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.