More Money Podcast - 225 How to Be a Common Sense Investor - Ben Felix, MBA, CFA, CFP, Portfolio Manager & host of the Common Sense Investing YouTube channel

Episode Date: February 5, 2020

For this episode of the podcast, I interview someone who I’ve been getting a ton of requests by listeners to be on the show…Ben Felix! Not only is he a well-respected portfolio manager at PWL Capital with more letters behind his name than anyone I know, he is also the popular YouTuber behind the Common Sense Investing channel as well as the co-host of the Rational Reminder podcast. Benjamin took a fairly unique path to the investing world. Whereas many guests I have on the show had a strong passion for personal finance early on, Ben first studied mechanical engineering before deciding to pivot and get his MBA in Finance (because it was the most difficult program offered at Carleton University’s Sprott School of Business!). While doing his MBA, he got the chance to work at an investment firm and soon realized the culture and strategies used by a traditional institution did not align with his own values and research. But before deciding to ditch the whole thing he was hired at PWL Capital, a firm with a fairly alternative approach to doing business, offering fiduciary advice and index fund portfolios to clients. Ben started his career there in 2013, and has since become a strong advocate for financial literacy and educating Canadians about how they can take control of their investments through his podcast and YouTube channel. Specifically, he likes to explain the rationale behind why indexing is such a great (and increasingly popular) investment strategy, while also sharing research on alternative investing strategies such as factor-based investing. Honestly, he is one of the few people out there who can actually explain complex ideas in a very easy to understand way. It’s no wonder he has over 80,000 YouTube subscribers and counting! As mentioned on the podcast, make sure to check out his website RationalReminder.ca and his YouTube channel. There is so much amazing content on there, you’re sure to find yourself binging episodes and videos just like I have! For full episode show notes visit https://jessicamoorhouse.com/225 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, hello, hello. Welcome back to the podcast. This is the Mo Money Podcast, episode 225. And I am your host, Jess Burrows. Welcome back. I'm excited. I have a guest who I'm a big fan of. I've been following him with his YouTube channel called Common Sense Investing. He also has a podcast called The Rational Reminder. You may know him already too because I know there's a lot of fans in the house, especially in my Facebook group. I'm talking about Ben Felix. So Ben is what I would call an investing expert. He has more letters behind his name than most people that I know. So he has an MBA in finance. He is a CFA charter holder, a CFP professional, and he is also a chartered investment

manager. And he knows so many things. I mean, I could probably have him on for several episodes, but I'm going to have him just for this one for right now. We're right now. We'll see what happens. And in this episode, we talk about, well, a number one, important things that you need to know if you want to work with a financial planning firm or an investment firm. There's a lot of misinformation out there, or there's just no information out there. And I think a lot of people have no idea. So how much do we pay? How much money do you have to have to work with a fee-based firm? What are you getting for that? All that kind of stuff. And then we kind of talk about some just key things that everyone should know about investing and just some common questions that he gets from his huge YouTube subscriber base. And anyways, we get into it. It's going

to be great. You're going to absolutely love it. But before I get to that interview with Ben, here's just a few words about this episode's sponsor. This episode of the Momany Podcast is supported by ShopTaker. You know what I've been dreaming of having ever since I moved into my townhouse over three years ago? A new fridge. The old one I've got is ancient and hideous, but I'm one of those people who cannot in good conscience buy a new appliance until the old one stops working. That is, unless I find a crazy deal. But who has time to regularly check retailer websites to see if there's suddenly a sale or a price drop? Thanks to ShopTaker, no one needs to anymore. ShopTaker is a free must-have app for your computer and phone that enables you to save items from over 4,000 online stores like Amazon,

Costco, Sephora, and Zara to one place and get notified the moment they go on sale. It also scans the web for coupon codes at checkout and automatically applies them to your purchase. In short, if you shop online and like a deal as much as I do, you should try out ShopTaker by visiting jessicamorehouse.com slash ShopTaker and that's spelled S-H-O-P-T-A-G-R. So go on, join the over 1.5 million members and sign up to ShopTaker today. Just visit jessicamoorehouse.com slash ShopTaker or find the link in the show notes for this episode. Thank you, Ben, for joining me on the Momenty podcast. Jessica, thanks a lot for having me.

I'm excited to be here. Yeah. So I'm obviously a huge fan of your YouTube channel. And I know a lot of people are because you have a ton of subscribers. So I'm not alone. And you also have an amazing podcast called The Rational Reminder. And I feel like you're kind of like that go-to. I mean, there's a couple people like Canadian Cache Potato. Obviously, you know who Dan is. He's a great go-to person when you want to learn about investing. I feel like you're another amazing voice to add. So I'm very excited to have you on the show.

So I want to first dive in a little bit so people can get to know you and your background a bit more. Because I find it very fascinating that you did not necessarily have dreams or intend to become a financial planner or an investing expert. You actually started off your career in basketball and then mechanical engineering. Yeah. Well, as a student, I was playing basketball through high school and then into university. And because I was so focused on basketball, I didn't have any real professional career aspirations, which made it kind of hard to decide what to study. And so my methodology there was to ask the university what the most challenging program was in their opinion and do that. So that's how I chose mechanical engineering for my undergraduate degree at Northeastern University in Boston.

Wow. Okay. That's one way to find a path for your career. You're like, what's the hardest thing? And well, you obviously didn't end up doing that as a career. So what made you shift into the world of finance, which I feel like is probably very different than mechanical engineering. I have no idea because I've never studied mechanical engineering. I don't really know what it is. Yeah. I mean, there's a lot of analytical thinking in both fields of study, but they're obviously very, very different. And again, I wasn't chasing a career dream when I switched over to finance. It was again, following basketball. So I finished my degree in the States, which allowed me to come back to Canada to play a little bit more basketball and pursue a master's program. And I chose Carleton as the school based on their

basketball program, not necessarily based on their academic programs. And I figured doing an MBA would give me the most diverse set of career options afterwards if I had the engineering plus the MBA, as opposed to doing a master's in engineering engineering where I think I'd have fewer career opportunities. So I did the same approach of asking. I decided on the MBA program, and then I asked what the most challenging stream would be there, and it was finance. So I didn't have a passion for finance by any measure. It was just a – And you wanted to study it anyway.

It was just a fluke. So I was like, okay, I'll try this. And through the MBA program, I ended up having an internship with a financial services firm. And that's kind of the beginning of the whole story of how I got into this field. So you, despite not being very passionate about personal finance or finance in general, you decided to do that for your MBA. Props to you. I don't think most people would make that decision. So that probably means that there was probably some kind of inkling like you were a little interested in. I've got to assume.

I don't even think that's true. My line of thinking was always that if I did the hardest thing in the academic setting anyway, if I did the hardest thing, that would open the most doors. You sound very smart and very ambitious. in the academic setting anyway, if I did the hardest thing, that would open the most doors. You sound very smart and very ambitious. Because that is not a typical way of thinking. But I mean, I guess that really shows just like why you have been so successful in your career.

You've had, you know, it's very interesting how that's never the answer I've ever gotten from anyone. It's usually like, oh, no, I've always been really interested in finance. You're like, I just want to do the hardest thing, and here I am. And my interest in finance almost never came to fruition because now I am. I would even go as far as saying that I am passionate about it. But when I was doing that internship program, I was pretty turned off by what I was seeing in terms of what financial services were. I was working at a place that was selling commission-based mutual funds and selling life insurance and everything was commission-based and there were sales targets. I was working for an existing established financial advisor in that environment. But the incentives just didn't

make sense to me. And the way that decisions were being made just didn't make sense to me. So in my mind at that time, I was going to get out of that industry as soon as I could. Yeah. I mean, I feel like if I had a similar situation, I definitely would not have followed through and made personal finance a career. Because like you said, that sounds more like a sales role and not a financial advisory or planning role. That's exactly how it felt. And so it was just by another fluke that I discovered the firm that I'm at, which is PWL Capital. And first I discovered them and thought that they were pretty cool because they were doing stuff based on academic research and evidence. And they were using index funds and they weren't charging or earning commissions.

They were fee-based. And after discovering them, it was kind of like it would be so cool to work there, but I probably never will get the opportunity. And I just happened to get the opportunity by meeting the right people at the right time. Wow. Wow. So let's talk a little bit about, because I feel like it's really important and there's a lot of misinformation or just people just don't know the different kind of structures of like financial planning and financial advisory firms. Like you mentioned, I think a lot of people are aware of the ones that are commission-based, that are sales-focused. Those are probably lots of the big names that we probably recognize.

But I feel like a lot of people don't know that there's other firms like the firm that you work at that is structured differently. And I think probably the biggest difference is the way that your firm decides to manage investments is very different than typical investment firms. Do you want to explain a little bit about that? Yeah. I mean, it kind of breaks down. There's three main, and I'm no industry expert, so there may be more than the three categories that I'm going to describe, but I would break it down into three categories, which is the traditional commission-based sales operation.

Now, the tricky thing is there might be people working in that environment that are really, really good at giving advice and are really good at not being affected by the incentives. But anyway, there's the commission based structure and just structurally, you wouldn't expect to get the best advice in that environment because of the incentives. So then the next iteration that kind of happened in the industry later on was this idea of fee-based firms. And so this is a firm that's charging a percentage fee, a percentage of the assets that they're managing, but they're charging it directly to the client. So instead of being paid commissions for selling products, the client is now paying them for advice. And then the firm is implementing the portfolio and giving financial advice and things like that.

And then the newer option that's come onto the market is the concept of hourly fee advice or fixed fee, flat fee. There are different names for it, I guess. But that's a situation where instead of paying someone a percentage of your portfolio to manage the investments and give you advice, you're just paying them a fixed dollar amount for their advice. And some people argue that that removes another conflict of interest because in a fee-based environment, when you're charging a percentage of assets, the person giving advice has an incentive to get you to invest more of your money as opposed to, say, paying off your mortgage. That's true. That's right. Yeah, that's fair. I feel like one thing I hear often, though, is a lot of people are looking or think that, you know, wouldn't it be nice if I can go to like one firm that kind of does it all? I think we're all used to that by going to traditional banks and, you know, the kind of full service. But if you are looking for, I don't want to work with the bank or I don't want to work with a commission-based firm, I want to work with someone that seems a little bit more objective and is just fee for kind of service. Sometimes it's also hard to find those companies or to

find out what's the structure. Kind of like you mentioned, there's the firms that will charge you kind of a percentage of your portfolio. Those usually tend to be, well, you have to have a lot of money to usually work with those people or those firms. And then there's the ones where you can pay an hourly rate to get advice, but then they won't touch your investments. And I find a lot of people find that kind of frustrating or confusing, trying to figure out, how do I get help? It's not as easy as it looks. Yeah. And I think, I don't know about the Canadian environment, but I know in the United States, hybrid models are popping up more and more where there might be a lower fixed

percentage fee for investment management and then sort of a la carte financial planning services. So that's a model that we could see eventually where it is a bit of a mix that you can get more of an integrated approach from the advisor. Yeah. And I, cause I feel like that's a model that we could see eventually where it is a bit of a mix that you can get more of an integrated approach from the advisor. Yeah, because I feel like that's a big reason why a lot of people tend to stick to the banks longer than maybe they should or they want to is because they don't – it seems complicated trying to create your own system where it's like I use this fee-only planner just for my general financial planning. And then I either do DIY investing or robo-advising or I use an investment coach or whatever it just for my general financial planning. And then I either do DIY investing or robo-advising or I use an investment coach or whatever it is for my investments. A lot of people are like, shouldn't it all just be in one place? But I know, for instance, for your firm, you do have a certain limit or basically only take clients that have a certain portfolio.

And that's probably similar to most firms that are kind of full-service wealth management firms. Yeah. And it comes back to the structure of the fees. So because we're charging a percentage of assets and not a fixed fee for our advice and service, if we take on someone with a smaller account, then our revenue is still it's a percentage of that smaller amount. And so to maintain the level of service that we want to and the level of advice, which requires humans with the appropriate training and certifications who are expensive to hire, if we want to maintain that level of service, we've had to put in this minimum investable asset

limit. And for us, it's a million dollars. A lot of firms will be half a million or a million, sometimes lower, sometimes higher. But it just speaks to the economics of hiring people with the right skill sets that are able to give intelligent financial advice to the end client. They're not free to hire. And that amount of money isn't like you need to have a net worth of that. It's like, that's the amount of money that we need to be able, that we can invest for you. Like that's how big your portfolio should be.

Yeah, that's right. Right, right, right. So that's something, a nice goal to work towards. But I guess for like lots of people, people like the rest of us, where that is not realistic at this point in our lives, I guess the alternative is to kind of fabricate some sort of like either do it yourself

or have someone to sort of help you with some of your finances and do your own investing or something like that. Yeah. Something that we've been experimenting with is having a minimum fee as opposed to a minimum investable asset level. Now, the amount that you're paying for our service is the same, which is why it can work. But we've taken on some people who are below our minimum, but they're willing to pay the

fee as if they had the minimum. So I guess that ends up kind of being like the hybrid approach that I described earlier. But you would only do that if you have a complex enough situation. Like you can go and get pretty good financial advice from a fee-for-service advisor for the low thousands of dollars. So you wouldn't come to us and pay us $8,800 per year, which is what the minimum fee would be, unless you maybe have a corporation or multiple businesses or a family trust, in which case paying a fee-only financial planner is going to end up costing you

in the sort of $5,000 to $20,000 range anyway. So then we start to become comparable. But it's all about the, what can you actually benefit from paying fees at that level? Yeah. And I feel like a lot of people don't realize how, uh, how expensive things can be, but also, you know, if you do want to, if you can't afford that, then the only way to save money or to, to not pay that fee is to basically take the time and energy and educate yourself. And I think a

lot of people don't want to, I mean, people listening to this podcast want to do that. That's why they're listening. But I think a lot of people don't realize it's like, yeah, sorry. If you want to be good at anything or understand anything, you have to take ownership of it and you do have to learn about it. And even if you do want to work with a professional, I always tell people, I'm like, even if you do want to work with somebody, you still need to know what they're talking about. Because believe me, I think we've all been in a situation where we do work with someone or go to a bank and we have no clue what they're saying. And that's usually when you can make a mistake because they may be leading you in a direction that isn't the right direction for you. Yeah. financial situations is that the basic principles of saving more than you're spending and paying

off debt and keeping your investment fees low and maxing out your RRSP and TFSA accounts, things like that are probably enough for most people. It's just when we start getting into more complicated situations or when we're reaching the retirement age when things do get a little bit more complicated, that's when advice starts to become more valuable. Since you mentioned retirement planning, I feel like that's also a lot of people focus on like building that wealth so they have enough for retirement and can live a comfortable life in retirement. But I feel like there's also like not a lot of information or it's not talked about as much life in retirement. Is that something that you help your clients do?

Or you have any knowledge about? Because I feel like a lot of people have no actual clue, like what happens when I decide to retire? Yeah. So in our world, that ends up being one of the places that we're spending a lot of our time. And part of that's a selection bias because of that asset minimum. People don't tend to become clients until they're more established from a financial perspective. Yeah. But yeah, to answer the question, yes, that's one of the things that we spend a ton of time on is figuring out what is the most efficient but also sustainable way to turning this pile of money into an income stream for the next whatever it is, 30, 40, 50 years. Is it as complex as it sounds? To do it well, I mean, there are a lot of different decisions. There's thinking about asset allocation. What should the mix between stocks and bonds be? There's thinking about

product allocation, which is thinking about how much of this pot of money should we be putting in index funds and how much should we be putting in annuities? Should we be thinking about using home equity as a source of capital? Should we be renting or buying our home when we're retired? So those are the investment considerations. And then there's the withdrawal amount, how much can you sustainably spend, taking into account the potential for market volatility. And then there are tax considerations, what's the most efficient way from a tax perspective to take the money out of the pile and into your bank account? And then I guess the last piece is thinking about the estate planning portion. Like, is there a way to spend on the capital in a way that makes the estate at the end of the day

more tax efficient for the eventual heirs? So yes, complex. It's the short answer. There are a lot of things to, yeah, there are a lot of things to think about. Yeah. So luckily, I mean, for lots of people listening, it's not for a long time, but I feel like it's still an important thing to just remember that it's, there's the, there's stages in our life. There's wealth building and then there's the time where you're like, you're in retirement and things are kind of different. I feel like it's also as important just to educate yourself about what is that next step, even if it is like 40 years away. It's good just to have an idea of what to expect.

Totally. And I didn't even mention CPP. Oh, gosh. Yeah, that's right. That's a whole other bunch of decisions in there. Yeah. I wanted to talk a little about, because one thing that I think is pretty cool about the firm that you work at is just how you do choose to invest. Basically, a lot of firms are into

active investments and mutual funds. You guys are more on the index fund kind of path, which I find great because I also like that. Why was that a decision that your firm made? Why is that the way that you decide to invest for your clients that way? Well, personally, I was attracted to PWL because the way that I try to make decisions is based on evidence as much as possible. And this is one of the reasons why I was so turned off by the mutual fund industry at the onset is that a lot of the decisions that I was saying were not evidence-based. When you start looking at the evidence, it's pretty clear that investing in traditional actively managed mutual funds is probably a bad bet. Likewise, trying to pick stocks is probably a bad bet. And all of the evidence points to using well-diversified,

low-cost index funds as being the smartest and most reliable way to invest for most people. So that's how I made that decision personally. But the founders of PWL, the firm actually wasn't founded with an index philosophy, but not long after it was founded, they changed to that. And I think part of it was that PWL was an early adopter of that idea of being fee-based, so charging clients a fee directly. And there's a quote. I can't remember. I'm going to misquote it terribly. But once you take off the commission blinders, you see that there's a whole world of other types of investments like index funds that can actually make a lot more sense for clients and are a lot more cost effective. If you're earning commissions, you're less likely to see that as an option

because index funds don't pay commissions. So anyway, PWL is an early adopter to that financial planning fee-based movement. And because of that, I think it was easier to make that decision to adopt index funds. And then we've been, I think, the leader in that space because we were doing it before pretty much everybody else in the retail space. But we continue to be pretty passionate about that as a philosophy. What are your thoughts now?

Because it seems like, and it could be because sometimes I realize I am in a bit of a bubble, but it seems like indexing has become a lot more popular. A lot more people are talking about it. I think part of it has to do with the emergence of robo-advisors. What are your thoughts on just how things are shifting in the investing world? Well, they are shifting. I mean, in terms of US fund assets, that's assets in mutual fund and ETFs, around half or maybe a little bit more than half even now is in index products. In Canada, we're pretty far behind.

We're still in the high 80% that's in actively managed assets for funds. Overall, in terms of the overall market, the percentage that's in index funds is way smaller than 50%. But even that stuff is almost beside the point, because what people get worried about when they say that there's too much assets in index funds is that it comes down to a concern about market pricing. Can the market still price assets properly? And asset pricing is extremely important, including to the concept of index funds making sense. If the market doesn't price assets correctly, then index funds don't actually make a whole lot of sense. And you should be picking stocks based on what's undervalued at the time.

But in an efficient market, prices are pretty much right pretty much all the time. And the concern I've heard from some people is that too much money in index funds can affect that pricing mechanism. But I think the really important data point on that is that the vast majority of trading, and trading is what sets prices, money sitting in an index fund or somebody owning a stock that doesn't affect the price. It's whenever someone buys or sells a security, that's what affects the price. And today, even with all of the money flowing into index funds, most of the trading, most of the price discovery is still being done by active managers. Yeah, I see that a lot with people that want to counter how great index funds and index ETFs are,

but like, oh, well, if everyone just invests in it, then it'll just kind of ruin it for everybody. And I'm like, I feel like because of human nature, that just everyone won't just shift to that type of investment product. There are just so many people out there that love active investing, that love just buying individuals. I just don't see a collapse because everyone's just going to move to index funds. I don't know. It even goes beyond human nature, although maybe it's related to human nature. But there's a good economic argument for why everybody will not go into index funds.

This term was coined as the Grossman-Stiglitz paradox based on a paper written by some guys with the last names Grossman and Stiglitz. But they wrote a paper called The Impossibility of Informationally Efficient Markets. I'm pretty sure I got that title right. The paper is basically saying that if everybody did put their money into index funds, then nobody would be doing research on stock prices. And if that happened, the market would cease to be efficient, in which case people would no longer invest in index funds. So there have to be active investors for the prices to be set. And I think in reality, it's true. Markets can't be perfectly informationally efficient for those reasons because then everybody would go into index funds and then prices would no longer be set

correctly and it would all collapse. In reality, it's more of a continuum or the market exists in more of an equilibrium where there might be opportunities that can be exploited by active managers every now and then. And the active managers with the best research and the best information might be able to profit from that sometimes. And as long as that's true, the market's going to stay efficient. If it got to a point where there were truly too many people in index funds and prices really were wrong, that would be a huge opportunity for active managers to profit. And what happens when they profit? Well, everyone realizes that they're doing well again,

and all money would flow back into active managers. Markets would become efficient again, and then we're back to where we started. Yeah, that makes a lot of sense. I wish I could, I'm just going to save that clip, and whenever some active manager or active investor has a robot, I'm just going to play that clip to them because I feel like that explains it so concisely. Oh, that's so helpful. So I know on your podcast and also your podcast website, you have some model portfolios, but you also have a lot of information about a specific investment strategy that I just wanted to kind of pick your brain on because I don't quite know a lot about it. I feel like a lot of people haven't heard about it.

Do you know what I'm talking about? I can't – like I'm going to get the name wrong, so I'm going to let you say the name of the strategy. Yeah, yeah. So it's called Factor Investing. And that name has been – it's been taken over by the financial services marketing machine. So you can find all sorts of different factor products, but they're not really true to what the original concept behind factor investing was, which is a shame and it's misleading and it's confusing for investors as the financial services industry tends to be, I guess. But factors, they came originally from research that stemmed out of papers from a couple of guys named Eugene Fum and Ken French.

So their first paper summarizing this, the work that had already been done. So they weren't the guys that discovered the empirical – like they didn't observe these effects originally. But they wrote the paper that took the empirical observations and wrapped it around in some theory and they became the thought leaders in the space. So anyway, what had been observed empirically was that smaller stocks on average had higher returns than larger stocks. Now in an efficient market, that shouldn't be possible, but the way that it appeared, the way that we were able to look at the stock market at that time, when that original research was done in the 1980s, it looked like small stocks were producing reliably higher returns relative to the amount of risk that they were exposed to. Now, in an efficient market, your expected returns should be directly related to the risk

that you're taking. So the idea that you could just own small stocks and get extra return without taking extra risk, it kind of blew the whole idea of an efficient market out of the water. And then there was research that came out a little bit after the small cap study, and that one was looking at value stocks, so stocks with low prices. So a stock like a Walmart or McDonald's that has a low price relative to its book value or some other fundamental measure. Those are value stocks. And on the other side, we have like a Google or a Facebook where their prices are very high relative to their book value. Those are growth stocks. So anyway, the observation was value stocks tended to beat growth stocks. And it was the same observation where they had higher returns without being exposed to risk, higher risk relative to the amount of extra returns that they had.

So again, at the time, this was a total knock to the idea of efficient markets. But what Fama and French came out with in their 1992 paper was that there's more than one type of risk in the market. So when the small cap and value research, the empirical observations, when that came out originally and said, look, look, markets are not efficient, the only risk model that we had to look at how stocks were priced was called the capital asset pricing model. And it looked at expected returns relative to the market risk. So if you're taking on more risk relative to the market, you'd expect higher return, but it was all related to market risk. And what Fama and French said is that they actually came out with a different asset pricing model. And they said, it's not just exposure to market risk that drives asset prices. It's also exposure to size, smaller stocks have higher expected returns on larger stocks, and value, where the cheaper

stocks have higher expected returns than the more expensive stocks. And the interesting thing is that with the capital asset pricing model, with the one that only relates it to market risk, we were able to look at two portfolios side by side. And we could explain about two-thirds of the difference in their returns based on their exposure to market risk. So if we take portfolio A and portfolio B and one's got slightly higher returns, we could explain two-thirds of that difference based on the level of market risk exposure that each of those portfolios had. When you roll in the size and value factors that Fama and French wrote about in their paper, we see over 90% explanatory power in differences between two portfolios, differences of returns between two portfolios. So that's powerful in terms of understanding why did this portfolio do better than this one?

Or maybe more importantly for investors, why should we expect this portfolio to do better than this one? And it all comes back to exposure to these specific types of stocks. Now, that was 1992. More research has come out since then. And now Fama and French, those same guys,

in 2015, they came out with a five-factor model. So they've continued to develop this research. But at this point, we can explain slash predict differences in expected returns at like above 95% based on these asset pricing models that have been developed. And this is where modern financial research has been heavily focused, is developing these what are called factor models. So I feel like if anyone wants to kind of do, is into indexing but wants to learn, like, more other strategies and really wants to do a deep dive, this would be a very interesting rabbit hole to kind of go down. Yeah. And I mean, it's really like, you're totally right. It's once you've made that decision to be an index investor, when you're an index investor with, you know, like a VGRO, like a Vanguard index fund,

those are usually market cap weighted index funds. And what market cap weighted means is if, you know, Apple is 5% of the market capitalization, it is going to be 5% of the index fund. So just based on company size, that's how the weights are determined in an index fund portfolio. Now, the effect of that just based on market structure is that you end up with more large cap growth stocks and less small cap value stocks in your market cap weighted portfolio. And that gives you the market risk factor, which is a good risk. That's going to deliver you a positive expected return,

and that's a good thing. But based on the asset pricing research, you can also give yourself exposure to the risk of value stocks by very simply buying a value index fund. So it's still index investing, but like you said, it's a way to sort of tweak it a bit. Tweak it a bit. Yeah, spice it up a, it's a way to sort of tweak it a bit. Tweak it a bit.

Yeah, spice it up a little bit if you want to do something a little different. I'm going to let you go soon. But first, because I know you have such a huge audience on your YouTube channel and also your podcast, I know you get a ton of questions from people that want to learn more about investing. And you probably get some that are very, very common that I'm sure lots of listeners also have. Would you be able to share some of the most common questions you have and share some of your amazing answers? Yeah. I mean, I end up making a video about any question that is common. So I think for the most

common questions, I probably have a video made about it. Like I had a ton of questions about leverage. Should I borrow money to invest? And so I made a video about that. And the answer is there's actually been some pretty good academic studies that have shown that – and don't tell me I'm crazy here. These aren't my words. The academic research has shown that for young people, it is actually prudent to use leverage. Yeah, really?

It's risky for young people that don't have a lot to invest. It's risky for them not to be using leverage. And I'm not saying people should use leverage. It's not right for most people. But it is fascinating what the academic research says about it. The reason is even more interesting than the statement. And the reason is something called time diversification, where even if you're in an aggressive portfolio now, but you've only got $1,000 in your investment account, the effects of the market going up and down on your total future wealth are tiny. If you lose half of $1,000, that doesn't really matter relative to the, say,

$2 million that you expect to save over your lifetime. And so the challenge can be if you end up having really good returns early in your saving years in an aggressive portfolio, that's got much less impact than having bad returns later in your saving career when you've got much more wealth. So there's this mismatch on the impact that returns have early on and later on in your investing and saving career just because of the amount that you have invested. So if you end up with a good market early on and a bad market later on, you're getting unlucky with the timing. And so anyway, the research suggests you should borrow money early on so that you've got more invested so that you're more diversified over time. So that's one common question. Probably the most common question and the most popular video that I've ever made in

terms of the number of views that it's gotten was on renting versus buying a home. Oh man, I hear that all the time. Everyone wants to know the answer to that. What did you say? So I think I invented this thing, and I don't know if I did or not, but I called it the 5% rule. And what I did is I added up the unrecoverable cost of owning a home, which people don't often think about. People often say, what will my mortgage payment be if I buy this house and how does that compare to my rent? That's not the right way to make the decision because a mortgage payment is not an unrecoverable cost. It's a mix of interest and forced savings. So you can't compare it to rent, which is a completely unrecoverable cost.

But as a homeowner, you have property taxes, you have maintenance costs, and you have the cost of capital. So whenever you have equity in a property, that's money that you could have had invested in stocks. Now, the reason that matters is that stocks have higher expected returns than real estate. Expected returns is important because obviously if you bought real estate in Toronto 10 years ago, you did probably better than if you'd invest in stocks, which makes us even harder. But anyway, so I summed up the unrecoverable costs of owning a home, property taxes, maintenance costs, and the cost of capital, I said that's about 5% of the value of a home. So that means that if you own a home, you're flushing down the toilet every year, just like

people think they're doing with rent. You're flushing down the toilet 5% of the value of the home in unrecoverable costs. So if you can find a house that's for sale, say it's $500,000, if you take 5% of that and you can find a place to rent for less than 5% of the $500,000 home, then renting from a purely financial perspective, and I know people always argue there are lots of other reasons to own a home, but purely from a financial perspective, renting is just as good as owning if you can rent for that 5% number of the value of the home that you would otherwise have purchased. Very interesting. You probably did invent that because I haven't heard anyone explain it like that. And that's a way better way of just comparing like, well, how much is your mortgage compared to how much your rent is? It's like, as a homeowner,

man, did I, I knew it was going to be expensive to be a homeowner, but some of the expenses that have come up and I've been, I've only owned this place for over three years, I'm like, yeah, I would have saved money if I rented. And you know, it's funny because I said 1% for maintenance costs, and the comments on that video, there are thousands of comments, but it's pretty polarizing in terms of roughly half of people are saying that 1% is way too low for maintenance costs. And roughly half of people are saying it's way too high. I mean, every, every appliance is broken down in my townhouse. So, so I've been unlucky, but what could you do? I'm not moving anytime soon.

So I'm, I'm, it's the long game is what I'm playing. That's important too. Yeah. Yeah. Well, I'm sure there's a lot of other questions people have. And like you said, you probably have a video on it, answering it with a very unique and different answer. Cause I feel like a lot of other people I've talked to have different answers, but I like yours cause it seems like you're very focused on facts and research. And I appreciate that. I appreciate the time and effort you put into all of those things. Yeah, so where can people find more information about you, your YouTube channel, your podcast? Where can they find you so they can bug you with their questions?

Yeah, you know, the questions are, I've taken my email address off of all the different platforms because I get so many emails. I answer all of them, but that ends up being really time-consuming. So anyway, I get way less emails now because it's harder to find my email address. But anyway, the YouTube channel is just on YouTube, obviously. It's called Common Sense Investing. The podcast is the Rational Reminder Podcast, and it's on, I think, every podcast platform that you could listen on. And we've also got a website where we post all the episodes.

And we try to get people to go to the website because you can leave comments. Although we also post the podcast episodes on YouTube just as an audio-only file, and we tend to get a bunch of comments over there. I'd love it if all the comments were in one place. In one place, I know. What can you do? What can you do? Oh, well, thank you so much for taking the time to chat with me. I feel so much smarter after talking to you. Awesome. Well, thanks, Jackson. Great talking to you. And that was episode 225 with Ben Felix. Make sure to check him out

on his YouTube channel, Common Sense Investing, and his podcast called The Rational Reminder. You can find it on iTunes or pretty much anywhere this podcast exists. You can find that podcast as well if you want to do a deep dive about everything investing and just get his point of view. Smart guy, that guy. Smart guy. Make sure to check out the show notes for more information about this episode. Just go to jessicamorehouse.com slash 225. You can also go to his website rationalreminder.ca for some of those things that we talked about like model portfolios and just more investing information and all that good stuff. I've got some very exciting things to share. Maybe another special giveaway. Okay. I'm just going to let you know if you missed last week's episode. Well, I'm going to share again the exciting giveaway that I mentioned at

the end of yesterday's episode, but I also have another giveaway, another exciting giveaway, but you're going to have to stick around to find out what it is. I just have a few words I need to share about this episode's wonderful sponsor. This episode of the Momenty Podcast is supported by ShopTaker. Did you know that 67% of millennials prefer to shop online? Well, I guess that makes me one of them. And a big reason is because you can save so much time and money by doing so, especially when you use ShopTaker. You see, ShopTaker is a free app for your computer and phone that helps you do your online shopping and get the best price.

All you have to do is make an account, then when you're doing your online shopping and see something you like, tag it with ShopTaker. After you tag it, you'll be notified whenever there is a price drop or sale on that item. Not only that, once you're ready to buy, ShopTaker will scan the web for coupon codes at checkout and apply them to your purchase. ShopTaker has already helped members save over $92 million. Don't you want to save some money too? To learn more and to try it out for yourself, visit jessicamorehouse.com slash ShopTaker. And that's spelled S-H-O-P-T-A-G-R. Once again,

that's jessicamorehouse.com slash shoptaker or find the link in the show notes for this episode. All right, so if you missed last week's episode, well, I highly recommend you check it out. It's a great episode, but also at the end of that episode, I shared that I'm doing a giveaway of, I'm gonna basically pay,

or it's like a scholarship if you want to call it that, but I'm going to pay for your registration to Cara Perez's Talk Money to Me debt management course for one lucky winner. I'm just not going to just give it away to everybody. It is a giveaway that you have to sign up to hopefully win this wonderful course that's valued at $119 American guys, and I'm Canadian. So just add like 30% onto that. But I just wanted to do something cool and exciting and nice for you wonderful listeners. So if you want to enter that giveaway to have the chance of getting free enrollment in her course, just check out the show notes for that episode, jessicamorehouse.com slash 224. And since I'm still in a giving mood for some reason, I am going to give away a

scholarship to my Investing Foundations for Canadians course. So since this episode was all about investing, yeah, that's what I'm going to do. I'm going to give away a scholarship to my course, which is valid at $399, y'all. And you can find more information about it at jessicamorehouse.com slash investingfoundations. But in order to enter to win this giveaway and hopefully win the scholarship for my course, yeah, check out the show notes. That's the game. Go to jessicamorehouse.com slash 225. There will be more information on how to enter there. Yeah. Yeah. I think that's really it. That's all I got. I'm very excited. And I hope one of you lucky listeners win. I mean, one of you will win

because the only way you'd probably find out about it is, well, if you're listening to this show right now. And I guess also my email list. Oh, speaking of my email list, one last thing before I let you go, make sure you're on it because I do giveaways all the time, share very important information about what's going on. I'm going to be hitting up actually a couple locations. I'm doing some travel for work. So I'm going to be in Vancouver and Edmonton, Vancouver in February, Edmonton in March. So I might be doing a little bit of a hangout, just like an impromptu, totally casual meetup. So get on my email list to find out more information about that. Yeah, that's really it.

Oh, yeah, you can sign up to my email list by going to jessicamorehouse.com slash subscribe or go to my website and you can find information about that there. Okay, that is it for me. Thanks so much for listening. I of course have another Money Minute episode for you on Friday. So I hope to see you there for that fun little episode. Otherwise, I will see you back here next Wednesday with another wonderful interview with another wonderful guest for the Mo Money Podcast. All right, have a good rest of your day. See you soon. This podcast is distributed by the Women in Media Podcast Network.

Find out more at womeninmedia.network.