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portfolio strategy

The Wealthy Barber is back and he's not happy. Debt levels are soaring, consumer spending is out of control and people aren't having a lot of success with their investments. And so David Chilton has written The Wealthy Barber Returns, a new take on some of the themes he covered in his original book, published 22 years ago. (Read my book review of it here)

The following is an edited transcript of a conversation I had with Mr. Chilton this week. First we cover investing matters, and then - exclusively for our online readers - we get his thoughts on spending and borrowing.

Q: David, you're a former broker and someone who follows the financial world closely. How optimistic are you that markets will settle down any time soon?

A: I don't think they will. Back in 2008, I said this time it's really different. Painful challenges are ahead and returns may be somewhat muted.

Q: A lot of people are really turned off of stocks after all the ups and downs of the past few years. Is it sensible to stay out of the stock market?

A: I think it's a big mistake. If you look at competing investments like bonds and so forth, the interest rates are so low that they're negative after inflation. You're never going to build up enough capital for retirement. What percentage you put in stocks may change a little bit because you're having trouble handling volatility. But having nothing in the market seems to me to be a very foolish move.

Q: What do you suggest to the paralyzed investors who are sitting all or mostly in cash right now?

A: At some point, you're going to have to ease back in. The key word is ease. If you know you're going to find it psychologically challenging, then maybe dollar-cost-averaging back in is the way to go.

Q: You suggest in the book that people watch their investments too closely. How often should you check your portfolio?

A: I think annually makes a lot of sense. It's a true common denominator among the people I know who have posted good long-term performance numbers that they are not that involved.

Q: You've probably seen hundreds, if not thousands, of investor portfolios. What are the most common mistakes you see being made?

A: Diversification has been much too narrow over the past 10 to 15 years. People embraced stocks to a tremendous level, even people who probably didn't have the proper risk tolerance. People need to diversify more geographically and among asset classes. A second thing is that we haven't paid much attention to costs.

Q: Why are Canadians so oblivious to the costs of investing?

A: I would somewhat disagree with that premise. In the last 12 months, for the first time in my career, I'm starting to get a ton of questions about cost. We might be seeing the beginning of a turn.

Q: In The Wealthy Barber, you talked about how to pick the best mutual funds. In the new book, you suggest that people not bother with traditional mutual funds and instead go with index investing. Why the change in thinking?

A: My approach didn't work, truthfully. I'm going to be blunt about that. It's so difficult to pick the future mutual fund winners. For a lot of people, indexing is a better move. At the very least, if you're going to get involved with active money management, you've got to look for lower-cost funds. Low costs are the one thing we know correlates to performance extremely closely.

Q: Exchange-traded funds are popular with cost-conscious investors – what do you think of them?

A: I think the old-fashioned ETFs – the big broadly based ETFs that mirror the broad indexes and actually hold the physical securities – are great alternatives. Some of them have exceptionally low expense ratios. But a lot of the new ETFs – segmented into very small parts of the market, double bear, double bull, holding derivative contracts – I don't like at all.

Q: What's your view on how well the investment industry discloses the cost of its products and the returns investors get in owning them?

A: Horrible. I think there are a lot of good advisers out there – I want to be clear on that. I'm not saying advisers are horrible, but the disclosure of how people are charged and what they're making is nothing short of horrible. I'm not sure how anybody could argue that.

Q: What's in your portfolio?

A: I don't like to answer that. I've found in the past when I answer this question that people think: If it's right for the Wealthy Barber, it's right for me. In terms of how I invest, because I'm still relatively young – I'm 49 – I tend to have a fairly good percentage of my money in long-term growth vehicles like stocks. I tend to use individual securities more than I think most people should because I enjoy the process of doing the evaluation, and it's in my background.

Q: Do you have an adviser?

A: No, I've done it all myself my whole life. I know this stuff. I live it, I breathe it, I read it every day.

Q: In your book, you discuss TFSAs compared to RRSPs and you tell readers to "sit down with your adviser" to discuss which is best. Should we all have advisers?

A: No, I don't think everyone needs an adviser. In fact, I meet a fair number of people who handle their money well on their own. I do think a lot of people would benefit from advice. Late in life, as you transition to retirement, there are enough tax consequences for different decisions that a good adviser can add a lot of value.

Q: You now have the opportunity to offer once last piece of investing advice to readers. What's it going to be?

A: I would say watch your emotions. Watch your costs is a good one, but watch your emotions is a very important one, too. It's so difficult to handle your money well when you're emotionally involved. It almost always leads us to making the exact wrong decision at the exact wrong time.



Spending and borrowing



Q: Let's turn to the broader world of personal finance. In the introduction to your book, you talk about how frustrated you were to see the savings rate plunge, debt levels soar and investment returns disappoint? Why has this happened?

A: The savings rate going down ties into borrowing going up. It's rising homes values, too. People trick themselves into thinking, 'my net worth is growing and I don't need to save as much.'

Q: There's a push on to improve financial literacy in this country – do you think that will help?

A: I do. No doubt about it. But we have to make it interesting. We have to wrap it in humour and anecdotes. If we get too technical, too numbers-oriented, we'll lose people.

Q: Let's talk about over spending – the tone of your book suggests you think people are too materialistic and self-indulgent. Is that fair to say?

A: Yes. Absolutely. It's almost impossible to communicate to the public just how crazy some people's spending is. I give a specific example in the book about a $500 hockey stick. I've seen families that are making no RESP contributions, but are buying multiple $500 hockey sticks in a year.

Q: Your first book was anchored by the pay yourself first concept, which is worth reviewing. How much should you be paying yourself?

A: I think the general consensus is about 10 to 15 per cent of your gross income. But here's a key point that isn't made often enough. All of the analysis is based on people starting at age 25 and continuing to age 65. But most people don't do that. If you start later, it ends up being quite a big higher in many instances. In fact, the majority of people I sit down with probably have to save 15 to 18 per cent because they're starting later.

Q: Once you've paid yourself first and covered your bills, can you blow the rest on fun stuff?

A: Absolutely.

Q: The latest stats show that while borrowing is still on the rise, the growth rate is at least tapering off. Is that good enough, or do we all have to cap our borrowing and pay down what we owe?

A: A dangerous number of Canadians have too much debt by any common measure. These people obviously have to start hammering away on debt.

Q: You mention in the book that you're uncomfortable with credit cards, even in the case of people who pay in full each month. Can you explain why?

A: People think that when they pay their credit card off in full every month, they're not affected by the 18-per-cent interest that is often talked about as being the downfall of credit cards. The problem is that because a credit card makes it so easy to spend, they go ahead and over-spend. That prevents them from saving enough.

Q: I've had some readers raise this question recently – how responsible are the banks for the country's debt problems?

A: The lending institutions have become so aggressive in pushing credit. A lot of people don't have the willpower to say no.

Q: What does the Wealthy Barber think of the idea of young people buying big, expensive homes with 5-per-cent down payments and 30-year amortizations?

A: I hate it. Outside of pay yourself first, the thing I've become most adamant about in the past 10 years is people living in homes they can truly afford. I understand the 5-per-cent down payment because in a lot of instances it's hard to build up a down payment larger than that. And I understand the 30-year amortization – people are trying to spread the pain a little bit in what are some very expensive markets. But what I don't get is why young people are insistent on buying the most expensive home their lenders will let them buy.

Q: Flash ahead five years – are we in stronger financial shape because we took the advice you and others provided about cutting debt and saving more, or are we in trouble because we didn't listen?

A: I'd like to think it's the former because otherwise I wouldn't have written the book. But with or without my book and other books, I really believe people are going to start spending a little less and saving more. I think demographics are on side for that, I think the low-interest rate environment can't last forever. But finally, and maybe most important, before The Wealthy Barber Returns hit the market there was a general feeling of uneasiness out there. People knew they were living beyond their means too much. They're seeing what's happening in other parts of the world with both governments and individuals, and they're saying, 'you know what, we have to do something.'



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