Episode 362 – AMA #7

Episode Summary

Executive Summary: Episode 362 is an AMA covering safe withdrawal rates, the behavioral value of boring investing and financial advice, investor reactions to crashes, conflicts and incentives in banking, trend following, leverage, and demographic change. The hosts consistently argue for low-cost, globally diversified, simple portfolios, strong planning, and staying disciplined because most “clever” solutions add cost, complexity, and regret.

Main Topics: Safe withdrawal rates vs. amortization-based withdrawals (Priority: 5/5): Benjamin Felix models global stock data to show that withdrawal rates fall as horizons lengthen and that flexible, amortization-based spending can support much higher average spending than fixed rules, though at the cost of annual variability. The behavioral challenge of staying invested (Priority: 5/5): The hosts argue that the hardest part of investing is not picking a portfolio but enduring the boring middle while ignoring constant news, fear, and the urge to change allocations during market stress. Market crashes, uncertainty, and investor overreaction (Priority: 4/5): Using the 2025 drawdown as an example, they explain that crashes feel worse in real time than they look in hindsight because investors fear further losses and act on narratives, not just data. Conflicts of interest and advice quality in the banking channel (Priority: 5/5): They criticize bank incentives, high-commission products, and structured notes, emphasizing that bad advice often comes from both conflicts and poor education, with improving Canadian proficiency standards seen as a positive step. Trend following and market timing (Priority: 4/5): The hosts are skeptical that trend-following meaningfully outperforms buy-and-hold after costs, noting mixed academic evidence and weak live performance for several trend-following ETFs. Leverage and the limits of 'safe' borrowing (Priority: 3/5): They say leverage is inherently risky and that mortgages are the most defensible use case; otherwise, productized leverage may reduce execution risk but cannot eliminate market risk or behavioral risk. Demographics, ETF ownership, and future market structure (Priority: 4/5): They discuss whether aging populations and rising passive ownership could affect prices and liquidity, but conclude that such macro shifts are hard to forecast and not actionable for most investors beyond staying diversified.

Key Arguments: A 100% equity portfolio does not automatically justify a higher safe withdrawal rate; the data source and time horizon matter more than simple intuition. For global stock data, the safe withdrawal rate is around 3.5% over 30 years at a 5% failure rate, and lower over longer horizons. Fixed withdrawal rules are conservative because they plan for worst historical outcomes; flexible spending can materially raise average consumption. Investment success depends more on taking the right amount of risk and staying invested than on fine-tuning tax or planning tactics. Advisors can add value mainly by reducing anxiety, preventing bad decisions, and automating behavior rather than by beating the market. Clients often accept risk better when an advisor or product structure keeps them from constantly monitoring and reacting to the market. Bank advisors and structured products are often designed to maximize bank profit, not client outcomes, and complexity obscures the true source of returns. Trend-following may help in specific contexts, but the evidence is mixed and live products have generally lagged simple equity benchmarks. Leverage should not be framed as safe; the best defense for borrowing is usually a home mortgage, not portfolio speculation. Demographic shifts and index-fund growth may affect prices and elasticity, but the practical investor response is still broad diversification and patience.

Data Points: Safe withdrawal rate (30-year horizon, 5% failure rate): 3.5% - Global stock data from 1900–2023 used in Benjamin Felix’s model Safe withdrawal rate (35-year horizon, 5% failure rate): 3.2% - Holding failure rate constant while extending retirement horizon Safe withdrawal rate (40-year horizon, 5% failure rate): 3.0% - Global equity withdrawal modeling Safe withdrawal rate (45-year horizon, 5% failure rate): 2.9% - Longer retirement horizon under constant failure rate Safe withdrawal rate (50-year horizon, 5% failure rate): Just over 2.8% - Very long retirement horizon in the model Failure rate at constant spending rate (35-year horizon): 8% - If spending stays at the 30-year safe withdrawal rate Failure rate at constant spending rate (40-year horizon): 14% - Longer horizon using the same withdrawal rate Failure rate at constant spending rate (45-year horizon): 16% - Same withdrawal rate, longer retirement Failure rate at constant spending rate (50-year horizon): 21% - Same withdrawal rate, very long retirement Amortization-based average spending (30-year horizon): 7.6% of starting portfolio - Variable spending designed to deplete assets by the end of the horizon Worst 30-year period average spending (amortization): 3.6% of starting portfolio - Worst historical 30-year sequence under amortization-based withdrawals Worst single-year spend (30-year amortization): 1.5% of starting portfolio - Lowest annual spend needed in a bad sequence Fifth percentile single-year spend (30-year amortization): 3% of starting portfolio - Bad-but-not-worst annual spend under amortization Amortization-based average spending (40-year horizon): 7.4% of starting portfolio - Variable spending over longer retirement Worst 40-year period average spending (amortization): Just under 3.1% - Worst historical 40-year sequence Worst single-year spend (40-year amortization): 1.4% of starting portfolio - Lowest annual spend needed under a bad sequence Fifth percentile single-year spend (40-year amortization): 2.6% of starting portfolio - Bad-but-not-worst annual spend under amortization 2025 U.S. stock drawdown: -19.7% - XUU in CAD from Jan. 30 to Apr. 8, 2025 XUU year-to-date as of June 6, 2025: -2.54% - Canadian-dollar performance cited during the AMA VEQT year-to-date as of June 6, 2025: +3.6% - Vanguard all-equity portfolio performance cited during the AMA DFA 607 year-to-date: +4.31% - Global equity portfolio mentioned as a comparison 2025 crash length: Jan. 30 to Apr. 8, 2025 - Period used to illustrate investor panic and recovery CIRO proficiency rule implementation date: January 1, 2026 - New assessment-centric proficiency model for Canadian dealer members and approved persons ETF price/NAV dislocation: Rare - Discussed in relation to ETF arbitrage and underlying asset pricing Vanguard demographic estimate: 65+ share rising from 8% to 15% - Megatrends: The Economics of a Graying World, 2015 to 2045

Pivotal Quotes: "we shouldn't be calling this sequence of returns risk. We should be calling it sequence of withdrawals risk." — Benjamin Felix: Explaining why fixed withdrawals are harmed more by continued spending during poor markets than by bad returns alone "the boring middle is good. Boring is the place to be in investing. If your investment portfolio is exciting, you're probably doing something wrong." — Dan Bordolotti: Discussing the value of staying disciplined and not meddling with a well-designed portfolio "net of fees, investors consistently underperform the market, but experience less anxiety and earn higher expected returns than they would have by investing on their own." — Benjamin Felix: Quoting the 'Money Doctors' paper to explain why financial advice can be valuable despite fees

Implications: Listeners are urged to prioritize simplicity, diversification, automation, and discipline over clever products or market-timing ideas. The episode suggests most long-run gains come from behavior and risk control, not prediction, and that complexity usually transfers wealth to intermediaries.