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.
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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 Odean. Terry Odean looked at over sixty six thousand discount brokerage accounts. So this is twenty one year old data already. So it is that number is going to be way bigger today.
Oh, absolutely, yeah. This was back from the early days of discount brokerage when things really took off in the early to mid nineties. In the late nineties. Yeah.
But on average what they found was that clients of discount brokerages or households of discount brokerages tended to underperform the market return by somewhere between one point one percent and three point seven percent per year. Now, that doesn't sound like a lot when you talk about over one year, but when you compound that over twenty years. Oh, huge. So let's just say on average was two and a half percent because that's somewhere in the middle. So twenty years of two and a half percent difference per year compounded. That's the difference between a multimillion dollar mansion and something much smaller. Exactly. So turnover, there was lots of turnover with these discount brokerage accounts and it was just from hazardous trading.
That's right. Some of the turnover was like they turn over the entire portfolio twice a year, which is massive, selling every single stock you've got, buying and selling twice a year.
The next one is overconfidence. So overconfidence is one of those behavioral biases that we've talked about in the past. And it has a major impact on financial decisions.
And coupled with free trading costs, it can contribute to underperformance. Overconfidence can't be discounted. No, for sure. I mean, we had a client years ago who would look at the paper on the weekend and then call me on Monday to do a trade based off of the research that they had done on the weekend. And they had this confidence
Bias that they knew more than the marketplace. And I would often talk to this fellow about how. Look, if it's printed in the paper, it's already priced into
The oh, yeah, it's old news.
Yeah, that's there is no
Way that all of those CEPHAS out there missed the weekend edition of the Calgary Herald or the Globe and Mail.
So there are about 600 actively traded stocks that trade every day in Canada and in the US. There's about 3700 publicly listed stocks to trade on the exchanges. So the question do it yourself. Investors have to ask themselves as well, which ones do I invest in? That's got to be something
That's a lot to filter through.
Yeah, just because you have access to the ER the ability to trade doesn't mean you know what to trade. So Odyn identifies that investors choose the companies to catch their attention. And we might call this familiarity bias. The investors feel more confident when they're familiar with the names of companies that trade. So attention grabbing stocks are in the news. Stocks experienced high abnormal trading volumes. Stocks with extreme one day, one month or one year returns like looking at what something did over the last year. It doesn't mean it's a good investment for the next year.
Exactly. And once the stocks in the news that, again, it just grabs your attention because many people read the news or they'll watch CNN or CNBC or something and they'll see stocks getting mentioned and the stocks are getting mentioned for some reason. Yeah, something has already happened.
Or the person mentioning the stock is trying to create something to happen. Sure. You got to ask yourself if there is a research analyst on I won't mention the TV show, but on a show and they're promoting a stock, there has to be an underlying reason because if the stock was so good, they would probably keep it all for themselves. So the ugly. So we've talked about the GameStop phenomenon, which is continuing on as we speak, by the way. But this is taken all of the risks of online trading described above, and it's put them on steroids. So you've got this active community of stock traders sharing ideas on this Redit Wall Street bets forum using their own language like diamond hands and paper hands. And you've got this unlimited zero cost trading
So they can trade it.
No problem. And you have very little experience in this cohort of people that are, for the most part, trading this short squeeze. And so for every winner that comes out of that, there's a loser like somebody bought GameStop at four hundred and eighty three dollars a month ago. And today it's priced at somewhere around, I don't know, one hundred and seventy dollars. Somebody bought it and that means somebody sold it. So somebody won and somebody lost. That's right.
When you think back to what I had talked about earlier, some of the motivations for being do it yourself, as you can see how like the whole Reddit crowd really falls into that sense of community, because here you've got a bunch of like minded people connecting on Reddit and talking about their investments. And they're all sharing ideas and sharing their great stories
On how much and everybody wants to be part of it. And it's not about saving money here, of course. Well, of course, they've saved money on transactions, but it's also about making lots of money because they think, hey, here's a great opportunity to be part of the crowd, stick it to the short
Sellers and make some money while we're at it.
And so there's a real camaraderie
Almost of being part of that group. Well, Daniel Crosby was on our show talking just about that, that it's almost like A social movement that came out of this, where you had people that are just looking for something to attach themselves to.
Exactly. Let's finish off by looking at some of the reasons why investors may want to use a professional for their investment strategy and financial planning, looking at the same reasons as do it yourself. Renovators might want to look at a professional.
Now, we should preface this by saying, are we promoting people work with an investment professional, Greg?
Well, I think if they can look at their own situation and say, I just don't feel comfortable or confident that I have the tools and the resources and the expertise to do this myself, absolutely. There really are two choices. You do it yourself or you use a professional. And I think that's something that people have to decide for themselves.
But look at some reasons why you might want to consider a professional.
First of all, we talked about safety. So here we're not talking about falling off ladders. We're talking about hurting yourself financially. If you make a mistake, if you
Make a bad call or something that doesn't work out as you planned or hope it could hurt you financially and take a long time to recover. Remember, we talked in a previous podcast about the time cost of being wrong. So if you make a big mistake and underperform the market significantly or one or two years, it could take many years of actually outperforming the market just to catch up to where you would have been had you not made that big mistake to his expertise and experience. A lot of advisors not only have years of experience behind them, so they've gone through similar market periods, perhaps sometimes many times over. But many advisors continually upgrade their knowledge and education by attending conferences, getting new certifications
And abilities to do their jobs better. There's an evolution in this world that's.
Exactly, and continuous education, continuous improvement is critical and that expertize could help some people avoid common mistakes and pitfalls that might interfere with their investment, success, quality of work. Well, the quality of a portfolio isn't based just on how the portfolio did last year, but it's really how the portfolio could be expected to perform in the future under a variety of market conditions. We talked a few weeks ago about probability and the importance of understanding its role and expected returns. Luck can work for a portfolio from time to time, but it's not really a long term strategy for success. You have to play the odds and you have to
Build a high quality portfolio that's expected to perform well in a variety of different market conditions. I can't imagine somebody writing a book on do it yourself, investing, make luck, your strategy.
Now another one is what is the true cost?
So while using a full service advisor certainly could cost more than doing it yourself, it's important to look at the benefits, which can be both monetary and they can be psychological. So monetary, if you look at the portfolio benefits of being properly invested to begin with, regular rebalancing, attention to tax efficiency, financial planning, all of those could actually generate better returns and not just the same returns at a higher fee that you might sometimes see advertised on commercials. And there's another thing which is just that whole the psychological impact of having someone in your court that's looking out for your interests financially and helping you in
Guiding and providing advice.
There's benefits there as well. Time. So this is an interesting one, because we actually believe that a well-positioned portfolio should largely be left alone, aside from regular rebalancing, because, as Odyn pointed out, trading is hazardous to your wealth. So a well-structured portfolio doesn't need to be tinkered with too much other than regular rebalancing.
However, the time that you need to put into research and create that initial portfolio could be extensive and ongoing and ongoing.
I look at that, too, like that rebalancing. I've mentioned this before as we're in the spring season now, finally, and things are warmer here in Calgary and people are starting to garden. And I look at that rebalancing is like tending your garden. You're just sort of pulling weeds every three to six months and making it better. Exactly.
It's a great analogy, actually.
Well, thank you know.
You're welcome. No, no, I insist. And lastly, the right tools. Interestingly, much of the data that we have available as investment advisors, that data is available to anybody online and probably free. If you want to look at performance information for any kind of mutual funds, historical returns or different asset classes, fundamental financial information on companies, you can easily access that information. But being able to take all of that information, which is massive, distill it into an actionable investment strategy, is not necessarily that simple. And so being able to use the tools properly takes practice in time. Being able to look through the data to avoid drawing wrong conclusions is also critical. There's a saying. It says if you torture the data long enough, it will confess to anything. And so that's one of those things. And interestingly enough, when people start getting interested in investing, what they do is they start looking for patterns. So what's a pattern? Well, gee, the market did well during this time. What else was going on in the world? And maybe we can find a connection. So kind of like buying lottery tickets and having your set of lucky numbers. Well, we know that there's no lucky numbers out there.
Seven, I guess it could be if you're playing craps, I guess, but playing with the same lucky numbers on a lottery ticket.
I mean, there's as I say, there's no lucky numbers. It's totally random. Which numbers are drawn out of forty five or however many there are.
Well it's forty nine because it's isn't six.
Forty nine. They're ok. OK. Forty nine numbers.
Unless you're playing lotto Max.
I'm not sure if that has that number.
I don't know
Anyway. The point being is that you can draw wrong conclusions from things that look like there's a pattern and avoiding making those kinds of decisions and using a more academically derived investment strategy was probably going to benefit you in the long run.
So that's all I've got to say about do it yourself investing. It absolutely is appropriate for many people and probably not appropriate for many others. And so it's important to understand, I guess, what are the benefits and what are the potential drawbacks. And that's what we tried to point out here.
Well, and if you choose to work with a professional or you choose to do it on your own, it's critical that you don't start at the product.
Exactly. You need to start from what we've talked about many times over past episodes, the plan. So have this what we would call a smart plan, a specific, measurable, actionable, realistic and timely plan once you've. Established that I would counsel people to follow Deming's next model, which is the plan Do
Check Act, you've established the plan, then you need to implement it, but then you've got to check on it every once in a while, right. If something is going awry, you might need to act and change course. So we just want to sum up that portion with this, because there's a reason why locksmith's experience locksmith's only take 15 minutes to fix your lock. They've already done all the work.
They know what they're doing and they do it quickly. And the tending your garden analogy is spot on.
It's not about tearing out the whole garden and starting from scratch.
It's about starting it with a plan and then making adjustments over time.
You mean when you get one weed, you don't tear everything out and then go back to the greenhouse by hundreds of dollars of new plants? Exactly. Good one. All right. Well, that was good. Thanks for joining us today. Is there anything else you want to wrap up with, Greg?
No, just we're still hopefully in the final stages of this covid thing, so hopefully everyone will stay safe, stay well, get vaccinated, and things will hopefully be back to normal shortly.
That's the hope for sure.
All right. Until this
Time. Until next time.
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Episode 52 - IPP, a Super Charged RRSP?
Greg and Colin interview Ryan Ackers from GBL who shares his knowledge of Individual Pension Plans and Retirement Compensation Arrangements. Listen in to hear the strategies that business owners and professional corporation owners can take advantage of.
Episode 52 - IPP, a Super Charged RRSP?
Welcome back to the Free Lunch podcast with Greg Kraminsky and Colin Andrews and Greg, here we are in our first episode of our second year of the show.
Right on. We got a lot of episodes under our belt and it's hard to believe it's been a full year since we started, but we're looking forward to the next year.
Episode fifty two now. So last week we went through some of the highlights from the previous 52 weeks as hindsight is 20 20.
Great. Oh, good one.
But today we're pleased to have Ryan Ackers from GBL join. The show was our guest. Ryan is vice president business development and client relations at GBL and has become one of western Kansas experts on individual pension plans and retirement compensation arrangements, something that we're going to talk to Ryan about today. He helps business and professional corporation owners between B.C. and Manitoba retire wealthier and mitigate corporate tax along the way. That sounds pretty good. So Ryan completed his executive MBA at the Ivey Business School. Well, also, Greg Building the Calgary Petroleum Club Scotch Whiskey Program. I don't know if that's at the same time as his studies will
Be delving into that a little bit as
Well, I hope. Yes.
So, Ryan, welcome to the Free Lunch podcast.
Thanks for having me, gentlemen.
Well, it's great to have you, Ryan. And so just to get started, tell us your story. Like, how did you end up where you are today?
I started my career actually working with CIBC in the special products group. So working with unique products. As I started my career, I ended up moving into headhunting where I helped launch a couple of business with Canada's largest recruitment firm. And that's what got me out of Calgary. So I was born and raised in small town Ontario and lived in Toronto for a few years. And I got moved to Calgary with a former employer. And a couple of years after that, I was recruited to come join GBL. So it was the opportunity to work with unique products again and help kind of grow a business that isn't quite as well known as other businesses.
Just for the listeners. What is GBL stand for?
So GBL stands for Gordon B. Lange and Associates, Gordon B. Lange being our founder who founded the company back in nineteen ninety five.
Right on. And can you tell the listeners a little bit about what GBL does?
So GBL, our whole reason for being is to empower business owners from a retirement and tax standpoint. So we've since nineteen ninety five been the largest provider of individual pension plans and retirement compensation arrangements in Canada. We're headquartered here in Calgary. We have an office in Toronto as well as we service the country from coast to coast. We also offer a few other products as well for business owners such as fair market valuations of life insurance for times. And we need to move policies between corporation, a corporation or corporation to personal and health benefit plans and defined contribution and things like that.
Well, listen, I think today we're going to focus in on a couple of the items you mentioned, specifically the individual pension plan and the retirement compensation arrangement. And so just for our listeners, when we talk about individual pension plans will be probably using IP as the acronym just for Simplicity and RCA for the retirement compensation arrangements. So first of all, what are IPOs our and how do they differ from each other?
Yes, I'll start with the IP. So the IP, we like to refer to it as a supercharged RRSP for business owners and incorporated professionals. So in a lot of ways acts very similarly to an RRSP, though we have some added features. So with an IP, for example, I like to say it does three things for most people and for things for some. Number one, it lets you put more into it than you can with a traditional RRSP number to every single dollar that goes into the IP is sponsored by the Business Owners Corporation and therefore tax deductible by the Business Owners Corporation. Number three, we've got some risk mitigation so the IP assets are held in trust off the corporate books and are therefore creditor protected. And then in some cases we get some pretty unique estate planning as well, such as the ability to pass money to the next generation without having to go through the estate. So it's really like a supercharged RRSP for business owners. Now, the RCA is we as an actuarial firm, it blows our hair back, but we like to refer to it as a supercharged IP. So the RCA allows for, in most cases, quite a bit more funding room than an IP would allow for. And we really see the RCA used in specific circumstances. So if a business owner sets up an IP and needs a bit more funding room, then we can set up an RCA to be able to get them some more room. It's also great in special situations. So if somebody is coming into a large sum of money, for example, through an executive severance or through golden handcuffs, if a company were to set up a retirement allowance. A person we can set up an RCA to kind of hold on to those assets and then the individual can draw down as they see fit from the RCA.
Let's dove in a little bit deeper into the ipis. So you say it's like a supercharged RRSP. And so let's talk about that. You say there's the ability to contribute more to an IP than to an RRSP. Can you give us some numbers to show us how that works?
Yeah, absolutely. So with an RRSP, it doesn't matter your age. Up until age seventy one, you can put 18 percent of your earnings into it up to a certain maximum every year or so this year. That's about twenty eight thousand dollars. You can put it into an RSP. Where the IPI differs is the percentage of your earnings you can put into it. Isn't the flat 18 percent as you get older, it actually increases over time. So this year, the difference of when I first NASSP contribution, we're looking at about forty six. Forty seven thousand dollars you can put into the IP vs. about twenty eight thousand dollars you can put into the RRSP. Now, like I mentioned, with the IP, the percentage you can put in increases over time. So that number that I gave you for the IP is for a sixty five year old, but still for anybody over the age of thirty eight, you can put more into the IP than you can the RRSP.
Ok, so many business owners might already hold an RRSP and so let's say their companies decided they wanted to start an IP then. Is that totally separate then that you would stop contributing to an RSP personally when the IP is set up?
Exactly. So you're essentially making a choice between the RRSP and the IP. So if you're over thirty eight years old, the IP is going to give you more funding. So you're essentially making a choice between, I guess the Honda and the Acura, let's say. So we essentially make that choice. We move a portion of the RSPCA into the IP and then you fund the IP going forward every year as opposed to the RSP.
So why if there's this flexibility to put more money away, why wouldn't everybody do this?
It's a great question. I think the biggest reason why more people aren't setting up the IP is because they just don't know about it. So this is a product that really sells itself. It's just educating people on it and how it works. That's what we have to do. So the RRSP applies to a huge population of Canadians, while the IP really applies to business owners and corporate professionals. That's a very small portion of the Canadian population in comparison. So we don't see as many companies talking about the IP as they would the RSP. We've also seen there are some misconceptions around the IP as well. So in most provinces, funding's no longer enforced for connected persons, connected persons being somebody who owns 10 percent of the shares of the company or more. So it's thought that if you set up an IP, it is a defined benefit pension plan. The thought is if you set it up, you have to fund it every year, no matter what. As you could probably understand, that's problematic for many business owners, especially those here in Alberta who have fallen victim to the boom bust over the past few years. So things like that where we kind of educate people on the IP and things that don't necessarily apply to it.
So like in an RSP, for example, if you ran into at an all cash crunch, like you just mentioned, because things didn't go your way, for whatever reason, you have the ability to collapse your RRSP and you have to pay tax on the money you take out, but you can access it. Is it the same for an IP?
Not quite. So with the IP, you don't necessarily have to fund it every year. But once you choose to set up an IP, the money that is inside of it is meant for your retirement. Now, there are some ways that we can get money out before retirement. So if there is a legitimate case of hardship, we can make an appeal to try to have money unlocked from the IP and there's always the option to collapse it as well. So if you collapse the IP here in Alberta, you can collapse it into a liora and unlock half of the assets when you do that. So we've got some options, but for the most part, the IP is considered to be locked in until retirement.
And what is retirement? Is that a specific age or date or is it relevant to the individual who may choose to
Retire at a younger age? It depends when you want to retire. So once you start drawing down from the IP, you can't turn off the taps, but you can retire and either drawdown or wait until age 70 one, at which point you're forced to drawdown.
Oh, so similar to the RSP converting to Ariff. Same age range.
Very similar, yeah. There's a lot of parallels between the idea of the RSP. Yeah, but the
Ip is supercharged. You just told us
It is, it's a lot more fun so
And so you touched on that. So what are the options then. Are they exactly the same options you might experience with like a defined contribution pension plan where there's a lump? Some and it can be paid out in a variety of different ways to the I guess I don't know what do you call them? We call them an annuitants with an RSP. Is it the same for an IBP?
Pretty much, yeah. We refer to them as the plan. No. OK, but the options with the IP, you've got three. When you decide you want to retire, you can draw your pension down directly from the IP. So this would be just like your typical defined benefit pension plan that we don't see a ton of these days. But you can draw it down until you pass away. And then when you pass away, depending on what you do when you retire, your spouse can get sixty six point two three percent until they pass away or the IP assets can roll over into their RRSP. The second option is to collapse it into a liora and then the third option, we can purchase a life annuity. So we've got a few different things we can do at retirement.
We've talked a little bit about you can see how it's a good benefit to the individual by having a much larger pool of money than they otherwise would have to draw down in retirement. What about the corporation? What are the benefits to the corporation of doing this?
Yeah, there's some big corporate benefits. So, I mean, the biggest benefit is the IP contributions are logged as an expense that's become increasingly important since tax policy has been changing since twenty sixteen, particularly here in Alberta. But every dollar that goes into the IP is tax deductible to the corporation. So in addition to being able to supercharge the plan members retirement assets, the corporation also gets to get these expenses that help mitigate corporate tax, the logging of the IGB contributions as either a salary expense or a pension obligation that's reducing our profits and therefore the tax that we pay in the corporation. This has been a big driver of IPOs over the past few years with the passive income rules that have come in. There's a lot of companies that are kind of getting close to that small business deduction, grinding the IPOs, just a little added benefit to it has been reducing corporate tax and helping keep them out of that territory of their corporate tax rates jumping up.
So tell me, obviously, a big part of GBL is the need for an actuary, the involvement of actuaries and in both of these types of plans. So what is the role of the actuary in administration, say of an IP?
It's kind of like the relationship of the client, the investment advisor and the accountant. We're kind of like a second accountant that is needed to offer complex products like IPIS. So our actuarial team is going to be responsible for completing the calculations to make sure that you're able to maximize your IP. We redo those calculations every three years to make sure that the IP is up to date. We're handling all of the correspondence with Sciarra, all of the filings that pertain to the IP and things like that. So we pretty much handle every extra thing that you have to handle as the advisor. We do all that. I like to kind of joke around IP. These are huge pain in the neck. We take that pain in the neck off your hand so you can enjoy the benefits with your clients
Right on the well. And it gets to my next question, which is what would you say are the disadvantages of an IP? You've touched on one which might be possibly the complexity.
How can something that's supercharged have any disadvantages?
Greg, you're talking to the sales guy here. But what we can consider to be disadvantage is the IP. We talked about one of them already. And this isn't a disadvantage for everybody, but the assets in the IP are locked in until retirement. So if you're an entrepreneur who is expanding your business and you want to be able to access this money, then you're not going to be able to with the IP. This is really meant to be there so that you have a secure retirement. So that's really what I view to be the downside of the IP for some people. Another question we get. So the complexity, like I said, we handle all of that. So we guarantee you a smooth experience with the IP. The last piece is the things we often get asked, what are your fees? Why do I want to pay these extra fees for a pension plan? Our fees are deductible and they make your fees deductible as well as the advisor. So typically most clients are revenue neutral when they set up an app just from the deductions on the fees alone. So those are kind of the downsides of the IB. If you consider the downsides,
Once the assets are in the IP, can they be managed the same way as our assets? Are they managed by an investment firm or investment advisors like ourselves?
Absolutely. We would work with the CME Group. We wouldn't hold the assets. You would hold onto the assets. And the rules are very similar to that of an RRSP. So the big one is, yeah, you can have non arm's length investments so you can't invest in your own company with the IP and you shouldn't have more than 10 percent in one individual holding.
That's prudent investment principles there.
One thing I just want to understand better, Ryan, is so you set up this IP, you're able to put away a lot more than in an RSP and you retire at like the normal retirement age. Sixty five, let's say. So then you start to draw on the IP as a pension payment or something like that, and let's say hypothetically, you die at sixty seven, what happens to the IP then? I don't quite get that.
It depends on what you're doing at the time that you pass away. Hopefully you're having a blast somewhere warm with covid goes away. But if you're drawing down from your pension when you pass away then your spouse would get survivorship. So that's the sixty six and two three percent of the annual pension payment every year that I mentioned earlier. If you're not drawing down when you pass away, then the IP assets roll over to your spouse's RRSP. If the spouse is a member of the IP when you pass away, then your assets would just they would stay in the IP and then the spouse would draw those down until they pass away. So there's a few different ways that it can play out depending on your situation.
But is there any risk of the value that you put in you or your beneficiaries never being able to access it? Or does it pass down just like an estate
Guy passes down? So when you set up the IP, so your spouse, if you have a spouse, is the automatic beneficiary when you pass away, you would assign your beneficiaries after that and you could say, I'd like for my IP assets to go through my estate on my death, or you can designate name beneficiaries on death as well.
Ok, excellent. Let's talk about a Nasya a little bit then. So tell us about the retirement compensation arrangement and how does that work?
Yeah, so the RCA, like I mentioned earlier, we like to call it a supercharged EBP, but it is essentially a tool that typically allows for considerably more funding room than what you would have with an IP. We like to refer to the IP as kind of like a supercharges RRSP. The is more like kind of like a supercharged TFSA You're not getting deductions with the RCA. What it's doing is it's allowing you to shelter just a lot more money and you can take it out as you please. You can take that money out as you please. Unlike with the IP, you've got a set schedule throughout retirement. So the RCA, we really see it used in cases where someone's going to come into a large sum of money or they want to, in the case of a business owner, be able to get more money out of the company and into their retirement assets when calculating the room for the RCA, unlike with the IP or use the entire career earnings every year with the RCA, we're using the top three years of T for earnings and we're assuming that average of those three years and we're assuming that they've earned that average every year that they've worked with the company.
So as you can imagine, that creates a pretty big contribution ceiling for the RCA. So it's really good for cases of executive severance. Like I said, instead of taking that severance as income, the year that you receive it, you can have it go into the RCA. And I like to kind of use the analogy of a goaltenders like goaltender can kind of hold on to that money and break it up into smaller parts and give it to you over time. So you're able to have a significant impact on the rate of tax that you pay on that money. So executive severance is a big case. Executive compensation as well is big. So like I said earlier, we can use that for golden handcuffs. We can set up a retirement allowance for key executives and have that money go into the RCA, but they can then trickle out over time in amounts that they choose. If you take out in smaller amounts, you pay less tax on it. That's essentially how the RCA works. You control over your tax rates, but you pay
From the company's standpoint. When the money is set aside for the RCA, there's no deduction per say that they get at that point. Is that right?
The company gets a deduction for all of the money that goes into the RCA. Oh, OK.
So now tell me, I've done a little bit of reading on it. There's some issue with regards to how the money is set aside and held and is there not a CRA aspect to this? That is a big part of the plan?
There is. So there's the RCA, it's two account. It's not just one account. So we've got an investment account which the CME Group would manage. So that's just like any other investment account. Client puts money into it. You grow it. We also have what's called the refundable tax account, which is like a security deposit that you put on an apartment. As long as you don't wreck the place, you get that money back. At the end of the day, that's essentially what the refundable tax account is. So we've got these two accounts. One of them is growing interest. The other one is not. The other one is held on to in a non interest bearing account by ICRA. So the reason why the refundable tax account is there is to just incentivize not paying the tax that should be paid on the money that's in the RCA. The way that it works is if you put, let's say, one hundred thousand dollars into the RCA, that one hundred thousand dollars has to be split between the investment account and the refundable tax account evenly. So they always have to be equal. They always have to balance just like a balance sheet. If you take money out of the RCA, then half of the money from that was taken, let's say ten thousand dollars is taken out of the RCA. The refundable tax account has to move five thousand dollars back to the investment account.
Ok, this is a rebalancing.
Exactly. They always have to balance. So if money goes in, you have to give money to the refundable tax account. If money comes out, you have to take money from the refundable tax account.
So so given the federal government is obviously part of these programs, both the IP and the RCA. Is there any risk that the government could make changes to the tax code or something that makes these arrangements less valuable than they currently are?
There's always a risk that that can happen. Probability wise, I'd say it's quite low with the IP. We're using the same two percent defined benefit formula that's used in federal pension plans and larger company pension plans. We don't see any changes to that with the RCA. It's been around since the 80s, is holding on to half the money that goes into it to make sure there's no tax avoidance happening. So we always see changes to these plans. Maybe, for example, there was a change of the IP back in 2011 where CRA decided to limit how far back you could have groups service. So parcel service being similar to the concept of unused room. On your notice of assessment, we essentially asked the question, what would the IP look like had you set it up when you started your company? So you used to be able to kind of take that back to the beginning of time. If you started a company in the nineteen fifties, you could accrue service back in the nineteen fifties, they limited that to nineteen ninety. What will they do that again sometime in the future? Maybe, but I'd say that that's not a huge impact on IP. RCA is there were some loopholes up until twenty twelve those were closed. I would argue that closing those loopholes improve the integrity of the RSA so we don't see a lot of major changes happening going forward.
Well, it's funny to me, like why they choose nineteen ninety one. I mean other than the fact that I graduated high school in nineteen ninety one, I'm not sure if there's a link there becoming an age of majority, but that was probably it. Yeah that was it.
Now the nineteen ninety one was a big year for pension reform and they decided in 2011 that would be a good year to pay it too. So they happened to be conveniently twenty years. That's interesting. Well hey listen, just for fun,
Can you share like a real life example without obviously naming names or circumstances, but just give an example of the benefit who would go into an IP and what they would expect from it and versus nurser? I know you've been talking about it, but can you just give us a Real-Life example?
I'll give you a real life example here. I'll give you one for each cell for the IP. We've got a case study where we have a family business that sets up the IP. Now, a lot of the time when we think about IP, we think, OK, it's got to be an affluent business owner or A, P, c, so doctor, dentist, lawyer. There's a lot like the IP be applied to any business owner. We like to give an example of a farm so IP is can be set up for farmers. So we have an example where mom and dad and the kids are set up on the IP. So Mom and dad are in their 60s. They're getting close to retirement and the kids are in their mid thirties and they're just getting added to the IP. If they set up the IP, all four members in year one alone would be able to put about one hundred thousand dollars into an RRSP with the IP in the example that we have. And I can share this with you if anybody would like to see the numbers after, but nine hundred thousand dollars can go into the IP for that one hundred thousand dollars that can go into the RRSP in year one alone. Well, and then every year thereafter we've got about a fifty thousand dollar difference between IP and RSP over a ten year period.
So over that ten year period, excluding year one, it's about fifty thousand dollars more on average that can go into the IP RSP at the end of that ten year period that we use for this example, we have the difference of about six million that they would have been able to put into an RSP versus eight million that can go into the IP over a ten year period. That's not too shabby. And this also I don't think we talked about this earlier, but another benefit that the IP is this estate planning benefit. So if you have mom and dad and the kids, let's say, on the same IP and mum and dad decide to start drawing down their pension and they pass away after they started drawing down, well, there's no taxable disposition on death of the last. That money doesn't have to go through the estate because they're still members inside this defined benefit pension plan so that money stays there for the kids. So not only do we have two million dollars more in retirement assets, but that money is staying there for the kids until they decide they want to retire and then they start drawing down and paying tax on their income so they don't lose roughly half of it to the estate.
That's a huge benefit for family businesses. So with the RCA, a good example of that that happened a couple of years ago here in Alberta, we had an executive who was let go. They got a sizable severance package. One of the features of the RCA is you pay tax in the jurisdiction that you withdraw the money from it. So let's say you live in B.C. right now. You've got a fifty three plus percent tax bracket and you move to Alberta with a forty eight percent tax bracket at the highest margin. You're saving over five percent in tax rate there. But this individual had a place in the US in the state that has no state tax. So they collapse or RCA in the US they had a big severance go into it. They took it out of the US, collapsed. It paid a withholding tax. The Canadian government. Twenty five percent that act as a credit against US federal tax. There was no state tax where they went, they say six million dollars off their tax bill. So a lot of folks get caught up with that refundable tax account with the RCA, rightfully so. But when we look past that, we see some huge, huge benefit.
Well, anything else to wrap up our little discussion on IPIS our that we should be aware of?
If you'd like to receive an illustration to see what an epidural Nasya can look like for you to reach out to Colin and Greg and their team, they've got access to our illustrator. We work very closely with them. They've got expertize in setting up these plans. Other than that, I mean, the IP is just it's a better version of the RRSP for business owners and corporate professionals. You can do an illustration. It's non-committal. It's just going to get you more. And like I said, with the IP, you're going to get increased retirement savings, the corporate tax deductions that are more important these days, creditor protection and potentially the ability to pass money down to your kids without going through the estate. So that's just what I'd leave you with on the IP, with the RCA, I talked about that six million dollar savings. It's not always gonna be that much for everybody, but you're going to save a significant amount of money with it. Advertisements. Twenty to forty five percent for the average person.
Very significant. Thank you.
We should finish with our speed round, Greg.
Let's do that.
So just for fun, Ryan, there's no right or wrong answers to these questions. You're off the hook. You got through the heavy lifting. And this is just for fun. Greg serves up. Sure.
I think you've alluded to this. We talked about this a little bit in our introduction. But what do you do for fun when you're not working?
So that's a good question with covid right now. But I used to enjoy traveling and used to enjoy hosting friends. I'm involved with the Petroleum Club, with the Scotch Society. So we're having a ton of fun with that right now, but then spending time with my wife and son.
Well, good for you. Cool. When you're spending time with your wife and son, what shows are you watching or bingeing?
What are we watching right now? So we just finished the Whicher. We're watching Tacoma F.D.. Anybody who like super troopers, it's a must watch.
Oh, Super Troopers is amazing.
Yeah, you'll love this show. And then my wife's watching the show that makes her cry all the time. What is it. This is us
Isn't that a showboat like divorce or something.
I stay away from it cause I don't want to break down crying but
And just because you mention it. So just tell us a little bit about the Scotch program at the Petroleum Club that you run.
Yeah, well, hey, we'd love to have you. So a few years ago, the Petroleum Club went through, I wouldn't say a rebrand, but a big renovation. And there was a big focus on building community within the club, especially among young professionals. So we decided to launch a few clubs within the Petroleum Club. I decided to launch the Scotch Club. So it's this launch of Scotch and other Whiskey Society of our being Gaelic for Teater Health. Five times a year we have an event where we will have members come in and sample awesome whiskey is that you can't really find anywhere else with reps. And what was it? Twenty nineteen. We imported our first exclusive cask from Scotland. Twenty twenty. We imported our second. This year we're hoping to do a third. We might support a local company this year just given covid, but we're having a lot of fun with it. We are planning to start doing tours to Scotland and around Alberta and all that, but covid put a little dent in that.
Well, hopefully just a delay and not a cancelation.
Well, let's just wrap up this section with other than free lunch, which is one of the top rated podcasts, I'm told. Any other podcast that you're listening to these days?
Not really. I mean, free lunch. It's going to give me all the information that I need.
That's the correct answer. There you go. All right, well, Ryan, thanks again for your time today, we really appreciate it and definitely if somebody is interested in looking at an illustration for an OR, they should come to you, because I know that you guys do good work there and it could make a lot of sense for the right person.
Absolutely. Thanks for being on, Ryan. Appreciate it.
Thanks for having me. Always a pleasure.
Episode 51- The Anniversary Edition
In today’s episode Greg and Colin look back at the past 50 episodes from the last year. Reviewing topics covered and guest speakers who helped cover them. Hard to believe it has already been one year, enjoy the show!
EP.51 - The Anniversary Episode
Welcome back to the free lunch podcast with Greg and Colin, and welcome to our one year anniversary show for our podcast. We launched almost exactly a year ago that we call free lunch.
Pretty hard to believe, isn't it?
It is really hard to believe that it's been a year, but last week we talked about probability. And this week we're going to do a quick review of our last 52 weeks of episodes, although we didn't have 52 weeks of episodes, Greg. We have fifty one.
What are we lazy or something like? Why don't we have fifty two?
We took one week off for the Christmas holiday season, but that was it.
Other than that, we've nailed every week.
It seems like a long time ago we started this thing and funny that we started it in the midst of a global pandemic. And here we are a year later and we're just we have a new set of
Lockdown's announced yesterday. Yes. Like nothing's changed exactly.
Other than the fact that we're in episode 52. That's right. On that note, I got to say to this great episode, 50 to. Bring it on. No, no, stop, really. No, no. All right. Well, listen, in the last year, we've talked about a lot of different topics, obviously, but today we're going to lump them into three different buckets and talk about just a brief recap on some of the highlights of those topics and some of the highlights of the guest speakers that we've had. So those three topics, Greg, our investment theory, financial planning and lifestyle planning. And when you think about the investment theory part, which episodes come to mind or which topics come to mind that you want to get into?
It's interesting because when I look back on the episodes, we sort of created a bit of a journey starting well, I guess on the second episode of the first episode, we just introduced ourselves and let everyone have a good look. But we started back on episode number two, talking about asset allocation. I mean, that went all the way back to well, even before modern portfolio theory. But modern portfolio theory, which was described by Harry Markowitz in the 50s where he just looked at correlations among asset classes and discovered that by mixing asset classes or different classes of investments that behaved differently from each other, you could actually build a portfolio that offered the same expected return as a different portfolio, but with lower risk or lower volatility overall.
And really that to us is the free lunch. And so we're not talking about the highest expected return. We're just talking about a portfolio with a similar expected return to another one with lower risk. And so that really kick things off.
That seems to align with investment theory.
And from past allocation, it leads us into the, as you say, the only free lunch other than this podcast. It leads us into diversification.
And so asset allocation we're talking about, in a sense, diversifying among asset classes, stocks, bonds, cash, real estate. And then when we talk about diversification, we're talking about diversifying within each of those asset classes.
So not just owning Canadian stocks, for example, but owning Canadian US international global stocks, not just owning stocks of large companies, but also owning shares of small companies and so on. And so looking at diversification, it allows us to more broadly invest our money in a much bigger basket of securities, offering that extra level of protection from risks of different types.
But if you just get two things right, you're probably way further ahead than the average. So if you just get your act allocation rate and you're diversified, you really you're 90 percent of the way there. And that's really the critical things are getting diversified and protecting the downside.
Well, I want to use the word critical because I want to be critical of both something. Gregg, we did talk about stock picking in one of our episodes, and we've mentioned it a few times. And we like in stock picking, although it can be fun. Let me start there. It can be fun. Sure. But if you're just stock picking, it's more like Neandertal, like knuckle dragging behavior, then actually modern portfolio theory type of portfolio, correct?
Well, in the end, it's a zero sum game. And I think that's the thing about stock picking. And as you say, it is fun and we all still do it. I'm pretty sure everyone still has favorite stocks, but it's not necessarily the way to build the portfolio.
It's something to do as based on personal interest or certain views like that. But in the end, and we've talked about stock picking, is there's two possible outcomes. There's two extreme possible outcomes. When you pick individual stocks and we call those G.R. for get rich or leave or lose everything and nobody thinks they're going to lose everything.
That's right. And of course, those are the extreme outcomes. But we talked about how by being diversified and holding a diversified portfolio, you narrow down the range of possible outcomes. You may not get rich, but you might earn a very reasonable return over a long period of time and have a very positive investment experience. And you definitely will not lose everything. So the downside is protected as well. And so diversifying narrows those outcomes
And hopefully creates a better investment experience. So something investors will stick with.
Well, in stock picking goes into the whole active versus passive debate that we talked about in one of our episodes. We've talked about in a number of them. But if you're truly actively stockpicking, you're just not giving yourself the best odds.
That's right. You're just leaving a lot more to chance. And we talked about probability last time. And again, you're not increasing your odds, you're likely decreasing your odds.
And so just by being invested in a broad based market. Position, you're probably further ahead as long as you've got your assets allocation correct and you're diversified.
Well, that's right. And again, it gets into this concept of a zero sum game. When you look at it and work with me on this one, the market return is the market return, OK? It's the sum of all portfolios, the passive managers or let's call them indexers. People that buy the index essentially get the market return minus a small amount for very small fees. That means the sum total of all of the balance of active portfolios have to, by definition, get the same return as the index minus fees. And so
In the end, as Professor Fama would say, the winners, the losers, and it becomes a zero sum game and the average of all portfolios is the market average.
Well, actually, they call it a negative sum game because of costs.
So I think it's something that's really important to remember, because when we talk to people and we say, look, there are managers who will outperform the market and they will be offset by managers who underperform the market. And the solution then for many people is, well, I'm just I'm only going to invest with the managers that are winning.
Well, yeah, of course. Because why would you want to put your money with the manager that you know is going to lose? Exactly. Why would you pick the stock that you know is going to go down?
Exactly. And the problem is that we only know how managers have done in the past. We have no idea how they're going to do in the future or how a particular stock will perform in the future.
Well, and on that note, so in investment theory, in a number of episodes, we talked about the different factors of return in this. You've touched on a couple of them, but we talked about having a size premium. So how smaller company's stock return is higher or expected to be higher than larger companies?
That's right. And has historically in in all markets that have been steady.
And these come right from the Fama French factor models to which you mentioned. Dr. Fama, who happens to be a Nobel laureate. So he kind of knows what he's talking about.
Oh, he's not an idiot.
I mean, nobody's given us a Nobel Prize for our work here on this Podcast. Yet.
No, no. It's quite likely that will be nominated in the near future.
But those factors are return. So it was market. So the stock market has a higher expected return than the bond market over long periods of time.
That's right. They call that the equity premium.
The equity premium, exactly the size premium. So as I just mentioned, small companies have a higher expected return than large companies over long periods of time. Then we got into the price premium. So this is the value versus growth stocks and how value stocks are kind of like stocks that are on sale versus stocks that are overpriced and they have a higher expected rate of return over long periods of time.
So answer me this, given that we know that, say, small companies or value companies have higher expected returns than large companies or growth companies, does that mean they're going to get better returns every year?
Well, no, of course not, because as our last episode, we talked about probability.
Exactly. And it's not guaranteed that they're going to get better returns all the time. It's just that historically they've had better returns in long periods of time.
The probability of value outperforming Growth, for example, I think we said with something in the range of, I don't know, sixty eight Percent over a one year period and up to 80 percent over a period of 10 years.
And so that's an expectation. It's not a guarantee, but it's something that you want to include in your investing strategy in order to play the odds to be exposed to that factor that has a higher probability of outperforming.
I remember one episode before the last U.S. election. We talked a little bit about essentially market timing because the questions we got were what will happen if Biden wins the presidency or what happens if Trump wins and what will happen to the stock market? That was one of my most favorite episodes, actually, Greg.
Yeah, that was great. And we brought in Ben Carlson
As well, who talked about that a lot.
Ben, as an Investment professional in the U.S. where holds wealth management, is the parent company he works for. And he's an interesting guy. He's also got a great Podcast, Animal Spirits. He gave us some very good historical reference for what to expect the markets to do around different potential outcomes from the election.
Exactly. But he wasn't the only guest we had in the investment theory camp. Right on. We brought in Marc Goldfried chief investment officer of Canoe Financial, to give us an outlook on fixed income, because even though we just spent the last, I don't know, 12 minutes talking about the stock market in investment theory, we can't ignore the bond market.
Absolutely. The bond market just happens to be much larger than the stock market, yet nobody talks about it. I think the bond market in total is worth like one hundred trillion dollars globally.
Yeah, 100 trillion.
We had him come in and talk with that and then because people, for whatever reason, are more interested in talking about the stock market, we had Eric Ristuben chief global, I think. Oh, Global Strategy Strategist for Russell Investments. That's right.
Yeah. And another smart dude.
And he came in and talked about where they expect interest rates and inflation rates and how that will play on the stock market potentially. And so far, I think he's right. Yeah, but that was only like a couple of months ago. And we had Alex Heron from PIMCO come in and again talk about the bond market and asset allocation and being diversified. So in that investment theory bucket, I feel like we've touched on pretty much everything we have.
I think one of the things that's critical is that we understand that all of this background, all of the theory, all of the academics in academia that has gone into developing these investment strategies, which have then been implemented into actual portfolios by a variety of different providers of investment products, the problem of investment management has largely been solved. There's not a whole lot of question about, OK, well, what's the best time to get into the market and what's the best time to get out of the market or some of these questions that just dog investors and cause stress on a daily basis? The answers are there.
Let's answer it right now. What's the best time to get in the market, Greg?
I think when you have money.
Yeah. So like now if you had money now, this would be the best time to get in because you don't as you said, you don't know what's going to happen in the future.
No, you don't. And the point is
And people will fret about, OK, well, what if I get in now and the market's high and therefore I won't get a good return going forward? Or what if we're very close to a correction or a bear market? And the answer to that is, well, probably for most of our clients and investors, we're not talking about putting all your money into the stock market because we're talking about having portfolios, using asset allocation techniques that ensure that the portfolio itself reflects the individual's ability to take on risk. And so we're not talking about putting all your money into stocks. We're also talking about putting your money into bonds. And if you've reached a point where the stock market is just about to correct and darn it, we just put our money in just before the correction, well, that could benefit bonds. Government bonds in particular are not correlated to stocks. In fact, in some instances, they're negatively correlated, meaning that stocks go down, your government bonds could go up in value.
Well, and if you own bonds that are correlated to the stock market, those aren't really bonds
That you want to own. Well, you could, but at least in my opinion, you could. But you have to understand what you own and understand the risk. I mean, many people in high yield bonds, well, high yield bonds are in portfolios because they offer, as the name suggests, a higher yield than other government or lower risk bonds. But you have to understand how they're going to behave. They're going to behave a bit like stocks. When the market corrects, then those high yield bonds could correct as well.
Remember the convertible debenture days when we used to participate in a lot of those. And there is one Arctic glacier, remember? Oh, yes. Yes, I remember. That was a convertible debenture or what some people called the bond. So this is like June or something. And I'm supposed to mature in July. And it was trading at like, I don't know, eighty six dollars instead of one hundred dollars. And people were piling into this thing because if they held the convertible debenture for one month, they would get fourteen dollars back, plus the last interest payment.
How did that work out.
Well it didn't because they converted the debentures to stock and it didn't work out well at all. No.
And that's why it's so critical that whenever investment opportunities come up with individual securities, it's really important to understand exactly what is this security, how does it behave, what are the terms around the security itself that will have it behave differently than you might expect? And it's one of the reasons
Why we suggest to people that if you don't Fundamentally understand what you're investing in, then you probably shouldn't be investing in it. Oh, but let's talk about that for a minute.
That does not mean go and buy stocks of companies that you do business with.
Absolutely. That's right.
I'm not talking about the company itself. What I'm talking about is these days, back in the old days when life was simple, there were stocks and there were bonds. Now there's stocks, bonds, structured products, preferred shares with very specific terms that cause them to behave differently than you might expect from a different type of preferred shares. And so there's linked notes, notes whose performance is linked to the performance of a particular, whether a stock market index or a particular's share of a company or something like that, and so many different terms that might affect the way that particular. Her investment behaves, it's really important for us, and it was talked about in some of our planning discussions that our job is to simplify the complex as opposed to the opposite. We don't want to take simple things and make them more complex. We want to take complex things and make them simple so that people can understand what they're doing, what they're investing in and how they expect things to behave over time.
Well, it is really complex, and that's why we spent a number of episodes talking about investment theory. But let's end that bucket and move to the next bucket, if that's OK with you.
Absolutely. And particularly if you buy the concept that the investment problem has been solved, then where do we spend our effort? Where do we spend our time?
Well, and actually where should you start instead of like unfortunately, a lot of you will start with the investment, but they should actually start with what our second bucket is, which is planning.
Exactly. So we had a number of episodes on financial planning. We had Blair Howell from our team, a certified financial planner, join us for a couple of those. We talked about things like market cycles, how that affects what you're trying to achieve. We talked about just the fundamentals of having a financial plan and having a plan versus following one, which is that's a critical item. Just documenting something doesn't mean you're going to be successful.
I mean, a plan is a piece of paper, but planning means it's a living, breathing organism. And that's something that you need to look at all the time and make adjustments as necessary.
Because I think Blair mentioned something like a goal without a plan is just a wish. Right. I like that scene. We talked a little bit about RRSP versus TFSA because that's a question we get from time to time. And the answer is, should you find one or both or either? And it depends on what comes out of your plan.
And with that, there's a link between financial planning and your investment holdings, of course, because your plan is going to determine how much risk you are required to take to fund
Your goals. Exactly. When we talked about the fact that if the plan shows
That you need a two to three percent rate of return on your investments in order to achieve all of the life goals that you've identified, then you have to ask yourself the question, well, why would you therefore take a portfolio that's any riskier then? You need to. And we can agree that probably a portfolio designed to generate two to three percent is going to be less risky than a portfolio that's trying to achieve an eight percent rate of return. And people want a high rate of return because they believe that it makes them rich. And obviously it will if achieved,
Eight percent will make you richer
Than two to three percent.
Ok, let's say you get eight percent the first year, but you get minus 20 the next.
Exactly, because as we've talked about, eight percent is not guaranteed. It might be an average of historical returns, but it's absolutely not a guaranteed number for future returns.
It's funny, though, like twenty years ago, I remember doing my first financial planning exercise with people and we used to commonly use a rate of return of eight percent in financial planning projections. Now we use a number more like four to five percent.
That's right. And again, you have to pick a number that's
Reasonable, something you
Believe is achievable over a reasonable period of time, and it doesn't require something exceptional happening.
One of my favorite parts of the financial planning bucket that we went through this past year was we did three episodes on retirement planning, our retirement planning miniseries. That was a lot of fun.
That was fun. And I think we covered off some
Good stuff there because, again, it focused on what you had mentioned earlier, and that is that we can't develop an investment plan unless you have a retirement plan and you can't have a retirement plan unless you do some serious work around setting goals, visualizing your retirement and identifying what is retirement look like. What's it going to cost me? And importantly, how am I going to make course corrections if things change? Because there's a lot of uncertainty. Many people now can say, oh, I know how I'd like to spend my retirement, I like to golf every day, etc., play tennis, whatever it is. But you have to think long and hard about, OK, well, am I going to play golf every day? Am I going to play tennis every day? How am I spending the rest of my time? I love travel. Am I going to travel 52
Weeks a year. Well, in your house
Weeks a year, you're going to travel from your bedroom to your kitchen to your office exactly as we're in lockdown again.
That's right. Yeah. So I think that was a
Fun series to do because it really made people hopefully think
About what the future looks like. Well, one of the
We asked to get some research
For that mini series was what would you do if you had a
The old Barenaked Ladies song, If I Had a million dollars. Sure. It's a great song. It's a great song. It's fun to sing, so promote away. And we had a number of guest speakers in the financial planning bucket. On our show this last year or so, we had Don Rodgers join us from the Alberta Securities Commission to talk about investment fraud and want to see that was a fun episode. But it was and interesting.
It was interesting. If something seems too good to be true, then it probably is basically what it came down to. We had Jamie Golombek on, who's a noted speaker in Canada anyways, about all things tax. And that was a fun presentation that he gave. Who else did we have on the show?
We had Carl Richards, the sketch guy.
Carl is great.
He has published a book, The One Page Financial Plan, which we have copies of
Should anybody want that? And it's
Great. It's just he talks about simplifying the complex message and basically being able to simplify things like a financial plan
Down to a single page,
Which you can do because the punch line from that book was the investments like we just talked about, come well after
The planning. That's right.
And as long as you focus on your asset allocation and be diversified, keep your costs low, you'll be further ahead than if you spend all of your efforts on stock selection you see here versus we talking about financial planning. And I went right back to investment theory on that.
Well, I guess I've got a link there.
We had Daniel Crosby
Join us not that long ago about
Behavioral biases. And we did have a couple of behavioral biases, discussions. And I would lump this in financial planning because from the plan, you know what you need to do or what you should do. Yet we have these heuristics that get in the way.
What are heuristics?
Well, good question. These are cognitive biases, Greg.
These are mental
That we haven't
Meant to create. They're just created within us. And so what's an example like hindsight?
Bias is one. So we did a whole episode
On what is should have coulda and how ridiculous that is. I should have bought Amazon
15 years ago.
Everything seems so clear in hindsight.
What your mind does to you, though, is it
Makes you think that you had all the information back then. So your mind thinks, well, I should have known that this pandemic was going to turn into a worldwide global issue that is going to cause us to lock down everything. And we knew about the pandemic back in January, February of last year, and we weren't all running for the hills and selling
Everything because we
Couldn't have known that at that time. But our mind plays this trick because we know what's happened now. And so we make that leap well.
And then he talked to one called I think it's called normalcy. I think that's right. And it's where how everything that's occurring now we think is normal and will continue on forever. So we've gone through a 35 percent market correction last March. The stock market is at all time highs now. And so we just are heuristic or cognitive bias is to think that that will just continue forever, which, of course, it's not going to
I hate to break it to everybody, but
There will be another correction at some point.
That is sad to hear. But absolutely, if
And when that correction occurs, it's important that you refer back to your planning document to see should you do any course corrections, as
You mentioned. That's right. Part of the whole planning process is that
What is a course correction? Well, of course, correction
Might be look, I can't spend as
Much this year. I had planned to take two major trips every year, and I might just not be able to do that.
If that's the right
Then that's something that should be
An activity that's undertaken. Hopefully it doesn't happen. Hopefully it's the other way around. Oh, I can take an extra trip this year, should I or should I not that kind of thing.
We also had Penny Phillips join us. Penny runs a company in the United States called Journey was called Journey Well, Journey Strategic Partners, something like that. Anyways, Penny is a practice management guru and she talked a lot about the importance of trust. So even when you're going through that planning exercise and implementing the plan in your investment outcomes, there has to be a high level of trust on this stuff.
Exactly. And another one of
Our guests, Tim Noonan, also previously of Russell Investments as well, talked about the importance of trust as being that how can you work with someone across the table if there's not that high level of trust?
Well, I would say if to those listeners, if you do not trust the advisor that you're working with, then you should probably exit that relationship. And, hey, we're always looking for new clients.
And the interesting thing is when a lot of
Clients might ask, well, this Penny Phillips, so she consults to advisors. She helps advisors like ourselves in their practice. Well, how does that benefit the client? Well, how that benefits the client is the fact that she helps ensure that the advisors she's working with focus on what's important to the clients and making sure that we're addressing their needs and their interests and their goals.
As well as we can
In order to meet their needs, because this business isn't about us, it's about the clients.
Yeah, constructing the right tools, having the right tools in your toolbox to make sure that people are accomplishing what's important to them. That requires planning money and time. A phrase we got from our old coach, Steve Moore,
Who we want to give a shout out to. Absolutely. And hopefully we
Can have him
On one day that we get
Our third bucket and we won't spend too much time on this one and his lifestyle planning. And I guess this would come also out of financial planning, but or even before financial planning. It's got to be thought of like what kind of life do I want to live? And I go through this
With people like I was on a bike ride
Yesterday with my neighbor and we're just biking around Calgary. And I said to him, like, he's 53, 54 years old. And I said, like, what do you want the next ten years to look like? He's like, interesting. You ask me that question. Like, I was just talking about that with my wife. We're deciding if we're going to downsize our home, buy a condo, maybe relocate. We're just sort of exploring that. So this lifestyle planning is really critical.
It is. And in fact, I was just
With Tim Noonan. He brought up some really interesting points to talking about his own life and talking about how he's really gone through and doing an inventory of stuff, because all of us probably acquire a lot of stuff over the years and certain stuff gives us a lot of pleasure. And maybe we accumulate it for lifestyle purposes,
For family time. I think of
Some of my stuff, like a boat. Now, how valuable is a boat? Well, as a financial or as an investment, it's horrible. It's probably the worst investment you can make if you consider it a financial asset. For me, it's a lifestyle asset because our kids love it. Our time at the cabin was fantastic and a lot of that centers around the activity on the boat. There will be a time when that is not occurring anymore and that boat will not be necessary.
And there's a lot of things probably that
People accumulate less expensive possibly than boats are more expensive, whether it's recreation, property and things like that. And at some point, you have to take a look back and say, how does this all fit into my wealth? And is it something I need or is it something I can do without?
Well, that's a good question. I had a friend ask me
About they wanted to sell their place in Invermay and buy a bigger place. And he asked if I thought that was a good investment. And I said, look, you're not doing this because it's a good investment. You're doing this because you're trying to create a different life. That's right. Because from an investment perspective, it actually probably doesn't make a lot of sense. And they did. And I think they enjoy their new place better.
Exactly. And that's the right reason.
It's a lifestyle choice.
We spent a couple episodes talking about things like the evolution of
In the old days in our Neanderthal knuckle dragging behavior days, it was
Stock picking, is it?
And how over time it's changed dramatically. And we're talking about things like, should I upgrade my cabin?
And that's the thing. And I mentioned this. I mean, this is my 25th year in the business. And when I started it was the relationship with the client and the relationship with the investment products was all transactional, was a transactional relationship. We talked to clients not because we wanted to know how they were doing. We wanted to make sure that their financial goals are being achieved. We talk to them because there was a recommendation to sell a particular stock and to buy a different one. And that was the nature of the relationship. And I think I can say that the relationships have improved dramatically
Hopefully, if you're dealing with the right
Person and we're focusing on much bigger questions, not whether or not you are going to get a better performance out of one stock or another, but whether the investment strategy is going to deliver on their financial goals later on.
We had Tara McCool actually join us this last year. Tara McCool, local sort of media celebrity ish type of person
Who runs a company focused
On compassionate leadership. And I think that falls right into that lifestyle planning buckets, because
Even as leaders in
A business or in an industry, the importance of compassion is important.
And so that falls into that
Lifestyle planning bucket.
But anything else that you want to wrap this? You know, we talked a
Little bit about philanthropy. That was not too long ago.
Kris Putnam-Walkerly join us. That's right.
She's a U.S. based expert on philanthropy.
And it's something that a lot of people don't actually think of all the time. Gee, how am I going to use my wealth to help others
When I think sometimes
It's because maybe people have priorities with their families they want to take care of another time to think it's just because it just doesn't pop to mind
When I think there's a rule that everyone has to
Consider. Do I want to use some of my wealth to help
Others, whether it's other
Causes, the environment, other people?
Animals, you name it,
But it's something that should at least be discussed and thought about.
So that's it. That was the year, Greg.
Yeah, we covered a lot of ground over the last 50 episodes. And what we're looking forward to this coming year
And we'll be
Trying to bring in interesting speakers
As we have in the past. One of the
Most fun things for me is when we bring in our U.S. speakers and we try to get them to spell Saskatchewan's.
Exactly, because we had every single
One of them try to spell Saskatchewan.
And do any of
Them know what Kraft dinner is
Actually? I don't think anybody did. Maybe didn't
Think Daniel Crosby,
Having lived in Calgary for a while.
I think he might have bought the odd box. And as always, we encourage all of our
Listeners to let us know if there's
Some specific topics that you'd like us to cover off. We're happy to do that. And we'll be sure to include that in our plans for next year.
Right on. Well, listen, we need a standing ovation because we're going to go into a new year.
No, no, stop. Thank you. No, not necessarily.
But I should say going into your going into a new year of recording. And I'm hoping that a year from now, when we're doing year to wrap up, we're not still locked down and that things have opened up and improved dramatically. Let's hope. All right. OK, well, thanks for listening. Until next time. Your next.
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Episode 50 - Probably its Probability
In today’s episode Greg and Colin discuss the effects of probability on portfolio returns. Looking at probability theory and distribution and how they relate to playing roulette or investing in markets. Enjoy the show!
EP.50 - Probably Probability
Welcome back to the free lunch podcast with Greg and Colin and Greg, this is Episode 50.
Hard to believe, but yeah, it's been a good run.
It has. And we're coming up to the one year anniversary of the launch of our podcast. And we're going to do something fun to celebrate that on our next show. But before we get ahead of ourselves, Greg, last week
We had a great conversation with
Daniel Crosby, a New York Times best seller, Ph.D. in behavioral finance. Just a good guy.
That was a lot of fun, great talk. And certainly if
Anyone hasn't listened yet, we'd
Encourage you to go back and listen to that one.
Yeah, exactly. Now, this week, we're going to go. I always say this. We're going go a different direction, but it is a different direction. We're going to talk about probability like Greg. What is the probability that we can discuss probability and outcomes in 30 minutes or less when it comes to investing?
Somewhere between 80 and 90 percent. OK, well, we're going to go for it. All right.
Well, let's talk about probability. So for anybody out there who thinks math is fun and I have to be honest, I kind of think math is fun. This could be an interesting discussion. And for those who hate math, I think this is probably an important discussion because probability is something we have to deal with in everyday lives. We deal with it with regards to our health, the weather and importantly, this podcast. It's a very big part of what we do in investment management. So what is probability? Simply put, it's the numerical likelihood that a specific event will occur. So in order to calculate probability, the formula is to divide the specific outcome you're looking for by the total number of possible outcomes. So, for example, if you flip a coin, you know, you could get a head or a tail. So there's two possible outcomes. And if you want to consider, well, what's the chance of flipping ahead, then there's one desired outcome ahead out of two possible outcomes, and therefore one out of two, which you can describe as zero point five. Or very often we talk about probability in percentage terms, which is 50 percent.
Well, that just makes sense. You have a 50 percent
Chance of flipping ahead
Or a tail. That's right.
And I think everybody knows this kind of intuitively. But I think it's important to look at how does that figure then into some of these other aspects of our daily lives which are filled with uncertainty. So if you think about something that has absolutely no chance of happening, would have a zero percent probability and anything that's actually guaranteed to happen would be 100 percent.
I talked about this with my kids all the time. When something happens, somebody will often say, what is the chance of that happening? And the answer is always 100 percent
Because it happened. Exactly.
So there's actually probably not too many things in life that are 100 percent guaranteed, but there definitely are some. And we do come across them from time to time. So, for example, not to be overly morbid, but the bottom line is we're all going to
Die one day. So there's a
100 percent probability that we will die eventually. But let's look at
Situations maybe that are a little bit more
Uncertain and look at things in everyday life that
Depend on probability.
So let's talk about life insurance. There's different types of life insurance that most of the people we deal with and most people in general will look at.
And those two types of
Life insurance are term insurance, which is temporary insurance or permanent insurance. So let's talk about term insurance for a second. So if anybody out there has gone to look for life insurance when they're 30 or 35 years old,
They would find that it's very
Inexpensive. And why would it be inexpensive? Well, because the life insurance companies know that at age 30 or 35, there's a relatively small risk of dying. And it doesn't mean that people don't die at age 30 and 35, but it just means that on an individual basis, there's a relatively low risk. And so the insurance companies look at the whole population of 30 year olds that they're going to provide insurance to and they know what percentage of that population will die approximately, and they can plan accordingly. So for us, as the people that are buying insurance,
It's like, well, and thinking
Back to yourself for myself, when your family is young, you have a young family and the risk of dying, even though it's small, if it were to happen, it could have a big impact on your family because they would have to replace the lost income that you
Would have and your
Income potential for the next
30 years of working well. And the
Probability of them replacing that income if you died is actually zero if you don't have
And so as a person who needs insurance at a young age, it's great that because of the likelihood of your dying, the insurance companies can offer you a very good premium. So it kind of works for everybody and it's just a form of risk management. It's not that you're expecting to die, but you could.
Now, the other side of that, when it comes to insurance,
Is preeminent insurance. So permanent insurance is interesting. It comes in different forms. They call it term to a. Which basically just means you have insurance for
As long as you're alive
Or it can be whole life or universal insurance, but the bottom line is with permanent insurance, the insurance company knows that you will die and they will payout on your policy. And so for that reason, the pricing is a lot different on permanent insurance because the insurance company has to be able to, of
Course, recoup all of the
That they're going to pay out over time through your premiums. And that's why when you buy permanent insurance, which basically says my beneficiaries will get the money when I die, it'll be a lot more expensive. And so that's, again, a case where
Probability is such
Part of the whole
Insurance business. You're just prepaying
That dollar amount. So you have a million dollar permanent policy. You have to pay for it over 10 years. Maybe it costs you hundred thousand dollars in premiums to pay out a million dollars at your death. But I mean, the insurance company isn't doing this as a charity.
No, they're not.
And listen, and they know that when they use their
Actuarial mortality tables and things like that, they know that OK, of this population that we're providing permanent insurance to, some will die sooner, which is a detriment to the insurance company because they have not had the benefit of earning premiums for their expected time frame. And some will live longer. And so for those, those people will pay more premiums over time. And of course,
Mathematically, they can just calculate what do we need
In terms of premiums in order to meet our requirements.
So it's the same thing when you buy car insurance.
Now, you and I both have young sons who have just got driver's
Licenses and cars and cars. And so you've had to maybe help your son
Insure his car. I've had to help my son insure his car.
So what did you notice when you got the quote
On that insurance?
It was eye opening. It was shocking, really. I mean, the quote for my son's insurance was about four times what my
Insurance is exactly. And that happens because the insurance
Company knows that on average, young male
Drivers in that
16 to 19 or 21 age group are more likely to have accidents because that's just what's happened. That's the experience. And so when you're in that age group and you want insurance, the insurance company is going to charge you based on accident information.
And listen, for all of us
Who insure our cars, we pay for collision insurance, which is basically the ability to repair your own car. If you are found at fault in an accident and if you think you're a great driver and are not going to cause any accidents, you could choose not to buy collision insurance.
If we don't,
80 percent of all drivers
Better than the average.
Exactly. And so even though you may be a great driver, it doesn't mean that there can't be a situation. We call them accidents that could occur and therefore, you're willing to pay for that protection just in case. So what's another area where probabilities pay a fairly significant role? The weather,
When you turn on the Weather Channel, they tell
You what they expect,
The high for
The day to be
And they show you a
Probability of precipitation. So they never say it's going to rain today or they very rarely say it's going
To rain today. But they'll give
You a high probability, maybe 80 percent. And that's based on
Just their previous
Experience. They know that when certain atmospheric conditions occur, there's a higher likelihood of precipitation. And so they build that into their models and that's what they put up. And so you're not guaranteed of rain probably
Any day unless, as you
Well, it's a guarantee.
If it's a 40 percent chance of precipitation, but it rains, then it becomes 100 percent.
That's right. Exactly.
So in this case, what the meteorologists
Do in the forecasters
Is they look
At history, they look at thousands of situations when the atmospheric conditions were similar to today's, and they use that to make their predictions.
So let's move on to even one more
Topical issue, and that would be the covid-19 pandemic. So probabilities play a huge role in our understanding of how diseases are transmitted, how many people will get sick, how many of those will be hospitalized and how many may die. And right now, of course, we're talking about the probability of getting the disease once you've been vaccinated. And in addition, on top of all that, we now have to talk about what's the probability of experiencing a serious side effect from a vaccine like these blood clots which have been associated with circle of different vaccines, certain vaccines?
That's right. So it does
Become, I would say, a gamble.
What's a gamble is just making
A bet on something that's uncertain.
And listen to me. I guess I don't mind
Making my own views on getting vaccinated. These are just my opinions, of course. But in my
Opinion, if you're healthy enough and there's
Not some reason or some medical reason why you shouldn't receive a vaccine, I personally think you should try to get a vaccine. We're just talking earlier about. Let's say the situation
Around this one particular
That has some
Incidence of blood clots associated with it. Well, the incidence of those blood clots is about four cases in a million. So that's point zero zero zero four percent. So let's compare that to the incidence of blood clots from different things.
So women who
May be on the birth control pill, the incidence of blood clots in those women is about five hundred twelve hundred cases in a million. So but point zero five to point one, two percent, I'd say that's higher than point zero zero zero for much higher.
If you're a smoker,
The chances are about zero point one eight percent of getting a blood clot from your smoking. And if you do get infected with covid, there's about one hundred and sixty five thousand cases per million of blood clots in people that do have covid infection, 16 and a half percent.
So you don't have to be a mathematician to know that point zero zero zero four percent is lower than sixteen point five percent. Absolutely.
And again, it's a gamble,
But it's a gamble
That all of us have to decide
Whether or not it's a risk worth taking.
But, Greg, what the heck does this have to do with investing?
Well, it turns out quite a bit.
So let's look at the U.S. stock market.
Just because we have so much data going back almost 100 years with the U.S. data. So when you look at the last ninety four years of stock market returns, that goes back to 1926. We see that on average, U.S. stocks outperformed Treasury bills, which is the guaranteed return 70 percent of that time in any one year. So in any year when you start the year, what are the odds of the stocks outperforming? The odds are about 70 percent.
It's pretty good, is what you would call a higher likelihood
When you look at five year time periods and this is all five year rolling periods starting in 1926. So nineteen twenty six to thirty one, twenty seven to thirty two, et cetera. Of all of those five year time periods, the number grows to 78 percent and it grows to 86 percent
Over all 10 year
Periods. So if you were to say, well, what's the chance of stocks outperforming Treasury bills, the odds are, well, in any one year it's about 70 percent. And if you've got a 10 year time horizon, it's about 86 percent. So that's pretty good. And so when we build a portfolio, we want to make sure that we have exposure to something that's likely to occur. At the same time, when you think about it, over a one year period when stocks outperformed by 70 percent of the time, that means 30 percent of the time stocks did not outperform. In fact, they underperformed. And so what do you do with that information? And during that time, that 30 percent of the time when stocks do not outperform Treasury bills, other asset classes could be outperforming bonds, could be outperforming real estate, could outperforming, et cetera. So when we build a portfolio, when we go
Back to one of our first
Podcast's was on asset allocation, how do we decide what percentage of our assets to
Put into stocks compared to
Bonds, cash and real estate? We want to look at those percentages and say, well, I would like to have something that we hope will do better during that 30 percent of the time or 30 percent of years when stocks do not outperform. And again, remember, even when we talk about those 10 year periods, stocks still underperform Treasury bills 14 percent of the time.
So when we talk about
Time periods like 2008, 2009, we've talked previously about during that time frame, the US stocks actually declined zero point nine percent annually from 2000 to 2009. So that's the most recent 10 year period where stocks actually underperformed Treasury bills.
I think it's one of the only 10 year periods where stocks underperformed Treasury bills in recorded stock market history.
And so we have to remember that even though that was unusual, it's not unexpected. In fact, it's expected maybe 14 percent of 10 year time periods.
And so things can
Happen and that would be
A bad thing for stock
Market investors. But what it also does
Is, as we've talked
Many times, well, that's US stocks. So how did Canadian stocks do during that 10 year period? They did better, as did some international and European stocks, as did bonds.
And so when we
Diversify, basically what we're saying is probabilities can work for you or they can work against you. And what we want to do is we want to make the best bet that we can. Now, let's take this a little bit further. We just talked about
Stocks versus Treasury
But in some other of
Our discussions, we've talked about factors of return and what are those factors of return? Well, we know that small company stocks have a higher expected return than shares of large companies do. And it turns out that about 55 percent of the time, one year periods, small stocks outperform. You might look at that and say, well, that's close to 50 50.
So maybe that's not a big deal.
That's right. But when you look at 10 year periods, small company stocks outperformed 71 percent of the time. So does that say you want to have all your money in small company stocks? Probably not, but it does say that you want exposure to those small company stocks, because why would you not want exposure to something that outperforms large company stock 71 percent of the time over 10 years?
What would you say when somebody says, wait a minute, if I
Can get 71
Percent of the time my small company stocks are going to outperform, why wouldn't I just put it all in small company stocks?
Well, and again, exactly for the reason I mentioned earlier, and that is that you might go through a 10 year period
Where you underperform.
And that's a long time
When you're looking back. Ninety four years to nineteen twenty
Six, maybe at 10 years doesn't seem that long. But as an investor, when you're staring at your account statements every month
And you see
Nothing but underperformance for a 10 year period, the odds of sticking with that investment strategy are very low. And so what we want to do is we want to make sure that we use probabilities to pick the right asset allocation, but make sure that we're taking care of the uncertainty of those bad outcomes happening. So we talked about small companies value stocks, which are just companies with low relative share prices tend to outperform growth companies. Fifty nine percent of the time, over one year periods and eighty one percent of the time over 10 year periods. So do you think you should own some value stocks in the portfolio?
Of course you should. And for the 19 percent of the time, over 10 year periods, you probably want some growth stocks in there as well to take care of those periods where value stocks do not outperform. And in fact, we've just come through a three year period where value stocks dramatically underperform growth stocks that ended back in November and now the situation has switched around again. And lastly, just to finish off the factors, we know that companies with high profitability beat companies with low profitability 91 percent of the time over 10 year periods. That may not be a surprise to people. You might think intuitively. OK, well, it makes sense that high profitability companies, their stocks would perform better. And that's true. And that's exactly how things play out. What does this say to us? To me, it says, well, we should play the odds when we make investment decisions. We want to make sure we have exposure to those factors that have higher probabilities of outperformance. And that's not to say invest everything in those factors, because as we've seen, there's still a chance that the outperformance won't materialize even over a 10 year period,
Because what's the probability of another correction happening sometime in the future? Greg?
Well, I guess I can't say it's 100 percent, but I would say it's highly, highly likely.
I would say
It's 100 percent because you just don't know what the time frame is. At some point, there will be another correction.
It makes sense that there would be. And in fact, the
Corrections have come along a
Lot more frequently
In the past than they even
Have in the last 10 years or so.
Well, let's talk about probability theory and probability distribution. And I hope to not lose
Listeners when I go through
This one. But in probability theory and statistics are probability distribution is what you described. It's the mathematical function that gives the probabilities of occurrence of different possible outcomes. The experiment in this case that we're describing is the stock market or the bond market or some function of both. So it's a mathematical description of a random phenomenon in terms of its sample space and the probabilities of events. That sounds very technical,
And it is because it's the set
Of all possible outcomes of an experiment. So in the stock market, we could call this the sample space, what's occurred in the past and events are subsets of the sample space and they're assigned a probability that is a number between zero and one. And so how we use these numbers and why we're even talking about this is that for portfolio management, we commonly use Monte Carlo simulations to look at expected rates of return. Now, Greg, when I say expected rates of return, is that a guarantee?
And we're talking there about
Expected rates based on history. And so history,
As we've just gone
Through, tells us what kinds of returns you might expect in the future. But again, absolutely not guaranteed.
Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of something called random variables.
You don't know what's going to happen tomorrow. You mean like a global
Pandemic, for example?
That would be a random
Variable, although I'm sure there
Are people out there that said, well, with the upcoming global pandemic around the corner, I'm going to move to cash. There's no way those people exist, by the way. That's right. But it's just a technique used to understand the impact of risk and uncertainty in prediction and forecasting models. So the history of Monte Carlo simulations go back to the popular gambling destination in Monaco called Monte Carlo. And it's just basically because there's chance and random outcomes in the modeling technique, similar to playing games like roulette, dice and slot machines. So roulette might be a good one.
So with roulette, you can.
I've never really played roulette, Greg, but I've watched it. I know you can bet on red or you can bet on black. Or you can bet on specific numbers of red and specific numbers of black, and so the payout on the specific number and color is obviously much higher than the payout if you just bet on red or black,
Because what would be the probability of lending on red if you chose red
On red? Almost 50 percent, because I think there's a green in there, too. So it's not quite 50 percent.
But what's the chance of landing on Red 32?
Exactly. And that would be a much smaller probability and therefore, as you say, a higher payout.
So this Monte Carlo simulation was first developed by somebody named Stanislav Ulam. I hope I'm pronouncing that right,
A common name in our household,
Stanislav. He worked on the Manhattan
Project during World War
Two. And the Manhattan Project was the project where the first nuclear weapons were created. Kind of a scary thing, but after the war will recover from brain surgery. And I'm not sure why this person had brain surgery, perhaps working on nuclear weapons will who knows be a byproduct of that. But he entertained himself by playing countless games of solitaire and became interested in just basically plotting the outcome of these games to observe their distribution and determine the probability of winning.
And he shared his findings
With one of his friends, somebody named John von Neumann, and the two collaborated and they developed the Monte Carlo simulation. And Greg, why are we talking about Monte Carlo simulations again?
Well, because Monte
Carlo simulations play an important role in trying to predict possible outcomes
Of whether it's
In our case, obviously, the likelihood of success of an
Investment strategy. Right.
The expected rate of return. So the basis of this Monte Carlo simulation is that the probability of those outcomes, it just can't be determined because of random variable interference like a global pandemic. So therefore, a Monte Carlo simulation focuses on constantly repeating random samples to achieve certain results. And the Monte Carlo simulation takes the variable that has uncertainty and assigns it to a random value. And this is getting kind of deep. And I don't mean to get too deep, but I want to explain it that the model is run and it just basically provides a result and the process is repeated over and over and over. So in our case, we run Monte Carlo simulations on our model portfolios that are driven by different asset allocations and we run ten thousand different scenarios and it gives us an expected rate of return
Based on how much you have in
Bonds and how much you have in stocks. And that expected rate of return will be different depending on the wedding to those different asset classes. So when we look at one of our real model portfolios that we call the balanced growth model, which is simply 60 percent in stocks and 40 percent in bonds, and we look at the historical data that goes back to nineteen seventy eight through to the end of twenty twenty. The actual return for that model portfolio was seven point eighty eight percent per year.
That's pretty good. That's pretty awesome.
That's what would have happened if you had stayed in the model for 40 some odd years. And then they measure the standard deviation or just a measurement of volatility was seven point nine. And for those that aren't familiar with standard deviation, the higher that number, the more volatile, the lower the number, the less volatile.
I think it just basically
Measures the deviation
From that expected number. The higher the deviation, as you say, the scarier the ride.
So when we look at the Monte Carlo simulation on this model portfolio, the expected rate of return going forward is only six percent, even though over the last forty two years it returned, I don't know, call it eight percent a year. The expected standard deviation going forward is nine point four, which is higher than what occurred over the previous forty two years. So what does this tell us, Greg?
Well, I think what it tells us is that there's a lot of uncertainty in life. But of course when we're talking about investing, there's a lot of uncertainty and you can't count on what's happened in the past to necessarily recreate itself in the future and particularly when it comes to actual rates of return. So, as we said earlier, we can expect that stocks will outperform bonds eighty six percent of the time in 10 year periods. But that doesn't tell us what the rates of return will be.
Yeah, the only one hundred percent number is what's occurred.
You have one hundred percent chance of having a return exact rate.
Well, and the interesting thing about
Monte Carlo simulations is it doesn't tell you exactly what your return will be. It tells you what the expected return will be, and then it calculates the likelihood of getting that expected return because there's the chance that you'll do better than that number and there's a chance you'll do worse. And so the Monte Carlo simulation actually helps tell us, well, based on this plan and this strategy, you've got an eighty five percent chance of reaching.
Well, I think where it plays in even more is it when investors come to us, they're looking for certainty in something that is completely uncertain.
Exactly. There's no
Certainty around where the market is going to go today, tomorrow, next week or next year, but we do have probability statistics that, as you pointed out, show us that if you stayed invested for a 10 year period, well, you've got an eighty six percent chance
Of having a positive return.
So this sounds really familiar. It just sounds like another version of market timing all over again. So let's talk about four ideas of market timing and probability to wrap up this episode. Sure. What's the first one?
We've probably talked about this in previous
Episodes, but to successfully time the market, you actually have to make two correct decisions when to exit the market and when to get back in or vice versa, when to get in and when to exit. And so this requires accurately predicting when markets are going to decline and when markets will rise. But at any point, we believe the market is already priced in all available information. And so new information can move prices. But research has shown that it's difficult to reliably predict what new information is going to come up. So making one prediction can be challenging. Making two is even harder. And the other thing, too, is you have to not only make a prediction about future information, but also how the market's going to react to that. So when you think of all those things,
It makes timing
The market extremely
Challenging. Well, I think if the housing market when you say that I had this hypothesis that house prices
Would go down this year based on a global pandemic, economic down, job loss. Wow. Completely wrong.
Exactly. And it's hard to actually even pinpoint what is going on. Well, certainly we know that historically low interest rates and therefore historically low mortgage rates
Has fueled a lot of the move up in
But as you say, it's hard to if
You sat back and said, well, who would have predicted that a year and a half ago, hey, we're going to go through a global pandemic of biblical proportions. Let's buy real estate. That wouldn't have been the first conclusion based on that information. Well, the other thing,
Too, is just when you talk
About market timing or whatever, the stress of being out of the market can be just as great as the stress of being in
The market. Oh, this is the
Fear of missing out versus the fear of being in.
That's the fear
Of missing out. And so if
You're out of the market, it's like you look around and everybody's portfolios are moving up.
And if you're in the market, you're looking around and watching your
Portfolio go down, as everybody
Did a year
Ago this past March,
And which is also tough.
And again, that comes down to, OK, well, should I get into the market now trying to make a prediction about, well, the market's already gone up so far. What are the odds that it's going to keep going up when the odds are it's not going to go up indefinitely? There are certain limitations that we can say from time to time
That the market will
Not go up indefinitely. And so how close are you to that point where it stops going up atrás? Who knows? It's very uncertain.
Well, and another one is
When you exit the market and put your assets in cash, you have by definition actually lowered your expected return because you've as the Monte Carlo shows us, cash has an expected return, much lower than the
And unfortunately, we watched somebody do this last year. They sold out of their stock positions, put it to cash because they expected the stock market to go down. When I see the stock market, I'm saying the US market. Well, what happened to the US market in the last year and one of the best bull runs in history. So that person missed out on, I don't know, 30 percent return rate. So their expected return going forward was lower.
That's a real consequence. And actually, I
Want to talk about that one a little bit more, because when we talk to Daniel Crosby last week, we talked about, well, why do people make those decisions like that type of decision? And when you start digging into it, you can understand
Why from a
Behavioral away, not from a rational, logical way. So I think it's part of our job is to keep people invested
During those periods. Oh, exactly.
Also, research offers little evidence that market timing or other types of prediction work consistently. So one example is the performance of mutual fund managers versus benchmarks, a variety of studies. This is shown that mutual funds, that employee things like active management techniques, including market timing, have a poor record of beating their benchmark. So many of them fail to survive the performance period. So they want to spend a lot of time on this. But basically what it means is like if you looked at some data over the last, I don't know, 10 years, there was a specific number of mutual fund managers at the beginning of the period, but only about, let's say half of them survived the 10 year period. And only a quarter of those actually
Met or beat the benchmark.
Yes, exactly. So it's not that people can't beat the benchmark, it's that the likelihood of doing it is not in your favor. Well, and
Probability sort of comes into play in a big way
When you're looking at investment management performance,
Because when you think about
It, as we know, the average of all investment portfolios is
The market performance
Minus fees, because all portfolios combined to make up the totality of the. Stock market, and therefore they all have to average out to be average. And so when you look at those, if these were not involved, you would expect half the managers to outperform the market and have to underperform
Just by random chance. And so the
Difficulty is when you look at manager performance and what a lot of people do say, well, I'm only going to select a manager that's on the way. If you're looking at a graph, it would be the right hand side of the graph. But I'm only going to select a manager from the ones that outperformed.
I'm only going to pick a winner. Exactly. Because who would pick the loser? But when you do that,
As it turns out, of those ones that outperform excluding fees for now anyway, they've only got about a one quarter chance of being in the top twenty five percent in the future. And so that part of the risk of looking at managers and their performance is that even
If they had great skill, it's hard to
Discern it from luck and their persistence of their outperformance. Again, coming down to probability, maybe only 25 percent. So I think, again, it comes down to playing the odds. If we had to summarize
This podcast, it's you've got to
Play the odds
Go where is the greatest
Likelihood of a positive outcome and protect yourself for those cases where the positive outcome doesn't materialize.
Now, I got a question for you, Greg. Ready for it? Go for it. What's the probability of recording a podcast on your birthday?
I would say that's one hundred percent. Happy birthday,
Thank you very much.
Talk talking about being morbid.
I was looking
Up the life tables from the insurance companies today just as the birthday
Passes and. OK, I've got a little work to do here.
Well, anyways, I'm glad to be able
To do this with you on your birthday. So happy birthday and thank you.
I think we
Should just wrap it up there.
What do you think? Let's do it.
A lot of numbers, a
Lot of discussion
There so we can leave it there.
Well, and for any listeners that want to dig into this a bit more with us, I mean, give us a call. Drop us a line. We're happy to talk about all these things. So thanks for joining us today. And Greg, next week, we're going to be going through our one year recap right on the last 50 podcasts. Looking forward to it. You betcha. All right. Next time.
Episode 49 - Unbiased Biases with Daniel Crosby
Greg and Colin interview Daniel Crosby, a PhD Psychologist, a noted behavioral finance expert, and a New York Times bestselling author. We discussed why we make decisions by understanding our biases and what we can do to avoid making bad ones.
EP.49 - Unbiased Biases with Daniel Crosby
Welcome back to the freelance podcast with Greg Kraminsky and Colin Andrews. And Greg, you missed last week. I did the last week with Blair on the show and we wrapped up our retirement mini series discussing investment strategies and fallacies of those and retirement years. And it was a wrap up to the four episodes
Where we looked at lifestyle
Goals, layers of income and financial planning, retirement funding, and lastly, the investment strategy discussion, which is usually where people start their retirement discussions. Which is the wrong way, right, Greg?
Yeah, absolutely. Got to start with the goals and work your way back.
Exactly. So today we're going to go a different direction and we're so happy to have on our show a true expert in behavioral finance. And we've talked about behavioral finance in our episodes in the past. But I'm really excited about the person who's joining us today. I met him a couple of years ago at a conference pre covid remember when we used to go to
Conferences, the good old days, but hopefully they'll be back soon,
I'm sure. Hopeful. So today we're so thrilled to have Daniel Crosby join us. Daniel is the chief behavioral officer at Orion Advisors Solutions. He holds a Ph.D. in psychology and has successfully bridged the gap between the social sciences and the investment world. He's a New York Times best selling author of the book Name The Best Investment Book at the time of publication. And he also runs a podcast called Standard Deviations. And that's one that I listen to frequently and we've quoted many times on our show. So, Daniel, we have to give you some credit for those quotes and we just want to welcome you to the free lunch podcast.
Thank you. It's good to be here and it's good to know where all my Canadian downloads are coming from. Thank you very much.
Exactly. Well, listen, Daniel,
We were just talking before we started recording,
But maybe you could start off by telling us your story. How did you end up where you are today? What was your path?
So I am the son of a financial advisor, so my dad is still in the business. He actually got his job on the day I was born. He dropped out of graduate school and he was cutting yards for a living. And I think my mom
Was beginning to
Question her decision making about who
She had landed with.
And my dad
Got his job as an adviser on the
Day I was born. So he's been in the business ever since. And so I grew up really steeped in the sorts of conversations that you have with clients every day. My dad preached from an early
Frugal, being charitable, investing early, the power of compounding all the great lessons you teach your clients. I learned at a young age. And so when I went to
College, I was
Taking general education classes with an eye to becoming a financial adviser like my dad. And I just really fell in love with psychology. After my first
Year of school, I
Actually went on a mission for my church to Southeast Asia.
And so they're building schools.
I'm teaching English, I'm helping out.
And I just sort of felt even
More in love with this idea of doing something with my professional life that had people at the forefront
And was trying to
Help. And so that's
What drew me to clinical
Psychology, which is what my PhD is in. But about three years into my PhD program, I started to burn out. I was just bringing work home with me. I was dealing with some really rough clients. I wasn't handling it well and I was just internalizing the
Stress and said, I'm not
Sure I want to be a doctor like a clinician
For the next 40,
50 years. And so I was talking to my dad as sort of my friend and career
Coach, and he said there's a lot of
Psychology in the work that I do.
And I was like at the age
Of whatever twenty three at the time. I was like, what are you talking about? You're a financial adviser, you're a money guy, you're a numbers guy. And so he sort of turned me on without him knowing what it was called 17 years ago. He sort of turned me on to the field of behavioral finance. And long story short, that was sort of my first entry into understanding that
Markets really are about the intersection of mind and money.
I didn't grasp that until that point. He set me on the path there.
That's really cool. I don't even know where to go with that.
Greg, where do you go with that?
It's an interesting
Diversion. And certainly, I guess
We've talked about some of the
Other leaders in the whole field
Of behavioral economics. And what stage was the
Industry or the study of
Behavioral economics that when you got into it and how did you sort of find the transition into that with existing research that was being done
When I graduated? So I got my PhD in like two thousand seven. And so when I got out and got my PhD, I started working for a bank and I was doing pre-employment assessments of bankers. So before a bank would hire someone, I would give them an IQ test and a personality test and the like and make sure that they were a good fit. So inside the bank that I discovered the work of people who are still luminaries in the field, like Richard
Thaler and Daniel Kahneman and people
Who had pioneered behavioral economics 40 years. Years earlier, but when it came to everyday advisers in two thousand seven, if you had heard of behavioral finance and you were implementing it in your practice in any meaningful way for a unicorn, I mean, that was just really not happening. So that was sort of the business opportunity that I saw was, look, there was so much great research
Up here in the ivory tower
Of academia. Some of these now Nobel Prize winning luminaries in the field had done some incredible work, but it wasn't making it to people like Call and
It wasn't making
It to people like my dad who are in the trenches every day working with clients, but not necessarily benefiting from the insights
Economics and behavioral finance. And so I said, look, I can speak both languages. I speak advisor and I also speak wonky academician. And so I can be sort of a translator between this really esoteric part of the world in this very applied part of the world. And I think that's basically what I've done lo these many years.
That's kind of been my career is translating
Between those two worlds.
Well then thank you for doing that, because
For us, as you know in this chair,
That's where the rubber really hits the road is how can we take all of this great research and things we know about people's biases, emotional and cognitive, and how do we help them, not necessarily overcome them, but understand
Them and adapt
Accordingly? So, Daniel, maybe you could just explain for us what exactly are behavioral biases and how important is it for investors to understand these biases, behavioral biases?
I think the most generous way to think about them is their cognitive shortcuts. So if we look at our brains, our brains make up two to three
Percent of our body weight,
But they account for twenty to twenty five percent of our caloric expenditure in a given day. So they're not very big, but they are very hungry. And so one of the things that we're always looking to do is to think less. And so one of the ways that we can reduce this cognitive load, reduce the drag on our brains, is to rely on stereotypes or heuristics
Of thumb. And that's really what biases are. Biases are like, oh, Canadians are like this. Americans are like this. And so when I meet Colleen and Greg, I
Don't have to really
Do the heavy lifting of getting to know them. I can just apply. My Canadians are nice and overly apologetic lens and then
I can save
Myself some cognitive load. Now, however, you know, I give sort of this funny example of what you two are like. If I'm operating from that lens, though, I'm going to miss nuance. I'm going to miss subtleties about
Who you really are. And perhaps you're a
Lot like the stereotype in my head and perhaps you're nothing like the stereotype in my head. And so the same way that we have biases about people, we have biases about money. So people have all this sort of emotional balance and all of these preconceptions about money. And so whether in their personal financial lives or in markets, all of that stuff is stressful and all that stuff is complicated and highly analytical and takes a lot of work. And most people aren't great at it and they're not schooled in it. And so they just rely on these rules of thumb or they rely on emotion. The final thing I'll say about this is that the
Extreme, either to the positive or negative a person's emotions are, the more likely they are to be biased. So we find that people who are really happy, like in the research, people who are really happy, are also often really biased because they don't want to do sort of the nitty gritty thinking that's going to shake them out of that happy place. Like they just want to stay sort of high and dry, happy, and they don't want to think and get bummed out. So the same is true of people who are very fearful or stressed out. So really biases are just cognitive shortcuts, but they're exacerbated by any kind of move
Away from the middle
Point in terms of our emotional lives. We get more and more biased.
Well, and one of
The and we'll get
Into the different biases. Or do you say biases or biases?
I should ask you the academic.
Oh, no, it's tomato. Tomato. They both work.
Yeah, I question that because I think of biases in our chair, probably just like your father's chair, where he's meeting with somebody about their future and they're talking about planning and what they want to do. And then they default to things like, well, what stock should I buy? Which actually has nothing to do with planning a 30 or 40 year period. It's just it's like a piece of candy in front of you. So I think of our role over the last five, 10, 15, 20 years has really evolved more to why do you want to own that? How does that. Fit into your plan, how do you see that changing going forward for investors when they look at their biases?
Well, so you make a point about the landscape of a financial professional has changed over the last 20 years. So I'm forty one years old and in my adult life, I've lived through two of the three worst
Economic downturns in US
History. I mean, I'm not that old, but it's been a rough adulthood. I sort of expect that to persist. And like what we saw during the covid crisis
Was the quickest
Bear market of all time and in the quickest bull market of all time, markets are just going to move faster and faster going
Forward. And as
Information becomes more widespread as the ability to trade becomes free now basically everywhere, at least here, as it becomes easier and easier
To trade and it
Becomes people have better and better access to information, markets are going to move faster and faster to the upside and to the downside. And I think it's going to elicit the worst
In people in terms of
Their fear and greed. So all of the research shows I talk about this in my book, The Laws of Wealth. And in Chapter two, I talk about the enormous volume of research that shows how much better people who work with a financial professional
Do than those who do it
Themselves. But all of that research shows almost exclusively to a single factor, and it's that adviser keeping that person out of their own way. If you kept a client from settling in March of twenty twenty and you kept them invested when otherwise they would have panicked, they'll never pay you back. If they work with you for another 20 years, your fees will
Never match the economic
Good that you did for them.
And so I think the research
Shows that people who work with advisors do better than those who don't because the advisors help them at critical inflection points when they want to give in to those biases and those worst impulses in the advisor events that I expect that to continue. And I expect that to become even more
Pronounced in the years
I've had a scene said to me that I quite like it's fear is transitory and greed is part of the human soul.
I don't know who said that.
I just like the quote, but it reminds me of back a year ago last March when things were really scary and everybody forgets that. And then everybody says, yeah, but we knew it would come back and look where we are today. And they talk about it like it was just fact when a year ago it literally felt like the world was going to end and everybody was going to die.
And that, I guess, would be
Probably a classic example of hindsight bias. And I'm just wondering,
Daniel, if you can just maybe talk about
What are some of the most important biases that
People succumb to and cause the
Greatest amount of grief when it comes to investing,
Calling it on to
Their. You're right.
One is hindsight bias. Also called knew it all along bias. Looking back with now twenty twenty vision, no
Pun intended, looking back with
Perfect knowledge of how things were going to shake out, it's easy for us to say March of twenty. Twenty was no big deal. I mean at the time if I'm honest and I put myself in that place, I was scrambling, trying to make sure my children had enough meat and toilet paper like I mean, it was legitimately scary and we didn't know much about the virus. We didn't know what the economic impact was going to be. So we did not know it, even though it feels like we knew it all along. And then now we're experiencing what I'd call normalcy bias, which is the human tendency to think that what's going on now is all that will ever go on. We as a human race think about the world in exactly the opposite way of markets. So in March of twenty twenty, when everything was terrible, we looked around us and we said, well, everything's going to
Be terrible going forward.
This is just it. Now we live in a dystopian hell scape where there's no toilet paper and no
Ground beef and we just can't get anything
Right. And it's always going to be like this. Now, looking where we are today, with everything elevated, with everything on fire, seemingly every IPO, the average IPO last year went up seventy two percent, every IPO seemingly blowing up a stock market, running hot, real estate hot. We look around now and go, oh, wow, everything's always going to be like this. So the thing about us is our minds are wired to think that whatever is going on now is whatever will be ad infinitum. But the way that markets work is whatever we see now. The opposite is going to tend to be true in the medium term. So periods of Great Depression in the markets, we have to know this too shall pass.
This too shall
Pass. It won't always be like this, but the same. This too shall pass. Montera needs to chastened
Us at times
Like this when things. Running a little hot and we go, hey, let's be a little conservative, let's make sure we're still diversified
And still making right
Choices, because humankind tends to view history in a straight line, but markets tend to be mean reverting.
Could you talk a little bit about what's driving those
Markets with the fear of
Missing out type of attitude? Is that a bias or is it just a thing? And how is that different than the fear of being in when things go down?
What's funny about fickle humans is that we have multiple simultaneous preferences. So when you look at an economist who has an idea of a rational human being, a rational human being would never buy an insurance policy and a lottery ticket in the same day, these things are like on opposite ends of the spectrum. And if we were purely rational, we would not do these things. And yet many of us do both of these things all the time.
Like we take certain
Decisions that are with an eye to getting rich in certain decisions, with an eye to not becoming poor. And so we have multiple simultaneous preferences. We want to be
Safe when times
Are bad, but we also want to shoot the lights out when times are good. And of course, there's no real way to do that. There's no real way to do both of those things, except I think perhaps in a bucketed way you could have a portion of your assets trying to shoot the lights out and a portion of your assets as a buffer. But you can't have both. There's a strong relationship between risk and reward. And so we have these multiple simultaneous preferences for becoming extravagantly wealthy and never losing money. And they just really can't coexist in any sort of meaningful way unless we tease them out and sort of bucket them and look at those buckets for their intended purpose.
Some interesting things happened recently that I think might tie into some of this discussion. So if I can mention GameStop,
We got to talk about that one. We do
Gamestop and the
Robin Hood Reddit crowd and
Things like that. So there's a lot of biases, I'm sure, wrapped up
In that whole event. But can you maybe talk a little bit about what drives
That, what gets people on board like that?
And what mistakes are they making
Emotionally to think that that's going
To end well?
So GameStop, I think is actually a really interesting example
That has a ton to do with
Covid in particular. So there have always been message boards before the Internet. There were a little investing clubs.
Internet. There have always been Yahoo! Message boards and discussion rooms and all this. So in some respects, Reddit
And the Wall Street crowd are nothing new.
This has always been around. But what you have now is a group of people who are completely shut off from each other. When we look at what makes people happy, what makes people well, social connectedness and relationships are at the top of that list every single time. And so for more than a year now, we've all been locked in our homes, kept from each other. Loneliness is at epidemic levels. Suicidality is up in the US four and a half times
Year over year.
People are just lonely and disconnected and having a tough time and their lives have been completely risked. Now, enter the GameStop phenomenon,
Where it's positioned in two ways. The first
Way it's positioned is you're part of a movement and that was extremely appealing to people who were lonely and bored and shut in their house and sitting
In many cases,
Money from the government.
So it's like they're bored, they're lonely, they're disconnected. And here comes a movement that I can be a part of. And oh, yeah, the message of this movement is you're going to get rich and you're going to stick it to the man. So it's like I'm part of a movement. I'm going to make a bunch of money and I'm going to do it in this righteous way. I mean, the week that GameStop was going crazy, I don't think I slept more than four hours. One night, I was up every night reading these message boards because as a psychologist who studies market behavior, it was like my Super Bowl. I was so fascinated. And that's really that's really how this was positioned, as like you're going to get rich and you're going to do it in this righteous
Way where it's
Taking from the rich and giving to the poor. And so I think there were like moral ethical undertones to that whole thing. I think the loneliness and isolation was a big factor. I think good old fashioned greed was a good factor. And so I think it was just this perfect confluence of events
That caused us to witness
A truly incredible thing. And I mean, I haven't looked at it recently, but when last I looked whatever, 12 months ago, GameStop was about eight, 20 bucks a share. It's still sitting around one for. Or one fifty. I mean, even
After an enormous
Haircut from four hundred or whatever it got to, so I mean, it's still really elevated and that tells you just the power of that movement.
It reminds me a little bit. People say history doesn't repeat itself, but it rhymes. I don't know
Who said that. But whatever the case, I had been in the
Business for about four years back. And the first tech boom. Nineteen ninety eight. Ninety nine. Two thousand. And that was the beginning of like discount brokerages were just relatively new
On the horizon. And there was a lot of research coming out.
I was at a conference, I think in two thousand or two thousand one, Terenzio Dean spoke at another behavioral guy
And was talking
About how research from those discount brokerage accounts showed that
Obviously the more trading, the worse
The outcome. And certainly that people that traded more frequently tend to have poorer results than people that
Basically bought it and forgot it. And it sort of
Strikes me that what's going on with starting last
Year in covid leading
Up to this call GameStop thing, but what's going on with Robin Hood and free trading and people with more time and more money on their hands to sit around? It seems like a little bit of a repeat of that. And again, it's not identical and people have tried to maybe compare it. But are there some comparisons there? You've got a new crop of investors. And basically it was almost free to trade on discount brokerages 20 years ago and now it is free to trade. And would you expect to see the same kind of
Pattern that we saw the first
Where it's all fun until it's not fun anymore and then
Things go back to normal? Or is this the new normal?
It's interesting. Free is its own category in the human mind. When you look at behavior, when something is free versus when something costs a penny,
Effectively free, people will eat four times as much of something that is free then they will of something that costs a penny. And so it's just free is its own category. And so, yeah, before trades were five bucks or whatever, four or five bucks or whatever they were before, now they're free. But I got to tell you, free is qualitatively different, even though it's only five dollars. People feel emboldened to do things in a way when it's free that they never do before.
So that's one thing
That's not going away. The other thing is a lot of these apps make money from selling order flow. So they have a reason for people to want to trade, even though they're not. They're making money on the frequency of people's trades, even though they're not charging for the trades. And so in a very real sense, the user interface of many of these apps is incentivized to make people trade as much as they can and to do everything wrong, to compare their trading behavior to other people, to mimic the crowd. I mean, there's one that I won't name. There's one platform that very literally encourages you to mimic the crowd, and it's just crazy. So in a very real sense, they're telling you to do all the things that Odean and Bahbah and the rest have been writing about for years that are terrible for us.
But it's what happens
When what's good for the investor runs into what's good for the
Platform. And you can bet
That the platform is going to do what's good for the platform. And what's sneaky about is they can do it under the auspices of democratization. They can do it under sort of the cloak of saying this is good for investors. We're giving you what you want and we're giving you access. We're giving you all these things. Well, access in a very real sense, this isn't a popular comment. But like access the enemy of the average
Investor, the average
Investor needs to do less. They need less access. That trades should cost more. And people would be better
Off if things
Weren't quite so easy.
So I think this is here to stay.
I think this particular moment in time lockdown is still fairly widespread. Activities are still fairly limited. So people are still kind of bored and isolated in their houses. I think when people can reengage with the world a little bit, it'll abate some. But the free trading and all sort of the behavioral fallout of that is here to stay. I think
We have a portfolio tool on our belt
That we've used
Over the years. It's a magic eight ball and we would pull it out when somebody would come in and say things like, should I buy a GameStop? And we say, well, let me refer to the portfolio tool. And it was
Just a prop. It was just to
Show, look, this is crazy. I mean, how would I know that? How would you know that? I mean, the only way, you know, if you should buy or sell something specifically is if you have more information than the market in the chance of you having more. Information in the market or very little.
So isn't that
Kind of what's going on with the GameStop, EMC, all these other trades that are occurring?
It is, but my worry during this whole thing is that people are learning the wrong lessons. So there's a lot of people, a number of retail traders tripled in the
Last 10 years. The number of
Options traders has six in the last couple of years. So people are not just trading more. They're engaging in complicated trading and it's sometimes levered trading and trading that they don't really understand. And so the fear for me is that at a time like this, when things are a little
Frothy, there's a strong
Bifurcation of results. Like if you look at the GameStop thing, there's people that made tons of money on GameStop for no good reason, not because they had any sort of profound thesis or did any sort of reasonable due diligence like they heard about it on the news or on Twitter. They invested in it and they made a bunch of money. There's also people who are learning the other lesson about markets, that you can lose your shirt. There's people who are on the other side of these trades who are doing very poorly and are walking away with an idea that's sort of unnecessarily scary. I worry that they will be so snake bitten by the whole process that they won't return to do what markets really do well, which is to compound wealth slowly over a long period of time in a way
And not that scary. I guess that's
My biggest fear about this whole thing, is that people are just learning the wrong lessons. They're either walking away thinking they're trading gods or that the market is this terrifying place to be.
And neither thing is true.
It sort of raises the question for me, Daniel, is how do you walk that fine line? Because you've got really both sides of the coin right now at this point in the market. You've got the overconfidence, optimists who have made some good money over the last year by either being in the right place at the right
Time or what have you.
And they're very optimistic indefinitely into the future because, of course, why would this change? And then on the other side, we have people that are it's like they're so
Nervous and they listen
To the pessimists or the bears. And it seems that bears sound a lot smarter than bulls bears. They've done their deep analysis and they've evaluated valuations. And compared to previous times in history and
Based on their analysis, we to get
Out of the market by April. Twenty seventh, you've got these two types of people.
And how do you
Balance that off and walk that fine line with regards to, as you say, long term returns make money slowly over time. How do you fight the overconfidence on one hand and then the fear typical me? I get in just at the end, just before the big crash, and
That's my bad luck.
I'll give sort of a flippant answer and then I'll
Sort of expound on your real
I think the flippant
Answer that happens to be really true is that for the average investor, you shouldn't think about any of it. Like I mean, I think for the average investor, you should
Go watch hockey.
You shouldn't worry about maximizing the engine of your wealth. You are the engine of your wealth creation. You should make yourself the most marketable, high earning, wonderful to be around human that you can be. You should really focus on cranking up the engine of your wealth. That's something you can control. And then you should forget about the markets. You should spread it around. You should work with someone competent to hold your hand through the fire and you should go play with your grandkids. You should watch hockey, you should go run a marathon. You should do a thousand things that are more important than talking about the stuff that the three of us have to talk about all day. If you really are sort of convinced that keeping a finger on the pulse of the markets is important, and I would tell you that the research says that it's not, if you're really convinced that this is something that you need to do. I think the thing you have to understand is how we're wired. We are
Wired to be
Two and a half times as fearful as we are happy. We have an asymmetrical preference for avoiding bad stuff, then getting good stuff. If you lose one hundred bucks, you're two and a half times more upset than if you gain one hundred bucks.
And so you have to understand
That asymmetry and understand that the bearish news is always going to kind of scratch that itch. And the bearish news is always going to feel more articulate or better reasoned. But you also have to understand that over time it's a probability game. You got to play the numbers and the numbers say the market goes up seven years out of ten. And so being invested in staying the course is your best path. So I really strongly believe that the best thing you can do is just not think about it and go control the control of. By making yourself a better earner and a better person, and I think if you insist on it, just know that you're wired to be goofy, know that you're wired to sort of view this stuff through a prism that is sort of a doomsday prism run on.
Regarding last questions for Daniel before we
Jump into something more and more
Fun. No, I think we've covered a lot of ground there and probably that's load's for the listeners
And spend some time thinking about.
I like that you you, Daniel, made a preconception that we would just go and watch hockey. Yeah. So as good Canadians, that's what we do. Right.
I'm just trying to listen. I'm just stressed out and playing to my biases. Maybe you love baseball. I don't know.
Hey, listen, so we have a short speed round.
We want to take you through it. It's sort of a Canadian specific. At one point, having known that you've lived in Canada for a short period of time, we're hoping that you'll do better than our previous U.S. Guess. I'm sure you will. But, Greg, you want to start us off?
Well, let's start with something, because this is the province that Colin and I both hail from.
You spell Saskatchewan,
S.a.s., Katie, AWG and oh, so
Close. Oh, man, that was awesome. That was the
Closest, though, Greg. That was
Is it W8 in its EWTN. EWR so close.
You nailed it. Yeah. That was awesome.
I got greedy. I should have written it down and then read it. I wanted to be quick on
The a little cocky there and. That's right.
Yeah I did.
On those colder mornings in Atlanta. If there are such a thing do you ever wear a Tulk
That is a beanie. Hey, good job
You're killing this.
Yeah. Greg what do you got.
Have you ever had ketchup. Potato chips.
I have had ketchup. Potato chips. I love your country so much. Ketchup, potato chips are absolutely disgusting.
I hope to live in Canada.
My family had so much fun in Canada. I'm never going to say the word process and I'm
Never going to eat ketchup,
Potato chips. These are nonstarters for me.
The important thing is you actually knew what they were. So that's a point.
Well, and when you move to B.C. with your family, will you buy everybody a bunny hug?
Oh, no. I don't know what this is.
Well, you probably do. What is it?
A bunny hug? It is a hooded sweatshirt with the pocket at the front in Saskatchewan known as a bunny hug and also, I think in Australia. But anyways, that's a very specific hoodie.
It's a hoodie. Call it a bunny. Yeah, well,
This is a Colins thing. I grew up in Saskatchewan, had never heard of it. So it's a generational I think this is a generational thing. You're right. Yeah.
But yeah, if you Google Bunny, you'll find it.
My kids started calling stuffed animals stuffies. That's a Canadian word. That's an improvement
Americans stuffed animals. We call them stuffies. Now that's an improvement.
Oh, there you go.
Yeah. Sorry, didn't stuffies otherwise known as teddy bears, weren't they called teddy bears after Theodore Roosevelt is not a story I heard.
So, yeah, I think that's the story.
Well, maybe we will take you through anymore. Do we have any more Canadian ones going to go through?
Well, actually, you actually alluded to one.
What we normally ask our
Guests is, have you ever witnessed a sorry fight?
You had mentioned Canadians
Propensity to apologize.
So you've probably been on one end of
A sorry fight.
Sorry about that, Daniel. Yes, my apologies.
Canadians are so nice. The other thing I'll say about Canada is
Respect for pedestrians like in America, you're just get run down in a crosswalk like you better look out. And in Canada there would be a car one hundred yards from me and I'd start to cross and they would throw on the brakes. So nice. Everyone was so nice about the
Pedestrians and the bicyclists.
Well, not not only that. Well, wait until you get to the other side before we even start moving. So that's right. It might explain our
Traffic jams in Atlanta. You'll die. Don't try that in Atlanta.
Well, we were in New York City years ago and some locals gave us heck for waiting for the crosswalk light. I mean, I couldn't
Understand, like, they actually
Gave us a hard time about it.
Well, New York is known for giving people a hard time, so that fits.
Well, that's great. Well, Daniel, thanks again for being a good sport and for joining us. I know you didn't have to do
This and you probably
Have an hour. You could be doing something where you're getting paid or things like that. I didn't know if you knew that you're not getting paid for this podcast, but.
Oh, man, I got a fight. My agent. No, this is
Great, guys. This was
Fantastic. Thank you. For having me. All right, well, thanks again.
Sign off there
And say thanks and I don't know, maybe we can have you back some time and we can, I don't know, have a repeat.
I'll wear my bunny hug right on you.
All right. Thanks again. Thanks, guys.
Well, Greg, that was a fun discussion with Daniel Crosby.
It was, yeah, he's a great
Guy and he's got a lot of
To impart. Yeah, I'd be interested to spend
More time with him, but obviously we want to keep these episodes
To a reasonable
Length to keep our listeners engaged. But next time we are going to get into looking at the best and worst ideas that we and others have made or been around during our time rotating around the sun. And I think we're going to get into sort of specific investment things, of course, but I'm sure there will be a few other ones thrown in.
I'm sure they will. That's going to be fun.
All right. Well, thanks again, Daniel. And we hope to see every or not see them, but we hope you'll listen to us next time. Next time it is.
Episode 48 - How Goldilocks Invests In Retirement
Greg and Colin wrap up their retirement mini-series by focusing on how to invest during your retirement years. You can’t start at the product though, you must understand which balance is “just right” for you and your goals.
EP.48 - How Goldilocks Invests In Retirement
Welcome back to the free lunch podcast with Greg and Colin and Greg. Last week, we talked a lot about different layers of income in retirement. We went through the different periods of pre and post retirement as pre-retirement, being sort of ages 50 to 62, early period of retirement, age 62 to 70, middle retirement age 70 to 80 in late retirement, 80 plus. And today, we're going to wrap up our retirement mini series, which actually we've had a lot of people downloading the retirement episodes, I have to tell you. And we want to get into a discussion about investing and investment strategies during retirement years because there's some pretty serious misconceptions about possible or potential changes to investment strategies when somebody goes into retirement. For sure,
There's often people to talk about, well, I guess I have to just get really
Focused on GICs and fixed income and we'll get into that a little bit and just some fallacies about changes to investment strategies, because as those periods point out, somebody that retires that I don't know, the normal retirement date, what, sixty five, let's say
And if they live to ninety five, like, that's three decades. So let's talk about how investment strategies change or don't change upon retirement.
Sure. Let's dove in. I mean, so listen, prior to retirement, what do you think is the greatest source of wealth? The answer?
Well, it's written here yourself.
Exactly. I mean, so when you're working pre-retirement, so during your working career, which could be 40
Years from age 25
To age 65 or something, it's your ability to earn income that actually allows you to set aside
Funds for future use in
Retirement. And the other thing it does is it allows you to recover from market setbacks. So if you have investments
During a correction
Or a bear market of some kind, the income that you're earning
Really allows you to sort
Of make that back reasonably quickly. So I think a lot of people don't think about the fact that the greatest source of wealth for most people is their earning power and their income during their working years, not the money that you were in on your investments.
Well, actually, very few
People get rich
From the stock market. It's just their savings rate that actually
Brings them their wealth. That's right.
So this ability to generate income we talk about is human capital. And so in your prime
Earning years, the human
Capital provides the cash flow, funds your current consumption and allows you to save for future consumption, that's to say future lifestyle expenses in retirement. So when you're working this ability to generate income, it's kind of like holding a bond, a bond, as we've talked about many times, it's an investment that provides a regular stream of income and in ideal circumstances, that's dependable from one year to the next. And since that bond provides a significant source of income, many younger investors may choose to invest their savings in higher volatility securities like stocks in an attempt to grow their savings for retirement at the fastest pace possible.
Well, and we would
Actually usually counsel people that if they are younger, to have more invested in higher volatility and less and lower volatility.
That's right. And listen, this is
Not breakthrough information, but a lot of people, they don't think about, well, why should I have more stocks when I'm young and less stocks when I'm older or in retirement and there's a good reason for it. And that's because you have a source of income like a bond.
And that's what's called your job, your career, hopefully.
Yeah, exactly. Again, maybe a portfolio with higher exposure to equities fits the typical strategy of younger investors,
Of holding more stocks than those that are older.
So once you reach retirement, essentially you're human capital disappears
And in some cases it
Disappears permanently. Now, some people choose to go back to work in retirement or work part time or something like that. But basically the human capital element disappears and your income is going to be comprised
Of any pension income. So that could be
Company pension, KTP, old age security or income from your retirement savings
Plans, tax free savings accounts or non registered investments. And you
And Blair spent a fair bit of time
Talking about these various buckets or sources of income.
Last time we actually referred to them as layers of income because they are layers and it's kind of like peeling back an onion.
Exactly. So when you think about, though, the loss of human capital has implications for investment strategies after you retire in the event of a significant downturn in the stock market, you've lost the ability to replace that lost value. So for many people, they do look at their asset allocation strategies and make changes in retirement to include a larger allocation to some of the lower volatility securities, such as bonds or other income investments.
And this is kind of what happened a year ago when we had the global shutdown, economic shutdown and the same thing that happened in the global credit crisis. I remember talking to an 80 year old back then. And they said they lost 80 percent of their money, but the stock market didn't go down 80 percent, so they just had more invested in something that was higher risk, that just didn't make it.
And we've talked about that in
Other podcast, highly
Concentrated portfolios in certain sectors of the market, oil and gas being the one that is more common in Alberta where we live. Oil and gas did not behave exactly the same as the rest of the market and other sectors did extremely well. So for people that might have been lucky and invested in the tech sector last year, then they would have had a very different experience. So when we think about investing in investment strategies in retirement, some of the things we need to consider are the unique
Risks that exist for
And so let's just talk about
A few of those risks. So, number one, I would say, is the risk of living your money. So it goes without saying most of us would like to have sufficient resources to last our lifetimes. And the problem is we don't know how long we're going to live. So you look at some of the financial plans and some of them are built around assumptions of people living to age 80 or age 90 or whatever might be the actuarial average. But in the real world, there's going to be some of us living into our
90s and maybe even longer,
And particularly if you're starting out now in your 40s or 50s. And so the implications for our investment strategy is we need to be able to have a portfolio that will provide returns that maintain value near the end of our what let's call actuarial lifespan. And this is an argument for having sufficient stocks or equities in the portfolio to give you some growth. And that will last your lifetime and not just necessarily an average lifetime, because, again, as I say, you don't care about the average. You care about how long you live.
So and none of us are average. Exactly. We're all better than average at everything we do.
True enough. Exactly.
Now, it also speaks to the need
To have sufficient guaranteed income that you can't outlive. So for people with defined benefit pension plans, that's a lot easier. The pension plan basically pays you as long as you're alive now. And of course, because there's not as many defined pension plans out there in the real world these days as there used to be, we have to look for other sources of guaranteed income. So here in Canada, we have Canada pension plan, old age security, but those may not actually give us all of the income we need to meet our fixed expenses. And so one of the things when we're
Talking about investment
Strategy is looking at annuities as part of the overall investment mix to provide some guaranteed income to cover basic nondiscretionary expenses. So for people without a big defined benefit plan or something like that, we always believe in, I personally like to think that people will have enough guaranteed income essentially to cover their guaranteed expenses. And so what I'm talking about, there are basically nondiscretionary expenses. So you have to have a place to live. You have to be able to eat.
You have to pay for heat and electricity
And things like that. Those are nondiscretionary. You have to be able to pay those expenses. And so it's nice to be able to match up a level of guaranteed income
That will meet those expenses.
And we're not going to get into annuities too much today rate because it is a tradeoff.
That's right. And I think what every individual retiree wants to look at is, OK, well, how does my income and how do my expenses line up? How much of my income is guaranteed? And is there room for something like an annuity that will provide a guaranteed income for as
Long as I live? Greg, sorry
To cut you off. I got one point on that, something that Blair and I talked about last week. If you don't know that number well, you better do a financial plan to get to that number.
And where can somebody that's listening to this get some financial planning from?
Well, I wonder.
I guess they could speak to their investment advisor and see if those kinds of financial planning services are
Available and if they're not happy with that investment advisor, where could they go for that planning service?
Well, gee, I don't know.
Well, maybe to the CME Group.
Well, of course, when I talk about your advisor,
That's who I'm suggesting you need to have an idea. And as we've
Talked about this a couple of episodes
Ago, you have to
Have an idea of what your lifestyle and what your expenses will be in retirement in order to build that investment strategy, to deliver that amount of income that you need. And again, as I say, things that provide regular income or guaranteed income might play a role in that. So the next risk I want to talk about, which is something that people might not
Think about in a lot of
Detail, but it's called sequence of return risk and sequence of return risk and have a significant impact on investment strategies. So what is it? Well, this is the risk that's created in investment portfolios when money is being withdrawn on a regular basis as compared to when money is left invested for a fixed period. So let me see if
I can describe how this
Would work without the benefit of visual aids. So let's look at a few scenarios where there are no withdrawals being made, so let's say during a period prior to
Retirement, an investor has money
Invested, they're not adding to it and they're not withdrawing from it. It's just a fixed amount of money.
So this is the preretirement this is what we called the age group, 50 to 60 to roughly. Sure.
Just an investment portfolio with no cash flows in, cash flows out.
And so let's talk about some theoretical returns.
So let's talk about a five year time horizon or five year investment time. Let's say in year one, the return was 15 percent. Very, very good. Positive year, year to was 13 percent.
Pretty good year,
Three, 11 percent. Still good year for negative five percent. What happened? Well, something went wrong in the markets. They went down and year five, negative seven percent. Oh. So when you look at that scenario, the total return for the five years is twenty seven percent and the average annualized return is five percent per year. Now, in this scenario that I just
Walk through, all of the
Positive returns were in the first three years and the negative returns were in the last two years of that five year time frame. Now you can change the order of those returns any way you like, say, put the negative returns in the first two years and the positive ones in the last three. So negative seven in the first year, negative five and then 11, 13 and 15 doesn't matter. In the end, you're going to have a twenty seven percent total rate of return for the five years or five percent annualized. And if you want to play with the numbers, you can put them in any order you want. The result will always be the same.
Well, this is just math.
It's math. It's just a compound annual return. You just multiply the returns all together and you get five percent a year. So that's the situation. When you're leaving, everything alone doesn't matter. Order of returns. The situation totally changes when you're withdrawing funds from a portfolio on a regular basis. You ask the question a few weeks ago, what would you do if you had a million dollars? Well, let's say you've got a million dollars invested in your portfolio and you're retired. The rate of return is
Five percent, the same five
Percent that I just talked about in the previous example. And let's say we withdraw sixty thousand dollars a
Year, so we're withdrawing
Six percent with sixty thousand and six percent of a million dollar portfolio. And our return is five percent a year. So in this case, we actually would expect the portfolio to decline over time because we're withdrawing more than we're earning. And in fact, if you were to earn a constant five percent, let's say you took your million dollars, you got five percent every single year. You withdrew sixty thousand dollars or six percent every single year. The value at the end of thirty years could be a typical retirement lifespan. At the end of that 30 years, the million dollars would be three hundred and eighteen thousand. So that's just by pulling out more than we're earning
Every single year. Let a lot more.
At first we're only taking out an extra one percent,
But over 30 years it's going to have an impact.
And that million dollars, as I say, will be worth three hundred and eighteen thousand dollars.
That actually makes sense because you're as you say, you're pulling out more than you earn.
You're depleting your capital. And every subsequent year, of course, the amount that you're withdrawing is proportionately a bit higher than it was the previous year. So that's earning a constant five percent every single year, which we know is the only thing that will never happen. Never we don't make many guarantees in this podcast. But I think I'm going to guarantee that we're not going to get five percent out of investment portfolios every single year.
We're not supposed to use that.
Well, sorry. It would be my guess that the very strong likelihood of earning five percent every single year would be unlikely now. So let's say the sequence of returns in each five year period of that
30 years was like the
Example I just gave earlier, where the first three years the returns were positive and the last two years the returns were negative. And we just repeat that sequence over and over again. Well, at the end of thirty years, you'd actually have seven hundred and sixty three thousand dollars. That's compared to three hundred and eighteen thousand if you just got the five percent every single year. And that's because the returns were stronger in the early years.
And so the portfolio
Was allowed to grow a lot more before the
Impact of making those
Withdrawals really kicked in. So that's almost twice of what you would have got. However, here's the problem. If you did exactly the same experiment, starting with a million dollars
And the negative
Returns occurred in the first two years of each of those five year periods, you'd actually run out of money after twenty seven years. So the difference is, gee, with the different sequence of returns, you would get somewhere between you'd be out of money after twenty seven years or you'd have seven hundred and sixty three thousand after 30 years. And so that's a that's
Very easy difference.
It's a very
Dramatic difference and it just
Highlights the impact of having negative returns in the early years of a. Portfolio where you're making regular withdrawals.
Yeah, and people will say, well, that wouldn't happen to me when I retire, it's going to be five percent a year forever. But somebody that retired in 2008, their first two years out of the gate, would have been negative.
And that had huge impact on people that chose that exact time to retire. And so, again, it means you can't exactly time that I mean, people are going to retire when they're ready or in some cases they might be forced into retirement. It just highlights the risk of that sequence of return risk when you're withdrawing funds. So what does that mean for investment implications? Well, what it says is that if you're too heavily oriented towards stocks, for example, it could expose you to this risk by having extremely early, poor returns, as we talked about in the 2008 example.
And so with the
Poor early returns,
It leads to a faster
Reduction of your investment principle and therefore the risk that you might run out of money too early. So one other risk that I really
Want to highlight, because it's so important
During retirement is inflation risk. So inflation is always a risk for investors. But when you're working and earning income or human capital, as we talked about earlier, typically wages and salaries increase roughly in line with inflation. And so the purchasing power of your income remains relatively constant during those working years. However, once you retire and your salary is no longer a source of income, then expenses could increase while your income remains constant. So in any planning exercise, we need to allow for increasing income to cover increased expenses over a long period of time. And just to put some numbers around this, let's say your annual expenses today are five thousand dollars a month or sixty thousand dollars a year with only two percent inflation, those expenses will grow to over 9000 a month or one hundred and eight thousand a year over that 30 year time frame that we talked about earlier. So you're talking about going from sixty thousand a year to one hundred eight thousand dollars a year for exactly the same purchasing power.
The reverse example of this is always when you have neighbors that tell you that they bought their house for fifteen thousand dollars, but it was like in 1960.
So exactly like who cares?
And when you work it back, it works out to about two to three percent a year. Yeah. So, again, when we talk about inflation, that has implications for our investment strategies during retirement. And it's kind of
The same thing that we talked
About with regards to longevity risk or the risk of outliving your money. There needs to be enough growth in the portfolio to allow for your assets to grow during the withdrawal phase of retirement. And if you are, for example, in a defined benefit pension plan or if you're considering purchasing an annuity to cover your expenses, you would certainly want to have the option that allows a cost of living adjustment in those types of income sources. So when you look at those three risks that I just talked about,
Some of them are competing.
In some cases, you need more equities in the portfolio to ensure you have enough growth to maintain the portfolio over time. And in some cases, the sequence of return risk you want may be a little bit less equity. So that poor negative years early
On in your withdrawal
Time period doesn't set you back too far off your goals. So, again, it's, again, very individual and it's all a critical part of the planning process to make sure that we've got the right mix of equities and fixed income in the portfolio.
Well, I think that's the key. Everybody's looking for us to answer the investment
Question, but the answer is it
Depends. It depends on how much you need to fund what your time horizon is. And that will determine how much risk is required for your portfolio. And then it kind of depends what happens in the markets.
But I want to focus on trying to answer that question for
Listeners like the investment
Question, because most people start with the investment question as the first thing, and then they work backwards and we're saying that's the wrong way of doing it. Start with the planning and work towards the investment.
Exactly. So when our work with clients,
I guess we sound like a broken record sometimes, Greg, but what do we focus on, like asset allocation, diversification, all those good things. But they're there for a reason. So let's get into some rules for investing after retirement. I'm just going to name them out first and we'll just spend a minute or so on them. So the general rules for investing after retirement, number one, you already mentioned be mindful of risk. Well, that's pretty obvious number to watch out for inflation. You just talked about that. Three, think like Goldilocks. I'm going to get into that one in a minute for breakdown your retirement into five year segments or segments, whatever they might be. I think I'm on number five, my number five, one, two, three, five. Consider real assets for diversification and inflation protection.
Six, look to
Fixed income diversification and tax advantages. Seven, have a. Drawdown strategy, which you just talked about, and the last one is have an estate plan so listeners might think, well, OK, well, what do I invest in when you hear those things? What kind of answer can you give them when they say, what do I invest in? Like, that sounds good, but what do I invest in, Greg?
Well, I think we go back to the basics of
What we always talk about. You invest in a diversified portfolio of stocks and bonds with an asset allocation strategy that reflects the amount of risk you're willing to take or able to take, but only the amount that you need to take in order to get the return that you need to provide the income in your lifestyle and in retirement.
It's perfect and exactly right, of course. So being mindful of risk and you talked about this is that if you take on too much risk in a period where you don't have a long time horizon, then something happens. There's substantial consequences to that decision or there could be. So getting
Back to that fundamental
Belief that be diversified and focus on your asset allocation and that asset allocation comes from your plan, how much risk do I need to take?
Exactly. And I think what's critical is that people only take the amount of risk they need to take. If you only need four percent in retirement to reach all of your goals, then why would you
Take on risk in
Trying to achieve 10 percent?
When I just went through a financial
Planning exercise with a client and we just did that in the outcome, it came up that one of the options was to not take any market risk at all, that they had enough saved up, that they actually didn't need market risk. They could literally just leave it in cash. Of course, they chose to have a little better than cash as an outcome. But that watch over inflation I won't get into because you already talked about that. Think like Goldilocks, this one.
I like this
Idea. And it's just what you talked about. If your analysis, your financial plan, your investment analysis comes out and says you need to have a five percent return to fund your retirement, similar to your example that you went through, why are you taking on risk of a portfolio that has an expected return of maybe 10 percent? Because what if it doesn't go up 10 percent and it goes negative 20? So the think like Goldilocks is to get the just right investment strategy. So how is the Goldilocks story go? It's like
The porridge. Yeah, too hot,
Too cold or just
Rest. Right. You want the just right portfolio that can only come from doing the planning.
Breaking down your retirement into segments is important as well. I mean, your needs when you were sixty five are going to be different than when you're eighty five. So a discussion we often have with clients as well. When I'm sixty five I want to travel a lot, but when I'm eighty five I probably am not going be traveling so my expenses are going to go down. I don't actually believe that to be true. I think your expenses just change.
Exactly. So you've got to
Have a portfolio that's going to help fund that
And the idea of breaking down the retirement into segments, whether they're five years or not. But that sort of ties into what we always suggest to people when we talk about revisiting their plans, because if you're not revisiting your plan every five years, then you're probably missing some very dramatic changes. Changes happen without us really paying a lot of attention to them. But when you look at what happens over the course of five years, there's probably been a lot of changes.
We'll just look at the last five years.
Exactly. And so it makes sense that you're going to revisit your plan, check your assumptions, make sure that the previous assumptions you made are
Still valid or make changes to them.
And at that point,
To the investment strategy will be warranted based on those updated plans.
Exactly. The next one was to consider real assets. And now some people might have a problem with this one. What I'm talking about here is in our model portfolios, Greg, am I promoting our model portfolios?
Yes, you are.
Of course I am, because I think they're excellent. Of course, I'm biased. And of course, I believe they work. But in our models, we have a five percent exposure to an asset class called global real estate. And it's included because it's a diversified asset class that doesn't tend to move directly at the same speed or direction as other markets.
Exactly. And that's what you want out of a diversifying asset classes. You want something that's not perfectly correlated to the other asset classes you already hold.
Look to fixed income for diversification and tax advantages. Now, as the second word of fixed income is income, that's where you want to hold it firstly. But as you pointed out, with interest rates being so low, inflation probably above interest rates right now, there's a negative return of negative real return. That's right. But that's not always the case. And there's two reasons. Old fixed income, one is for income and the other one is to offset market risk. And both of them are important. Now, the next part of it is that that fixed income is going to attract your marginal tax rate. So holding fixed income vehicles makes more sense in a registered account.
But there are cases where you can have some fixed income securities that are treated as capital gains income. And in that case, you'd want to hold the. In a non registered account, so not your TFSA or your RSP, but remember, the overall thing is fixing to provide some form of income, but it also provides downside protection.
That's right. I think it's
Safe to say that for most people that we encounter, all of those people would want to have some fixed income in their portfolio, just like all of them would want to have some equities in their portfolio.
Exactly. And it's going to vary. And again,
As things change, the proportions may change. But you have to look at all of these asset classes and how they contribute to the overall return.
When I look at it this way, my mom and I
Have exactly the same investments. Exactly the same is just the way things are different, because our time horizons are expected. Time horizons are different. So getting back to answering that question, what should I invest in? Well, you should invest in my mom's portfolio and just adjust your waiting to whatever your planning tells you. And that's a plug for my mom, by the way.
Well, OK. Are we are we recommending your mom?
Well, that's kind of weird. She's a wonderful
Next, have a drawdown strategy. And you talked
About this in your
Part there. But the drawdown strategy is important because when you go through things like last March, March of twenty twenty, if you're drawdown strategy was to take out a bunch of income in March when the stock market was down 35 percent, that might be a problem. But as you talked about as well, there's different layers of income that
You can draw from.
So even when the stock market's down, let's say you had an asset allocation, Greg, of, I don't know, 60 percent in bonds and 40 percent in stocks. And the stock market's down.
Thirty five percent like March.
And you need to pull out some amount. Five thousand dollars as in your example. Five thousand dollars. Well, where would you take it from?
And I think the answer is you would take it
From the fixed income,
Which had done relatively
Better than your equities while leaving the equities a chance to recover in value. And by the way, on another note, you might also rebalance at the same time.
But that's for a different podcast. Exactly, because if you take
It out of your equity side, what did you call it?
Sequential risk sequence of return risk? Yepp, sequence of return risk.
That's a real thing. You're giving up all kinds of future growth. That's right. So have a drawdown strategy.
And the other thing, by the way, and we haven't really talked about it
Because we always talk in terms of our
Ideal situations. And so we plan our lifestyle in retirement. We have enough assets to cover that. And the reality is for many people is that if all of a sudden your income is
Reduced because of negative
Returns in the market, sometimes you have to adjust your spending and your plan will hopefully accommodate that, because as we talked about earlier, there's going to be lots of nondiscretionary expenses, which are shelter, food,
Clothing, et cetera. But there's
Also discretionary expenses and which would be things like travel or
Entertainment, meals out,
Things like that. And some people, unfortunately, when bad things happen to the overall portfolio, whether it's from a bear market or just a correction, sometimes spending plans have to change until the market recovers or the portfolio recovers. The value that you expected.
Yeah. So maybe it's not organic avocados that you're buying right now, but you can still buy some vegetables, I bet.
Absolutely. No, that's right. It's just a matter of having flexibility in the plan to understand that things may not
Work out exactly as what's written
Well, do they ever work out exactly as what's written on paper?
Well, they don't. And sometimes we even joke about the fact that when somebody is presented a plan, it's probably somewhat off when they ride down the elevator to leave the building.
And that's just to say
That things change. A lot of these plans are built on assumptions. And the longer you're in retirement, the more accurate your estimates of things like lifestyle expenses, et cetera, will become,
Highlighting the importance of not doing that planning once. But you're doing it regularly. Lastly in this section is have an estate plan. And what I mean by this is you need to have those three documents in order. You need to have a will so that everybody knows where your assets are deemed to go. You need to have power of attorney and you need to have personal directives. Those just need to be done. So if we go back to answering the investment question, somebody might say, what does having an estate plan have to do with answering the investment question? And my answer would be, it depends on what you want to leave to your heirs. If your goal is to leave a legacy to your family or I do know to an organization, well, that's going to determine your rate of return is required to fund that. So the only way we can answer the investment question and maybe we should have started this way, Greg, is what be diversified?
Absolutely. It sort of wraps it all up from our last three podcasts in this series is having a really good understanding of what A you want to achieve in retirement, which is a combination of things. It's your lifestyle. It's any giving that you want to leave at the end for heirs or charities or what have you. We've talked about
Philanthropy. As well recently,
So I think it's really
Having as strong or a
Good an understanding as you possibly can have in advance in order to build the investment strategy that will help to deliver the assets that you need to fund it. And all of the usual rules for investing will remain in place.
You need a well diversified portfolio.
You need a strategy in the first place and asset allocation strategy that may be subject to change over time upon sober reflection and updating of things like plans. But you need to be diversified to avoid some of those specific risks that can happen. If you're not,
You need to have an asset
Allocation plan that's geared towards giving you the rate of return that
You hope for and expect. You need to rebalance and you need
That you're doing this, that
You're controlling your costs. And again, once you've done those three things, then the rest still will be up to the markets
And the decisions you make during that time period. Because I want to make something very clear to listeners. I'm a little bit worried about what's been going on in people's accounts these days. Greg, I've heard of a lot of people who say, well, interest rates are so low, what's the point of having fixed income? Let's just put it all into dividend paying stocks. That is a huge mistake or a potentially huge mistake, because as what happened last March, stock market can go down very quickly. And if you're withdrawal strategy is based on collecting those dividends,
Well, then you've got a problem.
Well, then again, I think the other thing, too, is that there's unknown connections or connections that people just don't think of. So, for example, in the dividend discussion and we're not saying we are not
Fond of high quality
Companies that pay good dividends, we don't discriminate against those.
And probably all of our
Portfolios have them in one form or other. But the thing is that when you look at particularly in the Canadian context, which companies tend to be the high dividends, they tend to be things like utilities, pipelines, real estate, those kinds of companies.
Well, they also share a common feature,
And that is that they're all quite interest
Rate sensitive, those sectors
Of the market. And so the same reason why bonds are paying low yields, these stocks should be doing well. And if we go into a period where interest rates rise based on inflation expectations, whatever that is, then that can have a detrimental effect on those kinds of companies. Specifically, sometimes you pick one strategy and then all of a sudden you're accidentally exposed to different risks that you don't even think about at the time that you do it.
So as always, as you point out,
Don't abandon excellent asset allocation strategies for short term reasons.
Right on. I think that wraps up our retirement miniseries.
It does. That was fun. Yeah, that was great. And hopefully it was helpful. And just to highlight
Some of the key elements that we think are important when you're thinking about retirement or developing a retirement plan,
A really important discussion. And so we do want to let everyone know if you have questions about the stuff, I mean,
Reach out to us. Absolutely.
I do want to also let the listeners know that as we talked a little bit about next week, we've got Daniel Crosby joining us. And Daniel Crosby
Is a behavioral
Finance expert. Yes. And that's going to be a good discussion because he's going to get into why people make the decisions they make, even though they might know that they're the wrong ones.
Exactly. Just talking about how being human can lead to certain behaviors that may or may not be beneficial in the long run or not looking forward to it.
All right. So next time, Greg.
Episode 47 - “FUN”ding Retirement
Blair Howell and Colin Andrews carry on with the retirement mini-series, discussing various ways to fund retirement. Digging into the importance of layers of income in funding your retirement to live the life that you want to live. Enjoy the show!
Episode 47 - “FUN”ding Retirement
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. Hosted by Greg Kraminsky and Colin Andrews of the CM 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 Markets-work.com.
Welcome back to the free lunch podcast with Blair Howell and Colin Andrews, that's me and Blair. Thanks for coming back to the show.
Thanks for having me back.
We're carrying on with our retirement miniseries. Last week, Greg and I discussed lifestyle planning. As in what kind of life do you want to live during retirement? Something you and I have talked about, about how retirement is a transition and not a destination.
It's true. It's very important.
And the Japanese refer to retirement as your second life, a time to be the best you and focus on things that bring you happiness or inner peace. That sounds pretty cool.
That's what you're looking forward to, isn't it?
Well, exactly. So today we're going to talk about the tools to fund that period of inner peace because we've spent the last couple episodes talking about the lifestyle portion. But today we're going to talk about how to fund it. And we brought you on the show because you're our subject matter expert on financial planning within the CM Group. And it's great to have that resource and have you back on the show. So today we're going to get into the various methods of planning for funding retirement, different layers of income. We're going to talk about Canada pension plan, old age security, various defined benefit and defined contribution pension plans, strategies for different registered accounts and even the sequence of withdrawal and something called sequential risk. Now to get us started. Blair, I'm going to play us a little song.
Isn't that a fair statement?
I think for some people, yeah, it sometimes has the opposite effects of what they intend.
Kind of like a young Justin Bieber having 100 million dollars and people being upset with him for raising his Lamborghini or Ferrari down the street.
I'd like to get mad, but I'm trying to think at 20, if somebody gave me that type of money, I couldn't even imagine what stupid things I'd be doing.
You do the same thing.
So listen, let's get into it to the difference between retirement planning and retirement funding. Now, I want to talk a little bit about the different stages of income requirements and spending requirements. Early years as travel, possibly later years is focused on more like estate planning. So according to an article in Investopedia, just in December of 2020, they identified four financial stages of retirement, the first one being pre-retirement. And this would be ages 50 to 60 to a category that you and I are almost in, by the way.
The second being early period of retirement, ages 62 to 70, the third being middle retirement age 70 to 80 and the fourth being late retirement, which is 80 plus. So we are a middle age and we're talking about our middle retirement years later.
I mean, those numbers, I mean if they're going to be different for everybody. But we look at probably the most important period there, which will probably focus on is that early retirement, that first step, which I have a big highlight through.
Yeah, there you go. So I want to talk a little bit about the various methods are planning to fund in each type of retirement. There's no one right answer. And I know you're going to use two words later in the show. And they are. It depends.
My favorite saying.
The first one I would talk about is called the four percent rule. Now, this used to be called the five percent rule prior to the global credit crisis of 2008, but it's been altered to the four percent rule. And what it is, is it's a four percent withdrawal rate. So this is something that was worked on by Russell Investments. Blair, I got to ask you, are we promoting Russell Investments?
No. This is just work that they did.
Well, yeah. You want to take the best research.
Exactly. So they previously stated that one dollar of retirement income is derived from every twenty dollars of retirement savings. That would be five percent. Now, as I mentioned, they've altered that to one dollar of income being derived from every twenty five dollars of savings. It's just simple math. So if you need if you've done your planning, your retirement planning, your financial plan and it says you need seventy five thousand dollars a year just picking a number to fund your retirement expenses, then you just need to multiply seventy five thousand times twenty five dollars, which is 1.875 Million dollars. So it's just a simple tool and simple calculation that would require you to know how much money retirement is going to cost you. But what it doesn't talk about is it doesn't talk about depleting the assets or selling the assets off. So I think in this example, it's saying that it would kind of go on forever.
Well, yeah. And a lot of that Russell research comes from pension studies. And also this is based on your saving your own money. We'll kind of talk about other sources that will come into play.
Exactly, so the second one I want to talk about is funded ratio or funded ratio status, and this is something that somebody who we had on the show, Tim Noonan previously at Russell Investments, spent a great deal of time working on funded ratio status for individuals. Funded ratio is used to calculate if a pension fund is fully funded or underfunded based on its current and future cash requirements. So Tim has been working on this for quite a while and he likes to relate it to an individual rather than just to a pension plan. And he writes about it in his book called Someday Rich. He calculates it as total estimated assets divided by retirement savings goal, and that gives you a percentage. So if you done a financial plan and you know that your total assets, that being savings, investments, real estate, whatever, was a million dollars and your plan said you needed a million dollars in retirement savings, then your funded ratio would be one hundred percent. So it's simple math.
So because it is simple math, it doesn't necessarily factor in a couple of things like inflation and tax liabilities. So even though at first it might appear that a hundred percent funded ratio is one hundred percent, that might not actually be true.
And just kind of jump in there to that, although this is kind of a rule of thumb and I always go back to my it depends saying, the reality is this is actually a really nice estimate. If you're going to use one, it probably gets you a lot closer to what you will need than just 70 percent of income. That kind of old.
The old rule of thumb type of stuff is just old rules of thumb. But I agree with you that this is more accurate. I mean, it has to be because this is the same calculation that pensions used to fund their pension payments.
Yeah. And people who get their statements of if they have those defined benefits will always have a fund at ratio somewhere on the bottom of the sheet showing just for that particular pension.
Exactly. So if the projected funded ratio is above 100 percent, I guess you have options. You have reduced your longevity risk. So that's the risk of outliving your money. You may have the option to retire earlier than you first expected. You may have the option to increase spending in retirement, which is always a fun conversation to have. And there's a potential for legacy assets. But if that projected funded ratio is below 100 percent instead of options, I think you have choices which I'd rather have options and choices.
Well, that's just it. I say to a lot of clients, I don't think anybody's ever got mad at us that they save too much money in retirement. I wish I would have spent more or not saved enough. You always want to have options.
The choices you could have if it fell below 100 percent is you've increased your longevity risk. So in other words, you may outlive your money. You may need to save more. You may need to take more risk by adding more equities to your portfolio to try to get a higher expected rate of return, which has consequences to it, by the way. And you may need to lower your standard of living or you may need to work longer than you thought. So I just want to play another little song just because that's what I'm doing today. It's kind of an oldie, but it's one that people will probably recognize if I can queue it up right.
[music playing in the background]
Little Pink Floyd.
Love Pink Floyd.
Who doesn't like Pink Floyd? My kids don't know who it is though.
There you go grab that cash with both hands and make a stash. I don't know how you do that in a calculated your funded ratio status, but I guess you could do it on paper. So Blair, why don't we get into the layers of income?
This is important in terms of funding your as you've said, I've already talked about what your values are, what your retirement plans are. So kind of step 1B is you've got to pay for it. And so we look at different incomes coming in. So for years most of us are saving and we're probably saving in a variety of buckets. So we're putting money into an RSP. Some of us have work pensions that are just coming off the paycheck. You're going to have off your paycheck as well. You're paying into a pension plan. And for those fortunate enough to kind of have extra money, you may be putting money into a tax free savings account or not registered. So there's a variety of options that you're probably paying into these different buckets. So when we kind of look at it, if you plan properly, kind of going that pre-retirement and you're putting money into the proper buckets, you're most likely going to hit your goal. You know, where we're kind of getting that funding ratio of one hundred and ten percent. We've kind of hit where we want to be, but now we want to go to the point of we need to start taking money out of those buckets.
And it's not a scary thing for people, though, feel like they've spent all their time working to save, save, save. And then you get to turn around, start taking the money out.
And that's why at the start, we kind of said that first few years of retirement is so important because it is stressful. People look forward to retirement. It's always this when we say it's a transition rather than a destination, we can't look at it as a big holiday. You know, it's going to be a big life change. So it is a little scary that suddenly. Well, I need to take my Canadian pension plan right away and I need to do this. And should I spend this much? And a little planning is going to take away that anxiety. So going through and taking a look at, OK, I have all these these different savings avenues, where do I start taking money? And I think what I find is right away, as soon as retirement hits, you talk to to people who haven't done the planning ahead of time and they're immediately going to apply for Canadian pension plan. I've already put my application in. It's like, well, let's talk about that or I start taking my pension. Right. Well, let's talk about that. Do you need to and that's where we come from layering is really that not only what buckets we're going to take money from first, but when to take them because each one have some consequences. So we talk about layering. You have all these buckets and if you're fortunate to have four or five different, your RRSP and your maybe a defined, ideally defined benefit, but a defined contribution pension through work, you might have work RRSPs. You have a Canadian pension plan that you may have access to. You may have.
Old age security.
Old age security. And so I think it's important to kind of talk about maybe how we view them. So if we were to sit down with our clients of how we kind of present and really how I look and you look at these different instruments. So we've kind of talked about fixed versus variable.
Now you're not talking about mortgages. You're talking about fixed versus variable layers of income.
That's right. And we did talk about kind of budgeting as well, that difference between a fixed let's fixed income or a fixed cost in your budget. So it's the same idea, fixed layers of income. And I sometimes referred to as the kind of flexibility. One might be more flexible than another. So fixed would be almost pretty much an annuity. So your Canadian pension plan, your old age security, if you have a defined benefit pension plan, those are essentially annuities. They provide a lot of certainty to you. You're going to get a set amount and you're going to get it for life. And so it kind of that can pay for the necessities of life, but there is options in those as well. Take the Canadian pension plan, for example. So we usually say retirement at 65, but we all know we can take your Canadian pension plan early. So you retire early and you can take it as early as age 60, but you may not get the full amount. Most Canadians don't, because there's a long formula in terms of getting the absolute full amount of Canadian pension plan. Pretty much you have to soon as you hit 18, you had to be working full time for
Isn't it like 40 years?
Yeah. So it's for those who've worked for thirty four, you're going to get a substantial amount, but you may not get your full amount. So but if you take it early, I think the formula's like point six percent every month. Before year sixty fifth birthday goes off, so if you take it at age 60 instead of 65, you're going to lose 36 percent of your annuity on the opposite end if.
Annually. And if you go the opposite way and you wait till age 70, you're going to get a bonus of 36 percent.
Annually. That's a pretty good bump. But again, it depends on the person. And that can be true to some extent with the old age security where you can't take it early, but you can defer it to age 70 and you can increase that old age security by thirty six percent. And you notice for those who have defined benefits, there are options to have early pension, sometimes a deferred pension to kind of get more. So you want to be aware of what options, because with those annuities, for the most part, once you take it, that's it.
You can go on the CRA website and calculate your CPP and OAS benefits, right?
So you can go in and look, we encourage clients to do it and just see what those benefits look like. And for some, it doesn't change too much if you take it a year earlier. But for some it may be a bigger deal. But yeah, that's why it's really important to kind of know your options and those, because, like I said, I think the thing to keep in mind is a couple of things A, once you've said they're now set for essentially the rest of your life, there will be some inflation adjustments and they may change to some extent. But with annuities, there's no capital. If there's an emergency or you need more money, really, you're just here's your monthly income. That's it.
So there's no liquidity to it.
Exactly. No flexibility.
Which actually let's just get in a little bit, because people that have defined benefit pension plans, you mentioned it, that's an annuity. But lots of times they have the option of converting those to another form. It can move into a LIRA. Is that right?
You can when you do that, you can take that freedom. So you're giving up certainty for freedom to some extent. And if you decide that, you know what, I want the freedom on my defined benefit, it gets a little bit complicated because there is a formula of how much you can commute from your defined benefit to a LIRA tax free. And then there is tax consequences after that, that if you have RRSP room, you can add to it. But.
Sounds very complex.
It is. And for some people it makes lots of sense especially and we were going to talk when you go into variables is when you move it from that, I'm going to rely on government Canada, pay my pension for the rest of my life. There's an appeal to that. Same time You give up a lot of your if something that's important to you as future estate planning, leaving money for kids. If there's health problems where you think, I don't think I'm going to make it to age 75, then maybe it makes sense to commute that pension and having that funds that you can do with what you want.
Just to summarize here for myself and for anybody listening. So the fixed income options, they're fixed. Of course, there is an option to convert a defined benefit pension plan to a variable option. But let's get into maybe what the other variable layers would be.
An obvious one is your RRSP, which will be converted to a RIFF. So a registered retirement income fund. So in some extent it turns into there will be some restrictions. So we go kind of from very flexible to less flexible. So a RIFF would kind of be a little bit more on the flexible side, where at age 72, you've converted it from an RSP to a riff and now there's a set amount you have to take out every year. With that, there is obviously some restrictions, but you can access the capital in it if you want to. There'll be tax consequences. But if there's an emergency or for some reason, you really need more money, it gives you that flexibility to take that money out of the roof. So, again, it goes into that flexibility and then kind of on that same point, on the defined benefit, the other part of that organization, Pension Plans, is a defined contribution, which is a bit of a it's considered a work pension, but really it's just kind of a group RSP. But there are pension restrictions on it.
So you can't cash it out?
You can't, but there is a way to commute them. You're essentially a defined benefit is your company or if it's a government pension plan, are running that. They're just paying you out an income. A defined contribution is you pick what you're saving, so you pick the investments. They're really just giving it to you and then when you retire, it's up to you to run it. So there is minimum maximums you can take out. And I don't know how deeper we want to go into this because.
We can really do a whole episode on the difference between defined contribution and defined benefit. But yeah, I think isn't it that kind of like historically all companies had defined benefit pension plans and then there was this loophole that was created where they were able to pass on the onus of operating a pension plan to the employees, and it was marketed as giving those employees this great benefit of now they have the flexibility to do something with it, when in reality it was just taking the future liability from the company and putting it on to the employees.
Well, that's exactly it. The fine benefits are expensive to run and the risk and the onus of paying that pension is on the company. So if that investment, their pension managers are mismanaging the funds, well, the company's got to make it up. You kind of understand why companies want to move to a defined contribution where really it's just part of your compensation and we put some money into this. Good luck.
Yeah, I'm sure you'll do well with it.
And yeah, other variables, tax free savings accounts, which they're not new new. But over the last 30 years, they're relatively new and they're a great option for retirement to give you a lot of flexibility where you put money in. There's no tax deferral, but anything growing in it is tax free and you take the money out tax free. So it's a great option for I don't think it would be considered kind of that layer of income, but it's there for maybe unforeseen expenses. If you want to give money, putting excess money from your retirement, if you have it into it. And then the non registered portion is probably that in the tax free would be your most flexible options where there are some tax consequences with it. But really, there's you don't want to sell anything. You don't have to.
Kind of keep it and go on. So with all of those different options and some people may only have one or two of these options, others, quite a few of our clients will have five or six of these different options. It's really going in and finding a balance of when do I take my pension? Does it makes sense to spend some of my most flexible money first and wait for those bigger annuities to build up? But each one and it also depends, there are some pension splitting with spouses that you can do and there are some benefits that go along with pensions that you got to consider. So there is I could talk for hours. I'm sure people are already closing their eyes on this stuff. So there's a lot of things we look at. Essentially, you want to know your options. You want to know what the best balance is of having an income that will pay for the retirement you've planned out. And really the fixed incomes will supply a base is how we usually look at it. And then making sure your position for emergencies or estate planning, passing money on to family. If those are the things that are really important to you, then maybe those other assets or things you want to keep the non-registered or the tax free, something that you can pass on because really like something like the old age security, there are no benefits.
Well when you die, it's over.
When you end, it ends.
So this can be a pension plan, does have some spousal benefits, but there's no money going to a estate and that goes the same with defined benefit. So you got to match it up with your retirement plan and what your values are and then finding that balance of when to take things out.
Well, and so all I hear when you say all of that is if you don't have a financial plan, understanding your layers of income and how it's going to compute for you in your own funded ratio status or whatever is almost impossible.
Well, it's you're going by luck.
Like you're just picking a number. But you need to understand where each portion of that number is coming from. So I know we started the segment by saying we're going to get into the nuts and bolts of funding retirement. We're not going to be able to get into all the nuts and bolts of it. I think the key that I'm hearing you talk about is just it just really requires a lot of work on the planning piece first.
Well, yeah. And we deal with that every day. How many clients that we deal with there. And we do planning for our. Well, this is exactly the same as the other person because it's not everybody is going to have different layers, different income streams. Some are worried about giving money to family. Others are more worried about just themselves. So we could probably spend three or four hours talking about the different strategies on what's best for clients.
But there's no way we're doing a four hour podcast episode though.
Break for lunch, break for dinner.
What about tax consequences? That's a great question. So where is your salary? And for a lot of people, your tax comes off your salary for the most part, and sometimes you get a tax refund when you go into retirement. That's something really to consider because now you're paying the tax yourself for the most part,. For some RIFFs You can withhold some tax. But really now you really got to think, well, I'm going to get seventy thousand dollars a year from my income or I'm going to get one hundred and fifty thousand. Well, that's always before tax. You want to be aware of, well if I need seventy thousand to live off of, well, I got to consider that I'm going to need to take more out to pay the tax on those. Because Canadian pension plan is taxable, your pensions are taxable, RIFF income is taxable, especially if you need to take large sums of money out of your RSPs. And then with that as well, you have your old age security, which starts getting clawed back at a certain income.
Is that seventy seven thousand dollars or something like that starts getting clawed back?
Yeah. So the every dollar you have over that, there's a percentage where it starts getting clawed back. I think it's like one thirty six or.
Well actually I have the number here just because I looked it up one twenty nine two sixty. So if you make more than one hundred and twenty nine thousand two hundred sixty dollars your OAS gets clawed back 100 percent. Now what I will say though is when I've had people complain about this in the past, I kind of say to them, this is a good thing. If you're making more than one hundred and twenty nine thousand dollars a year in retirement, that's not such a bad place to be in.
You've done well. Life is good. You've probably had us planning for you and you've saved more than you need. And I'm sure three quarters of Canadians would love to have that problem.
So again, that layering tax consequences are something we really look into because again, it eats away at your savings. Well, and actually with that, you mentioned Canada Pension Plan. Of course, you have the flexibility of taking it early or late or on time. So I looked at what's the maximum you can get out of your Canada pension plan at age 65. And it's like twelve hundred and three dollars a month. But then I looked at what's the average that people get on average? It's like six hundred and eighty nine dollars a month. Those are reinforces your point about there's a complex calculation and options that people have created.
Those are things you've got to keep in mind. Kind of I'll be protected from, I got the government pension plan. In a city that we live in, even in an economic downturn. That's not a lot of money a month. Six hundred and some dollars. So you want to make sure that if you have the ability and you need that Canadian pension plan, maybe you have to work a little longer to get maybe that a bigger annuity. And another thing in taxation is inflation, which is something we haven't really talked about in a while. We hear the stories of the 1980s, but 10 years ago in Calgary and our little bubble here of Alberta, we were going through a pretty big boom. And both of us know costs went through the roof. And this part of the world and I think the average it was around 2010, 2011, Canada had an inflation rate of just around that three percent Bank of Canada. But it wasn't in Alberta, it was something like six or seven percent and a fixed income that maybe is based on the Canadian inflation. It can really play havoc on your savings. So, again, having that plan, having those buffers, being at one hundred and ten percent rather than just one hundred percent of the funded ratio is so important.
Well, that's a good point. Now, also on that layering aspect, I want to talk about just as an example, let's say you had a couple husband, wife, husband, husband, wife, wife, whatever floats your boat. I don't know if I can even say that, but I didn't mean anything by it. It's just a general statement if you have a couple. And so each of those people are getting that average CPP of called seven hundred dollars a month. So that's fourteen hundred bucks a month. Plus they're each getting OAS, which is six hundred eighteen dollars a month at maximum. So that's another twelve hundred. So you got what's at twenty six hundred dollars a month which is just a little over thirty thousand dollars a year of just a basic income.
So I mean if you are in a couple and there are some if one of the couple passes away so your spouse passes away, there are part of that money. If it was set up properly, you can have some benefits, but that income is going to go down substantially. And it's a larger part of the picture. But you're going to be taxed separately, which kind of goes into another point that won't spend a lot of time in. But it is that income splitting, which you can do with pension. Pensions you can split up to 50 percent of your pension with a spouse and you reset it every year. So it's not written in stone and came pension plan is no different where you can split that income to some extent to kind of lower your taxes. So you want to kind of get ahead of it. So you're not relying on Canadian pension plan or old age security. You want to make sure you have it. But it does make up an important part of your retirement savings. And it does for a lot of retirees, just that basic income every month is paying for utilities, for costs, and then they can kind of determine on the more flexible parts of their income of how they want to spend it.
Exactly. Well, look, I mean, thirty thousand is nothing wrong with getting thirty thousand dollars a year. So the other layers you talked about, of course, were the registered accounts the TFSA maybe also get into. What are their options, what people have for layers, what could they do with their assets or anything like that?
You're talking kind of non registered or?
Well, I'm thinking even there's people that say, well, a house isn't a good retirement plan. And we talked about this the other day. I have a problem with that, because a house can actually create some retirement income, not income as in it like pays you to live there, but it is an asset you can sell. I've seen it with so many clients and recommendations where I don't think you should use it as a cash cow to fund your retirement. There would have to be kind of extraordinary measures are a reason to do that. But what it is, is you've now invested in this home and you're always going to have to live somewhere. But always and we've seen it time and time again, sell the family home. Kids have moved out your empty nesters and you downsize, but you still have this asset and you want to kind of keep the value close to what it's being. So you downsize, but you put that money into retirement funding to some extent. But now you're getting to the point where, you know what, it's even our downsize place get a little too much. You may want to think about assisted living, but instead of focusing on well, as my pension, going to pay for an assisted living property or home or do I have enough? Well, you do you have this downsize home or even your family home that you can sell. And now that funds kind of the later stages in life and that living. And you also have the opportunity, especially with recent events, with covid, more and more people are talking about, I want to stay in my home, my family wants me here, but we need in-home care. And that would be one of the few exceptions where I'd say, well, now it makes sense to kind of use your home to fund retirement because you're paying for you to stay in there, but to kind of live on an assistant. And again, it it always depends on the individual. It has to be included in your retirement plan because it's probably the biggest asset you own.
Well, it's definitely the biggest purchase people usually make. Real estate does grow or it's expected rate of return is lower than the stock market, but it definitely is usually the largest single item the people purchase. So maybe let's just wrap up this section on going back to those four stages of retirement. That's the pre-retirement early period, middle retirement and late retirement. And maybe just talk about the difference in spending rates during those periods. I know I'm giving you an adlib here, but.
Well, I mean, pre retirement, you pretty much know what your costs are. You're working. You're spending money. It's kind of your life. So what changes when you hit kind of retirement? Well, I mean, that's why it's important to maybe have a plan to kind of figure out what you're going to be doing. There may be a few vacations coming up that you normally wouldn't take, but essentially you don't change that much when you go into retirement. You're still the same person. So the spending rates are probably going to be not too much different outside of maybe a few larger.
So this pre-retirement to early retirement.
Early retirement. It's a transition. It's not like you. OK, I'm retired. I'm a different person. If you enjoy going for coffee in the morning, chances are you're probably going to still go for coffee in the morning. If you out in the golf course, you may do a little more golfing. And you've probably budgeted that in but in terms of utilities and day to day expenses and that probably not a lot has changed. But it's important because some things will change those big capital expenses and that first four to five years in retirement, you are trying to figure out what life is going to be like. Am I sleeping in? Am I working? Am I spending more? Why am I spending more? And so we can sit and plan. But there is going to be adjustment. And again, that's why you want that buffer. But what we really don't want is missteps in those first four. You just like spending it all. We're traveling the world. It's like, well, you didn't quite budget to travel the world. So and then by the middle retirement, you've got to figure it out. You're kind of in that stage of life for you. For the most part. You know what you're going to spend, you know what you like, you know who you are. Ideally, in an ideal retirement, this is what we enjoy doing. But there are the unexpected expenses. Health becomes an issue. We talked about assisted living thirty years into retirement or even twenty years. That's a whole lifetime. Things that are going to change so well by that time, you kind of have a feeling of what life's going to lurk out. And then kind of late retirement again. I think when I first got in the business, we always talked about that middle to late retirement as well you're kind of in the hole. But we have clients who are in their 80s who are traveling to Africa when you could travel. We're healthier and living longer. And then also health costs are going up. I don't think it kind of all sudden income levels just shoot down. I just think it's spent on different things.
Let's talk a little bit about the sequence of investment asset accounts and sequential risk, because in the layers of income discussion, there's another part of it, and that is that from an investment perspective, I often run into people and I talked about this in our last episode where my neighbor, when we were talking about retirement, all of a sudden just start talking about the stocks that he owns, which I couldn't understand. It had to do with his retirement planning, but that's what you want to talk about. I was thinking about that guy and if he was invested 100 percent in, I don't know, dividend paying Canadian stocks like a lot of people are, what happens when you go through a global pandemic and a global economic shutdown? You still have to draw money from your investments to pay for your life. I mean, you've got as part of one of those layers. So what do people do?
Yeah, well, I mean, you don't have to take those missteps. There's no need for major setbacks if you have a diversified portfolio. We stress that so often. But you and I both were in the industry during the global credit crisis, which.
Oh I hate talking about that one.
I'll bring it up because it's an extreme example, but it could happen again and people should be prepared. I think people I've noticed a change where that fear of the global credit crisis almost happened a couple of years ago, where that fear started dissipating. People are forgetting about it. But the end of the day, how many companies? We won't mention names that were considered blue chip dividend paying companies that you could just price is always going to go up or stay stable and you're always going to get your dividend. And one of them in Canada, it had to go in. They had so much financial problems. And this was kind of the blue chip Canadian company. They had to cut their dividend by 60 percent. And what happens when you cut your dividend by 60 percent? Well, the stock price dropped. I think it's something like 82 percent. So now you have an asset that you are no longer getting the income you required from it and is worth a fraction of what you paid for it. So you can't really sell it to pay for everything. And now you have that sequential list where now you're selling things that you don't want to sell, but you have to to pay for this. So relying on a single strategy and not being diversified because at the same time you saw fixed income start going up substantially. And imagine if instead of a 100 percent Canadian equity portfolio, you had 30 percent in bonds that were going up five, six percent. Well, you know what? I'm not going to touch those stocks, but I'm going to start taking things out of other areas that weren't hurt quite as badly. And again, it's going and it's not like it was new. The idea of asset allocation and diversification has been around for quite a while. But on good times, people start well. Good times last forever.
But people start in the wrong point. The investment point. Well, we've been talking about the last couple episodes will start with the lifestyle you want to create. And with this episode, now figure out how you're going to fund it and the next step or maybe next steps later on is actually the investment piece.
And so because bumps in the night, as I say, or bumps in the road happen. There's no way, that two years ago somebody who was looking at retiring in 2020 said, well, with the upcoming global pandemic, an economic shutdown, I should have more invested in this area to make up for a shortfall of income.
And not to harp on it. But we've been in the industry long enough that there's always something. It may not be a global pandemic, but it's a global credit crisis or it's an energy collapse in oil prices or its tech companies. Like there's always something there will be something else coming up. So the kind of think, well, it's really only a couple of strategies that we know will work for everything.
I think Abba is saying about this.
Always need money. You're right, because as much as this was hopefully a one off in our lifetimes, this global pandemic, but there will be other crises in the future.
Of course there will. Well, yeah.
So as long as you've got the layers of income figured out, you can plan to be OK during them.
That's the whole point is to know you're OK. Here's the plan. Here's what we are expecting, that there will be something else coming up. But you're going to be OK.
Now Blair, last couple episodes we've been advising people of various books to look at if they're looking at retirement or in retirement or they want to do some reading about it. And there's a book that you mentioned to me a while ago, and I mentioned it on our last show. But what was that book that you talked about by Daryl Diamond?
It's called Your Retirement Income Blueprint. So, yeah, it's kind of a bit of a how to book. So I came across Daryl a number of years ago and I found it really an interesting book. I think it gets updated from time to time, but really it just talks about exactly what we just talked about in terms of not the retirement plan, but more of the retirement funding in terms of how you layer income flexibility versus non flexible assets. So, yeah, for anybody who's interested in that, I recommend it. It's a great read.
Awesome. Any last parting comments before we wrap it up for today?
I don't think so. Hopefully I didn't bore anybody too bad with all this stuff but,
Hey, well, we get it like retirement planning isn't the I don't know the most exciting thing to talk about, but it is a necessity.
Well, it is. And it's funny because I love talking about it. And I know as a group we get together and for us it's exciting. Did you hear about this or what about doing that? And we're really engaged. But I know my wife is maybe not quite as engaged when I start talking about it. And but it is incredibly important. And really that's what we're here for, is to help people out and.
Exactly. Alright, well I guess that wraps up for today. So next time we are going to carry on and we'll probably wrap up our retirement mini series. So hopefully you'll join us then. And Blair, thanks for being on the show today.
Hey, thanks for having me.
All right, until next time.
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Episode 46 - A Random Walk Through Retirement
We continued the miniseries on Retirement Planning. Discussing how retirement is a transition to your second life, not a destination. So, what is your retirement vision? What things do you plan on doing during your back 9 on the 18 holes of life?
Episode 46 - A Random Walk Through Retirement
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. Hosted by Greg Kraminsky and Colin Andrews of the CM 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 Markets-work.com.
Welcome back to the free lunch with Greg and Colin. And Greg, last week we started this mini series on retirement and lifestyle funding.
It was a fun one. We talked about what we would do if we had a million dollars as part of the discussion. And the reason we started this is that many people view the topic as a mathematical equation, as in I need X to retire to generate Y in income. And this is true. But retirement planning and retirement funding are two different things. And people kind of forget that sometimes, don't they?
They do. And again, too often we just talk about the numbers. And as we've talked about last time and we'll be talking a lot about today, it's more the numbers.
The numbers are important, but they're not the only thing.
Yeah, there is math to it, but there's also what kind of life do you want to live? So sometimes people ask us how much money they need to retire. Well, actually, I get that question a lot. And the answer is it depends. It depends on how much you plan on spending. What's your burn rate for the next 10, 20, 30 plus years in some cases? I mean, anybody can pretty much retire in air quotes at any age if they adjust their lifestyle expectations.
Yeah, you hear that a lot. A lot of people will say, what's your number? And the number is always what's that number that once you have that much money, then you'll be able to retire. And again, it's totally different for every person you talk to.
Well, as we talked about last week, some people think the numbers, I don't know, a million dollars, but we spent some time talking about an 18 year old getting a million dollars is different than a 60 year old getting a million dollars.
So we also looked at the six reasons to retire. We asked that survey question about what people would do with extra money and finish the episode with five things that the dying regret the most, which is a bit morbid. But today we're going to carry on with a conversation focused on all things from a lifestyle aspect about retirement. And next episode we're going to get more into the funding aspect.
We talked about retirement. Technically, it's used to refer to an event. So it could be like, I don't know, the day you leave your job or hand over the reins of your business to the next in line. It's not always the case of being pushed off the demographic cliff. Your company forces you to retire by the age of 58, for example. That does happen, but you might be forced into it earlier than you thought when you were retrenched. Alternatively, you may have accumulated sufficient funds to retire early. So whatever the reason, retirement is not a number. As we talked about the amount of funds you've accumulated, it's not an age you could retire any time. And it's not an event. It's the starting of a new phase in your life.
This song is going to hit a little close to home for me, I'm afraid. Here's the hair again.
Kind of a good retirement song, right?
Sing it Greg. Sing it.
And that wouldn't be fair to our listeners.
Well, I just wanted to play that little clip because we found last week, having a little music was kind of fun.
Exactly. And for all of the youngsters out there, that group that played that song was a group called The Beatles. You may have heard of but.
Wasn't that a movie that just came out a while?
Exactly. So, listen, Canadians are living longer at age 65, the average lifespan of Canadian men and women is 85 and 87, respectively. So we're living longer. The majority of us are not working through retirement. Actually, we're retiring early. And the average retirement age in Canada is 64.
The Beatles called it.
Exactly. Number three, we're not on track right now. Four in 10 Canadians, 40 percent over 55 say they're falling short in their savings for retirement and almost half don't have a financial plan. And something we talk a lot about on this podcast. And we're going to certainly try to make sure that everyone we deal with does have a financial plan. And lastly, Covid-19 is having an impact. About one of four Canadians have been unable to contribute to retirement savings and one third say they'll retire later than planned as a result of Covid-19.
That just goes to show the disruption of a global economic shutdown because of a global pandemic.
Exactly. So let's talk retirement in the name of this podcast is a random walk through retirement. So let's talk about some general points in retirement. And one of the key ones, I think is, as we've talked about last time, is retirement is a transition. It's not a destination. We hear a lot of people talk about when they retire, they're going to do this or that, and then they sort of see retirement as a utopia. And the likelihood is that retirement is just another chapter in your life, therefore a transition, not a final destination. And in fact, the Japanese refer to retirement as your second life. Time to be the best you and focus on things that bring you happiness or inner peace.
That sounds pretty good.
It does sound good. Here's another random point. But when you think about it, your retirement is going to be different from your parents retirement and it very likely will be different from your friends retirement because it is a very personal decision and a personal choice and a personal lifestyle. And it should be about who you are, not what you're going to do. So I think there's maybe a confusion with things like bucket lists and certainly a lot of people have bucket list items when they retire. Which are OK, well, I've always wanted to see Tuscany. That's the classic. I've always wanted to.
But you mean like Tuscany, Italy, not Tuscany, northwest, Calgary?
No, I was thinking northwest Calgary. I've never been to the north. But no, lots of people have their bucket list items, things they want to do or accomplish, but that's not exactly a retirement lifestyle. And lifestyle is more about how you live, what's important to you on a day to day basis. Unless you're going to spend 52 weeks a year traveling, Then you need to know what happens in the intervals. And so it's really about who you are and not where you're going to do. So it gives you the opportunity you can be whatever the best you is, free from some of the pushes and pulls of daily life and daily work. And I like this saying retirement does not have to be when you stop working, it can simply be the day that you can start working. And I think there's a freedom to that Barry Lavalley who's who we mentioned last time, retirement expert. He says when you wake up one morning and decide that from this day forward, you can do what you want, when you want and how you want, you're retired. And in fact, you might still be working. But if you feel that way, if you can say that you probably are retired. And again, since it's a transition, it's important to plan for that transition, not just financially, but mentally.
Yeah, exactly. Now, financially, the conversation must be that the strategies that were used to get you to your financial freedom or your second life or I guess as you said, the Japanese term will not be the same, is you will use in retirement. And there is this guy, Darryl Diamond, he wrote a book called Your Retirement Income Blueprint. And he had a great analogy in the book in that he said, In the past, people have used the analogy of a golf game to describe life. The front nine was your working years and the back nine was your retirement years. You've heard that analogy.
I have. Yeah, you bet.
But in fact, it's very different than that. It's that it's more like you play the front nine and then you hit the clubhouse, grab a quick snack and then walk on to an ice rink for a hockey game for the back nine. So the game's changed. In order to get ready for that new chapter in life, you have to be prepared for this transition. You need a plan. It's not the same as playing nine holes than playing nine holes.
So you have to be prepared to move from golf to hockey or vice versa. I know it's a sports analogy, but just meant to frame it that there's new tools and strategies that are required. And if you do not know that is going to be a change in the game. You're going to have a tough time adjusting. And many retirees have a hard time adjusting to this new so-called freedom as they've not thought about it as a different life. So even if they have enough money, they may or may not be mentally prepared for that change in the game,
I think about that for myself, because on weekend mornings, given that I'm still working. Weekend mornings, you kind of get out of bed later or possibly wander around, take a little time, have a leisurely breakfast and a cup of coffee, catch up on the news and don't really get going until ten, ten thirty in the morning. And that's great to do on weekends because it's a change. If every day is like that, I'm not sure that for me, I would want to have that kind of an unstructured day. And so I think I would have a difficult time. Even these days, taking a two week or a three week holiday that changes enjoyable but it's a shock to the system.
Don't you find it like when you're on a holiday, sometimes you lose track of days. Isn't it Tuesday today? And it's actually like Thursday.
Exactly. And I think for a lot of people in retirement that when they approach it that way, sometimes they don't really know the days blend together. And that may be great for some people and for others it may cause them a lot of stress and anxiety.
Well, so perspective's is reality is a saying I've heard a lot these days. So whenever somebody has a perspective on something, that's their reality. In retirement, we could talk about how this relates to your values, what's your purpose, what are your core values, be it truth, kindness, respect, safety, friendship, faith, whatever those values are, what do they mean to you? And your values will drive your purpose, so it actually will create your perspective. So purpose is something we deal with in working life in a lot of us use our job is our purpose. And I've been guilty of this in the past that, you know, when you're a younger person, be it male or female, and you're starting off in your career and you go to a cocktail party. Remember going to parties Greg?
I do think of it. I used to enjoy those.
Yeah. Like presume.
And what's the one question when you're introduced to somebody, somebody say what's the first question they always ask you?
Hey, what do you do?
Yeah. And I remember as a 30 some years old being at a cocktail party and that question goes around the room and I went up to somebody I didn't know and I said, hey, how are you? And he looked at me and he said, so what do you do for fun? And I thought, what a weird question. Just ask me what I do for a living like everybody else. But in hindsight, looking back at it, what a great question that person asked. I just wasn't there mentally to answer it when he asked it.
So Barry Lavalley talks a lot about this and Barry gets referenced a lot in retirement planning because he is a retirement guru, as you mentioned. But finding what makes you happy in order to bring that to your everyday life. So we already talked about golf. And I remember being at a presentation with Barry and he said, who here is going to golf during retirement? And a bunch of people put up their hands and and then he said, OK, so you live in Calgary. You can only go for four months, a year, and you're most likely can't golf every day. So what are you going to do for the other eight months, a year?
Or the fact that you can't play golf 24 hours a day. And really the whole point was to start thinking about, well what's your purpose? What are you going to do with your time? And thinking about purpose in your core values before that retirement transition. It's a very important thing to do. It will help you adjust to a new life, and that should be part of planning.
Got another song for here just for fun. It's a retirement song Greg. You know it because.
Was this a top 20? Top 20 song?
[music playing in the background].
That's pretty good.
We won't play the whole song. Won't ruin it for everybody.
Retirement bliss. That should be our goal.
So we looked at views from retirement planning experts and one of them, a guy named who I don't know, George Kinder of Kinder Institute of Life Planning. And his views on retirement were very interesting. He asked some questions to get people thinking about retirement. One question was when does a housewife or house husband retire? That's kind of a good question right?
It is. Yeah.
When do you retire from being a parent? I got to tell you, recently, I've been wanting to retire from being a parent, but there's not really a retirement to that.
No, that's right.
And when do you retire from being the best person that you can be? So in his construct, what George Kinder talked about is retirement is a concept that comes out of our corporate and industrial structure. Where we are working a job until we become redundant to them. That's kind of harsh, but.
Well, that's right. And that's certainly from the corporate standpoint. And when we talked about things like forced retirement or mandatory retirement at age 65 or whatever, that is kind of forced. But he asks, good question, do you retire from being your parent even if you wanted to? Most of us won't ever. And so that becomes part of your post working life or continues to be part of your post working life as it was while working.
Exactly. Now, Barry Lavalley, again, of the Retirement Lifestyle Center talked about how and you mentioned this earlier, retirement is not a destination, but people look at retirement like it's a deliverance, like the pot at the end of the rainbow and very quickly become disillusioned with that notion. And many people believe that retirement is a new life, a third age, the longest life stage. That's interesting because you hear about people that retire early, let's say at 55, they might have 40 years ahead of them.
So in reality, it's a multiphase journey in each phase has its own opportunities and challenges that are marked by issues relating to health, death, travel, leisure, marriage of children, birth of grandchildren and so on and so forth. So none of that has anything to do with how much money do I need to retire. So his advice is to remove the focus on money and start thinking about life issues, start looking at retirement from an emotional perspective, your life still has to have meaning. So figure out what your value in life is before you retire, as it's the opportunity to spend time on things that you love doing and are already doing. But you can't golf every day, as we mentioned. So you've got to find some other things
Yeah right on and some other retirement planning experts, Dan Kempt of Morningstar Investment Management Retirement. And the next couple focus a little bit more somewhat on the financial side of it, not strictly not around the question of how much you need to earn or save for retirement, but just how the finances factor in as you retire. So he says, seldom do people stop work and start drawing a pension. So individuals have to plan through retirement, not just plan for retirement. So remember, when we're talking about post retirement pot, it really comes from the preretirement pot. So again, when he talks about planning through retirement, you have to think about, OK, how does this all carry forward? I can't sort of do my planning, OK? I'm planning up to the date of retirement and then I start my planning from there on. It's got to be part of the process well in advance of when you actually hit that point. So Alison Schrager is with Lifecycle Partners and talks about, well, when you think of retirement, what vision comes to mind? We've talked about vision a little bit. And again, identifying well, the hardest thing is deciding what to do when you quit working. So that vision is really the place you can start when it helps you define a roadmap. So getting into the financial side, she says, well, saving is easy. You divert some of your salary into an investment account, hope that the investments work well. But if they don't pan out, you've got time and income that you can keep adding to it and make up for the difference. Whatever the loss is. Less room for error after you retire. And so if you invest poorly or spend too much, there's no way to replenish that pot. And again, it comes down to retirees or pre retirees figuring out how much they need to spend and how much they can spend. And remember that you're spending categories change in retirement. So you need to cover health expenses. In Canada, not so much. Medical expenses, but certainly pharmaceuticals, life supports, things like that. In retirement, expenses change and we need to plan ahead and see how that's going to be readjusted. Spending more on those areas. I talked about less on work related things, commuting, clothing, and in my case, parking underground at this building.
Well, and I think there's a huge misunderstanding of that, that quite often people, as you mentioned, look at retirement like I'm going to hit this date, this utopia date or this date that will bring me Utopia. Maybe that that's a better way of saying it, but and then I'm good. But there's a misunderstanding that just because you retire does mean you don't stop spending money.
You spend it in different areas, as you talked about.
Well, that's right. Remember when I started in this business a long time ago, but for a long time that I have been in this business, a lot of people would make some assumptions about, oh, well, you spend about 70 percent of your pre-retirement income in retirement. And that may or may not be true. It really depends on that vision and how that vision plays out. And if you are one of the people that have been saving up and have a couple of dozen bucket list items, you could easily spend what you spent during your working years.
Or what if you have adult children that you're going to help with a down payment on a house or.
Like that wasn't something you were doing maybe during your working years, but.
It's a big cost. Sorry, does that one hit close to home?
Yeah, that's right. You don't touch a nerve there. Kathleen Coxwell of New Retirement. She says, Once upon a time, long, long ago, we set a date and planned a big retirement party. You went to work one day and then never again. That still happens probably, but these days, as more and more of us that have a totally different perspective on what a retirement date is. So a lot of retirees transition into retirement either by going part time for a few years or finding a retirement job after you leave the pre-retirement job. And some people, as we talked about, make the assumption that you need to maintain lifelong spending habits when you retire. It could be true. But again, people redefine themselves in retirement and they can dramatically reduce their spending or they could increase it. The key thing is we don't need to keep the status quo. So when we retire, you need to spend to be comfortable while working and raising children. And that may be different than what you need to spend when you're retired. And if you retire somewhere less expensive than you live now than how much you have saved could be a different number. So, again, the retirement lifestyle is really what defines the future. It's a mindset. It's a process. It's a goal. And it might help to take advantage of the services of professionals. We strongly believe that people should talk to not only us when it comes to figuring out how to fund their lifestyle goals, but talk to people that can help define those lifestyle goals as well.
Well, and I would say, actually, if you're in a relationship, it's probably pretty important to discuss your goals with your partner's goals and because they might not be in alignment. Right?
Well, that's right. When a married couple or a couple have had very different lifestyles during the working years, trying to merge those into on lifestyle postretirement, might take some negotiation.
Well, and we had a former member of our group who retired years ago, won't mention any names, but when he retired, his wife got a job.
Yeah. What does that tell you?
Well, I'm not going to pass any judgment, but maybe they weren't aligned in what retirement was all about.
So there were two recent surveys. I want to quote one Canadian and one American, and they demonstrate a gulf in perspective between aging parents and their adult children. So the Canadian survey was done by Ipsos Reid and Base Your Home Health focused on differences of perspective between adult children and their aging parents.
The American Survey was done by the Pew Research Center with input from a sample of about three thousand adults with perceptions about health and aging and how those relate. And there were numerous areas where discrepancies in perception were apparent. I remember we talked about perception was your reality.
So there's discrepancies in the perception. So in the Canadian version, 90% of Boomers, hey, Boomer! 90 percent of Boomers.
Are you talking to me?
Admitted that they wished their parents would get regular health checkups and report any issues. Yet fewer than half of seniors believe that their children worry about their state of health. So there's the perception is a different reality for each cohort. About four in 10 or 40 percent of adult children of aging parents believe that their parent needs help with grocery shopping, companionship and driving, while only 6% of seniors admitted that they needed help in those areas.
And it's quite a gap.
That's a huge gap, one in 10 adult children. So 10 percent. See, I do that math quite easily in my head?
Yeah, you're good with numbers.
Two in 10 is 20 percent, Greg. But in this case, it's only 10 percent of those surveyed thought their parents had put themselves on a short list for retirement, home or long term care. But the actual figure was closer to three percent, which is a pretty low number.
That is a low number. Yeah.
Like, you don't need to be a mathematician to know that three percent is a small number.
The American survey showed that many of the perceived benefits of aging, for example, more time to relax, time with family, time to travel were in fact less of a reality than what was hoped for. So in the survey, 87% of people aged 18 to 64 thought their retirement would give them more time for hobbies and interests. Well only 65% of retirees reported this to be true. And I've heard this a lot from retirees. That again, a misunderstanding, that there's all this free time when you retire, but it's the time just gets filled with age. In the survey, 86% think retirement will afford them more time with family, but only 70% find this to be true. And 77% look forward to more time to travel when actually only 52% of retirees say that that's the reality.
That's an interesting one, because certainly when you talk about what is your retirement look like, travel has got far and away. One of the major goals that people have. There is some typical ones, travel time with family and friends, etc. But it's interesting that only half of retirees admit that that actually worked out for them.
Well, and I don't know if it's just as common thing that people think they're supposed to do. When I retire, I should travel. And I remember in that same presentation, Barry Lavalley, when he talked about well, so we asked the golf question and then he asked the travel question, who here is going to travel in retirement, remember? You were at this presentation.
And let's say half the people put up their hands, his follow up question was, well, how much travel do you do now? Why do you think you're going to travel more in the future just because you're retired.
Now exactly. And again, thinking personally, I am not one of those people myself that has this list of places that I've always wanted to see. I have a few, probably like most people, I'd like to get to Australia, for example.
Too far a flight.
It's a long flight. You got to make it a long trip. So I would like to see that. But it's not like I have a list of 30 countries I'd like to see. And my wife, Ellen has some very specific things which are related to it would be great to see the Galapagos or be great to go to Churchill and see the polar bears, because here you're seeing things that, in all honesty, may not be around to be seen in the future. And so when you think about your own retirement, you're just a youngster, of course. So yours may be way, way away. But what do you think of how do your goals fit into sort of this group?