Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a Stu’s day on Thursday, as we say. Let me tell you, sometimes we like to get the Stu’s day done actually on Tuesday. But sometimes, for whatever reason—it's usually my fault because I'm traveling, but Stu's very busy, too, so to coordinate is sometimes tough—sometimes we end up doing it on a Thursday. And I just said to Stu, who's been waiting to do this since Tuesday, are you ready? And he said, let it rip. So I know we're going to have one heck of a podcast today. Stu, you are just raring to go. What's got you thinking that way?

My dad used to always say, let her rip, and I just loved it. I don’t even know where it exactly comes from. My father-in-law used to always say rock and roll, and my dad said, let her rip. So it just seems like a good way to build up the enthusiasm.

Absolutely. And the enthusiasm continues in markets. We're generally sitting at all-time highs. And despite the news flow and volatility, things just seem to be chugging along. And I'm out on Vancouver Island this week, and we're doing some work with investors and doing some presentations. We had Dan Chornous on yesterday —you know Dan, obviously—and we had him talking about a research paper that he and the team have put together, and it's surprising in some ways in that it suggests, even when you go back and you look at buying at the worst possible times, that retirees should actually consider having likely more equity than they generally do in their retirement portfolio. The research suggests, even if you go back to 1929— say you bought right before the stock market crashed in 1929—you would have been better holding 75% equities than sitting holding cash in that situation. I go out and part of the presentation I'm doing is I'm saying, okay, well, here's what the research says. It's a fantastic paper, and I think I present it pretty well. I break it down into some pretty understandable terms for the advisors, the financial planners, and the clients to understand. But then they come and they say, yeah, but I'm still scared of buying today. We're at all-time highs and the market's going to correct tomorrow. Even though you tell me that 30 years from now, I'm going to feel good about this decision, I'm still going to wake up next week with the market crashing and I'm going to feel terrible. So what do I do? How do we get from a position where we've got so many investors who have really embraced saving as much as investing? We've talked about that a lot on the podcast. How do we get the client or the investor from 0% equity to maybe not 75, but maybe they're comfortable at 40 or 45% equity? Why do we do that when the market is chugging along and there's a news flow that gets people quite worried?

Well, I might get my cape on for dollar cost average. Dollar cost average is just a great way to find your way through that difficult decision. It's one thing to look at statistics, and then there's the emotion of everything that goes on. We deal with this with private clients. We deal with this with portfolio managers inside of their portfolio in this notion of trying to polish the bullet. I'm going to know just the right day to act in its entirety. The unfortunate thing is it's just not likely going to work out that way. The way that you turn the odds in your favor is by being continuous with how you put money to work. And some days you get better prices, some days they're maybe a little bit elevated, but the totality of all that enters you at a reasonable price. And then you allow the compounding of the earnings and the cash flows inside of the businesses to take care of it. And the interesting thing when you do that analysis is it assumes a certain withdrawal rate. I can't remember what the percentage was in Dan's analysis, but you're kind of dollar cost averaging out when you retire. So you're comfortable doing that. So you flip it on its head and say, well, that's probably a good way to start the process as well. And then once you own all these equities, people look at the volatility. And I think you brought it up with me, it was a Jeremy Grantham statistic about how the economy grows pretty upward to the right, pretty straightforward. There's the war, but otherwise, it's pretty straightforward. S&P earnings is pretty straightforward. And then you draw the stock market around those lines that just go and say, and this is what investors do with that. They make it a bit more volatile. And that's what Dan's analysis was showing, that even though there's going to be volatility around that trend, that trend carries the day. So the way to get that trend on your side is through dollar cost averaging.

Yeah, I'm glad you brought that up. This was one time I wasn't sure what answer you were going to give, but I should have known you were going to put the cape on and let it rip with the dollar cost averaging. But that does make sense. I often get too rigid, and I think some advisors and some investors get too rigid in thinking that a dollar cost averaging approach or a regular investment approach is part of what you're doing when you're accumulating and you're saving towards retirement. Because it makes sense that you're putting in a little at a time. And don't forget, you're earning money along the way because you're likely still working. So you're putting a little bit in all the time. And if you get a lump sum, it makes sense to ease it in, especially in periods of volatility. But you don't often think of it in retirement. I think one of the reasons why is that in other periods—I've experienced this being in this business for the last 30 years or so— generally, people are sitting with some level of equity and some level of bonds in their portfolio. It's very unusual that we see right now so much money sitting on the sidelines. I think Dan mentioned the number of $7 trillion in money market funds or some ridiculous number in the US right now. Canada is about one-tenth of that, usually, and that's what we're seeing as wel. A lot of money is sitting in cash because interest rates had risen. People went with the idea that, oh, I'm going to make a little bit more in a guaranteed investment over the next little while, while interest rates are higher. You are going from almost 0% equity in some cases to a position where you have 25, 30, 45, 50% stocks in your portfolio. So it does make sense to use a dollar cost averaging approach.

Yeah, I don't know what the real word is, but it disarms the emotional component of it. And you'll look back on a period of dollar cost averaging, and sometimes you say, I should have done it all at once, or sometimes I should have done more on that day. But again, it just gets you over the hurdle of doing something. As I say, it's not just putting money into the equity market. Even in a portfolio, we talk about buying and selling stocks, and rarely would we sell the entire position on one day or buy the entire position on one day. It's just a way of making your way through all sorts of things, which is in a very measured manner and turning something that can be emotional off and being very prescriptive and accomplishing longer term benefits from something. And I think the other thing, too, we get the benefit as portfolio managers in our job, because we get to talk to companies all the time about how they see their business evolving over three, five and so-forth years. And when you see share prices go up and down, it can be intimidating. And you forget that underneath those businesses is a management team, a balance sheet, a bunch of assets. And they're all being—hopefully, anyways—positioned on your behalf over time and trends will present themselves. I was thinking we might just talk about an example. I went to see a power producer this week, a big North American power producer. Their share price has been a little bit volatile around the price of power, the artificial intelligence trade gets captured in that. And then, of course, the big, beautiful bill in the United States has changed some of the tax credits. So you talk through it with them. On the one hand, if you're a power producer and you lost some of the tax credits, it impacts your assets in the short term in a certain manner. But then the other side to that, when you start rolling to look a little bit even more forward, there'll be less power development than there might have otherwise been. And yet the demand for power continues to look very robust on the back of all these data centers and other electrification in the economy. So all of a sudden, in your head, you start to envision, well, come later this decade, the case for a higher power price certainly presents itself. Whether or not that's in every stock right now, we have to do the analysis, but on days where you get volatility downwards, those are the types of days where we might be dollar cost averaging into a power stock because you now have this little nugget, this little north star about this company that you can think through. So that's an example of a company specific thing. But the north star in the equity land is those charts around economic growth and the resulting earnings growth that are far more stable than what we get on a daily basis.

Yeah, we should take one Stu’s day in the future and talk about energy markets because it's pretty fascinating. I had to drive from Victoria to Nanaimo at about 1:30 in the morning after an event I did the other night. I was listening to a gentleman who runs a big power company in Germany, and he was talking about exactly that. How the regulatory framework comes in on top of it and creates constraints, which all leads to the thing that you're talking about, that down the road, you're putting the market in a position where prices might be higher, which is not really what you want to do. But again, it could be an opportunity for the stock itself.

Yeah, exactly. And so we get the great benefit of meeting with companies and analysts all the time to talk about how these businesses will unfold over time and whether or not it's a financial company or an asset manager or an industrial stock. You think about the new markets that they're targeting and what type of revenues I might get from those markets and the resulting profits that will flow. And across a wide swath of companies, that has been quite reliable over time. If you had all your chips in one basket, it can be very powerful. If you have all your chips in the wrong basket, it can not be as powerful. We always want to have more of the good than the bad. But in this analysis that we're doing around, say, a retirement portfolio, you really want to make sure you're attached to that earnings growth that exists out there to get the job done. And I think the one thing that active management sometimes struggles when there's real excitement in certain areas, because you have to be even more excited about that excitement to have an even larger position there. But the one thing that active management does in these longer-term growth scenarios is it's often easier to avoid the bad. Even if you don't totally attach yourself to all the good, you've probably avoided the bad, which is very important to the road that you've laid out for longer-term equity investors.

Yeah, and I think that's a big point for when we start to talk then about retirees, specifically, and what we're talking about with this paper, the idea that you want to have equity holdings, but very important that it is a portfolio that is really well-constructed and particularly in terms of managing risk. Because often you see portfolios that are constructed, as you say, as a professional investor, you're not going to get out over your skis and be dumping money into some of these really hot sectors because you can recognize the risk involved in doing that. You're going to create a portfolio that manages to an appropriate level of risk with the equity exposure, the stock exposure you're going to get. That's going to be very important for that retiree, not just to be in stocks, but in a group of stocks that are quality, that are not going to create unnecessary risk, that aren't beyond the market risk, and have the right companies, maybe even dividend stocks—I'll let you make some comment on that—that are going to really work through even a negative market. That doesn't mean they're going to stay up, but they're going to work better than the average stock through negative markets. And that even smooths out further that experience where you need equities—you know you need them, that's what the research says—but you want to make it as comfortable as possible to hold those equities through that retirement period.

100%. And we've talked about it before, but I think it really fits with this paper. What is available to me inside of the equity fund? So I'm dollar cost averaging in the equity fund. Inside the equity fund, I've got a collection of good businesses. So that's my first line of defense. The second line is—in our case anyways; I do like dividends—but we're collecting a lot of income each year from these companies, which we then put back to work in what we think are the best opportunities. And then we have rebalancing within the portfolio. We don't get a lot over their skis, but if they get a little bit excitable, they give them a bit of a time out. Your kids are a little excitable? You give them a little bit of a time out. You allocate some money to one that you think is on the verge of improvement. So you have all these levers available to you in the portfolio that assist with, yeah, I'm going to get there in the longer term.

Yeah. And then the last piece, and you brought it up—and I was sharing this when I was presenting, and it's not specifically in the paper—but I know a lot of retirees, particularly in Canada, because of the structure of tax-sheltered plans, some do take big withdrawals at the start of a year or big withdrawals at the end of the year. What you might want to think about, as you say, is reverse dollar cost averaging, as you're withdrawing, spreading that money out and those withdrawals out within the year for the same idea, to mitigate that volatility in the equity holdings that you have as you're drawing down your retirement income.

Yeah, I was thinking about this the other day. Like a lot of people in the summertime, you buy a basil plant. And you take a couple of leaves off for your tomatoes or whatever, and then you come back the next day, you're like, oh, boy, it looks like that thing's the same. It doesn't look like anything's gone. Yet if you shed it, you take all the leaves one day, it looks the same the next day. So the idea of just pulling a little bit from something over time, it may not look that different in the grand scheme of things. So that's the same thing with your portfolio, taking it out slowly versus just stripping it bare one day.

Well, you've certainly earned the cape when you're even dollar cost averaging your herbs in the garden. That's a commitment. I know we come back to it a lot, and I think it was right to do it today in the context of this paper, because I think this paper is something really important. We taped the podcast with Dan Chornous yesterday. It should be up and available today. If you subscribe, it'll be sent right out to you to the podcast. It's also on our YouTube channel, if you subscribe to that. We'd love you to do that and give us a review. Let us know what you think about, but the dollar cost averaging is a key element where we're sitting today that combines with this overall strategy and rethinking the amount of stocks and bonds and risk you should take even in retirement to make sure you increase the odds of your retirement savings lasting throughout your lifetime in retirement. It all comes together along with dividends. It was a perfect time to have you on today to talk about these things because I know you are, as you say, dollar cost average boy, and no one believes in it more and commits to it more.

Okay. Well, Dave, thanks so much. Enjoy whatever time you have left on Vancouver Island. Hope you get home with Air Canada.

Yeah, I'm likely not coming home. But wherever I am, we'll see you next Tuesday for Stu's days. Stu, thanks a lot.

Thanks, Dave.