The Biggest Myths in Personal Finance

24:05And when the results come out, turns out if the bad company was bad, but not as bad as people thought, or the good company was good, but not as good as people thought, those stocks are going to behave in the opposite way most people have expected. Your knowledge is not necessarily any insight here. Whatever you think about the relationship between the economy and the stock market, the market has already thought about it much more deeply than you have and has much more information and has already absorbed it. So it's time just for a bit of humility about it.

24:37Ben Felix:Yeah, it's pretty hard to compete with the collective knowledge of the market, even if you're really, really smart. It's hard to be as smart as everybody combined together mashed into the price of a stock. I think too, the idea of the coming recession, for example, is humans by nature, I think, are very often pessimistic. I think the stock market often reacts on fear that turns out, again, not to be totally unfounded, but perhaps not as bad as people thought. And if that's the case, the result is usually good stock returns, not poor ones. So interesting. Just another thing that causes people to behave badly with their investments.

25:17Ben Felix:Okay, the next myth. I find this one so interesting because it's true, but it doesn't mean what people think. Dividends explain 40 % or whatever, some large percentage of the stock market's historical returns. Now this one's often used, and I've seen this many times in my own content where I talk about the irrelevance of dividends. This argument is often used by dividend investors to explain why focusing on dividends is so important. Its fundamental premise gets causation backwards. And that's the main issue here, because it is true that dividends make up a large portion of returns, but whether they explain them, I think is the core of what I'm calling a myth here.

25:54Ben Felix:When a company pays a dividend, its returns are not increasing. They're changing in character from capital to income. The amount of the dividend income that you receive reduces the capital value of the stock you own roughly one for one. It's not actually going to happen mechanically on the dividend date, but the value of the company is decreasing by the amount of the dividend. That's tautologically true. So you end up with less capital and a dividend payment to make up the difference. But the only thing that's changed is the characteristics of what you own, but not your return. What actually matters is the underlying fundamental characteristics of the companies, not whether they pay you a dividend.

26:31Ben Felix:Now, the fact that companies pay dividends splits total market returns into a combination of capital and income. But it's not correct to say, and this is the main issue here. It's not correct to say that dividends deliver or explain stock market returns. At best, they describe them. And I think that word choice is very important. An interesting example is if we look at a dividend-focused ETF and a buyback-focused ETF, both of them have similar-ish factor exposures, which is like the underlying company characteristics, basically. Companies that pay dividends and companies that buy back stock are both returning capital to shareholders.

27:06Ben Felix:Those are two different ways to return capital to shareholders. It makes sense that they would load on value, profitability, and investment factors, which basically just ways to describe the broad characteristics of those groups of companies. So it's like companies with lower prices, more robust profitability, and more conservative investment than the stock market average. Now, despite those fundamental similarities, this could just be specific to this time period that I'm looking at, but it's still interesting. the companies focused on buybacks have a lower dividend yield and they have outperformed the dividend payers so if dividends were like the thing that was responsible for higher returns we would expect the dividend portfolio to outperform but in this case it was the buyback which has a much lower dividend yield that actually outperformed especially after tax oh yeah we didn't even talk about taxes this is a funny one because i like to turn it on its head and you say, well, if dividends explain 40 % of the stock market's historical returns, so we should focus on dividends.

28:05And like, why are we focusing on the other 60 %? That must mean the price appreciation explains 60 % of stock appreciation. So we should favor that. I mean, it's a strange way to frame the argument. You're right. I mean, we could talk forever about the dividend behavior that it influences, but it's just a different way of describing a return. different companies because of their nature, their growth opportunities, their maturity are going to deliver their returns in different ways. At the end of the day, if you ignore tax, a dollar is a dollar. And if you don't ignore tax, a dollar of capital, again, is more tax efficient than a dollar in dividends.

28:48I mean, look, you buy a diversified portfolio and you get both. Buy an index fund that holds the total market, you get all the dividend payers, and you get all the ones that don't pay dividends and it's the best of both worlds. You don't have to be ideological about one or the other. I agree with that.

29:05Ben Felix:You've heard that myth too, though, right? It's not just me. Oh no, all the time. Yeah. And people make graphs, you know, like this is the stock market without dividends. And it's just totally misleading because again, you could do it the opposite way. Do a graph that shows returns based only on dividends and ignore price appreciation and it's worse. Yeah, that's fine. It's just a strange way of framing. It seems to me kind of, you've decided that you like the idea of a steady stream of income and now you're looking for ways to rationalize it. Right. That makes sense. Yes. It is true that if you take a dividend and light it on fire, your returns will be lower than the stock was before.

29:47But if those dividends were reinvested by the company, we don't know what the performance would be like.

29:52Ben Felix:Yeah, that's one of the other ways that I've tried to describe this to people is that if we compare the total returns of an index to the total returns of an index minus spending 2 % a year from the portfolio, the one that's spending money is going to look worse, but that's because you spent the money. It's interesting too, philosophically, when a lot of people will say that they like dividends because it keeps companies honest, which there's probably some truth to that, I think. But then the idea is that when the dividends are paid out, then they set up drips and reinvest them. It's like, if you didn't trust the company to spend the capital responsibly and you wanted it to be paid out to the shareholder, and then you immediately pay tax and then give it back to them, doesn't sound like the smartest strategy to me.

30:40Not to say that dividend reinvesting is wrong, just that it would have been better had the dividend not been paid, taxed, and reinvested if it was just simply reinvested at the company level, all other things being equal.

30:56Ben Felix:Such a funny topic. Next myth is that index funds only give you average returns. This surprisingly is still a myth. I've been talking about this stuff for 13 years. You've been talking about it for longer, Dan, but this one still keeps you on though. And I think this is typically the setup for telling you that some other investment strategy is going to give you above average returns by being different from the index. But I think for two reasons, index funds deliver returns that are much higher than the average fund that tries to beat the index. One reason is the skewed distribution of individual stock returns.

31:32Ben Felix:We know empirically that most stocks perform poorly. Well, if you perform incredibly well, you're far more likely to pick a losing stock than a winning one. And missing the big winners makes it very difficult to match the return of the overall market, let alone beat it. That's one issue that an actively managed fund is going to have in beating the index. And we know, again, empirically, we know, and this is pretty crazy, before fees, most, I guess a bit of a narrow majority before fees, but still a majority of actively managed funds underperform the market. And it's for this reason. It's because of the skewness of individual stock returns.

32:05Ben Felix:But then the other issue that exacerbates it is fees. The average index fund fee is a fraction of the average actively managed fund fee, which shifts the whole distribution of expected fund returns in favor of index funds. And we look at the data, it's exactly what we see. The vast majority of actively managed funds underperform indexes and index funds by a wide margin. Using the SPIVA report, the asset weighted average actively managed U.S. equity mutual fund in the U.S. returned an annualized 9.41 % for the 20 years ending December 2025, trailing a U.S. equity index ETF by well over one percentage point annualized, which is a lot over time.

32:48Ben Felix:The crazy thing, and this is pretty interesting, I think, is that the index fund would easily be in the top quartile of actively managed funds. So I'm going to say that no, index funds don't just give you average returns, They give you top quartile returns and they do it without taking on the risk of future underperformance. I love this stat, Dan. Do you know what percentage of top quartile actively managed funds remain top quartile five years later? Zero. I think I can guess. Yeah. None of them. To me, that's crazy. And that's, again, SPIVA data. I've seen other research that looks at three-year selection periods of funds and finds that the portfolio built out of top performing funds over the past three years tends to go on to underperform pretty significantly and losing funds actually tend to do better anyway just the previous winners don't tend to go on to keep winning and based on some research they might even lose you take the index fund they keep on trucking along delivering the market's return which as we've mentioned is way above the average actively managed fund this came up on the investee podcast that i did recently that doesn't mean there won't be outlier active managers even over long periods of time the way that i explained it to those guys because they asked about this they're like well there's still fund managers producing alpha so there must be alpha out there and i was like even if and i'm not saying this is the case although when i said this we all laughed about it even if active managers were just randomly picking stocks and had no strategy then we laughed with that but it seems like in some cases that's actually what's happening but it's not like active managers are intelligent people they're doing their best to beat the market but if they were just randomly picking stocks there would be a right tail there would be outliers that even over long periods of time get lucky in the case of random selection and outperform the index even at a long horizon but that doesn't mean that you can rely on them to continue beating the market in the future which is the big challenge of picking an active manager and there's other issues there too like the luck issue is one the other issue is that there's an efficient market for manager skill where if there is a truly skilled manager they will attract capital up to the point where they can no longer beat the market.

34:54Ben Felix:It's a tough one, but all that to say, index funds, I think, give you much more than average returns. Certainly over the long term, right? I think some part of this is just maybe a misunderstanding about the term average, because a cap-weighted index fund gives you essentially the market average, weighted average of all stocks in the market. So that much is true. But to interpret that in a way that says, if you invest in index funds compared to other investors, your returns will be average. This is transparently not true. A other part of it comes down to the fact that index funds are never superstars in a given year.

35:32There's never going to be a time where an index fund is the number one performer in a lineup. It might be top quartile. In fact, it frequently is top quartile, but it's never going to be in the top one or two percent. And so that feels average to people, I guess, or mediocre. But you know, if you are in the top quartile, but you never come first over the long term, you're going to be pretty close to coming first. I mean, if you take a group of a hundred random investors and one of them just buys the market for 40 years, it's a pretty high probability that that person is going to be maybe not number one, but certainly not average in that group, right?

36:16Nowhere close to it. It's all about time horizon, I think in this case.

36:20Ben Felix:And we do see that like the distribution of active fund returns gets worse and worse and worse the longer you go out in the horizon. That's right. The next one that is coming up quite a bit right now, although it has been for a while because the CAPE ratio has been high in the U.S. market for a while. The myth is that future market returns are always low when the Shiller cyclically adjusted price earnings ratio is above 40. That's, you know, dot-com bubble level CAPE, the cyclically adjusted price earnings ratio for the U.S. market. For anyone that's not aware, the Shiller PE, the Shiller cyclically adjusted price earnings ratio, is a measure of stock market prices scaled by a trailing 10-year smoothed real earnings.

37:01Ben Felix:It's a way of measuring how expensive stocks are relative to their fundamentals. And it's anchored in historical earnings, which tend to be a pretty good predictor of future earnings. When the number is high, when the CAPE ratio is high, you're paying more for expected future earnings. And your expected returns are mathematically lower. So there's some truth to the myth, which, as you said earlier, Dan, there's a bit of truth to all these things. And then I'll explain what the truth is. but I think the real myth is the level of conviction that's often ascribed to the data and how the information is used.

37:35Ben Felix:Kind of like the last myth we talked about, this is coming up a lot right now. It's used to sell some other investment product or to discredit index funds more generally. You need to be active right now because of market valuations. You need to be in private assets right now because of market valuations, stuff like that. If you only look at the U.S. stock market, so we only look at historical data for the U.S. stock market, there has been a pretty reliable relationship with very few data points, but still a pretty reliable relationship. I mean, but still, that's a big but still. We don't have much data of the US stock market.

38:06Ben Felix:But historically, when US stock market valuations have been as high as they are now, which has really only happened around the dot-com era, we have tended to see pretty low future returns. And that's really following the dot-com bubble, we had the lost decade of US stock market returns. And so if you look at all the starting points around the dot-com bubble where the CAPE ratio was high, the future returns were all low, but that was one period in history. If you look more broadly, there's still been a bit of a relationship. Periods where CAPE has been high, yes, returns do tend to be lower. It seems scary.

38:41Ben Felix:I don't think there's enough US historical data to be sure that high CAPE ratios mean there will be low future returns. The data are just too noisy. The future is too uncertain. We don't know what's going to happen. It's possible that future earnings will be really high and that markets will never crash. Earnings will catch up to valuations. It's possible the CAPE ratio gets even higher than it has been in U.S. history. U.S. history is not world history. The small sample problem is a tough one because we can't create more historical data to test. One thing that I've done is look at countries outside of the U.S.

39:16Ben Felix:Now, it's not perfect because cross-country CAPE ratios aren't necessarily comparable to each other, but I think it's still an interesting exercise. So I looked at 10 developed markets from 1982 through the end of 2024, and I sorted the 10-year future stock returns on their starting CAPE ratio. Now the relationship, we'll hopefully put a graphic up in the YouTube video here, the relationship is still there. Having higher starting valuations does lead to lower realized returns on average, but there can be periods where future returns are still high when the starting CAPE ratio is around 40, which is that level where everyone starts freaking out a little bit.

39:53Ben Felix:Market timing is really, really hard. Canada has one period, I think, where the CAPE ratio starts at 40 and then goes on to have really strong returns because the CAPE ratio got higher. Eventually there was a correction, but just because the CAPE is high doesn't mean that it's certain we'll have low future returns. Another problem with operationalizing these data, with taking, okay, the CAPE is high, therefore I should do something, is highlighted in a 2017 paper in the Journal of Investment Management. It's from the folks at AQR. The authors show that while there has clearly been a relationship between stock market valuations and future stock market returns, a valuation-based market timing signal based only on the historical data available at the time, meaning that as in real life, the timing strategy does not know what future market valuations will be, which of course we don't.

40:42Ben Felix:That strategy produces lackluster results. And the authors explained that the reason is that market valuations can drift up over time. So what was expensive in the past becomes normal or at least less expensive in the future, leading the market timing strategy based on historical evaluations to be underinvested in stocks during periods of strong performance and rising valuations. I do think it makes sense to be aware of market valuations. To be clear, PWL Capital does use them when we develop our expected returns, which we do twice a year. And we use those for financial planning process with clients.

41:15Ben Felix:But we do not use the CAPE ratio as a market timing tool or as a reason to invest in private equity or private credit or actively managed funds. And I've always liked the way PWL has used that in expected returns, because as you said, we don't want to use valuations as an excuse to be market timers. So when people say US stocks are really expensive right now, you say, correct, you are correct. Does that mean we should underweight them going forward? We can't do that because it implies that that is somehow going to lead to a better outcome when we know that trying to time the market in such a way is more likely to backfire than anything else.

41:58So what do we do is we, in our plans, say, no, we don't expect stock returns in the future will be as high as they have been in the recent past because we're coming in at higher valuation. So it's not that you're ignoring the problem or pretending it doesn't exist. You're just acknowledging that there isn't a heck of a lot we can do about it outside of a diversifying across various regions because the CAPE ratio is not that high in other countries. So we have Canadian and international stocks in the portfolio as well, and we rebalance those appropriately. And also to just acknowledge that yes, returns might be lower in the future, and we should probably prepare for that, acknowledging that we will never know or what returns will be in the future.

42:45So I just think it's a sane, balanced way to deal with the high price of stocks.

42:52Ben Felix:And there have been recent periods where if we had reduced our exposure to U.S. stocks because valuations were high, we would not have looked very smart in hindsight. We could have been having this conversation five years ago. In fact, people were having this conversation five years ago. That's right. That markets are overvalued. The next five years are going to be muted returns. It might happen. we just don't know by how much and we don't know by when so the only thing you can do is stay invested and stay disciplined all right next myth is that warren buffett proves that you can beat the stock market by picking stocks we've talked about this before buffett did beat the market through his the entirety of his career as a professional investor largely due to incredible early performance he did not beat the market or a vanguard u.s stock market etf for more than 20 years leading up to his retirement as the CEO of Berkshire Hathaway in January, 2026.

43:46Ben Felix:Now, while that is true, and that's still surprising to people, which is interesting, Buffett and his highly quotable investing wisdom, which he had a lot of, I love Buffett's thinking on investing. They're often used to justify picking stocks as a viable investment strategy for casual retail investors and for active fund managers. But Buffett himself was a huge advocate of investing in low-cost index funds due to the challenges with beating the stock market over long periods of time, as we talked about earlier for actively managed funds. In his 2016 letter to shareholders, he acknowledges that there will be some successful active managers.

44:21Ben Felix:He says there are, of course, some skilled individuals who are highly likely to outperform the S &P over long stretches, but he says that in his lifetime, he's identified early on only 10 or so professionals that he expected would accomplish that feat. I think he does say that there might be a few thousand out there in the world that he hasn't met yet, but still a pretty small number. And so he concludes that section of his 2016 letter with the bottom line, when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients, both large and small investors should stick with low cost index funds.

44:54Ben Felix:So people quote Buffett on, you should be concentrated and you got to pick good companies at great prices and all that kind of stuff. We'll quote those things to justify picking stocks, but they won't quote Buffett telling you to just sit down and invest in index funds. Which he's been saying for what, 30 years? A long time. Yeah. I think the first quote from his shareholder letter where he basically says the average person would be better off just buying a Vanguard fund was like in the 90s. So it's very selective about what people listen to. I have never heard Buffett say, you should be a stock picker like me.

45:28He's too humble to say it, but what he's thinking is you're not me. and I don't think your performance is going to be like mine. It's also to your point, the outperformance came, and this is not to say anything bad about Warren Buffett. I think we both agree the man's a genius. A hundred percent. But so much, the fact that he was a genius allowed him to outperform early on in his career when markets were perhaps a little bit less efficient and research tools and the tools available to other people in the market were not as great as they are today. And so I think the market has only gotten more efficient over time.

46:06And even he would admit it's not so easy anymore. There's no easy profits out there, perhaps like there once were, if you were in his position.

46:15Ben Felix:That's another one. These are all things that always come up. It's fascinating. Next one is an interesting one too. I'd be curious on your thoughts on this one, Dan. The myth is that bonds and cash are safe investments. When investors get nervous about the stock market, they'll often consider moving into bonds or cash to reduce risk. And I think this also happens around retirement, where retirees will hold large cash allocations or a ton of bonds to, in their perception, reduce risk. Same thing with cash wedges and different equity glide paths that have heavy fixed income allocations, all that kind of stuff that's designed to reduce risk.

46:48Ben Felix:I think that the safety of bonds and cash are, broadly speaking, misunderstood. They certainly tend to be less volatile than stocks. This means they don't fluctuate in value as much as stocks when you log into your investment account every day. Volatility is a measure of risk. It's an important measure of risk. Volatility sucks for a lot of reasons. But what really matters to long-term investors is being able to put food on the table throughout retirement or go on a cruise or whatever. So there's the 2025 paper, Beyond the Status Quo, a critical assessment of life cycle investment advice, which is Scott Sederberg and co-authors paper.

47:24Ben Felix:Scott's been on the podcast a few times to talk about it. They use Block Bootstrap, a method for simulating hypothetical data from historical data to simulate a million investor life cycles for an American couple who save and invest through their lives and then follow the 4 % rule to spend from their portfolio in retirement. Their historical data source for the simulations includes 39 developed countries with data as far back as 1890 through 2023. It's like a huge data the project. And it's super interesting. They've got 2 ,600 years of country month return data. And they establish, and this is the main headline finding, an optimal 100 % equity portfolio allocated to approximately 33 % domestic stocks and 67 % international stocks.

48:07Ben Felix:They came to that conclusion by testing basically all possible allocations to domestic stocks, international stocks, bonds, and bills. They also tested a target date fund setup. They tested a 60-40 portfolio. So all these different portfolio designs, and they evaluated them on wealth at retirement, retirement income, conservation of savings through retirement, and bequest at death, like how much you leave to your heirs at death. And I think illustrating the risk of bonds and cash for retirees, they show that bills, which are basically cash or basically like a high-interest savings account or something like that, functionally at least.

48:43Ben Felix:The balanced 60 % domestic stock and 40 % bond portfolios and the target date fund all produce less wealth at retirement, a lower income replacement rate, a higher probability of ruin based on a 4 % rule of spending, and less wealth at death than the all equity portfolio. There's other research on this too that I didn't include in the notes here, but similar findings. The main idea is that bonds and cash feel safe because their value is relatively stable, but they open up a whole other type of risk that's likely more damaging than volatility for long-term investors, which is really the erosion of purchasing power over time.

49:17Ben Felix:Now, real quick, to be fair, in Scott Cedarburg's paper, they do find in their, the optimal portfolio where they optimize it every year of the life cycle, they do find, assuming fixed spending, that there is an optimal allocation to cash at retirement that declines over the first, I think six or seven years. So it's not like we were saying cash never makes sense. Now, should you plan for fixed spending that never changes regardless of market conditions? That's a whole other question. And they do test that, that cash allocation goes away if you allow for variable spending. But anyway, main point is that cash and bonds feel relatively safe because they're not so volatile relative to stocks, but they introduce a whole other type of risk that I think can be more damaging in the long run.

50:02Maybe. Yeah, fair, fair. So here's my take on this one, because this research, which is amazing, by the way, and it's a fascinating finding. I mean, I could have any issue with the research or what it found, but what I think it potentially ignores or it minimizes the importance of volatility in investor behavior. 100%. You're never going to sit in front of a client and say you should be 40 % bonds because your return is going to be higher because it's transparently not true most of the time. I'll tell you an anecdote. I had a client who's quite conservative call me and say, hey, I watched this video on the Scott Cedar break and say, what do you think about a hundred percent equity portfolio?

50:44Would that be appropriate for me? I said, are you comfortable losing 50 % of your investments in say six months? That ended the conversation instantly. He, no, and I'm not joking because he said, of course not. I said, well, if you're going to be 100 % equities, you need to be prepared for that. That's not ancient history. That happened in 2008. I just think the vast majority of people are just simply ill-equipped to stick to their investment plan in the middle of a downturn like that. And if you make a big move in your asset allocation, which is typically sell low, that is potentially permanently damaging to your portfolio.

51:28So I think we just have to accept that nobody is adding fixed income and cash to a portfolio because they're trying to improve returns. They're trying to make the ride a little smoother. And as long as they can get where they want to go, as long as they can meet all of their financial goals with a bit of a buffer with a more conservative portfolio and sleep better. There's nothing wrong with that decision.

51:55Ben Felix:No, I agree with all of that. A hundred percent. Reminds me of John Cochran in one of his papers has a made up dialogue where someone has been told to invest in an inflation indexed perpetuity, which is the risk-free asset for a long-term investor. You're going to get guaranteed inflation indexed income for the rest of your life forever. However, the person who has decided to invest in this asset because it makes sense for them is trying to explain to their wife why their portfolio is down 50%. It's not going very well is kind of the joke. So it's like, even though it's a very safe investment, but it's mark to market value is very volatile, which makes it very hard to own and not seem risk-free at all for someone who doesn't like deeply understand the mechanics of the asset that they own.

52:42Ben Felix:to be clear stocks are not an inflation index perpetuity it's just an interesting example it certainly gives you the highest likelihood of a bigger number some period down the road but if your only goal was to maximize estate value and i appreciate the research went beyond that it also said about meeting all of your spending goals during retirement but i think one of most people's goals as well is not to live in terror of stock market declines. Yeah, to sleep a night. And so if you don't need to take that much risk, if you can achieve all of your financial goals with a more conservative portfolio, you have to ask yourself why you would want to increase the risk.

53:26If you want to do it, fine. But I would think that most people are simply not temperamentally equipped to do that. And we see that.

53:35Ben Felix:I mean, if you look at all PW clients as one portfolio, I think we're about 70 % equity, 30 % fixed income. Most people are not in 100 % equity portfolios for the reasons that you described in, which is interesting because we'll have conversations about these data. And for all of the reasons that you just described, people will still not go 100 % equity portfolios, which is the right thing for them to do. I agree. All right. Next myth. Gold is an inflation hedge. I think the idea that gold is an inflation hedge comes from two main sources. One is the fact that gold has actually roughly held its value in real terms over extremely long periods of time.

54:11Ben Felix:And the other is the fact that for a brief period of time in history, some major currencies, including the US dollar, were backed by gold and attached to the price of gold. And some people just can't let go of the idea that gold is money and that money should be gold. We'll talk about each one separately. It is true. Although there were some people with what seems to be very deep knowledge of what I'm about to say, who were disagreeing with it in the comments on my videos, which is interesting on itself. But anyway, we'll take it for what it is. Roman centurions were paid about the same in gold 2000 years ago as US army captains are paid if their wages were converted to gold today.

54:48Ben Felix:So that's pretty cool. But the issue is most people don't have 2000 years to wait and gold has been highly volatile in the intermediate term, far more volatile than inflation, making it very difficult to use as a hedge for anyone with a normal lifespan. And who knows what the next 2 ,000 years are going to look like. We say that. It's like, yeah, 2 ,000 years, gold held its value. Is it going to hold its value for the next 2 ,000 years? How the heck do we answer that question? I don't know. Now that the correlation has been exposed, it's going to break down. 2 ,000 years. That's a long time, Dan.

55:17Ben Felix:Like we're probably going to be colonizing space and there's lots of gold up there. I don't know. Yeah, we might not be around. We won't be. I don't think. Well, I don't mean us personally. I just mean our species. But is that actually true? Because I've heard the story too. I'm talking about the Roman centurions being paid. Because I've heard people say too that a nice man's suit has been roughly the same in gold for centuries. And like, I don't know where the data comes from. If it's true, it's super interesting. I love that as an idea, but I'm a little bit skeptical about whether it's true or not.

55:51Ben Felix:I think it's very approximately true, but the person in the YouTube comments, I don't remember exactly what they said, but they were talking about like the number of troops that a centurion commanded compared to an army captain. And they're like, well, no, it's not equivalent because of this, this, and this. And I was like, oh man, this person clearly knows, but I don't know. It's a rough approximation, but it's in one of Cam Harvey's papers. I don't know. It's at the very least an interesting example, even if it's only approximately true, at least based on that one YouTube comment, which like how credible is that they made a pretty compelling argument that there were enough differences between the two for it not to be a great comparison i want it to be true it's a good story so that's one that's the the gold has actually maintained purchasing power over long periods of time but it's so volatile in the intermediate term that it's not a good inflation hedge the next one's super interesting i find this topic fascinating gold as the one true currency, I think is very ideological.

56:45Ben Felix:There's been an ontological debate about what money is going back thousands of years. And it really comes down to who should control money. This is such an interesting topic for that reason. If money is a thing that rises out of the free market as the most convenient intermediate good in trade. So this assumes that everyone barters. An economy starts because everyone's bartering, everyone's trading stuff with each other. And over time, because it's a hassle to barter because you don't always have what other people need. The market determines some intermediate good that everyone agrees is a really good medium of exchange.

57:22Ben Felix:And then that thing is intrinsically valuable for that reason. And it should be left to the free market to control its supply and to assign its value. So that's the commodity theory of money, that the market figures out what money is and assigns its value and whatever. And then on the other hand, and this is the other theory of money, if money is an abstract idea based on mutual trust that ultimately relies on an authority to mediate it, the state, the final authority, the ultimate authority should almost definitionally play an important role in how money is created and distributed. And that's the credit or state theory of money.

58:00Ben Felix:Those are two slightly different theories, but similar principle. if you want to believe and this is the part that i find fascinating if you want to believe that the government should have no role in money then viewing gold as the one true measure of value makes sense and again that's very ideological we are not going to settle this ontological debate which goes back to at least aristotle's writing thousands of years ago and was also hotly debated in british parliament in the 1800s during the bullionist controversy and the bank charter act debates. But at the very least, we can say that gold being the true measure of purchasing power and therefore a perfect inflation hedge comes from one theory of money and one relatively short period in history where major currencies were using gold to anchor the value of their currencies.

58:45Ben Felix:The international gold standard operated for only about four decades before World War I, and the US dollar's last formal link to gold ended when Nixon suspended gold convertibility in 1971. one. Today, gold is still held as a reserve asset by central banks, but it plays no role in how monetary policy is conducted or in how mainstream economic theory explains the value of money. So all that to say that empirically, based on the volatility of gold and theoretically, there's really little basis to believe that gold is an inflation hedge. It's a store of value, and I think it can reasonably be expected to stay one for the foreseeable future.

59:23But this has been brought up to me very directly by clients who say things like, if we think inflation will be higher in the future, should we add gold to the portfolio? And I think there's tons of evidence for this that, yes, there's a big difference between a inflation hedge, quote unquote, over centuries and something that will actually buffer you in the medium term in a portfolio. If inflation spikes, gold will go up. It's inversely correlated to inflation. That's just not true. And you can just look back to the 80s and 90s to see that during periods of very high inflation, at least in Canada, gold was a terrible investment.

1:00:09And there are other times where gold has done extremely well during periods of very low inflation. So it's just not behaving in this way that maybe makes intuitive sense. And it's pretty easy to demonstrate that.

1:00:22Ben Felix:I think that's true. One of the challenges is in the view that gold is the true money. People might say that, well, inflation is measuring the wrong thing because gold is the one thing. That's where it starts to get almost conspiratorial. Well, not almost, that's conspiratorial. Probably not going to settle that one today. Yeah, yeah, yeah. We did our best. We'll leave it there. Next one, we'll just do this quick because we've beaten it to death so many times. Renting a home is throwing money away. Listeners really know our thoughts on this. Dan, you and I have done some of my favorite episodes on this topic where I don't know what else can be said really, but it also can't be said enough.

1:00:58Ben Felix:When you rent a place to live, you're paying rent in exchange for a roof over your head and keeping the capital you would have alternatively used to buy a home invested in other assets, like the stock market, for example. When you buy a place to live, you're investing your capital into a real estate asset and saddling yourself with three costs that people often fail to fully account for, which are property taxes, maintenance costs, and depreciation, and the cost of capital. When you add it all up, both logically and empirically, we've done this work using historical data, renting and owning are approximately financially equivalent.

1:01:31Ben Felix:So in other words, if renters are throwing money away, owners are also throwing money away. With equivalence, financial equivalence as a baseline assumption, there are lots of other things to consider in deciding whether renting or owning make sense for any individual person. And again, that's stuff that we've talked about ad nauseum in past episodes. There's only so much more we can say about it. The one takeaway I had from our long discussions, I think I will always remember is this idea that if you compare owning a home to renting and investing the difference, renting can look very good. But if you compare buying a home to renting and spending the difference, then homeowners frequently look better.

1:02:14And the fact is most people given that choice are not likely to save and invest wisely with their surplus. If you can do that, and many people can, then do it. But if you want the discipline of paying off a mortgage, which you will almost certainly never miss a payment, then you get rewarded for that.

1:02:40Ben Felix:Yep. And it takes away, you're right. The premise of the financial equivalents is not just that you actually save. It's also that you don't invest in high fee actively managed mutual funds. You don't invest in crypto. You don't invest in options. You don't invest in prediction markets. Because if you did those things, then renting would definitely come out in front. So the idea is they're both good choices if your other choices are good, right? In other words, they are not the determining factor. The choice to rent or buy is not a choice between success and failure financially. There's a whole lot of other corollaries that have to be considered there as well.

1:03:19Yeah, that's right.

1:03:20Ben Felix:Okay. The last one to bring us home here, Dan, is, this is a fascinating one too. Debt is always a bad thing to have. I think a lot of people, both individuals and some high profile professionals, are highly averse to debt of any kind for any reason. Now, there's no doubt a psychological benefit to being debt-free. I think it's kind of like the other side of income investing. I was thinking about that when I wrote this. It's like when you buy dividend stocks, you feel good because you have cash flow coming in. When you pay off debt, you feel good because you don't have cash flow going out. I'm not saying that's a mistake.

1:03:54Ben Felix:There's something to be said for that. Not having to make payments is psychologically freeing in the same way that having cash flow from an investment is psychologically freeing. And the other thing here is that paying off consumer debt, like credit cards and a line of credit that you use to take a big vacation that you couldn't afford at the time is almost certainly good advice. But not all debt is created equal. In theory and empirically, you can make a pretty good argument that people with high and stable future human capital and low financial assets today should, and to be clear, I'm not saying people should actually do this.

1:04:25Ben Felix:This is theoretical for now. We'll talk about it more in a minute. The theory says people should borrow to invest because their human capital is bond-like and their ideal lifetime equity allocation is almost certainly much larger than their available assets. So there is a 2013 paper in the Journal of Portfolio Management, Diversification Across Time, that argues that this is what people should do. So in that paper, they explained that a leveraged lifecycle strategy, meaning a strategy that starts with a leveraged stock allocation and gradually decreases leverage to ultimately become unleveraged near retirement, produces better retirement outcomes.

1:04:58Ben Felix:They link their findings to foundational research from Paul Samuelson and Robert Merton, which recommends investing a constant fraction of wealth in stocks throughout your life based on your risk aversion. So the argument here is basically that if you have a few hundred thousand dollars to invest today, but your expected lifetime wealth is in the millions of dollars, you should probably be boring to invest to get as close as possible to having your lifetime intended equity allocation to stocks as soon as possible. Whatever. It's theoretical. I think the most interesting part of the paper is that the authors claim that by taking that approach, you're actually taking less risk by diversifying across time.

1:05:32Ben Felix:Instead of having your maximum equity allocation near retirement, you're getting it sooner in your investing life cycle. So they do a bunch of modeling in the paper. I hope we can have one of the co-authors on at some point to talk about their work. They argue that people have too much invested in the stock market later in their life and not enough early on. And they say that an initially leveraged portfolio can produce the same mean wealth accumulation with a 21 % smaller standard deviation than an unlevered approach. Leverage needs to be used judiciously. I'm super sensitive about saying people should use leverage because it's a very risky thing to use.

1:06:09Ben Felix:But I think it's just an interesting point that yes, paying off debt is good, but leverage can have a place, at least in theory, in the life cycle. The other place that I think this myth shows up is in homeownership, which we just touched on. But owning a home outright is the lowest risk way of paying for housing. If you can pay for a house in cash, have no mortgage, there's not a whole lot somebody can do to make you leave that house. You own it, it's yours. You have to pay your property taxes, maintain the house. The bank's not going to come take it away. What I think people don't recognize is that it's also the most expensive way to own a home.

1:06:43Ben Felix:And if we do a side-by-side comparison of an owner with no mortgage and a renter, the rental will almost always come out ahead. But it's a lot closer when the owner has mortgage. And then the reason is pretty straightforward is that the cost of borrowing from the bank is a lot lower than the opportunity cost of having equity in a home rather than invested elsewhere. so that's a counterintuitive thing and it's should you have your mortgage or not is a bigger question but it's just an example of having debt is not always necessarily a bad thing in the context of a mortgage it's definitely not a bad thing for most people taking a mortgage that they can comfortably service to live in a home that gives them great satisfaction is a great financial decision whether if you pay off your mortgage you should then reborrow to invest i don't know I wouldn't.

1:07:31I wouldn't do it personally. I wouldn't do it personally, for sure. Would I advise my kids when they're getting started in investing to lever up as much as they're allowed to? Of course not. I think there's a reason why banks aren't going to lend money to people at that age and that stage of life either. There's just too much behavioral risk here. The research, again, it's fascinating. It's interesting on an intellectual level, but it doesn't translate into real world advice for most people, I think. The myth might end up being better advice than the actual optimal thing to do,

1:08:07Ben Felix:which is, it's kind of funny. Yeah. Sometimes you do the right thing for the wrong reasons. I think that is often true in finance as well. There's other types of good debt. I mean, I think student loans are a good example. Great point. You're investing in yourself. If taking on debt at that stage of your life means you're going to be prepared to earn more in the workforce. Very good use of debt. Not all debt is created equal, clearly. Paying off debt always is probably better advice than don't worry about debt. But it's useful for people to understand that there is an argument that you could strategically use debt throughout your life for the right reasons if you manage it properly and if you behave well and it can improve your situation as opposed to the blanket statement that all debt is bad.

1:08:55Yeah. If you had to pick an extreme, I'd rather say all debt is bad. I agree. If you had to pick. You don't have to pick an extreme. I will say too, I have never worked with anyone who has regretted paying off their mortgage and not reborrowing. Never.

1:09:09Ben Felix:I've told this story many times. I think you have too, Dan, where we've worked with lots of clients where we explained to them for tax reasons in Canada, if you have enough taxable assets to pay off your mortgage. It can make a lot of sense to pay it off and then re-borrow and you end up in the exact same overall asset allocation, but your interest becomes tax deductible. And that's pretty cool. But when we've given that advice, people are like, oh, that's really smart. Yeah, let's do that. They pay off the mortgage and then we're like, okay, well now the next step in this financial planning is to take a loan out and reinvest.

1:09:40Ben Felix:And they're like, yeah, no, no, I'm, I'm pretty happy without a mortgage. So this is a good idea, but. yep i'm quite happy to be debt free and i'm gonna keep it that way all right that's the last of our myths well i hope we busted them all yeah i hope so hopefully people enjoyed the discussion

1:09:59Ben Felix:we do have one review from apple podcasts to read and under sec regulations were required to disclose whether a review which may be interpreted as a testimonial was left by a client whether any direct or indirect compensation was paid for the review or whether there are any other conflicts of interest related to the review as reviews, including this one are generally anonymous. We are unable to identify if the reviewer is a client or disclose any such conflicts of interest. This review says my favorite investment podcast. I recently discovered this podcast. It was my favorite investment podcast by far intelligent discourse based on recent data and papers translated in a way that investors can understand.

1:10:35Ben Felix:It hits me right at my level. And that is by Thomas, who is in the United States. Excellent. That is all we have. Anything else, Dan? No, I think we're good. Hope everyone enjoyed that lesson or episode, I should say. And like I said, it's good to be back with you. Yep. Thanks everyone for listening and definitely good to see you, Dan.

1:10:58Hey everyone, it's producer Matt. Thank you so much for tuning in to this week's episode. Before we sign off, here's the disclaimer you've been waiting for. Portfolio management and brokerage services in Canada are offered exclusively by PwL Capital, which is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Investment advisory services in the United States of America are offered exclusively by One Digital Investment Advisors, LLC. One Digital and PwL Capital are affiliated entities, and they mostly get on really well with each other.

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