What Financial Planning Should Look Like with Mark McGrath

[00:00:00] This is the Canadian Investor, where you take control of your own portfolio and gain

[00:00:06] the confidence you need to succeed in the markets.

[00:00:10] Hosted by Braden Dennis and Simon Belanger.

[00:00:15] Welcome back to the Canadian Investor Podcast.

[00:00:17] I'm here today with Mark McGrath who's a financial or financial planner.

[00:00:22] Is that the best term with PWL?

[00:00:25] Yeah, so technically the title is Financial Planner and Associate Supportfolio Manager.

[00:00:30] Okay, well okay so I'll just say Financial Planner.

[00:00:33] Good enough.

[00:00:35] That's good so well.

[00:00:37] Mark thanks for coming on the podcast.

[00:00:38] I've been following you on Twitter.

[00:00:40] You always have some pretty interesting takes.

[00:00:43] You know I agree for the most part.

[00:00:45] I mean sometimes I don't fully agree but I think that's okay.

[00:00:48] I mean I think you have some good discussions and you know for the most part some good

[00:00:52] logic behind it.

[00:00:53] So you want to tell us a little bit about yourself because you've never been on the podcast

[00:00:57] before.

[00:00:58] I know some of our listeners are familiar with you but you can just introduce yourself

[00:01:03] and also your general guiding principle as a financial planner.

[00:01:08] Sure, sure thanks.

[00:01:09] And thanks for having me.

[00:01:11] It's great to be here.

[00:01:12] I know you've got maybe not that many financial planners or advisors that get an opportunity

[00:01:16] to come here and chat with you so I wanted to be here.

[00:01:18] Thank you.

[00:01:19] Yeah so Mark McGrath at Work at PWL Capital as he said Simon.

[00:01:22] I've been doing this for about 14 years off and on kind of doing different roles within

[00:01:28] or adjacent to the financial planning and investment advice space.

[00:01:31] I joined PWL just last year in July after following a lot of what PWL have been doing

[00:01:38] for years and years and years like going back to the Canadian couch potato, the rational

[00:01:42] reminder podcast which maybe some of your listeners are familiar with so I've been kind

[00:01:45] of following PWL for a long time and it was truly thrilled when I got the opportunity

[00:01:51] to join them.

[00:01:52] I'm B.C.

[00:01:53] I'm about halfway between Vancouver and Whistler and Squamish B.C. moved up here in 2019

[00:01:58] early 2019.

[00:01:59] I've got two young kids now so we wanted to get out of the city and come to the suburbs

[00:02:04] and as you mentioned I'm quite active on Twitter.

[00:02:06] I like to go out there and chat with people all the time and talk about index funds

[00:02:09] and financial planning and all that fun stuff.

[00:02:11] No, that's great.

[00:02:12] You'll have to plug me in with Ben Felix from the rational reminders just because I think

[00:02:17] he's in Ottawa so be good to kind of meet him personally, maybe have him on the podcast

[00:02:21] but I digress.

[00:02:22] So, we've been pretty critical of financial advisors, financial planners on the podcast.

[00:02:28] I mean I think it's just because of the experience and the feedback we've had from our listeners.

[00:02:33] People I know in my personal life friends and family, the typical and I don't think

[00:02:37] that'll come as a surprise where you have an air quotes this financial advisor who I

[00:02:42] usually I think is just someone with a mutual fund license.

[00:02:45] That will be putting them in these high fees 2% plus mutual funds that are underperforming

[00:02:51] the market oftentimes extremely high bond allocation for someone that would be in the

[00:02:56] 30s for example and providing little to no advice.

[00:03:01] Just meeting with them once a year to just go over I guess their returns and that's about

[00:03:04] it.

[00:03:05] So, how do you defer?

[00:03:06] And I saw tweet in terms of like how you approach new clients.

[00:03:10] I think meeting with them first, collecting some information and then without a cost

[00:03:17] yeah just letting them decide whether they want to continue with you.

[00:03:20] So do you want to talk about the differences and maybe some of the gripes that you also

[00:03:25] have with people called themselves financial advisor?

[00:03:29] Sure, yeah it's a good question, it's a big question.

[00:03:32] And I largely agree with you and I think it's a function of how the industry kind of started

[00:03:38] and where it is today I mean a lot of the financial advice industry has largely been built

[00:03:43] up on commissions right.

[00:03:44] And if we go back to like DSC deferred sales charges on mutual funds as an example or

[00:03:50] even front load fees on mutual funds, a lot of advisors when they were just getting started

[00:03:53] that's how they paid the bills was transaction fees right in commissions.

[00:03:59] And so because of that the focus was always on investment products and that's how advisors

[00:04:03] built practices right it was very very transactional in commission based in nature.

[00:04:07] And I think that's changing a lot so myself and PWL we are what we would call I guess

[00:04:12] AUM advisors or fee you know there's many different terms for it but fee only means we charge

[00:04:18] a fee on the portfolio is that we manage but we don't have transaction commissions or anything

[00:04:24] like that.

[00:04:25] So we're not compensated through the transactions, it doesn't matter what our clients

[00:04:27] have in their portfolios, our compensation doesn't change but I think a lot of it also

[00:04:31] comes from where you were kind of trained and so we have this we have these kind of echo

[00:04:34] chambers I think in the industry where if you grew up in a firm that was very sales oriented

[00:04:39] and you were trained from the top down to do things a certain way or to sell a certain

[00:04:43] type of you know mutual fund with high fees for example that you know they think can beat

[00:04:46] the market.

[00:04:48] You grew up in that environment that's all you know and you think that's the best way

[00:04:51] to do things and then maybe you change to a different firm where they do things a little

[00:04:54] bit differently and you have maybe a bit of an epiphany and go oh actually this is the right

[00:04:57] way to do it but that might not be much better than what you would learn before and so I

[00:05:02] think for a lot of advisors it's difficult to break out of this these kind of echo chambers

[00:05:06] that are that they they fall into like everybody's going to start somewhere right I started

[00:05:10] at the bank and you know we all have our opinions about the banks but they're very sales focused

[00:05:14] right.

[00:05:15] So it takes a keen interest and curiosity about I think the evidence and about the bigger

[00:05:21] scope of investment advice to kind of break free from that and we're just talking about

[00:05:25] the investment side here but really where the value is in my opinion is around all of

[00:05:29] the other things that aren't investment related right so we talk I talk about financial

[00:05:32] planning all the time and that's a that's a big catch all term and what is financial

[00:05:36] planning mean right.

[00:05:37] The way I think about it is that most people are likely to make thousands of financial decisions

[00:05:43] in their lives right around many many different topics from retirement planning to investing

[00:05:47] to insurance and risk management to state planning small business concerns if you have a corporation

[00:05:52] education planning for kids there's there's dozens and dozens of things that people generally

[00:05:57] need advice about and that's where good advisors are good financial planners I believe can

[00:06:01] add value to their clients so my process as you mentioned is basically I do often a 30 minute

[00:06:06] call with somebody and just gets to know them a little bit and the whole purpose of that

[00:06:09] call is to see are we the right people for you right like is what you need in your life

[00:06:14] right now somebody like us or is it better for you to go and see like a fee only project

[00:06:18] based type of advisor or you pay them wants to solve a couple of problems because we're not

[00:06:22] for everybody and I don't think everybody needs a financial advisor but I will say that

[00:06:25] focusing on the financial planning aspects first if they do come on board getting to know

[00:06:29] them getting to solve all of those bigger financial planning pieces first the investment recommendation

[00:06:34] follows from that right like you can't I can't tell you how to build a portfolio unless

[00:06:38] I know you very intimately so that's it's it's a bit of a reverse from I think how the

[00:06:42] industry was built.

[00:06:43] Yeah no I think that's a great point because people will look at you know at me my investments

[00:06:47] are my co-hosts and we always remind them look we have a certain risk tolerance we have a

[00:06:53] certain we know the businesses we own I also own a mix of index funds I do kind of a more

[00:06:58] hybrid approach all you know research some businesses less than 10 I own them and then I have

[00:07:04] an index fund approach but it's not for everyone obviously index investing is a pretty powerful

[00:07:10] tool and it's usually what I'll recommend to people who you know want to do it themselves but don't

[00:07:15] want to put in too much time and I think the time component but also being able to read financial

[00:07:21] statements and be willing to learn that stuff is really important so I do I do like that approach

[00:07:25] and I guess you also do maybe not you but your team I'm assuming you work with other people

[00:07:31] tax planning a state planning all these kind of things.

[00:07:34] Exactly and that's where we spend most of our time right like when when people come to me I

[00:07:37] tell them like we're gonna spend probably 10% 15% of our time on the actual portfolio management side

[00:07:42] because one support to your point where we're index investors as well we use different types of

[00:07:47] indexes we use factor indexes but at the end of the day it's just a different type of index so

[00:07:51] we're all about low cost indexing and once that portfolio is set up it's very very simple for many

[00:07:55] of my clients and our clients and myself included we use a single fund and it owns you know 12,000

[00:08:00] stocks all around the world so once we've got that in place there's not a lot of maintenance to be

[00:08:03] done around the actual investment portfolio itself but the beautiful thing about that is it opens

[00:08:08] up all of our time to really focus on the important things tax planning and the state planning

[00:08:12] you know we're not accountants we're not lawyers we're planners and so we look deep into the future

[00:08:17] for clients and identify things that we think are going to help down the road whereas often not

[00:08:22] always the case but often accountants are a little bit backwards looking for example right you

[00:08:25] meet with your accountant and they're looking at the prior year to see where can we save you some

[00:08:29] tax so it's very common for us to sit down with our clients accountants or their state lawyers and

[00:08:34] go through those areas with them yeah and it wasn't one of the things I mentioned to you but

[00:08:39] I am interested to hear your thoughts on this so one of there's always this debate right between

[00:08:45] the FSA and RSP you see it a lot people on Twitter and I do agree some situation for example if you

[00:08:51] have you know a higher earner out of a couple for example 1 person earns way more than the other

[00:08:57] person a spousal RSP and potentially withdrawing the money a couple years down the line could be

[00:09:02] really tax efficient but from the TFSA perspective I find that a lot of people and it's hard to quantify

[00:09:09] but the certainty with taxes is a big advantage because as much as you like to plan and if you're

[00:09:16] planning for you know couple decades down the line I mean tax brackets could look completely

[00:09:22] different than they do right now you're projected income you know there could be some bumps in the

[00:09:27] road you don't exactly know so what are your thoughts on that I don't know I feel like this is a

[00:09:32] quality of the TFSA that tends to be brushed over by a lot of people at least on Twitter that I see

[00:09:38] no you're absolutely right and the way you just phrase it is exactly the way to think about it right

[00:09:42] the RSP is a trade-off for tax certain T versus the TFSA so you you you know you earn your money

[00:09:48] and you decide am I going to pay tax on it now am I going to pay tax on it later and if I'm going

[00:09:53] to pay tax on it later I'm going to use the RSP and the primary reason I want to do that is because

[00:09:57] I believe that I'm going to pay a lower rate of tax on the withdrawals than the bracket that I'm in

[00:10:02] today but to your point future taxes are unknowable taxes have been actually pretty stable in Canada I

[00:10:07] know there's been some variation but if you look at charts of marginal tax rates historically

[00:10:12] it's not that they just continuously go up I think a lot of people believe that but if you if you

[00:10:15] actually look it up the marginal tax rates haven't changed like really significantly but there is

[00:10:20] that uncertainty and there is that risk the tax rates could be higher in the future and so the TFSA

[00:10:24] does give you that certainty today a big problem with the TFSA is that the contribution room is relatively

[00:10:30] limited for higher earners right like $7,000 a year I mean yeah if you compound that out over decades

[00:10:36] in decades you're going to have a seven-figure TFSA in future value but RSP room is generally a lot

[00:10:41] higher so to your point for higher income earners specifically the RSP can be very very compelling

[00:10:46] I'm a huge fan of the RSP and I think it gets a lot of flak that is undeserved and it's a

[00:10:51] deceptively complex account when you really look at it and when you try to factor in these future

[00:10:55] taxes but to your point the TFSA is simple it's tax certainty today and it's very flexible because

[00:11:00] you can withdraw without no taxes or without penalty and you can re-contribute so in a perfect world

[00:11:04] if you're a higher earner max out both if your income is lower TFSA is a beautiful thing

[00:11:09] yeah and just in case some people aren't aware so the RSP room is accumulated it's 18% of your salary

[00:11:14] up to the maximum I think it's what 31 32 000 just on I think 30 yeah 30 700 or something like that for

[00:11:21] last year okay yeah always get confused with the money purchase limit which is just a year before

[00:11:26] basically the RSP limit yeah so no those are great points

[00:11:31] before we talk about index investing and then dividend investing so what are like maybe two

[00:11:37] most common mistakes that you see from an individual who start working with you

[00:11:41] and I know you focus primarily working with physicians right yeah historically I've worked

[00:11:45] primarily with physicians I do a number of clients who are not physicians but I'd say it's hard

[00:11:51] to answer one of the most common mistakes because everybody is so unique in what they've done

[00:11:56] so far with their financial plan and I get a lot of clients or prospective clients that come to me

[00:12:02] they don't all come from the same place so many of them were do it yourselfers who are now either

[00:12:05] don't have the inclination the time the the energy they don't want to do it themselves or some of

[00:12:09] them come from other institutions or other planning has been done for them but I'd say a lot of

[00:12:13] from the do it yourself crowd the biggest mistakes I see are thinking you're an index investor

[00:12:18] because you own an index fund for example I had a client that had all of his money in industrial ETFs

[00:12:26] like industrial sector ETFs and so he's like no I don't need your help I'm an index investor like well

[00:12:30] let me take a look at the portfolio and the spirit of indexing is really to grab you know the global

[00:12:35] market cap weighted portfolio and participate in the market returns but this individual by owning

[00:12:41] an index fund identify themselves as an index investor but there was a lack of diversification

[00:12:45] diversification there for sure right so I think people tinker with their portfolios they overallocate

[00:12:51] to risky sectors they under diversify that's a big thing that we see and the other one is I'd say

[00:12:56] not playing defense properly like most people maybe not most but many people don't have the right

[00:13:01] types or amounts of insurance like life insurance disability insurance that type of thing

[00:13:05] where they've got some through work and they think that's enough and it turns out it's not

[00:13:08] we're near enough and the other defensive tactic is estate planning right like not having wills

[00:13:12] not having accounts set up in a way that's going to allow you to distribute your assets if something

[00:13:17] happens to you and not only a tax-efficient way but in a quick manner and to the people that you want

[00:13:21] the assets to go to but there's there's lots right like people paying high fees for closet indexing

[00:13:27] at a different institution or misunderstanding things like rsps versus tfsa isn't having

[00:13:31] preconceived notions about things where it's really just a financial literacy issue yeah I totally

[00:13:36] agree I mean I think there should be more just financial indication in our in our schools just

[00:13:41] because a lot of stuff I've learned I've just I learned on my own because I'm interested in it

[00:13:46] I've always been good at math so it's just came a bit naturally but I'm looking back and I went

[00:13:51] to a really really good high school as well as like one of the top schools in Quebec and I think

[00:13:56] we had one course that talked a little bit about the basics of the stock markets and bonds but it

[00:14:02] was just a basic basic so I it's not surprising that you know there's a lot of people and I may be

[00:14:09] guilty of one of these mistakes the the will the will is on my to-do list this year because

[00:14:15] I have a daughter now so it is definitely something I will be doing now to go back to index investing

[00:14:21] so I'm gonna push back a little bit and you had tweeted that the Qt so the Vanguard all equity

[00:14:27] fun or execute T work great option for global equity exposure and the reason I want to push back is

[00:14:32] because it's it has a big waiting to Canada and we've been pretty critical on this podcast about

[00:14:41] you know home country bias for Canadians and even though I think this fund is is not bad at all

[00:14:47] it's actually pretty good fund quite low fees I maybe something that would be like XA W which is

[00:14:53] the all-world excluding Canada and mixing that with maybe a 5 to 10% allocation to a Canadian

[00:15:00] index fund would make a bit more sense so what's your kind of thought process on those two funds

[00:15:06] that I just mentioned? I mean those are great great funds right to your point you can combine them

[00:15:11] to generate the amount of home bias that you want and still then have a global index portfolio which

[00:15:16] which is great I think at the end of the day home home bias is a preference it's a choice you can

[00:15:21] you can set up your portfolio to have some none and then quite frankly many people have too much

[00:15:26] home bias right? The reason that I think funds like VQT and XQT are solid is or let me back up one

[00:15:33] of the reasons that home bias matters is currency and taxes right I mean we're Canadians presumably

[00:15:39] we're gonna consume in Canadian dollars we're gonna retire in Canada and consume in Canadian dollars

[00:15:43] and having a home bias acts as a currency hedge for your future consumption in some way right?

[00:15:49] so you had mentioned XA W if you had you know everything in XA W with a very small allocation to

[00:15:54] Canada if the Canadian dollar is very strong over your investment horizon and there's no way

[00:15:58] to predict that it's going to have an adverse effect on your returns right? So if the Canadian dollar

[00:16:03] grows you're not capturing the returns of the marketing Canadian dollars and so you can you can

[00:16:08] introduce a lot of risk to your portfolio just from the currency standpoint. So having a bit of

[00:16:11] a hedge against the currency risk by allocating more to Canadian stocks I think helps another reason is

[00:16:16] taxes so dividends are relatively tax-efficient right? And in Canada Canadian eligible dividends

[00:16:23] I should say because foreign dividends are actually quite punitive from a tax perspective they're

[00:16:26] taxed as just like interest would be so fully taxed and you can get into foreign withholding

[00:16:30] taxes and all these other things. So there's some tax benefits holding some some home bias

[00:16:35] there's a few good studies about it as well I mean there's a paper that came out recently

[00:16:40] that looked at this and suggested that the optimal home bias was 30 to 40 percent. Now this is

[00:16:45] based on historical data of course in Canada's had a really good run compared to many many countries

[00:16:49] right? If you were in Italy holding 30 to 40 percent home bias would have been pretty bad news.

[00:16:54] Yeah or Japan I don't think you'd done exactly yeah totally so there are countries where

[00:16:59] historically that wouldn't have made a lot of sense Canada's got a you know pretty stable economy

[00:17:05] in the grand scheme of things but there there's some risk to having too much there's risk to not

[00:17:08] having enough and so I think a lot of it just comes down to you to preference and understanding those

[00:17:14] risks something like execute because it's one fund and I think it's got about 24 percent in Canadian

[00:17:20] for me I think that's I think it's a reasonable decision to make right? Now that's fair and also the

[00:17:26] the angle I'm coming from too is I'll also presuppose that a lot of people's you know living currently

[00:17:33] is dependent on the Canadian economy maybe not fully right there's different levels so having such

[00:17:38] a large allocation to Canadian equities it just makes the person very dependent on the Canadian

[00:17:45] economy and hoping it performs well so that's kind of where I'm coming from for that.

[00:17:48] Mm-hmm no that's it's a good point right and especially if you work for a Canadian company in

[00:17:54] your day job you have your human capital tied up in the Canadian economy and you have your

[00:17:58] financial capital tied up in the Canadian economy and if you live here and you own your home you have

[00:18:02] your your shelter tied up in the Canadian economy so I mean absolutely you want to diversify

[00:18:06] the level of Canadian hope by so you have in the portfolio again I think it's a preference

[00:18:11] the study show 30 to 40 percent I think 5 percent is probably a little bit too low even though to your

[00:18:16] point it does more closely mirror the global cap weights of the Canadian economy but you know if

[00:18:22] you if you got 10 to 20 percent yeah and all of this is just based on we don't know what the future

[00:18:25] is to hold to right so there's no way to know in advance what the optimal amount is we can only

[00:18:30] look at this by looking backwards. No exactly and speaking of the Canadian market we have a lot of

[00:18:35] dividend payers in that as you as you definitely know and you know I have nothing against dividend

[00:18:41] stocks I do own some in my portfolio but the plans I tend to approach these Canadian stocks that are

[00:18:49] dividend payers or just dividend payers in general is that to me I'm trying to achieve the

[00:18:54] best total returns right so if I can achieve that with these dividend stocks definitely you know

[00:19:01] I want to own some but what I've seen is this kind of income focus I would say dividend like

[00:19:09] especially on Twitter so dividend Twitter where you see them just pose the income that they have

[00:19:14] and I've checked multiple accounts and I know you know some of the accounts I'm talking about

[00:19:19] yeah I've checked some videos on YouTube where literally they never talk about their returns it's

[00:19:24] always about the monthly dividend payment for the month and you know we're having an issue and

[00:19:30] feel free to expand on that is it's just not being I don't know I don't know if they're willfully

[00:19:37] being not transparent to people or it's just they believe so much in it it was almost like cult

[00:19:42] like where you know that's what they think they like getting paid for their stocks and they don't

[00:19:47] really care about the total return so what's I mean do you have anything to add on that what's your

[00:19:51] thoughts on that? I largely agree with you and anybody who who knows me or follows me that's

[00:19:56] listening to this will know about some of the sort of epic dividend battles I've gotten myself

[00:20:01] into on Twitter and we usually you know end out fairly friendly with the dividend accounts at

[00:20:06] the end of the day but you know I fully agree at the end of the day total returns is what you eat

[00:20:11] right and there are a lot of accounts and a lot of proponents of dividends out there

[00:20:16] that I think don't really understand that and they say what part of it is because they see the

[00:20:21] dividend as infinitely sustainable and they separate mentally the capital from the income right

[00:20:28] and so they focus on the dividend income and they never want to spend their capital so to speak

[00:20:33] and I just think that's that's dangerous like dividends get cut all the time and wall green so

[00:20:37] as a good example is it late last year I think they've been paying dividends for something

[00:20:40] 47 years in a row and they cut the dividend in half or eliminated it I don't quite remember

[00:20:44] but this stock took an absolute hammering right and so there's no way to know which the

[00:20:48] dividend aristocrats the dividend kings are going to be in the future and so dividend growth is

[00:20:53] I think there's there's risk to it that a lot of investors don't realize to your point I think

[00:20:57] it's easy to focus on the income and psychologically when the markets are down if that keeps you in

[00:21:02] your seat and keeps you from making mistakes with the portfolio I absolutely agree there there can

[00:21:07] definitely be some behavioral benefits to it but at the end of the day dividends aren't free

[00:21:11] money a lot of people see them as an additional source of return but you're just moving money from

[00:21:16] the businesses balance sheet to your pocket basically right and so the company must be less valuable

[00:21:22] after the dividends paid and so to your point the total returns are really really all that matters

[00:21:26] and a lot of new investors get caught up in this and this is where I I think have a major concern

[00:21:30] with it is you have these accounts touting the power of dividends over time and you get newer or

[00:21:35] novice investors focusing just on the yield and selecting only stocks that pay a dividend

[00:21:40] and dividend stocks have done relatively well historically like absolutely they perform pretty

[00:21:44] well but it's not because they pay a dividend it's because they're usually profitable companies bought

[00:21:47] at good prices and they have conservative investment mandates at the company they're run very well

[00:21:52] so if you can create a portfolio with those characteristics which are the characteristics that actually

[00:21:56] drive returns over the long run and kind of ignore dividends I think you can build a better portfolio

[00:22:00] and you can still get that dividend income yeah and I've noticed some of these accounts they also

[00:22:06] even some that have like you know hundred thousand a year in dividend income when you ask them to

[00:22:12] you know tell you about why they invested in that business they usually have a really hard time

[00:22:17] right even then they tend to focus on the dividend whether it's like looking at the payout ratio

[00:22:22] compared to their earnings or free castle oftentimes they don't even look at that which to me

[00:22:27] should be one of the first steps if you want to see if there's actually some sustainability

[00:22:32] there to the dividend but they're I've noticed they don't do the basic homework on the

[00:22:37] companies themselves they just focus zoning on the dividend and nothing else matters

[00:22:44] yeah I mean the irony in this is that I own more dividend stocks than all these these guys because

[00:22:48] I own 12,000 stocks I own all of them right and so I get into these fights with them that I

[00:22:52] call that car I do more dividend stocks than you do right so it's not about the dividends I have

[00:22:56] no problem with dividends I certainly want to you know keep the dividends that are paid to me but I

[00:23:01] think I mean as an indexer I'd argue the type of work you're talking about to analyze a company

[00:23:06] isn't worth doing in the first place I know you disagree with that I'm sure to let your listeners do

[00:23:10] but again I'm an indexer so I buy a store it's that strategy but you're right I think a lot of us

[00:23:14] we see these businesses especially Canadian dividend stocks like the banks or the telcos and the

[00:23:19] utilities they just feel invincible right like we have this kind of like oligopoly and some of

[00:23:26] these industries I guess and it just feels like the gut feeling is those companies are never going to go

[00:23:30] away they're always going to be profitable they're always going to do well and that could be true

[00:23:34] but buying good businesses at bad prices isn't a good investment and you can buy bad companies at

[00:23:39] great prices and it can be a great investment so by just focusing on the wrong metrics things like

[00:23:43] the dividend yield you're not really putting together a very thoughtful portfolio in my opinion

[00:23:48] and if you can just keep your expected return the same by diversifying and owning other companies

[00:23:53] like what you're doing is concentrating your risk and you shouldn't really expect a higher return

[00:23:57] by concentrating your risk you should expect a lot more volatility but not necessarily a higher

[00:24:01] expected return over the long run so I think people suggest diversifying or the dividends like

[00:24:06] I have no idea what the yield is on my portfolio couldn't tell you yeah I mean either I mean and a

[00:24:11] problem too especially a higher dividend yielder is especially those are looking to achieve like

[00:24:15] 5% dividend or more they tend to be very concentrated in certain industries white you said telcos

[00:24:22] I guess industrials maybe real estate you also have utilities they tend to be those that are most

[00:24:29] concentrated on so I think it adds up some level of risk there and the other issue I have especially

[00:24:36] with the higher yielder are the ones that have been paying a dividend so the dividend risk

[00:24:40] or crats or kings for 25 plus years is I always get the impression that hamstrings or

[00:24:48] the management team a little bit when the you know sometimes the better decision would be to either

[00:24:55] stop growing the dividend or potentially cut it for the longer term for the business to be

[00:25:00] more successful longer term but because they're so afraid to cut the dividend they actually don't

[00:25:04] do it which will impact the future returns that you'll have with with that company yeah and I think

[00:25:10] 2008 like the great financial crisis is a good example of that the Canadian banks as far as

[00:25:15] I remember didn't cut we're stopped paying dividends and in hindsight that all worked out for them

[00:25:20] but at the time when we're at the hard right edge of one of the most market meltdowns in history

[00:25:25] and it's a credit crisis and the banks are looking at their investors and going we have to

[00:25:31] keep paying these dividends because if we don't the share price is going to tumble so to your point

[00:25:36] I think in that moment paying those dividends may not have been a great idea but the optics around

[00:25:42] cutting a dividend are can be devastating to the company right so they continue to pay them and

[00:25:47] then again it all kind of worked out in the end but you're right it does it does constrain them

[00:25:53] and I know a lot of dividend investors see that as a good thing right because it forces management to

[00:25:57] be potentially more cognizant of what they're doing with their with their money because they know

[00:26:02] they've got these dividend payments they have to make and so they're maybe more conservative but

[00:26:05] if you look at the literature on this it's it's companies that have conservative investment

[00:26:11] that's that's the key factor that you want in a company it's not that they pay the dividend so

[00:26:15] if you have a good management team that doesn't pay a dividend but manages their their capital and

[00:26:18] they're cash flow that way that's really the factor that you want to expose yourself to not

[00:26:22] necessarily just the dividend yeah or or they take on debt to keep the dividend which has been

[00:26:27] not happened there was an article a couple weeks ago about private equity and I know that's not

[00:26:32] the same necessarily as stocks in a lot of ways but they're this headline I think it was New York

[00:26:36] Times or maybe Forbes was that private equity firms are taking on record debt in order to pay

[00:26:41] out dividends so they're loading up these companies with debt in order to pay out dividends to

[00:26:45] satisfy investors is that a good business move I don't know it's good for the for the optics of it but

[00:26:50] yeah I'm not a big fan of private equity actually like dug into that some few months ago and

[00:26:56] I have some big issues with just the IR so the until rates of returns that they actually say because

[00:27:01] these returns are for the most part estimated they don't know for sure until they have an

[00:27:05] exited strategy right so they have these returns and then they bays are performance bonuses on

[00:27:10] that and then investors which are typically institutionals and up you know being stuck in the fun

[00:27:16] because they're only able to withdraw 50% of the capital at the end of the life expectancy of the

[00:27:22] fund yeah and the way that they draw capital to like the capital calls if you put a million

[00:27:25] dollars with the private equity firm but they only draw 300 of that your capital's tied up there

[00:27:31] because you have to be able to meet any capital calls that they make but then they calculate

[00:27:34] the IR are often just on the 300 that they drew but you've you've sideline to million dollars

[00:27:38] to make the investment so your actual investment return that you've earned yourself

[00:27:42] is not actually equivalent to the IR that the fund is posting right Michael James actually put out a

[00:27:47] very succinct and great piece on his blog about this a couple weeks ago that I read he tweeted about it

[00:27:52] but it's an interesting way to think about private equity and the fees are really really high and

[00:27:57] yeah no and that's what I found to I think Warren Buffett a couple maybe three four years ago said

[00:28:03] the same thing essentially you're yeah that capital frozen and then you know they'll just start

[00:28:09] calculating the IR on whatever they deploy even though you know you're not getting much on your capital

[00:28:15] maybe now a little more if you have it in the US Treasuries or short-term tea bills but

[00:28:20] yeah it's a big problem and I think it would be welcome I think in my opinion for more

[00:28:26] oversight in those industry but I feel like there's a lot of lobbying happening in the state

[00:28:31] to prevent that from happening now we'll move on so I'm sure you've been aware I know you had a few

[00:28:37] tweets about Bitcoin I was just kind of scrolling down your your timeline on Twitter or sorry

[00:28:43] X and I was just interested in knowing about you know your perspective for the spot Bitcoin ETF

[00:28:49] that launch into US knowing full knowing that obviously Canada it's been here for a couple years now

[00:28:55] so have you seen like greater interest from your clients since the launch have you had people

[00:28:59] just inquiring about it just because obviously I think Larry Fink has been that you're leading

[00:29:04] that amongst others I'm just curious to see the impact in Canada because I saw Bitwise survey

[00:29:10] that even a couple weeks before it was approved that very very few financial planners in the US

[00:29:15] were actually anticipating the spot Bitcoin to be approved this year and it happened 10 days

[00:29:21] in or 11 days in yeah that's interesting yeah Bitcoin's it's super fascinating I've largely

[00:29:27] been critical of Bitcoin well it's funny I started buying Bitcoin in 2016 and part of the

[00:29:32] reason I bought is just because I was getting a lot of inquiries about it so I was like okay I

[00:29:35] get to figure out what this is I'm going to learn to at least buy it so I can explain to my clients

[00:29:39] how I did it and what the what the experience was I was buying a little bit of it in 2016 and then

[00:29:43] I largely stopped and then the more I thought about it the sillier I thought Bitcoin was and so I'd

[00:29:47] get into these kind of discussions with with people on Twitter about Bitcoin and I realized quite recently

[00:29:53] that it's not fair for me to be critical of it if I haven't at least taken their viewpoint on

[00:29:57] it seriously and so they've got a number of books that they always recommend that you that you read

[00:30:01] to understand Bitcoin more fully so I went and I read those three highly recommended books this year

[00:30:06] once the Bitcoin standard the other one was broken money by Lynn Alden and the other one was Jeff

[00:30:12] Booth's price of tomorrow so I read all three and I thought they were great like they were they were

[00:30:18] great books and I mean a lot of my questions or skepticism around Bitcoin was largely addressed in

[00:30:24] those books and I was like oh okay so now I'm starting to see why Bitcoin enthusiasts are so

[00:30:31] enthusiastic about it and so I actually started buying a little bit of again recently I still think

[00:30:35] there's huge risks to it like it's not you see a lot of people talking as if they know the future

[00:30:39] and and Bitcoin is absolutely there's no chance of failure and I think that's a bit silly I think

[00:30:45] you have to take a look at this from a risk management perspective and just realize that lots of bad

[00:30:49] things can still happen to Bitcoin investors government intervention could get could ramp up right

[00:30:55] I'm not saying a will but there's absolutely risks right yeah I think I'm less critical of it now

[00:30:59] and I think I have a bit of a better viewpoint on it than I did before my clients generally like some do

[00:31:04] own it for sure and some people will come to me and they already own some but they want to diversify

[00:31:09] or whatever and I'm not I don't tell people to sell or or to buy more or anything like that I think

[00:31:13] if you have an interest in it and you understand it and you're buying it for a good reason that you

[00:31:17] can elucidate to me without just speculating like I want to buy it because I think it's going to go up

[00:31:23] well that's very very speculative and that's fine if you want to do that with a little bit of your

[00:31:26] money but I don't think people should make a core portfolio position built around a very volatile

[00:31:32] and speculative asset but you want to go through a couple bucks and scratch the itch to manage a bit

[00:31:37] yourself like absolutely interest hasn't really picked up since this body T.Fs in my experience but

[00:31:43] that could just be a bad sample bias like a lot of my clients I've worked with for a long time and

[00:31:47] they've been critical of it for a long time as well so it was kind of a like when the spot ETFs came

[00:31:51] out I expected the price to do nothing and it largely did and then it's it's it's come back so I

[00:31:56] think a good chunk of it was priced in but yeah if you want to own it I have no problem with it.

[00:32:01] No and I think that's a good point like look I own it is probably too big of a portion of my portfolio

[00:32:06] but it's because I started buying essentially after the crash in that early 2018 and to add to what

[00:32:13] you were saying for risk I actually initially bought Bitcoin in 2013 but the exchange that I bought

[00:32:19] it on essentially was you know they ran away with the money and was a bit of a scam so I lost half

[00:32:25] a Bitcoin back then so I was kind of snake bit in a little bit and then got back in later on

[00:32:31] but I think your tweet had some really good points and you had some people that were kind of going

[00:32:35] back and forth with you but that's what I like always remain respectful even if you disagree

[00:32:40] and I try to do the same on on Twitter and one of the big I think issues with Bitcoin is for people

[00:32:48] who want to actually own the Bitcoin it's not it's a learning curve so especially if you want to

[00:32:54] do self-custody whether it's cold storage or if you want to do some kind of multi-signature service

[00:33:01] like there's a couple of them out there they don't come to mine right away but I think Kasa is

[00:33:07] one of them that's pretty big I think it's scary for a lot of people right it's just different

[00:33:11] versus just going into their broker their online broker and just you know buying an ETF and then

[00:33:16] you click it's done you know it's the same as buying an index fund so have you seen that being a

[00:33:21] little bit of an issue with clients where either just kind of struggling to get started and just

[00:33:27] that fear of messing it up basically yeah and it's a real fear like I have my Bitcoin in cold storage

[00:33:34] like on a wallet I don't own a lot just to be clear but yeah I have it in cold storage and I tried

[00:33:38] to sell it like a couple years ago and I couldn't figure out how like it'd been a couple years since

[00:33:42] I bought it and like had figured out the wallet and I was like I can't remember how to sell this

[00:33:47] so I had to do a bunch of research and I kind of just gave up I was like how would I

[00:33:49] ever just leave it because it's hard to interact with unless you're kind of in that space all the time

[00:33:53] and really learning and thinking about it and I think about people like you know my mom or

[00:33:56] kind of older generations you might not have the same technical capabilities as younger generations

[00:34:00] and I think about her trying to interact with Bitcoin and I'm like she like she can barely you know

[00:34:05] she has we have to reset her password three times a week on her email right like there's no way

[00:34:10] there's no way she's getting into Bitcoin and so I think the ETFs at least give people the

[00:34:13] opportunity to interact with the price of Bitcoin and if that's why you're investing then I think the ETF

[00:34:18] is a great way to do that there was an article yesterday that I tweeted about about a guy who lost

[00:34:24] $350 million with a Bitcoin yeah yeah that's a replies I was looking at yeah yeah and I was like how

[00:34:30] is this not a problem right and and I was just posing that question to people on Twitter because

[00:34:33] maybe there's a great answer that I just don't know about and you you mentioned multi signature

[00:34:37] wallets in kasa I just learned about that yesterday from that that Twitter thread was like okay so

[00:34:41] there are safer ways to interact with Bitcoin but the risk of losing at all

[00:34:47] is is real and so if you're trying to own it directly in self custody yet unless you're very very

[00:34:53] careful and have some redundancies in place the possibility of losing everything is real

[00:34:58] and like if you've got a hundred thousand dollars in cash and physical bills you're probably not

[00:35:02] going to lose it unless it's taken from your rob or something like that but if your entire Bitcoin

[00:35:07] is written down on a piece of paper because it's just a seed phrase or something you lose that paper

[00:35:11] or the ink dries you spill wine on it or whatever it is you've got a real problem so I think the ETF

[00:35:16] solved that problem but I know a lot of the maximalists and enthusiasts that's not why they

[00:35:20] necessarily own Bitcoin like they do believe the price is going to go up of course but they own

[00:35:24] it because it's a lot of them are you know very anti-government and so the self custody and the

[00:35:28] trustless aspect of it is actually a feature not about yeah yeah and I mean that's the part why I

[00:35:34] own it right to me I see that a little bit of like insurance against our financial system just

[00:35:38] because there I'm sure you can agree there's been a lot of weird stuff happening especially since

[00:35:43] 2008 2009 which is government intervention so to me that's the way I see it and when people ask

[00:35:49] me like how much did I own I just say look you know I can't really tell you how much you should

[00:35:53] own I usually tell them we learn about it learn how it works and then you know usually I will tell

[00:35:59] them to be able to deal with the volatility I'll say just on whatever percentage you're comfortable

[00:36:05] with going to zero yeah I'm not saying it will but at least like that if you see a drawdown that's

[00:36:10] 50% you're not gonna panic so that's usually the approach I take when people ask me what

[00:36:15] percentage of my portfolio and the upside you know technically could be so big that even just

[00:36:21] of 1% you know could be 10x I don't know right but if it goes to zero then you're just losing 1%

[00:36:27] so that's the way I see it yeah I think that's a totally reasonable way to look at it right and like

[00:36:33] for me I own it because it's a hedge against me being wrong about it and then I don't know that

[00:36:36] Bitcoin is gonna 10x but there's this like what if aspect right like everybody says okay I get

[00:36:42] off zero have fun staying poor you're not gonna make it and I make fun of those people and then

[00:36:45] I'm like what if they're right like me and I know there's no way to know so a small allocation just

[00:36:51] gets me owning it and if I'm wrong about my previous thoughts on Bitcoin then I'm kind of hedged against

[00:36:57] my own my own mistake no that's great and I something I hadn't mentioned that I wanted to chat about

[00:37:04] I guess it just goes with Bitcoin a little bit do you get a lot of clients asking about owning gold

[00:37:08] especially in the last like three four years just kind of curious with obviously the you know

[00:37:14] like a better word the money printing that's been going on with all the the governments do you

[00:37:19] see a higher interest in gold from some of the more conservative investors I think I think

[00:37:25] with gold it really depends on your your world view in a lot of ways right like to your point

[00:37:29] with with money printing and government intervention in the markets you get a lot of people who are

[00:37:33] very concerned about that and gold is a way to kind of have some sort of physical asset right that

[00:37:39] in theory is a little bit more inflation resistant and so for for certain types of people they're

[00:37:44] very big on on gold for others they have no use for gold they don't understand why you wouldn't

[00:37:49] own gold and if the market's going to return some kind of equity risk premium in the future where I

[00:37:54] can get a reasonable return net of inflation over a long period of time then they don't see the

[00:37:58] utility of gold so I think I think whether someone wants to own gold or owns gold is more

[00:38:03] reflection of that person's view on things like government and the state of the world and that type

[00:38:08] of thing we talk about it from time to time with clients like as index investors we own all the

[00:38:13] gold miners anyway and I know that's not obviously quite the same as owning gold because there's a ton

[00:38:16] of like management risk and stuff there but you do have exposure to commodities especially if

[00:38:20] you have some home bias in your portfolio because the Canadian markets a little bit more bias towards

[00:38:25] the resource sector but yeah it really just depends on the person I don't recommend an allocation

[00:38:29] specifically to gold for clients but if they're really adamant that they want they want something

[00:38:33] sure we can do that okay no I was just interesting just the kind of discussion that people will

[00:38:38] or the question are there any other questions that sometimes you get a pretty frequent from

[00:38:43] from clients just like they'll want through your perspective on a certain type of asset that

[00:38:48] I didn't talk about didn't mention it's usually just stocks that have done well recently like in

[00:38:53] video it's popular these days right or Tesla when Tesla was on that crazy run like should I own

[00:38:57] Tesla and this is just the classic investor mistake that that we're all biased to is look at the

[00:39:04] returns imagine that I bought that a year ago how much money I would have made is now the time

[00:39:09] to buy it is it gonna keep going up and a lot of this is just recency bias and and hindsight bias

[00:39:14] in these these sort of standard human errors that we make but inevitably whatever the shiny object of

[00:39:19] the week or the month is we we're gonna get questions about it and that's a big reason why people

[00:39:23] hire folks like us is to keep them in their seat and keep them from making mistakes and that's not

[00:39:27] me making a prediction on where those assets are going to go in the future but it's to keep them

[00:39:32] making rational decisions as frequently as possible about their portfolio and not getting sucked into

[00:39:36] these headlines and news events and that type of thing yeah that's funny you mentioned that because

[00:39:40] I was listening to you familiar with macro alf on Twitter yes actually yeah yeah yeah exactly

[00:39:48] Zitalian and he was I was listening to an interview of him and he was talking about Nvidia and

[00:39:53] saying similar things to you is like it's the neighbor test right because even if you have a good

[00:39:58] portfolio is performed pretty well if your neighbor owns Nvidia and he's triple his money in the

[00:40:04] matter of a year then you're gonna hear that and say why am I not invested in Nvidia so that's

[00:40:11] just bad benchmarking right and so we see we just have clients to do this all the time the S&P is

[00:40:15] up 12% why is it my portfolio 100% S&P 500 right well I mean other markets do better over

[00:40:21] different time frames and if you're diversified you're always going to be upset about some part of your

[00:40:24] portfolio that's that's entirely the point that's that's the risk you are trying to systematically

[00:40:29] kind of diversify away right but I mean remember the people who have conviction and companies like

[00:40:35] Nvidia many of them have the same conviction going into stocks like Peloton and Zoom and

[00:40:39] and the darlings of the of COVID and you get wiped out right so like nobody buys a stock they think

[00:40:44] it's going to go down they buy a stock because they have the conviction that it's going to go up but

[00:40:47] markets can be very punitive and you're not generally rewarded for taking these these big risks on

[00:40:53] individual companies and you only hear about the winners right so yeah and I've been listening to

[00:40:58] an audio book recently and I'm not finished quite yet but he one of the big things he mentioned is

[00:41:04] that since especially the last 20 years or so the stock markets have been really focused on price

[00:41:09] appreciation and less so on the actual businesses and he goes and makes a case for dividends because

[00:41:17] having a dividend and he's talking about obviously sustainable dividends and businesses that are

[00:41:22] growing not necessarily the 78% 10% yielders but he said by doing this you actually make sure that

[00:41:29] you're investing in businesses if they have a sustainable dividend and you're less focused on

[00:41:34] the price appreciation and he mentioned that that is actually you know a potential big problem

[00:41:39] brewing because we're so focused on just the price appreciation you have any take on that I know

[00:41:45] it's a bit of a curveball here but I'm just curious to hear what you think yeah it's interesting I think

[00:41:51] I don't know I think I mean we've talked about dividend investing how focused dividend

[00:41:54] investors get on the dividend to their own detriment sometimes because they're not looking at the

[00:42:00] price appreciation or the depreciation or they're not looking at the total return and you probably

[00:42:03] to your point have people on the other side of that really that are just buying in order to try

[00:42:08] to realize some sort of price appreciation and don't care about the business the profitability

[00:42:12] of the business like if you think about all the companies out there somebody owns all the stocks

[00:42:16] right like every every stock so I often get into these kind of discussions where it's like oh well

[00:42:20] I would have never you know nobody's buying that stock well somebody owns all the shares right like

[00:42:24] not one person but all those shares are owned by people so investors do own all of the shares

[00:42:28] and I'm sure nobody is investing in companies they think are terrible and are going to go down

[00:42:31] at value right but there's gonna be a lot of good companies there's gonna be a lot of bad companies

[00:42:35] and people get fixated on recent price appreciation maybe to their own detriment and they pile in

[00:42:40] at the top and you look at things like arc for example the ETF and it was in my and this is probably

[00:42:45] my own hindsight bias but it was so obvious to me that this thing had to come back down to earth

[00:42:50] and when things like that happen most people lose money because money piles in at the top

[00:42:54] the only reason they're buying is because they see it going up and so more money piles in it

[00:42:57] it becomes this exponential problem where eventually things kind of dry up and it's like musical chairs

[00:43:02] right the party stops and there's just no chairs for anybody so I think an unhealthy focus on only price

[00:43:07] appreciation is probably equal or equally bad to an unhealthy focus on only the dividends right

[00:43:14] this it's the total returns that matter you want to earn or own good businesses over long periods

[00:43:18] of time and if you just earn reasonable returns over very long periods of time you will build wealth

[00:43:23] but people want to get rich today right yeah yeah I mean FOMO is a powerful drug

[00:43:27] yeah yeah yeah it's an advisor like I I experienced my own FOMO when I see these things like

[00:43:33] I tweeted yesterday is like oh the best thing about being an index investor is that I don't care

[00:43:37] about impudence earnings call and then I see it spike after hours and I'm like oh man like

[00:43:41] the FOMO is kicking in you know I do own it it's a big position for me as well because because

[00:43:45] I own the index but you see everybody high-fiving and celebrating because they were you know predicting

[00:43:50] this and had big positions that the FOMO kicks in for real yeah imagine being a high dividend yield

[00:43:56] investor only and not having any stake in Nvidia through index fund so that would be that would

[00:44:01] not be the best feeling and the returns of the market are largely driven by a small subset of

[00:44:05] stocks over time right and so that's the idea behind it X-ings you don't know where the next

[00:44:09] Microsoft appeler and video is out there but they do exist and you want to own them before they

[00:44:14] become the next Microsoft appeler and video you don't want to own them once they're already the biggest

[00:44:18] most expensive companies in the world because typically your future returns are lowered when you buy

[00:44:22] these big expensive stocks so indexing gives you that ability to at least own the next

[00:44:26] market is buying the haystack instead of the needle as I think as I think Vogel said no I definitely

[00:44:31] and now the last question I wanted to talk to you about so like I talked to you before we started

[00:44:36] recording and people know I work in pension and retirement so I don't like to talk about my

[00:44:41] employer because I like to keep things separate although they're well aware of the podcasts but

[00:44:46] essentially we have two plans so we have a defined benefit plan legacy plan and then for new

[00:44:51] employees or employees will roughly in the past 10 years of the fine contribution plan both are

[00:44:56] very generous one thing that I've seen on both ends whether it's the DB or the DC plan is people

[00:45:03] don't have a very good understanding I have also noticed that people tend to equal any pension

[00:45:09] plan to a DB plan that's something I've kind of seen quite a bit and people tend to also

[00:45:16] think that all DB plans are equal are you seeing the same thing because obviously I mean I could go

[00:45:22] on and on about all the differences all the you know the funding ratios and so on but is that

[00:45:27] what you're seeing as well from clients traditionally I'd say yeah like you mentioned earlier I work

[00:45:31] with a lot of physicians and physicians generally don't have a pension plan so it's not something

[00:45:36] that I've had to spend a ton of time with but I do have a lot of clients that have pensions I think

[00:45:41] you're right a lot of people when I ask them like new new clients or whatever do you have a workplace

[00:45:46] plan of subkind and their answer is usually yeah I've got something but they don't often know much

[00:45:52] more than that right so I ask is it like one of those things where when you retire you're going

[00:45:56] to get an income for life or do you actually see your investments and get to choose them and they

[00:46:00] go oh no it's that I get to choose my investments so you're right they do you can plate the idea of

[00:46:04] a pension as being one or or the other without really knowing the differences pensions are great I

[00:46:09] love them I think you have probably a more interesting or even better perspective than I do on things

[00:46:14] like funding ratios and the sustainability of these pension plans but you bring up a good point

[00:46:19] I mean you look at companies like was it Ford I think in the US and Sears Norteil these

[00:46:24] pensioners and these private pensions they got largely wiped out and so some of these are not as

[00:46:28] gold-plated as maybe we think they are but there are I think there's a couple things especially

[00:46:33] in Canada or at least in BC like the municipal pension plans they're pre-funded they're pretty

[00:46:38] well-funded they're like multi-employer pensions I think and so yeah like owners and Ontario yeah yeah

[00:46:43] yeah so they're there I think relatively robust compared to something like Norteil where it's

[00:46:47] like a private plan or something the other thing people can do maybe a lot of people don't know this

[00:46:51] but you can do something called a copycat annuity is that something that's ever that you're familiar with

[00:46:56] uh no I have an idea of like what it is just based on the name but it's uh yeah yeah so if

[00:47:01] you're worried about the health of the pension or the sustainability of the pension

[00:47:05] you can buy an annuity with your pension assets at retirement and it has to look basically

[00:47:10] identical as to what you would have got if you took the pension but you can basically transfer

[00:47:14] the risk of your pension from the pension company and the pension manager is to an insurance company

[00:47:19] in exchange for buying an annuity so that can also be an option for those who are worried about

[00:47:24] the health of their pension plan okay now I wasn't aware of that I guess it must vary from

[00:47:29] pension to pension I'm assuming they would take the commuted value and then bring it to the

[00:47:33] insurer yeah and you have to this isn't something I have a lot of experience with as I mentioned

[00:47:37] because I don't deal with a lot of pensions but the annuity that you buy the copycat annuity

[00:47:42] has to basically be identical to what you would have gotten the pension so you have to work with

[00:47:47] somebody who's done these before you have to work with the insurance company work with your

[00:47:50] pension company work with an advisor or an accountant or a tax lawyer somebody who knows these things

[00:47:55] very very well yeah so it's not something you just want to try and set up yourself but there is a way

[00:47:58] to kind of transfer the risk from the pension to an insurance company yeah and I was talking with

[00:48:02] a colleague of mine too and a lot of people seem to think that a DB pension is guaranteed

[00:48:09] and I always like to remind people that it is a promise and promises can be broken I don't want

[00:48:14] to make people panic obviously but it is a promise and it's not a guarantee and recently we saw

[00:48:21] with the auto workers negotiation I think in Canada part of the one of the things that they gained

[00:48:27] and I will say gained an air quotes because I don't think it's necessarily a gain as they

[00:48:31] had a defined contribution plan then they went to DB going forward and my question was that okay like

[00:48:38] I don't know how the auto industry will look in 15 20 years from now and if I were then I'd rather

[00:48:44] have a good DC plan where I can actually know that the money is set aside and I control the investments

[00:48:51] a promise from a company that there could be a lot of disruption in the next 15 20 years especially

[00:48:57] if you're not in why even if you're retiring in a few years obviously you're going to be receiving

[00:49:02] income from that well that's why a lot of companies have gone from defined benefits to

[00:49:07] define contribution plans right just take the risk off of the employer or the pension company and

[00:49:11] put that risk into the hands of the actual employee and the employer can kind of just wipe their

[00:49:16] hands of it and say hey we gave you the money we contributed what you do with it is your problem

[00:49:19] right so I can see why companies move primarily towards defined contribution plans it's pretty rare

[00:49:25] for companies to go the other way I find from a DC plan to a DB plan so that's interesting that

[00:49:29] they did that yeah I think it's just the current state right where he had workers that had a lot

[00:49:34] of bargaining power with these automakers I think they used that to their advantage by again I feel like

[00:49:41] the leadership of those unions I probably don't have a deep understanding of how pension

[00:49:45] plan works and I think it was maybe misguided a little bit I mean maybe it ends up working out well

[00:49:49] for them but I think there is definitely some risk for the the plan members there and one of the things

[00:49:54] I always mention about the fine benefit plans is they're as strong as obviously the funding but also

[00:50:00] the formula because a lot of people think it's index it could be conditionally index it could

[00:50:05] also have no indexation at all where you're losing purchasing power so that's why I'm always when

[00:50:10] I hear people that don't know a lot about pension plans and they think that DB plans are all great

[00:50:15] you know I'm always I always have a really hard time because I know there's so many differences

[00:50:21] for sure and I think having some kind of you're right like the risks aside right like your

[00:50:26] pension may not be there I think there's a pretty good probability at least for the public pensions

[00:50:29] here that that's not going to be an issue hopefully I will say that many people who otherwise

[00:50:35] wouldn't be prepared for retirement and maybe aren't that financially literate or aren't saving

[00:50:40] enough or wouldn't save enough on their own that pension really does backstop them and this is

[00:50:44] why I love CPP people you know church me on Twitter all the time because I do love CPP because I've

[00:50:49] seen it I've seen retirees who are basically saved by CPP who wouldn't have contributed enough for

[00:50:55] their own retirement otherwise I think for for many pensioners that's that's likely the same so the

[00:50:59] pension puts them in a far better spot the other thing is it's a lifetime pension right so it's a

[00:51:04] longevity hedge if you live to be 110 great you got income coming in yes inflation can be in risk

[00:51:09] yes inflation is capped on some of these plans as well so it might not actually match the CPI

[00:51:15] increases over time but you do often get some inflation protection but the big thing is that you don't

[00:51:20] have to worry about what's going on in your portfolio as much in your portfolio a volatile portfolio

[00:51:25] risky assets doesn't have to do as much of the heavy lifting I told the story to somebody recently

[00:51:29] but my happiest client ever was this this retired doctor and he was in his I think late 80s maybe when

[00:51:35] I took him on but he had taken basically every penny and bought an annuity back in like the 90s

[00:51:41] when interest rates were pretty high and he had something like eight thousand dollars a month of

[00:51:45] income coming in in his 80s and the only other asset he owned was his townhouse and he was the

[00:51:50] happiest client I ever had like we never talked with the markets he didn't care right like you didn't

[00:51:54] really need my help in a lot of ways you just wanted to come and we get a small portfolio right but

[00:51:58] 99.9% of his income came from this annuity and there's actually good research I believe that shows

[00:52:03] that people with a new attized retirement income actually live longer right and that's probably

[00:52:09] just a function of the reduction in stress so I think if you can get some kind of fixed income that's

[00:52:12] guaranteed in retirement you're going to likely have a better outcome in many cases but to your

[00:52:17] point it's a promise not a guarantee yeah and maybe last question on this what do you think about

[00:52:22] viewing CPP as like fixed income in your portfolio when you retire that's kind of what I like to

[00:52:29] view it at I think it's a good way to look at it it is a fixed income it is an inflation adjusted

[00:52:35] fixed income which is very difficult to buy because even annuities in Canada you can't really buy

[00:52:39] as far as I know annuities that are actually indexed to CPI like to inflation you can buy

[00:52:45] annuities that have fixed indexing like it'll go up by 2% per year but you can't actually have an

[00:52:50] an annuity that's tied to whatever CPI is right so CPP is actually pretty much the only way to

[00:52:56] guarantee yourself a real inflation hedged pension for life so it is the definition of fixed income

[00:53:03] and it's probably one of the safest incomes that you can go out and buy because it's a government plan

[00:53:08] so I think it's a good way to look at it yeah and even if you could get it fully index I mean

[00:53:12] obviously the cost would be pretty ridiculous like insurance companies are not stupid right they'll

[00:53:17] hedge accordingly oh of course yeah you're going to pay for it through the nose but the peace of

[00:53:21] mind that that gives you and just knowing that your consumption is kind of locked in at least for part

[00:53:26] of your income and knowing you don't have to worry about that I think can be pretty powerful like when

[00:53:30] we run retirement plans we do that's called the Monte Carlo analysis so you run basically a thousand

[00:53:34] simulations for example that says hey when we're projecting returns they're not going to be linear

[00:53:40] like even if you get 5% on your portfolio you're not going to get 5% per year and the order of returns

[00:53:45] that you earn is going to be really important to your outcome so we run a thousand simulations

[00:53:49] but those that have pensions are fixed income obviously those simulations look a lot better

[00:53:53] most of the time because there's no variability on the returns of that and they can just get

[00:53:57] that fixed income over time and to your point it can allow them to take more equity risk with

[00:54:02] their portfolio because they have this source of fixed income and that can actually provide a much

[00:54:05] better outcome because they have a higher expected return on the portfolio over the longer yeah and

[00:54:10] great book for people want to learn more about that kind of stuff is retirement income for life by

[00:54:15] Frederick a bit test see you know yeah you know the book as he was a former I think had actuary

[00:54:21] of more no ship hell or life works or whatever they've changed your name into yeah there's another

[00:54:26] really good book that is a great book for test books are awesome Alexander McQueen and

[00:54:31] Moshmalewski both Canadians and they've written a book called pensionized your nest egg I want to say

[00:54:37] and it's about this this concept that we're talking about about taking at least you know a portion

[00:54:41] of your retirement and creating some kind of guaranteed income stream out of it at least to hedge

[00:54:46] your fixed expenses in retirement it's a great book no I think that's it pensionized your nest egg by

[00:54:53] Milewski and McQueen yeah that's it yeah yeah so for people interesting but

[00:54:59] no I think this has been a great conversation before I let you go mark do you want to just let

[00:55:03] us know where people can find you and get in touch with you if they're interested sure yeah

[00:55:08] Twitter or X I'm still I'm still not used to calling it XA so yeah so call it tweets that's kind of

[00:55:14] where I hang out most of the time my handle there is at mark McGrath CFP people can email me they

[00:55:20] can look me up on the P.W.L capital website as well my email is m McGrath at pwlcapital.com and

[00:55:27] I'm always happy to chat with people and thanks that was great great to be here and thanks for

[00:55:32] the conversation yeah thanks for coming on Mark the Canadian investor podcast should not be

[00:55:37] taken as investment or financial advice. Braden and Simon may own securities or assets mentioned

[00:55:44] on this podcast always make sure to do your own research and do diligence before making investment

[00:55:50] or financial decisions