Episode Summary
Executive Summary: This episode combines listener Q&A with a deep dive into value investing, bond behavior, risk framing, and portfolio design. The hosts argue for diversified, evidence-based investing, critique simplistic narratives around dividends, leverage, and “victorious” portfolio tweaks, and conclude that current value spreads remain historically extreme despite recent underperformance.
Main Topics: Rapid-fire listener Q&A on ETFs, RESP investing, leverage, and bonds (Priority: 5/5): The hosts answer practical questions about factor tilts, Canadian small-cap exposure, RESP drawdown management, Smith maneuver investing, and whether bonds still play their traditional role after COVID-era fiscal stimulus. Critique of Wealthsimple's portfolio changes and 'victory lap' (Priority: 5/5): Ben challenges Wealthsimple’s claim that low-volatility stocks and long-term government bonds improved outcomes, arguing that the framing overweights drawdown comfort and ignores weaker long-run consumption outcomes versus other portfolios. The historic state of value investing (Priority: 5/5): A detailed review of AQR/Cliff Asness research argues that value is at historically extreme cheapness levels across multiple measures, and that common explanations for value’s underperformance do not hold up well in the data. What is risk? Volatility vs. consumption outcomes (Priority: 4/5): The episode contrasts traditional risk measures like drawdown and volatility with a consumption-based definition—probability of failure to fund spending goals—showing that portfolios with worse drawdowns can still better support long-term wealth. Books, media, and mental models (Priority: 3/5): The hosts briefly discuss Elon Musk on Joe Rogan, Shane Parrish’s Great Mental Models, and Charles Duhigg’s Smarter Faster Better as examples of perspective, productivity, and decision quality. Risk profiling and investor behavior (Priority: 4/5): The back half of the planning discussion weighs psychometric risk questionnaires against gamble-style questions, emphasizing that risk tolerance must be combined with capacity, time horizon, and financial plan constraints. Bad advice of the week: forecasting oil prices (Priority: 3/5): They revisit Jeff Rubin’s 2008 oil forecast as a cautionary tale about overconfidence in macro predictions and why portfolio decisions should not hinge on dramatic forecasts.
Key Arguments: Factor tilts toward value and small cap in the referenced ETF model are described as conservative; more aggressive implementations add concentration, which increases tracking error and idiosyncratic risk. Using dividend-paying Canadian stocks in a Smith maneuver strategy may improve cash flow mechanics, but it sacrifices diversification and does not create superior expected returns. RESPs should not be treated as rigidly sacred education buckets; they are flexible tax vehicles, and asset allocation should reflect actual need, time horizon, and the family’s ability to tolerate volatility. Bond duration risk is real, but the portfolio role of bonds has not fundamentally changed just because governments are borrowing more; global demand for safe debt remains strong. Wealthsimple’s long-bond/low-vol approach may have helped in this downturn, but Ben argues that better drawdown behavior does not necessarily imply better long-run risk-adjusted or consumption outcomes. Long-term bonds had similar average risk-adjusted returns to shorter Treasuries over the full U.S. history, but when the post-1981 bond bull market is excluded, long bonds underperform and increase failure rates in retirement-style withdrawal simulations. A consumption-based risk framework showed that a 70/30 portfolio with U.S. small value stocks and Treasuries produced zero historical failures and much higher terminal wealth despite deeper drawdowns. The current value spread is historically extreme across many measures, industry-neutral sorts, and quality-adjusted comparisons, undermining claims that value is dead because of accounting changes, intangibles, or low rates. If value were being arbitraged away by crowding, spreads should compress; instead, they have widened, which supports the case for expected future value premia. Risk profiling should combine psychometric stability with behavioral choice questions, but also capacity to take risk and the investor’s actual financial objectives.
Data Points: Podcast episode: Episode 98 - The episode number discussed during the transcript. Factor tilt in sample ETF portfolio: 22% equity tilt - Referenced in the question about U.S. large value and small value ETFs. Alpha Architect QVAL holdings: 41 stocks - Used as an example of a concentrated, aggressive value implementation. IJS holdings: 488 small value stocks - Illustrates that broad ETF factor tilts are much more diversified than concentrated factor funds. Small-value underperformance in 2020: Negative 20% - Example of how even modest factor tilts can create noticeable tracking error. RESP allocation transition: All equity to 60/40 to 40/60 - Ben described how his children’s RESP asset mix evolved with age. Bond ETF ZFL: Up 12% year-to-date - Long-term Canadian government bonds used in Wealthsimple portfolios had strong 2020 performance. Canadian aggregate bonds: Up 5% year-to-date - Used to emphasize that bonds remained strong despite widespread skepticism. Japanese government bonds: 5.83% annualized since 1990 - Hedged to USD, used as a comparison for debt sustainability concerns. U.S. government bonds: 5.77% annualized since 1990 - Compared with Japanese and global government bonds. Global government bonds (hedged to USD): 6.02% annualized since 1990 - Benchmark for the bond comparison discussion. Japan debt-to-GDP: Above 200% - Cited as an example that high public debt has not automatically destroyed bond markets. U.S. debt-to-GDP: A little over 100% - Used for comparison with Japan. Canada debt-to-GDP: About 50% - Mentioned with a caveat that provincial debt may not be fully included. Long-term bond portfolio outperformance: 20 basis points annualized - 70/30 U.S. equities with long bonds versus 70/30 with five-year Treasuries over 1926 to March 2020. Long-term bond portfolio underperformance post-1981: 24 basis points annualized - Same comparison, excluding the long bond bull market from July 1981 onward. Historical failure rate with Treasuries: 0.13% - 30-year historical withdrawal simulations using a 4% rule with 70/30 U.S. market and five-year Treasuries. Historical failure rate with long-term bonds: 4.6% - Same withdrawal simulations showed a much higher failure rate with long bonds. Maximum drawdown with market/Treasuries: 68% - Worst 30-year drawdown in the withdrawal simulation set. Maximum drawdown with small value/Treasuries: 77% - Despite worse drawdowns, this portfolio had zero historical failures. Average ending assets with market/Treasuries: About $6 million - Starting from $1 million under the simulation framework. Average ending assets with small value/Treasuries: About $33 million - Illustrates much higher terminal wealth with small value exposure. Value spread percentile: 100th percentile - Cliff Asness argued current valuation spread is the widest in over 50 years under certain definitions. Price-to-sales percentile: 83rd percentile - One alternative valuation metric; still elevated but not the most extreme. Value premium history: ~96% of 10-year periods - Cited as the share of historical 10-year windows in which value outperformed growth. Oil prediction: $225 per barrel by 2012 - Jeff Rubin’s 2008 forecast, used as a cautionary example of macro forecasting.
Pivotal Quotes: "Possessions become an attack vector when you're very wealthy." — Elon Musk (as discussed by Ben): Rationalizing why he wants to reduce visible personal assets and avoid public criticism. "We think the medium-term odds are now rather dramatically on the side of value." — Cliff Asness: Cliff’s conclusion on the historical cheapness of value stocks and the lack of convincing alternative explanations. "How investments perform in downturns may be more important than how they perform in rallies." — Wealthsimple (quoted by Ben): Ben uses this line as the basis for critiquing Wealthsimple’s long-bond/low-vol portfolio framing.
Implications: Listeners are urged to focus on process, diversification, and goal-based risk rather than headlines or recent performance. The episode reinforces that value may still have strong forward prospects and that drawdown comfort is not the same as better long-term outcomes.
From the Transcript
In an efficient market, you can have a winner-take-all market at the corporate level, and it won't be a winner-take-all market at the investor portfolio level. Anyway, I just heard someone say that, and I thought it was an interesting way to frame it. Okay, so Cliff concludes that the cheapness of value today is not coming from a broken metric, price book, not from the winner-take-all companies. It's not concentrated in tech mega caps or the most expensive stocks. And this is a direct quote from Cliff: We think the medium-term odds are now rather dramatically on. The side of value with no this time is different explanation we can find, and we've tested a lot of them, holding a drop of water and no other period in the 50-plus year history matching today. Now, keep in mind, Cliff has said this a few times now and been burned pretty hard. Yeah. But he's saying, based on the way things, well, what did he say? We think the medium-term odds are now rather dramatically on the side of value. It's always a scary thing to say, but he's saying it. Well, that's what happened coming out of 99, 2000.
From 35% to 37%. That was also interesting. That average maximum drawdown wasn't that much worse over all the 30-year periods. But now, this is the crazy part: the average ending assets increased by a multiple of five. It went from like 6 million on average ending assets after 30 years to 33 million. Wow. Yeah. So, what is risk? Really fascinating question. Yeah. So, my final note that I made to myself was that people might feel better about long bonds in their portfolio, especially in a year like this, where it's like, all right, this really helps. Really helped cushion the blow. You know, you can make the same argument for gold. Gold's up a ton recently too, but the historical risk-return characteristics are not great. And it really comes down to that difference in framework. Do you want to think about this from an expected return perspective, or do you want to think about portfolio construction from a risk-parity perspective? Gold fits into a risk-parity framework too. Long way of saying I still don't agree with Wells Simple's portfolios, and I think that the victory lap is unjustified. Great answer. That could.
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.