There’s a common theme in all three segments of Episode 19 of the podcast: the risk-return trade-off between stocks and bonds. This is hardly an original idea, but it remains one of the most important concepts in investing.

It’s a good time to revisit this theme, as we just marked the 10th anniversary of the collapse of Lehman Brothers, which spiraled into the worst financial crisis since the Great Depression. Many of us will never forget those dark days of 2008 and early 2009, when people genuinely wondered whether stock markets might go to zero. Yet for others it seems to have faded from memory. And for those in their 20s and 30s, who haven’t experienced anything more than a few modest corrections, it has about as much resonance as the Second World War.

For the interview segment, I’m joined by Larry Bates, a former investment banker who has become an outspoken advocate for Canadian investors. Larry is the author of a new book called Beat the Bank, which lays out a strategy he calls Simply Successful Investing, with a focus on education, long-term thinking and low costs.

A few years ago, Larry created the T-REX score, a way of measuring the portion of an investor’s long-term gains that are lost to compounding fees. For example, assuming an annual return of 5% over 25 years, an MER of 1.5% would eat up 43% of your total gains. Drop that fee to 0.25% and you’d lose just 8% over the same time period. Use the T-REX calculator on Larry’s site to run the numbers for yourself.

This is low risk?

In “Bad Investment Advice,” I target yet another article that suggests dividend-paying stocks are “low-risk” and therefore ideal for retirees who find GICs and bonds too sleepy. One would have thought the 2008–09 crisis had dispelled that myth once and for all.

The article (from The Motely Fool) specifically recommends Royal Bank and Manulife Financial and as “low-risk stocks that are perfect for retirees whose aim is to generate growing returns.” They leave out the part where, between May 2007 and February 2009, Royal Bank stock lost over half its value, falling from $60 to less than $30 per share.

As for Manulife, in November 2007 it was trading at about $43 per share. Some 15 months later, at the depth of the financial crisis, it fell below $10, for a decline of close to 80%. Moreover, after its share price recovered significantly in 2009, Manulife cut its dividend by half. Investors responded by dumping the stock in droves: it fell more than 14% on the day of the announcement.

Even diversified dividend ETFs were slaughtered during the crisis: the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) holds only Canadian stocks with a history of rising dividends: it lost about 44% of its value in the six months following September 2008. In the US, the Vanguard Dividend Appreciation ETF (VIG) also lost about 40% over the same period.

Dividend-paying stocks are wonderful, and they’re likely to be appropriate for just about any portfolio (as part of broadly diversified index funds, of course). But we need to let go of the idea that they are “low risk,” and that they’re a suitable alternative to GICs and bonds for income-focused retirees.

Do I even need the stock market?

Finally, in the “Ask the Spud” segment, I answer a question from a reader at the other extreme: she wants to know whether she can fund her retirement without any equity risk at all: “I am considering putting most of my investments in GICs. What do you think of this approach?”

When risk-averse investors ask this question, they often get a disrespectful answer. They’re frequently told (usually in a condescending way) that they just need to get comfortable with stock-market risk because that’s the only way to generate growth. To me, that’s like telling someone who is afraid of flying to stop complaining and just get on the damn plane. People who are anxious about flying probably know it’s statistically safer than driving, but the data don’t allay their fears. Risk aversion is emotional, not intellectual, and there’s nothing wrong with being unwilling to lose money.

That said, an investor who wants an all-GIC portfolio does need to accept that they will likely need to save more, work longer, or spend less in retirement, compared with a disciplined investor who accepts more risk and earns higher returns. They will also need to avoid FOMO when they read the news about how stock markets have delivered double-digit returns.