Ep. 12 | Why a 100% Equity Portfolio Could Be Your Best Bet

Investing Simulator: https://buildyourstax.com/

Most people think bonds are “safe” and stocks are “risky.” But what if that’s exactly backward, especially over the long term?

In this episode, Tré breaks down the real meaning of asset allocation and why traditional advice like “add more bonds as you age” may be setting you up for failure. Backed by research, Tré explains why a 100% equity portfolio often leads to the best outcomes — and how to know if it’s right for you.

You’ll learn:

• Why bonds can increase your risk of running out of money in retirement
• What “balanced” portfolios really deliver—and why they might fall short
• How to match investments to your spending timeline (not your age)
• The emotional traps investors fall into (like anchoring bias)
• Why financial literacy is your best defense against panic
• How to think about asset allocation across TFSA, RRSP, and corporate accounts

Follow, review, or share this podcast to help more Canadians invest with confidence.

Transcript

0:00

Hello, and welcome to the Plain English Finance Podcast, the podcast dedicated to helping you make smart financial decisions. I'm your host, Trey byo financial planner with TC Wealth Management and a Visa Wealth. For more information on me, or to send in your questions, check out the show notes at trey byo.ca/podcast. So let's get into the 12th episode. So this episode is on optimal asset allocation. What do you think that means? Hello, this is the editing tray. Uh, just a quick interruption. This episode does have a little bit of buzz to it due to a loose cable. Either way, I had a choice. Either make my wife redo a 45 minute conversation or just post it and fix it for the next one. I value my life. So here is the episode. Who knew that audio would be so annoying? But we do have it figured out for future episodes, so it should be good. So don't feel bad if you have to skip this episode. That's okay. It should be good for future ones. Um, I think that means putting assets into the most efficient funds. Is that the right or, uh, vehicles Maybe like T-F-S-A-R-S-P-R-D-S-P, is that right? No. Okay. So that's close, that, that's asset location. But allocation is really, we're gonna focus on, we're gonna keep it pretty simple, is to focus on the difference between how much stocks you have in a portfolio and how much fixed income you have in a portfolio or bonds. Mm. So quick lesson bonds in a portfolio historically reduce the long term. Expect expected return, um, because that's fixed income. Is is that in general? So a bond is similar to a gic. Okay. But issued by a, instead of issued by a bank, it's issued by a company. So a company wants to borrow money, they need a hundred thousand dollars. It's normally a lot more than that, but let's say a hundred thousand dollars, they will say, depending on the risk. Of that company, they will say, okay, we'll offer the market, uh, 5% if people give me a hundred thousand dollars and we'll pay it back in 10 years. Mm-hmm. And then that, that piece of paper or whatever is a bond. There was a period of time when people will push to buy like government bonds. So it was very popular that if you talk to like your grandparents' generation, they would have likely at some point bought. Like government and Canada Bonds. They might even have them sitting around. Well, remember, I think I had a bond. I think so, yeah. We had to like go to the Ministry of Finance to cash a dinner. It was like a hundred dollars. It is very small. Yeah. So, so that, that's a bond, an equity or a stock is completely different. That's where you own part of a company. Mm-hmm. Or it's the stock market is what people typically think of. Um, but it's really, yeah. Equity versus our stocks versus fixed income. Okay. So when it comes to picking your investment allocation, that's, that will determine your experience that you go through, like the experience, what you, what you as an investor experience, your overall return. It will have a, a very large factor on that, a very large influence, should I say on that and picking. Something that you are comfortable with is really important to your, your experience and your outcome. Your outcome. Huge to your outcome, but, but really important to your experience as well because, well, we, we, we'll look at it. I might be jumping ahead, but I wanna ask, is this like the pension plan thing where you're put into the balanced fund, but you're always like. Yeah. Put it into the equity fund. Is that asset allocation? Yes. That's, uh, so a, a balanced fund is typically 60 40. Mm-hmm. So 60% in equity and 40% in fixed income. Yeah. And then you have an income fund, which would be closer to the other way around where you have about 30, 40% in equity or stocks, and then the rest in fixed income. Yeah. And that is because of the way risk is measured. What you have is. The typically, the higher the bond or the fixed income component, the lower the risk rating of that particular investment vehicle. So if it's a 60 40 balance fund, it's likely gonna be low to medium risk rating. Yeah. If it's a 30 70 like income fund, then it's probably gonna be rated as low. If it's a. That would be 70% of it is in bonds. Yeah. 30% is in equity. Yeah. And you would maybe choose that if you were like, really close to retirement? Well, I think you should never choose it, but yes. Oh, we would, well, we'll get into reason why, but yeah. Yes, you would. Um, well let's get into it. Yeah. So fir first off, that's, that's a really fundamental thing that you have to understand is that when. When people, when you're thinking of risk, we've already talked a little bit about risk in a previous episode, but when you're thinking about risk, it is, when you're talking about investment allocation between stocks and bonds, it does not mean that you are holding risky stocks in the risky in the stock part of that, right? So if it's 60 40, oftentimes, especially with pension funds and things, it'll be the same equity. You just hold it in a smaller percentage of the portfolio. Right. Which then controls the ups and downs of the portfolio. Yeah. It doesn't make the investments riskier from the point that people view risk, like the absolute risk. It will just, the higher the amount of equity the. The higher the ups and downs that you will experience. We're not getting into what's in the equity and picking that option. Like choosing. So you're saying it's not like, okay, if you're choosing the equity fund you're in now invested 70% in weed stocks, Bitcoin? Yes. All those like no. You're a hundred percent correct. That is, that is not like the S 500 either. This much. This much. This much, yes. Yeah, basically. So if using the s and p 500,'cause you brought it up, um. Uh, if you had a, like a just us balanced fund, you could have 40% of it in government bonds, and 60% in the s and p 500, and that would technically be 60 40 split. Right. And so balanced portfolio. Yeah. Or you could have 80% in the s and p 520% in Government America Bonds. Same. Thing, not one's, not suddenly more risky than the other, but that portfolio that is 80%. Is much more likely to experience ups, larger ups and downs, larger swings. It's the volatility thing exactly. Where it's like it's, it's the definition of risk. If you wanna learn more about risk, check out, what is it, episode five? I don't even know what it was. You don't know. One of our previous episodes we talked about it, but yeah, the, yeah, episode five. You got it right. Here you go. Look at that memory. Anyways, it's the volatility. So because there's 80%. Because 80% of the funds that you have are in equity. That means the bigger number. How, how am I saying this? It makes so much sense in my head and I'm like, now I'm trying to get it. It's just, it's just you. You, you're gonna see more movement Yes. Is essentially what it is versus the 60 40. Correct. Yeah. So ultimately, a lot of advisors will say, you should pick. Yeah, like you should start with, you should like do, there's like, I do risk tolerance questionnaires with people as well. I do your mine's a little bit weird compared to what some other people use. Um, but people think you should start with that and then you kind of like build up your, you build up your risk tolerance. Um, me being the way I think, I think people should do it the other way. Um. And well, let's look into, let's look at the paper that I wanted to look at. Sure. So there was a paper produced, it's called Beyond the Status Quo, A Critical Assessment of Life Lifecycle Investment Advice done by a few different universities, university of Arizona, uh, the University of Missouri at Columbia. A few different people got together. Mm-hmm. This is a pretty heavily researched topic for sure. Okay. Um, but this, so lifestyle lifecycle investment advice is what you're talking about. It's the, it's what the basic advice is when we're trying to, like that advisors give out when you're trying to just determine somebody's risk or how they should be invested. So when you're younger, you have more stocks. When you're older, you increase the amount of bonds that you have. Okay. So this paper. You can, I'll put it in the show notes and you can look at it. I'm not gonna go through every single part of it. Mm-hmm. It's a little long. But basically they looked at how that fed throughout history. Yep. Okay. And they looked at risk through a completely different lens. So they looked at risk through the probability of financial ruin. Okay. So they took this, this, uh, this couple and. Depending on how they invested, they looked at probability of financial ruin and how much of their income they had to save in order to achieve their desired retirement. Okay. Does that make sense? Yep. Okay. So I, I can't really show you, show this to you, kind of sitting too far away. I dunno. Okay, so there's four charts here. Okay. Yeah. Well explain it because the listeners need to know. Yeah. Okay. So the, the first one is, it, it, it compares, uh, if somebody was just invested in domestic stocks. Mm-hmm. So just if I was just investing in Canadian stocks Yep. If I had a balanced approach throughout my entire life. Mm-hmm. If I used the, as you get older, you increase your allocation towards bonds approach. Yeah. Or a hundred percent equity. About 30% of it's in domestic stocks. Everything else is international. Uh, and it compared it in different scenarios. So if, for example, the inflation's a big one, people often talk about inflation. So we see the, the potential of financial ruin. For the all equity approach, if inflation is really high, is around 18%, it's pretty high. Yeah, right. Uh, when it gets to the, a domestic stock portfolio, it's now at 40%. Okay. So 40% chance of financial ruin in this type of environment. That's crazy. When we get to Next up is balanced. The balanced portfolio is about. 50%. Oh wow. 50% chance of financial ruin. That's crazy. Yeah, I know. And then this is the most craziest one is, so the target date fund approach, what's that one? That's the one where you get more and more bonds that the older that you get. Oh yeah. So you dial back the risk. Yeah. The older you get. What do you think it. Was the chance of financial ruin? Well, based on how you responded earlier when I was like, oh, and then in the pension, when you're older, you dial it back, you were like, no, not white. So I'm guessing it's pretty bad. Yeah, you, you have to gimme a guess. Uhs. 60%? Yeah, about 65%. Just over 60%, 65%. Is the chance of financial ruin in a high inflation environment. What, what does financial ruin mean? I mean, that's just so, that's so means you can't afford, afford to, you can't. The retirement that they set out, which you can look into it, um, for those wanting list, I'm not gonna go into it, but the retirement that they had laid out wasn't possible. Okay. So they ran outta money. Okay. Right? So it's the chance of a bad outcome. Right. That's what we, that's what most people are scared of. They're not really, I mean, they might be scared of the markets going up and down in the moment. But most people know, okay, markets go up over time. That's, most people know that. The issue is that when markets go down, you're like, the fear is, oh, oh no. Now I can't retire. Now I can't go on that trip now. I can't take my kids to Disneyland. Maybe like it's the, it's the stuff that they want to be able to do. Yeah. More than anything else. And that translates to people thinking, okay, now I'm low, I'm low risk. So,'cause I don't want the ups and downs of the portfolio. Right, right. When most people, the real fear is, I, I can't do what I wanted to do. Yeah. Right. When things are, yeah. Sometimes I think of it too as, um, you talked about the trend going up. So if even though that money is worth more even in a down, it's almost like once you see the highest number, you're now that number is the benchmark. It's called anchoring bias. Yeah. Yeah. Absolutely. Absolutely. And, and in this. In this type of, if you were to choose a hundred percent equity portfolio for life, you would be, you would be susceptible to that. Because even if, if you'd chosen that, and let's say your portfolio has grown and grown and grown over the last 10 years, and you now hit a million dollars and then it drops 30%, you are now thinking, I just lost$300,000. When in reality, if you had picked a. An income fund in that same amount of time, you wouldn't have even got to a million dollars in the first place. You probably wouldn't even be at$700,000 right now. You'd be at. 450,000 bucks. Yeah. Right. So PE but people don't look at it like that'cause they're like, no, no, no. I lost$300,000. Exactly. I totally, I don't know why I relate to that. I'm like, that makes sense to me. Which is bad, but I'm, like, we say people gain money in percentages and they lose money in dollars. Oh yeah. That makes, we say in the industry that makes sense. It's like people think, okay, I, my, my portfolio is up 20%. That's a great year. But when it's down, they don't say, oh, my portfolio's down 5%. They say, my portfolio is down$65,000. And you're like, okay, but it's a$2 million portfolio. That's nothing. You know, that's a, that's a, I do not lose any sleep over that. That's absolutely fine. But to, that's, it's just a human nature. I'm not sure why people do that. It's interesting. Yeah.'cause immediately I'm like, that is exactly how I would view it. That's how you do here. That's what you've said to me. Yeah. Gimme back my money. Yeah. Stock market. Yeah. So, but that, that's inflation, but, but what the whole paper basically goes through is that the way that the industry views risk it, they don't agree with it. Like these professors don't agree with it, and numbers, show numbers prove that for the best outcome. Is a hundred percent equity throughout your life. Now, does that mean that everybody should be a hundred percent equity? I would argue yes, mathematically. Remember, mathematically, it's like there's so many common themes in this podcast already. I'm like tying it all together because yeah, again, this is the problem with like the optimization thing and like, yes, money is numbers, money is math, money is logic. Except that we're all humans and we all have feelings, so it's like not quite like, yeah. Anyways, sorry, I kind of stole that from you, but I'm sure that's kind of where you were going. Yeah, that's pretty much it. It's, it's great seeing it on paper. Yeah. It's harder to implement it in practice. I was actually having this conversation with a client today where we were looking at. The potential of leveraging. So you paid off them, they'd paid off their mortgage and we're looking at taking a sizable amount out of the mortgage in order to invest it. It was about$200,000, which is a lot of money. Yeah.$200,000 out. They're relatively close to their retirement and, and we were discussing the pros and cons of it. Not going into specifics, but on paper leveraging Makes a ton of sense. Yeah, it really does. In practice it's very different. So like we went over the last five years or so even, and the five last five years have been incredible in the markets. But even then there were two, three year periods where, I mean, if you start in 2020 looked great, but that if it was a hundred thousand dollars, I think it went to 160 and then back down to 140. Or it went up to 130 and then down to a hundred. I can't remember what it was exactly, was the exact numbers, but there wa it wasn't, it's not all rainbows and sunshine and rainbows. Yeah. So over the long term, yeah, you made a ton of money. Still you have to, you go through, you have to get through it. So while the paper does show a hundred percent equity portfolio is the optimal way to do things, doesn't mean it's right for everybody. But what I would say is. People should, when you are starting out investing, I truly, truly think it is a disservice for you to start off in like low risk investments. Mm-hmm. And I say low risk. I'm gonna be a little bit more specific. Specific. I think it's a mistake not to start with a hundred percent equity portfolio. Hmm. I think people should start with a hundred percent equity portfolio and then if they can't handle it, dial it back. Yeah. Right. And, and, and try to, and if they can't handle it, they should make sure they understand it and then dial it back If they're, because starting out with$10,000 and the market's dropped 20% and you realize you can't handle it at all, but you've seen that$10,000 go to 15 and then you've seen it drop. The 20%. Like, I think that's a very, a much easier journey to go through than starting really slow with big numbers and then getting to$200,000, three, four,$500,000 and then going through those, that emotional rollercoaster. Mm-hmm. It's just for most people, I think the best decision would be to start. S at a hundred percent equity and a hundred percent equity portfolio is typically like a fully diversified global portfolio. You're looking at medium risk, like a medium risk rating on the, you're not talking about high risk, I'm not talking about high risk investments. Yeah. Um, large companies, I'm an big believer in index style investing, sell low costs, globally, diversified equity portfolio. I think it's a great way for people to start off the process of investing. And learn because ultimately if you lose 10% in the markets and realize I can't do this, and you know, either you should be learning more or it's not for you, well you will learn that better I guess. Yeah, you, it's much better to do it that way than to panic sell or something. Yeah. Like you don't wanna risk actually. It's like the actual risk is you as the person, like the human element. You are the risk. Absolutely. Humans are. That's how we should measure risk somehow that way. Absolutely. This is reminding me though, do you remember for my, oh, I was working, um, at another credit union and on their marketing team and I had to find a game for, I was kind of helping with their financial literacy. Um, program, um, and I found a game online. Do you remember it was this asset allocation? Yes. Where you got to pick it, it went back the last however many years and you got to pick, you got given a certain amount of money every single Yeah. Like paycheck and you kind of lived through a life and you had to decide where it went. It was like, yes, because, and I remember it had equity. Bonds. Gold. Gold. There was like corn. Yeah, like commodities. It had a bunch of, had a bunch of stuff. Yeah. And I beat your score. Yes. By a landslide. And what did I do? You did a hundred percent equity. I was buying corn. I was like, whoa, what's this? I was throwing, I was like, I should put a little bit in everything. I'm just gonna do, I didn't even, I didn't even, I didn't touch anything else. I went from, I think I had a little bit of cash, so I,'cause I was singing to myself.'cause they would like give you like, uh. Life. We should see if we can find it. If I can find this game, I'm gonna try and find it and we can put it in the show notes. Sure. But it would give you like different things happen in your life and you have to decide what to do with it. Now I'm sad that I kind of, I mean, it's technically possible to beat, right? Like you could go, go and beat it if you pick the right things and time the market, et cetera. Like you can buy and sell whenever you wanted. But all I did was,'cause I know the numbers, I did what I do in real life and I put it all into global equity. A hundred percent. Kept a little bit of cash. By the way, it's very annoying to find a game like this. And I played it, of course,'cause I wanted to see what it would be like if we were gonna use it for like, students. Um, and I, I sent it to my other teammates, like a few of them, and I was like, oh, try this game. I think one guy did it. Um, and then later I was like, oh, you should try, like, this is what I got. What was I thinking? What was I thinking? Of course he's gonna win against me. Like, ugh. So annoying. Never play a financial game with a financial plan. Yeah. That and Monopoly, um, people don't like paying with me either. No. So it's, you know, that I don't do that anymore. Yeah. Im out for Monopoly. It's fine. We're getting off topic. Okay. Yeah. So, uh, so we know what the numbers say. The numbers say a hundred percent equity. Yeah. So, sorry, I'm gonna go back. So 1, 1, 1 more comment I really wanna make is that people get used to whatever you get used to. And I think that people that, like why, why doesn't your, why aren't people used to your money? The money that they have fluctuating every day. Because they're used to checking and savings account. Just stay needs, right? If they've never been, if they've never been, if that has never been the standard, people would become more comfortable with the markets. The markets go up and down. So what. That's, that's how the markets work. It's because people either are liking it to their past experience, a savings account. Well, it's not the savings account, but it doesn't mean that it's now suddenly too risky. Right? Like it's just people get this idea that this is the way that. Like it's, it's almost like a negative thing that it's going up and down when reality, that's just the way it works. That's the price of making money while you sleep. It's worked that way for a long, long time. There's lots of ups. There's lots of downs. I think it is, honestly, I do think the anchoring bias is the biggest thing because you say. Yeah, the markets go up and down. People don't care when the market's going up. No, everybody, it was volatility. One way is great. Yes. People are like, we'll, take the ups. Yes. But they don't, they're like, oh, I lost my money. Like it is, like, it's not your money yet. And they, and for some reason, and the industry does it as well, um, all of us do it where we tie returns to years. Hmm. Like, why, why do I care what 20? 25 does or 2023 does, or 20 or 2001 does. Why would I not just look at what I make from now until I need the money? Mm-hmm. I, I, I never, that's always, and it's, we need to track somehow. People are like, yeah, I gotta see. If it's still going in the right direction and then they'll, yeah, and they'll make decisions based on what it's done in the past year or last six months or last two years even when it's like, okay, well what's the alternative? Like truly, what's the alternative for most people? I would say the markets, when it comes to like ranking of what to do with money, I would say, I would say they're pretty low on my list. Like my order of what to do with your money. Mm-hmm. Right. But there's no other alternative for, for me, right? I, I just, I, I think of it as like the first thing I would wanna do with money. Like the best way to make a return is to self-educate. Right? To improve your, improve your own earning capability. Probably the best thing to do with money that you want to invest, right? And then you're looking at businesses like small businesses, the vast majority of millionaires and people worth tens of millions of dollars. They did it through businesses, right? They started their own business and learned how to do that properly and have nailed their industry and do it very well. Mm-hmm. Only once you've exhausted those or can't do those things. You know what I would even say? Real estate is another great place to put money if you're gonna do it yourself. It's a great place'cause you can leverage it. But after that, what other option do you have? You have the markets or you leave it in cash. Well, we've already discussed that. That to me is crazy. We left, we don't, like the US left the gold standard a long time ago. That's a terrible idea. It's been a terrible idea. For some reason people still like to do it. We know it's a terrible idea. We everybody knows. It's just people still like to do it. You need to leave as, you need to leave some, for sure you need to live, but. We, everybody knows it's a bad idea to, to leave it in cash, but at that point, what other alternatives do you have? To me, the only, only alternative is follow the data and you, you invest in the markets and ideally you have the financial literacy to be, to have a high risk tolerance, and there's a direct correlation between somebody's risk tolerance and their financial literacy. Yeah. The more somebody knows, the more willing they're, the more willing they are to take on. Market fluctuations, market risk. Yeah, that makes complete sense.'cause same again, like when I started working in the financial industry, I knew nothing. Very, very low. Financial literacy. Literacy. Um, and I remember like the advisors teaching me. Just the basic, basic stuff about investing and I was like, oh, I would've definitely been like a GIC only person. Abs Yeah. Back. I mean, I was, yeah, so young. I think I started when I was 18, but still, like young people need to understand this too, right? Like that's, those are your prime, prime years to be investing. So if you're sitting with a ton of cash or in GICs, you're wasting. Your potential, basically your earning potential. I don't know. Yeah. I You are, you're wa you're wasting time. And it's interesting because I would say that during those years are really formative to how you're going to invest for your entire life. Mm-hmm. And if you learn young and you don't force extra decisions, like a really big extra decision people. I often find themselves in is when do I invest this lump sum of cash that I have been accumulating for the past three years right now? Yeah. And it's like, well, the truth is three years ago, right? Like it's, mm-hmm. If you put yourself in a position where you don't have tons of cash sitting around doing nothing, and you're constantly putting money into the markets so that you don't have these giant decisions, then timing the markets isn't an option. You are likely to do better doing it that way than other ways. And honestly, once you've been invested for a certain amount of time, even if the markets drop 20, 30, 50%, you're still up. Like you're still ahead because you've been, you've been investing for so for so long. And granted there will be a crash on it there, Gar, there's very little that I can guarantee. That like almost nothing. Yeah. Especially as an with all the compliance, very little. I can guarantee I feel pretty confident in saying that. I don't guarantee, but I probably would be willing to. I'm like, are you even on? It would be probably not, but would be that we are gonna have another market crash at some point, but in the future. Yeah. Right. Oh yeah. It's like we know it's gonna happen at some point there's gonna be something so. You deal with it. I dunno. Like we, anyway, you go through it, you go through it, you, you make a plan for what you're gonna do when that happens, and you make sure you can execute when it does happen. And something that I often teach would be is some, a, a, a mindset to invest to the right timeframe. Mm-hmm. So if somebody isn't comfortable being a hundred percent equity like we are, and you know what, like I'm okay putting money in today that I need next year. And or I might need next year if I don't need it. If the mark is down and I needed it, I would just take it from a line of credit or something like, I'm perfectly comfortable doing that. Yeah. If you are not comfortable with approaching life that way, and being flexible, investing to the right timeframe is the way to go. So what that would look like would be any money you need within three years, you'd be keeping in very accessible cash and cash equivalents. Mm-hmm. Anything you need. Three to five, seven years, you can, it would be fixed income like bonds and gs, that's fixed income. And then you could on the longer end of that, start to incorporate some high quality equity. And then above that, like 10 plus years, you should be pretty close to a high amount of equity, a very high amount of equity. 15 plus years. I would struggle to. To find good enough reason not to be a hundred percent equity for that type of timeframe. Right. So basically what you're saying is like a pension fund, when you're starting a job at 18 years old, a hundred percent equity, a hundred percent equity.'cause you're not, you can't even take it out. You can't even, even if you want to, even if you want to, you can't do anything with it. Right. You might as well make it, make money. And Warren Buffet made a, he made a comment about, he said, uh, I would rather guess at what companies are still gonna be around in. Yeah, 20 years. Then what interest rates are gonna be in 20 years. And within, with bonds, people think they're less risky and they, they rate as less risky on the fund, but there's still risks associated with them. It's different types of risks to equity, but I would argue that with a bond with fixed income, the risk you, the risk of a bad outcome increases over time. But with a. With the risk of a bad outcome when it comes to equity decreases over time, right? So bonds are riskier long term, and stocks are less risky long term. That makes sense. Stocks are riskier, short term, and bonds are less risky of a bad outcome. Short term. Yeah. So as long as you pick the appropriate investment to the timeframe, you're almost picking the lowest risk. Of a bad outcome for your, yeah, for your goal investment. For the goal, for the timeframe that you could be investing in you for the timeframe that you, until you spend the money. Spending the money is really important. Like when you spend the money,'cause people do this in retirement a lot, where they think, okay, I'm retiring at 60, that means buy 60. I need to be, you know, if they are following their traditional target date type of, uh, philosophy, then they're like, by 60, I need to be 70% in. Fixed income and 30, it's like, no, at 60 years old, the average Canadian makes it till early eighties. You still have a long way of investing to go, you should be investing it according to when you're going to spend the money. Right? So that's how you, and you almost would, you, you could very well could assign each dollar a timeframe and that's how you build a portfolio. And it would be if, if. Somebody wants to stick to that type of approach, they would have a pretty good investment experience. They would get through the majority of any scary things that, that we've had as long as the numbers work and things like that. But that's, that's a, a good way to determine, you know, you're not comfortable with doing like a hundred percent equity. That's a good way to determine how you should be invested and your investment allocation. So instead of thinking it as, oh, 40% stocks, or. 60% stocks or 80% stocks. You build it according exactly to your goals and when you're gonna spend the money, and then you have your allocation and you can kind of work backwards from there to determine your expected rate of return, et cetera. And that's what one really good way to do it. Hmm. The other way that you would, uh, determine your, your investment allocation, we've touched on this briefly, is your risk tolerance. Again, I would be really cautious on saying that this should be the driver. Mm-hmm. Because most people do not understand enough to make an informed decision. There's some, there's an argument often in the healthcare sector about informed consent. Yeah. And that is something that you, to a certain point, when it comes to a doctor and a patient, you, it's very difficult to get there. Like, yeah. And most people don't understand enough to make a truly informed decision. Yeah. So you end up relying heavily on what the doctor says. And this is the similar type of world where for your advisors, most of your clients can't, don't know enough to make an informed decision. Yeah. So that's your job is to determine where they should be and try to coach them to that level based on capacity. So capacity is a really important one when determining. Where you, your investment, um, your, your investment allocation capacity is objectively what type of risk can you take? So, for example, I, I would say people should start off with a hundred percent equity portfolio, but that wouldn't be true if it was the first time they're investing, they haven't invested ever before, and they're investing a large lump sum that they. If they do not, if the markets are down tomorrow, they can't put food on their table. That's crazy. Very different. Very different investment allocation, right? Yeah. Because they don't have the capacity to take the risk. Right. Versus a young professional that's just getting, starting his accounting career and he's earning$80,000 a year. Just got an apartment, has free cash flow, is saving a thousand dollars a month. If worst case scenario happens to him while he doesn't go on the vacation or he takes it from a line of credit and moves on. Yeah. Right. Very different risk capacity. Yeah. So your capacity to take risk and have those short term fluctuations is really important. But I would also caution that you should be, you should be investing once you have a fully funded emergency fund and you have like, you have the basics covered all ready? Yeah. Yeah. So if you are investing your emergency fund, that's not the the point. That's not the point. You, you, you need to be, it needs to be in its place and you can't just, that, that could be, I would consider that almost too risky if the consequences, if you can't live with the consequences of the market is being down 30%. You shouldn't, you need to reallocate, you need to reallocate. Right. That's why I, I gave those type of timeframes because they're very. That's significantly safer. It's a good way to go about and think about investing. You're gonna, you could end up with a pretty good idea and a pretty good asset allocation. Uh, and then the, the other one would be, so tax considerations and, we'll, we'll get to this more when we talk about tax location, which is what you was talking about earlier. Oh, okay. Uh, but. You should look at your asset allocation among all of your accounts. So different types of investments are better suited tax wise to certain types of accounts, right? A brief example is inside of a inside of investment account in a corporation. So let's say I'm, uh, I, I know I run a business and it's incorporated and I have an investment account within the corporation. I also have TFSAs RSPs. Let's keep it simple and keep the three. Then there's certain types of investments that make more sense after tax. You get more money after tax in certain places. So inside of a corporation, foreign dividends are taxed very heavily. Mm-hmm. In Canada. So maybe I'd have my foreign dividends inside of my RSPs. Right. Where there, there's very little penalty for it. Mm-hmm. Um, but or I. Inside of the corporation, equity is better. So like high, like, uh, capital gains, which is what happens when you sell a stock for more than you pay for it. Okay? Yeah. That, that gap is called a capital gain. Capital gains are very attractive inside of a, a corporation. You can do some really cool planning things with it to reduce tax, et cetera. So maybe I would put myself in a situation where maybe I'm a 60 40 investor, but I keep my 40% of bonds. Out of the corporation because after tax it makes more sense. Yeah. So that corporate account might be a hundred percent equity, but overall it's not. Yeah. Okay. Mm-hmm. So that's a, that's one way that you would, you could, uh, allocate and figure out your asset allocation. I'm definitely seeing why you like your job so much more and more. Because this all sounds very like, almost like a puzzle, like every single client and situation you deal with is different and you have to figure out how to make it work. With all these factors coming in, it's like, can they handle it? What's their capacity? What are they like as a person? Can they, are their emotions gonna get outta hand? Okay. How much money do they have? What's the tax? Implications. What's the, there's, there's a lot there. There's a, there's a lot that goes into, uh, yeah. Making recommendations like that because yeah, you're right. There's, that's part of, that's part of the reason I enjoy it. Yeah. I, I do think I, I, I think so. This is really complicated and like a giant puzzle. That's why Tree likes it. Yeah. And there's no perfect solution for everybody. Everybody's different. Everybody's unique. Mm-hmm. And because, because of the, the nature of it, you have to know. A lot about a, a wide, wide variety of different topics from tax to law, uh, to the investing piece to foreign tax policy. Like there, there's a, there's, I dunno. I find it really interesting. It's, yeah, I, the nerdy part of me, I don't know. Um, but yeah, this is, this is, this is a really important one that if you are going to spend any time focus and you can only focus on one area. Apart from budgeting, I would say that'd probably be the most important. But yeah, foundationally this would be, this would be it. And this is not, I'd be very clear. We'll do another topic on, on like people thinking that they should know more than they do, but this is an area where it doesn't matter how successful you are in your career, a lot of people get it wrong. And when they don't, when you don't understand the, when you don't understand it, it's very easy to get wrong. I, I've worked with people that are multi, multi worth tens of millions of dollars that don't have this. Right. Yeah. And a lot of it is just either that, either it scares them, which is very fair. Uh. Farmers is a huge one where this can get very scary very quickly because for a lot of farmers, they run very lean operations cash wise. Yeah. Until they sell it. Yes. And they go from, uh, you know, having basically everything going back into the farm, to suddenly having a$10 million check. And now they're learning and they've never invested before. Like I talked about at the beginning, like asset allocation is so important, but that can also terrify them. And then you make. They, they'll make mistakes with it. Yeah. And you can't get time back. So somebody that is willing to learn and to understand that, you know, a$10 million portfolio that goes up and down 10% every two years is normal in the markets. That's a million dollars fluctuating. Yeah, that's crazy. That is huge, right? Like that is crazy. But then I'm like, if you have$10 million, like well that's part of it is that's pretty good. Then people will say like, the biggest argument for not allocating appropriately would be, well, I can just live off this. Mm-hmm. Right, and that is true, unless you go back to Germany, that where the value, where the currency gets devalued and you have the inflationary concerns. Or you go back to any of the other hundreds of currencies that have disappeared and changed. We are not on the gold standard. Our currency is not backed by gold. So you cannot just say, oh, I'll just like put it in the bank and live off the interest, because things can go really wrong. It can go really, really wrong. Yeah, and it's a case of yes, that you might choose to do that with some of it. But you, when it comes to risk and financial risk and types of risk, you want to be in a position where everything hurts a little bit and nothing hurts a lot and nothing will kill you. Yes. Yeah. Because financial ruin. Yes, exactly. You don't want to like, yes,$10 million might seem a lot, but$10 million back in Germany when the currency was worthless suddenly buys you a loaf of bread, you know? Mm-hmm. Like it's, it's. I, I, I wish when people made these type of decisions, they look at the chant like what's happened throughout history and what's happened to different economies and currencies and investments, and make an informed decision because the least risky thing for this individual to do that has this$10 million pot of financial ruin is to. Take$2 million of it, put it in Gs, and take the rest, the eight, stick it into a globally diversified index fund. You know, like yes, the index fund will go up and down. It'll go up and down a lot over time, though, it will, you'll better buy stuff with it. Like it's, yeah, it's, I will. How, and it's, there's other stuff. Obviously I'm being very, very general, not advice specific or anything like that, I'm just saying. Just look at the, look at the big picture. Yeah. I just wanted to call you out because you're like, I wish people would just make an informed decision. As earlier you were like, it's really hard for people to make a truly informed decision. It's like, who's the problem with all that stuff you just talked about? Here's my little rant on the side. The problem with that is by the time, okay, by the time someone can make an informed decision. If they even get that far, because that's a lot of work for people who are maybe not interested in this, don't, you know, they're doing other things. It's not their profession, blah, blah, blah. They've lost all that time and they beat themselves up for it afterwards. Well, I, it's like, is it, was it the best decision because they've lost all that time. Like it, yes. But yeah, I'm thinking about the health industry more so because it's like if a doctor, I'm going to like use a drug, for example. If, if a doctor says to you, Hey, you have this condition and you have to pick one of these eight drugs if you'd like to treat your condition, which drug do you want? And you're like, I don't know, which drug should I take? And they're like, we can't tell you. You have to do the work yourself. You're like, oh my goodness, I'm completely overwhelmed. And that's only, you know, they're like, oh, it's just eight drugs for this. You know what I mean? It's like the, but I have to, or whoever has to make the decision and w at the, like, the best that they can based on the information they have because they have to start treatment feel, you know what I mean? It's way this, this topic is way easier than, of course you think that the, that like, that would scare me. I'm like, oh, that'd be a terrible decision to make this, this is easy. It is clear. There's clear choices. Um. Yeah, that was just my little side rant.'cause you were like, oh, I just wish, like Yeah, of course. Everybody wishes they were just a genius in everything. Yeah. Of course life would be very easy to make decisions. Yes. And you, you're not gonna know everything. You're right. But there are some, there are some fundamental principles that I think everybody could learn. Very pick very ply very quickly. We always have to, what is with us in the podcast? It's because it's. 1230, we gotta bed. We need to go to bed. Okay. Life ast parents doing this is hard. I don't think we've, I don't think we've done a single one of these episodes and it's not been past midnight at this point. Anyway, I think we'll, we'll leave it there. Good idea. Yes. Um, the next one is, oh, what I wanted to do was do a few episodes on what we do for, for stuff. So I have like a. Like managing day-to-day finances, talking about investing, investment products and things like that, retirement planning, et cetera. So the next few will be, instead of talking,'cause as you mentioned, there's so many different variables and things like that. I wanted to talk through what we do, the reason we do it, and then in future episodes we can get to some of the other variables that might change people's route. Right. Yep. So that's what we'll do in the next episode. Okay. Awesome. See ya later. Bye. Bye.