When I started my career in finance, one

of my first big assignments was

delivering a 45minute investing 101 talk

to employees at a local tech company. I

got good feedback on the talk and I was

invited to keep coming back every month,

which I did for years. In many ways,

those talks early in my career were a

precursor to this YouTube channel. I'm

going to cover that same investing 101

information in this video. I'm Ben

Felix, chief investment officer at PWL

Capital, and I'm going to teach you

investing 101.

I'm going to cover why investing

matters, what stocks and bonds are, what

a sensible approach to investing looks

like, and what tools you should consider

using to implement these ideas. At the

most basic level, investing is important

because inflation is a real thing.

Inflation means that stuff gets more

expensive, measured in dollars over

time. Central banks in countries like

Canada and the United States target low

but stable inflation rates for reasons

beyond the scope of this video. The

important thing to understand is that

inflation should be expected. Meaning

that dollars held under your proverbial

mattress should be expected to lose

purchasing power over time. The same

number of dollars will be able to buy

less stuff in the distant future than

they buy today. This isn't a grand

conspiracy and the solution is actually

pretty simple. Don't hold dollars that

you plan to use in the distant future

under your mattress. That is at a

baseline why investing is important.

rather than under your mattress.

Investing your dollars into assets with

positive expected returns can generally

offset the effects of inflation and then

some. Stable investments like treasury

bills and high interest savings accounts

should generally be sufficient to keep

pace with inflation. Not always, but

generally. And investing in riskier

assets with higher expected returns can

help you on your way to becoming

financially independent. Financial

independence means that over your

working life, you save a portion of your

income, converting your human capital,

your ability to earn income by working

into financial capital, the ownership of

financial assets, eventually reaching a

state where you do not need to work for

money, financial independence. Let's

look at a couple simple examples to see

why investing matters. If you're 30

today, saving 10% of your income and

expect to earn a 7% rate of return on

your investments, you could retire at 65

and replace 60% of your pre-tax income

from your savings until age 95. That's

not including government pension

benefits like CPP and OAS in Canada or

Social Security in the US. If instead of

earning a 7% expected return, you earn

2%, which is a number in line with the

inflation rate in this simple model that

we're playing with, you would need to

save a little more than 50% of your

income. The difference between saving

10% of your income and 50% obviously has

huge implications for your lifestyle

today. One way to think about this is

that by taking on some risk to earn

higher expected returns with your

investments, you're letting the

financial markets do a lot of the heavy

lifting toward funding your financial

independence. That is the main premise

of investing. At a minimum, you need to

keep pace with inflation. And if you're

strategic about taking the right kinds

of risk at the right time in your

investing lifetime, you can use

financial markets as a very powerful

tool on the path toward financial

independence. The next important concept

is understanding what I'm talking about

when I say things like taking risk and

investing in higher expected return

assets. I'm not talking about trying to

pick winning stocks or getting ahead of

the next market trend. Two of the

largest and most practically relevant

types of assets, types of investments

for long-term investors are stocks and

bonds. Stocks and bonds are both

financial assets. A financial asset is

not a physical asset like a house or a

piece of gold. It is a contractual claim

on expected future cash flows. I'll

explain what that means, don't worry. A

stock is a piece of ownership in a

company. When you invest in a stock,

you're buying an asset whose value today

is based on the expected future profits

of that business. As a shareholder, you

participate in the ups and downs of the

company's successes and failures. If the

company does well, you can earn high

returns. And if it does poorly, you can

lose money or even lose your entire

investment. Stocks in aggregate have

performed well historically. Global

stocks have returned a little more than

8% annualized before inflation or a

little more than 5% after inflation for

the last 125 years. The stock markets of

some individual countries have performed

much better than the global average,

while others have performed worse. It's

important not to read too much into this

when deciding where to invest. For

example, the US stock market has

delivered huge returns in recent

history, but this will not necessarily

always be the case. The Japanese stock

market is a cautionary tale. From 1970

through January 1990, Japanese stocks

more than doubled the annualized return

of world excluding Japan stocks. over so

many years. That means that $1 invested

in Japanese stocks grew to $53.56

while investment in rest of world stocks

grew to only $6.72.

Japan had become a dominant stock market

at the time and it might have seemed

crazy to invest anywhere else. There

were narratives about Japanese

innovation and efficiency making them

economically unstoppable. However, if

you had invested in Japanese stocks in

January 1990, after that period of crazy

good performance, you would have $1.90

in August 2025, while the cost of

purchasing $1 of stuff that people need

had increased to $2.54.

This means that you lost money after

inflation over this period investing in

Japanese stocks. An investment in rest

of world stocks would be worth $22.94

over the same period. That Japan example

is for sure an extreme outcome. But

given the challenges in selecting which

country will perform well in the future,

holding a globally diversified portfolio

of stocks covering a cross-section of

the world's stock markets is generally

wise. It's common for investors to want

to invest in countries that have

recently performed well or avoid

investing in ones that have performed

poorly. But this performance chasing

behavior is more likely to do harm than

good. Past country performance does not

tell us much about future country

performance. Figuring out how much to

put into each country is another

interesting problem. But the good news

here, and this gets really interesting,

is that the market has answered that

question for us. The market is shorthand

for the huge amounts of buying and

selling of stocks that occurs around the

world every day. Each transaction in the

in the stock market contributes a little

bit of information into the price of a

stock. All that buying and selling

ultimately determines the value of the

companies traded on the stock market.

The market pricing machine assigns value

to companies based on things like their

expected future profits, their

riskiness, and how they behave relative

to other stocks in the market. In

general, more profitable and less risky

companies become more valuable, all else

equal, earning them a larger weight in

the market. Similarly, the combined size

of the companies in each country

determines that countries weight in the

global market. Those are called market

capitalization weights, and they're a

very, very good starting point for an

investment portfolio. In simple terms,

this means that you can look at the

relative size of each country's stock

market and allocate your portfolio

accordingly and you need a good reason

to be different from those weights.

Today, that means a large portion of a

market capitalization weighted stock

portfolio is invested in the US market.

All that said, taxes, costs, and the

currency that you spend your money in

could all be reasons to somewhat

increase the weight of your home country

relative to its market capitalization

weight. Too much home country exposure

is generally not a good thing, but some

overweighting of home country stocks

relative to their market capitalization

weights can be sensible. This will come

up when we look at some sample

portfolios later in the video. While

global stocks collectively have done

well historically, individual stocks

have been very risky. Many of them

perform poorly, often going to zero,

while a relative few of them have

performed exceptionally well. Picking

those exceptional winners ahead of time

is really, really hard to do. Similar to

not picking countries, it generally

makes sense to hold a diversified

portfolio of many stocks. Again, market

capitalization weights are a good

starting point. The good news is that

today there are lowcost investment

products that make it easy to buy a

globally diversified market

capitalization weighted portfolio of

stocks. It's important to mention that

even a properly diversified portfolio of

stocks can have violent ups and downs.

When your stock portfolio represents

your financial future, your financial

independence, it can be very hard to

watch its value swing wildly, which

makes stocks difficult for a lot of

people to invest in. Somewhat

paradoxically, that difficulty or

riskiness is exactly what makes stocks

good long-term investments. If stocks

were safer and their prices didn't

change much day-to-day, they would have

lower expected returns. Not everyone can

comfortably hold a portfolio of 100%

stocks. This is where bonds come in.

Bonds are loans made to companies and

governments. Instead of buying a piece

of ownership in a business, like with a

stock, with bonds, you're effectively

making a loan to a business or a

government. Unlike a stock, if a company

performs better than expected, its bonds

won't change in value much. And if a

company does poorly, its bonds still

won't change in value much. Even if a

company goes bust and its stock becomes

worthless, its bond holders may be able

to recoup some, not all, but some of

their value. Government bonds tend to be

even more stable. Bonds are still not

guaranteed investments and they come

with their own unique risks, but they

generally do not change in value from

daytoday as much as stocks do. In

finance jargon, finance speak, they are

less volatile. Bonds are less volatile

than stocks. While bonds are less

volatile than stocks, they also have

lower expected returns. That's the risk

expected return trade-off with stocks

and bonds. Bonds are also sensitive to

inflation. Periods of high inflation can

reduce the purchasing power of money

invested in bonds, which is a problem

for long-term investors. Stocks aren't

inflation hedges, but they do tend to

perform better after inflation than

bonds over long periods of time. Using

these two asset classes as building

blocks, you can create an investment

portfolio that matches your desired

levels of expected return and

volatility. A stockheavy portfolio

should be expected to be more volatile

and have higher expected returns while a

bond heavy portfolio should be less

volatile and have lower expected

returns. I am being intentional about

referring to stocks as being more

volatile rather than more risky than

bonds because risk is a pretty ambiguous

term. Volatility is certainly one way to

think about risk and commonly how it's

framed for investors. The risk of not

being able to meet your long-term

financial goals is another way to think

about risk. Some research has suggested

that from the perspective of meeting

your long-term goals, stocks may be

safer than many types of bonds despite

their higher volatility as long as you

can handle the ups and downs. Okay, so

these broad asset classes, stocks and

bonds exist and their expected returns

are useful tools to plan for the future.

It's not terribly complicated, but many

people have been taught that investing

means guessing and predicting.

Predicting which stocks or markets will

do well or predicting when to get out of

the market to avoid a crash. This

general concept of following the market

really closely in an effort to gain an

edge by guessing and predicting is

typically referred to as active

management. At the most basic level,

active management is the idea that you

can use your knowledge, your

information, to outguess the market,

resulting in improved performance. The

problem with this idea is that the

market's main function is aggregating

all available information, including

expectations about the future, into the

prices of stocks and bonds. The idea

that any one person or even team of

people can consistently outguess the

combined information production of all

market participants is kind of

far-fetched. An economist named Eugene

FMA shared the 2013 Nobel Memorial Prize

in Economic Sciences for his work on the

efficient market hypothesis which

formalizes the idea that prices are

pretty good representations of all

available information about stocks and

bonds. From the perspective of

investors, the people probably watching

this video, one of the best tests of

market efficiency, as FMA explained to

me when he was on my podcast, is whether

professional active managers can

consistently beat the market. If prices

do not reflect all available

information, if markets are not

efficient, a savvy active manager should

be able to learn things about a stock

that are not currently reflected in the

price and profit from trading on that

information. What we see in practice is

that only a small percentage of

professional active managers are able to

outperform the market and even the ones

that do outperform over one period

rarely go on to continue outperforming

in the future. This makes it very hard

to pick winning managers before the

fact. I would also say that this extends

to individuals trying to devise their

own active investment strategy.

Sometimes active managers get thrown

under the bus. Uh people make excuses

like well they can't because of their

fees or they can't because their funds

are too large. But very few individual

investors beat the market. I think the

same concepts apply to both professional

active managers and individual

investors. The alternative to active

management is typically referred to as

index investing. An index is a

representation of a stock market. In

Canada, we have the S&P TSX composite

index. The US market has a whole bunch

of different indexes tracking it, but

most people are familiar with the S&P

500 index. These are groupings of stocks

that have been put together by a

research firm, in these cases by S&P, to

be a representation of a country's stock

market. These indices are market

capitalization weighted, meaning that

larger companies get a larger weight in

the index than smaller companies. Since

they simply hold stocks as they exist in

the market, they're often used as the

benchmark for active managers. It's

basically like an index is like what if

you just did nothing? What if you just

took the market values of stocks and

held them like that? And so it's it's an

obvious comparison to an active manager

who's trying to do something. So the

index are used as a benchmark for the

active managers. Now an index is not

itself an investment. It's a

representation of a market. But there

are funds that rather than trying to

beat the market simply invest in the

stocks in the index in an effort to

capture the market's returns. Index

funds were first created in the 1970s

based on the observation that active

managers were not delivering index

beating returns. The other issue that I

haven't mentioned yet for active

management is that to do all of the

analysis and other work that's required

to run an actively managed fund that

tries to beat the market. These funds

have to charge higher fees and even

small fees in investing matter a lot due

to compounding over long periods of

time. If we think back to the earlier

example of saving 10% of your income for

retirement and earning a 7% expected

return on your investments, if you pay

an extra 0.64% 64% in fees. That's the

average fee difference between fee based

active funds and index funds in Canada.

And you don't earn higher returns in

exchange for the higher fees. You would

need to save 12.5% of your income or 25%

more to have a similar long-term outcome

to the cases I talked about earlier. If

the active fund that you choose

underperforms by more than its fees,

which is often the case since it's so

hard to pick winning stocks before the

fact, the numbers will look worse still.

When you sit down with a financial

adviser, they may well be able to show

you a list of actively managed funds

that have outperformed, making active

management seem compelling. But the

problem here is that over any 10-year

period, for example, less than half of

actively managed funds survive. The

remainder close or get merged with other

funds. Funds that merge or close tend to

be poor performers that have failed to

attract investors, which is why they are

closing or merging. This creates a

problem of survivorship bias. The sample

of actively managed funds that exist at

any point in time are not a good

representation of the performance of

actively managed funds in aggregate when

survivorship bias is accounted for. The

other problem is that funds that perform

well and survive in one period are no

more likely to continue winning in

future periods. Index funds take the

guesswork out of investing and make it

accessible to anyone. You don't need to

know how to analyze companies or predict

the economy or identify successful

active managers before the fact to be a

successful index fund investor. You

don't even need to be interested in the

stock market. You just need some

baseline knowledge about index funds and

enough conviction in your chosen

strategy and your chosen portfolio to

stay disciplined through inevitable

difficult market conditions. That point

is really important. You have to be able

to stick with whatever you decide to

invest in. To put this information into

practice as opposed to just talking

about it from a theoretical perspective,

we need to talk about investment

products. In 2018, Vanguard launched the

first asset allocation ETFs in Canada.

An ETF is an exchangeraded fund, which

is a fund that you purchase on a stock

exchange like you would purchase a

stock, but it gives you exposure to a

diversified portfolio of assets and you

you pay a fee to own it. Asset

allocation ETFs are now offered by a ton

of different financial companies in

Canada. We're going to look at one of

Vanguard's ETFs so that you can see what

I'm talking about. VGRO is the Vanguard

Growth ETF portfolio. It holds a US

total market index ETF, a Canadian total

market index ETF, a developed markets

excluding North America index ETF which

covers countries like Japan, the UK,

France, Germany, Switzerland, Australia,

and a whole bunch of others. And an

emerging markets index ETF covering

China, Taiwan, India, and a whole bunch

of others. And also three bond ETFs

covering Canadian, US, and global

excluding Canadian and US bonds. The

overall portfolio consists of 80% stocks

and 20% bonds. Canada in this portfolio

receives a much higher weight in the

fund than its market capitalization

weight. Canada's about 3% of the global

market and it makes up about 30% of the

equity portion of this portfolio. Now,

that is a deliberate decision by

Vanguard reflecting an intentional home

country bias which may be appropriate

for Canadians. I've got a video on that

if you want to learn more about why that

is. Vanguard has also created asset

allocation portfolios for more

conservative and more aggressive asset

allocations allowing investors to choose

the product that makes sense for them.

Since Vanguard had success with those

products, uh Beimo, RBCI shares, TD,

McKenzie, and and other companies too

have have launched similar asset

allocation products. An important point

is that these asset allocation ETFs are

rebalanced for you. Rebalancing is the

action of keeping your portfolio's asset

allocation targets in check as markets

change over time. For example, if you

were to build your own ETF portfolio

with the same underlying ETFs as VGRO,

you would need to keep an eye on the

weights of each fund. If the US market

does particularly well over some period,

it would end up making up more of your

portfolio than you had initially

intended it to. To resolve this, you

need to buy more of the other ETFs or

sell some of the US equity ETF or

whatever. Rebalancing is not

insurmountable, but it's it's work. It's

real work that needs to be done and it

often requires some math and a

spreadsheet. Asset allocation ETFs take

that off your plate and they and they do

the rebalancing for you, which is pretty

incredible and it makes investing just

that much easier and that much more

accessible. VGRO is just one example,

but each individual would need to choose

an asset allocation or an asset

allocation product that has the mix

between stocks and bonds that makes

sense for their behavioral loss

tolerance, their ability to take risk,

and their financial goals. I've also got

a whole video on that topic on asset

allocation if you want to learn more

about that. Investing is important

because it combats inflation at a

baseline and when some risk is taken, it

offers the expectation, not the

guarantee, but the expectation of

growing your wealth above inflation for

your future financial independence. The

two main asset classes to think about,

at least at the 101 level, are stocks

and bonds, both of which are financial

assets. Stocks are more volatile and

have higher expected returns, while

bonds are less volatile and have lower

expected returns. Depending on your

goals and your ability to withstand the

volatility of your investments from day

to day, you can arrive at some mix of

stocks and bonds that make sense for you

specifically. People tend to believe

that successful investing requires

understanding the stock market, the

economy, and individual companies in

order to guess and predict what to

invest in and when to get in and out of

the market. But decades of research

suggests that these are fool's errands.

Successful investing simply requires

capturing the returns that financial

markets have to offer, which can be

accomplished using globally diversified,

lowcost index funds. This is achievable

in Canada today with the many low fee

asset allocation ETFs that we have

available to us. Thanks for watching.

I'm Ben Felix, chief investment officer

at PWL Capital. If you enjoyed this

video, I discussed the same topic in

episode 381 of the Rational Reminder

podcast with Dan Bordalotti, aka the

Canadian couch potato, the OG of index

investing education in Canada. You

should check it out.