Episode 80: A Planning Checklist, Portfolio Concentration, and Leverage

For our very first episode of 2020, we kick things off with some quick updates before sharing Cameron’s ten best financial planning strategies for the new year. After laying out some statistics about the great asset class returns that 2019 saw, we get into the wonderful listener questions we have been receiving over the break. Our first topic is about buying versus leasing cars, and Ben shares his thoughts on some of the reasons he recently converted to leasing. Our second question is about using credit to invest in a TFSA and acts as a great segue into our main topic for today’s show: implementing leverage in an investment portfolio. We discover some fascinating outputs given by a Monte Carlo simulation that compares the reliability of expected returns between diversified and concentrated investment portfolios. Surprisingly, the concentrated portfolio, while unpredictable, actually produces higher returns, even in its worst iterations. We start to think of concentrated portfolios as just another form of leveraging after comparing IUSV to VLUE ETFs, and then move on to the idea of time diversification as it relates to implementing leveraging in Lifecycle investing. As always, we end off with our bad advice of the week, with the 60/40 stocks and bonds model taking centre stage, so hop on and join us for the ride!

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Key Points From This Episode:

• Different corporate cultures and the value of instilling one in your workplace. [0:05:55.0]
• A top ten list of strategies for financial planning in 2020. [0:08:48.0]
• Asset class returns from 2019 which were very high across the board. [0:15:34.0]
• Market unpredictability and why to buy a second-hand car but lease a new one. [0:19:18.0]
• When to use your unsecured line of credit to invest in a tax-free savings account. [0:22:49.0]
• Three things that structure a belief: values, biases, and models. [0:24:51.0]
• Ben’s model and expected returns of diversified vs concentrated portfolios. [0:27:49.0]
• When concentrated portfolios work well: if high performing stocks are chosen. [0:34:01.0]
• Ways to achieve higher factor exposure with IUSV vs VLUE ETFs. [0:35:47.0]
• How unexplained portions of returns are the costs of leveraging via concentration. [0:40:40.0]
• Why investing using leverage creates ‘time diversification’ and higher yields. [0:42:47.0]
• Ways for young people to leverage their savings: concentration, derivatives, etc. [0:42:47.0]
• Time decay on leveraged ETFs and other reasons for leveraging not being a joke. [0:50:52.0]
• Why ditching a 60/40 portfolio denies market efficiency by increasing risk. [0:55:36.0]
• And much more!

Tweetables:

“Culture in an office is something I’m always fascinated with, since you spend so much time in an office. Culture in an office, a lot of people think, is just the cool things in an office, like happy hour, or a beer keg, or snacks, but it is a lot more than that, a lot more than just hiring people.” — @CameronPassmore [0:06:41]

“Given two portfolios with the same expected return, the more diversified one is going to have a more reliable outcome around that expected return.” — @benjaminwfelix  [0:29:31]

“Concentration is a form of leverage and the cost of that form of leverage is idiosyncratic risk.” — @benjaminwfelix  [0:40:17]

“There are a lot of ways you could screw leveraging up pretty badly. Bad behaviour, bad portfolios, sub-optimal diversification, active trading.” — @CameronPassmore [0:48:49]

Links From Today’s Episode:

Rational Reminder Website — https://rationalreminder.ca/

Barry Ritholtz — https://ritholtz.com/

Masters in Business — https://www.bloomberg.com/podcasts/masters_in_business

Ben Horowitz — https://www.forbes.com/profile/ben-horowitz/#5f17248b2c7f

What You Do is Who You Are on Amazon — https://www.amazon.com/What-You-Do-Who-Are/dp/0062871331

Andreasson Horowitz — https://a16z.com/

Playing with FIRE — https://playingwithfire.co/

RRP with Wes Gray — https://www.pwlcapital.com/the-rational-reminder-podcast-episode-69-quantitative-investing-the-solution-to-human-bias-with-wes-gray/

The Portfolio Visualizer Website — https://www.portfoliovisualizer.com/

Allison Schrager — https://www.allisonschrager.com/

Larry Swedroe  — https://buckinghamadvisor.com/people/larry-swedroe/

Download the transcript of this episode here: Rational Reminder Podcast – EP. 80 – Transcript