Benjamin Felix

This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making from two Canadians.

We're hosted by me, Benjamin Felix, Chief Investment Officer and Braden Warwick, Financial Planning Product Architect at PWL Capital.

It is really interesting.

So it's like figuring out what to use as an expected return for stocks and bonds.

Like what is the average return that you expect or any other asset class is super important.

It's one of the most important parts of financial planning and portfolio management.

It ultimately informs how you allocate your assets, how much you need to save or spend in your financial plan.

Higher expected returns make an asset class more attractive, all else equal, but of course all else is not always equal.

Higher volatility makes an asset less attractive, all else equal.

But again, all else is not always equal.

And lower cross asset correlations make assets more attractive together in a portfolio, all else equal.

But there are always trade-offs.

It's never actually all else equal.

Modeling those relationships is hard enough, but there are other aspects of expected returns that get less attention while being similarly important.

The big one there is the shape of the distribution.

And another one is the time series characteristics of asset class returns.

That's like volatility clustering in stocks where a little bit of volatility tends to be followed by a lot of volatility, mean reversion in stocks, mean aversion in bonds.

Those are all characteristics that can materially change optimal asset allocations and modeling outcomes like long-term financial planning outcomes.

Now, listeners will be familiar with Scott Cederberg's work on this, which we found illuminating.

He and his coauthors used block bootstrap to preserve the time series characteristics of historical stock and bond and cash returns to show that doing that changes the relative attractiveness of stocks and nominal bonds and cash for long-term investors.