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Benjamin Felix Profile
Benjamin Felix

@benjaminwfelix

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Helping Canadians make better financial decisions. Chief Investment Officer, Portfolio Manager @PWLCapital; co-host @RationalRemind. Meet with PWL ⬇️

Canada
Joined March 2013
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@benjaminwfelix
Benjamin Felix
2 months
@WarwickBraden In the meantime, check the tool out!
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@benjaminwfelix
Benjamin Felix
2 months
Tune in this Friday for @WarwickBraden' s walkthrough of PWL Capital's new Canadian retirement planning tool.
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@benjaminwfelix
Benjamin Felix
5 months
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@benjaminwfelix
Benjamin Felix
5 months
They are also tax efficient, simple to understand and implement, and consistent with financial theory. Canadians have been particularly slow to adopt index funds. I hope this thread helps to change that.
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@benjaminwfelix
Benjamin Felix
5 months
Index funds have low fees, they are broadly diversified, and, largely due to those two characteristics, they beat the vast majority of actively managed funds most of the time, especially at long horizons.
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@benjaminwfelix
Benjamin Felix
5 months
Together these works suggest, theoretically, that most investors should own the market through low-cost index funds rather than paying high fees trying to beat it, an assertion supported by the evidence presented earlier.
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@benjaminwfelix
Benjamin Felix
5 months
Eugene Fama’s work on market efficiency starting in the 1960s and continuing to today suggests that markets are efficient enough that most investors should act as if they are, even if perfect market efficiency is an unrealistic ideal.
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@benjaminwfelix
Benjamin Felix
5 months
Bill Sharpe’s 1964 capital asset pricing model, or CAPM, that in an efficient market, the market capitalization weighted total market portfolio is the portfolio with the optimal risk and expected return trade-off.
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@benjaminwfelix
Benjamin Felix
5 months
The final point I want to make is that index funds are consistent with foundational finance theory. In the 1950s, Markowitz showed mathematically why diversification is so important.
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Benjamin Felix
5 months
Simplicity is another huge benefit of index investing. Investing is a "loser's game" meaning that you don't win by winning, you win by keeping it simple and avoiding mistakes - by not losing - which index funds accomplish.
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@benjaminwfelix
Benjamin Felix
5 months
Index funds are also tax efficient. Research comparing before and after tax returns of actively managed funds and index funds has found that however bad things look for active management before taxes, it looks worse after taxes for taxable investors.
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@benjaminwfelix
Benjamin Felix
5 months
Index funds beat the average active fund and the majority of active funds in the long run. I’ve heard people ask why you would settle for "average" returns with index funds, but index fund returns typically beat the average active fund net of fees.
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Benjamin Felix
5 months
In either case, luck or diseconomies of scale, there is a lack of persistence. This is important because there will always be some active funds that have outperformed in the past, but that doesn’t matter if you can’t identify the future winners ahead of time.
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@benjaminwfelix
Benjamin Felix
5 months
Another explanation is that assets flow to skilled managers until the fund gets too big for the manager to continue outperforming, due to diseconomies of scale. The benefits of the manager's skill accrue to the fund manager, not to their investors.
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@benjaminwfelix
Benjamin Felix
5 months
One, described in a highly cited 1997 paper, is that the data “do not support the existence of skilled or informed mutual fund portfolio managers.” . Basically, managers who were successful in the past were simply lucky, and their luck eventually ran out.
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@benjaminwfelix
Benjamin Felix
5 months
There is little evidence that the best performing active managers from a prior period continue to outperform in future periods. There are a couple of potential explanations for this.
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@benjaminwfelix
Benjamin Felix
5 months
The obvious next question is whether you can identify those winners ahead of time. Many investors look to active funds that have beaten the market in the past and expect them to continue outperforming in the future. This is the question of persistence.
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@benjaminwfelix
Benjamin Felix
5 months
Active management is a zero sum game before fees, and a negative sum game after fees. These data suggest that you are much more likely to underperform than to outperform by investing in an actively managed fund, though there is a small chance of picking a big winner.
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@benjaminwfelix
Benjamin Felix
5 months
There was little evidence that any funds did significantly better than what we would expect from random chance. A 2010 paper similarly finds a distribution of fund returns in line with random chance before fees, and worse after fees.
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@benjaminwfelix
Benjamin Felix
5 months
The OG 1968 paper that introduced "alpha" to define excess risk-adjusted returns, found that 115 mutual fund managers in the period 1945-1964 were, on average, not able to outperform the market.
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