. The stock could actually go to infinity. It could be the best stock in the world and you could obviously get very rich or it could go to zero. And we're not saying that stocks go to zero very often, but in many cases they can lose 80, 90 percent of their value. And we watch that happen with energy stocks during the pandemic
Was going to see. When you talk about diversification in owning more than one thing, unfortunately, some people feel they're diversified if they own multiple stocks in the same sector, exact. And that is the energy market in Alberta and Canada there. Sure.
Yeah, yeah. And so in a sense, a sector, because it is kind of a defined part of the economy. Many stocks within the sector all tend to behave the same way. And so if you only own stocks in one sector and it doesn't matter whether it's energy or financials or anything else, if you only own those kinds of stocks, then it's almost like owning a one stock portfolio. It's just a one sector portfolio. But again, the extreme possible outcomes are lose everything or get rich. And when we diversify, what we're basically doing is we're limiting the outcomes, limiting the potential outcomes. So there's certainly upside potential. And we know that just the stock markets in general, regardless of any other kind of stock picking, but just being invested in the markets has provided very nice returns over 100 hundred years now. But they also have never gone to zero. And so by having a more diverse portfolio, yes, you may not get rich, you may not hit the ten bagger that that people want, but you also won't lose everything. And so it's just a much a much more controlled set of outcomes.
You had a scene that you had written down here from Carl Richards.
Yes, yeah, Carl Richards, he says, you know, you're diversified when there's always something in the portfolio to complain about and you know, and that's and that's the thing about diversification. You're never going to get every element completely right. And that's the point of it. So that's the good thing. In another renowned financial historian and economist, Peter Bernstein, in an interview said diversification is an explicit recognition of ignorance. And again, that's not an insult. It just says that nobody is knowledgeable and can accurately predict the future. And so you diversify and you can diversified in a number of ways. So we talked about geography. We talked about sector. You can also diversify by market capitalization and all. What that means is certain stocks have a massive market capitalization, meaning the market value of all their shares outstanding are huge. You know, they could be tens of billions of dollars or more like Apple.
Tesla might. That's right. Those types of things
And companies, I think, are getting towards that one trillion dollar mark, some of the big ones, whereas there's lots of companies that have a very small market capitalization. And you'll sometimes hear those talked about as large cap, which is just large capitalization or small cap. But by having both types of companies in the portfolio allows you to participate in different market cycles.
And we're going to talk about those factors of return in another episode in this miniseries. Absolutely.
And other ways are just relative price. You know, is the price high relative to certain fundamental ratios like price to earnings or price to cash flows or whatever, or is it low? And so there's a number of different ways to diversify stock portfolios, bond portfolios, the same thing. You could buy bonds issued by governments or you could buy bonds issued by corporations or credit quality. So how creditworthy is the issuer of that bond? Is it a high quality company that's been around for 150 years, or is it a relatively new company or a company that's run into trouble? So, again, the key thing is there are many ways to diversify a portfolio and the more we can diversify, the more we can control the risk rate on. Exactly.
Do you want to get into how a diversification impact portfolio returns real quick?
Well, sure. You know, and as we talked about the Carl Bernstein quote, you know, there's always something to complain about. Basically, diversification averages out returns. So some of the holdings are going to be the best performing, you know, assets or best performing stocks or sectors. But they're also going to be some poor performing sectors. And so there will be an averaging and you're going to do better than the worst and you're going to do less well than the best. But so it averages out the returns, but it also averages out the volatility of returns. And so you end up with kind of a smoother ride, just the way we talked about asset allocation by including bonds and a stock portfolio, you smooth out the volatility. The other thing is, you know, if you have a relatively smooth ride, you're more likely to maintain a long term strategy if you have lower volatility, because it's easier on the nerves and it's something that people can understand and be prepared for. And again, so less diversified portfolios have the potential for more volatility and therefore the potential for people to lose, lose faith in their investment strategy over time. So that's it.
That's it. That's it. In a nutshell.
Everything you need to know about diversification, do it.
Yeah, well, and we had a note here from the first time we did this, it was about and I'm reading it right here, pizza chains. Why do pizza chains or pizza restaurants offer more than just cheese pizza? Yeah, well, why do it?
Well, people might not want just cheese pizza.
So I like pepperoni
Kind of shooting themselves in the foot if all that they offer is one thing. Right. So why should you know, I guess to summarize, your portfolio shouldn't just have one thing in it or one theme. It's got to be diversified and you need to really focus back on your past allocation.
Right, exactly. And the good news is for investors out there is that there, while diversification can seem complex, there are very simple ways to execute and implement a well-diversified portfolio. Right on.
Well, listen, next time we are going to get into market timing and stock picking, I believe, right on. So that was early on with that.
Yeah, those are fun conversations because they're among the they are far and away the most frequent conversations we have with clients.
The most frequent conversation to which we just pointed out only attributes to less than seven percent of your portfolio is variation in return. Exactly right. Interesting. All right. Well, till next time. Right on.
Episode 60 - What is a mutual fund?
Greg and Colin discuss how a mutual fund is constructed. The different classes of mutual funds, expenses, expense ratios, and liquidity factors.
EP.60 - What is a mutual fund
There are very few things that investors can do that are free, but what about a podcast that delivers educational content on investing, saving strategies, financial planning, topical items of interest, and maybe even the odd wacky topic? Welcome to Free Lunch. Posted by Greg Kraminsky and Colin Andrews of the CME Group at CIBC Wood Gundy, free lunch will bring listeners the firm's vast knowledge and experience in dealing with uncertainty. Top clients achieve their vision through a deep understanding of what is important to them. It requires planning money and time. Learn more and subscribe today at Market Stasch Work Dotcom.
Welcome back to the free lunch podcast with Greg and Colin and Greg. Last week we had Pat Woodcock on the show. That was a fun one.
That was good. Yeah, he's an interesting guy.
Yep. Pat talked with us about getting healthy, losing weight, gaining muscle and doing it all with a plan. So it's interesting, I'm sure, for people out there wondering why we're having all this emphasis on health when we're supposed to be talking about wealth. But it's all linked to planning.
That's right. Of course, we talk about it ad nauseum on these podcast, the importance of planning and making planning an ongoing process, not just something you do once.
So whether it be in your investment world or your health world, it's so important to come back to. So the conversation was fun. I'd encourage anybody interested in getting healthy to go back and listen to that one and also to listen to the health and wealth miniseries that we wrapped up a couple of weeks ago. But today, Greg, we're getting back to our roots a bit, something more investment related. We're going to talk about something that's important. And it's important because we get a lot of questions about it. And that is, Greg, what is a mutual fund?
We're going to get into it, but there's a lot of misunderstandings about mutual funds and what they're all about.
While the question that I've had many times over the years or the statement is almost like mutual funds, I don't like mutual funds, I like stocks. I don't want to pay those mutual fund fees or something like that. So I've had this discussion many, many times, and I'm sure you have as well. I have.
And it's interesting because when you get into that, I don't like Mutual funds and you dive into, well, why don't you like mutual funds? What's typically the answer? Well, I bought one and it did terribly. And so I got out. And which one did you buy? Well, I did the one that did really well the year before. And so there's a lot of reasons why people don't like mutual funds. But typically that's a biggie.
Exactly, because let's face it, not all mutual funds are created equal, just like how all individual stock portfolios are not created equal to so. But too often we're talking to clients about when we're talking about investing in equities. And we mentioned that those equities are mutual fund based. It becomes clear that there might be a disconnect because you can have mutual funds that are specific to bonds or specific to stocks or a combination that holds bonds and stocks or even a mutual fund of other mutual funds for sure. So there's definitely pros and cons to investing in mutual funds or even exchange traded funds. And this might blow some of the listeners minds. But, Greg, mutual funds and exchange traded funds are basically the same thing,
Extremely similar. That's right.
But they're marketed differently. So the main difference is that mutual funds well, actually, I won't get into all the differences. But one of the main differences that they're priced at the end of the trading day where exchange traded. Funds are priced throughout the day, but the structure is essentially the same thing. There's actually many fund companies that have a mutual fund version and an ETF version of the same portfolio. Exactly. So before we get into it. Greg, I wanted to play a little song because people are going to ask about freedom, the freedom to choose things like stocks, bonds, mutual funds, ETFs, whatever. So let's listen to a little Fleetwood Mac here just for fun, maybe as a time filler,
Maybe showing my age. But this album used to be one of my favorite albums of all time when it came out. That was a very, very long time ago.
Stopped dating and stop dating it.
Well I was a very young man
Anyway as a child actually. Exactly. Let's do it. Greg. What's a mutual fund.
All right. Well a mutual fund is a type of investment fund. Sounds a little bit redundant. What's an investment fund? An investment fund is a collection of investments. So as you mentioned, it could be stocks, bonds, other funds, whatever. It's a collection of investments in a mutual fund is just a type of that. But unlike some of the other types of investment funds, mutual funds are open ended. Which means that as more people invest, put more money into the fund, the fund issues new units or shares. And so the mutual fund, so it's open ended mutual funds that'll become important when we talk later about ETFs, a mutual fund typically focuses on some specific types of investments. So if it's a bond fund, it may invest mainly in government bonds or it might invest in stocks. But stocks from large companies only, or it might invest in stocks from certain countries. And then you have other funds that might be, say, balanced funds which invest in a mix of stocks or bonds or other mutual funds.
Well, this goes back to your point about if somebody invested in a mutual fund years back and it didn't work out and they say, I hate mutual funds, but you just point out there's so many variations of what a mutual fund can be.
Exactly right. And so why would somebody invest in mutual funds? Well, when you buy a mutual fund, what you're doing is you're pooling your money with many other investors. So this allows you to invest in a variety of investments for a relatively low cost, because when you think about it, if you were to build a diversified. Portfolio of stocks, well, and we can argue about what diversified means, but let's say somebody considers 50 stocks as being properly diversified. Well, if you've got one hundred thousand dollars to invest, you would end up having to buy two thousand dollars worth of 50 individual stocks. You would rack up some serious trading charges and you would have relatively small investments in each one.
Even if one of those two thousand dollar positions doubled in size, it's not really going to impact the overall economy.
So by pooling your money with other investors who are looking for a similar type of investment, let's call it, for example, U.S. stocks, you're able to have a very diversified portfolio without having to spend all of the money, time and effort to individually buy 50 or more stocks. And by the way, most mutual funds hold probably closer to 100. So that's a problem. The other advantage, obviously, is that what you're doing is you're hiring a professional manager to make decisions about the specific investments. So by doing that, you're getting the benefit of a professional manager or at least somebody who does nothing else for a living, but select stocks by whatever basis they choose to do that, as opposed to trying to do it yourself.
Kind of like building a road, like you'd want somebody that that's all they do is build roads to build that road.
Exactly right. The thing about mutual funds, obviously, they're broadly available through investment dealers like ourselves or banks and credit unions. Things like that, so broadly available. And you can buy or sell your funds at any time. Like all investments, mutual funds have risk. And it's one of the things that people have to realize, just like if you're buying stocks individually or you're buying them through mutual funds, you could lose your money on the investment. And that typically happens when the markets go through some of their more normal corrections or even bear markets which come around from time to time. So the value of the funds change as the value of the investments inside the funds go up or down. And depending on the nature of the fund, the value could change frequently and by a lot. So the other thing is there are fees that will affect the return on your investment. Some of the fees that are embedded in Mutual funds are paid by you and others are paid by the fund directly. So one of the things that's really critical is understanding the costs of investing. And we've talked about that many times. In fact, I think it's one of the three things when we talk about controlling what you can control, it's one of the three we talk about asset allocation, diversification and cost
Fees and expenses super important.
So we really have to understand the costs of investing in mutual funds. And so let's take a look at what are the costs of owning mutual funds. So the bulk of the cost of a mutual fund, it's what's called the MER, which stands for management expense ratio. And so the management expense ratio will vary from fund to fund. But the management expense ratio includes a couple of key things. So let's look at a couple of different types of mutual funds. So you'll hear us talk about series F or F class funds. And those are the kind of funds that we buy in fee based accounts.
So as many of our listeners know, that one way that accounts can be managed by us is on a fee basis where there's no charges for transactions. When we buy or sell a mutual fund or a stock or a bond, there's no charges because that's all included in the overall fee that's charged based on the assets in the account. So those are called Series F and the others are called Series A, those are the adviser series, and that's where a client account, the transactions are being paid for each time there's a transaction made. And so even though we never charge a fee to buy or sell a mutual fund, whether it's a series A or series F, the series A fees have some extra costs included. And we'll talk about those. So let's talk about the series F first. So the fee based type of mutual funds, the costs only reflect the costs of the fund itself. So we use it in fee based accounts, as I mentioned, and any fee for advice or services charge separately. So the MER or the management expense ratio for the series F Funds includes the fee paid to a mutual fund company for investment management to pay the fund's operating expenses and taxes. So let's start with a mutual fund that has a management fee of point six percent or what we call 60 basis points. That means point six percent. And that's kind of a typical fee, but not the best fee, but a typical fee charged on Canadian equity mutual funds. And what you'll find is that a fixed income fund typically has slightly lower fees than that. So you're paying the management fee of point six percent. What does that cover? Well it pays for the professional investment management and research, the risk management oversight, the service and support for our firm, in this case, the firm we work for and the day to day management of the mutual fund company. So that's the first component, the management expense,
BEcause those mutual fund companies earn. Charities, because they have employees,
They do pay people too. That's what you're paying for, is the professional management. And then the second component of the management expense ratio are operating expenses. And so these might be somewhere in the neighborhood of 10 basis points or zero point one percent. And that'll vary again from fund to fund. And the operating expenses will include things like record keeping for unitholders other day to day expenses, such as accounting and fund valuation, custody audit, legal services, regulatory filings, costs of preparing and distributing annual and semiannual reports, that kind of thing. So those are the operating expenses. So the management fee and the operating expenses add up to make the MER. And on top of that, they are subject to tax at a rate that's determined in the provinces where the funds unitholders live. So let's say, for example, we'll us Toronto because a lot of mutual funds are based there. Eight basis points would be around the right amount for taxes for those funds in Ontario.
which would be different than Alberta, of course.
Different from Alberta. That's right. So if you add up everything, it looks like you've got 60 basis points, management fee, 10 basis points for operating expenses, eight for taxes, and so point seven, eight percent a year. So that's the management or the mark that was series. Now let's look at series A. So Series A as I mentioned, those are four accounts that are not in a fee based structure. And so the series reflects the cost of the fund that we just talked about and includes a fee payable to the adviser or I should say, to the advisors firm for their advice and service.
So when you say advisory firm, that could be a bank. So if you bought a series, a mutual fund from a chartered bank, there would be a fee embedded in there.
That's right. So that fee is called a trailing or a service fee. And those fees, because in those cases, the investor is not paying fees directly to the adviser firm. And so they're collected basically as part of the overall management expense ratio of the fund and then paid to the advisers firm. So typically for a A class fund or A serious fund, the typical service or trailing fee would be about one percent for stock based mutual funds or equity funds and usually point five to point seventy five percent for fixed income funds. When you talk about the trailer fee, well, what exactly does that cover? And it can be broken down into three components. So the first thing is advice. So financial advisers provide advice. They do due diligence on the fund. They make sure that it meets the investors objectives. They do tax planning and things like that. So that component is the advice component. The second component would be, I guess, access, and that's the infrastructure required by the adviser and the firm to support the distribution and sale and servicing of those mutual funds and things like a trade confirmations, opening and closing accounts, et cetera. So lots of those types of things. So in general, as I mentioned, you're looking at fee from zero point five percent to one percent. So that covers off the management expense ratio or MER.
Wait, though you said there's three things that three components advice, access and
So we talked about the MER and again, for an F Class fund, we said, let's say that might be point seven, eight percent for a typical fund, a Canadian fund. And so if you add the one percent service fee for a class fund for somebody who's not in a fee based account, then that would be one point seventy eight percent.
At a minimum.
That's right. That's an average. Now, we don't think that's the best we can do. And obviously, we're going to talk a little bit about how can you do better than that? And the answer is, well, lots of ways. There are many funds that have lower fees. And of course, that's what we would want to focus on ourselves. But in addition to the MER, there's something that's not quite as well documented, and that's the TER, which stands for trading expense ratio. And what that measures is the fund's trading costs. And so you'll find if a fund is highly active and the managers are doing tons of trading, then the trading expense ratio is going to be higher and in fact, it can be a lot higher. And so when we're talking about certain funds, I was looking at one fund in particular, and this is a Canadian equity fund.
To remain nameless,
To remain nameless. It does invest in US securities, but the turnover in that fund is two hundred and sixty three percent.
Let's just explain that for a second. So in a typical mutual fund that's replicating a market, the turnover would be just whatever the market turnover would be. So if it's the S&P 500 as an example, the turnover would be just to trade positions to replicate the index.
That's right. I don't have the exact number on it, but I think it's something like four or five percent a year. So two hundred and sixty three percent is pretty active.
That's a lot higher than five percent,
That is, and as a result, so the trading expense ratio on that is 18 basis points or zero point one eight percent. Now, that may not seem like a lot, but there are funds that you can buy where the trading expense ratio is close to zero. And those would be funds that tend to hold positions longer and not trade as often and therefore not trigger not only capital gains, possibly, but also trading expenses. So when you add up the MER and the TER, for example, that's what the total costs are. And so you have to be very mindful because with trading costs of point one eight percent on top of an MER, which could be anywhere from point seven eight to this particular fund, I mentioned the actual MER on an F class version of the fund, which means the investor is also paying a fee to the advisor. Separately, a total MER was two point nine nine percent, point one eight percent for trading costs, so three point one seven percent overall.
Ok, so let's break that down for listeners here just for a sec. So if you invested in that fund that's charging three point one seven percent plus a service fee of let's call it one percent, so four point one seven percent. So that fund has to do four point one seven percent higher than the market return just to break even to the market every year, every year.
And the likelihood of that every year is probably pretty low, Greg.
Exactly. And certain funds may outperform in certain years and underperform in other years. And that's why you need to really look at, well, what exactly is the fund investing in? What is the volatility of the fund as maybe some of that related to this incredibly high turnover?
Well, and so let me ask you this. Are we recommending that clients focus on their fees as a way to improve their performance?
Yes, we are.
Of course we are. You need to understand those fees. You need to understand what's embedded and what's transparent. Because one of the thing you didn't mention is that the service fee on an F class fund would be transparent and it could be written off as somebody's personal tax return, as a professional expense in some cases.
Whereas in an A class fund, the same fee is there, but it's embedded and not really talked about or able to be written off.
That's right. And again, our point here in talking about fees is not to say, gee, mutual funds are bad because they have fees, because, of course, there's fees to everything, whether you're buying and selling individual stocks on a transaction basis, there's costs to buying ETFs, cost to buying bonds or GICs. So there's always fees, but you have to know the fees, understand them and make sure that you're building that into your overall plan so that you know the fees and know what the hurdle is basically.
I know we don't have any problem, when people ask is what the fees are and break it down. And if you're working with somebody that was avoiding that question, well, maybe you might want to question whether you should be working with them.
There's nothing to be defensive about. And all investors are entitled to transparent fees and to know what they're paying for.
Let's get to some of the pros and cons of mutual funds. And there's a few out there. So some of them you kind of touched on. So advantages of mutual funds. No. One, you mentioned advanced portfolio management. Now, whether you believe in modern portfolio theory and active versus passive or whatever it is, you have to believe that somebody who does this for a living all day long probably has access to more information than somebody who looks at the newspaper on the weekend to see what stocks to buy. And so there's a cost to hiring those professional managers that have fancy designations like CFA at the end of their name, chartered financial analyst. And they have hordes of employees that all they do is analyze stocks and bonds. And there's a cost to that. There's an advantage to that, too, because you're an industry professionals. Another advantage would be dividend reinvestment. So as dividends and other interest income sources are declared for the mutual fund, it could be used to purchase additional shares in that fund on a monthly basis. So as the dividends come in, it just purchases more units.
Makes it very simple,
It does and it goes back to that open ended thing that you talked about, where the mutual fund can just issue more units to accommodate those new purchases. Another advantage is safety or risk reduction as done through diversification, something we've talked about many times in many episodes and is probably the second thing you need to get right. The first thing you need to get right is asset allocation, like how much risk you should have in your portfolio and then you need to diversify specific risk away from your portfolio. So by holding things that hold more things, you just naturally get more diversification. The last one would be convenience and fair pricing. So mutual funds are easy to buy and pretty easy to understand. Actually, they typically have low investment minimums and they're traded once a day at the closing net asset value of the day. So this eliminates any price fluctuation throughout the day and various other. Opportunities that perhaps some day traders practice or try to practice for sure. Now, Greg are we recommending that people do trade?
No, I'm not Colin.
Never. I mean, if you want to lose money, go for it. But I think the idea here is to make money. OK, so disadvantages of mutual funds. There are some, of course, and you pointed out that there are some that have high expense ratios and sales charges, sales charges you didn't really get into in your description there. But you have F class with no sales charge, A class with maybe no sales charge, maybe up to two percent or something like that. Then you have low load and DSC or deferred sales charge or deferred service charge. So we will get into the details of that. But you need to understand what you're owning.
That's right. And certainly any investors or clients of the CM Group know that probably it's been 20 years since we've ever charged either to purchase or sell a mutual fund because we don't believe in it. Again, sales charges are something that can be a factor for different companies.
Well, and there's a big movement to get rid of some of those sales charges. The securities commissions are trying to ban the use of deferred sales charges because that's been found not to be in the investor's best interests. So, listen, be aware of what your service charges and sales charges are. Another disadvantage might be management abuses. So what we mean by that, something you talked about, high turnover, a portfolio, it's turning over two hundred and sixty three percent. That might not be at the best interest of the investor. There's also this thing called closet indexing where you might have a mutual fund or an exchange traded fund that is basically mirroring the market, but they're just overweighting a few stocks.
Exactly. And the other thing, which is called window dressing, is that every quarter the fund is required to publish a list of their holdings. These days, a lot of stocks are in the news. And so a lot of investors are looking at the holdings and wanting to make sure that their fund owns the stocks that are in the news. And so what happens is towards the end of the quarter, you might find some fund managers actually trying to make the portfolio look a bit better, because if they weren't holding the stock that made all the news, they want to get it into the portfolio before they have to report or get rid of stocks that everyone knows have done poorly and they want to get them out of the portfolio before they have to publish their holdings. And so I'm not happy to report that that happens. But unfortunately, it does happen. Sometimes you just need to be aware of what can go on.
Well, I mean, there's good, highly reputable fund companies out there, and there's ones that maybe, I don't know, don't fall into that same camp. Tax inefficiency. So like it or not, investors do not have a choice when it comes to capital gains payouts and mutual funds. Those capital gains need to be distributed before the end of the calendar year. And I think in most cases, so a practice that we typically do for clients is we don't want to really purchase those mutual fund positions later in the year, because if you purchased them, let's say, December 20th, you might have a tax issue as if you held that position for the whole year. So that is a disadvantage and poor trade execution. So what do we mean by that? So if you place your mutual fund trade any time before the cutoff time for the same day net asset value, you'll receive the same closing price for your buy or sell on the mutual fund. So for investors looking for faster execution times, maybe because of shorter time horizons, day trading or trying to time the markets, which, Greg, are we recommending people time markets?
No, don't do that to yourself. I don't think we can say that enough times don't do it. But in that case, the argument would be that there's a limit to trade execution
For sure. And listen, I do want to make a point now. We've talked about some of the disadvantages, mutual funds. These are potential disadvantages. However, through careful due diligence and understanding of exactly what we own, I think we can safely say that when we buy mutual funds on behalf of investors, we've made sure that none of these disadvantages exist. For example, poor trade execution. Well, you can tell based on how the fund trades on TERs, things like that, you can tell if a trade execution is a problem. Tax inefficiency. Not all mutual funds distribute a lot of capital gains at the end of the year. For example, funds with low turnover would have much fewer capital gains even if they had the same return as another fund that had a high turnover. They will have less capital gains that they have to distribute to their unitholders. And so, in fact, you can find some very tax efficient mutual funds because they have low turnover and therefore low distributions and therefore the capital gains continue to accrue without actually being distributed. And management abuses. Again, due diligence. You can find funds where, again, window dressing is not an issue. Closet indexing is not an issue because you can tell by the nature of the portfolio and how the portfolio changes from time to time, that these funds are being well managed, let's dive into ETFs because we're going to talk about Etfs.
We got like two minutes to talk for two minutes.
Ok, well, here's the thing. What's an ETF? Well its kind of like a mutual fund? And the main difference between an ETF and a mutual fund is that the ETF trades on the stock exchange. So as you mentioned earlier, an ETF is just a basket of securities. So it could hold exactly the same securities as a mutual fund. But rather than buying or selling the units back to the fund company at the end of each day, you can actually just buy them on the stock exchange. They trade like a regular stock. And so it's been described to us, which I like, is that the difference between an ETF and a mutual fund is sort of like the difference between a hardcover and a paperback novel that just being it's just the cover, just the wrapper is different and inside the individual holdings could be exactly the same. Now, ETFs have become popular over the past number of years, but they go all the way back to about 1990, which we talked about before. One of the first ETFs was one based on the Toronto Stock Exchange Composite Index back in 1990.
It was called TIPS, which was the Toronto Index Participation Securities. But obviously since that time, there's been thousands and thousands of ETFs that have been launched and ETFs can be either passively managed. Most of the ones that came out in the early years were passive, meaning they just replicated an index. So in the case of the tips in Canada, they replicated the Toronto at that time, the TSE 35 index, which was the index of the thirty five largest companies trading on the Toronto Exchange or the Dow Jones Industrial 35 or the S&P 500, the 500 stocks that make up the broad largecap market in the U.S.. But since those early days, you still have all of the different indexes covered by exchange traded funds or ETFs. But you also now have actively managed ETFs, which again then would be identical to a mutual fund, with the exception that they traded on the stock exchange.
Yeah. So if the old argument was an active mutual fund versus a passive ETF, but then the passive ETF becomes an active ETF, then the hardcover becomes a hardcover.
Well, we're not going to get into any more on ETFs today just in the interest of time. But we should let everybody know that we are starting a new mini series. It's a back to Basics mini series. And we're going to go through some of this stuff like asset allocation, diversification, market timing, things of that nature. And we will spend an episode digging into exactly how an Etf works, maybe even compared to what a hedge fund is, how that works and spend some time in that area right on. So, hey, before we wrap up for today, Greg, anything you're doing for fun right now?
Well, as of this date of recording, the restrictions in Alberta have now been lifted and in Calgary as well. And so the only thing I'm doing that's interesting is finally going out, eating in restaurants again and getting together with friends and eating in restaurants.
We're doubling up there, but it's great. How about you?
Yeah, we went out for dinner last week for the first time in months. It was great. Now, I still am a little bit not concerned, but I don't know what to do in many cases because you walk into a grocery store, restaurant or whatever and there's, I don't know, half the people wearing masks and half aren't. And you sort of question, am I supposed to be wearing this mask or not? We won't get into that here.
But it's going to take a while, I think, for people to sort of feel comfortable. And listen, there's still a lot of people out there that maybe haven't had their second Vaccine shots yet and a number that probably haven't had their first shot yet. So if you're one of those, I would think that you might want to be a little bit more careful.
All right. Well, listen, let's end it there for today and next time, as they say, we're going to start our investment back to basics miniseries.
All right. Till next time.
Episode 59 - Gratitude, Meditations, Touchdowns & Health
Greg and Colin interview a former NFL and CFL player turned fitness guru, Pat Woodcock, about getting healthy, fitness myths and mental health.
Welcome back to the free podcast with Greg and Colin. We wrapped up our Health and Wealth mini series a few weeks ago and went back to some more normal content for us. Last episode we talked about how safe your money is, and we looked at the Canadian Investor Protection Fund, the Canadian Deposit Insurance Corporation. And what guarantees do investors have? And I think it's fair to say either I don't know, there aren't really very many guarantees out there.
No, that's right. And it's one of the things that people do worry about, they get concerned about. And we just want to make sure that people know that there are lots of protections in place for them.
When we talked about the difference between a fiduciary and an advisor or advisor, but we're going to throw a head fake here or a duke in football terms, because today we're going back to health and wealth, this arena for one last episode. As a reminder, we held this webinar two weeks ago that was focused on removing stress from your investment portfolio. We had Dr Kevin Fonseca join us discussing all things covid and that webinar is available for download. So I encourage any of those that couldn't attend. Please download it, view it at your leisure. But today we're pleased to have with us a former NFL and CFL player, someone who's won the big game in Canada, who had a great career in the CFL. And at one point, Greg held the record for the longest touchdown reception in CFL history. And at one point that means it's been overtaken. But we'll get into that. But someone who transitioned his knowledge of health to a business that has him leading his field in personal training. And Pat Woodcock is joining us today from, I believe, beautiful Ottawa, Ontario. Is that right, Pat? That is correct. Well, Pat, welcome to the Free Lunch podcast.
Thank you very much for having me, guys. I'm looking forward to the talk.
Well, that's great. Listen, Pat, let's get things rolling. Tell us your story. How did you end up where you are today?
Well, I kind of took a long, circuitous route to get here. Like Colin mentioned, I was fortunate enough to have an eight year career playing professional football and moving around to a couple of different cities. And over the course of that career, I was actually a business major in college. But over the course of my playing career, I began to take a more and more interest in sort of the strength and conditioning side of what I was doing in the off season. So every year they're looking for somebody younger and somebody cheaper to come and take your job the next year. So I didn't want to just show up and do what I was told to do. I want to take more of a vested interest in what I was doing on the strength and conditioning side to make sure that I was at the top of my game. And so by the time I finished my career, I had acquired a little bit of knowledge to go along with all the experience and training that I had. And so I really want to make use of that and parlay it and really be able to transition that and give it to sort of the next generation of athletes coming up and hopefully give them an opportunity to achieve some of the same things that I did. I opened up a gym, a training facility called the Live Performance Academy here in Ottawa, and that's been going for about 12 years now. And then over the last several years, I've just kind of naturally transitioned into training more guys like us, guys who are businessmen, guys who are busy with work, busy with families, but still want to look and feel great and have all the energy to do all the things that's required of them. And it's been a really interesting transition into moving from sort of competitive athletes into high performance men, as I like to call right now.
Well, that's great, Greg. He's just described you as a high performance man in my mind.
In my mind, for sure.
That's where it starts.
Well, that's right. Well, listen, what do you think is the biggest misunderstanding people have when it comes to losing weight or getting into shape?
I think one of the biggest problems that people have, especially, like I said, kind of high performance type personality men, is that it's an all or nothing deal that if I'm going to lose weight, I have to jump in and I have to go seven days a week and I have to work out for two hours a day and I can't eat any carbs. And it has to be an all or nothing perfect performance in order for me to gain any results. Oftentimes that's going to be much more to your detriment than it is to your benefit. Really what it is, is having a plan that fits into your lifestyle and enhances your lifestyle and is something that doesn't provide you with additional stress, but take stress away and basically incorporates all the aspects that you need to get the results that you want, that wasting a whole lot of time because we just don't have that kind of time to waste anymore.
And full disclosure, Greg, I've been working with Pat for 12 weeks now, just finished the 12 week program.
And the results are impressive, I'll tell you.
Well, thank you. I don't walk around the office with my shirt off, but maybe someday. But am I telling the listeners that the program works, Greg? Yes, you are. Yes, it works. It works for sure. But the link that I had found was the significant relationship between diet and exercise, whereas as you pointed out, like, you can work out all day long, but if you're not eating the right things, it doesn't really get you anywhere. So can you expand on that a little bit?
100 percent. So when we're twenty five, we can get away with eating pizza seven days a week and still get great results with almost just. Walking into the gym, but as we get older, things slow down and things just don't function the way they used to, and so being able to tie everything together and have your nutrition plan really match what you're doing training wise and also match what you're doing in the rest of your lifestyle is the biggest piece in terms of really accelerating results and making them lasting results. So you and I have talked. I don't want you guys to lose twenty five pounds and then gain it all back as soon as we finish. So what we focused on is obviously the training, but certainly creating a nutrition plan that is super simple and fits into your lifestyle and is something that is sustainable in the long term. And so we're not doing any eliminate this eliminate that you can't eat during these hours. That stuff can get you results, but it doesn't last in the long term. Really, what we want to do is find the sustainable plan that fuels your body and gives you the nutrients and the energy that you need to obviously fuel your training, but also to keep your brain healthy and to help you sleep better and to do all the things that make us function better. And those things are going to translate into fat loss, muscle gain, better energy, better sleep, all those things that we want to have as a result of a training program.
You heard that word there, right Greg? Plan.
That's one of the things we talk a lot about in building investment plans. And that is planning being the most important thing, because you can't start without a plan. And if you start without a plan, you end usually very quickly and without accomplishing anything.
What's that thing that Blair always says a goal without a plan is just a wish or something like that?
Yeah, exactly. So listen, Pat, and this is speaking personally. So I've been one of those guys who was in shape once and as I wish to get back into shape, sadly and probably like a lot of people, and have got involved in things where you do go on a program that helps you lose weight quickly but has no follow up. So you can execute during that period, whether it's a six week or 12 week period or whatever, and the execution is great. And again, the farther you get away from the starting point, the closer you get back to the starting point, it seems. And so you talk about the importance of creating something that becomes almost more of a lifestyle change in the long run. But how do you do that? How do you get people to they've sacrificed their favorite pizza or whatever, and I'm sure you'll tell us. But there is room for Pizza just in some quantity. But how do you get a lasting years long adherence to a new lifestyle as opposed to a gradually deteriorating one?
Great question, Greg. And I think the biggest key early on is that for somebody to get started, they have to have a reason why they're getting started. And for most of us, there's an element of vanity to it. But having six pack abs are having big muscles isn't enough of a motivation for it to last long term. Really, what has to be the motivation is going to be different for everybody. But for a lot of guys, obviously, it's going to be to be around and be healthy for my family to be able to perform well in my business, to feel the way I want to feel. And when you have a motivation that's strong like that and you can get reminded of that and it's easy to stick to a plan. Now, the plan has too, like I mentioned earlier, fit into what you're doing. I think a lot of times people, like I said, they go all in and so they get burned out. And that is not sustainable in the long term. So we start small and three to four workouts per week and gradually they see results. They realize that they're feeling better. They realize that they have more energy, they're sleeping better, all those type of things. And so it becomes easier to maintain and make it a lifestyle when you have the results that you're looking for. If you're doing a bunch of stuff and not getting the results will. And yet nobody wants to continue doing that. And like you said, if you feel deprived of your favorite pizza or you can't have a glass of wine with your wife, that's not something that people want to do for the rest of their life. So you create a plan that fits into the lifestyle, allows you to enjoy the things that you like, and still gets you the results that you want and makes you feel the way you want to feel. That is a recipe for long term success and it doesn't have to be perfection. And Colin and I have talked about this a few times in his own training. You don't have to be one hundred percent perfect day after day, week after week, because life isn't like that. You're going to have weeks where you don't get all your workouts. You're going to have weeks where you eat a little bit too much food at celebrations. But that's OK. You get back on track and you just follow along with what you were doing previously. It's just the consistency overall, long term, much like investing, rather than trying to go all in for a short period of time, that's really going to bring you the results that you want.
And you're talking about creating habits. Have you found any tricks to help people develop and keep those habits?
I think it's called a scale Greg put in the bathroom, get on it every day.
Well, I make them send pictures of themselves to me every week. So there you go. That's. Usually a big trigger, but no, I think when it comes to habits, one of the best ways to do it is to associate it with something that you're already doing. And so I got this from a book called Atomic Habits by James Cleary. And so something that happens in your day on a regular basis, it might be a meal. It might be a particular meeting or something that you do every single day. And that becomes the trigger to create this new habit. So last year, when everything was kind of shutting down, my wife and I decided we wanted to go for a walk every day and just kind of add that element to our fitness and mental health, getting up in the fresh air and walking and sort of create that habit. We would just as soon as we put the kids on the bus, we wouldn't even walk back in the house. The kids get on the bus and we just take off on our walk. And we know we were doing that every single day during the week. And so that was our trigger. And then the walk became the habit and gradually it just became second nature. And so if you can find something that whether it could be a meal could be, like I said, a particular even if just setting an alarm on your phone, that's your trigger. And then you create the new habit, it will take time for sure. But gradually when you have a consistent trigger, you can then create a consistent habit.
Do you remember the show The Biggest Loser? I do. So what you've just described is not the biggest loser show. Have you ever seen the where are they now? Type of, I don't know, editorial's on some of the contestants who have lost hundreds of pounds of weight and they've won it all. And then within six or 12 months, they're probably back to where they started. So what you're talking about is not a biggest loser approach?
Absolutely not. And I mean, that goes one hundred percent against all that I was talking about earlier. So that is going all in working out four hours every day, drastically reducing food. Yes. You have no choice but to lose weight, which you're crushing your metabolism. You feel terrible. And it's absolutely not sustainable in the long term. And when that finishes, as you can see from the results of those people, the rebound is oftentimes worse than where you started from because you've reduced your metabolism so, so much. Your body isn't functioning the way it should. So when you start to add in normal food again and take away the hours and hours of exercise you were doing, your body has no choice but to put weight in pounds and inches back on.It's really about we want to stoke that metabolism and make it stronger And Colin I think you can attest through the program we started you with some lower calories. But as we go through, we add more food to your program because your body's functioning better. It can make better use of the food that you're taking in and it gives you that energy to function at your highest levels and you don't always feel deprived.
Well, and actually, to your point, Greg, you're talking about pizza. Well, you know that on this lifestyle, I don't want to say this plan on this lifestyle. I have pizza every Friday. I think about it all week. that I know on Friday I'm going to eat pizza and a lot of it and I will weigh two pounds more the next day, guaranteed. And then it's back into it.
Exactly. That's the key, really. You just you have to get yourself to a certain set point, because for most people, they haven't done enough activity. They're not eating the right way. And they've been doing that that way for a lot of years. And so their body doesn't know how to deal with the food that they're taking in properly. But if we can reset some things, train your body, allow it to use that food more efficiently and more effectively for the things that we wanted to do. Yeah, you can fit pizza into your life and you can have a glass of wine with dinner and all those things that make life enjoyable. Everybody loves having a good meal with family and friends and all that kind of stuff, and nobody wants to put that aside. And you don't need to. Now, if you want to go to the Olympics or you want to step on stage in a bikini and look great with your muscles showing, then, yeah, you've got to take him out. But for the rest of us, it's just not a requirement. You just got to know how to plan and fit it into that plan with everything else that you're doing.
Grig, this sounds so much like investing, doesn't it?
It does, because there are things that you can do in investing which will hurt you in the long run. There are things you can do that. We've talked about another podcast where you make a short term, whether it's a short term bet or a speculative bet, and it may work out for you in the short term, but the odds of it working out in the long term are extremely poor.
Well, I would actually say that person that has that speculative bet that works out for them on their rebound, just like the post Biggest Loser show. That's right. They actually get crushed.
They can end up worse. And part of it is confusing luck with skill and some of these other things. And. Well, listen, Pat, you've been doing this a long time now. You said twelve years in Ottawa. So what kind of changes have you seen? Are people becoming more health aware? I'm in the baby boomer category here and I certainly figure at my age, maybe it's time to start getting back into shape again. But do you see that? Is that a trend that you're starting to see now?
Honestly, it comes in waves. There's certain times when it becomes sort of the popular thing or it becomes something that's big in the news. And certainly, I think with covid, there's been a big kind of influx of it because people are. Recognizing now that gyms have been closed, how much they need physical fitness and how much they need it for not just their physical but their mental health as well. And so I think right now, for sure, it's high and people are very dialed into finding the plan that's going to work for them when they can't go to a gym. How do I stay in shape even when I'm at home? How do I get my mental health back and get my body and my life back under control? Because so many of us have spent the last year watching Netflix and binge drinking and eating all the takeout and all those kind of things. And so even for people who are relatively healthy, before you realize you can't live this way for a very long time because your body just deteriorates so quickly. So for sure, right now there is a lot of interest in how do I improve my health, how to improve my fitness, how do I put myself in the best position to live a long, healthy, productive life for sure.
I got to ask you so in the program, actually, Greg, so there was one thing that I really appreciate was when you go through the 12 weeks on the 12th week, you get this email and says something like, I remember word for word you might have to fill it in with for me, but it's something like, congratulations, you've done the 12 weeks and this is your new life going forward. It wasn't like it's over and see around. It was you've made the changes and this is how you're going to live your life. Wasn't that kind of the message?
That's exactly what I aim to get out of this. Like I said, I'm not interested in the quick fix, like lose 30 pounds in 12 weeks just so I can put your picture on the website and then see it later. I'm trying to, like we talked about, create habits, create a lifestyle so that you feel better and are able to operate at your highest levels. Four years after we stopped working together, ideally, I want to work with everybody for as long as possible and be able to guide and help and do as much as I can. But really, I want this to continue long beyond whatever time I decide to work or the client decides to work with me so that it not only makes their life better, but then it becomes something that they can transfer to their family and hopefully their partner and their kids and all that kind of stuff start to pick up on the same habits and just move everybody kind of in the right direction rather than like we talked about a quick fix that is done after 12 weeks.
It's interesting, after Prince Philip, who passed away recently, was ninety nine at ninety nine or whatever his age was. I was reading a little bit about his history and it turns out that I guess when he was a young man in the Royal Air Force and he was training in Canada, this was before both of your time. But I was alive for it. They had a program called Five Books, which was created for the Air Force, and it was five stood for five basic exercises. And it was a program where it was just a routine, kind of like a body weight circuit that everyone did in the morning. And they worked up to different levels. But it included the basic sit ups and push ups and strength exercise and things like this. Apparently, Prince Philip did that his whole life. He learned it when he was a cadet in the Royal Air Force and he spent 11 minutes. It was just 11 minutes more of like a high intensity kind of training program practically till the day he died. And apparently his waist size was possibly two inches larger than it was when he was 18 years old. And he maintained that. Did it contribute to his long life? You would have to think it didn't hurt.
When you talk about making this part of your life, it sounds like that's a missing piece for a lot of people. It's like, well, I exercise. And that's kind of separate from everything else I do as opposed to this is what I do. I get exercise, I workout, I do weight training. I go for jogs or runs or biking or whatever it is. But it's a lifestyle. What we say in our business, it's not a transaction, it's a process. And it sounds like that's what you're talking about.
That's a great phrase. Actually, I like that one, but yeah, one hundred percent. And I think that falls under the category of just overall consistency. I talked a little bit about people who jump in one hundred percent and do everything. The other end of the spectrum is people who look around and see peloton and jogging and weightlifting and powerlifting and crossfit and they think, I don't know where to start. So I'm not going to do anything. And it doesn't have to be the perfect program. Obviously, there's a science and a process to doing things a certain way, but doing something is better than nothing. And doing it consistently will get you more results than looking for the perfect program and not actually doing anything. So it doesn't have to be the perfect program. It doesn't have to be the perfect time. Just take some action, get started with something and then be consistent with it. If you can prove it over time. Awesome. But stay consistent over a long period of time. And I think that's Prince Philip example is a perfect description of that.
Look it up.
Actually, I got one of the thing on that because this kind of caught me off guard a little bit. As a former professional football player. There's a certain stereotype that people get when you're in that camp. And one of the things you talked about were things like grouted. And meditation and the link of those things to your mental health and ultimately physical health. Can you talk a little bit about that
In a certain element? I am still a meathead at heart, but as I've gotten older, you realize that we deal with so much stress every day. And regardless of whether it's business stress or family stress or just sitting in traffic, stress, whatever, and stress is really like the silent killer of so many people. It creates so many issues, messes up hormones, disrupts sleep, all those kind of things. And so when you can create things or take part in things that create some mental health and some relief from that stress, that's going to go a long way, not just in losing fat and building muscle and looking good, but you feel better and you behave better and you have patients and mental clarity and all those things. And so one of the things that I kind of discovered in the research that I read was when you are truly in a state of gratitude and recognizing how blessed you are and being thankful for things, it's impossible to be stressed at the same moment. So those two things, like they just can't be there, like oil and water, they cannot mix. So if you're able to put yourself in a true state of gratitude and be thankful for what you have and who you are, that takes you out of that stressful environment, at least for a few minutes every day. And so that goes a long way. I usually do it before bed. I have a right to practice a little journal. So three things that I'm thankful for today. Three things that went really well for me today. Three people that impacted my life today. And just when you're thinking about those things and putting yourself in that moment, stress melts away. And that's a great way to finish off the day, go to bed with a clear head and get a good night's sleep. And then you wake up with kind of that same mindset the next morning. And the day gets off to a good start, a positive start, an energetic start instead of, oh, what do I have to do today? What am I behind on? What about this yesterday? All those kind of things. And so does it sound a little wishy washy for a football game? Maybe, but it works and it's something that has been a huge part of my life. And I think a lot of my clients find it very impactful as well.
Well, there's a course on Coursera. Are you familiar with Coursera?
No, I'm not.
If you go to I think it's Coursera.com or I can't remember. But there's a course called The Science of Well-Being. It's a Yale University course and it's offered for free on Coursera. And it's awesome. So there's my little tip to you
There you go, I'll have to check that one out.
Greg, what do you got for him?
Well, I'm just wondering, when you're working with somebody like yourself, you're working with a specialist, how important is trust in that relationship and in the ultimate success or failure of that relationship?
I think it's huge. It's a big part of it, because for a lot of like we talked about, a lot of guys maybe have not been training, at least very often lately and don't necessarily know what steps to take. We talked about in confused by all the different things out there. So if they're going to put their full effort and their full trust and faith and everything into a particular program, that trust has to come from the coach. You can't just be the words on a page or a PDF document like it has to be. You recognize that the coach, no one knows what he's talking about. No two cares about me and what results I'm getting. And number three is going to be there to support and help and adjust and all those kind of things. And so for me, like, that's a huge part of trying to take care of my clients and make sure that not only do they trust the program and get good exercise and build big muscles, but they believe that when they have a question, I'm going to answer it for them. I'm going to give them the best information that I have and that it's going to be information that they can take and apply and get results with and that we're kind of in this together once we sign up and it's our client coach and your goals or my goals. And I want to make sure that you reach them and we're going to do whatever we can to make sure that that happens right on.
And I guess it's important to from your end that you have trust that the people that have brought you in to help them achieve their goals, that they will follow along with your guidance and not try to cheat along the way as opposed to somebody who's really committed to following the guidance that you're providing
For sure. And I mean, it's a challenge and everybody's a little bit different and has different stuff going on in life. But I think the more that they trust the program and trust that I'm putting them in the right direction and this is the way to get the results, the better those results are going to be for them.
Must be a good feeling for you to see the results that your clients are getting.
It is. It's awesome. I started off my coaching career working with athletes. And so it was all about how much weight can we add to the bar, how much faster can they run that kind of stuff. But now seeing guys come back and say, not only have I lost this weight, but I have more energy and I'm more patient with my kids and my business is taking off and all these things that happen as a result of feeling your best and being confident in yourself and being able to go forward presenting your best self, that's just as gratifying as a fast forty yard dash time.
Man, I do not want to run a forty yard dash any time soon. I feel like I'd pull both hamstrings. My quads,
I know it takes some working up to for sure, no matter what you're doing training wise, if you haven't done it, that's a whole different deal.
We had a coach in high school. You do fourth quarter training at the end of practice. And this Coach was a former all star football guy. He decided he was going to run with us. Greg, for the fourth quarter. Didn't work out very well for him. He may not in twenty yard dash. Yeah. Blew both hamstrings and was out of commission.
That's a rough deal, man. That is not a good feeling that too many of those over the course of my career, I don't want anymore.
Well, listen, you did all the heavy lifting. We got through all the questions we wanted to get through with you. You're ready for just kind of a fun speed round to wrap things up.
Let's do it.
All right. Greg?
What do you do for fun when you're not working, either working out or helping others?
Well, generally, it's tough at the family. My kids are super active playing basketball and cross and soccer and that kind of stuff. So we have a trampoline in the backyard. So we love to be active and do stuff for the family.
Great. Any books you're reading right now?
I am actually. We talked about the Atomic book. I'm actually going through that one for the second time now, so that's the one I'm on right now.
That's a great book. It's amazing when we did our Health And Wealth series, how often that book comes up.
What the other one that came of tiny habits
Was there. Another one called Tiny Habits,
Something along that line. Yeah. Yeah. Well, I think that may have been part
Of the atomic habits. Yeah. Actually, yeah.
It's pretty crazy how it's all linked. It is. So just so you know, we had an osteopath a what did we have. Mindset coach and a perfectionist coach and they all sort of had the same book that you talked about. So anyways, what shows you watching? What do you binge in these days?
Oh, so I went through so many last year that I really have not gotten into a new one.
Good for you.
Yeah, kind of just floating around. So right now I'm just kind of watching the basketball playoffs when I had a chance. But yeah, I have not started a new series on Netflix because I know how addictive they are and I don't want to get into that right now.
Probably good advice right there as well, other than, of course, the free lunch podcast, which you're starring on today. What kind of podcast do you listen to? Do you listen to podcasts.
On occasion I prefer books if I'm being honest, but I do have a couple of business ones that I listen to and a couple on trends. So business wise. My name is Delmonte, has a pretty good podcast training wise. there's a lot of good ones in terms of health or training or nutrition or whatever your particular interest is. And then I've always been a big fan of Tim Ferriss. Actually, I think his podcasts are really entertaining to listen to, regardless of the guests. And I find you get to hear from a variety of different types of people. So that's always been kind of a staple For me, right,
Greg? I think we're going to edit that whole question. So the answer will just be that Pat listens to the Freelunch podcast and nothing else, the number one rated podcast Wednesday morning.
Well. I think that's about it. Is there anything to wrap?
I think that's been great, Pat. I think you've clarified a lot for our listeners and for me. I know and I really appreciate your sort of continuing to push that link between health. And it's not just about big muscles. It's about living a healthy lifestyle and being the best you can be. And I think everybody would want that.
And it just parlays into our world, too. It's not about the best stock you pick or whatever. You got to have that plan and you got to follow it and you got to execute right on. So cool. Well, hey, Pat, thanks for joining us today. Really appreciate your time. And Greg are we recommending his services to anybody. Absolutely are. Yeah, 100 percent it works. Awesome. Yeah. All right. Thanks, fellows.
It was my pleasure and good conversation.
Episode 58 - How safe is my money?
We discussed the safety measures in place in regard to investment accounts, the difference between a fiduciary and salesperson & reviewed CIPF, CDIC.
EP.58 - How safe is my money
Welcome back to the free lunch podcast with Greg and Colin and Greg. Last week, we wrapped up our Health and Wealth mini series. We interviewed Jen Anderson on overcoming perfectionism. And we also had a great webinar on health and wealth on Thursday. And that's why we did the Health and Wealth mini series was the lead up to that webinar. So if anybody is interested in viewing that webinar, it is available for download. We had Dr. Kevin Fonseca with Alberta Health Services talk with us about all things covid, something I'm getting sick and tired of talking about really well.
It feels like we might be getting nearer the end, so that's a good thing.
Yeah, it sounds good. And we also did a little presentation during that on how to remove stress from your investment life, because we are investment advisors and that's what we talk about.
Right, exactly. So we've had a
Lot of questions over the years about the topic we're going to discuss today. And usually these topics come up during times of major crises. So things like the global financial crisis, remember that one?
Yeah, I vaguely remember it vaguely.
Remember the time period where the market went down 50 percent. Exactly. And the topic today is based on how safe is my money? So what protections do we have in place in case of financial failure? And I know this sounds far fetched, but during that global financial crisis or global credit crisis, depending what you want to call it, it was reasonable question because there were very large financial institutions specifically in the US that were failing. Companies like you might have heard of these ones. Greg, Bear Stearns, yeah, Lehman Brothers, Washington Mutual, Bhabhi and many more, actually. But we'll just stop it there. But so today we're going to talk about Canada, though, in the Canadian Investor Protection Fund, because we had questions back then. We were working at another firm and I remember getting calls in about what happens if the bank that you're working at fails. What happens to my money?
That's a real concern for sure.
So we're going to talk with the Canadian Investor Protection Fund and the Canadian Deposit Insurance Corporation. And if we have time, we're also going to get into the difference between a fiduciary and an advisor versus an advisor. So it's E.R. versus or
And if we don't get to cover that, we will absolutely cover it in a future episode because it's pretty critical. But let's start off with this little thing called the Canadian Investor Protection Fund. And from now on, I'm going to call it CIPA. Just because it's easier
And faster saves time. It does.
So the CIPF is a not for profit insurance program that was established by securities regulators across Canada. What it is, it's it's really a fund that's designed to protect investors from the bankruptcy of an individual investment firm.
So an overview,
Basically, accounts are covered for up to one million dollars in shortfalls. We'll talk about that a little bit more in detail. But shortfalls in an account with securities, commodity and futures contracts, segregated insurance funds or cash. And the shortfall is basically the difference between the market value of the account and what the insolvent company can return to the customer. So because investment firms rarely become insolvent, the possibility exists and the CPF exists to protect investment accounts of the customers.
But obviously it happens.
Otherwise this form
Of insurance wouldn't be in
Place. That's right.
And it has happened, I believe, something like forty one times, something like that since the inception of the zipf. And so it's not that it doesn't happen, but they tend to be smaller investment firms. But anyway, let's talk about it. The Canadian Investor Protection Fund only protects investors for losses that result from the insolvency of the investment firm. It doesn't protect investors from losses occurring for other reasons. And we're going to discuss what some of those reasons are in a few minutes. So the Zipf insurance is essentially purchased by member firms through the fund. And as long as you have an investment account with a member firm, you don't need to purchase anything. No additional insurance yourself. You benefit from the insurance at no charge.
And so all of these firms, they always say on their websites, they've there's the CPF logo somewhere on the website indicating that it's part of the program.
That's right. And if anyone listening is not sure, they should certainly check with their advisor to make sure that their member firm is a member of Zipf. Now, the zipf is sometimes confused with the Canadian Deposit Insurance Corporation, or CDC, which was a corporation that was established by the Canadian federal government back in 67, that's 1967, to insure a consumer banking deposits. So we're going to talk about the CDs I see a little bit later. The zipf is a little bit more generous than the CDs I see in the ways that the deposits are insured up to a million dollars Canadian in shortfalls in accounts as opposed to 100000 dollars with the CDs. I see. So let's talk about Zipf. First of all, who qualifies? So there are a couple of criteria. First of all, you have to have an account with a member firm
And that's disclosed on the records
Of the firm. So, again, check with your firm to make sure they're a member of CPF. The member firm has to have become insolvent,
That's in order for the protection to kick in.
That's right. You don't want to deposit your money
With a member firm that's insolvent.
Exactly right. Exactly. The firm, as a result of its insolvency, has failed to return or account for property. It was holding on your behalf on the insolvency date, and you have to be considered eligible for coverage or in the reverse, not considered ineligible. And I'll tell you a little bit about that in the second.
That's very confusing. It is to be eligible by not being ineligible. Exactly. OK, got it.
And also just of interest,
There's no requirement that
You live or be a citizen of
Canada. So as long as you have an account with a member firm in Canada, you don't need to be a resident. So who doesn't qualify for zipf protection?
Well, first of all, anyone this may
Anyone who actually has
Materially contributed to the insolvency of the member firm would not be eligible for protection under CIPA.
Yeah, directors and general partners of the member firm are not eligible, and some shareholders and limited partners with five percent or more of the member firm and Iraq are self-regulatory organization that looks after investment
Dealers, other member firms
Or firms registered with other security regulators. So for the most part, anyone listening?
If you're an individual
Like us that has an account with a member firm, you're eligible for Zipf coverage. So what does it cover? Well, basically what CIPA covers is missing property. So this is property. And when we talk about property, we're talking about investments like individual stocks, mutual funds, things like that. So missing property is property held by a member firm on your behalf that is not returned to you following the firm's insolvency.
Let's break that down. So somebody deposited a hundred shares of a company into their trading account and your member firm goes insolvent. So you're just trying to recoup that 100 shares or whatever?
Exactly. That's right. And again, as I mentioned, so missing property could include cash. It could include securities, futures contracts or segregated insurance funds. Now, what it doesn't cover are losses resulting from any of these following items, a drop in the value of your investments for any reason. So, for instance, if you bought shares of a company at 50 dollars and the shares went down to twenty dollars, the CPF is not going to compensate you for that loss.
So if you
Bought GameStop at four hundred and eighty three dollars a share and it traded down to 140 dollars a share,
It doesn't qualify. Exactly.
It was just a terrible trade.
That's right. And culinarily recommending people buy GameStop shares will.
No, never. I mean, I don't think we have to get into that one. We spent a lot of time talking about GameStop over the last few weeks. But if somebody is listening out there that actually owns it, I think we would recommend that they just sell it.
Now, here's some other things that Zipf doesn't cover. And it's one of the reasons why we were planning to talk a little bit about the role of a fiduciary
As we go on.
Zipf does not cover investments that weren't suitable for you in the first place. It doesn't cover fraudulent or other misrepresentations that were made or misleading information that was given to you, important information that wasn't disclosed or generally poor investment advice. It also does not cover the insolvency or default of a company that issued your securities. So if you own shares of Company X, Y, Z and X, Y, Z goes bankrupt.
By CIPA for that. So it'd be like
Enron or something like that. Right? You bought shares and the company ceased to exist.
So I guess we can't actually recommend Enron to any of the listeners. You know,
And we won't. The other thing that's not covered, which
Is sort of self-explanatory, is any securities that are held directly by the client. So meaning if you've received a share certificate or you've got a share certificate sitting in a safety deposit box, obviously that's not covered under CIPA because the firm isn't holding that property for you. But again, the key thing is that the CIPA doesn't guarantee the value of any particular
Investment you hold.
So, as I mentioned, here's the number I was looking for in back in 1969 when Zipf was created. Since then, it's helped investors following the failure of about 21 investment dealers
And paid out about forty seven million
Dollars for claims and related expenses, which, when it comes right down to it, is not a big number. And I think it just speaks to
How well our industry is actually regulated and managed well. These are
Doomsday scenarios. This is like in the global credit crisis. Getting calls is that large Canadian bank that you work at going to fail, which the likelihood of that is? I can't say zero, but it's probably close to zero
Our banks or some of the most highly regulated in the world, I think. And I think that gives a lot of comfort
To people, even though during the
Global financial crisis, it wasn't obvious that every bank was going to
Survive. Well, bank
Stocks went down about 60 percent in value during a period everybody sort of forgotten about. Greg, exactly. So in this case, let's use that as an example, you put money into it doesn't matter which Canadian bank and it went down 60 percent. Zipf does not cover for market movement. Exactly. It will only cover you if that bank failed.
So let's talk a little bit about the Krapf coverage, because I think there's a lot of misinformation or misunderstanding, both among well, probably among advisers, among investors
Regards to how the losses are allocated. So when we say, well, gee, these accounts are
Guaranteed, they're insured for up to a million
Dollars, it doesn't mean that if you had two million dollars in your account, then you're only getting a million dollars back.
So what the zipf does
Is it basically covers the shortfall up to a million dollars. So I'm going to talk about some
Numbers and work with me here. But let's just do a
Couple of scenarios to let people know how it works. So let's say if you add up all of the investments that firm has for its clients, let's say the value of all those investments are two billion dollars, OK? And that's called the client net equity. So all of the value of the client's accounts and investments, two billion dollars. Then there's something called the customer pool and the customer pool is all of the money that's available or all of the money in securities that's available to return to clients in the case of an insolvency.
So these are all the
Securities held in each client's names. That's right.
So they put together all of those securities. They pool them all together
And they also add up any
Cash or securities that the firm itself holds. And so they add up all of those total numbers. This would be the trustee or the receiver that would be doing this, of course, with the zipf. And so that becomes the customer pool. So that's the money that's actually available to return to customers. So you've got the client net equity, all of the value of the client's accounts, two billion dollars, let's say, and then you've got the customer pool.
So the trustee and the zipf
Are going to determine whether or not the net equity is larger than the customer pool or less than the customer pool. Now, if it's less than the customer pool, it
Means that the insolvent
Firm actually has enough to return all of the customers their money that they're entitled to. And so there's no losses. And so there's no need for insurance.
But the likelihood is that the company, if it went insolvent, doesn't have enough.
That's right. So if there's a shortfall, meaning that if the net equity belonging to the clients is actually higher or larger than the customer pool, then there's going to be a shortfall. So in our
Example, let's say the net equity owing to the
Clients is two billion and the customer pool is one point nine billion. So one hundred million dollars short.
And what's that in percentage?
One hundred million dollars is five percent of the two billion of
Net equity for the clients.
Ok, so there's a five percent shortfall. So let's take an example
Of a client who
Has two million dollars of net equity,
Pretty good portfolios worth
Two million dollars. The loss that's allocated to them is five percent of that or one hundred thousand dollars. And the Zipf coverage is a million dollars. And so
Since the Zipf
Coverage is more than the loss that's allocated to the client, there's no loss to the customer. They'll get all of their investments, all of their money back.
That's the insurance portion. The hundred thousand dollars gets returned to them by the zipf.
They become whole. That's right.
They would get their one point nine million dollars of investments and they would get 100000 dollars from Zipf.
Well, let's look at a bigger example.
So let's take a bigger example
Where a client, a lucky client, through hard work and good savings
And investments, has a net equity of 20 million dollars. So the loss allocated to that client would be five percent of 20 million dollars or one million dollars because the Zipf coverage is one million dollars. There would be no loss to the customer in that case either.
Same example, they just pay the million dollars directly to the client. That's right.
So it just goes to show that when people say, oh, well, OK, if the firm goes insolvent, I'm only going to get a million dollars, even though I've got a 20 million dollar account, that's not at all how it works.
And so, again, we have to just
Remember that the insurance, the CPF insurance
Covers the shortfall,
Not the total account
Value. I know that this
Is kind of a confusing topic for people. So let's just say if there's somebody listening that has more questions about how that works, just give us a call. We can walk you through it.
Absolutely. OK, so what about the other insurance program, the one that more people probably have heard of, and that's the CDC or Canada Deposit Insurance Corp.. So what is CDC? Well, the CDC is a nonprofit Crown Corporation that was launched in 1967. So it's funded by premiums paid by the member financial institutions, which, of course, are all the major banks, as well as some of the smaller institutions and federally regulated credit unions, things like that. And what the CDC insures are your deposits in the event of a bank's collapse. And thanks to the oversight of,
Of course, the way,
As I mentioned, how well regulated our banks are and the CDC coverage, no Canadian has lost even a single dollar due to the closure of a bank since the inception of the CDC. That's pretty good. Not bad. So what does it cover? Well, in the event your financial institution goes bankrupt, at least 100000 dollars of the money you hold.
And again, here, we're going
To talk about shortfalls as well. It covers up to one hundred thousand dollars of shortfalls that you hold in deposits, such as checking accounts, savings accounts, genisis, that kind of thing. And the important thing is so the limit is one hundred thousand dollars of shortfalls, but you can have
Deposits in a bunch
Of different categories. So, for example, you can have deposits that are just held in your name alone. They would be covered up to that hundred thousand dollar limit per institution. Per institution. Exactly.
So in this example, if you had two hundred thousand dollars and one hundred thousand was at one bank and hundreds, thousands at another bank, and for whatever reason, both of them failed, you're covered for both tranches. Exactly right.
You can have also deposits that are
Held in more than one name.
If you have a joint checking
Or savings account with your spouse, then that's considered separately from the deposits that you have in your own name. Now, deposits in an RRSP accounts again separately deposits in a tax free savings account, deposits in a riff, a registered retirement income fund.
But it's just the cash and term deposits in those accounts, is it?
That is correct, because the other things
Would fall under the Canadian Investor
Protection Act. So if you held, for example, if you held a bank on Jessey in your investment
Fund with an investment firm,
Then you would get coverage for both the jessey through the bank that
Issued it and you would have
The Zipf coverage in case your own firm
Ran into trouble.
Exactly. Exactly. Deposits held in the trust or again, separate and deposits held for paying taxes on mortgage properties as separate. So there's really seven different categories. So you could have up to seven hundred thousand dollars per institution of coverage
When we've had some extreme examples over the years when people have been worried about things. Remember this one person? They had a million dollars. They wanted term deposits. They wanted to make sure their insurance covered them. So what did they do? They bought 10 different guises from 10 different providers and held them all under the same account, which you can do. And in their essence, you have ten one hundred thousand dollar tranches of CDs, insurance, plus the Canadian Investor Protection Fund. Exactly.
And that's one of the things that people
Might do, is
If they're particularly
Concerned that a bank might run into trouble, then they spread
Their money around. And as you say, each institution has its own CDS coverage.
Let's talk about
That for a minute. If you were worried that a bank was going to run into trouble, would you actually put your money into a term deposit from that bank?
No, probably not.
Like, wouldn't you just choose another alternative?
And it does happen from time to time. And the actual insolvency
Of a bank
Is relatively rare. But there are times when it can become concerning. And then, of course, you do feel a lot more comfortable at that point if your money is spread around.
Yeah, like if Joe's bank is offering you 10 percent rates on their term deposits. Exactly. But they're not a chartered bank. You probably don't want to give
Them your money. That's right. Yeah.
Or Acme, the Acme Financial. OK, so again, like the CPF, we talked about CDS, coverage shortfalls as opposed to total value. So in the unlikely event of a bank failure, the insolvency trustee would look at all the funds owed to depositors, compare it to all the funds available for distribution, and would cover the shortfall up to that hundred thousand dollar limit. So listen, we've talked about how the money is protected at
And investment firms. But let's also talk about how investors are protected in terms of the investments recommended for their portfolios or selected for their portfolios by a portfolio manager. And this is where the concept of a fiduciary comes in.
Yeah, fiduciary. What is a fiduciary? Well, according to the definition in the World Wide Web,
We decided that the information superhighway,
Yes, the interweb, a fiduciary duty is a commitment to act in the best interests of another person or entity. Broadly speaking, a fiduciary duty is a duty of loyalty and a duty of care. That is, the fiduciary must act only in the best interest of a client or beneficiary, and the fiduciary must act diligently in those interests,
Which seems reasonable.
Well, of course. I mean, so when people
Invest their money with an investment firm, I think they expect that the person they're dealing with is actually a fiduciary. But in many cases, that's not true.
So I can say with all honesty and integrity that we are registered as fiduciary. We're registered as portfolio managers with our securities. Missions and regulators, but there's a huge difference between what an investment adviser is and a portfolio manager in regards to fiduciary duty.
So the other thing, too,
And I have this one person I always talk to who points out if adviser is spelt E, R versus O R, one indicates fiduciary duty and one does not. One actually indicates that you're just a salesperson. So that trusting that is interesting. And whenever he has that debate with me, I always just remind him, well, it doesn't matter because we're portfolio managers, so we have fiduciary duty. Yes. So however, you are in a spot, but how it works is an investment adviser is regulated. They're registered with the securities commissions and regulators. But when they do a trade, the trade of that security has to fall within a framework that is based on the client's overall risk levels and investment objectives. And the trades proposed need to be in line with what the client's needs are. And they have to discuss that trade with the client. Each trade has to be discussed
At length to make sure that
The client understands what they're purchasing. But there's no stated fiduciary duty in that arrangement.
No. And in the end, it's the client who does make the decision of whether or not to buy or not buy that security.
So to me, this is kind of like when I take my car in for its annual checkup and I get a call from the service manager recommending all kinds of service to be done to my vehicle. I don't really know what needs to be done and what doesn't need to be done. I just assume that they're telling me what I need to do.
And yet they're not fiduciaries by any means.
They're not. And they always seem to get me for
A very high service bill.
This is way different than a portfolio manager is a portfolio manager. We're licensed through the same regulators, but with a much higher standard. And we're granted the ability to trade securities for clients without having to discuss each trade in advance. Exactly. So to accomplish this, we complete an investment policy statement with each client that's specific to each client, and it states the same risk levels and investment objectives. But it also describes asset class ranges and specific types of securities that are appropriate for each client. There is a stated fiduciary duty when dealing with a portfolio manager. Now, not every adviser is granted this portfolio manager status. It requires extra educational content, a review of the investment philosophy of the portfolio manager with regulators and much more additional screening. So, Greg, this is the question, portfolio manager versus investment advisor so commonly used as synonyms. I mean, as we just talked about, they're not the same thing. They're similar, but not the same. So the things that differ, a portfolio manager from an investment advisor kind of fall into four critical areas, fiduciary duty, which we just talked about, fees and payments, education and experience and discretionary management and personalized services. So let's talk about fiduciary duty again so I won't get too much into because we just spent some time on it. But it's just that we have to act within the client's best interest. We have to put the client's interests first. It's just stated fact. Where is the investment advisor? Really has no defined fiduciary duty to the client. They're licensed as a salesperson. So from education and experience, well, the regulators standards require that portfolio managers meet rigorous experience and educational standards simply to be allowed to operate in the province that they are licensed in that capacity. So, as I said, as an investment advisor, you're only required to be registered as a salesperson with the regulators. That's a huge difference.
Massive difference. That's right, exactly.
Provincial securities commissions regulate portfolio managers and the firms they represent require that all managers receive formal training and certification from recognized securities institutes. Basically, to serve as a portfolio manager, you kind of have to have things like analytical skills, communication skills, expert knowledge of the markets and be recognized for that work. So according to the Canadian Securities Institute, a prospective portfolio manager must have kind of three things. They have to have industry experience, a lengthy amount of industry experience. They have to have a proven track record. They have to have a clean track record so they can't have like blemishes on their record. And if anybody's ever curious, you can always look up your advisor. Where do they look that up?
That's on the investment
Industry regulatory organization
I, I see it's on their website and it's, I think it's under like a find an advisor kind of menu item.
I mean you could look up us, you could if anybody was interested, look up Greg Kraminsky and see what comes up. Is there anything there, Greg, that we'd
Better go check out first? No, I think we're safe anyways.
The last part
That the Securities
Institute says is that you also have to have a track record of managing multimillion dollar portfolios on a discretionary basis.
Well, and that's one of the things, too, when you look at people that are quite new to the industry investment advisors or advisors that just come into the industry, they will not be able to be licensed as portfolio managers or discretionary. Portfolio managers, until they've achieved that, more experience, more years in the business, dealing with larger clients with higher net worth.
Yeah, so if you think about it from other fields, Greg, I guess let's talk about the medical community. You go to your GP or general practitioner for, I don't know, because you got something that's going on. It's not like that person does your hip replacement. They end up sending you to a hip and knee specialist who has extra training and can do that type of procedure. Exactly. The kind of the same thing.
What is it? Just talks to experience and expertize in a particular field. And portfolio managers
Have just demonstrated that
Track record of dealing with many clients, larger accounts and again managing it in a way that is only in the client's best interest and avoids any conflict of interest.
Now, Greg, am I recommending the CME Group as portfolio managers for the listeners out there? Why not? Of course I am. We do an excellent job. If you're not dealing with us, you should seriously think about it. Anyways, let's get back to item number three fees and payments. So the legal structure governing portfolio managers ensures there's no conflicts of interest because we have to operate in a fee only service where we're paid a percentage of the assets that we manage. There's no fees, trailers or commissions from any other source. So the client's interests are
Always put forward. There's no
That's right. And there's no way for a portfolio manager to earn any more money than has already
Been agreed to under the terms
Of the accounts.
Now, let's contrast that to investment advisors. And I'm not being hard on investment funds. I'm just stating the facts.
There's just differences, just differences.
Investment advisors, when recommending a product or some might talk about the benefits rather than the full view of the client's financial picture. So in other words, they might focus on one aspect versus does it really fit with that person? There are some out there that might focus on the fees. I don't know if we're supposed to talk about those things in public, but they're true. It's just like any other vocation. There are like my example of taking my car in for service. Yeah, well, there are times where I'm like, I'm paying way too much for this oil change. Yes. And did I really need to get that whatever procedure done?
I think the critical thing is, regardless of whether you're a portfolio manager and investment advisor, it's the full transparency of fees that's so important. For example, when a client buys a new issue, there may be a commission earned by the salesperson
That the client might not
Even be aware of. It may not be a bad investment. It's just important to know that there is a commission payable, even though it's maybe not coming out of the client's own pocket. But it's important to know, and
That's why our regulatory
Moved to much greater
Transparency of fees and expenses, which now everybody on their December statement every year can see exactly what fees have been earned by their advisor or their portfolio manager over the course of the year.
And fees are really important part of return. The less you pay, the more you keep. So if
You're dealing with something that's afraid to
Talk about fees, then maybe you should think about who you're dealing with. So item number four, personalized services and discretionary management. So what sets the portfolio manager apart from the investment adviser and other financial professionals is the rigorous process they've taken to understand things like, I don't know, clients, financial needs goals, what's important to them, what requires planning money and time and fit that into their risk tolerance through their asset allocation and security selection. And there is a huge, rigorous process to that. And it should never be led with product. It should be led first with what do you want to accomplish and then finding the product later that fits into those goals. So since portfolio managers don't receive commissions, they're not compelled to over trade a client's account to boost their earnings, which does happen in other situations.
Again, I can
Basically, again, is just putting the client's needs first. And of course, we're covered under the investor protection fund. So back to your earlier points. So let's sort of wrap up this part here that like I said, I'm not trying to be hard on investment advisors versus portfolio managers. It's just a different arena.
Well, we ourselves are investment advisors as well as portfolio managers. Right. And part of that speaks to the nature of the relationships with the clients. And not all of our clients are in discretionary accounts, which means that we have the discretion to make the investments without consulting them on every single trade. And so we have to work in both capacities. However, as portfolio managers, that fiduciary duties extended to all of our clients, regardless of the nature of the relationship.
Yeah, so investment advisors, E.R. or who cares? You're dealing with a portfolio manager that is a fiduciary. Well, listen, those are kind of the main differences in and maybe I'm beating a dead horse here, but portfolio. Versus investment adviser, but again, if anybody ever wants to talk about that stuff, we're happy to talk about it. But let's wrap up here with our fun part. Greg, tell me, what are you watching or reading these days?
Well, I'm still reading the
Book I started a year ago, so I guess I really shouldn't say I'm reading it anymore. The evening in the morning, it's a big one,
But I am. And I notice that
You're watching the same show I'm watching right now, which is called manifest or manifest.
Manifest. Yeah, I got to tell you, I started manifest and I was about three episodes in my daughter walked in the living room, said, what are you watching us and watching so-called manifest. And she sat down there
Watching a few minutes and she said,
I think I'd like the series. So I offered to re watch the first two episodes with her. What a great dad. So now we're on episode five together. OK, my wife walks in the room. What are you guys watching manifest.
I see where this is going.
So now I'm re watching the first five episodes with her.
You're a better man than I am.
My daughters left us in the dust. She's just like, I don't know. Are there multiple seasons to this?
I'm not actually sure. I think we're at about
The same point, but it's a very interesting concept, a little sci fi ish, I guess, sort of or outer limits or what's like
Lost like the show lost a little
Bit. Like lost. That's right. Anyway, that's a good one. And now that we're reaching the end of Netflix, it's probably a good thing that we're reaching the end of covid because soon there won't be anything to do.
So might as well get outside, enjoy the good weather, play some golf, tennis, whatever floats your boat. Right on. OK, well,
Well, that wraps it up. That was our discussion on how are you, the investor protected against a variety of different potential issues. Next time we'll move on to something different.
Exactly. Till next time.
Episode 57 – Complexified Perfectionism
Greg and Colin conclude the health and wealth mini-series by interviewing a recovering perfectionist! Jen Anderson joins the show to discuss what a perfectionist is and how to behave more as an accomplist instead!
EP.57 - Complexified Perfectionism
Welcome back to the Free Lunch podcast with Greg Kraminsky and Colin Andrews and Greg, this is the final week of our Health and Wealth mini series.
That's been a lot of fun this last few weeks.
It has. The mini series we designed is a lead up to our webinar on health and wealth. There were hosting on June twenty fourth. And just as a reminder to those listeners, we'll have Dr. Kevin Fonseka back with us, a clinical virologist with Alberta Health Services, and he's going to give us an update on all things covid. And we're going to get sick and tired of talking about covid pretty soon, aren't we, Greg?
Well, after six months, I think there's other things going on in the world
We can talk about. That's right.
Last week, we interviewed Charlene Valentine and talked about habits and goal setting and goal achieving and what gets in the way of those pesky goals. But before we get into today's conversation, I actually wanted to say a big thank you to Paige Hilton from our team. Paige has done a great job sourcing some great guests for the free lunch podcast specific to this health and wealth ministries, but also other episodes that we've done. And she's been the person behind the scenes just really putting it all together. And after fifty six episodes, Greg, I think she has it figured out.
Doing a great job. You bet.
But today, let's talk about today. Jen Anderson is joining us today. Jen is going to talk with us about how to stop being a perfectionist. I know that, Greg, you are perfect in every way.
I know. I told my wife that, but she doesn't agree.
But Jen is going to break that myth. So now, before all the listeners start to ask again, what the heck does this have to do with investing? Well, Greg, the answer's lots, right?
Sorry, I just got interrupted there with a call on my phone, which is interesting when you're in the middle of recording. So we'll just carry on with that. So anyways, that wasn't planned, I guess. Not a perfect strategy executed there, was it Greg?
Well, we'll work on that for next time.
That's right. So anyways, let's get into it. Let's see where this conversation takes us. And Jen Anderson, welcome to the Free Lunch podcast.
Thanks so much. Glad to be here.
Well, listen, Jen, just to get started, like, tell us your story. How did you end up where you are today and what led you to what we're going to be talking about today?
You know, just kind of happened is I used to work in technology. I actually have a degree in fiction writing. So, of course, I worked in technology and I also I suffer from migraines and nothing worked. I've had them for decades. And I start to suspect there was something underneath that was keeping all the medication from working and helping. And mind body health proved to be part of the solution. And one of the problems is that if you're a perfectionist and a people pleaser, your brain will be very happy to give you pain when you can't say no. And you really should. If you have this resentment, building up, your brain will do that to you and then the neural pathways build up. And it's not the only reason why you can have a mind body problem. I found articles that said, yeah, you should stop, that. It's really unhealthy. You don't do that. And very little advice on how to do it. And as a perfectionist, of course, I had to find the perfect way to go about perfection. So for me, I actually started making collages. For some reason, I feel very bad that I'm not a better artist. I can't draw better, even though if I practiced, I get better. But it drives me crazy that I'm not better now. Collages, I didn't care. I just rip things out of magazines, got it out my glue stick. It was fine. And doing something that you're not good at, that you're not good at helps a lot. But one big thing that keeps bothering me about this other people is my to do list is perfectionist. We always put too much on our list and then beating ourselves up for not getting it all done. So I actually designed an app crowdfunding campaign coming eventually that is a to do app with a perfectionist point of view and building for that building. From that, there's a Facebook group and I did a video workshop recently, apologies and more workshops. Perfectionism is just really bothering us all very badly. If you are too perfectionist, it's an albatross around your neck.
Well, let's talk about that a little bit. So I think you touched on a little bit already, but what exactly is perfectionism and what is wrong with it? What can we do about it?
Perfectionism is trying to reach impossible standards is the thing. There's a big difference between perfectionism and aspiring for excellence because there is no such thing as good enough. My inner perfectionist cannot tell the difference between 99 percent good and nine percent good. It's a lot out of all or nothing thinking. And it also has to do with excellence, has to do with the quality of your work. Perfectionism has to do with the quality of you as a person and your worthiness as a person. Either I'm perfect or garbage and people lose sleep over this, that their career hasn't gone exactly the way they wanted it to do. Their housekeeping isn't up to some ridiculous standards in their head, even though they're all working sixty hours a week, what have you. If you have psychological distress over how much you do and how well you do it, that's perfectionism and that's toxic.
That plays into investing, right, Greg? I mean, you're looking for the perfect outcome in their investment world, but I don't know, stuff gets in the way.
It's like planning for uncertainty a little bit.
I want to talk about your to do list thing that you mentioned to do list or something that I've used while forever. But what I've found is that you're right, I put too many things down on my to do list. They might have 50 items and there's no way I can get through those 50 items. And so then just in reading it, you read through it and you actually don't do any of them because you're so overwhelmed. Is that kind of what your experience has been?
Oh, absolutely. That is a huge part of the problem. And with the video workshop I did, I actually suggested doing several different lists. You've got your big picture list of everything that you want to get to at some point, and then you little picture list, all the things that you do every day and don't even think about it, making dinner, stopping by the store, all these things that take up time that when you make a daily To-Do list, you look at it and think, oh, you know, I got some free time. No, no, no. It's all on the little picture list. You have to consider all those things as well. And there's not only too much on our list, there's also not enough in some ways.
Should people's to do lists be longer? Should they be more inclusive of the little things? How do you create it to do list that you can feel good about at the end of the day or the week or whatever is your schedule?
I would recommend looking at your little picture list and either refer to that while you're making a daily list and keeping it short is actually reasonable or actually put some of the little picture list items on your daily list. Write down, scan it in, print it out and have every day. I need to do these tasks. I have to do this thing for this client and I have to do one, two and three and make lunch and dinner or whatever. And if it's on the list, then I can see, okay, I can work around that. Some people argue people are short, put three things on it maximum, but that inner perfectionist nags going, oh no, no, that's not enough. Even if I do everything on that list now, I still feel like I wasn't trying enough. I think it's a matter of adjusting, holding onto your list for a couple of weeks and figuring out what you did and what you didn't do and exactly where your reach is exceeding your grasp.
Who is subject to trying to be a perfectionist? Like, do you find it in one area? Is it more men than women or vice versa? Is it business people or who's most at risk?
Gifted students? If you did well in school then and even in school and going throughout your life, you are holding yourself up to some ridiculous standards. Even if you weren't that competitive in school, you're still used to being top of the class. The valedictorian of my high school never had to put in any effort once you got to college and actually had to put an effort into a slacker because he just oh no, I can't be top of the class, so I can't be tenth in a class of two hundred. Oh, no, that is definitely a problem. It does tend in general to be more towards women as well, just because there's always someone to tell us that we're doing something wrong and they never agree with each other. Parenting, among other things, that men get to be shielded from that a little bit interesting.
A lot of what we've talked about in our Health and Wealth series has been sort of how stress and anxiety can affect your health. And certainly we run into stress and anxiety all the time in the investing world where people can create a lot of stress for themselves. What are the health aspects or health effects of being a perfectionist?
Pretty much anything that stress causes. Migraines like it could be IBS, that could be cardiac and heart issues or blood pressure problems. It's all this pressure on yourself. It's like being in an abusive relationship with yourself. What I hear from a lot of people who have escaped abusive relationships, it's yes, I could never please them. I could never be good enough no matter what I did. And if we went shopping together, I pick the right thing. They would still take it out of the car and bitch at me for not buying the cheaper thing. Instead, it's a sucker's bet perfections. I'm just like trying to please the abuser. And it is like having a bully following you around in your brain. I'd go to my kitchen every single time and think it's not clean enough. And I used to have my mom and my Aunts voices in my head nagging me about it. And if they if they were actually there would not be that way about it.
No they would wait till you left the room then they'd be judgie.
It's kind of fascinating actually because of last week's. Yes. We were talking about telling stories. We create stories in our own mind. We make up stories and those stories kind of what we do to ourselves is quite remarkable. If you make up stories about yourself and here it's the same thing. It's making up a story about your ability to get things one or to achieve that standard of excellence that you think you need to achieve. And it's quite remarkable. But as you say, in the end, it all comes down. To what it does to your physical well-being. Fascinating.
Also affects your productivity is the perfectionist think we're not doing enough, but then we spend time and energy beating ourselves up and we're free to start anything unless we have the perfect experience. I have to read these three books before I can start writing a novel for fun. I have to learn everything I can about this one company before I buy into a Mutual fund instead of making just a reasonable amount of research. And people are afraid to make a change. They're afraid to show their work to other people. They're afraid to launch a business because they're afraid of failure and success. But it's not perfect. And so it's just holds us back in every part of our life. There's a writing coach Linda Formicelli who said that most people can't tell the difference between your A plus work and your B plus work. That's life changing because that actually does help my earning potential, because in my other job, I'm a freelance writer. And so if I'm going to talk to myself for spending three times as long to get something just a little bit better, that doesn't really make a difference if it is true.
You know what I hear when I was listening to you there is as perfectionists, maybe have a hard time with trust. Is that a fair statement? Like we work in a trusted relationship with clients where we hope that they trust that we're making good decisions on their behalf and that's the goal. But is trust an issue when you're a perfectionist?
I would think that especially with someone you're doing business with because you go on instinct and then think, oh, no, but that one time that I trusted someone on instinct and I really got a good impression out of them, it didn't work out. So therefore, I have no reason to trust my instinct this time. So it is difficult. There's this hesitation. There's OK, there's financial advisers. Are they good? He seems to know what he is talk about. She seems helpful, but it's difficult. You need the perfect person to help you.
The perfectionist needs the perfect person. How is that accomplished?
It isn't. Pretty much, you just get overwhelmed, put yourself into a corner and in some cases you just have to make a decision. You just have to make an allocation for your for one, for example, other cases. Yeah. And you just end up like five years to retirement. I'm thinking. Oh yeah, I know I have to manage this money properly at all. Oops.
What is an accomplicist to.
AN accomplicist is someone who accomplishes so much more than they give themselves credit for. And it is also the list of their accomplishments.
And so they differ from a perfectionist how?
That's the thing. It's a perfectionist who is recovering. Someone is starting to realize that they're doing enough.
So what is the solution then? Like how do you do it? How do you go from being a perfectionist to an accomplist?
There are a few different ways. Everyone's brain works differently and everyone has a different cause. Perfectionism is an excellent defense mechanism, so it may require some therapy to figure out what's causing this fear and anxiety that perfectionism is helping you with. In other cases, it could just be a habit and just typical fear of rejection, fear of failure. So one thing I suggest is find something that you're no good at and you don't care, OK? And of course, everyone goes straight to oh actually my is better. Whatever bothers me the most, I have to get good at it and have started something stupid like making collages for me. I was just. Yeah. Whatever for other people that would be too much pressure for them. It varies. Do something that you're going to be bad at. I went to a Handel's Messiah sing along a couple of years ago in the before times I was in the chorus in college I sang Handel's Messiah and yeah, no, that was the most humbling experience of my life. I did not remember some of it. I could not hit all those notes anymore. And it was because I went in there knowing that I was not to be perfect. It was a delightful experience. It could have been murder, could have been absolutely miserable. Another way that I suggest is you take that voice in your head and you change the voice. You make it sound like someone who you don't like, who doesn't like you and you don't care instead of your mom, your aunt yourself. We value our own opinions, but someone whose opinion they don't value. If you're the one nagging me, it's a lot easier for me to mentally yell at them and tell them to go away. So that is helpful. Another exercise I've discovered is the reverse bucket list, where you make a list of things that you have accomplished in your life. So often we look at this is what I wanted to do. This is why I still want to do. I haven't done it yet. But if you make a list of what you've actually done of your life, I've traveled here, I've done this. It's amazing when you realize these are all these things that I dreamed of doing at one point that other people at my age and stage of life would still wish that they were doing that. So it's kind of gratitude. It's kind of more than that. It's realizing that you should be pat yourself on the back, striving. Four more is great, but to step back and realizing that you've done that and with the to do list and the test management, I think it's something that we keep with us all day long. So changing your approach to that can be very helpful because it does reinforce.
I had a life coach, Jen awhile back and we talked about to do lists and her recommendation was to have a done list. So write down the things as you mentioned, write down the things that you just finished that day versus the things that you need to do the next. Now, my question on that would be, how does it relate to multitasking? People talk about multitasking is inefficient and some people think it's efficient as a perfectionist, as multitasking work.
Not necessarily. It depends. I feel that if I'm watching a video or a Facebook live from an expert, I should actually be paying attention to it. And then, of course, then they start off with their five minutes of talking about how the sound and I coming through and all this fluff. But I can't go off and do something else because eventually they're going to start talking about something good. But it can help you to focus to do it all or to play a mindless video game like the textile things to help you focus. Multitasking, we usually mess up both things. It's something that we're tempted to do is perfectionists because we want to be as productive as possible, but then we just get frustrated because it doesn't work.
Interesting. So in our business and when we're investing, people can look for perfection. As Colin mentioned earlier, they look for certainty in a world that is absolutely uncertain, and particularly as we're talking about investing, it's all about probabilities. There's no guarantee of what's going to happen next year or
Or tomorrow. And so what advice do you have for people that are looking for that certainty in a very uncertain environment?
Taking a very grim outlook on life may actually be helpful. Thing that we think that we can avoid risk in everything in finance and in our career, in our health, if we're just controlling enough, if we just know enough. And it's not just perfectionist to do that. You hear someone has lung cancer, they smoke. Well, not necessarily. Everyone wants to hear, oh, something bad happened to that person. What did they do that I could not do so that it will never happen to me. That's not how it goes. We live in an uncertain universe, which is absolutely terrifying. But it's also kind of freeing to realize that we can't control everything and we can mitigate we can do our best. If we can't tolerate high risk and our investments, then we should go for moderate risk instead of any risk and balance out have a little bit in each level of risk. Don't put all your eggs in one basket. It's diversification. It's just basic advice that we have for everything.
Yeah, you're using our terminology now. Diversify your perfectionist ways. Right. But I got to comment on that. So in our world, as Greg mentioned, the world of finance is very complex. I don't think enough people give it enough credit for how complex it is. As you say, people are looking for certainty in something that is forever uncertain. But there's also this inner desire of many to complexify things. So instead of simplifying them by diversifying in your example, they like to take things that could be more simple and make them more complex. Is that an issue with perfectionists? Is that a self-esteem thing? Where do you think that stems from?
I think it might actually come from high self esteem. In some ways in the tech world, we have a type of programmer we call cowboys and cowboys think they know better than everyone else, everyone else. So standard ways of doing things are not good enough for them and in some ways unnecessary for them. So they'll set up things in ways that you can't understand. It makes things more difficult than they need to be. And it's because they think they know better than the experts and they have a certain amount of expertise, but they're exhausting because they are usually wrong and there are reasons why there are standards. So I do think it's actually comes from a certain arrogance and ego. You don't want to be the sheep I don't want to follow the advice of the experts. Well, yeah, but you guys know so much more about it than I do. It's your job. You're an expert at that. We don't all have to be experts at everything
You had mentioned. You're working on an app. Tell us about the app you're working on,
I guess, to do functional design or software. So of course, that is how I solve any problem. there's going to be a crowdfunding campaign, essentially. It's a to do app that does not make you feel bad for not doing things. Every other app will if you don't finish a task, show and read and change the status to overdue. But it was probably something you weren't going to get to in the first place. If you're a perfectionist, perfectionist need to forget some things, whereas all these apps are meant to make sure you don't forget them. So there's no overdue status, nothing isn't read. And I've introduced a couple of statuses that can. Actually make things a little bit easier for perfectionists, skit is one of them, sometimes you just can't get everything and it's perfectly normal. We need to normalize that to ourselves and delegated. We tend to forget that we can delegate things and or when we consider it, we think I'm going to obey. I could do it perfectly. Therefore, I can't impose and app. You don't really need that. You just change the dates. It's delegated and skipped or a very big deal are some tasks that maybe you want to do every day and you can't get it every day, but you want on your list every day and then you can work at skipped and not beat yourself up over not getting into it because skipping things is fine. But prevarications don't realize that.
And somewhere along there, I guess there must be a whether an internal or an external way of prioritizing the to do list. So you're skipping things that actually aren't going to cause a major problem, like there must be some discretion as to, OK, well, this can be skipped effectively in this. I better not skip because bad repercussions might happen.
You have to be able to do some prioritization within that as well.
Hey, so we never even mentioned that. I don't think we did the Jen your joining us from Burbank, California, we were talking about before we started recording. Where can listeners find you? If they're interested in your services?
They can go to the website accomplicist.app. It's the word of the teens that have an age. They can look for us on Facebook, Instagram and Twitter as a team accomplist. And there is a Facebook group called Team Accomplist and links to all that are on accomplist.app.
And do not let people join your group. If they're not self-declared perfectionists,
Why would they want to? If you want in, great. If you think you're there to get advice to deal with other people who are perfectionists. Fine, great. If that shows to you that you are also a perfectionist, go ahead. I'm not going to grab you and say, no, no, no, you have a problem. But were there looking for people to encourage each other? We don't want someone saying, oh, no, no, perfectionism is good. No, no, no. We're talking about different things.
This is like a support group in essence.
Absolutely. We need the support because society tells us we're not good enough in certain aspects. We're telling ourselves that, and I trust my opinion more than I trust other people. But if ten other people are telling me something that I'm wrong to beat myself up, I'll give that some weight. I'll consider that.
Any last few questions for Jen Greg?
No, I think you sort of covered it and you've raised some great points. And again, as I say, I think I loved your discussing how you're bullying yourself. It's because it is. People do that all the time, whether it's in their expectations for themselves or the stories they create about themselves. It's remarkable how you see that through so many different areas of living. So that's great. I appreciate your bringing that to us.
Greg, you often have a scene that you've shared with me over the years, like, gosh darn it, you're good enough and people like you or something like that.
I stole that from Saturday Night Live, I'm afraid.
How does it go again.
I'm good enough. I'm smart enough. And gosh darn it, people like me.
Yeah. So let's move on to the speed round. So again, Jen, this is just for fun, this section. You did all the hard work and this is just the desert to our discussion today. So you want to kick us off Greg?
Sure. What do you do for fun when you're not working or putting pressure on yourself to get things done?
Working my art journal, making art, making bad art, OK,
Making bad art, but not judging yourself for it.
It's supposed to be bad and I worry that it's not bad enough, but.
And what about are there any books you're reading right now?
Yeah, I am reading online. You're Paying by Howard Shubner, which is one of the great books of my body health. It's a fantastic book. I am also listening to the audio book of Valette by Charlotte Bronte, and it is her most annoying book That's tough going. And I'm also reading Anne McCaffery's or Anne Caffrey's the first of her Dragonriders of Pern books.
One of the classics.
Yeah, quite a diverse grouping there. What about any shows you and your husband are watching or you watch or anything you binge?
Let's see. Last night we watched these legends of tomorrow, which we refer to as the bonker show because it's a superhero show, but it is just bonkers. It just really leans into the weirdness. There's also a show on Apple TV called Mythic Quest.
Oh, yeah. Oh.
Which is about. Yeah, they're fantastic. I actually used to work at a gaming company, so. Yeah, it's very interesting with that. And of course the Muppets just hit the Disney Channel. So we've been watching an episode every day or so working our way through that. And another classic we watch as we're doing, Designing Women.
Wow. Designing women, that is. You haven't heard of it a long time.
Yeah, especially during the lockdown. We have been watching, like, one episode of a classic every day. And we did The Mary Tyler Moore Show, which is so much more sexist than I remember. Yes, we did Golden Girls, which there's so much meaner to each other. Yeah. And of course, they have no interest in continuity because there was no dvrs then and with designing women, yeah, they don't care about outbreaks. You don't notice that what you want episode a week, but those in the end of a scene, OK, cut to commercial success. So we're just like, OK, it's jarring now that we watch them all at once.
But what Newhart is that on the list?
It may be my husband has been lobbying for that.
Ok, well, other than the Free Lunch podcast, the most famous podcast released every Wednesday on all of the podcast providers, the one that you're on right now, any other podcast you listen to?
Welcome to Night Bill, which is a fictional podcast. It is supposedly the community radio station of a town in the desert where time doesn't work. Right. It's just a very weird, wonderful place if they've been doing it for years. And they actually did go back to the first one and work my way through that one.
Cool. That sounds really interesting. Can you tell me the name of that again?
Welcome to Night Vale.
Welcome to Night Vale.
Night Vale. All right.
Ok, we got a Canadian specific question for you, Greg. You want this one?
Sure. One of the ten Canadian provinces is a province called Saskatchewan where both Colin and I happen to be from. Can you spell Saskatchewan?
S , S.A.S. K Avw A,
You're so close.
It's very flat. There's no mountains. It is very flat.
And you made it to five letters, which puts you in that leaderboard for all of the US guests we've had on the show. So congratulations on that
Top decile for sure. The joke about Saskatchewan is that if your dog runs, we can watch it run for four days, something like that. I can't remember exactly where it goes..
Shall we finish the corner gas? And that is the theme song.
Oh, yeah, that's right.
All right. Any last ones Greg?.
No, I think we've covered it all. And thanks for being such a good sport, Jen, as well on our speed round there.
Yeah, that was awesome. Thanks, Jen.
Thank you. It's been a lot of fun and getting it wrong. I'm an example to other people who need to be inspired to be wrong.
Exactly right. Well, listen, we really appreciate you sharing your thoughts and insights and we'll make sure that people can be directed to your website and to your new app when that hits the shelf.
So. So that was accomplist.app app for anybody looking for you on the World Wide Web. All right. Well, I guess that about wraps up. Thanks for joining us today. Remember to give us a reading on your podcast provider and remember to join us tomorrow, June twenty fourth for our webinar on health and wellness.
Until next time. All right.
Episode 56 - Heath & Wealth Mini-series - The Mind
Greg and Colin interviewed Charlene Valentine, a holistic mind coach on the impact of low self esteem, creating routine, tiny habits, and tracking your progress to a goal. This is the second of three episodes in our health and wealth mini-series.
EP.56 - Heath & Wealth Mini-series - The Mind
Welcome back to the Free Lunch podcast with Greg Kraminsky and Colin Andrews, and last week, Greg Blair took your chair.
Yeah, that was great.
He snuck in there for one interview. Christine Dixon from Prairie Therapy. And we talked with Christine about what an osteopath is, what osteopathy is and why it's important and linked planning, be it in finances or health outcomes. And today, we're continuing our mini series on health and wealth as this is a lead up to our next webinar, because on June twenty fourth, we are hosting a webinar on health and wellness, a follow up to the one we hosted about nine months ago. Remember that when
I do get right in the beginning of the pandemic.
Yeah, right. When everything was hitting the fan, we had Dr. Kevin Fonseca join us, a clinical virologist, and he's going to join us again on June twenty fourth. And he's going to present an update on all things covid related. And of course, we're going to present on all things investment related because that's what we do. But for today, we're going to continue our health and wealth ministries. And we are so pleased to have Charlene Valentine. Is it Valentine or Valentine? I should ask you, Charlene.
That's a great question. It's Valentine. Perfect.
Well, thank you for making that right for me.
So Charlene's joining us today, and she's going to talk about habits and goal setting and goal achieving. And before the listeners start to ask, like, what the heck does this have to do with investing, Greg? People are going to ask that, right?
They will. And the answer is it has a lot to do with it.
Yeah, because as much as we focus on the health aspect of an investment portfolio, diagnosing investments through a financial plan, tracking the progress of those investments to a goals based report, I mean, the same things can be done in a health aspect.
So for today, we're going to see where this discussion takes us. And Charlene, welcome to the Free Lunch podcast.
Hi. Thank you, Colin and Greg, for having me. It's a pleasure to be here and to speak on this stuff, because as you said to your point exactly, mindset is everything.
Exactly. And. Well, listen, thanks again for joining us, Charlene. And first of all, tell us your story. How did you end up where you are today?
I'd love to share. I mean, it was kind of linear in an aspect. I'm a nutrition coach and a mindset coach. I overcame a severe eating disorder when I was in my teenage years. And this eating disorder arose when I was suffering with self-doubt and low confidence issues. I was using food as a means to feel better on the inside. But really it just stemmed from really having a poor mindset and just struggling with a lot of self sabotaging behavior. I was really disconnected from my self talk and I was really just in a really bad place. I kind of hit the so-called rock bottom and I was using kind of food as a means to feel better. But obviously it didn't work. I kept trying to change my habits and use different types of behavior change to feel better, to get healthier. And nothing was working until I discovered the power of mindset. But before I get to that, when I worked through my eating disorder after nutrition school, I started to become a health coach in the corporate world, helping people with chronic diseases like diabetes, heart disease, high cholesterol get better and doing the coaching. It's great and it's really empowering. But trying to coach someone by just changing their behavior, just changing their actions won't really be sustainable until you change the story in your mind, because the things that we say to ourselves are the reasons why we do the things that we do. So when I finally figured that out, it took me a lot of figuring that out. It took me hitting rock bottom, realizing that doing all these different things wasn't working and changing my habits came across an LP neurolinguistic programing, which is basically it's just a modality that tells you a lot about mindset and why we do the things we do, why we think, the way we think and how to change our thoughts, to match our behaviors and become successful with our goals. So I enrolled in a program to be a certified neurolinguistic programing, not a very attractive name, but and using that mindset, techniques and holistic healing through eating healthy food, I was able to finally heal my eating disorder. And that empowered me to not only continue doing nutrition coaching in the corporate world, but to also break free and do mindset Holistic coaching. So it's a very mind body health way about coaching.
I got to ask you a question about that. In the investment world, we talk about things like cognitive biases or heuristics or mental shortcuts on why people make the decisions they make, because things are always so obvious after the fact. Like, why did I buy that GameStop stock? Because that was so stupid. But when you're in the midst of it, these heuristics, these mental shortcuts are kind of what take over. Is it the same thing in your world? Is that what you're kind of describing?
It is it's like our inner dialog, the things that we say to ourselves everyday take over. So if we don't control our minds, our minds will control us. And the crazy statistic is like ninety five percent of our thoughts every day are repetitive in eighty five percent or. Negative. Which is crazy. It's mind blowing, really makes you think, what are we saying to ourselves? And a lot of the times we're not in charge of it. Our inner dialog is a lot of that behind the scenes thinking, which is a part of our mind called the subconscious mind that is responsible for our identity, our beliefs, our thoughts. And so I think the first step is just becoming aware of that, realizing that you have the power to change the story and your thoughts. And when you do, then your behaviors and your actions will follow through.
Interesting. So tell us. So what is a mind set coach do? Like how do you approach this challenge with your clients?
I approach it very holistically. I think one of the first things is just asking my clients what their struggle is, what their roadblock is, what's not going right in their life, and what they would like to fix and overcome. Getting really, really clear about that, because a lot of people like they can focus on what they don't want, but they have a hard time actually clarifying what they do want. So I think it's changing the story and becoming more the driver and realizing that you have more of the power to change and change the story into something a little bit more empowering and focusing on what you do want to change. And then when you focus on what you want to work towards, realizing what roadblocks are in the way and those roadblocks in the world, we call them limiting beliefs. The stories that you tell yourself that isn't necessarily true and it's definitely not empowering. I can't do this because of X, Y and Z. And we challenge that because half the reason why we go about the way we do things and it's not successful is because we're letting these self limiting beliefs get in the way.
Well, because eighty five percent of what you're telling yourself is negative all day is what you just told me. So it makes sense that they get
Where do those beliefs come from?
Those beliefs that come from conditioning as you grow up, not on purpose, but parents have a lot to do with the way that we think, the way we think and everything we pick up when we're young. I was just telling someone this the other day. It's when we were, I think before the age nine. We're a walking subconscious mind. And what that means is you're not aware of your world and you don't know you don't have rules on your world when you're a kid. So you don't form any hard rules or beliefs on how things should be. So before you're nine years old, you're going about your life just by how you feel about things. But it's funny, as you get older, you place these self limiting beliefs in yourself. And then you also have all these rules about how the way the world works and how what you can do and what you can do.
And without those self limiting beliefs, does one become a sociopath?
That's a great question. I'll save that for another day
On your website and we'll have to get the listeners the contact information for you by the end of the show. But you talk about Level up coaching. What is level up coaching?
Level coaching, I think, in my terms is just improving yourself. It's self mastery on more than one level. One of my favorite quotes "Is when you improve one area of your life, you improve all the rest". And when I healed my relationship with food, I healed my mind set. I was able to become more of a well-rounded person in my relationships, career, etc., finances, you name it. So I've integrated my learnings into my six plus years of holistic health coaching into this program where I help people really get clear and what's holding them back, like I said, challenging that and really coaching them through, getting back to their intuition and the person that they came on this earth to be and really like change the story into something a little bit more empowering. But then we also do take a look at not just the mental health, but the physical health and how our actions can be self sabotaging as well, too, and how we can improve that for the better.
It seems like there's obviously a very tight correlation between mental health and physical health. What are the sort of more common issues that you deal with your clients about? You've mentioned food, that was an issue for yourself. Is that a common denominator? What are the major things and how do they interact with each other?
Food is definitely a common denominator with a lot of the clients. And there's always something. And that's one thing, whether it is food issues or even insecurities around money, relationship issues, career, you name it. That one thing. It's not always the same with all the clients, but there is that starting point. And then once we get to the root cause of what's causing that issue, for me it was like low self-esteem or confidence. And I see that as a common theme with a lot of my clients. Once we identify that and then we change the story, we really challenge that belief. We're able to kind of heal other aspects of their lives. So if it's self doubt that's holding you back, you're not going to be confidently taking action on your goals. You're not going to be supporting your health. You won't believe that your have what it takes to be financially secure, things like that, so it can manifest in so many other areas of your life.
Self-esteem is a big one. I've been reading a lot about self-esteem and how there's some people out there that see that sort of the world suffers from low self-esteem in general. And I see it in our investment clients, Greg, when we talk about people, know what decisions they should be making, but then they make different ones. That's kind of like what you just described. You know, what you need to do to be healthy, but then you go to the fridge and eat something that you know you shouldn't. Isn't that kind of the same thing?
Definitely, because it becomes automatic. It becomes second nature. It's comfortable. It's like your comfort zone. So to go and change that, it's like, whoa, that's stepping outside the comfort zone.
What does it take for people to come to you? What happens? Lots of people, as you talked about, so many people out there have issues or limiting beliefs and things like that. But what does it take for somebody to say, OK, this is a problem for me and I need to get help as opposed to just going on and living their lives with these beliefs but not really taking action?
Well, I mean, there's some people who are ready to change and some who aren't and or people who don't realize that they have a problem that they need to be fixed or solved or improved on. Sometimes it takes a little bit of time for them to realize that for myself. That's my story. I had to hit rock bottom until I realized that the only way to go was to go up. So there's that. And there's also just being aware, I think, more self awareness, honestly, in whether it's doing things like this and getting the word out on noticing your behavior is noticing your thought patterns and becoming aware of what's not working in your life and just realizing that you have the power to change that. A lot of people can focus on what they don't want, but they don't realize that they have options. I think that's one of the biggest things. When my clients come to me and say something so simple and it's just like, wow, you just don't realize that you have options to do something differently. So just raising that awareness is just the biggest thing. And symptoms of that can manifest in different ways, like being critical, hypercritical perfectionism was a huge symptom for myself and realizing I needed to change. So I'm sure that is a common theme with a lot of other people as well.
Judgey people are Judgey, aren't they? Yeah, I find it in everything. Yeah, it's maybe hard to not be. Sometimes you have to step back and maybe not be judgmental, but that's not my question. My question is how important is having a routine and how do you establish one and follow it in a way that adds value to yourself, your self-esteem, your self awareness, just those things you talked about.
Routine is everything. I wrote a book called Tiny Habits by behavioral psychologist BJ Fogg. Highly, highly recommend it if anyone has a hard time gaining motivation to do their goals and achieve their goals. But routines are so important because when you set a routine in your life, you develop more confidence in your ability to do something. And a lot of the times when we set big goals and we don't achieve them is because we're lacking the motivation, but we can't rely on willpower and motivation to change. So the only way to bypass that is to set small, realistic goals for yourself. They call tiny habits or atomic habits something so small that you can't not do it. For example, I think one of the things that he recommends is do one jumping jack in the morning, literally just one. It's ridiculous. But when you can do one thing and you can apply this to any era of your life, then you're like, oh, that was easy, let's do more. And then you build off that confidence and you feel more motivated as you do that more often.
I just literally a few weeks ago listened in on a seminar and we were talking about atomic habits and the example they used is getting up and driving to the gym. And in fact, for this one particular person for the first week, all he did was drive to the gym. He didn't work out. He just drove to the gym. And so the habit became driving to the gym, not working out and introduced the actual activity at the gym after the habit of just getting up and going to the gym every day was established that working out was the easy part of getting to the gym was the hard part.
It's interesting how that works
In our world. I would say people maybe lack a routine in that they would do a financial plan, but not follow up on it, not track the progress. So you need that routine of rebalancing and doing things like that. So I'm not going to talk too much about investments. I know that's not what we're here to talk about today, but in your website, you talk about having a daily gratitude journal. This is really interesting because I did a course, a Yale course on Coursera. Greg are we recommending Coursera to the listeners.
Yeah, it's a fabulous, fabulous free course.
It's like the most popular course at Yale. And you could do it for free and was on the science of well-being. And it was really good. And one of the things was a gratitude journal. So tell us a little bit about your take on that very question.
I love that course, by the way. I took it. And it's transformative. It's amazing gratitude. Journals are as cheesy and as stigmatized as they are. They work. It was one of my gateways into just becoming happier and just taking control of my life and sets the tone for the day. One of the things that I recommend the most with my clients is just setting the tone right in the morning, which means. Feeling good right away, because how you start your day is how you finish your day and what better way to do it than by gratitude and just expressing whether in your head or out loud, just seeing what you're grateful for, but then also really feeling it like we can say all these things as much as we want, but it won't become true unless we put our feel good emotion towards it. And it's going to be weird right away to start seeing gratitude statements, but after a while becomes such a habit that it becomes your second nature. It's really powerful.
Give us an example of what you would, and it doesn't have to be too personal, but what would you write down in a gratitude journal?
I would say things like I have what it takes to be successful. And if that doesn't feel real to you, for example, one of my goals is making a big financial gain in my business. Say your I don't know, a coach or whatever you do in your business, say the next month, your goal is to make like ten months. If that doesn't feel real to you, I'm on my way to making X, Y and Z dollars this next month. Because when you say that you want to believe yourself, when you're saying these things
Interesting I've heard as well some people, certainly the way they word things around people that are on a diet and they're presented with a piece of chocolate cake or something. And there's a real difference when they refuse it by saying, I can't eat that as opposed to I don't eat that, then just looking at how you approach your life and those kinds of decisions can make a big difference. I guess I don't eat chocolate cake or I don't eat sweets. I mean, that's how you live your life. Whereas I can't it's a restriction on you that is external, not internal to your own feelings.
So that's interesting. Yeah, I can get a better
Would you say like I can't be judgmental or I won't be judgmental or I'm not
I'm not a judgmental person...Typically, but
Except in this case I'm going to judge.
Tell us about your typical client. Who do you work with primarily and the kinds of things you do. Are they relevant to all people? How do you like to approach your business?
I approach it individually. I think every one person is not going to have the same cookie cutter way about going about things. And I think that's why coaching is such a great field, because what works for one person might not work for another. But most of the people that come to me are either entrepreneurs or just ambitious people looking to have that growth focused mindset. Also, a lot of the holistic and a lot of the health population that I've worked with in the past have come to me to offer coaching. So if they have some breakthroughs, when they realize they come in for one thing and then they come out with so much more transformation,
How does your coaching work? So what is your schedule of coaching? Is it a three month program, six month program? How do you approach it. typically?
For right now, it's a three month program. It's a bi-weekly Zoom call for an hour and unlimited conversations in between those calls. It's really transformative when you can have that full hour to sit down with someone and coach them through a roadblock. I have four different pillars of my coaching program. We focus a lot on mindset in the beginning and confidence building has confidence is so important for everything. Talk a little bit about goal setting and creating a personal roadmap for someone that includes getting real clear on how to feel better physically. Because it's not just the mindset and of my coaching program, we really get clear on how to set that health goals and develop a system that works for the person.
I feel like you are describing our process in describing your process, really, because you're talking about four pillars and setting goals and having a roadmap and tracking your progress. I mean, that's exactly what we're doing on the finance side. Sure. There's a lot of alignment here. Maybe that's the point that we were trying to make before of health and wealth. They kind of go hand in hand.
And I think they do, and for us, Charlene, what we very often run into is some of the beliefs that we deal with our I need to follow the stock market every day. I have to check in with CNBC to see how I'm doing. And these are in many ways, they're very counter to what's beneficial in the long run, which for us is develop a good plan and stick with it and don't diverge from that. And there's all these distractions along the way. So for people that are trying to live a healthy lifestyle and eat the right foods, there's obviously many distractions to that
Called the refrigerator.
And for us it's the same thing. It's like don't get lured away by the shiny objects and try to keep focused on the goal. So I think there is a lot of overlap. One thing you talked about sort of with a gratitude journal as well, for some people, that's going to seem like kind of I don't know what it's
Or just not the kind of thing that I would do or something like that, but just the kind of things you do in general, lifestyle coaching and helping people with lack of confidence. It's, I think, more and more people. they're doing it, than not, and women and men and people of all different ages. How do you see that progressing? The health awareness and people taking charge of their own health and their own self, limiting beliefs, improving themselves over the next five, 10, 20years? Because obviously there's been a lot of change to this point already.
Definitely. I see it progressing very well. I think that there's more awareness over minds, body health and personal success, personal growth and realizing that we are the drivers of our own lives and we have the ability to change directions. To your point about trusting yourself and your intuition is listening to your needs and your goals and your desires and sticking with it. I definitely see it progressing in a really good way and bringing more awareness to it.
Well, I mean, in your website, you talk about and I'm going to quote your website here, I utilized my knowledge in NLP, hypnosis, time techniques, EFT and as a life plus success coach to help people overcome self sabotage, doubt and overwhelm so that they can achieve a deep inner fulfillment and passion for the life they created. Like that sounds pretty awesome. Like that's what I want to be.
It's crazy. All those things you just listed, we can have all these titles, but when it gets down to it, the biggest thing about being able to do the work that I do is it all comes down to one thing and that's working with the part of our minds that no one focuses on, which is like the subconscious mind. I've never learned about it. This is like stuff they don't teach you in program. Schools, teachers, parents don't tell you about this. No one really knows about it. But we have two parts of our mind is the conscious and the conscious is us doing the daily things, waking up because the alarm tells us going into the fridge, because we're hungry, blah, blah, blah, the subconscious is the behind the scenes stuff, the stuff that's responsible for the habits. And so using things like the time techniques, the life and success, coaching, hypnosis, even, there seems to be a lot of stigma around that think that kind of work. But what it really does is it actually talks to the part of your brain that's responsible for changing habits. So you're able to do that. You're able to do it. Otherwise you probably wouldn't if you didn't have these modalities in a coach to show you how to work through that yourself.
What are time techniques, by the way, just because it's been mentioned?
I just learned about a year ago. So I think it's somewhat of a newer modality of time techniques is also called timeline therapy. And what you do with someone is you go back in time when you're coaching them, bring them back to a past where they had a self limiting belief or decision that stops them from achieving a goal that they're looking to work towards in the future. So you go back in time to when they think that happened most likely in childhood, because that's a lot of where our beliefs are formed or where they feel like that emotion came from and we identify it. And I won't really get into the meat of the technique, but it really is you have to go through it to kind of experience it. But we work to eliminate it and identifying. and I think the biggest thing with this technique is we work to change the picture in your mind so we feel differently about something. And you look at it differently, the picture changes everything. So when you change that from like a negative discouraging picture to a positive empowering one, that actually improves your mindset moving forward on your goals, you're able to work towards it rather than getting discouraged by it.
Well, what I hear there is like your perspective is your reality. Your perspective is everything. So you listen. What are the top three things? Maybe we can close this out soon with this. But the top three takeaways that our listeners can take from your discussion or from working with a person like yourself, what three things or two or whatever are most important?
Three things. I have to minimize it to just three?
five or ten, I don't care.
I don't overwhelm people. That's great. I can try this. So I guess the first thing is just when you're focusing on any goal financially, health, whatever, just focus on what you do want and what you don't want. I'm sure you hear this a lot in the financial world, But for a lot of people who are trying to have more financial gain rather than saying, like, I don't want to be in debt, it's focusing on, well, what do you want to accumulate in the future moving forward? So future oriented. And the second thing is, rather than relying on willpower and motivation, focusing on setting small goals for yourself to be successful, that's one of my secrets to personal success. Tiny habits take one big goal. Focus on that one big goal and break it down into three small micro goals, things that you can do weekly, daily. And I guess the third thing is how fun there's so much seriousness around this topic. But when you're not feeling good, it's hard to get motivated to do anything. So really just getting to a state where you're feeling joy and just excited about your goals and excited about life because it's hard to do something that you don't want to do or don't feel enjoy about doing.
Well, that's an excellent point, because, as you say, people can get so serious that they forget that there's a lot of good stuff out there and you can have a lot of fun and enjoy yourself.
Yeah, because what's the point? Because every day you're one day closer to death right. See might as well have fun with that day.
Well, thanks for putting such a positive spin on it.
That was my subconscious mind coming through.
The negative mind.
All right. Well, you know, we didn't ask you or we didn't point out to the listeners is you're joining us from Boston. Do you say Boston?
Oh, Boston. Some do I don't know.
How do you say it?
You sound Canadian to me.
You have a Canadian accent.
Yeah, my boyfriend plays all the Canadian. We have the hockey going on. There's so much culture around here.
There you go. Canadian culture.
And you're having chowder for dinner tonight.
Park the car over there by the park.
I love it. OK, well, we're going to do a speed round with you. Well, actually, before we do that, can you tell us how people find you?
Absolutely. You can find me on my website www.charlenevalentine.com. But I am hanging around Instagram these days handle, @CharleneMarieValentine.
At Charleen Marie Valentine.
That sounds a little Italian. Is it Italian?
I do have Italian. I think. Twenty five percent Italian in me.
A quarter Italian from Boston. We have the jackpot here.
Ok, that's perfect.
So for our speed round and this is just for fun. You've gotten through all the heavy lifting, so thank you for that. This is just a fun little speed round.
Greg you want to kick us off.
Sure. What do you do for fun when you're not working?
Oh, go to concerts.
What are those? I don't remember
Oh yes, I've heard of those
Are those just on TV?
Once upon a time during a pandemic.
And what type of concert? This live music. What do you like to hear. What type of music.
My boyfriend and I are a diehard country fans, so that's where we're hanging around these days. Right? Country music concerts.
I didn't realize people from Boston listen to country. You're blowing my mind
A lot of hard work.
You'll need to make a trip to the Calgary Stampede one year, if that's the attitude.
And what about any books? What books are you reading?
Oh, I just picked up actually. Just got it through Amazon Outwitting the Devil by Napoleon Hill.
It's a book about personal success. So it goes perfectly with our topic.
Any shows you're watching, do you binge anything?
Yeah. Oh, man. Who hasn't heard about Handmaid's Tale? That's right.
Actually, I haven't heard of it.
What is it?
Oh, my God.
You got to get on that wagon.
Was it like I don't watch TV? I mean, I feel like that's all I've done for sixteen months.
Right. It's good. I recommend.
Other than free lunch, the podcast you're on, are there other podcasts that you listen to?
I mean, there's so many others in the personal development realm. Nothing top of mind that I mean, I listen to a lot of Tony Robbins. I have to say that
Tony listens to the free lunch Podcast, I hear.
No, yeah. I'm pretty sure.
Wow. big deal.
Let's get to the Canadian specific, Greg.
Ok, what is Kraft dinner?
I bet you've had it.
The Mac And Cheese.
So here we go. Kraft dinner in Canada only. Really? Oh, yeah. Grew up with it. And that was more than a few years ago
As a kid yeah, that was my dinner a lot.
Exactly. Or as a college student.
This is a loaded question because I can confirm that there's no way that I can spell Massachusetts. But how do you spell Saskatchewan? Because that's where Greg and I are from.
Oh, no. Oh, I have to spell Saskatchewan right now. No cheating. Right. OK, S A?
you're on a roll. So it's either a humorous right or wrong,
. Yeah, but you're getting there. You're getting there not to, right.
I tried, started off strong.
Yeah. One more for her Greg.
Last one. Are you a cat or a dog person? Neither or both.
A dog person.
Right on. We share that with you then.
Well, listen, thanks for joining us today. Before we let you go, I got to say go Bruins for your sake, because they're in the Playoffs right now. But the Calgary Flames are not. Greg, I don't know if you aware of that.
I was aware. Yeah.
Anyways, thanks again for joining us. Really appreciate your insight on all things mind related. We got a beat down that subconscious focus on the conscious. That's what we're trying to tell people.
Absolutely. Take back control.
That's great. All right.
Thanks again, Charlene. Great to have you on the show.
Thank you so much for having me. It was a pleasure.
Episode 55 - Health & Wealth Mini-Series - Your Body!
Blair and Colin interview Christine Dixon, an Osteopath at Prairie Therapy. We discuss the links between stress and your body and what you can do about it. Markets can be stressful enough, but if you are not getting enough sleep - a recipe for disaster!
EP.55 - Health & Wealth Mini-Series - Your Body
Welcome back to the free lunch podcast today with Blair, Howell and Colin Andrews. Blair, good to have you back on the show.
It's nice to be back Colin.
Well, you're prettier face than Greg, let's just put it that way. So it's nice to be around you.
Last week, Blair, Greg and I talked about bubbles, that being market bubbles, asset bubbles, et cetera, what to do when a bubble bursts and how to protect yourself leading up to a bubble. So the problem Blair is identifying when a true bubble is occurring and timing what to do with that bubble. I would suspect that's a very difficult thing to do.
Well, yeah. I mean, if everybody could time it, then there wouldn't be any bubbles
well we wouldn't have a job. Today we're starting a new three part mini series on health and wealth. And this is an area that we spent some time on in the past. And it's very relevant today. There's a fair bit of stress still out there, I would guess, from all things covid related. But the purpose of this mini series is to get us all set up and on the same page for our next Health and Wealth webinar, which is happening on June twenty fourth. On that day, we're going to have Dr Kevin Fonseca remember him.
I do, yeah.
He's a clinical Virologist, I believe.
With Alberta Health Services and he's going to be joining us and talking about all things covid related. And of course, we're going to present on all things investment related. But to kick off our Health and Wealth mini series, we have Christine Dixon joining us today. And Christine is an osteopath who works at Prairie Therapy. And before all the listeners start to question things like what the heck does this have to do with investing, I got to say lots. And we're going to get into that. But as much as we tend to as investors focus on things like the health aspect of an investment portfolio being rate of return or things like that, we have to remind ourselves that the rate of return comes from the asset allocation strategy that only comes from the diagnosis. So in this case, the diagnosis is from a financial plan. But today we're not going to talk about diagnosis from a financial plan. We're going to talk about the health aspects of Christine. That was a very long introduction. But thanks so much for joining us today on the free lunch podcast.
Yeah, thanks for having me.
Now, Christine, going to kick it off here with one really important question for you to answer, and that is tell us your story. How did you end up where you are today?
I was born and raised in Regina and grew up playingVolleyball. I was really into sports, played every season I could and loved it. I loved the team atmosphere. I loved the team mentality. And I loved being around like minded people that wanted to better themselves. And so that rolled with me into university where I pursued an athletic therapy career. So I finished my fourth year of the program at Calgary. That's what brought me out this way. And I started out practicing as an athletic therapist and just felt a bit frustrating, if it was a normal ankle sprain that walked through the door. No problem. I felt like I could textbook follow the rehabilitation plan and get that person fixed right up. But if there was anything more, anything chronic, any medical conditions involved, anything a bit more complex, I felt limited. There wasn't a plan in the textbook for me to follow, and I wasn't sure exactly where to go with it. So I felt there was more to the body and more I could do as a practitioner with my hands to better that person. And so I looked at going back to school and I wasn't quite sure what that meant for me. So I started doing some research on same health field, but different career path in it. And I looked at all everything. I looked at becoming a doctor, becoming a sport doc, a surgeon, a Chiro, a naturopath, and none of it really fit. I still really wanted to be hands on with my patients and make that relationship with them. And an old professor mentioned osteopathy and I'd never heard of it, like many of us wasn't quite sure what it was. And I did the old Google that night. And the next day I wrote my application. It was everything that I thought I wanted and I didn't know there was a career out there for me. But that was in March and I started school the following September.
That's pretty cool. Now, I can ask you, though, how do you pronounce it? Osteopathy?
Osteopathy. But if you're just talking, I'm an osteopath. But when we describe it, it's osteopathy
And you got into this field because of what I would call models versus reality. And this is something we talk about in the investment world all the time, that on paper things should work out just the way they are. Just like you mentioned, treating an ankle sprain is pretty straightforward as long as that's all it is. But the reality is there's something underlying that is causing the issue that you can't see.
Absolutely. That's exactly it. So a lot of the time, if somebody sprained ankle, great, it can be a straight forward ankle sprain. But if you have an old back injury and you're in a cast for six weeks. And you're on crutches, it's going to hurt your back, and so it was the ankle sprain I could fix, but then I couldn't quite figure out what was going on up in the back. And so we had to unpeel the layers of the injury to find out where it was going. So practically, we take a full approach to the body every time it's a head to toe assessment. And so we want the whole picture before we know where we can dove in.
That's awesome question for you, Christine. So what's the difference between a physiotherapist and an osteopath? Osteopathy, osteopathy.
No an osteopath. That's right. So we all have our little categories that we put into. A lot of it is very similar. It's a hands on therapy when you go see a video. Typically, they use some form of modality. So they'll use an ice machine or ultrasound or heat or acupuncture. When you come and see me, it's just my hands moving your body around to get you in a position so we don't use any modalities. It's just hands on therapy. And then I would say I typically describe the differences as we do the normal muscle bone, joint ligament stuff that physio would do or a massage therapist. And then we add in a few extra layers or spoons, just a bit different, whereas we add in visceral manipulation. So if there's been any problems in the digestive system, in the reproductive organs at all, in the lungs, the heart, we can move the organs around minimally to get them to function better and to relieve stress off of the system. So typically, physiotherapists and chiros, don't do visceral manipulation and the extra one that we add is cranial psychotherapy. So that's really nice. I describe and it's really nice for the basic metabolic functions of the body. So is your brain telling your body, hey, it's time to go to bed, let's shut off the brain, let's get into sleep and let's have a deep sleep and rest for the next day. So it was your brain sending your body the signals to function.
You brought up a really critical word there. Sorry, Blair, to cut you off, but stress the reason we wanted to do this mini series.And again, for the listeners out there, that being my parents and your parents, Blair and her friends, but the stress in investing, we talk about this all the time, that investing is full of stress if you let it be. And so it sounds like there's a real link between the body and stress and sort of like any ailments,
We are huge believers that anything we go through in the day, emotionally, physically, stress, it takes a toll on your body. And so when you have a stressful reaction in your life, your body's going to have to react to that. And so a lot of the time when people are in a stressful environment, they are so stressed right now, particularly because your body's able to produce the hormones and produce what you need to get through that time. And then you had a big role when you come out of that and you go, oh, man, last week is really tough. I'm feeling pretty wiped like my body just can't cope this week. I'm so tired and so lethargic and I just can't get my body out of this funk that I was in from all the stress that I put myself through. And so osteopathic babies really help with that. We can really help your system balance out your nervous system so that you can cope with things better. I typically tell a really stressed out patient that you're going to still have the stress that flies in day to day, but your reaction to it will lessen. You won't be as quick to judge, quick to misfire, quick to react. You'll just be able to cope with things a lot easier if we can balance out your nervous system.
Well, that's great to hear. I like that method kind of speaking with that with stress and your diagnosis and that. So is there a significant relationship between diet and exercise? And when you talk to your clients or patients about that, is that advice you give in terms about eating properly and exercising?
Absolutely. So we always look at the whole picture. Like I said, I go through detailed history, typically takes about 20 minutes on each patient depending on what they've been through. So we ask all those baseline questions on intake. And so we want to look at the full picture, full body always. So if you have digestive disorders and you're lactose intolerant, is it because you ate an ice cream sandwich last night or is it because there's something physically with your digestive system that we think we can help with? So I'm by no means am a dietitian. I'm not a nutritionist, I'm not an exercise coach. But I for sure include that into my therapy and make sure that patient is always going to get the right help from the right people. So if a patient comes in with extreme digestive dysfunction and they know they have all these allergies but can't quite pinpoint it, I typically refer out to a naturopath. That's the best person that's going to be able to help you control your diet and learn what works best with your system and in conjunction with me. Then if there's inflammation in your system, I can help move that around and help settle out the dysfunction from my standpoint. But if you're still going to be. In something that's aggravating, we need to control that as well, and I'm not the best person for that as well as exercise. I started out as an athletic therapist, so I have a really good grasp on injury rehab and what needs to happen physically. But if a patient comes in and they're needing a full workout where they are wanting a home program, same thing. I typically show a couple stretches at the end of my day when I'm with my patient. But if you're looking for a full reboot, I refer out as well. But it's absolutely discussed every time.
Oh, that's good to hear. I mean, we talk about that when the last 10, 15 years, kind of how medicine has changed and how it's becoming more of a holistic, you know, the importance of exercise, which kind of leads the next question. What changes do you see in health awareness over the next five, 10 years? And have you seen a major change in health awareness? I mean, let's go before covid because obviously health becomes paramount. But have you seen a change in medicine over that since you've entered the osteopathy?
Yes. So what I would say to that, yes, of course, covid is that all of our mindsets and so this year has been a big mental health one and we're worried about how we work balance, life balance, stress, balance. And so I would say, since I've been practicing, that's been the biggest shift that I've seen was in making sure patients are seeking mental health care in whatever capacity they need that from. But on top of that, the one that I would like to see going forward, I'm really trying to push this on my patients is being an advocate for yourself. You know, your body, you trust your body. So when you walk into my office and you say there's something wrong, I trust you. I believe that. I believe what you're feeling. And so you go to your doctor and say, hey, I slipped on ice in December and after that I didn't hit my head at all. But after that, I started getting these headaches and something's wrong. And your doctor goes, it's not related on paper. Your head checks out, you're fine. Go home. And so what I want patients to be able to do is just have more of a voice. You go back to that doctor or you've come to see me. I trust everything that you're saying. And I write you a letter and that goes to your doctor. And so it's just being heard with your own health. So many patients get sent away. Our health care system is overrun right now. It's it's easy and it's hard for those physicians to take the time to listen to you when they are overworked the way they are. And so when you come in and book appointment with me, you have 15 minutes every single time, one on one time with me. And so you can tell me everything that you're feeling, everything that your body's going through. And I'm going to hear you and believe you and try to find the right practitioner for you. And so just being advocates for our own health, it's where I'd really like to see it go. Instead of sitting back and waiting for somebody to come help you, I think we need to be a bit more proactive instead of reactive, a bit more of preventative instead of what can we do to fix this after it's happened. And I think that's where a lot of practices are going is how do we prevent these big back episodes from happening instead of dealing with them on the back end? Financially, it's also very important to do so, dealing with something after that that costs our health care system in ourselves way more exponentially than if we can be proactive with our care.
We're proactive planning, setting goals, linking your health to this sounds a lot like investing Blair.
It sounds very familiar and I love to hear that. Kind of going back to what you said originally, Christine, the idea of coming in and I have a sore ankle and yeah, I can fix that. But maybe there was something else going on that why it's always saw that I'm missing.
what's the root cause?
Yeah. And that ability or that passion to go out and just like I think I can do better. What do you think the relationship is? Because you just spoke to it a little bit. And I've always kind of been curious because as you said, when we go to our doctor, a good relationship with it. But I find a lot of times, yeah, you are kind of being pushed through. This is happening. And OK, I'm going to here's a prescription and I think they want the best going through. But what do you think the relationship is between an osteopath, kind of that traditional medicine and other forms? Do you think there is collaboration's being formed or you still think it's a bit, I guess, siloed in terms of your own doctor and other people?
So what I like is that multidisciplinary approach. I want every patient of mine to have a family doctor. I want them to get their physicals every year. And I think it's very important from that side medically. We want everybody to be healthy. So they have that blood work and we know they're safe on paper. Then we can do our magic in here. But we for sure are trying to bridge the gap. And I think it's just again, that is every health care practitioner. Is so busy and so what I really try to do when really I would say a strength is communication and so bridging that gap and having those conversations with the doctor. OK, you don't think it's something medical? Let me take over. Let me take this one off your case and I'll put them through my stuff and see if that helps instead of them being back in your office every two to three weeks asking for more painkillers because they're bastards. And so we're for sure trying to bridge the gap. But I really think multidisciplinary is the way to go. I think every person should have a family doctor. They should have a physician they can go to for an acute injury. They should have an osteopath to help with just maintenance of health and anything they're going through. And then, of course, the other ones massage, I think is excellent for stress reduction. But just helping with circulation and just getting you to a place where you can relax, chiros are really good as well. If you wake up with a kinked neck, chiros, the one to go to. And so we each have our little special piece of where we can fit in. But I think every person could benefit from every treatment.
I like this idea of it's up to you to take control of as a patient, as a person, it's up to you to take control of your future health. But this idea of having a diversified approach, understanding the things that you know and focusing on those things and then outsourcing the things that you don't have control or knowledge of is kind of what I'm hearing.
I think that's where we're best and really putting that ego aside and really trying to help the patient get better. And so our whole goal at prairie therapy is getting the patient better, whether that's a patient walking into my office. I you know what my physio actually I think would be way better at this than me. And just being able to have that patient over without that worry of medical saying, like, I don't know how to fix this, but that doesn't matter. I don't need to know how to fix this. I need to get this patient better and that's in somebody else's hands that's going to do it. And we are a family here and we walk patients through different doors every day trying to get them better care.
Hey, are we recommending Christine Dickson at Prairie Therapy? I think we might be. Yeah, I think we are. I think we are. We can recommend stocks. We can't make stock recommendations on this podcast, but we can recommend that somebody go see an expert in health related stuff.
Well, I mean, health is incredibly important for our clients. We want them financial health. But same time, we want them to live a long, happy life that they can enjoy that wealth. So being physically and mentally happy just means that they can enjoy the money, the trips, the vacation, what things they like to do.
I got to tell you, I've been counseling more people this last few years on spending their money than on anything else, because just like what you talked about, you get to a position where if you don't have your health, you don't have anything. Really? What's that saying? You don't want to die the richest person in the grave or something like that. Like at some point you got to enjoy your life.
The person who dies with the most still dies.
What are the questions you have for Christine Blair?
I have if you just kind of have a general conversation, what would you say? It might be the biggest thing people should be doing for their physical mental health. If you just had let's say you're taught to on a day to day basis,
Day to day, I would say have a person you're number one, go to the you can talk about your day where I find that loneliness, the big one this year, and not having the ability to reach out and chat with somebody. And so have a person talk about your feelings, talk about your day, talk about what you talk about, what made you happy that day, and just have conversations and relationship with somebody. And the number two, I think it takes the cake. You're good quality sleep, set up a foundation for the rest of everything that you do. And so you can shut down at night and have a good whatever your body needs. Some people can function off. Some people need nine anywhere kind of that. Seven to eight is the best from the research standpoint. But quality sleep sets you up for your day. If you don't have a good sleep the night before you go into a stressful work meeting, you just can't cope as well as if you had a really good rest the night before. And that's due to everything else. If you're not sleeping, your digestion is not going to work, your circulation is not going to work. You're not going to have an energy to exercise. So it's the base foundation for everything that you've built your life on. So having a relationship, talk to someone, talk to anybody that you can trust and then sleep, that's awesome.
It was good. I think you answered most of the questions I had.
Well, actually, you had another question that I wanted to clarify. And it was the do it yourself, because we did an episode on Do It yourselfers two weeks ago. In it, we poked fun at one of our colleagues because he's a real do it yourself for as a matter of fact, I won't tell you his name, but it starts with Steve and his last name's Molina, and he soes things like change springs in his car and things like that on his own. But Blair, what was your do it yourself question?
Well, I guess right now it's a do It yourself world. It's easy to get information off the Internet and that becomes fact. I just want to know what kind of your maybe frustration. There's stories with people come in. And for a while I remember it was copper bracelets that fix any arm problems or
Those don't work. Sorry. OK, I want to interrupt. I want to hear the answer.
You probably hear it all the time. I heard that I should be taking this to solve this problem.
And don't get me wrong, if there was a pill, I would take it to. But so much of that stuff is gimmicky and it just doesn't work. And so I think that's the baseline is that you got to put in work to be healthy. It doesn't just come naturally. It's not an instinct for most people to pick the salad or the burger and go for the walk instead of watching TV. And so you've got to put in the work to do it and. I have the YouTube patients that find exercise programs on YouTube and they're putting themselves through it, and then of course they get hurt because the guys in the videos are professionals doing these things and they have built up the baseline strength to get there. And the typical patient is sedentary. We sit in our desk all day long working and so you can't just jump off the couch and be a YouTube star. And so I think it's bridging that gap. Is it in life? I think there's a lot of things you can do it yourself or sons. And they all had birthdays this last week and I made four cakes and I decorated for cakes. And it was that Instagram versus reality type thing. But I've been in that situation. Nobody's getting hurt. Nobody loses anything. And we had a lot of fun. But in this situation, it's your body, it's your health. And really, I think there's not a lot you can do it yourself. I think you need to go see a professional and everybody is different. And so you get the good information on what you can do in home exercise programs for sure on stuff that is valuable for you at that time. And that can change. But just taking the initiative to go get help I think is really important right now.
Yeah, I like that. No shortcuts to good health.
You know, where we get it, Christine, is I have people that come into my office and tell me how the stock market works. And I was doing that. I listen and I ask open ended questions because the person in front of me is quite passionate about how they understand how global stock markets work. I happen to work in the global stock markets, a good baseline understanding of how they work. But so it's interesting when somebody tells you like so in this case, it's kind of like somebody's self diagnosing because they went online.
Maybe their ankle was sore, they went online, they googled something it always leads to to pass one of two pass. You're having a heart attack or you have cancer every single time.
Yeah. And so I don't say I don't Google your symptoms because nobody listens to that but Google it. Take a breath, come back to reality and see what's most appropriate. And then in with me and we can talk it over. So nine times out of ten, ten times out of ten, a patient walks in and they go, I think I have to get a double. And we take a look at it and I go, Why do you think you have to you've never played a day of tennis? And they say, well, I love it. And that's the location of the game. And we go, OK. And then I'll say, let me go through my assessment and we're going to chat about this. We're going to chat about what I find. We're going to chat about why I think it's not tennis elbow and how we can go from there. And that's just it is I have the educational background to get you through this as opposed to just, oh, well, your ovaries must be tennis elbow. And so it just puts that comprehensive thinking behind it I guess.
That was awesome. Is there any last questions, Blurr?
I don't. You're speechless. I'm speechless,
Well, you're not done yet, though. We're not letting you off the hook just yet. I was giving you a hard time before we started recording because you're from Regina and I'm from Saskatoon. And there's a bitter rivalry between Regina and Saskatoon, right?
So we're going to give you a speed round. These are just for fun. These questions are just for fun. You got through the heavy lifting. So, Blair, start us off with a speed round for Christine.
Well, what do you do for fun when you're not working? time's ticking.
We go outdoors, camping.
All right. Any books you're reading right now?
Oh, I just finished twenty eight summers last night.
Twenty eight summers.
It's like a cheap you love novel. I cried at the end. It was great
Colin ,You'll have to read that.
I might have already read it. You don't know
What shows you watching?
Oh I do like this is us. I have triplets and so it just hits my heart
And my wife is watching that right now.
Isn't that about divorce?
There's a lot of love in it though, to a lot of like family love and all the good stuff. I mean, one of the big messy family, I got one and I feel like I watch my life on that show.
Pick a number between one and ten
Wrong sorry. That's a Regina answer answer Saskatoon.
Ok other than free lunch podcast, which you're on of course right now. Are there other podcasts that you listen to.
Regina Boy, Danny Hiebert and Bobby by Mitchell just started One Dropkicks Uninterrupted and I've been into that lately.
Ok, that leads to the next question. Ryders or stamp's.
Oh it has to be the writers were born.
Yes, exactly. Blair, I hate to break this to you, but we might be different. Is in Regina in Saskatoon, but we still wear green jerseys. Will you wear your red one blue
Green all the time. Yeah.
Ok, read it. You have to be a about
This should be an easy one for you. Bunny hug or hooded. Sweatshirt by any hook. Yes. Ding, ding, ding, ding. Nice answer that about wraps it up. So listen, you did great.
I don't know. We'll give you a six out
Of 10 on this beat round. Good job.
Oh. Oh, sharpen up for next time.
That was good. Well, listen, thanks for joining us today, Christine.
It was a lot of fun.
And for anybody that's looking for osteopathy or an osteopath, they can find you at prairie therapy.ca I believe, is your website.
Yeah, it is. We have an amazing people. Like I said, we've been around just over 10 years now and we really are a team here. And I would trust any single practitioner we have here with my life.
Awesome. All right. Well, listen to all the listeners out there. Thanks for joining us today. Remember to give us a reading on your podcast provider and to join us on June 24th for a webinar on health and wealth. We are going to have two more of these Health and Wealth Ministries podcast with two other practitioners in different fields. And Christine, have a great day.
Yeah, thank you, guys.
All right. Thanks. Catch you next time.
Episode 53 - “To DIY, or not to DIY”
We discussed the "do it yourself” mentality, and how it relates to investing. We looked at the motivations for people doing things outside of their area of expertise, discussed the lock smith paradox and weeding a garden as they relate to investing.
EP.53 - To DIY, or not to DIY
Welcome back to the free lunch with Greg and Colin. Last week, we discussed individual pension plans and retirement compensation arrangements with Ryan Ackers from GBL. We did.
And that was a good discussion. So for anybody that's a business owner or who has a professional corporation, you go listen to that one because it might be beneficial to you as they describe an individual pension plan is a supercharged RRSP right on this week, though, we're going to go in a slightly different direction and we're going to talk about do it yourself or the old DIY. You know who you are. And let's be honest, there's a lot to do it yourselfers out there.
Exactly. And probably everyone is a do it yourself or to some extent, so let's dive in.
But but there's limitations to do it yourself.
So that's what we're going to talk. Going to talk about that today. Where this all came up is the other day. We're having a
Conversation with our very own Steve Molinna about what we did on the weekend.
And now are we giving Steve Molina a hard time about being a do it yourself?
Of course we are.
Yeah, that's what we're going to do right now.
So Steve shared with us that he had spent the weekend painting the trim in his house, including along the Gable's, which from what I could tell from the pictures you sent us, were about twenty five feet above the ground. He did implement safety measures. He had his daughter standing inside the house, reaching out of a window, hanging on to the letter.
The 15 year old daughter let me rephrase this. You said inside the house, reaching through an open window to hold the ladder that her dad was up.
I believe that's true.
So now listen, Steve is a self-confessed do it yourselfer. He does home improvement projects, landscaping, and he works on his car, changes his own oil, Which you don't see every day, but many people do. So I started thinking about what is it that motivates people to take on projects or activities outside of their primary area of expertize. In Steve's case, Steve provides investment advice and planning expertise to our clients.
And he's really good at it!
And he's very good at that. And so what is it that motivates a guy like Steve? And clearly over the last many years, the growth in home improvement stores, Home Depot, Lowe's and more people are tackling projects that previously they might have contracted out.
And probably during covid there's more people doing do it yourself projects than there was pre covid.
I would think so, because they're certainly not that I follow too closely what Home Depot's earnings are, but I understand that their earnings were completely off the chart I think just reported this past week. So DIY or do it yourself extends beyond home improvement or construction projects. And I think because of the availability of lots of online resources these days, people can write their own wills. They can sell their homes without a real estate agent, and they can make their own investment decisions and security transactions, including buying and selling stocks, options, mutual funds, ETFs, so on. So I was thinking like, what is it? What are the motivations for taking on activities outside of your specific area of expertise that you otherwise might have hired a professional for? And so I did a little research on this. And Colin, what would you think is the number one reason why people do things themselves?
Well, I was going to say self esteem, but I think the answer's money.
They're both correct. But money, certainly on the economic side, money is one of the main reasons. And it's not just about saving money. So lots of people want to look at what's the best way to spend their money. And so they might reallocate money to other things. So if they save money by doing their own tiling in the bathroom, for example, they might be able to buy higher quality tile or replace the fixtures in the bathroom as well.
But what about the opportunity cost of that, Greg? So if somebody like tiling their own bathroom, they're spending their time doing that.
Exactly. And when we get into some of the reasons why people might want to hire a professional, that's certainly one of them. Some people actually believe that they can do a better job themselves. They think that outside contractors don't have the same pride of workmanship and the pride of ownership that they have in their own houses. So they might treat their own house better. sometimes lack of availability if you're in high demand times, a construction boom or Calgary after a hailstorm, for example,
Ever Summer, it might be difficult to find people to do what you need them to do. And in other cases, and I've certainly run across this in many cases, jobs are too small for professionals to want to take on trying to bring in a plumber just to fix a leaky faucet. You're going to spend two hundred dollars just for the guy to drive to your house, let alone what he's going to do. And so people might take on projects like that just for that reason. And then another motivation which you brought up is identity enhancement, like there's a number of sources of identity enhancement or self-esteem that can come from this. You can achieve a feeling of empowerment. You have a good result. You're empowered to take on further projects. It makes you feel more independent, not at the mercy of other professionals, that kind of thing. You can also build an identity as a craftsman, as someone who doesn't need help to do certain tasks or being able to do something other people can't do. And there's a strong feeling of accomplishment there. And another thing is just being part of a whole do it yourself community, so lots of people involve other peoples in their projects, family members, friends, come on over and we're going to build a deck or something like that. And it can be a kind of a community thing.
So what it reminds me of, Greg, is the plumber paradox that we've talked about in the past. So for the listeners out there, all four of you that are listening to this, the plumber paradox was how did that go? So you're known as a locksmith paradox.
Your lock is broken and you have somebody come out who doesn't have a lot of experience and they spend all day working on the lock. And you feel bad for them because they spent eight hours working on this lock and they finally sort of fix it. And you feel like you should pay them a lot for their services. Exactly. But then you have an expert that comes out and he fixes the lock in 15 minutes, charges you the same amount that you paid the previous person and you feel ripped off.
Exactly. And what you're paying for, of course, is expertize and you feel that there wasn't enough activity to justify the cost. But in the end, he solved the problem.He just did it in record time. So.
And Greg, we're not being hard on do it yourselfers.
Not at all.
Like, actually, I'm very envious of people that can do a lot of this work by themselves. And there's also a lot of people out there. When you talk about a craftsman, I mean, that might be somebody who is working on a craft that will take them through retirement years.
Exactly. I know many people actually who really enjoy woodworking and in their spare time, they're out in their garage. They have all the tools and they make wonderful things. As you say, it's very admirable. It becomes a source of enjoyment and pride. So what about you, Colin? Are you a do it yourself?
I've dabbled in this stuff, but I know my limitations. My wife and I used to have an argument every year when we had a trailer and RV because you have to winterize it every year. And I didn't know how to do it. I would pay somebody some lump sum of money to come and winterize the trailer and Leanna, my wife would get mad at me. And because we paid for this service and I'd say, well, listen, it took that person 20 minutes to do something that would have taken me three hours. Was it worth it? I think so. Now, other things I have done myself and you kind of know when maybe you shouldn't be like I've done some home radio projects where you're moving wiring around. It's like I don't really feel safe doing this.
You know, that's one that I often get caught up with because. Yes, changing a light bulb, I think that's certainly in my wheelhouse, replacing a light fixture. I have done. And really, when you think about it, it's pretty simple. There's only two wires in. There are sometimes three. And so you just kind of put them together and screw on one of those little Mouritz, I think they call them, and away you go. But then when I'm doing it, it's like, OK, now, gee, like what could go wrong? Well, maybe I didn't exactly screw these things together properly. What if a wire comes loose, shorts it out or something starts a fire
That burned your house down?
Exactly. And all because I replaced a light fixture myself. And so lots of people would do that without batting an eye and others would say, you know what, I'm not going to get involved in that kind of thing. So we all do it. And as you say, I think the secret is to know your limits. So clearly, there's lots of reasons to take on these do it yourself projects. And the question that you just asked is, just because you can do something yourself, does it mean you should do something yourself? And without making any value judgments on that point, let's just look at some of the reasons why you might want to consider using a professional to do things that you could do yourself. Number one, I would say, is safety, so just a little statistics from back in eight years ago in the US, in twenty twelve, there were about nine million nonfatal falls from ladders that were treated in the emergency room.
Steve. That's a lot, Steve. Nine million falls from ladders. The most common injury in the home now. And of course, there's other types of injuries that include cuts and eye injuries. And if you're using power tools, obviously there's more chance of that. So that's one expertise right now with YouTube and other easily available information sources online, you can certainly learn to do things by watching.
But there's lots of things, as you mentioned, with the locksmith experience can allow professionals to do the same thing faster, maybe better. And I know speaking personally, when I look at YouTube videos and then go try to do something, what I'm looking at is never exactly the same as it is in
The video or they make it look so easy on the video. Don't exactly. I do have to give a shout out to all these people that post these videos, though, because if you want to know how to do anything, just look it up on YouTube. Chances are somebody put a video up.
It's fantastic. It's a fantastic source of information. But again, in some cases, there's no replacement for years of experience. The quality of the work. I don't know if you've ever tried to put up drywall or even patch a hole in the wall
Like I have drywall lots and you know how difficult it is to get smooth joins the mudding.
It's an art.
It's more than just sort of an activity, it's an art.
And well, let me talk about that for a minute. So going back to your thing about limitations, hanging drywall isn't that hard, but biting and taping is the tricky part. Exactly. So in our experience, what we would do is hang the drywall and then hire somebody to do the taping.
Probably a smart thing to do. So another reason why you might want to use a professional is just the true cost. Lots of people take on do it yourself projects as a way to save money and or reallocate money, as I talked about earlier. But in the long run, it could cost more. If something doesn't go exactly as you expect it to, you might need to pay someone to repair what you've already done and spent time and money on already. So there may be extra costs that you're not actually considering in this one, which is fairly important that you mentioned his time. Lots of people are willing to spend time on their do it yourself projects and activities because of a sense of satisfaction or accomplishment or they enjoy it. And that's great. But again, it does take time away from something else.
Your free lunch, like free lunch, is an economic term for opportunity cost. So every minute you're spending doing drywall or something else, you're not spending doing something else.
That's right. You hear stories of people and often cases and this is not being sexist is just that.
Often cases you hear of a husband who might be the do it yourself or and spends hours or all weekends or evenings working on projects. And that's taking time away from the family or your kids as they're growing up. It's a choice you make, but it is a cost.
And the last thing maybe I'll say is maybe the right tools for the job. Everything's easier when you have the right tools. You're not going to fix your car with a hammer and a screwdriver.
So you need the right tools. And not only that, you also know how to use them properly. You can go rent any tool you want these days. But if you don't know how to use it,
Let make a note on that. There is this thing I studied years ago called collaborative consumption. Oh, yes. This is where like, do you have a drill at your house? I do, yeah. Like, everybody owns a drill. Do you need the drill or do you
Need the whole like you need the hole. But why does every household need to own a drill to produce a hole. I don't know, once a year or whatever it is. So collaborative consumption would be like, why don't we all just like share some of those tools?
Exactly. Well, then I think we're getting into the age of sharing. We've got ride sharing, we've got home sharing through Airbnb.
So so what does this have to do with investing, though? What are we talking about here?
Well, it turns out a lot because, of course, do it yourself.
Investing is something that's very popular right now. And we'll talk about why it's popular and just get into a little bit of the background of it. So the origin of do it yourself investing actually goes back to May 1st 1975. They actually call it Mayday. And what happened on that day is the Securities and Exchange Commission in the US made a fairly radical change. That was the day they allowed brokerages to charge varying commission rates. So prior to that, all brokerages charged exactly the same set fee for transactions. And as you can imagine, that wasn't a low fee. And at that point, they essentially deregulated fees and allowed
Low cost or discount brokerages to be created. And I believe Charles Schwab was actually the first discount broker in the US. And of course, the thing with discount brokers is they offered lower commissions but didn't provide any advice. And in those days, so you would phone up the company, you would tell them what transaction you wanted to make, buy me five hundred shares of some company and they had a transaction of Enron calling.
Are we recommending people buy Enron shares?
Well, we can't because it doesn't exist anymore.
Exactly. So you could do that.
And so that was really the beginning of what we now know as online discount brokers. So here's a pop quiz. What was Canada's first discount brokerage?
No idea. It was a company called Disney that formed in 1982, and it was later acquired by Desjardins Securities, still in existence today when it's called Disney that I assume it was owned by Disney. But it's not.
No it's not. Yeah, that's right. And so listen, this gave rise to the do it yourself investor who conducted their own stock research and use discount brokers to execute their transactions and over time, the opportunities for do it yourself investing became even more dramatic when investors could access their discount accounts online and complete their own trades themselves without the help of a telephone contact. And so TD launched a web broker in nineteen ninety six, and that was Canada's first online discount brokerage account. So over the late 1990s,
I got into the business and sort in the mid 1990s and as the technology bubble was just beginning to form and lots of people wanted to get on board and participate in the mania, which of course became a bubble, as we now know in hindsight. And pretty much at that time, everything was going up for years in a row. So you could pretty much throw a dart at a Nasdaq listing and pick a winner. But we also know that that ended badly in. March two thousand and there's a lull in the action, you didn't hear a lot about discount brokerages for a few years as that bear market lasted for almost two years. But fast forward now. We're into the late 2010s and the game is changing again. Online brokerages
Are providing access to virtually all the information available to professional money managers, investment advisors, that kind of thing. You have data and charting capabilities and you also have packaged advice in terms of asset allocation program. There's planning software available, et cetera, with do it yourself, investing this new availability of information and ease of access. Good thing or a bad thing?
Well, I think what we're going to talk about is the good, the bad and the ugly. So there's pros and cons to everything, just like we talked about Steve painting his own house, gave him some purpose for that weekend, gave him a sense of self-satisfaction, and that can't be discounted. But so as it relates to investing the good in do it yourself investing is that discount brokerage in general has been good for investors by breaking this monopoly of trading. So as a result, the costs for transactions have come down significantly. And in the US you can actually trade for free. Canada's is not quite there yet.
No, but it's still pretty cheap. Five ninety five a trade or something like that.
So there's little barriers to trading ability for investors so they are able to trade on their own. There are many investors who are capable of doing the research and educating themselves on investing and have the right temperament to execute their investment strategies at this low cost. That's a pro. There's many digital platforms that provide model portfolios using exchange traded funds, which is, you know, from previous podcasts, are often preferable to buy an individual stocks and get diversification that way and low cost. So why not?
And we would align with this. If there's an investor out there that is choosing between trading individual stocks or following a model exchange traded fund portfolio would say way better. The model is better, way better. And there's people who do not want or value advice and don't like to pay for it.
We've had conversations like that with clients over the years. If you want to do it yourself, I mean, you don't need to pay me. And there's no hard feelings.
By the way, this is great. This is your choice.
I wonder what that person would have done in March of 2020 when the market went down. So let's get into the bad part, because those are all pros like you are able to do it. Executing a trade is simple. Finding the buy or sell button on a trading platform is pretty easy to do. There are some limitations to that though. Like when you're buying or selling a small stock, for example, and you put your price in at the market price, you could actually move the price of that stock significantly. Exactly. And that's something that do it yourselfers might not know,
Might not consider liquidity and things like that for sure.
Yeah. So the cons, the fact that trading is free actually encourages people to be more active, which can be a dangerous activity at times. So you pointed out there's a paper in 2000 from Od