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.
Dave Chilton, known as The Wealthy Barber, announced he is retiring at the end of the year to spend more time with family and friends following health challenges among peers. He plans to shut down active social media operations and step away from public appearances, concluding a decades-long career in Canadian personal finance.
Dave Chilton noted that while his book 'The Wealthy Barber' targets an audience under 45 and heavily skews female, his podcast appeals to an older demographic in their 50s and 60s who read the original book decades ago and are now seeking retirement and estate planning advice.
Discussing his pessimistic views on macroeconomics, Dave Chilton highlighted the unsustainable trajectory of United States government debt combined with unfunded liabilities for programs like Social Security, Medicare, and Medicaid, warning it will eventually lead to major economic pain.
Reflecting on four decades in personal finance, Dave Chilton stated that failing to pay oneself first remains the biggest mistake people make. He emphasized that automating savings and making financial sacrifices early leads to lower stress and greater happiness over time.
Marco Sammon and Chris Murray discussed the growth of leveraged ETFs, noting that while they are not as massive as traditional index funds, they have grown to a little over $100 billion. They highlighted that the fastest growth is occurring in single-stock and crypto products.
Chris Murray and Marco Sammon explained the mathematical components of long-horizon leveraged ETF returns, identifying a 'convexity bonus' from daily resets that works in favor of the ETF when the underlier moves positively, alongside a 'volatility drag' that multiplicatively reduces wealth based on variance.
Marco Sammon and Chris Murray stated that financing costs and daily volatility drastically raise the hurdle rate for leveraged ETFs. For a 3x single-stock fund with 5% daily volatility, the breakeven return required to beat the underlier is estimated at 170% annually.
Marco Sammon pointed out that inverse leveraged ETFs have seen massive capital destruction and outflows over their sample period, dropping from $93 billion in total flows including launches down to $13 billion remaining.
Marco Sammon and Chris Murray noted that despite structural headwinds like fees and volatility drag, dollar-weighted investor outcomes in leveraged equity index ETFs actually generated an extra $50 billion over the underlier during their sample period, driven by favorable market timing and strong recent underlying performance.
Victor Haghani, founder of Elm Wealth, discussed his upcoming book, "Get Rich Once and Other Financial Wisdom for Our Younger Selves," set to be released in early 2027. The book aims to provide financial guidance in a more accessible format than his previous work, "The Missing Billionaires," targeting a younger audience.
Victor Haghani discussed his forthcoming paper, "Who Killed the Random Walk?", which explores persistent puzzles in stock returns like excess volatility and momentum. The research posits that these anomalies are not fully explained by rational expectations alone, but are exacerbated by different investor types, particularly extrapolators or return chasers.
Victor Haghani explained his model, which includes three investor types: value investors, static investors (like those with strategic asset allocations), and extrapolators (return chasers). He argued that extrapolators, who base decisions on recent returns, and static investors, who rebalance to target allocations, exacerbate market volatility and create momentum, contradicting the idea of a purely rational, long-term value investor dominating the market.
Victor Haghani highlighted the difference between momentum investing and return chasing, noting that while momentum has a defined strategy and has historically performed well, return chasing is more gradual and detrimental. He explained that extrapolators, a type of return chaser, gradually increase equity exposure as markets rise and unload as they fall, leading to poorer performance compared to defined momentum strategies.
Victor Haghani explained that momentum strategies, particularly in risk assets, correlate with vol targeting. Vol targeting, which reduces exposure in volatile markets and increases it in calmer ones, aligns with momentum principles and contributes to better risk-adjusted returns. This correlation, along with the risk premium associated with momentum, helps explain why these strategies have historically persisted.
Victor Haghani discussed leveraged long-short direct indexing, a tax-loss harvesting strategy. He expressed skepticism about its value unless there is a belief in generating alpha, citing high fees and complexity. Haghani suggested that for most investors, simpler strategies like owning ETFs and performing tax-loss harvesting on them may yield similar results with less risk and complexity.
Victor Haghani shared findings from an experiment testing if advanced knowledge of news could predict market returns. While macro traders performed reasonably well with a 60% hit ratio, even sophisticated AIs struggled with proper bet sizing, initially taking on too much risk. Haghani noted that while AIs improved after being trained on financial principles, sizing remained a challenge.
Victor Haghani advised that investors should pay very little attention to the news, recommending a focus on sensible, long-term investing strategies. He emphasized that while staying informed about world events is important for being a good citizen, it is largely irrelevant for investment decisions.
Victor Haghani expressed concern over the amount of leverage in the U.S. stock market, particularly within leveraged ETFs and options trading, seeing it as a potential exacerbator of market instabilities. While acknowledging margin interest costs might deter some, he noted that hidden leverage and the potential for rapid declines, as seen with funds like Situational Awareness, are worrying.
Victor Haghani discussed the rationale for borrowing to invest, suggesting it makes rational sense for young individuals with high human capital and low financial capital, as it allows them to align their total wealth exposure with a desired stock allocation. However, he cautioned that leverage is expensive and variable, and for most people, especially older individuals with significant financial capital, it's likely not worth the complexity and risk of substantial loss.
Owen Zidar, professor of economics at Princeton, shares data indicating that most millionaires in America are not celebrities like Elon Musk but rather ordinary business owners who have become wealthy through unglamorous, private businesses. These "everywhere millionaires" often run mundane businesses such as auto dealerships, beverage distribution, or construction companies.
Owen Zidar highlights a significant shift in income sources over the past century, with entrepreneurial income from private businesses increasing substantially. In 1960, only 17% of top 0.1% income came from entrepreneurship, compared to 43% in 2022, while wage income decreased as a share.
Research by Owen Zidar indicates that the typical millionaire is more likely to be a 'Main Street' business owner than a 'Wall Street' financier. Only about 20% of top 0.1% income from private business owners comes from finance and real estate, with the majority derived from diverse industries like construction and healthcare, and present in towns across the country.
Owen Zidar points out that the path to becoming a millionaire is often through "mundane" or "dirty jobs" and takes decades, contrasting with the fast-money narrative often associated with Silicon Valley. These businesses are not always visible, unlike publicly traded companies.
The discussion highlights that while diversification is important for investing, accumulating significant wealth often requires concentrated ownership in a business. This approach, though riskier, has historically led to greater financial success, with entrepreneurs often starting small and reinvesting over decades.
Analysis of entrepreneurs shows that, on average, starting a business yields higher earnings than not doing so, even after accounting for failures. The median person also makes more money, suggesting that the potential upside of entrepreneurship outweighs the statistical risk, especially when considering the skills gained.
The discussion features Beaver Applin, owner of the Buckies convenience store chain in rural Texas, as an example of a 'Main Street millionaire.' His stores are described as football-field sized, generating significant revenue, with merchandise even being sold secondhand online for millions.
Couples who spent less than $1,000 on their wedding ceremonies reportedly experience the lowest divorce rates, according to research discussed on The Rational Reminder Podcast. This finding suggests a potential correlation between financial prudence in early marriage stages and long-term relationship stability.
Entering into marriage is described as a significant financial decision, carrying real legal obligations and potential liabilities, regardless of the romantic aspects. The decision of who to marry and how finances are managed together compounds across all major life decisions.
Financial compatibility is highlighted as a key, though often overlooked, factor in marital success. Research suggests that couples' financial behaviors, categorized on a spectrum from 'tight wads' to 'spend thrifts,' significantly impact relationship dynamics and long-term happiness.
A 2008 paper by Scott Rick and colleagues defined spending behaviors on a spectrum from 'tight wads' to 'spend thrifts.' Tight wads experience pain from spending, leading them to spend less than they ideally would, while spend thrifts feel too little pain and overspend.
Host Benjaman Felix shared his personal experience with a 'tight wad' spending quiz, noting a shift in his classification over time. He emphasized that being a 'tight wad' is not about the amount of money spent but the internal experience of pain associated with spending.
The podcast discussed how joint finances can affect a couple's relationship with money, contrasting it with separate financial arrangements. One speaker noted that if one partner's financial situation changes while finances are separate, it can create significant difficulties for the couple to manage together.
Despite potential for personal growth, research indicates that a person's propensity to spend tends to be a stable characteristic over time. Awareness of one's own spending patterns, whether as a tight wad or a spend thrift, is suggested as a key factor in moderating this behavior.
David Booth, co-founder of Dimensional Fund Advisors, shared insights into the company's business philosophy, which he believes stems from the lesson of always doing the right thing, even if it means not making a sale. This approach, he explained, is crucial for long-term success, especially when combined with a solid scientific basis for investment strategies.
David Booth highlighted the transformative impact of data availability in finance, which enabled academics to challenge Wall Street norms and develop evidence-based investment strategies. He emphasized that this 'outsider' perspective, backed by data, allowed for a more rational approach to investing.
David Booth described his transformative experience studying under Eugene Fama at the University of Chicago, where he was introduced to groundbreaking research on market efficiency. He recalled the stimulating environment of weekly research presentations and Fama's mentorship, which profoundly shaped his understanding of finance.
David Booth explained that empirical work, backed by robust data, suggests that professional money managers struggle to consistently outperform the market after fees. He emphasized that while beliefs are important, data is essential for winning arguments in the investment world.
David Booth recounted the rigorous academic approach of Eugene Fama and his colleague John French, who, after finding persuasive data, would actively try to disprove their own findings. This thoroughness ensures the reliability of their published research.
David Booth discussed the foundational work of Jim Lorie and Lawrence Fisher in collecting stock and bond return data, which began as far back as 1926. He also mentioned the development of the first index portfolio, the Samsonite Index, funded by Samsonite with $6 million, and the Black-Scholes option pricing model.
Barry Ritholtz discusses how success in one area can lead to an unwarranted halo effect, making people believe individuals are expert forecasters in other, unrelated fields. He states that billionaires appearing on TV to make economic forecasts are often unqualified and that their success in business does not equate to predictive ability.
Barry Ritholtz asserts that Wall Street professionals, despite their valuable skills in understanding their space, are generally poor at predicting future market returns. He quotes John Kenneth Galbraith, stating there are 'two kinds of forecasters, those who don't know and those who don't know they don't know.'
Barry Ritholtz criticizes the impact of short-form social media platforms like TikTok and Instagram on investors, stating that algorithms reward extreme emotional pitches. He notes the IRS had to issue a press release debunking 42 false claims found on TikTok and Instagram, some of which could lead to penalties.
Barry Ritholtz emphasizes the importance of recognizing one's own limitations in investing, linking it to the Dunning-Kruger effect. He states that the most successful investors are humble and understand the unpredictable nature of the markets, avoiding overconfidence in their predictions.
Barry Ritholtz highlights patience and discipline as the most crucial financial lessons learned throughout his career. He advises investors to focus on controlling what they can, such as savings rate and emotions, rather than trying to predict market returns.
Barry Ritholtz believes that passive investing, particularly through low-cost index funds, has historically outperformed most actively managed funds. He notes that while active management can have a role in specific situations, a passive approach is generally the most effective for long-term investor goals.
Barry Ritholtz shares his grandfather's advice: 'Never invest in anything that you don't understand.' He elaborates that investing in unknown assets is akin to gambling, leading to potential emotional decisions and increased risk.
Barry Ritholtz explains common behavioral biases impacting investors, including recency bias (overweighting recent events), anchoring (relying on initial information like purchase price), and confirmation bias (seeking confirming evidence). He stresses that unchecked biases lead to poor investment decisions.
In response to a question from a recent engineering grad aspiring to become a financial advisor, the podcast hosts shared advice on career development. They emphasized the importance of being a 'sponge,' absorbing all available information and experiences, and connecting with reputable people in the industry who embody good values.
PWL Capital is encouraging potential clients to reach out for initial consultations, stating that they do not charge for these meetings. The firm prides itself on not being 'salesy' and aims to equip individuals with the information needed to make informed decisions about their financial planning, even if that means not working with PWL.
Louis Bose, a Wealth Advisor and Associate Portfolio Manager at PWL Capital, has won the 2026 National Financial Planning Awards. His winning submission included a written financial plan and its accompanying presentation to a panel of peers and judges.
The podcast hosts discussed the importance of gaining diverse experience early in a financial advisor career. Ben Wilson shared that leveraging his father's network and seeking informational interviews was valuable, while later focusing on content and connections. Ben further elaborated that his early career involved compliance, which provided a strong understanding of industry rules and what not to do, ultimately leading him to PWL Capital.
One host advised aspiring financial planners to get as credentialed as possible, as early as possible, mentioning his own intensive pursuit of CFA, CIM, and CFP designations. He also highlighted the value of gaining practical experience through high-volume client interactions, noting that PWL Capital's model provides advisors with significant client throughput, which is essential for developing communication and decision-making skills.
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.