Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 21: Larry Swedroe on Investing in Retirement

2018-12-19T10:42:50+00:00December 20th, 2018|Categories: Podcast|Tags: , |6 Comments

In my final podcast episode of 2018, I’m joined by Larry Swedroe, who has long been one of my favourite authors on investing and financial planning. Larry and I discuss his latest book, Your Complete Guide to a Successful & Secure Retirement, and we focus on the challenges investors face as they approach the end of their careers.

Larry’s book is written for an American audience, but it includes valuable information for investors on both sides of the border. One idea that resonated with me—because I have seen it first-hand—is that people have a tendency to worry more about their investments once they stop adding new money. As Swedroe writes: “Combine the challenge of finding a replacement for work with the increased investment risks … and retirees often begin obsessing about their portfolios. The time they used to spend at work is now spent watching CNBC, reading financial publications and browsing financial sites online.”

It’s also common for retirees to ask whether they should remodel their portfolios to generate income. Many feel that traditional index funds are no longer appropriate and they feel they should focus on dividend stocks, REITs, corporate bonds, and even more adventurous investments, such as private mortgages. As Larry explains, this often leads to taking an inappropriate amount of risk. (For more about how you can generate cash flow from a portfolio without focusing on high-yield investments, see A better way to generate retirement income in MoneySense.)

Beware of success stories

In the “Bad Investment Advice” segment, I reluctantly call out Toronto Life, which is a magazine I respect and enjoy. The article is called Bitcoin or Bust, and it profiles six “early-bird investors” in the cryptocurrency everyone is talking about.

My goal isn’t to judge these folks, but simply to argue that nothing they’re doing has anything to do with investing. One is a trader who says, “All you need is a Wi-Fi connection and a laptop, and you can literally make money from anywhere in the world.” Another (described as a financial analyst, no less) “bought $300 worth of Bitcoin, as an experiment, just to see if it would eventually appreciate enough to cover the rent on her $1,000 student apartment.” A third sold his house for Bitcoin. These make for entertaining stories, but this is naked speculation, not investing.

I have an aversion to investing “success stories” in the popular media. If they’re not celebrating people who took huge risks and got lucky, they’re doing something even worse: boasting about the wins while glossing over the losses. Our day trader “bought $5,000 worth of cryptocurrency and has watched its value rise,” but we don’t know whether he also watched it plummet, which it certainly did. And did the guy who sold his house for Bitcoin in March 2017 also sell the cryptocurrency before it lost 50% of its value, which would have made him the only person in the last decade to have lost money selling Toronto real estate? We don’t know, and we never will. That would ruin the fun.

I’ll be watching for future success stories about investors who (gasp!) saved regularly, built a diversified portfolio, never gambled with their rent money, never traded crypto using a laptop on a beach, and who sold their house for cash. It will make for gripping reading, I’m sure.

Escaping the dreaded DSC

The podcast concludes with an installment of “Ask the Spud,” where I answer a question from Julian, who wrote the following:

I’ve just discovered the Couch Potato strategy and I’m interested in building my own ETF portfolio. The problem is, my accounts are with an advisor who has me in expensive mutual funds with deferred sales charges. I’m trying to decide whether I should bite the bullet and pay those DSCs, or whether I should wait until they expire before I transfer my assets. What do you recommend?

The deferred sales charge is among the worst practices in the mutual fund industry. Peddled by commissioned-based salespeople (it’s inaccurate to call them “advisors”), mutual funds with DSCs hold investors hostage by charging them high fees—as much as 6% of the original investment—if they sell before a specified period, which can be as long as seven years. While not as popular as they once were, DSCs remain a blight on the financial industry. Two lobby groups—the Investment Funds Institute of Canada and Advocis—are embarrassing themselves by continuing to push back against attempts to ban the practice.

In my answer to Julian, I suggest a few strategies for breaking free of DSCs. One is to tear the bandage off quickly and just pay them: if you’re moving to a DIY model that will be 90% cheaper, you may find that you’ll recoup the DSC penalty in a relatively short time. This has the added benefit of swiftly ending the relationship with an advisor who does not have your best interest at heart.

Another option is to switch to another DSC mutual fund in the same family. For example, say you hold a high-fee equity fund from a provider like Dynamic, or Mackenzie, or AGF, and you can’t sell it without incurring a high deferred sales charge. You could switch it to a bond fund managed by the same company. This generally will not trigger the DSC, and now you can wait it out in a fund with (usually) a lower MER and a lot less risk. You can then integrate this bond fund with the fixed income part of your portfolio. This is a strategy we use frequently with new clients if they come to us with DSC funds that would be prohibitively expensive to sell immediately.



  1. Jan Muir December 21, 2018 at 11:51 am

    I agree with your analysis of capital gains on investments vs dividend income, especially in retirement. Having retired 2 years ago, I look at my portfolio differently now. Two items your analysis did not address are time involved and fees to sell.

    If you require monthly income, you must spend time deciding what to sell and when every month, but also pay the fees involved. If the investor is more disciplined, there is a way around this by doing the analysis once a year, selling a years worth of income needed and transferring that amount to a high interest savings account to draw on throughout the year.

    Receiving dividend income takes these two factors out of the equation and makes it easier and less time consuming. There are other more enjoyable ways to spend your time in retirement..

    Love your podcasts. Thanks for keeping us on our toes.

  2. Canadian Couch Potato December 21, 2018 at 12:00 pm

    @Jan: Many thanks for the comment.

    RE: “If the investor is more disciplined, there is a way around this by doing the analysis once a year, selling a years worth of income needed and transferring that amount to a high interest savings account to draw on throughout the year,” This is exactly what I would recommend. Since a portfolio should be rebalanced at least once a year anyway, this can all be done at the same time, so it’s really not a significant amount of work once the portfolio is set up properly. And there would be no additional costs either.

  3. Anton December 22, 2018 at 9:46 pm

    Thank you so much for your time, effort and sharing of your knowledge. I especially love your podcast, they are interesting, contain wealth of information very well put together. I am looking forward to more in the new year.

  4. Canadian Couch Potato December 23, 2018 at 2:46 pm

    @Anton: Thanks for the kind words!

  5. Tristan December 25, 2018 at 3:31 pm

    Thanks for a very interesting interview with Larry Swedroe, also one of my favourite financial experts. Of particular interest is his take on diversifying across factors at retirement. You do hear people saying that they don’t want to factor tilt at retirement because they may not have time to hold through periods of under performance. If fact all factors (including market beta) can have long periods of underperformance, which cannot be predicted in advance, so the safest strategy is to diversify across the main factors. In a recent article Swedroe showed by doing so the probabity of underperformance of a factor diversified portfolio over very time period is less than a market beta portfolio. However one then has to content with tracking error disease, which makes it difficult to stay the course during periods when a market portfolio does, in fac, beat a portfolio that is diversified across factors – like the last 10 years or so. Dan, how do you deal with this conundrum?

  6. Canadian Couch Potato December 27, 2018 at 8:59 am

    @Tristan: Thanks for the comment, and the excellent question. I agree there is a very good case to be made for factor diversification in theory. In my opinion, however, it is extremely difficult to implement such a strategy, especially if your goa is to capture premiums as reveled in the Fama-French data that Larry and others use in their analysis. There are simply no products that can do this reliably, especially with regards to momentum. Even if some funds can come close, they all have fees, transaction costs and taxes that will significantly reduce the theoretical returns, not to mention the additional behavioural challenges.

    So I am agnostic about this approach: if you believe strongly in factor-based investing and you believe you can execute it over long periods, then that’s fine. But if you prefer a simpler approach based on traditional indexing, you should not feel like you’re being “sub-optimal” by doing so.

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