Do you see any risks to our economy that you think people are overlooking?

Tons of risks.

I, I think it's very easy to get bogged down worrying about questions like that, and I think a lot of people do.

Like, when I, when I posted my video recently on the biggest myths in personal finance and I mentioned that savings myth, that you should save as much as possible, a ton of the replies were that, "Well, in this economy it's different.

You need to save as much as you can because the future's gonna be awful." It's like, uh, maybe, maybe it is.

I think being an investor inherently requires optimism, and I think if you're not optimistic, you're not gonna be a good investor.

It ties back to the checking your portfolio too much.

What did you find out in the making of that video?

18 plus.

plus.Well, at first I had no answer to these questions [laughs] so I would probably pick some of them.

Yeah.

So we, we spent a lot of time doing, doing research on this.

We, we worked a little bit with some of the top researchers in objective setting, uh, i- in the world.

We had them on our podcast and kind of went back and forth with, uh, with our process for goal setting.

So we've created this structured goal-setting process that we use with clients.

Right.

But before that, let's dive into the Grossman-Stiglitz paradox and what it means for investors on today's Plain Bagel.

I talk a lot about the benefits of investing in index funds over at Common Sense Investing.

Index funds only work well in an efficient market.

Market efficiency is a term that was coined by Eugene Fama in 1965, and defined formally, again by Fama, in 1970 as a market in which prices always fully reflect available information.

If prices always fully reflect available information, then we would expect market prices to change as soon as new information develops.

New information could range from a company announcing a new product line to changes in the broad economic outlook of a given country.

If markets are efficient, stock prices should adjust to account for these changing conditions immediately.

Without active investors, stock prices likely wouldn't react to positive or negative news, even though these could be things that inherently alter the value of a stock.

Now, the renter also invests the money he saves by not paying for the upkeep of a home.

In the model, the renter is saving that cost difference and investing it in stocks.

So they're investing the initial down payment and then the ongoing cash flow cost difference.

And so that's what's allowing the renter to keep pace with the owner financially.

He just thinks that people often overestimate how much better it is to buy a home, and they underestimate how much it costs to look after a home.

I remember when we had our rental, the backsplash in the kitchen was all mangled up and the grout wasn't done properly, whatever.

But I was like, I don't care.

It's a rental.

Tell us what are some takeaways from that paper, from what you've shared in your own shows?

I did a recent video on my YouTube channel where I kind of did an overview of this paper and added some more up-to-date research.

So if people want to check that out, I would actually suggest watching the video instead of reading the paper, but the paper still.

I think it's still all right.

That paper was interesting.

So that was like, and I don't mean to diverge from the question a little bit here, but so years ago we had someone come in, Brian Portnoy, who's been a guest on my podcast, great guy, consider him a friend.

He basically has a consulting practice for financial advisors where he helps you connect with clients on a more personal, emotional kind of level.

What would you like to talk about when it comes to factor investing, Ben?

or the thinking behind your process, what's the thing that you see happening in the industry or that is sort of maybe still pervasive in the industry that you can't say out loud, but you believe it anyway?

Our approach is pretty simple.

I'll just start with that.

We take the approach that markets work is kind of the highest level of abstraction.

We don't think that we can pick stocks.

We don't think that we can time the market.

We don't think that third party managers that we could hire or buy the funds of can do that either.

There's a culture shock, right? I mean, advisors coming from bank-owned brokerages to join PWL is one cultural change that must be fairly significant.

How do I think about my portfolio in that context? So could you help us walk through how you would think about those portfolios in the decumulation phase or approaching retirement or sustaining a level of financial independence while continuing to work?

It's complicated is the very short answer.

There are so many different things that are going to play into that decision.

Really talking about the mix between stocks and bonds, right? Those are the big asset classes.

Stocks have higher expected returns.

They are historically much more likely to at least keep pace with and exceed inflation over very long periods of time.

Bonds in particular, nominal bonds, which in the US you do have tips, which are inflation protected bonds.

Let's put all the caveats out there.

How do I think about my portfolio in that context? So w- could you help us walk through how you would think about those portfolios in the, you know, the decumulation phase or approaching retirement or sustaining a level of financial independence while continuing to work?

It's complicated is the very short answer.

There are so many different things that are gonna play into that, into that decision.

Really talking about the mix between stocks and bonds, right? Those are the big, the big asset classes.

Stocks have higher expected returns.

They're, they are historically much more likely to at least keep pace with and, and exceed, uh, inflation over very long periods of time.

Bonds, in particular nominal bonds, which in, in the US y- you do have tips which are inflation-protected bonds.

Let's put all the caveats out there.

But could you give us a quick overview about why we're interested in factor investing in the first place?

Oh, man, that's a big topic.

So it's basically like index funds.

Your audience, I'm assuming, is familiar with index funds.

Of course, yes.

It's like just all the stocks in the market at the weights in which they exist in the market.

That's a total market index fund.

But how would you leave somebody who just listened to this buys the argument for small cap or factor investing? How can they begin to make a decision that's high quality around that?

Yes.

It's like just all the stocks in the market at, at the weights in which they exist in the market.

That's the total market index fund.

Those make sense in theory because markets are efficient, and if markets are efficient, it should be really hard to beat the market, which in reality it has in fact been.

Now, the general premise of index funds is based on what's called a s- a, a single factor asset pricing model.

This is get- this is gonna get nerdy fast.

I hope that's okay.

Please, yes.

[lips smack] What about buying a house? Is that a good investment?

I wouldn't consider buying a house to live in an investment.

It sort, it sort of is.

You get an asset, but you're really, you're buying an asset that funds your housing consumption.

It kind of pays you a dividend that's sort of like getting rent from the house that you own.

But when you do the side-by-side comparison, which I think is the only way to think about this, if you compare buying a house, so that means i- in, in Canada you'd usually save up for a 20% down payment.

So you put 20% down on your house.

So the side-by-side.

What is the basic misunderstanding that you see when you speak to a lot of these investors about what dividends represent?

There are a ton of biases at play for why investors really like dividends.

I think if I were to say the biggest problem in conceptualizing what dividends are and what they mean to investment returns is that dividends are themselves investment returns.

If you receive a 5% dividend from a stock, that 5% dividend is not an investment return.

The reason is very simple.

It is because the capital of the stock that you own has decreased by 5%.

So you received a 5% cash payment.

Can annuities play a role in people's late life finances? And why do we see them used so remarkably infrequently in Canada?

So can, can you help us understand why it might be beneficial to have a lean to a domestic market, especially outside of the, the US?

Yeah.

So I know you talked to Elroy Dimson about this, and he, he disagrees with my position, and he's like not one of the people in the world that I would want to disagree with on something.

Um, but, but I guess here we are.

Uh, so the, the, the justifications that I would give are a- at least from a Canadian perspective, it is more cost and tax efficient for a Canadian to own Canadian stocks than to own international stocks.

That's one piece.

So if you take...

Could you just kind of share with us and the audience w- why you believe that that's the case over the next century, 10 years, 20 years, or, or whatever period you measure that over?