My newest podcast features an interview with Andrew Hallam, author of Millionaire Teacher, a compelling introduction to building wealth through smart saving and disciplined investing.
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.”
I reviewed the first edition of Millionaire Teacher when it was published back in 2011, and it’s now available in a thoroughly revised second edition.
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?
I’m actually a fan of Andrew and you, so having you both together was a treat.
It doesn’t surprise me that Andrew switched to a Couch Potato Strategy with his sizeable investment. It is a fairly defensive strategy after all that is easy to follow and maintain. I imagine he didn’t want to be proactive anymore and/or risk what he had built up over time so “market returns” going forward made sense to him.
I wonder if Andrew ever back tested to see how much he would have accumulated with a Couch Potato strategy from the onset of his investing life?
Thanks Dan and Andrew!
Seth Klarman in his letter yesterday speaking out on Trump, also touched on some other subjects including etf/index investing, I would love your thoughts or comments on this:
Perhaps the most distinctive point he makes — at least that finance geeks will appreciate — is what he says is the irony that investors now “have gotten excited about market-hugging index funds and exchange traded funds (E.T.F.s) that mimic various market or sector indices.”
He says he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit.
“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.
“When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),” he wrote. “Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.”
To Mr. Klarman, “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.”
“This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”
One Canadian passive-investing icon interviewing another! Nirvana!
I also really appreciated the supplementary links;
– “Index Investing Makes Markets and Economies More Efficient” – fascinating and intuitively seems correct. Passive investing doesn’t influence security valuation and leaves those gunning for alpha alone to set the prices. A small pool of high-performing experts can do this just as well as a larger, more varied pool, or better. Doom and gloom about too many indexers is utter nonsense, and probably spread by those who have something to lose by its proliferation.
– and also Graham Westmacott’s take on glidepaths. I think his take is correct. Personally think I’m sticking with a constant AA since it’s just easier simpler and my risk need/tolerance/ability are not changing. I’m stuck on how to action the advice on a short-term account like an RESP though. Dan did an RESP strategy a while back and the model he presented was basically a glidepath. Self-directing an RESP is stressing me out ;)
Anyway, congrats Dan on a great episode.
(Not the same guy who wrote in)
I really enjoyed this episode. Can anyone comment on if Andrew Hallam’s new book The Global Expatriates Guide to Investing has any specific information for US citizens? Our investing options and decisions are somewhat different than regular investors or non-US expats.
Great podcast guys – keep it up!
I too am a fan of Andrew’s book and often recommend it to fellow Canadians getting started in investing.
I liked the discussion on the passive “bubble”. I agree that this issue won’t likely occur since there are always market participants looking to find inefficiencies, and I can’t see fundamental seekers disappearing anytime soon. Moreover, there are many style / rules-based ETFs which will automatically balance out the market and therefore the basic passive index; these by default would grow in popularity as they achieve (short term) market-beating returns.
Excellent podcast, Dan. The claim about the supposed tendency of passive investing to create a”bubble”, a claim which you refute well, is raised again in this article in the Globe and Mail today: http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/seth-klarman-shows-real-danger-that-etfs-pose-to-market/article33950421/
@Gerry P: Hmm, another underperforming hedge fund manager making vague, scary pronouncements about how ETFs are wrecking the market and creating opportunities for people like him. “So as markets rise and cash pours into ETFs, these dominant securities will perform well relative to everything else. The longer this persists, the more a company’s bonds and stocks can generate returns that are superior to what their fundamentals suggest.” What? Perhaps someone can provide an example of this, because it doesn’t even make sense.
Hi great podcast, Dan. I’ve just one remark in regard of your concluding ask the spud. I agree that a person without a pension near retirement have greater need than a person with a DB pension and thus should take more risk in their portfolio. However, if we compare a person with a DB pension versus a person with a DC or RRSP account of similar value, then the person with the DB can take more risk in their RRSP due to the stability of their pension,
@Patrice: Thanks for the comment. Yes, both statements are true: i.e. the person with the DB pension has both less need and more ability to take risk with their personal portfolio:
Great podcast Dan.
I m also a great fan of Andrew Hallam.
Millionaire Teacher is a great book for sure. Cant wait to read the second edition.
Thanks for the link to the glide path white paper!
Andrew gives advice to expat investors from Canada, Australia and several other countries. He devotes a chapter to expats from each country.
@Brendan – totally agree. I found the white paper by Graham Westmacott super interesting and I’d love to hear more from him and also more from CCP about this topic.
Great podcast! One I always look forward to.
I love your blog and also you podcast , me and my girlfriend just listened to your most recent one with Andrew Hallam.
I’m curious where should i post my “ask the spud” questions because i have a few.
This isn’t a “passive investing is a bubble” kind of article but it does discuss some interesting changes in index fund managers’ roles. Do you have any thoughts on this?
I was a bit surprised by the recommendation to not use a glide path. I understand and agree with your points that
1) investors should build their asset mix based on their AW&N to take risk and that does,
2) AW&N does not change notably year to year, and
3) a couple % change in fixed income will not make a significant change to the risk of the portfolio.
But I have the following counter points:
1) AW&N are notoriously difficult to quantify, and are especially fuzzy for DIY investors who are focused on low costs and don’t want to pay for financial advice
2) Assessment of one’s own AW&N is subject to all the behavioral biases that lead to errors
3) Although your AW&N to take on risk will not change much year to year they certainly will change over decades. If you don’t adjust for it gradually, then you will have to make a large change at some point
4) Planning to make large changes to your asset allocation at some undermined time in the future based on your behaviorally biased self-assessment of AW&N to take risk seems to me to open the door for large mistakes
My approach was to start with the average of all currently available glidepaths for a reasonable starting point. Then made some tweaks to address my guestimate of AW&N and how it will change toward retirement.
My thought is that setting out a glide path approach may be superior because:
1) You make the decision in advance in a cool headed mindset likely minimizing some behavioral mistakes
2) You don’t have to make a big decision when to make the big asset allocation change
3) If you are rebalancing annually(ish) anyways it does not have to add any extra costs or much for complexity
Certainly the size of the portfolio is relevant here and those who have larger portfolios should be more careful about exposing big decisions to behavioral biases.
@Greg: This is another argument that is reasonable in theory: if large index funds really were hands-off, disengaged majority shareholders of large corporations it likely would cause problems. But as the story makes clear, the biggest players like BlackRock and Vanguard are well aware of their responsibility and seem to participating in shareholder meetings and visiting on key issues.
Nice to hear from Mr. Hallam. I count his book as one of the most useful investment books I read while learning about indexing.
Regarding the ‘indexing bubble’, here’s a recent article about the slow rate of adoption in Canada
As per other comments I think the investment advisor industry is increasingly concerned about algorithmic investing combined with fudiciary requirements. It will be, or is, increasingly hard to argue for any other investment types than what are espoused in this excellent blog.
Just wait till machine learning is applied to develop context driven real time optimization of an individuals cash flows using a digital personal assistant, combined with index investing. Every present day financial decision, big or small, will be able to be algorithmically related to future scenarios to give the best possible advice. “If you buy this pair of shoes Dave, and I might gently remind you this is the third pair this month, you will have trouble meeting your savings goal this month for that driverless car you had you eye on.”
Millennials will be quite comfortable with digital hand holding as it helps them achieve their financial goals faster and easier and cheaper. Wealth management will have to become a major player in AI especially if equity risk premiums are smaller in future and fees consume up to half the real return.
Vassanji’s recent book abou the near future in Toronto, Nostalgia (Canada Reads 2017) has an assistant called Tom who knows his boss intimately. This is coming for real and soon.
This is maybe why fudiciary requirements are on the chopping block in the USA – fudiciary requirements limit choice – such as the choice to offer higher fee assets that have a very small chance of beating the market. Wealth mangers are lobbying to hold on to their lucrative territory like record company execs did when Napster came about.
I’ve seen more and more examples like the article about a passive investing bubble.
Good day all:
A quick question I am posting here as I do not find an appropriate existing thread on either The Couch Potato or Hallam sites. As background, I am a convert to the low cost indexing system, and have bought the books, done the research and have my portfolio churning away.
I have an opportunity now to move back to Canada for a period to do a project. If i choose to do so, and become a resident again, do I have to unwind all my banking and investments (now with DBS Singapore) and go back to banking in Canada? Or can what I have set up now stay in place?
Wondering if the audience out there has any experience they can share.
Thanks in advance