Andrew grew up in Canada, but he’s a citizen of the world. He spent several years as a teacher at the Singapore American School and has lived and travelled all over the globe. As this podcast goes live, Andrew is touring the Middle East to speak to expatriate investors about how to avoid getting fleeced by the financial industry. And he’s not being paid for his appearances: “I’m not a saint,” he writes on his blog. “But when I’m teaching people about money, I’ll do almost anything so others can learn.”
Andrew has an interesting backstory, which I featured in my MoneySense Guide to the Perfect Portfolio. He was both comically frugal and a tremendously successful stock-picker for many years. This combination of talents allowed him to amass a tidy nest egg in his 40s. “So what did I do after a decade of stock-picking success?” he told me. “Apply for a job as a Wall Street analyst? Start my own hedge fund? Nope. I sold all my stocks—more than $700,000 worth—and switched to a Couch Potato strategy. Then I wrote a book encouraging others to do the same.”
In 2012, The Globe and Mail asked Andrew to participate in an ongoing project called Strategy Lab. It follows four investors with different strategies and tracks their portfolios’ performance. The others focus on growth stocks, value stocks and dividends, while Andrew holds an index portfolio. Some four-and-a-half years later, Andrew sits in dead last.
I tease him about this in our interview because his decision to enter a stock picking contest with a 30% allocation to short-term bonds was like bringing a knife to a gun fight. Of course, Andrew’s is the only portfolio in the group that is fully diversified. But it sure makes for boring reading.
This episode’s Bad Investment Advice segment offers a rebuttal of a provocative article called The Passive Investing Bubble is Real, which was picked up by the popular site Seeking Alpha. The article argues (perhaps “states” is a better word, since there is no evidence that might constitute an argument) that passive investing is a victim of its own success, and that as more and more money flows into index funds there will be more opportunities for active managers to outperform.
This is an age-old argument that sounds compelling but suffers from one major flaw: absolutely zero evidence. Most of the evidence suggests the opposite: as indexing has become more popular, beating the market has become harder than ever. The most recent SPIVA data once again back that up.
As for the idea that the increasing popularity of indexing is a “bubble”—a term repeated in a recent Financial Post article—it’s so absurd that it’s hard to know where to begin challenging it. A bubble is what occurs when an asset’s price is driven up well beyond what seems to be its intrinsic value, like a tulip bulb selling for 10 times the average worker’s salary. As I argue in the podcast, indexing is growing as consumers move away from expensive and disappointing financial products in favour of cheaper ones that deliver on their simple promise. To suggest this constitutes a bubble is inflammatory nonsense.
For a thoughtful counterpoint to the bubble babble, I’ll point you to Index Investing Makes Markets and Economies More Efficient, by the pseudonymous blogger Jesse Livermore. This article takes more effort to read than the others, because it presents a thoughtful and coherent argument rather than empty rhetoric.
Switching to glide
Finally, in the Ask the Spud segment I answer a question from a reader regarding his portfolio’s glide path. Brendan is in his thirties with an aggressive asset allocation, which he plans to make more conservative as he approaches retirement. He wants to know if he should change his mix of stocks and bonds a little every year, by a few percentage points every five years or so, or simply wait until he’s within a decade of retirement.
The important lesson here is that asset allocation depends on much more than just your age. I like to invoke Larry Swedroe’s framework: your asset mix should be based on your ability, willingness, and need to take risk.
What if you decided not to change your asset allocation at all, electing instead to keep your portfolio’s mix consistent throughout your investment lifetime? My PWL Capital colleague Graham Westmacott explores this idea in his recent white paper, Should my portfolio be on a glide path?