Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 16: Common Sense With Ben Carlson

2018-06-21T08:49:59+00:00May 5th, 2018|Categories: Podcast|Tags: , , |5 Comments

In Episode 16 of the Canadian Couch Potato podcast, I’m joined by Ben Carlson, the author of A Wealth of Common Sense and creator of the excellent blog of the same name. Ben is also Director of Institutional Asset Management at Ritholtz Wealth Management in New York.

As someone who works with both individual and institutional investors, Ben shares his wisdom about how these two groups face different challenges. On one hand, pension funds and endowments have access to the best advice and an indefinite time horizon, so they don’t need to focus on short-term results. But it turns out that even institutions face the same pitfalls as the rest of us: “One of the reasons many institutions get in trouble is because they look at their peers to see what they’re doing so often,” Ben says in our interview. “They’re really measuring themselves against their peers instead of against their own personal goals. And that can really be a terrible way to manage money.”

Ben also discusses a recent article he wrote about lump sum investing vs. dollar-cost averaging, a hot topic these days. Despite the headline Bloomberg slapped on his article, Ben doesn’t argue that it’s a bad time to invest a large sum of cash. Rather, he points out that historically, when valuations are relatively high (as they are today), investing a lump sum has led to a wider range of possible outcomes. Most of the time it will still end up leading to higher returns than investing gradually, but the likelihood of a deeply disappointing result is significant. Best line from the article: “Investing is ultimately an exercise in regret minimization.”

Technical support

The “Bad Investment Advice” segment returns in this episode with a dig at technical analysis, which involves analyzing market data (such as price movements, trading volume and moving averages) to look for buy and sell signals. The article that inspired the segment was this one from BNN Bloomberg, but really, it could have been any scribbling on this bizarre trading tool.

Most investment professionals consider technical analysis as useful as astrology, so in some ways it’s an easy target. (Not many, thankfully, use Fibonacci retracement to manage your retirement savings.) But if you go to any of the investing expos that pop up in big cities, you’ll find crowds of people captivated by presentations of technical analysis software. Even brokerages such as Questrade and BMO InvestorLine offer these tools for their clients, so it’s not as fringe as it might sound.

I’ll leave you with this to ponder: if you developed software that could generate reliable profits in the stock market, would you spend your Saturday afternoons at investment seminars, standing in a booth and peddling it to amateur traders for $69 a month?

Does your portfolio need REITs?

In this episode’s installment of “Ask the Spud,” I answer a question from a blog reader named Brandon, who wants to know whether he should include real estate investment trusts (REITs) in his portfolio.

REITs are popular with investors, especially those looking to generate income, and when I first created my model portfolios I included a 10% allocation to real estate. But when I simplified the portfolios several years later, I dropped them, and in the podcast I explain why.

There are some good reasons to include REITs in a portfolio: they often behave differently from the broad equity market, so they offer a potential diversification benefit. You could also argue that real estate is underrepresented in traditional index funds: the sector makes up less than 3% of the S&P/TSX Composite Index, although I think we an agree its economic footprint is much larger than that. It’s just that most real estate is not publicly traded.

However, there just aren’t that many REITs in Canada, and most are quite small. The iShares, Vanguard and BMO ETFs covering REITs include just 17 to 20 holdings, and not a single one of these is part of the S&P/TSX 60 Index, which tracks the 60 largest public companies. The ETFs are also relatively expensive, with MERs between 0.39% to 0.71%, compared with as little as 0.06% for funds tracking total-market indexes.

Using US-listed ETFs to hold foreign REITs offers greater diversification and lower fees, though it also  creates additional hurdles, because you’ll need to convert your loonies to US dollars to buy them.

Finally, REITs are generally less tax-efficient than other equities: the majority of the income you receive from Canadian REITs is not eligible for the dividend tax credit. If you live in Ontario and have an income between $75,000 and $85,000, dividends from a traditional Canadian equity index fund are taxed at less than 9%, while REIT income is taxed at over 31%. And of course, any income from US or international REITs is not only fully taxable as foreign income, but is also subject to foreign withholding taxes.

 

5 Comments

  1. Juve101 May 5, 2018 at 11:11 pm

    Really enjoyed the piece on Technical Analysis. You’re right it is an easy target, but totally deserving.
    Vomiting Camel was a new one. Googled it and yep it’s a thing :)

  2. Steve Shaw May 6, 2018 at 1:50 pm

    Speaking of institutional investors, like a few other Canadians, I have some of my retirement investments with a plan that uses active investment management with high and ever increasing MERs. Would love a prodcast with someone from the CPP Investment Board.

  3. James May 7, 2018 at 8:26 am

    This is timely as I’ve been debating about what to do with with my REIT (VRE). Should I keep it or sell it? It’s 10% of my portfolio (~$50,000) and is 1/3 of my Canadian Equities holdings with HXT being the other 2/3. If I get rid of it, I’d just flip it for HXT.

    As it’s currently sitting in my TFSA, I don’t need to worry about taxation issues so it’s really a debate about the 0.39% MER for VRE vs. the 0.03% MER for HXT. $180 a year. I don’t know…maybe that’s worth it for the additional diversification. And VRE is free to trade at my broker so that’s also a positive.

    I’m still debating this.

  4. […] If you enjoy the Canadian Couch Potato podcast then this episode featuring A Wealth of Common Sense blogger Ben Carlson is a must-listen. […]

  5. Jacky July 14, 2018 at 3:55 pm

    Another great podcast. Thanks Dan for taking the time to do it.

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