This transcript has been automatically generated.

Colin White: Do you wanna pay death tax? No. Let’s remove the risk of paying death tax. Well, the debt there’s no such thing as death tax, but it’s so motivating that, you know, people are willing to spend almost unlimited money to avoid paying something that’s very definable.

Kathryn Toope: Welcome to Barenaked Money, the podcast where we strip down the complex world of finance to its bare essentials. With your hosts, Josh Shellick and Colin White, portfolio managers with Verecan Capital Management Inc.

Josh Sheluk: Welcome to Barenaked Money. It’s Colin and Josh, portfolio managers at Verecan Capital Management as usual. And we’re pulling back the shower curtain to talk about money the way it should be talked about as usual, plainly close off and without a sales pitch. Look, we’re here as always to make you better informed, to give you straightforward advice. And our only angles of firm is to make you better off.

So if you want to get started, if you want to start a conversation with us, visit betteradvice.ca. And when we say better informed, well, risk and return. Those are big parts of the conversation, Colin. That’s what we’re talking about today.

Colin White: This is gonna be fun because I don’t think there’s anything that gets talked about more or understood less and used in more destructive ways than any other concept in the world. I’ll I’ll go that far. What do you think? Do do you think that this is a destructive topic used for malfeasance across the world, Josh?

Josh Sheluk: I don’t know if I go that far. That’s pretty extreme.

Colin White: Well, since it’s for effect. Right? I mean, you and I have both watched countless pitches in the investment industry that talks about risk and return and the false equivalency to more risk equals more return. Therefore, the more risk I take, the more money I make. You know?

The the then, again, there there are pitches that will lean into that concept. You know? And and that’s just not true. You and I both know that not to be true. So it’s a multiheaded monster.

There’s no easy definition of risk. And because you can’t define it, it’s it’s so open to interpretation. So I my goal today is try to give people a little bit of a framework in their mind to kind of put it in its place so that they can turn it into something they can make a decision on. For example, you know, a wet floor, that’s a hazard. If you don’t walk on the wet floor, it’s not a risk.

So, you know, it’s a it’s a risk if you walk on a wet floor. So I think we’ll talk about some things today that are hazardous that you can just remove yourself from the room and and not take the risk and, you know, risk that may be worth taking, how to understand what that risk is and what you’re actually risking, and, you know, what reasonable return expectations can look like and the danger of having that misaligned with reality, the harm that that can cause. So, anyway, you have a list as you always do, Josh. Do you wanna guide us on this journey?

Josh Sheluk: Yeah. We’ll we’ll we’ll jump into it for sure. But one of the things that you have mentioned there was was kind of interesting. You alluded to some of the marketing that gets put around, especially when it comes to money, risk and return. And I think there’s an angle out there that is from a marketing perspective, it’s reduce your risk.

Well, that sounds awesome. Who doesn’t wanna reduce the risk? Why wouldn’t I do that? Absolutely. Not stupid not to do it.

And I think that it can be used nefariously in a few ways. One, it can be used to put a label on something risk reduction that is not actually true. Like there are products or investment strategies and styles out there that say they’re less risky, but maybe the risk is just obfuscated in some ways. And then there are some strategies that might actually be less risky, but it’s still a dumb idea because it’s preventing you from getting something that might be, maybe more advantageous for you.

Colin White: So I think there What is the cost of avoiding the risk? You know, you see these these are always about probability and magnitude. Like if something

Josh Sheluk: Yeah. Is might wanna walk over the wet floor. If it’s gonna take me five minutes to walk around it. I might be totally happy and I might have my rubber boots on so I could be fine on the wet floor.

Colin White: The ice cream is on the other side of the wet floor and you really want an ice cream. You know? So the whole thing about probability magnitude is is is escaped. Right? And the the whole thing about removing a risk is not really a risk.

Like, too much broccoli can lead to iron poisoning. Okay. So I shouldn’t eat broccoli. That might be an overreaction. Maybe.

Maybe moderation would be fine to completely remove that risk. Right? So Yeah. It it it it’s nuanced. And the problem is is that these words could take an at face value and use to motivate people to immediate action.

And, you know, to your point, I do you wanna do you wanna pay death tax? No. Let’s remove the risk of paying death tax. Well, death there’s no such thing as death tax, but it’s so motivating that, you know, people are willing to spend almost unlimited money to avoid paying something that’s very definable. So it’s yeah.

There is no death tax just for the record, but it’s one of those ones, you know, managing a risk and paying way more in cost to avoid something that if you actually quantify, it’s not that big a risk after all, even removing probability.

Josh Sheluk: Yeah. So why don’t we start with this? I’ll ask you the question. When you hear people talk about risk and risk related to investments and money, what do you think they’re usually talking about? How are they usually defining it?

Colin White: I think the fundamental mistake that people make is they confuse volatility with risk and the investment industry leads into that. Like, the investment industry will take a risk measure, but they’re actually measuring as volatility. You know, I think to an average person, if you get outside of the the financial world, risk ostensibly means risk of loss. Like, what are the chances I’m gonna lose this? And it’s it’s a very major thing.

And I think that the investment industry hasn’t done themselves any favors by so closely equating perceived volatility, historical volatility with risk because we love putting numbers on things. And this is where I’m gonna start offending all the CFAs in the world. You know, you can’t accurately put a number on risk. Sorry. You can’t put a meaningful number on risk that really encapsulates what a risk is because it’s very subjective.

However, we have 18 different ways from Sunday to put a number on risk, and therefore we can order it and then we can use it to make a decision. And I think that misses a lot of very important aspects of making a financial decision. So to go back to answer your question directly because I wanna be that. I think people, when you say risk, risk is loss. Investment industry, that becomes risk of volatility.

Risk equals volatility. I And don’t think that that’s a fair comparison. I don’t think that that does anybody any favors.

Josh Sheluk: Yeah. The tough thing here is to some people volatility is risk. If you’re spending your money on a monthly basis that you’ve saved up over all those years, if you’re retired and need that money to live, then volatility is risky for you. If

Colin White: So you’re dirty it’s risky to accomplishing your goals, Right? So the the the so I mean, just just to put it, I wanna I wanna try to keep this really defined. There is a risk that if your assets are volatile that it may affect your ability to reach your goals, which absolutely is true.

Josh Sheluk: Yeah. And actually, maybe that’s the point. The risk for an individual, the risk for an investor is the risk that they’re not going to accomplish their goals. Yep. And those risks come in different forms.

For some, volatility might be the more meaningful risk.

Colin White: For

Josh Sheluk: others, longevity or inflation or liquidity or might be the more meaningful risk.

Colin White: Surprise, I’m pregnant, that kind of stuff, right?

Josh Sheluk: Okay. Yes. Sure.

Colin White: Well, not me, but like, you know, I get, I just had a friend who went through this, you know, very late life surprise, oops, we’re pregnant. That’s, that’s risk.

Josh Sheluk: Okay.

Colin White: It’s going to affect their financial plan.

Josh Sheluk: Right, right. So I think you’re exactly right. Risk is typically thought about as volatility, stock markets riskier than GICs. A lot of people would say that that’s true, but depending on where you’re sitting and depending on what your objectives are, depending on what your time horizons are, depending on what your tolerance for that risk is, that might not actually be true. If you’re 30 and saving for retirement at 65, you have far more risk being in a GIC than you would being in stocks.

Colin White: Well, yeah. I mean, I might even go a step forward and say that you’re making it very, very hard to accomplish your goal unnecessarily hard. You’re picking a path. It’s very, very difficult. Is it possible to fund your retirement using only GICs?

Sure. Is it gonna give you likely of the best outcome? Statistically, no. But, again, that’s that’s an understand. There’s a risk in not taking enough risk.

Look at that. I use risk on itself. Because if we’re looking at and I think you’re right to bring it back to accomplishing client goals. In the long run, you know, currency exposure doesn’t matter. Like, over any thirty year period, currency is neutral.

Problem is, the long run, we’re all dead. So, you know, it it’s it’s gotta be variable within a range within the important time horizon that we’ve set for ourselves. So but to go back to my earlier comment, it the industry does talk about the risk of investment separate from that. Like, they they they they’ll they’ll they’ll say this is a high risk, low risk, medium risk investment regardless of the time horizon of the person that’s buying it. And to your point, I think the person that buying it would experience that risk differently.

It’s not high risk for somebody to have equities at age 30 with a sixty five year retirement. That’s not a risky thing for them to do. But the product may be described as risky because it is equity and it has higher volatility.

Josh Sheluk: Yeah. And actually, we as an industry have literally quantified risks, especially when it comes to mutual funds and ETFs. In Canada, we have put standard deviation bands around low, low to medium, medium, medium high, high risk investments. So we actually, Us CFAs actually have quantified risk down to an exact measurements that we put on the financial products that are often sold and marketed here in Canada.

Colin White: Decimal points and everything, that’s we know serious math.

Josh Sheluk: Standard deviation is just a volatility measurement. That’s all that it is.

Colin White: A historic volatility measurement.

Josh Sheluk: That’s for sure.

Colin White: No. But it it it

Josh Sheluk: So yeah.

Colin White: The the the challenge is is that it’s it’s a very, very important topic. We seek to simplify it. Regulators seek to simplify it. But in the simplification, it loses its potency as to what it really is and can lead to to making some flawed decisions. And I think that’s what we’re trying to get to in this conversation to try to explain to people how one product may be risky for one person but not for another.

And sometimes it’s the opposite of what you expect because back to your example, a thirty year old is investing nothing but GICs because they don’t wanna take the risk of the stock market. He’s actually taking a much wide much bigger risk. You know, the the risk that that’s not gonna be able to keep up with inflation and fund the retirement they expect. So risk comes in different ways.

Josh Sheluk: Yeah. Trade offs there for sure. Yeah. So just, think as we go through the conversation, it’s worth our listeners keeping a bit of a broader view of risks that are out there. So it’s volatility to some extent.

You got temporary declines, you have permanent declines. It’s inflation, the fact that the cost of things is going to go up over time, and there’s a risk to that for you financially. It’s liquidity. So when you need cash, you need to have cash on hand or something that can easily be converted to cash to cover that expense, that cost, whatever it is. And there’s a behavioral risk too, that even if I am 30, and I have thirty five years and the stock market is very likely almost guaranteed to be up over that thirty five year, if I can’t deal with the volatility behaviorally, then I’m still hooped.

Colin White: The qubit is one that’s really rearing its head right now because we’ve seen the proliferation of all these private products that have maybe gone too far down market for people who can’t deal with the risk of illiquidity as well as others can, because it’s sold been to them as something the ultra rich do. This goes back to, do you wanna invest like a pension fund? No. You don’t. Like, you’re not a you’re just not you’re not a pension fund.

You’re not immortal, and you don’t have the ability to tie money up for forty years so they’re causing you pain. So, no, you don’t wanna be that, but we have product out there that has has positioned themselves that way. So, yeah, liquidity, I think. I wanna stick a bit of an exclamation point on that. You know, liquidity is a thing.

But I often talk to people about GICs because, know, you the Canadian banks are greatest on GICs. It’s really low cost of capital for them, and they make a lot of money off of it. But you take a look at you know, if I’m gonna advise a client to give up give up access to their money for five years, I wanna get paid for that. I think that there should be a payoff. Like, if I’m not gonna have access to my money for five years, I wanna get paid.

Well, that interest rate’s the same as what I can get with a one year GIC. It’s like, well, why would I tie my money up for five years for what I could I I could tie it for one year and get the same same amount. More complicated answer is where you expect interest rates are gonna go, and let’s just stipulate that nobody knows where interest rates are gonna go and say that, you know, the average consumer is making a decision at the moment in time. But you’re buying a five year GIC when you could get the same, you know, absolute return by buying a two year GIC. You know?

So you’re giving up access to your money for three more years. Maybe hoping that interest rates are gonna be lower, and that’s gonna show up to be a good decision. But I don’t think the average consumer is in a position to have a a thoughtful decision or a thoughtful opinion on where interest rates are gonna be in two years’ time. So, anyway, liquidity is a thing, and I think it’s an underestimated thing. Because the other thing is people put money in the stock market.

It was publicly traded. It’s volatile, but you can get out. You can cash it out. It doesn’t have the liquidity risk to it. You just may have to not sell it at a peak, which goes back to the psychological sign that you’re talking about, getting somebody to sell something that’s not at a peak.

But the liquidity of the public markets is something that’s absolutely in their favor compared to some of the alternatives.

Josh Sheluk: Yep. So you may reject the premise of this question. So I’ll just preface with that. But why should riskier investments earn higher returns?

Colin White: I don’t I understand where you’re going with the question. And so I can accept it for what it is. If I am taking on additional risk, then there should be a compensation for that. Now that’s just how the world should work. I looked out found you on this one.

Do you think that overall, the capital markets operate on that with that as a fundamental principle. Now execution wise, it’s not always executed on, but there’s a kind of a global principle if I’m taking more of a chance. I’ll say chance instead of risk with my money, but I should be compensated for that. Otherwise, why would I take on the risk?

Josh Sheluk: Yeah, well, and that’s exactly right. If you’re not gonna get compensated for taking on more risk, why are you doing it? And so I think by and large, the market does operate with this principle upheld. There’s exceptions and I do wanna talk about some of those exceptions, but by and large, the answer is yes.

Colin White: I mean, Tom Brady told us that fortune or Matt Damon, who was that, that told us that fortune favors the brave.

Josh Sheluk: A of those guys. Yeah.

Colin White: There’s there’s a lot of really fit determined bodies laying on the side of Everest. Just because, you know, people who take risk make a lot of money doesn’t mean that everybody takes risks, makes money. You And, know, there’s a lot of failures out there that don’t get discussed. And I think that that’s maybe in the background what holds people back. But, you know, for those that don’t get that piece, like, I wanna take as much risk as possible.

I wanna make the best return as possible. And and eventually that relationship just breaks.

Josh Sheluk: And that’s one of those examples where necessarily taking more risk does not lead to more return or like it probably is not expected to over time. And you can think of something like zero day options trading or something like you’re, and these just for everyone’s knowledge, these are investments that most likely are going to expire worthless at the end of the day, unless you see an outsized market movement that is in your favor at the end of the day. So you really need to have your forecasters hat on for that. But these are, I think if you spend enough time mixing around as a retail investor, for sure, with zero day options, you’re probably going to end up losing all your money at some point. And so those are risky investments that have a very low expected return given enough shots in my opinion.

So those are, there’s those types of scenarios.

Colin White: So when you buy tickets for the lottery or you go to the casino, you’re taking a risk, but it’s very, very well proven and understood the house always wins. So, you know, can you be the exception and make money? That’s what everybody dreams about. But, you know, there there’s a situation where taking more risk will eventually end up losing all of your money because mathematically, there’s a certainty to that. Now, you know, that same kind of thinking can leak into the investment world where there’s a big opportunity because there’s mineral rights about to be granted or there’s new technology or I’ve cured cancer or, you know, clean energy or whatever.

You know, there’s these really great stories. But, you know, what is the probability of them actually playing out? You know? And and those sometimes that’s almost impossible to know because there’s never the really, really aggressive stuff. You know?

That one of the reasons that the expected returns are so high is that there there’s very little visibility on on the outcome. That has got significant risk of loss. You buy the S and P 500 ETF, the chance if your money goes to zero one day, we have bigger trouble than the fact that your ETF is not worth anything. That means 500 of the world’s largest corporations all went bankrupt the same day. We’re probably living in caves hitting each other with sticks.

So, you know, now risk of volatility, percent. There’s absolute risk of volatility in that. You know? It doesn’t have a a a liquidity issue. So, again, understanding these different types of risk when it comes to investing because the word risk gets used in all those different situations, it means something different.

Josh Sheluk: Yeah. I think, again, by and large, this holds true. This relationship holds true when we look at financial markets. Think stocks and bonds is a good simple example to look at. So you can buy stock in Google or you can lend money to Google.

When you’re buying stock in Google, you’re buying a share of the future profits. Those profits are largely unknown. You might be able to plot a reasonable path for the future, but those profits are largely unknown. And that stock is probably going to be fairly volatile. Even the strongest companies have volatile stocks over time.

So your payout is quite uncertain on that. With a bond, it’s a contractual obligation for that company or that entity to pay you interest at a set rate, typically a set rate over a set period of time, and to give you your principal back at the end of that bond’s maturity. So there is quite a difference in the level of uncertainty of those two things. And that’s why typically you’ll expect to get a higher return on stocks, the bonds.

Colin White: Yeah. Because the the bondholder gets paid first. Now that this stock are only gets paid after, you know, all of the interest obligations have been met. So yeah. So you do expect a better rate of return for sure.

But in in that particular example, Josh, I mean, that there’s there’s, you know, the liquidity risk isn’t as high because typically that, you know, on a publicly traded on both sides of that, you’re not dealing with liquidity. You’re dealing more of the volatility risk. And maybe if you drive to the Nortel theory, maybe one day they’ll go out of business, but that’s probably a fairly minor concern that’s still unlikely to happen quickly. So you, like, summon your money out for sure. So it’s it’s not like a crypto bet or going to the casino or investing in a startup wind farm in Montana or something of that that

Josh Sheluk: Yeah. Yeah, for sure. That’s just one example. And generally speaking, your stocks are gonna get a higher return than your bonds because of that degree of certainty. But I think the other thing to keep in mind is higher expected return doesn’t always mean a higher realized return.

Colin White: Yeah, for sure. And this is where the investment industry kind of hides behind its own math a little bit. Right? Because if something’s not going well, it’s like, well, you just have to wait for it. It’s it’s it’s on its way.

You know? You you need to take more risk. You need to deal with the volatility in order to win. And and sometimes that’s used as a bullshit line to hire unmitigated trash. And so it’s one of those ones you can’t just say all that well.

I’m just gonna buy, hold, and prosper, you know, to steal our marketing line for an old mutual fund company. Just because you’ve bought something and it’s gone down, it’s not a truism that we’ll just hold on to it. It’s gonna go back up. There can be fundamental reasons as to why something is not working out. You know, there could be a fundamental flaw that was invisible or not apparent that becomes apparent.

So just taking on more risk is not a certainty of having a better outcome over time. And that’s where it gets super complicated because that’s where it takes a lot of wisdom to figure out, okay, what room am I in here? Am I just getting bad advice, or do I just need to be patient? And, honestly, that’s the most important conversation to have, and it doesn’t lend itself to math with two decimal points. It it it just doesn’t.

And that’s where good financial advice can help somebody make a decision as to whether this is something that I need to jettison to get out of or something that I just need to ride out the wave.

Josh Sheluk: So you mentioned the lottery ticket thing and the gambling thing before, which I think are good examples where higher risk doesn’t necessarily mean higher return. But what other examples can you come up with where there’s an inconsistency between the higher risk, higher return idea?

Colin White: I think the stock market is the best one because once you get beyond developed companies and get into companies that are more growth companies and or don’t have any income yet or have a kind of brand new business model that hasn’t proven itself yet, You know, then if you go from the S and P 500 into the, you know, micro caps or you get into the new issue space, you’re taking on actual risk of loss there. Mean, you know, in the back market, you can go from a volatility risk to a risk of loss. And sometimes you don’t notice when you pass that signpost. Like, you don’t you don’t notice that you’ve you’ve gone down the dark road a little bit, and this product or this particular option may just go away. So I I think that the dealing in, you know, broadly equities, that encompasses everything.

That encompasses from stuff that’s pretty stable. It’s gonna pay you an income to stuff that may be gone in six months. And that whole category sometimes gets spoken about us as if it’s homogenous and it just doesn’t. I’m thinking IPOs, I’m thinking, you know, limited partnerships.

Josh Sheluk: IPOs is a good one. Yep. Yeah. Yeah. Yeah.

Some of like the real venture type stuff that, we used to see like the, you know, like the labor sponsored funds and, and those types of things up here in Canada, those are good ones. One sort of obvious example that comes to mind for me is is concentration or having a high degree of concentration in your portfolio. Like if you pick one stock, your expected return on that one stock on if you just kind of like take it blindly is really not all that different than the expected return on the market as a whole. But your risk with owning one stock versus owning the market or owning 500 stocks or owning a thousand stocks or whatever it is, your risk with owning one stocks is exceptionally high.

Colin White: Well, that goes back into ways to manage risk. Right? So if you’re trying to manage volatility risk, then put together a diversified portfolio is a valid structure to try to to deal with that. So, I mean, I think we’re stepping into the next chapter of the conversation is how do you manage risk and at what point do you avoid it and what point do you manage it? So some of it’s how well can it be managed?

You know, it’s funny. We’ve had the conversation internally about hedging currency and, you know, trying to manage currency risk, you know, and the different methods of managing currency risk. And there’s a real cost in that world to manage the risk. So it’s another one of those ones you need to understand the risk you’re trying to manage and then weigh it against the cost of managing it versus just exposing yourself to the risk and letting it be. In the investment space, it’s am I managing risk or loss?

Okay. So maybe that’s just I need to make sure that it’s a minimal allocation to my portfolio. So risk of volatility. Okay. So I need to make sure that I I have got diversified and perhaps uncorrelated assets.

Is it risk of of liquidity. Okay. I need to make sure that I keep two years expenses in cash just in case. You know? So there’s different strategies to manage different kinds of risk that line up.

But you introduce something that is soft handedly talking about labor sponsored venture capital near and dear to my heart because that was right in the middle of my career. As soon as you start trying to accomplish a nonfinancial goal with a financial asset, you add another whole layer of the way things can go wrong, you know, because you introduce incentives into the equation that are not natural, that 99.9% of time will get in the way of the true goal, which is growing your investments. You know? So, you know, you gotta be really, really careful in the world of the, you know, accomplishing nonfinancial goals with financial assets because it’s something that sounds really good, but you’re adding risk to your portfolio. And, you know, even with our, you know, portfolios that we’ve kind of leaned in the way of trying to be a little bit more, you know, conscientious about things.

We’ve noticed that it leads to a certain security selection that has a different volatility profile. Adding something in that is not specific to maximizing, your return for the level of risk you’re willing to take does change that. And you should try to be aware of that and quantify it where you can.

Josh Sheluk: No doubt. Yeah. There’s obviously different ways to manage risk because you kind of went through them. And when you talk about risk management, one of the things that I was thinking of what was kind of like a different sort of risk is reasons why we use insurance. So insurance is kind of the opposite of the lottery ticket.

It’s like you have, in some ways, have a negative expected value from insurance. If you ran your insurance policy through in your life a million times, you’re going to lose money more often than not. But you’re protecting on the one catastrophic risk that if it comes up, your life is over, right? Or your financial life is over. Like, if you pass away and you got young kids and there’s no savings there, then what’s going to happen?

So there’s situations where you might actually actively have a lower expected return, but it deals with a specific risk.

Colin White: Well, think this is what I alluded to earlier. There’s a cost to managing risk. There just is. Like, you’re gonna have to give something up to manage that risk. I mean, the the the origins of insurance gets traced way back to when they were sailing ships across the ocean and, you know, hoping they didn’t get wrecked in the storm.

You know, so five ships take off, the five guys get to go and say, okay, listen. I tell you what. However many ships make it back, we’ll take whatever came back and we’ll just divvy it up between the five of us. Deal? Deal.

Now because there was no other way for each of them to take on all of that risk themselves, they, you know, made this deal. And, basically, it’s a pooling of risk, you know, taking a group of people with a similar risk and all agreeing on terms to say, you know, if something bad happens, I’m gonna be made whole or it’s gonna reduce the effect of of this happening or life insurance that’s gonna pay my family amount of money. But it’s another one to understand the cost because there’s investment products out there that come out of the insurance industry that carry a very high premium on them that are protecting against capital loss that really don’t make a ton of sense when you take a look at some of the numbers on what they think they’re protecting from and what, you know, the actual historic outcome has ever been. So understanding what you’re protecting, why you’re protecting it, likelihood of it, and the cost of it are all very, very important things. Lower risk isn’t always bad.

It isn’t always good. Higher risk isn’t always bad. Isn’t always good. It depends on the circumstance.

Josh Sheluk: So fast forward to today, look at the world of investing specifically. Where do you see smart risks being taken? Where do you see dumb risks being taken? Are there some pockets of risk that is more akin to driving blindfolded?

Colin White: Well, we’re we’re territory in the tech space where you’ve got some stuff that we may be in the middle of a a rightsizing of the technology space because expectations maybe you’ve got a little bit further ahead. You take a look at things I always describe as an asymmetric risk. What what is the realm of possible upside surprises versus the realm of downside surprises? And, you know, that often can be instructive in understanding how awesome the world has to be in order for a really high flying investment opportunity to continue on its path. And I I I love it.

The the line I read one time, it was like in order for Amazon to have a same, you know, valuation to to Walmart, it would have to have a 100% market share on two Earth sized planets. You know? So when when you start getting into that realm, now, again, we could get into a bigger debate about the efficacy of different ways of tracking things for sure. But at a certain point, something just runs out of air. Like, it it flies too close to the sun.

So I think right now, there’s probably some ill advised chances being taken in the tech space. And it’s it’s based on a fundamental belief that we’re entering a period of amazing technology advancement. That’s that’s without a doubt. But to make that an investment, you know, like, was the old rationale. Marijuana is legal.

Therefore, marijuana is a good investment. No. Just because there’s a something’s gonna be bought or sold doesn’t make it a good investment. Those are two different animals. I do think that there are people who are overly afraid of the overall stock market.

I think the global economy continues to prove itself to be able to reconfigure its output and provide value to shareholders regardless of how hard we try to mess it up. So I think that that’s a risk that’s a bit over. It’s a bit prevalent in people’s minds. It doesn’t necessarily need to be there, but it’s based on situation. Like, if if if you’re 85 years old and you’re just looking to pay your rent, then you don’t need to be taking the volatility risk.

You know, you probably don’t have the timeline for it. You don’t need to be taking it. But again, if you’re 30 years old going, I’m afraid of the world, I’m gonna put it all in my savings account until the world straightens itself out that investment, you’re not managing the risk appropriately.

Josh Sheluk: But some of these leveraged ETFs that I see today, I’ve written about them recently for our team. That’s one of those risks where you’re maybe not going to get the appropriate amount of compensation for the risk that you’re taking on. And here’s a situation where, so a lot of these so called leveraged ETFs, they’re designed to give you two times the leverage. So the stock goes up ten percent one day, your leveraged ETF in theory is going up 20%, the stock goes down 10%, the leveraged ETF in theory goes down 20%. So you might look at it over time and think, well, if the stock’s up 50% over the next ten years, then all of a sudden I get 100% with this leveraged product.

But the way that leverage works, you end up at zero, that’s it. The game’s over. You can’t recover from that. And a 50% drawdown on a stock is not extremely unusual. So Oh, let’s let’s hit that with

Colin White: a hammer. You know, a 50% drop is 100% of your money. Your money gets lost first. Okay? So in a leverage situation, a 50% drop is 100%.

So you have just wiped yourself out. So I think that, you know, again, we would sit here and agree that equity markets over time absolutely are gonna trend higher. You know? But in some of these leveraged, like, at five to one, I mean, that’s I’ve we’ve seen those too. Right?

So if you go that, it’s like, if it ever suffers a 20% drawback, you’re 100% wiped out. So it bites way harder on the downside than it adds on the upside, But it’s it’s a product people are willing to buy. And at certain points, you cross the the threshold into the house is gonna win because they’re gonna make money offering that product to you. And I’m not sure exactly where that point is, but but we’re seeing a creep into and and this is a a really good point to make, I think, on this on this particular pod. You know, we’re having prediction markets show up in investment accounts now, and that’s nothing more than a bet.

And the house is gonna, you know, take its rake off the top. And, you know, you don’t know more than anybody else where interest rates are gonna go or the other things you’re allowed to bet on. And the the proliferation of sports betting and people, you know, jumping on their phones and and and just placing bet after bet after bet. Well, there is a risk of loss. There’s a liquidity.

Yeah. You lose liquidity because you lost the money. So I guess that’s both a liquidity and a and a loss risk all in one spot. So

Josh Sheluk: Yeah. Yeah, I think anything that has binary outcomes with investment and binary by that, I mean, if things go well, you get x number of dollars. If things go poorly, you get zero. A lot of times that’s what we’re talking about. We’re talking about options in some of these prediction markets.

I think these leveraged are a binary bet to get 2x. If things go poorly, you get zero. And I think more likely they’re gonna be zero than than not. So those are ones I think when I look at the market today, if I could generalize, they’re they’re problematic. Let’s put it that way.

Colin White: Just if if things go poorly for any moment in a moment in time, like, it it it doesn’t you know, they could still work out just fabulously, but there was a bad day. You’re wiped out. You don’t get to hang around for the recovery. Why? Because you ran out of your money, and the person who gave you money took their money back.

So, you know, it just it’s nonsensical. It really is. And it it it is way more like betting than it is like investing. And, you know, there are those who sell the product, who are advocates of the product who would say, well, if markets are always gonna go up, you should always be leveraged. You know what?

I I I don’t think that that’s safe, fair, reasonable for the vast majority of the population because you you alluded to it earlier, Josh. We haven’t really gone back to it. You gotta have the stomach for it. Like, if you’re gonna, you know, be on medication because you’re looking at your account every morning, then woah. Woah.

Woah. You you gotta get out of the game. I don’t care what mathematically you should be doing. Like, you know, and I’ve I’ve run into people like that. They just get so overwrought with being so tied up on what’s going on that it becomes a complete distraction for them, and they they just shouldn’t be there.

Yep.

Josh Sheluk: No doubt. Any last thoughts? Final words of wisdom?

Colin White: I think, Josh, the the genesis of all this was that, you know, we have had clients who have left us because of they’re chasing a higher return because they’ve been convinced by taking more risks, they’re gonna get a better return. And I think that’s a gross oversimplification of the equation. And, you know, I think it’s, you know, it’s a heuristic that gets applied. It’s a shortcut that gets applied for people at more risk equals more return, and therefore, I should take on all the risk I can. And that doesn’t hold up to scrutiny, but it is used to motivate people to move assets and make decisions and allocate capital.

And I think that that’s overblown. It should stop. And people if you’re hearing that pitch, somebody’s saying take more risk, get more return, and there’s that’s all there is to it. That’s a that’s a real red flag. That’s a real danger because that just there’s no universal way to say that.

Josh Sheluk: Yeah. I I think you very well might get more return by taking on more risk. But the question is, do you need to do that? Is it giving you a higher probability of accomplishing your financial goals? Because as we said, towards the outset, a lot of this comes down to risk is defined relative to your financial objectives.

Kathryn Toope: And

Josh Sheluk: a higher return expectation may not get you closer to your financial objectives. In fact, as you said before, a lot of people could very well just have a GIC portfolio and accomplish all their financial objectives, in which case that’s totally appropriate for them. So it’s always within the context of if it is what I’m chasing actually going to help me accomplish what I want to accomplish. And it’s certainly very easy to chase a higher, higher return with higher risk when markets are really good, which they have been for the better part of four years.

Colin White: Last year, this did really well. So I wanna invest in that. Like, oh, no big shooter. Like, that’s not what no. Please don’t be that person.

So but anyway, it’s a complicated conversation. It’s a nuanced conversation. And if wanna have it, give us a call. We can give you 2¢ on what your risk profile might be that maybe you’re not aware of.

Josh Sheluk: As always, thanks for listening to Barenaked Money. And if you’re starting to wonder whether your current financial advice is appropriate for you, if it’s as clear and disciplined and well defined as it needs to be, give us a call. We’re always happy to have a conversation. Signing off, Josh and Colin, Portfolio Managers with VeriCain Capital Management. Our team’s always open to new client conversations, so visit betteradvice.ca if you want to get started.

Kathryn Toope: Have you ever wondered why your financial adviser is making a recommendation? In an industry where conflicts of interest are everywhere, it’s important to understand how they affect you. For more info, contact us at Verecan. You can find us at annoyingthecompetition.com. For more information on the subject of today’s podcast or any other financial topic, please visit us online at verecan.com.

That’s verecan.com. Plenty of information there, or you can reach out to someone on the team. Thanks for listening. Please note, the information provided in this podcast is for general information purposes only. It is not intended as financial investment, legal tax, accounting, or other professional advice.

Our discussions are not a solicitation to buy or sell any securities or to make any specific investments. Any decisions, based on information contained in this podcast, are the sole responsibility of the listener. We strongly advise consulting with a professional financial adviser before making any financial decisions. Listeners should be aware that investing involves risks and that past performance is not indicative of future results. Barenaked Money is produced by Verecan Capital Management Inc, a licensed portfolio management company in Canada.

We operate under the regulatory framework established by the provincial securities commissions in the provinces within which we operate. The views expressed in the podcast are our own and do not necessarily reflect the official policy or position of any regulatory authority. Remember, at Verecan Capital Management Inc, we focus on aligning our goals with yours, prioritizing integrity and transparency. For more information about us and our services, please visit our website. Thank you for listening, and let’s continue to challenge the norms of the financial services industry together.