Market Drops, Biological Age, and FIRE any Time (EP.88)

Episode Summary

Executive Summary: In Episode 88 of the Rational Reminder Podcast, hosts Benjamin Felix and Cameron Passmore discuss market volatility amid the coronavirus, using historical data to show the recent 6.8% drawdown is normal. They analyze the futility of market timing with tools like the Shiller CAPE and yield curve. The episode shifts to longevity planning, introducing the concept of biological versus chronological age as a key factor in retirement decisions, and argues for working longer as a powerful planning lever over early retirement.

Main Topics: Market Volatility and Coronavirus Context (Priority: 5/5): Analysis of the February 2020 market drop, historical drawdown data comparison, and why panicking is unwarranted despite the compelling story. Market Timing Fallacy (Priority: 4/5): Debunking common timing strategies using Shiller CAPE (AQR research), US yield curve (Fama-French), and the impact of missing best months—showing long-term outcomes are robust to timing mistakes. Life Expectancy and Biological Age (Priority: 5/5): Deep dive into FP Canada mortality tables, the 25% probability planning standard, and Moshe Milevsky's research on biological age as a superior predictor of longevity for financial decisions. Retirement Planning Adjustments (Priority: 4/5): Practical levers: deferring CPP, annuities, working longer, and asset allocation based on true longevity—challenging the FIRE movement's assumption of early full stop. Post-65 Work and Happiness (PERMA Model) (Priority: 3/5): Link between work, engagement, meaning, and the PERMA happiness model; Rob Carrick's critique of viewing work past 65 as failure. Bad Advice: Deferred Sales Charges (DSCs) (Priority: 2/5): OSC's partial restrictions vs. nationwide ban in 2022; critique of industry dependence on DSCs and the flawed economics they create for new advisors. Herbalife Documentary: 'Betting on Zero' (Priority: 1/5): Side discussion on Bill Ackman vs. Carl Icahn battle over Herbalife; information in prices and multi-level marketing as a business model.

Key Arguments: Recent 6.8% drawdown (Feb 2020) is within one standard deviation of the historical average intra-year drawdown of 8.65%. The decade ending 2019 had uncharacteristically low volatility. Market timing via contributions has minimal impact: investing $1,000/year at worst possible times yields $1.15M vs. $1.33M for arbitrary January—long-term returns dominate timing errors. Missing just 10 best months out of 602 drops annualized return from 9.5% to 7.7%, reinforcing the danger of exiting markets. Shiller CAPE and yield curve inversion are unreliable for equity timing due to long valuation drifts (AQR paper) and inability to forecast equity premium (Fama-French paper). FP Canada recommends planning to age with 25% survival probability: 94 (male), 96 (female) at 60. Life expectancy has jumped dramatically since 1971. Biological age can diverge 10-15 years from chronological age (Milevsky). This creates arbitrage in annuities and changes optimal CPP deferral and asset allocation decisions. Working longer (even part-time) has massive compounding effects: more savings, fewer drawdown years, and enables higher current spending for younger savers. The FIRE movement's premise is valid for values clarification but full retirement may not be optimal given longevity increases. DSCs are a flawed compensation model that should be banned. The OSC's partial restrictions are inferior to the national ban. New advisors should build capital or join fee-based firms rather than rely on sales commissions.

Data Points: Feb 2020 drawdown (peak-to-trough): 6.8% - For a 1/3 Canadian, US, international equity portfolio, month-end data. Historical average intra-year drawdown (1970s-2019): 8.65% - Standard deviation 7.26%; the 6.8% drawdown was below average. Average annual return in years with >=6.8% drawdown: +2.38% - 50% of such years had negative returns, but average was positive. Average annual return in years with >=10% drawdown: -2.4% - 67% of such years negative. Annualized return impact of missing 10 best months (out of 602): 9.5% drops to 7.7% - Demonstrates the extreme cost of market timing exit. Life expectancy (50% probability) for 60-year-old male/female: 89 / 91 - Up from 77/81 in 1971. Planning age (25% survival probability) for 60-year-old male/female: 94 / 96 - FP Canada standard; clients are typically shocked by these numbers. Biological age divergence: 10-15 years - Milevsky's research; Cam's online test showed him 13 years younger (biological 40 vs. chronological 53). Average retirement age increase (Canada, past 20 years): 64.3 from 61 - From Rob Carrick article. Asian Flu pandemic (1956-58) S&P 500 annualized return: 10.87% - Despite 2 million deaths. 1968 flu pandemic S&P 500 return: 11.08% - 1 million deaths globally.

Pivotal Quotes: "If I told you have a 10% chance of the plane you're getting into of crashing, you would never take that plane. But if you tell people in meetings, look, you have a 25% chance of living to 96. Oh, I'll never live that long. Why would I plan on that?" — Cameron Passmore: Illustrating the cognitive disconnect in longevity planning; people accept low-probability risks in flying but ignore them in retirement. "Once your values are clear, the decisions are easy." — Scott Rickens (referenced by Cameron): Core philosophy from the FIRE documentary 'Playing With Fire'; applied to finding meaningful work and spending alignment. "The results should disappoint investors hoping to use inverted yield curves to improve their expected portfolio return. We find no evidence that the yield curve inversions can help investors avoid poor stock returns." — Fama & French (quoted by Benjamin): From their paper on yield curve timing; reinforces the futility of market timing strategies.

Implications: Investors should stay disciplined during volatility, ignore market timing signals (CAPE, yield curve), and base asset allocation on personal circumstances, not market levels. Longevity planning must incorporate biological age and the flexibility of continued work. Advisors should adopt fee-based or salary models, not commission-based DSCs. The FIRE movement's value-clarification focus is key, but full retirement may be suboptimal given extended lifespans; semi-retirement with purposeful work offers better financial and psychological outcomes.