finance
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.
A listener, 'Morvich', sold 50% of their portfolio into a money market fund last year due to concerns about a market bubble and is now regretting the decision. They are seeking advice on whether to reinvest as a lump sum or through installments, and if their initial bubble concerns are still valid.
Benjamin Felix explains that research consistently shows lump sum investing to be statistically superior to dollar-cost averaging (DCA). In a study of six stock markets over 10-year periods, lump sum investing beat DCA about 65% of the time, with an average annualized cost of DCA around 38 basis points.
Dan Bortolotti explains that PWL Capital has an investment committee with five members, selected by a managed account committee, responsible for implementing overarching investment policies. The committee reviews and approves securities, culls inappropriate ones, and conducts due diligence on fund providers.
During a recent meeting, the PWL investment committee discussed new CIBC ETFs in Canada, which are seen as competitors to Dimensional funds. They also discussed the firm's active acquisition strategy and the process of integrating acquired firms' portfolios to align with PWL's philosophies.
PWL's investment committee benchmarks nearly all of its holdings annually to ensure they are delivering on stated objectives, particularly for index funds where performance is compared to the benchmark index net of fees. A notable case involved a US equity index fund with significant tracking error due to its structure.
Dr. Paul Kaplan defines life cycle finance as the economic branch focused on optimizing an individual's consumption, savings, and investment decisions throughout their entire life. He emphasizes the goal of smoothing consumption between working years and retirement, avoiding significant jumps in spending levels.
Dr. Paul Kaplan highlights the crucial distinction between risk tolerance and risk capacity in financial planning. He notes that these concepts are often conflated in common practice, but they are fundamentally different and both are important inputs into life cycle models.
Dr. Paul Kaplan explains that life cycle models provide a holistic view of financial planning, focusing on consumption as the ultimate goal. He contrasts this with conventional approaches that may treat saving, spending, and asset allocation as disjointed elements, emphasizing that his model integrates these aspects through net worth optimization.
Dr. Paul Kaplan discusses how his life cycle model differentiates itself by integrating with mean-variance optimization principles, a concept pioneered by Harry Markowitz. This integration allows for a more comprehensive approach to financial planning.
Dr. Paul Kaplan emphasizes the significance of human capital as a key asset in an individual's economic balance sheet, alongside financial wealth. He explains that this balance sheet, encompassing assets and liabilities including human capital and future consumption needs, is crucial for determining optimal asset allocation within his life cycle model.
The podcast highlights Dr. Paul Kaplan's career, noting his role as Director of Research for Morningstar Canada and a senior member of their Global Research team. He led the development of quantitative methodologies for fund analysis, indexes, and advisor tools.
The discussion explores whether it's worthwhile for investors to buy individual component ETFs instead of a single asset allocation ETF like VEQT, primarily for lower fees. Ben Felix calculates that a 14 basis point difference could amount to $300,000 over 30 years on a $1 million portfolio, but acknowledges the trade-offs in simplicity and potential for investor error.
The discussion notes that since the original question about VEQT fees was submitted, VEQT's management fee has decreased. Benjamin Felix estimates the new fee difference between VEQT and its components is now around six basis points, further shifting the cost-benefit analysis.
Dan Bortolotti explains his approach to using VEQT versus component ETFs for clients, prioritizing larger purchases of component ETFs and smaller TFSA accounts with VEQT for simplicity. He emphasizes that for professional implementation, the 'analysis paralysis' and rebalancing concerns that affect DIY investors are mitigated.
Ben Wilson highlights the difference in perspective between a portfolio manager implementing a strategy and a DIY investor. He notes that professionals, like Dan Bortolotti, have established processes to avoid biases like 'analysis paralysis' or avoiding rebalancing due to market jitters, which can impact individual investors.