Answering Your Financial Questions | #420

0:00This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We are hosted by me, Benjamin Felix, Chief Investment Officer, Ben Wilson, Head of M&A, and today, Louis BB, Wealth Advisor and Associate Portfolio Manager at PWL Capital. It's good to be back. We've got another AMA episode. This is number 420. Yeah, we've been cranking through the AMA episodes as regular listeners will be well

0:30aware, but we did try something new this week rather than sourcing from the massive bank of unanswered questions that we have from the Rational Reminder audience that we are still working through, although less so today. On my YouTube channel, we asked if viewers over there had questions that they would want us to talk about on this podcast. We did get a different kind of flavor of questions. I think there's a lot of audience overlap between my YouTube channel and the podcast, but they're not the same audience. Part of the idea there was that we will post this

1:01episode as a collaboration, which is a new feature that YouTube rolled out, I don't know when, a while ago in fairly recent history though, where you can post a video that is co-posted by two different channels. So we'll post this as a collaboration between the Rational Reminder YouTube channel and my YouTube channel, which will expose the episode to more of my audience. So if you're here from that, for that reason, coming from my channel, welcome to the podcast. If you haven't listened before, in case there are new listeners, I will just mention real quick that PWL Capital, who sponsors,

1:35I don't know, we all work at PWL Capital. I don't know how to describe it, but PWL produces the podcast. PWL Capital is a wealth management firm that works with Canadian families, businesses, and other entities like not-for-profits and charitable organizations to manage their portfolios and help them make good long-term financial planning decisions. And this podcast, which we've been doing for, it's getting close to a decade now, which is pretty crazy, is a platform that we use to share things that we're thinking about, that are coming up with our clients, things that we're working on, and to communicate with investors, clients, and otherwise, and our peers all around the

2:09world, has become a global audience, which is pretty cool. It also helps us test ideas and learn things. Louis will chat with you a little bit about how that feedback loop works later. So we are joined this week by Louis, as I mentioned in the introduction. He has been a guest in a couple of past episodes, but he's not always on as a co-host. He recently won the National Financial Planning Awards 2026 edition with his submission of a written financial plan and its accompanying presentation

2:40to a panel of peer judges. So it's a pretty cool concept, the Financial Planning Awards, and it's obviously very cool that Louis won. So after we go through the AMA questions, we will talk a little bit about the Financial Planning Awards and what an award-winning financial plan looks like. And in addition to that, so we will talk about that process, but then I kind of alluded to a second ago, Louis is going to talk about some of his thoughts stemming from his last appearance on the podcast and the discussion in the Rational Reminder community that followed. Wrapping up the introduction

3:11here, I do want to mention if you have considered working with PWL but have not yet reached out, we don't charge for initial consultations. And I mean, you guys, Ben and Louis can both attest this. I think we pride ourselves in not being salesy when we're meeting with potential new clients. I'm saying this because I saw some discussions on Reddit recently, just from people who had considered working with PWL but had never really dug into the details. I would encourage people just, if you've wondered about what it's like, how much it costs, which is part of the questions that I was seeing online, but also what the services are and what it feels like to work with

3:46us, I would encourage people to just reach out. Related to that, we will save it for the end as usual. But we do have an incredible review of PWL's service and client experience that someone posted as a review on Apple Podcasts. If you're curious at all about PWL and what working with us really looks like, as opposed to just what it sounds like on the podcast, I do suggest listening to the end of this episode to hear that review. Very nice to read from our perspective. Anything else from you guys before we jump into the AMA? I'll just kind of highlight that, at least in our case,

4:18a conversation doesn't cost anything. It's worth coming to see if what we offer is something you might be interested in. And even if it's not, we try to do our best to point anybody in the right direction, whether that's they're more suited for DIY or different advisor or to work with us at some point in the future, then we try to just equip people with the information they need to make an informed decision. The thing that I've really loved seeing is meeting with somebody, figuring out together mutually that right now is probably not the best time to work with our team, but then seeing

4:52them come back in the future, or maybe even just say, hey, we had a great experience. I know somebody in my life who'd benefit from your service and your advice. I want to put you guys in touch. I think personally, I'm a big believer in good karma and what goes around comes around. So no, anybody who wants to have a conversation and see if we can help in any way that we can, even when that doesn't mean working with us, we're all for it. I like that. And the reality is that consultation process is with a usually very experienced financial planner that's having a ton of those meetings and meeting with

5:22regular clients. So, I mean, worst case, maybe you learn something. Yeah, for sure. All right. Should we jump into the AMA questions? Yeah, let's do the questions. I can read the first one. This is by It's CO. Hi, all. Love the podcast. I'm a recent engineering grad working towards becoming a financial advisor and eventually a CFP US-based. What are some of the things you or the advisors at your firm are glad you did early in your career to set yourself up

5:56with the skills needed to be a great financial planner in the long term? What did you do to identify good mentors? Thank you always for the excellent episodes. I do have thoughts on this, but do you guys have thoughts before I jump in? Early on in my career, the way I approached it before I even had my first career job, my dad was an advisor. So I kind of leveraged his network and said like, is who should I talk to to kind of learn more about the industry? So I asked people to have conversations to learn about

6:26their journey, what they'd recommend doing and to just get better prepared for coming into an industry job and also build my own network at the same time. Over time and as I've evolved and spent time working at PWL, I think my approach would evolve now knowing what I do after working in the industry for 16 years now. I would probably kind of just look at the different content pieces that are out there, follow financial influencers on LinkedIn, YouTube podcasts that are reputable and just try to reach

7:02out and build connections. And you never know what's going to happen. I do that today in my current role just to meet advisors and learn about their practice and just hear how they're doing things differently. Sometimes we glean stuff that we can implement at PWL and other times we're offering advice or insight for how they can improve their own practice. But there's always something you can learn by having conversations and applying yourself to learn more, whether it's through content or designations or continued learning of any sort. I think my advice is very similar with the overarching

7:39theme of you should absolutely be a sponge. And what I mean by that is just absorb anything and everything. You're going to get some good stuff. You're going to get some bad stuff. I reflect on my career path leading to PWL. I definitely didn't start here. Started at a bank, then more of a private wealth management, financial planning firm, and then PWL. And every step of the way, I learned something. I learned a lot about what I love. I learned a lot about what I don't love or what I want to do differently in terms of how I interact with my clients and the team. And I didn't get that

8:13experience by reading or just talking to people. I had to just go and do it a little bit, figure it out myself, then take that, take the best versions of everything that I learned and then apply it where I am today. I think that you should try to connect yourselves to Ben's point with as many good people as you can in your industry. Find people that you look up to. They don't have to be the most decorated in terms of designations. They don't have to work with the most households or manage the most amount of money. But if you just look at somebody and you say, man, I think you're a good person.

8:43I think you take care of your clients and you do the right thing. Again, coming back to good karma, I think that that connection is just going to serve you so well in the long run. It's a good point. Just to add to what you're saying, I had a less traditional path to becoming an advisor. I started on the compliance side of the industry. I view those years as seven years where I learned a ton about the industry. It was not necessarily the most glamorous career. You're always enforcing the rules and telling advisors what they're doing wrong and how they need to

9:15adjust how they're talking to clients and meeting the regulations. But I learned a lot about the rules. I learned about what not to do. There's a lot of people that are under close supervision or doing things that could get them into trouble and are not always in the best interest of clients. And then that led me to the path where I am today to work at PWL and truly doing what I think is the best we can for clients. I'm going to reiterate, I think a lot of what you guys said, but my opinion is that if you want to work in a field, if you want to be a professional, and maybe this is just obvious to say, I don't know,

9:48you should get as credentialed as possible as early as possible within reason. Like, I mean, you want to do reputable credentials in the field, but that's what I would do. And that's what I did when I graduated university. I went straight into doing the biggest credentials in financial services. I was in engineering, like the person who asked this question, finished my degree. When did an MBA with a finance concentration, which is how I got into this kind of general field. I got an internship in financial services, which is how I got into this specific field. But before I'd

10:21gotten my last MBA exam marks back, I had already registered for the CFA program, knocked at all three levels in the next three years, and was concurrently working on the CFP. It was pretty intense, I guess. I don't know. But within roughly three years of starting at PWL, I'd done the CFA, the CIM, and the CFP. I learned a ton doing the educational materials. And then creating content for me has been another huge source of learning, like really specific knowledge in the field of financial

10:52planning and private wealth management. I'd been writing a blog prior to starting at PWL. And then when I started at PWL, I was doing financial planning and investing basics presentations to employees at companies. I was building the presentation materials, which was a great learning experience. And then doing the presentations was also great. I was still writing blogs back then. And then I started doing white papers. And then as people listening know, obviously I started doing videos and podcasts later. Something that's a little bit unique about PWL and Louie, maybe you can speak to this too,

11:22Ben, maybe less so. Well, I don't know, but this is your first advisor role, like you said, but we get a ton of throughput at PWL. We meet a ton of people, potential clients and existing clients. When I started at PWL, I would spend full days at a company's office, not PWL, but a third priority company that we were advising the employees of. And I would meet 16 people in a day in these 30 minute meeting blocks. It was wild. Those days were wild. I remember doing that too. Yeah, you did that. You've done that too. It's no joke. You'd be completely drained by the end of

11:54the day, but you're getting in just these insane reps. It's hard to get those reps in, I think in most settings. And it's one thing to know this stuff. And Louie, you kind of mentioned earlier, like it's not stuff that you'd necessarily read in a book. It's one thing to know stuff that you've learned and read, but it's a whole other thing to be able to communicate that to another human in a way that's going to be useful for them to go forth and make real decisions. PWL advisors today, like I'm not in a client facing role anymore, but PWL advisors today have just so much throughput between existing

12:24clients and meeting with potential new clients that they probably get more reps in, in a month. This might sound crazy, but I think it's actually true. They probably get more reps in, in a month than many advisors get in a whole year. And we often hear from new advisors at PWL. And again, this is something that Louie, you can speak to that the learning curve when they started at PWL is crazy steep and that they learn more in a few months at PWL than they had in their entire career prior. And that's not to disparage other advisors, but PWL just has a lot of clients, a lot of complex clients. We're busy meeting people. So you learn a ton. It's also not to elevate us above

12:58others. Our lived experience is that people that have come here have expressed that they have learned a lot in a short period of time. And we've seen this already in the past year of doing M&A. I've talked to a lot of advisors. We've had five teams join us and someone from each of those teams has already expressed, wow, the way things are done here are different. And I've learned a ton and my clients are better off for what we're doing here at PWL. It's a really cool experience to be part of.

13:29I have two thoughts there. The first is that thing that you mentioned, Ben, where we just get way more reps at PWL than maybe somebody in a different setting at a similar stage in their career. It's one of the things that I loved, but also hated about the bank because the name of the game is volume and candidly sales. So I remember being at the bank and I would be in like 15, 20 meetings a day, but they were low quality, low impact meetings where I wasn't really doing deep planning work or

13:59giving deep advice. And honestly, I wasn't gathering enough information from the people I was in front of to make a meaningful impact. But I was meeting so many different people with so many different, call it banking problems, where by the time I have showed up to PWL, and I wasn't deep in my career by the time I showed up at PWL, but I had already helped clients renew their mortgages, get new mortgages, business banking, private banking, complex credit. That was super valuable. But then I started doing that relatively similar model, I would say, without comparing us directly at PWL. We're seeing a lot of

14:35families. We're helping a lot of families, but the work is way more intense in such a meaningful and impactful way where one, we've skilled up tremendously as an advisory team because of the people that we're in front of. But two, Ben Wilson, to your point, all these M&A teams that are joining, we've been able to bounce ideas off of each other in a way that we haven't been able to before. Like I could talk to Brady or Jordan or Jacqueline or Phil about a certain planning item or idea, but now I get to talk to

15:05Connor and Taylor who have a totally unique perspective. I get to talk to anybody at MSC or any other team that has joined PWL and their takes are so cool. And honestly, I think are combining together so nicely where it's paving the way for what the next generation of planning and advice looks like here. Back to the other point where we're not elevating ourselves above others. As we find talented advisors that join the team or want to be part of what we're building, we all get better because of it. What we know rubs off on them and we benefit from the extra knowledge and experience

15:38from the advisors that come and join our team. It's such a cool team and experience to be a part of. To bring it back to the question that this listener asked, what are things that you or advisors that your firm did earlier in your career to set yourself up? I think a big one that we're talking about is joining the right team or the right firm. We've already mentioned it, but I've heard so many times from people who joined PWL who've already had a career in financial planning or portfolio management that they just learned so much at PWL because of the way that we operate and the practices that we have and the amount of throughput that we have. Where you end up working, I think

16:11does matter. Maybe that's obvious to say. Related to that on identifying mentors, I thought PWL was like the coolest firm ever before I worked here. I never thought that I would be able to get a job at PWL. I had them up on this pedestal. They're using index funds. I was at a mutual fund dealer where you couldn't even sell an index fund if you wanted to. They're using dimensional funds, which you had to jump through some hoops to get access to. So again, I just didn't have access to those products. They were portfolio managers as opposed to a mutual fund representative, which is what I was at the time. So I just thought they were so cool. Never thought I'd work here. When the opportunity came

16:44up with Cameron, I knew it was where I wanted to be. Cameron's been a great mentor on so many fronts. I don't have a formula to replicate that, but you'll know it when you find it. And to your point earlier, Ben Wilson, I know the reason that I ended up getting connected with Cameron is because I had been doing networking. I had called Dimensional Fund Advisors and spoken to folks there and told them that I was interested in their products and all that kind of stuff. And Cameron ended up calling them asking if they knew anybody in Ottawa because he was looking to hire an advisor on his team way

17:15back in the day. There were two other employees at the time on Cameron's team. Dimensional made that introduction because I had been networking with them. I'd called them. Having conversations, putting yourself out there, getting in front of people, which is like classic business advice. It really does matter. Lots of luck involved there too. But as my dad says, and I'm sure other people have said to you, you make your own luck at least to an extent. Yeah. On the mentor piece, having an openness and willing to learn all the time and also a willingness to learn from your mistakes. Cameron has also been a

17:47great mentor to me, but joining the firm, I met you, Ben, and you have also been another great mentor. And you and Cameron had two very different styles and I've learned a lot from each of you different ways. Like Cameron, very good delegative leadership. He's got more of a visionary style. And you had such a high standard for client advice that I had to force myself to level up to offer that type of advice to clients. And it wasn't always easy. I got some harsh feedback along the way, but

18:18I took it with a grain of salt. And this, I want to take it in and get better. I'm not going to go pout in the corner. I want to learn and be the best person I can be on this team. I don't think took it with a grain of salt is the right expression there. I think you took it to heart. I would give you feedback and you'd be like, damn, like, I'm not going to make that mistake again. You did level up and get better to the point where I was like, all right, well, you're good. Like I can leave a client in your hands and they're going to be in great hands. It was a rough road to get there for a little bit. Took a few times. Are you marching down the hallway to my office to give me some pretty blunt feedback?

18:49Yeah. Good times. That's fun. All right. Next one. I can read the question from Tinkertown123. Currently invested in 100% CAGE, which is the new Canadian listed CIBC Aventus all equity ETF, with access to a professional line of credit. I'm in my twenties. Would it be advisable to invest money drawn from a line of credit with a 4% approximately interest rate to increase my expected future returns? I'm still in residency, but will be an attending physician in less than

19:21one year. All debt thus far is interest-free federal and provincial loans. I do have comments here. I'll be really curious to hear from you guys. Louis, you work with a lot of physicians, so I'll definitely be interested in your practical insights here. But let me just rip through the thoughts I have to be clear. And maybe it's obvious from the question, but we're talking about borrowing to invest, borrowing money to invest from a line of credit. Physicians and resident physicians in Canada do get access to very attractive, unsecured lines of credit with low interest rates and high limits. So this is a pretty common question from physicians or soon to

19:54be physicians. In theory, which I'll talk about and empirically, which I'll also talk about, you can make a pretty good argument that people with high and stable future human capital with low financial assets, low current financial assets should borrow to invest because their human capital is bond-like and their ideal equity allocation is almost certainly higher than their available assets to invest in equities at that point in time when they're early career and have little or no financial assets. So there is a 2013 paper published in the Journal of Portfolio Management

20:28titled Diversification Across Time that argues that this is what people should do. And they're not even taking the, if you're a physician angle, they're just saying, this is what you should do based on your future expected earnings. So what they say, and this is a quote directly from the paper, a leveraged life cycle strategy, one that starts with a leveraged stock allocation and gradually decreases leverage to ultimately become unleveraged near retirement, produces a substantial improvement in expected utility over never leveraged stock portfolios earmarked for retirement spending.

20:59And this is still quoting from the paper, the gain comes from two sources. The first is improved diversification. Even if investors are well diversified across assets, they are insufficiently diversified across time. They have too much invested in stock late in their life and not enough early on. An initially leveraged portfolio can produce the same mean accumulation with a 21% smaller standard deviation. And continuing the quote from the paper here, the second source of gain comes from the ability to approach the utility maximizing investment level. Samuelson, 1969 and Merton, 1969 and 1971

21:33recommend investing a constant fraction of wealth in stocks. What we call in the paper, the Merton Samuelson share. The mistake in translating this theory into practice is that young people invest only a fraction of their current savings instead of their discounted lifetime savings. The big argument that they're making is that yes, it's true. People should have a constant allocation to stocks throughout their lifetime, but that constant allocation is not relative to your financial wealth. If you have whatever, a hundred thousand dollars invested, it's a constant fraction of your

22:04lifetime total wealth, including the income that you have not yet earned. So that's what their argument hinges on. So I'm continuing to quote here, instead of ignoring future retirement savings, individuals should calculate the present value of expected saving contributions and use leverage to invest some of those contributions in the stock market today. And still quoting the paper, following Merton Samuelson, we analyze a strategy that targets investing a constant percentage of the present value of lifetime savings in stock. This strategy calls for leveraged investing in the early years of life when the present value of future contributions

22:35is large relative to current savings, then reduced leverage and finally unleveraged investing as current savings grow and the present value of future contributions decline. So that's kind of the setup of the paper. And then they go through all their analysis. They run some empirical tests and show that it does improve expected outcomes. I think they're using U.S. data to test it. They're also using bootstrap simulations, if I remember correctly. Then they conclude, this article puts into practice Samuelson and Merton's original insight that people with constant relative risk aversion should invest a constant percentage of their lifetime wealth each period in stock. For young workers, wealth exceeds

23:09liquid assets. And again, that's the key to their argument. Thus, implementation of the Merton Samuelson rule requires leveraged purchases when young. Our recommended investment strategy is, this is not my recommendation, this is from the paper, just to be clear. Our recommended investment strategy is simple to follow. An investor begins by investing 200% of current savings in stock until the portfolio reaches a target level of investment. The investor then maintains a target equity investment level while deleveraging the portfolio, eventually reaching an unleveraged position with fraction

23:40lambda of, that's just a Greek letter they're using, of wealth invested in equities. And lambda in this case is the Merton share. It's kind of like their optimal lifetime equity allocation. There's a formula to calculate that. I'm not going to go into that, but it's not super complicated. If you want to learn more about that whole concept, we did a lot of coverage of this with Victor Hagani. I don't remember what episode number that was, but Victor Hagani and James White talking about the missing billionaires, their book. So when this paper came out, I think the first draft was like 2007, right?

24:12The paper came out. Paul Samuelson actually denounced it as a strategy in a speech, I think in 2008. He said this paper came across his desk and basically disagreed with it. And his comment was that you risk being entirely wiped out by using leverage and you have to stay in the game to have a good long-term outcome. But the others of the paper wrote an article countering that. They actually say that being wiped out in your financial assets doesn't really matter because most of your assets are your future savings derived from your human capital. So even if you lose your investments,

24:44most of your assets are still unearned future income. So you haven't actually lost everything, which is like technically true, but kind of sucks if you go bankrupt. Yeah, no kidding. So that's Samuelson. Samuelson is no longer alive to make arguments about this. Robert Merton is. And when he was on Rational Reminder, he actually agreed that leverage can make sense for young people for the same reasons mentioned in the paper. But he does not think borrowing on margin, which is one of the things the paper suggests doing, is the right way to do it due to the risk of wipeouts. So Merton says using options and ideally from his perspective,

25:19putting leverage, like putting this idea into a financial product makes a lot more sense. He basically says like expecting people to implement this on their own is crazy, but conceptually it's a good idea. So if there's a way that we can do it, have a financial advisor do it maybe, or put it into a financial product, then that makes a lot more sense. Dan Bortolotti, aka the Canadian Kutch Potato, who is usually a co-host on this podcast, but is not here today. He actually reviewed the book that these same co-authors of this paper wrote based on the paper. Dan did a review of the book

25:50in a blog post in 2010, a long time ago, geez, Dan. And Dan basically says that he does not contest the numbers. Like he thinks that the theory probably makes sense and the empirical results probably make sense. But in Dan's blog post, he says that the behavioral aspect really makes the whole strategy pretty tough to put into practice. Like you're borrowing money to invest. You have the potential of significant losses and the potential of total wipeouts. It's fine to say, well, you just get back up and again, and keep investing. But if you've got your line of credit with RBC or something

26:20and you end up losing everything, RBC is probably not going to like you very much. It might be tough to continue your banking relationship. I don't know. Probably doesn't feel very good either. So Ayers and Nellaboff, the authors of the paper, they do kind of address the behavioral criticism. So again, quoting the paper, they say, despite compelling theory and empiricism, many people have strong psychological aversion to mortgaging their retirement savings. Although families are encouraged to buy a house on margin using a mortgage, they're discouraged and prohibited with regard to their 401k accounts from buying equities on margin. We are taught to think

26:55of leveraged investments as instruments for short-term speculation, not long-term diversification. As a result, most people have too little diversification across time and too little exposure to the market when young. Based on theory and historical data, the cost of these mistakes is substantial. So they're basically saying, yeah, the psychology thing is real, but they don't think that people really understand the trade-off. They're kind of saying, yes, the psychological aspect is a real concern, but if you better understood what you're giving up by not doing this, you might think it actually does make sense to endure that potential psychological pain.

27:29So to take it back to the case of a resident physician, realistically, I'd probably want to see them build a strong financial foundation. We don't know a ton about this person's situation from their question, but I want to see them have a strong financial foundation before borrowing money to invest. Or I'd at least want them to use a conservative amount of leverage if they really want to borrow to invest. But I think ultimately this is going to come down to risk tolerance. And I think that comes up through the paper and the comments that I just talked through. Yes, it's like 100% equities versus 60% equities. 100% equities looks great on paper,

28:01but not everyone's going to do it because people have different behavioral loss tolerances. They have different risk tolerances, different risk capacities too. But even if you could do it, and even if it looks good on paper, a lot of people just don't want to take that much risk. So I think that ultimately ends up being the constraint, but it's a valid question. I think it just deserves very careful consideration. What do you guys think? I agree. It comes down to risk tolerance. The behavioral tendency is around money. The psychological piece of this is hard to predict, especially if you have not gone through an endured period of

28:34down markets with your own money, let alone with board money. As you said, on paper, this looks great, but it's hard to predict how you're going to react when the market's down 40% or 50%. If you happen to take money out at the wrong time or make a poor decision, there's a non-zero chance that you end up worse off than if you had just not used leverage in the first place. So if you understand the risks and the opportunity, and you think you have the discipline to remain

29:04invested throughout market ups and downs, then leverage could be a strategy that works. But going back to the house example, most people have no problem leveraging to buy a house. But when it comes to leveraging to invest, it's psychologically completely different. And when you see a $500,000 or a million loan drop to $500,000 in a span of months, like in 2008, 2009, that's going to be a lot more stressful for most people. I can't speak to the 2008, 2009 example because I was not working

29:37in this industry at that time. But to be clear, we're not pushing leverage on everyone. We do have some clients who use leverage. We have a very, very robust leverage assessment process that goes way above and beyond our typical risk tolerance process. We go through a whole bunch of stuff to make sure that it really makes sense for the client. But we do have clients who do it and who have been fine with it and who have had great outcomes. Markets have been so strong in recent history. It's been really beneficial for the folks who have done it. So it's not to say nobody should do this, but I think your point, Ben, is that you really have to be sure that it's right for you because if

30:12it does go wrong, it can go really wrong. You talked about your compliance background. You've seen stuff where this does go wrong and it can be really nasty when it does, especially if the client feels after the fact that they didn't fully understand the risk that they were taking. We're not saying nobody should do this, just that it takes very careful consideration to make sure that it makes sense for a specific person to do it. The magnitude of leverage makes a difference too. Like if you're doing a little bit of leverage, maybe it doesn't hurt as much, but it also probably doesn't benefit you as much as you might think. Like when we've done financial planning projections

30:46for someone that's comfortable with it, the amount of leverage has to be pretty meaningful, like six figures or seven figures to make a material impact to their long-term financial plan. Some people just like the idea of, I want to optimize as much as possible and implementing leverage is one way to do that. Acknowledging that there are risks with that approach. I have one clarifying question, which I think the RR community will pick up instantly, but if there's like a cross post to YouTube, the broader folks listening might not know this.

31:17Would you guys agree that an investor should not consider leverage to invest in like a 50-50 portfolio, 50% equities, 50% fixed income or bonds, and that they should just be in 100% stocks. And there's a different way to increase their future long-term expected returns before leverage even enters the equation. This is a tricky one because in classic portfolio theory, you should find the mean variance optimal portfolio, which probably consists of stocks and bonds, and then lever that up to your desired level

31:48of expected return. And then we can expand that to other assets too. Like, I don't know, I'm not recommending this and we don't recommend it, but people might use managed futures and gold and long-term bonds and all kinds of stuff, put that into a portfolio and then lever that up to their desired level of expected return. So that's, classic portfolio theory approach. In practice though, and Ben Wilson talked about how when you model this out, model leverage out, it doesn't tend to be hugely impactful. I think that's even more true when you account for asset allocation. So instead of thinking about the sort of portfolio

32:20theory angle of levering up the maximum Sharpe ratio portfolio to your desired level of expected return, if we think about leverage or borrowing money as a negative fixed income position, which I think is another reasonable perspective, when you adjust your overall asset allocation. So if we say instead of borrowing whatever, $500,000, we're going to shift your portfolio from 80% equity to 100% equity and say that works out to be $500,000 difference. And you model that out in financial

32:52planning software, the outcomes are very similar. If you have an 80% equity portfolio and you're considering leverage, maybe just go to 100% equities first. And if that gets you to the expected outcome that you want, maybe you don't need to borrow money. And if you want leverage on top of that, that's the next conversation. There are different perspectives on that, Louis, but I think in general, it does make sense to consider changing your asset allocation prior to introducing leverage. It could also be a good behavioral test. Like if you're a 70-30 investor, moving to 100% equity to kind of live

33:25out what volatility looks like in a 100% equity portfolio, it's going to fluctuate more than 70-30. If you can handle that and still have an appetite for more, maybe you take another step up and introduce leverage later. I had two distinct takes on this in relation to the question posed, especially given the number of physicians I work with. I struggled to identify, like I just met with one family today who have killed themselves to get to the point where they are now a staff physician. They've done 12 years of schooling and

33:57training. They've amassed a crazy amount of debt and paid it all off. I struggle psychologically to see a client like that put themselves again in debt. Even though there's an optimization to improve future expected returns, I think psychologically that's a pretty big barrier to potentially propose to somebody depending on the magnitude, I suppose. Are they averse to debt or is that you being averse to debt? It's probably a combination of the two, but I would say I try to step out a little bit more objectively and this specific family, it's more likely them. The other experience we've had is

34:30we've had this discussion where someone's had a mortgage and they're like, how can we optimize and leave her up to invest in the market? And we've said like, well, if you pay off the mortgage with your taxable investments, then we can re-borrow to invest in your portfolio. And the livid experience that we've seen with many clients is they pay off the mortgage and they're like, well, being debt-free actually feels pretty good. And we've got this extra free cashflow that we could just invest or spend. The people that said they wanted to invest or borrow to invest tend to just avoid making that

35:03decision and stick with the debt-free path. My experience too. We modeled this out for one family, a separate one, and it was paying off the mortgage, re-borrowing to invest, huge improvement to their projected long-term net worth. And then we paid off the mortgage and then he never raised re-borrowing to invest again. And that for us was just a bit of a sign that there was a huge sigh of relief when he paid it off. And to your point, Ben, there's just an improvement in cashflow and the ability to potentially save into the portfolio. It's not often that I've seen clients just re-borrow

35:37to invest. No, it's rare. I've seen that many times too. Exactly the same thing where it seems like a great idea. And then you, you show like, this is how much better off you can expect to be and all that kind of stuff. And it's like, yeah, this sounds great. And you get there. Okay. It's time to re-borrow. It's time to borrow against your house to invest in the stock market. Usually people are like, ah, like I'm actually good. Feels pretty good to be debt-free. More practically, I totally agree with what you guys are saying. In full disclaimer, I guess I'm a leveraged investor that I wasn't really thinking about to this point. I moved to a hundred percent stocks over time.

36:11I've now borrowed a percentage of my portfolio that I felt comfortable going to zero to become a shareholder of the firm. And I didn't want to sell my stocks to make that happen. So I've got an amount of leverage that I know that I can live with. If it goes to zero, I'm just going to keep working and I'll make myself whole. That is my more practical, less research-based approach to leverage that I think is worth a conversation with any family or client who's kind of taken those steps to really test the risk tolerance and make sure that they're not going to pull the plug when

36:41things get a little bit dicey. Makes sense. I've got leverage in my asset allocation too, and it's really not something that I personally worry about, but everyone's different. We're also a pretty biased sample of people. That's likely true, man.

36:57Do the next one. I'll read this one. I think this is from Kiwi Dev. There's a lot of letters and numbers. I'm going to assume it's Kiwi Dev. How do I start teaching my kid about the concept of money, its value, and most importantly, keeping them humble? I think you guys should start as the two parents, whereas I do not have kids. So I'll be interested to hear from you guys. The way that I've approached it since my kids have been old enough to know what we're talking about, we've just been super open about money and financial decisions, like all financial decisions.

37:30My wife and I just talked about it very, very openly. We bring the kids into the conversations if it makes sense to do so. And I think at this point, my kids, they range from age six to 11. They've all got a pretty good understanding of what money is as a general concept, separate from what cash is, which they've also had experiences with. But the general idea of money, they understand. They understand where it comes from, which in our case is largely me working. They get that. They get that it's scarce. Like it's not an unlimited resource. It's something that we have to be

38:02careful with. And they understand what it can and cannot do. I think they've all got a very respectful understanding of what money is and why we can't just buy whatever. Why I spend time in my office working, all that kind of stuff. Our approach has just been totally open and having conversations about that stuff with the kids involved. I think it's worked so far. We're quite transparent with the kids and my two oldest, we've set them up with their own bank accounts as well to kind of appreciate saving their own money. And anytime they get money or earn

38:37money, we tell them that they have to save 50% of it, put 10% away to give to help others. And then the other 40%, they can decide to spend, save or give more. And just to build that habit as an adult, are you able to save 40% of your income? Probably not. But if you build that habit early, you're going to set yourself up for success and gain appreciation. I'm also trying to teach them, they like to go spend their money on silly junk toys. When they buy something like that,

39:09I get them to reflect a few days later, that toy that you bought three days ago that you no longer play with. Was it worth spending the money? Just trying to get them to think through everything has value and you need to spend your money wisely on things that are meaningful and you're going to make bad decisions. They need to go through that on their own to figure out what's a good decision and what's a bad decision with money. And especially if kids are growing up in a wealthy environment, bringing them up with a healthy attitude around money, I think is important so that they have appreciation for how to earn money, how to save, how to budget on their

39:43own and not get arrogant or entitled and potentially set themselves up for failure. That money may dry up in the future if the parents are not constantly funding the kid's lifestyle after their age of majority. So they need to be able to build their own foundation to set themselves up for future success. What I've found to be powerful, I have tried to take as many learnings from Die With Zero behind me, that is not an ad for them, and just take some of those principles and try to instill it in our clients where if we identify that they have more money than they ever need for their own retirement

40:17plans, what can we start to do differently or how can we start to think about the excess differently? And a lot of clients are raising a lot of those same concerns where it's like we don't want the kids to just expect handouts. We don't want them to be arrogant. We don't want them to not appreciate money or think about helping others. I don't have the perfect solution for everything, but what I found has been a pretty cool sweet spot for our clients in practice is spending the money on experiences. So don't give them money to go buy whatever they want. We've got one client taking a

40:47family trip to Italy with a couple of different generations all headed there. They're going to go spend some time. They're going to take some time off work. And I know for a fact that they're not going to forget that experience. And I actually think they're going to take that experience and they're going to pass it on or try to pass it forward to the next generation. And it just creates multiple generations of wealth. They're not necessarily in terms of funds or the biggest portfolio, but in terms of memories and experiences. And I've seen it work really well for our clients. That's my take. To your point earlier, Ben Wilson, we definitely talk about hedonic treadmill and hedonic adaptation

41:20with respect to toys because my kids want to do the same thing. But then I'll do the exact same thing and point to like, do you remember this thing that we bought and now it's just sitting there or now we're going to go and donate it or whatever. And they kind of get that, but the allure of a new toy is pretty tough to combat. But when we talk through it, they're usually pretty good about letting it go. To your point, Louis, about spending on experiences. We went on a family trip to BC recently. Leading up to that, we did have a lot of conversations about that trade-off. The kids asked for a toy, or even if they asked if we can go out to a restaurant for dinner, we would talk about how

41:52we're going to save that money and we're going to allocate it toward a really good experience. Not worrying about spending as much when we're on our trip by being a little bit more frugal. Now, they seem to really get that. And one of the questions is about spending that's been impactful to your family, but we had a great trip and the kids remember that and are still talking about that way more than a random Thursday night trip to the local restaurant or a new transformer. We've had a similar experience with one of our clients. I know they're going to listen to this podcast and I know I'm going to get an email from them. They're going to like Antarctica in the middle of summer. It's not a decision I would

42:25make. I'm very excited for them nonetheless. But they've been telling me about how excited the kids are and how they're learning about the different animals and I guess like their roles in the ecosystems and they're kind of like making dinners and family events out of it leading up to the trip, which I actually think is in progress right now now that I think about it. It's been pretty cool to see that you can take every opportunity like this and flip it into a bit of a learning moment for the kids. This is a thing just to tie it into the literature on happiness and all that kind of stuff. That anticipation

42:57of a future experience is actually one of the most pleasurable parts of an experience, which is pretty interesting. The actual experience tends to be good while you're having it as long as it goes well. But that anticipation is huge and the memories are good too. But I think the anticipation, if I remember correctly, is actually even more impactful. Cassie Holmes talked about this when we had her on. For our BC trip, we had a countdown. We made it out of pieces of printer paper, but we had like a little tear sheet where every day for, I don't know, probably the month leading up to our trip, kids would wake up

43:29in the morning and they'd rip off the next sheet and it would show whatever. Now it's 29 days left and we're doing that every day, talking about the trip more and more. But I think building that anticipation is really, really valuable to getting the most out of trips like that. Absolutely. Okay, let's see the next one. This is from Denver Scribe. Wes Gray of Alpha Architect called value investing the worst strategy because of the long-term behavioral hurdles that have to be overcome of perhaps decades of underperformance. Given Eugene Fama was his

44:00doctoral thesis advisor and Gray's own work with value, are value tilts worth the behavioral risk of abandoning the strategy before a premium shows up? I would say that the value premium exists because of the behavioral risk of abandoning the strategy before a premium shows up. The people who abandon it are basically giving the premium to the people who don't. We talked about this with Wes Gray back in episode 69. He was a guest on this podcast. So I'm just going to quote from Wes here. I still believe in the value premium because I think human behavior are still on average going

44:34to miss it. And I think there's still risk there. You're going to buy crappy companies. Well, you should get compensated, but this sample and in this sample, he was referring to roughly the 2010 to 2019 period where value really got hammered. So Wes says it was a bad run because fundamentals were just really, really bad. I don't know why I would expect that in the future. I think value is still alive. I just think it's going to continue to be painful. Yes. Wes likes to say that value is the worst strategy ever. He also runs a value fund. It's got ETFs with value strategies. I think he

45:08says that somewhat tongue in cheek. He likes to talk about getting brain damage as a value investor, which he also says jokingly. I don't think he would tell you not to invest in value. I think the point he's making there is it sucks to be a value investor sometimes, but you're going to have to enjoy that if you want to capture the premium and the people who can't enjoy it are basically handing the premium to you. Nothing to add to that. I agree. It's largely behavioral. And often when you do wait around, premiums tend to show up in a big way that's meaningful to offset some of those extended

45:42periods of underperformance. All right. Who's got the next one? You. Me. From Frost X. Usernames are wild, man. Can the size of your portfolio adequately guard against sequence of returns? How much more would that be? If $1 million can adequately support your spending needs for your lifetime, but you've got two or 3 million in retirement accounts, does sequence of returns really matter? Theoretically, the larger your portfolio size relative to your consumption needs means that you could have a heavily equity weighted portfolio and not be at risk, but is there a

46:14threshold? Is it 2X, 3X, 4X? So this question is really just asking what safe withdrawal rate makes sense for an equity portfolio, not necessarily for a hundred percent equities, but this concept was the premise of Bill Bengen's original research on this topic that ended up becoming known as the 4% rule. He was asking what percentage of the initial portfolio value can you withdraw adjusting that amount for inflation thereafter without running out of money, even in the worst sequences of returns historically. And he was using U.S. stock and bond market data. In his analysis, we have had Bill Bengen on this

46:47podcast. If you want to hear him describe his research, you can find that episode. Sequence of returns, just for anyone who's not familiar with that term, is the concept of when you're withdrawing from a portfolio, the order in which you receive returns matters a lot. If you have multiple bad years while continuing to spend the same amount from the portfolio, you can really deplete your savings to the point that the eventual recovery is not going to be sufficient to bring you back anywhere close to where you need to be to continue funding your retirement in the long run, which is not great, obviously. So to answer the

47:17listener's question directly, that number, that withdrawal rate number is going to depend really on the data that you're testing it on. Scott Sederberg and co-authors found using only domestic stocks and bonds, but including data for 38 countries going back super far in history. They found in one paper, and again, only using domestic stocks and bonds, they found that a 65-year-old couple investing in a 60% domestic stock and 40% bond portfolio and willing to bear a 5% chance of financial ruin can withdraw just 2.31% per year. You need to have a huge portfolio relative to your

47:53withdrawals in that case. In a later paper, they find that a portfolio consisting of roughly two-thirds international stocks and one-third domestic stocks only fails 6.7% of the time under the 4% rule. So now we're back to 4% withdrawals and the failure rate is 6.7%. In that case, if we put it back to a 5% chance of ruin, which is kind of the standard in that strand of research, the withdrawal rate, I don't know exactly what it would be, but it would be something lower than 4%. So depending on the data sample and the scenario that we're modeling, like how long the

48:25person is expected to live, results for this type of analysis are typically between three. I mean, in Scott's case, I mentioned a minute ago it was below three, but typically somewhere between three and a bit below 4% is what the research generally shows. You can get higher numbers if you say, well, we're going to add in small caps, we're going to add in small cap value in the historical data. You can get higher numbers. At a certain point, I think you're just torturing the data to get the answer that you want. So whatever. Mid threes, call it, is the initial withdrawal rate where we

48:56can say that sequence of returns risk is approximately mitigated just by having a large enough portfolio. I would reframe the question a little bit though, I think. Before you get to that, I think to make it even more basic, based on how the question is worded, it's almost implying that consumption does not change. If he's got a million dollars, the sequence of returns matter if you got two or three million, if your consumption level does not change, then sequence of returns by definition becomes much less relevant. But arguably as you're spending, as your portfolio

49:30value increases, there is more likely to be a lifestyle creep. So is the spending relative to your portfolio or is it staying consistent over time? I would kind of reframe the thinking as opposed to thinking about how much can you withdraw without worrying about sequence of returns. I think it makes a lot more sense to think about sequence of withdrawals rather than sequence of returns. Sequence of returns is really only a thing if you're focused on fixed withdrawals. If you really want to take out the same amount of money per period from your portfolio, then yes,

50:01getting a bunch of bad returns in a row really hurts. But if you can adjust your spending, that risk is largely mitigated. So it's really more sequence of withdrawals than sequence of returns that's going to get you. Sequence of returns matters given fixed withdrawals, but withdrawals don't have to be fixed. If you can allow for variable withdrawals, you can increase lifetime spending overall without increasing the risk of ruin and maybe even decreasing the risk of ruin by spending less in bad times and more in good times. And that flexible approach to spending can come from the life cycle model, which is one of the workhorse

50:36models in economics for how people save and spend throughout their lifetimes. We've talked about the life cycle model in lots of detail in past episodes. We talked about a recent episode 417 with Paul Kaplan, episode 340 with Ben Matthew, and episode 122 with Moshe Malevsky. And all of them in those episodes, they talk about how the life cycle model, how the variable approach to spending compares to something like the 4% rule. I got some notes on this for a different question too.

51:08The equities question, you can think about mitigating sequence of returns risk a couple of different ways. And one of the best ones is probably just being flexible in your spending, but I'll speak to some other research on that in a bit. Do you guys have any other thoughts on this one? We love flexible spending, or at least talking about flexible spending with our retired clients as they get closer to retirement. I think this will kind of interact with a different question further down. We've tried to frame thinking about clients' spending in kind of like two buckets. And I actually picked this up from Andrea Thompson's interview with David Chilton not long ago,

51:42where she has clients think about the spendable bucket, and then like the fixed bucket component of their spending. And she was thinking more in the context of an annuity. That was the question they were addressing, but we always want to know what does the client need to live with? And then what can they go without when times get tough? I think just having that separation just really helps clients know how flexible they can be with their spending. I love to use the example with other clients that I talked to. We have this family that loves cruising. They will do an annual

52:12cruise, usually throughout the winter. And we will meet at least once a year to retest their financial plan depending on what markets are doing to help them identify how much they can spend extra on the cruise relative to what they were originally planning or potentially how much less depending on if markets are down. And that exercise is so much fun. I will admit it's been fun because markets have been pretty positive over the last couple of years. So we usually get to tell them to spend more, but it's pretty cool to see how that works in practice and how we can help people also kind of smooth out their spending a bit. All good, Ben. Next question.

52:45Yep. Next one. I can take this one. This is from Aaron O 24. I would love to hear about your best purchases that you felt you got the best personal ROI on. Great value from a car, vacation, in-house basketball court, household item that changed your life, et cetera. Those are some of the examples they put down. So I'm not going to lie, man. I mentioned this in a recent video, so maybe people know, but maybe they don't, but I put a basketball hoop in my house. We did some renovations recently.

53:16We used to have like a Spalding, you know, the outdoor hoops that a lot of people have outside of their houses. We used to have one of those inside the house. We have this big, when you walk into the house, people hear this and imagine I have like a mansion. It's not, it's not a huge house, but there is a really big main room when you walk into the house with a really high ceiling. That's also like the kitchen is right there and stuff, but it's this big open room, which is one of the things that we loved about this house when we first saw it. So I used to have the Spalding basketball hoop in there, which is cool to have a hoop in the house. We did this renovation. We had to completely redo one of the walls as part of that renovation.

53:48It was actually just never finished. I decided as part of that to mount like a proper glass backboard, like breakaway rim NBA basketball hoop on that wall. So that's kind of a crazy thing to do, but we did it and it's awesome. Being able to shoot some hoops while I'm waiting for water to boil or whatever is something else. You have a basketball hoop in your like living room. Like if that close to your boiling water, we don't really have a living room. You walk into the house, there's a front entry and then you walk into a second door and then it opens up. The house is

54:20basically one huge room with a loft. And so the kitchen's kind of under the loft, but then the main room, the loft doesn't cover it. So that it goes up like two stories, probably more actually, cause the floors are each really high. I think the ceiling is like 30 feet in that room at its peak and it's just a big open room with a concrete floor. So in that room, which is directly connected to the kitchen. Yeah. There's a basketball hoop right there. Pretty cool. It's pretty cool. It actually wasn't that expensive. I guess everything's relative. The hoop wasn't that

54:50expensive. Getting it installed because we were already doing a bunch of stuff on that wall anyway, was not a huge deal. It probably devalued the house more than it actually cost to put in. Cause now whoever buys the house has to deal with the basketball hoop. Unless they happen to really want that, then maybe it increases the value, but I at least narrowed my pool of buyers. There you go. It continues to be a great purchase. If I start shooting hoops, the kids will come play and it's just awesome. Other stuff like kayak and a bike, good purchase. I mentioned our BC trip earlier. That was incredible leading up to it. And still after we're now a few

55:22weeks out from getting back from that trip and the kids are still talking about it, we put a sauna in our bathroom. And I know I probably sound like super privileged talking about that, but whatever we did that. And that's been awesome. Cause now my wife and I can just be like, you want a sauna tonight? Yep. Turn it on. It's right there in the house. Pretty nice. The only other one that I can think of that we did a while ago, it's been years now because we stopped doing, we moved into this house that we live in, which was six years ago. We used to get a prepared meal delivery service, which not like a meal prep service. Like they deliver

55:56healthy pre-made meals that you just heat up in the oven or the microwave. And we did that for maybe a year and that was awesome. But when we moved out of the city, we were outside of the delivery range for any of those services. So we stopped doing it, but I just found a new one that assuming they actually do the delivery next week, which sometimes I've had this happen before, they'll accept your order. And then the delivery date comes and they're like, Oh, actually, no, we don't deliver out there. So hoping that doesn't happen, but I did just find the new one that apparently delivers out here. So we're going to try that

56:26again. And that's the thing where it's like, you for sure pay a premium over just buying groceries and cooking, but the time saved is like huge. And if the quality of the food is still high, or in some cases, maybe even getting more balanced meals than you would, if you were cooking on your own, I think it's worth paying the premium. So if this service we've signed up for pulls through, I'm going to get back on that train. That was another really obvious time money trade-off that I found to be helpful back when I used to do it. Yeah. I've got similar ones like family vacations

56:58are always worth the money and it doesn't have to be extravagant. We rented a cottage in Peterborough last week and hung out with my wife's parents and brother and his wife and the kids had a blast and they'll be remembering that for the rest of the summer. And then bigger trips that the anticipation of the trips is always fun. Another one that we do, we always get like a night seasons pass at a local ski hill. We do a weekly family ski night. So everybody looks forward to getting out and

57:28getting active together, do them the summer. And then we've translated that into doing a weekly bike ride to local food trucks. So buying the equipment to do those things has been valuable. And then bigger, more extravagant purchase. Like a few years ago, we were kind of going through, like, we want to do something that creates memories for the family. Thought about a cottage or a boat or a pool and kind of evaluated the trade-offs. Like the cottage sounds really cool and having that cottage lifestyle, but it's another property to maintain. Feel obligated to go there. And with kids sports in

58:03the summer, it's like, how often do you actually get up there? And can the friends come and join you? A boat, similar thing. You got to go trailer it to the lake all the time. So we decided to put in a pool and the kids love it. And we try to use it in a way to kind of bless our neighbors and our friends and invite people over and have a fun time in the backyard throughout the summer. And it's been a great investment for our family. My three, if I were to think of the three most impactful ones for me, I was just telling you guys about my 49 inch monitor from a work efficiency standpoint and like studying, having one huge

58:38screen where I can just create smaller sub screens has been a game changer for me. Number two, this is kind of a weird one to say, my dog, like from a mental health perspective, I walk into the house. I have a great day. He's got a huge smile on his face. I walk into my house. I've had a bad day. He's got a huge smile on his face. I go out to my car and step right back in. He's got the same smile on his face. It just does something for your mental health. I think that is tough to get from other places. Number two, more of an investment than a purchase, but I would say

59:11anything that is related to my own health and my own fitness. I know you guys did a totally separate episode on this, which I think was awesome. Anything that pertains to like me weighing my food, gym membership, sports, going to the gym. There's usually a scenario where I score 30 points on Ben Wilson at least once a week. If we're playing basketball, maybe a couple of goals if we're playing soccer, it depends on the week. Everything that pitches in or contributes to me living a healthier, longer life, huge ROI. I think those are my three. Oh man. I don't think about

59:45those as much because they're like relative to some of the other stuff. They're not as large in dollar terms of expenses, so they're just kind of running in the background. But yeah, gym membership, love it. Anything related to playing in a basketball league or whatever, I don't even think about that expense. I'll do it. Stuff like that is big. And Ben Wilson, your pool, man. Ever since my kids went there, they've also wanted a pool. So thank you for that. Come on over. They can actually swim next time. And for the record, when Louis and I are actually playing together, he tends to be more flattened on the ground or of the core of the field. And I

1:00:18allegedly hear about all these goals that happen when I'm not able to show up. HR has got a phone book sized textbook in terms of the flagrant fouls and violations that have taken place between the two of us. We'll just leave it at that. There's been a lot of me hitting the ground, Ben Felix. I'll say that. I don't want to come play with you guys. I wouldn't if you've heard what I've just described. All right. Next question. I'll read this one because it's kind of two questions that I ended up putting together. One question says, is it wise that small cap value funds from Dimensional and

1:00:50Avantis weight the U.S. in such a way that mirrors a market cap weighted fund? I think they do this for tracking our reasons, but are there other material benefits from this style of weighting? They ask in brackets, should implementation of small cap value funds cap a single country weighting to a number to spread geographical risk? And then in another bracket, they're asking, because mega cap USA companies derive their sources of income globally, but small caps are more domestic based, essentially creating a huge USA overweight. And then the second question that I put together with this one asks, if you want to invest in a hundred percent small cap value stocks, would it make sense to

1:01:23weight them based on the global stock market country allocations and then add in a home country bias? Interesting question. So that one thing to note is that the Dimensional and Avantis allocation portfolios that are investing in multiple markets, those aren't small cap value funds. I don't know if that's what the question was referring to, but they do market cap weight. Well, depends on the fund. Some of them have a bit of a USA home country bias. If they're the American funds in Canada, they have a bit of a Canadian home country bias and then market cap weight the rest of the world. But they're not small cap value only funds. If you wanted to do a hundred percent small cap value,

1:01:56the first thing to think about is that there's no optimal country weighting approach. Even should you have a home country bias or not, debatable. We think so to an extent, but you could make the argument not. Ken French thinks so too. We're in good company that you should have a bit of a home country bias. Eugene Fama has said that you need to talk yourself out of market cap weights, which I think is a very wise starting point. So for the home country bias, like, okay, there's a little bit of tax efficiency there. So that's good. There's a little bit of currency volatility of reductions. Maybe that's good. There's correlation with local consumption. Anyway,

1:02:31arguments for a home country bias, minimizing expropriation risk is another one that Fama has made for arguing for home country bias. There's no optimal geographic weights, but the dimensional global portfolios that we use at PWL, which are the Canadian products, they've got a fixed weight in Canada. So Canada's about 3% of the world, which I'll reiterate in a second here. Dimensional puts about 30% in the portfolios that we use for our clients. And when we're building our own models that are not run by dimensional, we're doing the same thing most of the time, unless a client has a very specific preference, not to do that. And then Canada side, we're market cap weighting the rest

1:03:07of the world. But again, those are total market funds with factor tilts, not small cap value funds. I think if you're building a small cap value only portfolio, it's an interesting question, whether you should follow market cap weights or small cap value cap weights. I don't really have the answer. I guess to Fama's point, I'd maybe start with the market cap weights of small cap value. Market pricing should account for different like revenue source differences between mega caps and small caps risk differences, just the overall value of those segments. Market prices are always a good

1:03:39starting point. I had not looked at this in a long time. It was pretty interesting. I looked at the MSCI all country world IMI, which is investment market index index. So the country weights in the MSCI all country world IMI are 62.71% US, 5.6% Japan, 3.39% Taiwan, 3.09% UK, 2.99% Canada. There's that 3% I mentioned a second ago, and then 22.22% in other countries. So that's

1:04:11the global market cap weights. But then the MSCI all country world small cap value index is 53.87% US, 10.4% Japan, 4.13% Taiwan, 3.65% Canada, 3.63% UK, and 24.32% in other countries. Not immaterial differences in the overall allocations, almost 10 percentage points lower in US if we're taking global small cap value, market cap weights. But honestly, probably not going to move the needle

1:04:42much either way, whether you're 54% US or 63% US, and likewise with all the other allocation differences. So interesting to look at those data and interesting to think about whether you should change your cap weighting strategy, depending on the type of stocks that you're investing in. It's not going to make a huge difference either way. I would tend to want to look at market cap weights as a starting point though, and work from there. But yeah, whether you did market cap or small cap value cap, I don't think it's going to change your ability to meet your goals in the long run. We talk about this a lot. I think the best strategy for you is a globally diversified strategy

1:05:17that you can stick to. You can debate these optimizations for a long time, but if you find a plan that you're comfortable with and you can stick with, set it, forget it, and focus on the things that you can control to achieve your financial planning goals. It makes me super grateful that we've got like a research team who's really zoned in on this research so that we can go and just be in front of clients and try to help in other ways. Investing is pretty simple in Canada. You do not really have to get fancy or complicated for

1:05:48somebody to have a great experience, whether you're a DIY investor or a PWL client. It's just so fascinating how his planners were a little bit removed from these conversations to some level because the product landscape in Canada has really changed a lot. It still comes up though. I agree with what you just said, Louis, but you as the client facing person with my support or the research team's support, you still have to be able to defend what we're doing because it does still come up with clients, especially when Canada was not performing so well, which has reversed pretty aggressively in recent history. But when Canada

1:06:21was underperforming the US for a while there, we got a lot of questions about why do we have this stupid home country bias that's making me underperform the S&P 500? And so you do need to be able to defend those decisions, even if they've been pre-made at a different level. And we, like when we're making those decisions, which product are we going to use or how are we going to allocate across countries or whatever? Are we going to use currency hedging, all that kind of stuff. We have to be able to defend the position because that will help clients stick with it when it's not working out and they say, why the heck are we doing this? If we can say,

1:06:52well, here's why, and here's why we still think it makes sense, that goes a long way to keeping people in their seats. It's also just a beautiful thing that all of these pre-made decisions, whether at a fund level or a PWL level get made, it's always on the basis or on the backbone of research or academic studies or some sort of evidence that tells us why this can make a lot of sense, as opposed to the three of us just trying to speculate what is going to potentially lead to a better outcome. Agreed. We do have one more question on sequence of return risk leading up to retirement or FIRE.

1:07:25So the question asks, what are the important things to do when getting close to retirement slash FIRE? Is dynamic asset allocation a good strategy against sequence of returns risk? And maybe some more suggestions on how to stick to the plan or make sensible revisions during drawdowns in early retirement stages, like guardrails, et cetera, which is a withdrawal strategy. I would not really go for dynamic asset allocation. There is a 2016 paper, The Retirement Glide Path and International Perspective, where the author uses data from 19 countries. They're using the Dimson-Marsh-Staunton data in this case. So you look at 19 individual countries and the world market

1:07:57over a 110-year period from 1900 through 2009 to test a whole bunch of different retirement glide path strategies, which is not exactly dynamic asset allocation, but it's the same kind of flavor. The retirement scenario in this paper has an initial withdrawal rate of 4%, and then that dollar amount is adjusted for inflation thereafter for a 30-year withdrawal period. So we're again in that 4% rule approach to this analysis. They test declining equity strategies, so starting at a higher equity allocation and decreasing over time. They test rising equity strategies, where the

1:08:30allocation to stocks obviously increases over time, and static allocations, where you just keep the same allocation over time. And the author finds that static strategies tend to offer the lowest or near lowest failure rates and the highest or near highest expected bequest, like expected inheritance for the next generation or money left over at the end. They also offer good upside potential and overall the best downside protection. And the author points out that the static strategy to fully invest in stocks. And this is an older paper, so this idea of being 100% equity in retirement was not as

1:09:04common. More research has come out supporting that idea since then. So the author points out that the static strategy that fully invests in stocks has the lowest failure rate, performs reasonably well when tail risks strike and provides a higher upside potential than other strategies. And he notes that the strategy does have a higher standard deviation of outcomes, but the higher standard deviation indicates uncertainty about how much better off, not worse off, a retiree will be after 30 years. So he's this commentary in the paper around, we think about equities as being risky, but based on this analysis,

1:09:36it's kind of hard to call a strategy that has low probability of failure, provides similar downside protection, higher upside potential than other strategies. And he talks about sequence of returns in the paper directly. It kind of says, I know sequence of returns is supposed to be a thing, especially with stocks. But the language he uses, it does not seem to have been a key determinant of portfolio failure in the broad global sample. So there's that paper. And then there's the more recent paper from Scott Cederberg, which we've talked about on this podcast. And we've had Scott Cederberg in a couple of episodes

1:10:07to talk about the research. So that paper is beyond the status quo or critical assessment of life cycle investment advice. They use a different method called block bootstrap, but basically they sample from historical data to build out a whole bunch of hypothetical retirement periods. They do look at the 4% rule as their spending rule as well. Really interesting research. I would go listen to the Scott Cederberg episode if you have not yet, but they established that an optimal 100% equity portfolio with an approximately 33% domestic stock and 67% international stock portfolio produces the

1:10:40best results. And they got there by testing a bunch of different possible allocations, including allocations to domestic international stocks, domestic bonds, domestic stocks, bonds, and bills. So tested all these different combinations of assets. And they find this roughly one third domestic, two thirds international portfolio to be optimal. And they were looking at retirement income, conservation of savings through retirement, bequest at death, like the risk of running out of money was included in there. And then they test that optimal portfolio against a whole bunch of different

1:11:10asset allocation strategies, including 60% domestic stocks and 40% bonds, a target date fund representative of a lot of the target date products that exist on the market. They tested against all cash, which predictably does not perform very well for a long-term investor. And so they find that this optimal all equity portfolio really performs the best across all valuation metrics. One of the things they do find in the paper that is relevant to the listener's question is that leading up to retirement, if they allow the investor to change their allocation every year, they do shift to a 27% allocation to bills, which is

1:11:43basically like a high interest savings account, basically at retirement. And then they shift back toward a hundred percent equity in the following years. So they're a hundred percent equity. And again, this is the scenario where they can change their allocation every year. The optimal portfolio in their setup is a hundred percent equity all the way through until retirement. Then it's 27% bills and the rest in the optimal equity portfolio. And they shift slowly back over, I think seven years, if I remember correctly to a hundred percent equity. So that's an interesting finding and then directly relevant to the listener's

1:12:14question, but that allocation to bills, what they say in the paper is that it's their simulated investors response to sequence of returns risk that is created by the 4% rules fixed real withdrawal amount. So they're kind of giving a nod to my idea that I mentioned earlier of sequence of withdrawals risk. So they're saying that if we fix withdrawals, yes, our investor optimally allocates 27% of bills at retirement to address that sequence of withdrawals risk, as I would describe it. But in the paper, they also switch to

1:12:46variable withdrawals. So withdrawing a percentage of the portfolio each year, as opposed to a fixed dollar amount based on the first percentage of the first year portfolio. And when they switch to variable withdrawals, that cash allocation goes away. So I think that it speaks to what I kind of mentioned earlier, that sequence of withdrawals risk is really a better framing than sequence of returns risk. You can do a lot of portfolio gymnastics like that initial cash allocation to make fixed withdrawals work, or you can build variable withdrawals into your plan and you have to do less

1:13:17gymnastics. If someone really doesn't like the idea of variable withdrawals, they can find some middle ground. But I think people try and solve fixed withdrawals on the portfolio side, when in many cases, it's a better solution just to change the withdrawal plan from being totally fixed, which saves you from having to do those portfolio gymnastics. I think the other things that they're worth considering comes back to your risk tolerance, your time horizon, and spending relative to the size of your portfolio. If you're financially independent, retiring early, then you may be more comfortable

1:13:53with a higher allocation to equities. Whereas if you're 65, just by nature of where you are, you may prefer to have a lower allocation to equities. It's important to have a asset mix that you're comfortable with and that you can stick to. And then also, if you have more than enough money to meet your needs in a stress-tested financial plan, the sequence of returns does not matter as much. But as Ben said, if your plan is at risk, if there is a sequence of returns, then you should

1:14:25focus more on the sequence of withdrawals and be flexible in your spending over your retirement period. I find this question is very similar to one of the previous ones we answered, where you should have a really good sense of your cash flow needs, both the fixed component and the leisure or the variable component. You should just have a plan. If you have a plan, it's peace of mind, test different asset allocation models against the spending needs, test for sequence of return risk, and make sure that you guys are going to be okay. There is a lot that planning software can do. And I think just

1:14:58having access to that at some point, whether it's through an ongoing relationship like ours, or even just a fee-only or one-time engagement goes a long way. All right. That brings us to the end of our AMA. Okay. So now we're going to talk a little bit about this financial planning award that you've won, Louis, but we got some serious disclaimers before we can talk about it. So the National Financial Planning Awards in Canada are run by the Financial Planning Association of Canada, or FPAC, and the Institute of Advanced Financial Planners, or IAFP. PWL Capital, an affiliate of One Digital

1:15:31Investment Advisors, LLC. One Digital is a sponsor of the awards. As a result, One Digital, through its affiliate, has indirectly provided compensation to, or in support of the organizations that grant this award, this creates a material conflict of interest because a One Digital affiliated entity has a financial or sponsorship relationship with the award program. Sorry, I'm laughing because this is, we're in serious disclaimer land right now. With the award program in connection with which this recognition is being advertised. Consequently, this award should not be viewed as a fully independent

1:16:02or unbiased endorsement of One Digital, PWL, the recipient, or any advisory services offered by any of them. The recipient was evaluated by the awards judging panel against the award's stated objective criteria. However, you should weigh the existence of this affiliate sponsorship relationship when considering the significance of this recognition. The award is not based on and is not representative of any One Digital client's experience, investment results, or outcomes, and it is not a guarantee of future results. So basically, Louie won this award and PWL sponsored the award. That's the short version

1:16:38of the disclaimer. Take the fact that Louie won with a grain of salt, even though I think the awards process does everything it can to mitigate any bias, which I'll talk about now. So the way the awards work is there's a standard $50 entry fee. And then the entire process, so just to reiterate what I just said about the awards doing what they can to mitigate conflicts and biases, standard $50 entry fee, and then the entire process is completely anonymous until the very final stage where the finalists, based on the quality of their written plans, present to a panel of peer judges. So at that point,

1:17:11your identity gets revealed and the judges are judging your presentation by you as a person whose name and affiliations they know. Judges, and this is directly from the Financial Planning Awards documentation. Judges are looking for financial plans that deliver meaningful value to the client's real-life situation. Submissions are evaluated using clearly defined scoring criteria with a focus on the quality of advice, the appropriateness of recommendations, and the overall impact on the client's outcomes. I will also mention that Mark McGrath, who's the former co-host of this podcast and a

1:17:42former PWL employee, is on the judging panel, as is Noc Day. Noc joined PWL through acquisition earlier this year. So Noc is on the judging panel. However, she was recused from the judging of Louis' presentation. So at the point where the finalists are revealed, and there's an obvious conflict between Noc and Louis being at the same firm, Noc is recused from the judging process. Mark was not, but I don't think that there's a conflict there anymore. Mark's got his own practice now. He's no longer affiliated with PWL. In addition to that, there are nine other judges of the initial submission and the presentation

1:18:17with no known potential conflicts with Louis or PWL. There's the disclaimer. Are we ready to talk about the award now? That was a mouthful. I think we're good. It was important. It's important, yes. So Louis, you won this award. Can you talk about what was included in your award-winning financial plan? There was a lot. It was 47 pages long, and there was an accompanying slide deck where I made that presentation to the 10 or 11 judges, whoever was there. The goal, in my mind, in terms of what to

1:18:50include in that plan was, let's take two years worth of ongoing meetings with a family at PWL, so typical kind of client, and let's just try to throw that all into 47 pages and make it as holistic as we can. So in this specific case, it was a family looking to get to financial independence as soon as they can start transitioning slowly to more part-time work to be more present with their younger kids. There was an element of tax and corporate planning, an element of planning for

1:19:21disabled dependents long-term. And the goal was, again, understand the clients, their goals, their values, build a long-term roadmap that shows how on track they are as of today towards their goals. And then let's narrow in and figure out the different aspects of their financial strategy, whether that's tax, corporate planning, insurance, estate planning, retirement, whatever it may be. Let's try to condense that down into one engagement, which isn't how we interact with our clients, but it was the scope of this exercise and kind of showcase what the PWL way is all about.

1:19:55You submit the 47-page document, which gets evaluated, that brings you to the finals, and then you do your presentation. Between the combination of the two, what do you think made your plan and presentation stand out among the submissions? So I know strongly what didn't make it stand out. The first is that I didn't employ like one specific technique or planning idea that just totally changed the trajectory of this plan or the client's success towards their goals. It's kind of a pointy take, but I don't think I was the

1:20:25standout. And I will elaborate on what I mean by that. This is also double down on the pointy take. I don't think it was the client file. That was the standout. What I think was really the standout was the PWL way of helping clients with their financial planning and overall decision making, where we take a really holistic view. We start by just deeply trying to understand what motivates clients, what worries clients, the trade-offs they're willing to consider, using tools that we've either built in-house, thanks to Braden and the broader research team, third-party tools like

1:21:00planning software and conquest that we have access to, and then just trying to showcase the trade-offs between certain decisions in the most unbiased, conflict-free way that we can. That, I think, was the standout. To be honest, it's why I submitted the plan. I think we do top-caliber work. I say that about everybody on the team, which is, again, why it's not about me. I'm one player on a broader team. We all did the same work. This was just one file where I conveniently had 47 pages ready to go. But the process is really the winner. When you did the presentation, what kind of feedback did you get

1:21:35from the judges after you made your presentation? There is a big feedback element that's going to come out of this exercise. I don't have it in hand quite yet because I think most of the judges are on summer break. They've got younger kids. But a huge part of this is they are going to give me written feedback in terms of what do we do or what do I do as a representative of PWL that they think we can improve upon or continue to lean into. The main feedback that I got throughout that process to this point was more so on the communication of the plan and the delivery of the plan.

1:22:09I simulated basically a meeting as though the judges were the clients where I was presenting these ideas, explaining trade-offs, giving recommendations. But that was primary driver number two in terms of why I wanted to participate. One, I love what we do and I want to see as many people hopefully leverage pieces of this work and then try to make it their own. It's more so for the advisors and planners out there. Second is that we get so much PWL feedback on what we do because we're a big team. Everybody collaborates, shares ideas, helps each other. It's kind of interesting to get non PWL feedback

1:22:45because I agree and I stand by my comment that I think we're top caliber, but there are tons of other top caliber advisors that don't work at PWL and getting their take on some of our work is pretty appealing to me. So I'm pretty excited to see when that comes in. Very cool. Yeah. Interesting. We can say that overall the feedback is positive because you won, but it'll be very interesting to hear any critical feedback that does come from the judges. As you kind of alluded to, the feedback doesn't just benefit you. We are very collaborative internally. So you can take that feedback back to the team and like, oh, I did this. And this is a

1:23:20practice we normally do on our financial plans, but here's some good takeaways to how to improve going forward. Totally. The story is not, I'm going to gatekeep any of this feedback or even us, we should gatekeep any of the ways that we do financial planning or help people model different decisions. If anybody wants to know how we do things, or if anybody has feedback on how we can get better, just ask or put your hand up or we'll ask because the goal has helped as many people as we can. And I think the right way to do it is without an ego. I want to ask you, because you and I have chatted about this separate from the awards conversation. What have you changed your thinking on

1:23:53since the last time you were on this podcast? I've had a lot of time to reflect on this. I read every single RR community comment, YouTube comment, Spotify comment, you name it after the asset allocation in practice episode. And I'm super glad that I did what I found through conversations and through just my own analysis of a lot of those comments. And there's probably a big compliance spin on this to some level. There are multiple ways that you can frame risk to a client as it relates

1:24:26to investing. I started to think more about how we approach it, how I specifically myself approach it in terms of framing risk as volatility, short-term volatility in one's portfolio, really leaning into the psychological comfort of investing or discomfort. But what I found was, if you do that, you potentially miss the bigger risk, which is that people don't have enough money to meet their goals. My takeaway after digesting that was, let me start to ask some of my clients, new families that are checking out working with PWL, existing clients that I'm just staying in touch

1:24:59with all the time. Could you guys define risk? What is the worst thing that you think is possible that could happen to you or your family or your plan? And what I can tell you is that nobody said the worst thing that could happen to my plan is my 60-40 portfolio goes down 10% and it stays that way for a year. Everybody's feedback was, I'm scared. I'm not going to have enough money to retire. I can't help my family long-term. I've got parents or kids to take care of. I want to make sure I don't run out

1:25:30of money. And it really switched a light on in my mind that we're trying to help clients have a great investment experience, improve their investment outcomes. There's an opportunity to help them better along the way and coach them. There was a client that kind of framed it to me this way as he was exploring increasing the equity exposure in his portfolio. I basically pay for this twice. I hire you guys and pay PWL fees to coach me into becoming a more comfortable investor. So I kind of

1:26:01view that as a bit of like a behavioral bond-like element of my broader net worth. And then there's also the opportunity cost of having less in stocks and more in bonds as of today. And then when you think about the other sources of fixed income and his net worth, like his income pensions that are going to show up later in retirement, and you take a more holistic lens, it all kind of starts to fit in. So that's my long-winded spiel of saying that I listened very deeply to the feedback on that asset allocation and practice episode. My new refresh take that I will continue again, no ego, try to get

1:26:35better, help as many Canadians as we can, is coach clients to become more comfortable investing over time. Both of you guys actually talked about the compounded effect of financial decisions. You think about this one, it's probably one of the biggest decisions an investor or a Canadian will ever make. There's a little bit more thoughtfulness that's going into that. That's my renowned take. The client's point about hiring PWL being like an allocation to fixed income, at least from a behavioral perspective, and then not adjusting their asset allocation to reflect

1:27:07that. That's what they mean by paying for it twice. And so they're saying that because PWL is a behavioral fixed income allocation, they can take a little bit more equity risk. They're not over allocated to behavioral fixed income, I guess. Yeah, I think if you think about it from like a multi-generational perspective, this is again teaching your next generation lessons about financial decision-making money. If I potentially coach somebody to be too conservative or to actually become afraid of stocks, they're probably going to instill those lessons and those values into their kids.

1:27:40And those kids are going to grow up and they're going to feel fearful of investing in stocks. And I'm realizing now that I have an opportunity to impact not just the clients in front of me, but the kids that they have, the kids thereafter and what the long-term legacy looks like. So the goal is to play my role as much as I can and make a difference. Very cool. Ben, did you have anything to say? It's awesome. It's just cool to see the takeaways and just the culture of what we do here. As we get feedback, take it to heart and get better for it. It's a big benefit of the podcast too. If you want to realize you're wrong about something,