Bogleheads® Conference 2024 Bogleheads Investing Experts Panel

00:00:00.000 | (audience applauding)

00:00:03.160 | - Okay.

00:00:07.380 | I'm Karen D'Amato.

00:00:11.280 | I came to my first Bogleheads meeting

00:00:15.400 | exactly 20 years ago this year.

00:00:19.040 | What was then called Diehards 4 in Denver.

00:00:23.320 | And I had the chance to come,

00:00:25.520 | that one and a few others as a financial journalist

00:00:28.760 | at the Wall Street Journal and then at Money Magazine.

00:00:32.880 | And since I've moved on in my career,

00:00:35.760 | I've had the honor to come as an individual Boglehead

00:00:39.680 | and now as a member of the Bogle Center Board,

00:00:42.780 | which has been wonderful.

00:00:44.240 | And I work with an amazing group of people.

00:00:46.920 | And I'm delighted to be up here moderating

00:00:49.720 | with our esteemed panel.

00:00:52.560 | They are authors, financial advisors, educators.

00:00:57.040 | Most of them have worn all those hats.

00:01:00.600 | They're widely recognized and quoted in the press.

00:01:04.880 | I encourage you to read all the details of their bios.

00:01:08.380 | Also, everyone here has already spoken

00:01:11.060 | or will be speaking at one or more sessions

00:01:15.120 | during the conference.

00:01:17.280 | I want to include a particularly warm welcome

00:01:20.040 | to Carolyn McClanahan who is here

00:01:23.140 | for her first Bogleheads conference.

00:01:25.360 | (audience applauding)

00:01:28.520 | Carolyn is a physician turned financial planner.

00:01:33.360 | She's the founder of Life Planning Partners,

00:01:37.160 | and she also dodged a very hazardous hurricane

00:01:41.680 | to join us here.

00:01:42.820 | So going from your left over Bill Bernstein,

00:01:52.400 | Paul Merriman, Carolyn, Alan Roth and Rick Ferry.

00:01:57.400 | We're gonna cover a bunch of topics

00:02:01.140 | and I'm gonna work hard to leave 10 minutes

00:02:03.480 | at the end for questions.

00:02:05.020 | So please write questions on the cards.

00:02:08.320 | People will be coming around to collect them.

00:02:10.760 | Let's start off with the US stock market.

00:02:15.680 | The last year has seen excellent performance

00:02:18.560 | when I looked at the Morningstar style box,

00:02:21.960 | all sections of the style box are up at least 25%

00:02:26.760 | over the past 12 months.

00:02:29.560 | But we've also seen that the market

00:02:32.040 | is extremely concentrated

00:02:34.920 | with the so-called magnificent seven stocks

00:02:38.080 | comprising over 30% of the S&P.

00:02:41.840 | And I'm wondering your thoughts about

00:02:44.360 | should investors be concerned about that concentration

00:02:48.560 | because supposedly we're buying index funds

00:02:51.040 | for this wide diversification,

00:02:53.480 | but are they still delivering that?

00:02:55.860 | - I wrote a piece roughly a couple months ago

00:03:01.440 | on is the market too concentrated.

00:03:03.840 | There are over 12,000 publicly traded companies

00:03:07.600 | between the total US and total international

00:03:09.760 | stock index fund.

00:03:11.820 | And the top 10 companies account for over 20%

00:03:16.600 | of the global market cap.

00:03:18.580 | So I researched what has happened in the past

00:03:20.960 | not that that could assure what's gonna happen

00:03:24.160 | in the future.

00:03:25.180 | And when markets go up, markets get more concentrated.

00:03:28.480 | And we are at record concentration now.

00:03:31.040 | But it's not predictive of when the market

00:03:35.200 | is going to go down.

00:03:36.540 | So I'm not a believer in value investing,

00:03:40.800 | I'm a believer in market cap investing.

00:03:43.040 | So, and I love Paul.

00:03:45.820 | It is a problem, it concerns me,

00:03:49.800 | but I'm still going total market cap,

00:03:53.000 | boring, low cost index funds.

00:03:56.560 | So I don't have a solution, but I do have a concern.

00:03:59.160 | - Well, speaking as someone who has

00:04:04.440 | a somewhat opposing point of view,

00:04:06.780 | someone who is tilted, although I have nothing wrong

00:04:09.960 | with the market cap approach,

00:04:12.000 | I'm sleeping a whole lot better at night these days.

00:04:14.840 | - I'm sorry, explain that Bill.

00:04:19.560 | - Well, the fact that I'm tilted away

00:04:22.280 | from the magnificent seven stocks

00:04:25.400 | makes me a lot more relaxed about the concentration

00:04:31.880 | in the markets, since I'm not exposed to it.

00:04:34.760 | I mean, a good day for me is a day when NVIDIA's down 5%.

00:04:39.760 | - Bill, as you pointed out, I sleep well at night,

00:04:42.760 | not by counting sheep, but by counting my tips ladder.

00:04:46.100 | - Oh, I'm sure we'll get to that.

00:04:50.200 | So, you know, on a practical standpoint,

00:04:53.520 | we've always just invested in the total stock market index

00:04:56.400 | instead of the S&P 500 index,

00:04:58.840 | 'cause that mitigates a lot of the risk

00:05:01.040 | of overconcentration, but if you look back at history,

00:05:03.880 | we go through periods of overconcentration in companies,

00:05:07.640 | and it just rotates.

00:05:08.960 | So what was overconcentrated 20 years ago

00:05:12.180 | is not overconcentrated now, and through all that all,

00:05:15.600 | the stock market has just continued to go up.

00:05:17.860 | So if you just stay fully diversified,

00:05:21.240 | I mean, widely diversified in total stock market,

00:05:24.160 | I think you're gonna be fine in the long term.

00:05:26.240 | And again, the one part, though,

00:05:28.440 | is ideally you have a portfolio allocation

00:05:32.280 | that's dedicated to your ability

00:05:34.680 | to take risks financially and psychologically,

00:05:38.020 | so you have that fixed income set aside

00:05:40.120 | so that whatever happens,

00:05:41.660 | you're gonna sleep well all the time.

00:05:46.800 | - I would agree that we've come to a fork in the road

00:05:50.200 | as investors where we are either going to be market timers

00:05:53.360 | or we're going to be buy-in holders,

00:05:55.920 | and we're either gonna build a portfolio

00:05:57.780 | based on what we see is gonna happen

00:06:00.160 | in the next five or 10 years,

00:06:02.180 | or we just accept what happens

00:06:04.480 | for the next five or 10 years,

00:06:06.600 | staying broadly diversified.

00:06:08.740 | And I happen to live 40 feet

00:06:12.240 | from this gentleman on my right.

00:06:14.260 | (audience laughing)

00:06:15.360 | He unfortunately lives above me.

00:06:17.780 | (audience laughing)

00:06:20.520 | That's 'cause he's smarter.

00:06:22.280 | But the bottom line is that

00:06:26.080 | when you're massively diversified,

00:06:28.200 | it really doesn't matter,

00:06:32.080 | except none of us like the market to go down

00:06:34.120 | and be in it when it's happening.

00:06:35.540 | But other than that, I don't even worry,

00:06:38.600 | I don't even look to see how the pieces

00:06:40.920 | of my portfolio have done this year.

00:06:43.040 | It doesn't matter.

00:06:45.720 | - Okay.

00:06:46.560 | Go on, Rick.

00:06:49.120 | Hi, Rick.

00:06:49.960 | (audience laughing)

00:06:52.160 | - Okay, if you're a global equity investor,

00:06:56.600 | only thing you need to worry about

00:06:57.940 | as far as your portfolio is money coming out of the market

00:07:02.320 | and money going into the market, okay?

00:07:03.880 | Once the money is in the market,

00:07:06.560 | whether it's in mega cap seven

00:07:08.840 | or it comes out of mega cap seven

00:07:10.720 | and goes more broadly to the mid caps

00:07:14.080 | or the small caps or maybe goes international,

00:07:17.960 | money is staying in the market,

00:07:20.120 | so your portfolio isn't gonna go down in value

00:07:22.960 | because it's like, okay, the fish moved

00:07:24.840 | from this part of the ocean to that part of the ocean,

00:07:27.760 | but you own the whole ocean.

00:07:30.000 | So it doesn't matter that the fact

00:07:33.400 | is these magnificent seven.

00:07:35.680 | As long as people are not pulling money out of stocks,

00:07:40.120 | then your portfolio will be fine

00:07:41.680 | 'cause they're just reshuffling the chairs

00:07:44.480 | is all they're doing, in my opinion.

00:07:46.320 | - Let's talk about tips, okay?

00:07:50.840 | Last year, we talked a lot about tips,

00:07:53.240 | treasury inflation protected securities.

00:07:56.680 | At that point, their real after-inflation yields

00:08:01.360 | were hovering at a rich 2.4% at multiple maturities.

00:08:06.360 | Now they're in the 1 1/2 to 2% range.

00:08:10.720 | I'm wondering how you feel about tips now.

00:08:13.360 | Do you feel as strongly about them

00:08:14.920 | as just a core part of portfolios?

00:08:17.820 | - Rates are about where they were two years ago

00:08:22.760 | when I built my tips ladder.

00:08:24.120 | Now, if I could time the market,

00:08:25.460 | I would have waited 'til a few months ago.

00:08:27.560 | But yeah, I don't know what they're gonna be in the future,

00:08:31.720 | but a 2% guaranteed real return is great.

00:08:34.840 | And I wrote a piece, "Wealth Without Risk,"

00:08:37.920 | and it was using $100,000, put $53,000,

00:08:42.560 | not a tips ladder, but one tips

00:08:44.520 | that's gonna mature in 25 years.

00:08:46.320 | It'll mature at $100,000.

00:08:49.080 | The other $47,000 in the total stock market index fund,

00:08:53.880 | do nothing for 25 years, and you've got no risk.

00:08:58.360 | If the market goes to zero,

00:09:00.040 | you still get your $100,000 back.

00:09:02.680 | But if the market does like it's done in the past,

00:09:05.960 | you've got a no risk, 5% above inflation real return.

00:09:10.960 | - Yeah, there are a couple different ways

00:09:12.680 | to look at the question, but the easiest way

00:09:15.440 | is to think back in the year 2000 when tips yielded 4%,

00:09:20.440 | or in 2008, at the end of 2008,

00:09:23.520 | when they yielded in excess of 3%.

00:09:25.640 | Gosh, why didn't I buy them then?

00:09:27.800 | Well, the reason why you didn't buy them then

00:09:29.480 | was because a dollar put into the stock market in 2000

00:09:32.360 | or in 2008 is now worth, you know, $7, $8, $9 now,

00:09:37.360 | which will buy you a whole lot more tips.

00:09:40.160 | And the same thing is even true over the past year.

00:09:43.920 | When we were at this conference less than a year ago,

00:09:46.680 | as Karen pointed out, tips were yielding

00:09:50.040 | a whole lot more than they are now, 2.4, 2.5.

00:09:52.920 | You could buy, there were places in the tips yield curve

00:09:55.240 | where on that date you could buy tips at almost a 2.7% yield.

00:09:59.000 | Gosh, why didn't I buy them then?

00:10:00.560 | Well, because a dollar put into the stock market then

00:10:03.600 | is now worth $1.35 or $1.40 now,

00:10:06.680 | and you will more than make up that difference

00:10:09.200 | in the tips price.

00:10:10.680 | So the lesson that I take from this

00:10:12.360 | is don't buy tips unless you're old,

00:10:14.840 | which I am.

00:10:18.400 | - I have a lot to say about this.

00:10:20.440 | So first off, I'm a student

00:10:21.760 | of complex adaptive systems science.

00:10:23.560 | How many peeps do I have in here?

00:10:26.800 | You guys don't, oh, yay, one.

00:10:30.360 | What is complex adaptive systems science?

00:10:32.640 | It is we have no idea about the future.

00:10:36.080 | We cannot predict unpredictable.

00:10:38.560 | Things are unpredictable.

00:10:39.760 | So just like the markets are unpredictable,

00:10:42.000 | earthquakes, hurricanes, which I'm so grateful to be here

00:10:45.480 | 'cause I live in Florida and so I got here late last night.

00:10:48.520 | They're all unpredictable.

00:10:49.720 | Inflation is unpredictable.

00:10:52.240 | And so I'm gonna say something here

00:10:55.040 | and I'm probably gonna get so many arrows.

00:10:56.800 | We have never used tips.

00:10:58.440 | Oh, isn't that scary?

00:11:00.640 | We do not time the market.

00:11:01.960 | We make sure our clients are invested

00:11:04.520 | with their ability to take risk.

00:11:06.640 | Again, I'm saying that over and over,

00:11:09.920 | but our most aggressive clients

00:11:12.520 | are gonna have 20% fixed income

00:11:15.800 | because if the market crashes,

00:11:17.560 | they have money to rebalance into equities

00:11:20.760 | and our more conservative clients

00:11:22.840 | are gonna maybe 80% fixed income,

00:11:25.520 | which a lot of people cried,

00:11:27.000 | but due to the low income years,

00:11:30.560 | but they slept very soundly,

00:11:32.600 | not having to worry about the unpredictable future.

00:11:35.360 | And they understood what they were getting into

00:11:37.800 | with those portfolios.

00:11:38.960 | And so for us, for fixed income,

00:11:41.280 | for our clients who have bond portfolios

00:11:45.640 | better than 200 to 250,000,

00:11:48.880 | we use individual municipal bonds

00:11:51.280 | and we use individual taxable municipal bonds.

00:11:54.480 | We don't like the tax treatment of tips

00:11:56.800 | in taxable accounts.

00:11:58.800 | So that's an issue.

00:11:59.960 | Another reason we don't use them.

00:12:01.960 | And then there's the whole argument

00:12:04.520 | of bond funds versus individual bonds.

00:12:06.600 | We just love that.

00:12:07.440 | And you can look at all the data.

00:12:09.680 | I don't think there's a straight answer for us.

00:12:12.400 | We love the capital preservation

00:12:14.200 | of using high quality individual municipal bonds

00:12:17.760 | that are insured.

00:12:18.720 | I've been doing this 25 years.

00:12:20.440 | It hasn't failed me yet.

00:12:22.140 | And so that is my answer on tips.

00:12:26.760 | - Oh, sorry.

00:12:28.680 | That was loud.

00:12:29.520 | - Yeah, I think that first of all,

00:12:32.600 | leaving the tax question aside about tips and treasuries.

00:12:37.240 | Let's just ignore the tax side of it

00:12:40.920 | and just talk about diversification.

00:12:43.280 | That in addition to your total bond market index fund

00:12:48.280 | that you could have an element of a tips index fund

00:12:55.640 | in your portfolio because one of the segments

00:13:00.440 | of the total bond market index that's not there,

00:13:05.440 | it's not included,

00:13:07.360 | is Treasury Inflation Protected Securities.

00:13:09.600 | I did a podcast with the people who created that index.

00:13:12.520 | There's a long story behind it.

00:13:13.960 | They wanted to include tips in the total bond market index.

00:13:17.120 | It was the vendors or the people

00:13:18.520 | who were running total bond market index funds

00:13:20.560 | that didn't want tips in there.

00:13:22.480 | So they took it out.

00:13:23.960 | So in order to get that into your portfolio,

00:13:28.200 | to have a more complete total bond market,

00:13:31.600 | total bond market allocation,

00:13:34.920 | you would need, say, an element of tips.

00:13:37.720 | So if you had 20% tips in your portfolio,

00:13:40.280 | you're actually rounding out

00:13:41.640 | your total bond market index fund with tips.

00:13:45.480 | After that, whether you're gonna buy individual tips

00:13:50.000 | or a fund, I mean, I like to keep it simple.

00:13:52.640 | I just rather use a fund.

00:13:54.840 | - And Bill, when you said about tips

00:13:56.760 | are for people who are older,

00:13:58.040 | would you not use them in a portfolio

00:14:00.840 | during the accumulation years?

00:14:02.760 | - Yes, I would, or no, I would not use them

00:14:06.760 | in the accumulation phase for that simple reason

00:14:09.200 | that the expected return of stocks

00:14:11.440 | is higher than that of tips.

00:14:13.640 | And if you have a 20, 30, 40, 50 year horizon,

00:14:17.800 | you don't need them in your portfolio.

00:14:19.320 | When you need them in your portfolio

00:14:21.000 | is when you are much older and you are accumulating

00:14:24.400 | and you do not wish to take the risk

00:14:27.080 | of significant inflation,

00:14:29.000 | which is a near constant in economic history.

00:14:33.080 | - But so in the accumulation years,

00:14:34.800 | if some, for the part of a portfolio

00:14:37.200 | that is not in equities,

00:14:39.680 | where would you suggest it be?

00:14:41.840 | - Well, in the first place,

00:14:43.200 | if you're in the accumulation part of your portfolio,

00:14:46.160 | you should be very stock heavy.

00:14:49.400 | As Carolyn explained, if you're 40 years old,

00:14:52.440 | you really should have,

00:14:53.640 | you're not gonna be retiring for another 20 or 30 years.

00:14:55.960 | You should have very little in the way of bonds

00:14:58.040 | in your portfolio.

00:14:58.920 | You don't need that money for 20 or 30 years.

00:15:00.880 | Why would you invest it in a low yielding asset?

00:15:03.600 | Now, there is a good reason for doing it,

00:15:05.480 | which is the psychological aspect of it.

00:15:09.040 | So the question is, where do you put your money,

00:15:11.240 | if not in tips?

00:15:13.000 | Tips aren't a bad place to put them,

00:15:14.400 | but treasury bills aren't a bad place to put them either.

00:15:19.320 | At last report, Berkshire Hathaway,

00:15:21.600 | Mr. Buffett had 30% of his assets in treasury bills.

00:15:26.160 | He's not a stupid man.

00:15:27.520 | - So in our portfolios for 25 years,

00:15:32.640 | in the fixed income portion, in the tax deferred account,

00:15:37.280 | we've been 50% intermediate bonds, governments,

00:15:42.000 | 30% short term governments, and 20% in tips.

00:15:46.400 | And that's never changed again

00:15:48.360 | because that's there just to protect against the downside

00:15:53.320 | because many of us, I'm in the period of accumulation,

00:15:57.600 | by the way, I hope we all are.

00:15:59.560 | (audience laughing)

00:16:02.560 | And so, but I still have a limit

00:16:05.920 | as to how much I'm willing to lose.

00:16:08.680 | So those bonds are there for no other reason,

00:16:11.200 | and that's why they're governments,

00:16:12.920 | because they're the most defensive thing

00:16:15.560 | that I know to do to keep the losses that I will sustain

00:16:20.560 | when it all comes apart to the limit

00:16:24.160 | that my wife and I have.

00:16:25.640 | And so it's been the same for many, many years.

00:16:29.960 | - I wanna say something to all this.

00:16:31.880 | It's like everybody's different.

00:16:34.160 | I have 40 year olds, I even have 30 year olds

00:16:37.480 | that have plenty of money, they know their number,

00:16:39.880 | they know what they need for financial independence,

00:16:42.640 | and they love their bonds.

00:16:44.600 | They don't care about growing a gazillion dollars

00:16:47.840 | 'cause they're financially independent

00:16:49.440 | and given what they're doing now.

00:16:52.840 | And so that's why the important part

00:16:54.560 | of maintaining financial independence

00:16:57.520 | because you can't predict your life

00:16:59.000 | is knowing what it is you need to spend going forward.

00:17:02.400 | And the most important part of a financial plan

00:17:04.840 | that I don't see hardly anybody doing

00:17:07.400 | is you need to revisit spending and redo projections

00:17:10.720 | based on spending every year,

00:17:12.840 | and your portfolio allocation should be based on that,

00:17:16.840 | not whether you're trying to make the most money

00:17:19.600 | and trying to figure out what the market's gonna do

00:17:21.920 | for the next 20 or 30 years.

00:17:23.660 | - Earlier this month, the Fed cut rates

00:17:30.200 | for the first time in over four years.

00:17:32.400 | The consensus is more rate cuts are ahead.

00:17:35.840 | Does that change your thinking

00:17:38.160 | about any of your investments or your allocations?

00:17:40.960 | - Yeah, I wanna say something to that first.

00:17:42.520 | So our firm is an ensemble,

00:17:47.520 | and so we all are specializing in something,

00:17:50.960 | and I actually have an investment manager,

00:17:52.660 | so I'm embarrassed to say I'm not our investment specialist

00:17:55.280 | in our firm, but we all know everything going on, right?

00:17:58.040 | And so my investment manager, this wonder kid of age 26,

00:18:01.960 | he shows this great chart of how interest rates go up

00:18:06.080 | kind of a little slow,

00:18:07.800 | and then when they start cutting, they cut like this,

00:18:10.120 | and then you get flat up,

00:18:12.080 | and then maybe a little peak, and then flat.

00:18:14.360 | And so I remember, since I'm old,

00:18:16.840 | I remember in 2006, '07,

00:18:19.520 | that interest rates were pretty decent,

00:18:22.280 | and we were buying a lot of,

00:18:23.920 | then the wonder kid was not born yet.

00:18:25.760 | I had a different investment manager at that point.

00:18:28.960 | But same philosophy, the young kid learned

00:18:33.220 | from the older guy.

00:18:34.720 | We just loaded up on bonds,

00:18:37.000 | and individual bonds that were going out

00:18:40.520 | in 2015, 2016, so when the market dropped in 2009,

00:18:45.320 | interest rates went, choo, clients loved us.

00:18:48.000 | And so we did the same thing this time.

00:18:50.360 | Soon as those interest rates went up,

00:18:51.960 | we said to clients, now's the time,

00:18:54.800 | let's take as much cash off the table,

00:18:56.900 | 'cause everybody loves cash, 'cause if it's paying 5%,

00:18:59.520 | I'm like, rates are gonna drop.

00:19:00.920 | We show 'em that beautiful chart that said,

00:19:02.480 | ooh, put more in bonds, put more in bonds,

00:19:04.820 | and that's what we did.

00:19:08.520 | - The Fed tells us what they are planning on doing

00:19:11.640 | with the Fed funds rate, which is the overnight rate.

00:19:14.360 | It's not even one day.

00:19:16.280 | The top economists, as measured by the Wall Street Journal,

00:19:19.520 | have called the direction, up or down,

00:19:22.240 | on the 10-year Treasury, correct,

00:19:25.200 | about 40% of the time, less than a coin flip.

00:19:28.360 | So the only thing it changes is perhaps when to go,

00:19:33.360 | I'm a believer now that it's okay

00:19:35.280 | to have some short-term bonds,

00:19:37.360 | but when total bonds starts yielding,

00:19:39.840 | let's say, a percentage point more than the short-term,

00:19:44.080 | then you're being compensated for taking on

00:19:46.960 | a bit more interest rate risk.

00:19:49.480 | Always keep credit quality high.

00:19:52.400 | The Total Bond Fund follows

00:19:54.440 | the Bloomberg Aggregate Bond Index,

00:19:56.800 | which used to be the Lehman Brothers Aggregate Bond Index.

00:20:00.440 | I mentioned that yesterday.

00:20:01.960 | - One of my touchtones is the famous

00:20:06.120 | Bernard Baruch statement,

00:20:07.440 | it's something that everyone knows isn't worth knowing.

00:20:11.680 | And so almost immediately when I hear

00:20:13.720 | the terms Federal Reserve,

00:20:16.360 | my brain immediately shuts down and I stop listening.

00:20:19.000 | - I haven't made any changes and don't recommend it.

00:20:24.000 | Did the Fed cut a half, so what are we at,

00:20:25.840 | four and a half now on, say, a three-month T-bill, roughly?

00:20:29.840 | Well, that's a good rate.

00:20:30.880 | I mean, so if you've got Treasury bills

00:20:33.000 | and part of your allocation is just to roll Treasury bills,

00:20:35.960 | I mean, there's no change there.

00:20:38.200 | If your Fed is starting to cut,

00:20:41.960 | so, I mean, usually that's good for the equity market,

00:20:45.360 | so there's no change there.

00:20:47.280 | The Fed cut, but the intermediate and long-term rates

00:20:51.200 | kind of stayed the same, didn't do anything,

00:20:52.960 | so there's no change there, so no change.

00:20:55.960 | - Okay, no change.

00:20:57.080 | - One more thing, as Carolyn touched on,

00:21:00.840 | the joy of owning a long bond when there's a market crash.

00:21:05.240 | But there are two kinds of market crashes, okay?

00:21:07.280 | There's the financial panic one,

00:21:08.680 | where the financial system shuts down

00:21:10.920 | and there, Treasuries are golden.

00:21:12.400 | The asset that you want to own is the long bond, okay?

00:21:15.520 | But there's another kind of market crash,

00:21:17.840 | which occurs when the Fed tightens dramatically

00:21:21.640 | and then bonds go down,

00:21:24.240 | and so you may not want to own the long bond.

00:21:27.680 | Long bond was not a particularly good asset

00:21:29.640 | to own in the year 2022.

00:21:31.640 | - I want to clarify, though,

00:21:33.520 | that we hold all bonds to maturity.

00:21:35.280 | We don't trade bonds, so.

00:21:36.960 | - Wanted to ask a question about another thing

00:21:40.280 | that is going on in the world beyond us.

00:21:43.600 | We're now less than six weeks to a presidential election.

00:21:47.480 | Without saying anything about your politics

00:21:50.920 | or the individual candidates,

00:21:54.360 | does the upcoming election affect any of your thinking

00:21:57.120 | or things you are doing as investors?

00:22:01.880 | - I think it has a lot to do,

00:22:03.000 | perhaps when we find out who wins,

00:22:05.320 | you may make some shifts to your estate planning,

00:22:08.680 | depending on what happens with the sunset of the,

00:22:11.880 | we know this is law already, right?

00:22:13.560 | The sunset of the Trump tax cuts.

00:22:16.120 | They're gonna go away in 2026,

00:22:18.000 | and that could affect your estate planning,

00:22:20.960 | and you may have to do some new estate planning.

00:22:23.880 | Other than that, I don't think so.

00:22:25.560 | - Tax law changes, as you mentioned, Rick,

00:22:29.760 | could certainly cause some changes in the financial plan,

00:22:33.360 | but I won't know anything the rest of the market

00:22:36.400 | doesn't already know after the election,

00:22:38.480 | so I will not change a thing,

00:22:40.040 | and I've written pieces ad nauseam.

00:22:42.880 | Don't do anything based on,

00:22:46.000 | you don't like the candidate that won.

00:22:47.900 | - I love this question, by the way,

00:22:50.880 | 'cause we have clients from all across

00:22:53.160 | the political spectrum, and they'll call

00:22:56.720 | when they're worried about the potential candidates

00:22:59.760 | gonna be elected from both sides,

00:23:02.520 | and we actually have this newsletter

00:23:04.820 | that we wrote a long time ago,

00:23:07.120 | 'cause if you look at all the studies,

00:23:09.140 | basically elections don't affect the markets,

00:23:12.440 | and we take that same exact newsletter every four years,

00:23:17.440 | and we just put new lipstick on the pig,

00:23:20.760 | and we send that newsletter out again every time.

00:23:25.320 | And I do think that one of the most important jobs

00:23:28.000 | of an investment advisor is to be there

00:23:32.320 | to talk them through that decision.

00:23:34.900 | John was about my age, I think,

00:23:39.440 | when I was a younger advisor, and Clinton had been elected,

00:23:44.440 | and he called up and said, "Sell everything.

00:23:47.800 | "I do not wanna be in the market

00:23:50.120 | "with Clinton as the president."

00:23:52.820 | And I talked for 45 minutes, and I won.

00:23:57.400 | And it wasn't that I was voting or cheering

00:24:00.480 | for who the president might be,

00:24:03.240 | but that I didn't want people to use that

00:24:06.040 | as a market timing tool.

00:24:08.240 | And if you do, there's no evidence that it works.

00:24:11.380 | - Yeah, I mean, you know, it's a truism

00:24:14.440 | that you tell your kids, and what your mama told you,

00:24:16.800 | is don't discuss religion or politics with strangers,

00:24:20.560 | but it shouldn't have anything to do

00:24:22.500 | with the way you manage your portfolio.

00:24:24.940 | Not a single thing, neither religion nor politics.

00:24:27.980 | - Okay, thank you.

00:24:29.360 | Changing gears a little bit, over the past few years,

00:24:34.460 | many Bogle heads have been dismayed

00:24:36.620 | by the quality of service at Vanguard.

00:24:39.420 | Should investors who have been loyal users

00:24:42.940 | of Vanguard funds consider buying those funds

00:24:45.980 | or other funds on platforms other than Vanguard?

00:24:50.880 | - Yeah, I want Alan to answer that,

00:24:52.260 | 'cause he wrote an excellent article on that.

00:24:54.500 | - You know, I'm not gonna make any excuses.

00:24:58.360 | Vanguard service has really gone down,

00:25:01.520 | and I still have a flagship advisor,

00:25:03.260 | so I can imagine how hard it is for a lot of people.

00:25:07.420 | You know, I can say I'm encouraged.

00:25:09.080 | I sent a blind email to Salim Ramji, the new CEO.

00:25:13.500 | He responded kind of like, just like Jack Bogle.

00:25:16.820 | And I wrote, I asked him 10 questions

00:25:19.100 | in an article that I wrote about,

00:25:22.060 | and one thing that's not in the article,

00:25:23.980 | he's saying all the right things,

00:25:25.820 | but one thing that's not in the article,

00:25:29.380 | Michael Nolan, Jack Bogle's last number two

00:25:34.100 | and fiercely loyal, the interview was conducted in a video,

00:25:39.100 | and Mike was smiling the whole time.

00:25:43.580 | It was as if Jack Bogle was looking down

00:25:46.380 | and listening to his answers.

00:25:48.180 | So I'm really encouraged,

00:25:50.220 | but it's not gonna be an easy task

00:25:52.560 | to fix things at a company that size,

00:25:54.940 | but I think they are making progress,

00:25:56.940 | and I'm really encouraged.

00:25:58.360 | - A lot of people are moving their assets out of Vanguard

00:26:04.840 | and moving them to, say, Fidelity.

00:26:09.180 | A lot of people moving to Fidelity, which is fine.

00:26:12.780 | Fidelity's a good firm.

00:26:13.940 | They have great service,

00:26:16.860 | but I have to warn you, when you do that,

00:26:19.940 | you are going to be asked to meet

00:26:21.700 | with a Fidelity financial representative.

00:26:25.580 | I hasten to call them financial advisors

00:26:29.780 | because their only advice is going to be

00:26:31.300 | sell whatever you got at Vanguard

00:26:33.260 | and get into our separately managed account program.

00:26:36.860 | I had a client, a couple of weeks ago,

00:26:40.140 | moved 15 million from Vanguard over to Fidelity.

00:26:45.100 | I had a $5 million position in VTI,

00:26:48.700 | the Vanguard Total Stock Market ETF,

00:26:50.900 | in a taxable trust account

00:26:52.480 | that had over a $2 million unrealized gain,

00:26:57.060 | and the recommendation of the Fidelity advisor was,

00:27:01.620 | "You're under-diversified.

00:27:03.420 | "You need to sell this position

00:27:05.120 | "and put your money in a separately managed account."

00:27:08.060 | I mean--

00:27:10.020 | - Yeah, I have a small rolling treasury ladder at Fidelity,

00:27:14.620 | which they will do.

00:27:15.860 | It's a wonderful service,

00:27:17.700 | and once a month, I get a little email from them

00:27:19.600 | telling me that my portfolio is horribly under-diversified.

00:27:22.640 | The alternative, in terms of big custodians, is Schwab,

00:27:28.020 | and they're fine, too.

00:27:28.980 | You're not gonna be harassed by their representatives much,

00:27:31.700 | but you will spend the rest of your life

00:27:33.220 | policing their sweep vehicle,

00:27:34.980 | which yields 40 basis points.

00:27:37.060 | - As investors, we are often looking

00:27:43.300 | for rules of thumb, guidelines for what we do.

00:27:48.300 | In my conversations getting ready for this panel,

00:27:51.260 | I thought it was interesting

00:27:52.700 | that both Paul Merriman and Alan Roth

00:27:55.980 | said that there are a lot of situations

00:27:58.580 | where half this, half that

00:28:01.180 | can be a really useful bit of guidance,

00:28:03.220 | so I'm gonna ask you, Paul,

00:28:04.220 | can you start us off by telling us about your 50/50s?

00:28:09.860 | - I am 50/50 buy and hold and market timing.

00:28:14.860 | (audience laughs)

00:28:16.820 | I am, and I am 50/50 U.S. and international,

00:28:20.600 | and I'm 50/50 basically growth and value,

00:28:26.260 | so you add all those 50s up,

00:28:29.300 | and I don't know how much more diversified I could be,

00:28:33.100 | and by the way, I was, at a point in my career,

00:28:37.580 | very knowledgeable about market timing,

00:28:39.940 | and I concluded it is not something

00:28:43.340 | that the individual person should ever try to do,

00:28:47.860 | which is why I don't do it,

00:28:51.180 | and even though I was an investment advisor in my retirement,

00:28:55.780 | the last thing I wanna worry about is our money,

00:28:59.740 | so I have an investment advisor

00:29:01.760 | to make sure that everything gets done

00:29:04.700 | because my emotions are such,

00:29:06.660 | when the market starts down, I get very protective,

00:29:10.960 | and I've learned to keep my hands off.

00:29:13.900 | After all, I am 50/50.

00:29:16.780 | - So my question for you, what is your goal for your money?

00:29:19.740 | - Well, my first goal is to make sure

00:29:22.640 | that Western Washington University gets enough money

00:29:25.820 | to educate their students on financial literacy.

00:29:30.820 | That's my first goal.

00:29:32.660 | My second goal is, we already have it set up

00:29:35.720 | so that my wife will be okay.

00:29:38.140 | I did what I advocate to everybody that can do it.

00:29:42.100 | I over-saved.

00:29:43.140 | I did not retire until I had way more than I really needed,

00:29:48.140 | so my goal is for it to grow, but not too fast

00:29:54.420 | because I don't like the risk if it grows too fast,

00:29:57.740 | but I also would like to see it grow a moderate amount,

00:30:01.600 | so if I got a 6% or 7% return over the years, I'd be fine.

00:30:06.600 | - In the words of that great financial authority,

00:30:12.160 | Yogi Berra, 50% of this game is 90% mental,

00:30:16.600 | and splitting the difference

00:30:20.040 | when you have a big decision to make,

00:30:22.300 | 50/50 one way or the other is generally a good way

00:30:25.600 | of accomplishing the main psychological chore

00:30:28.460 | which you have, which is minimizing regret.

00:30:31.180 | Alan, tell us about some of your 50/50s.

00:30:34.120 | - Harry Markowitz, the father of modern portfolio theory

00:30:37.820 | who does all these calculations

00:30:39.560 | to determine the optimal efficient portfolio

00:30:42.300 | was once asked, what's your portfolio allocation,

00:30:45.100 | and he said 50% to minimize regret.

00:30:48.340 | There are other reasons.

00:30:52.520 | If you look at Morningstar's safe spin rates,

00:30:56.340 | it tends to maximize somewhere around 50% bonds,

00:31:00.780 | 50% stocks, you get more of a boost

00:31:03.180 | from rebalancing at 50%.

00:31:06.420 | Paul, my portfolio was also at 50%.

00:31:10.100 | Other things like if a client has,

00:31:12.360 | let's say as an officer of a company,

00:31:14.620 | and they've got 80% of their net worth

00:31:16.500 | in their company's stock,

00:31:19.380 | oftentimes we say let's sell half over the next year or two.

00:31:23.920 | If it goes up, they can be happy that they had it

00:31:27.140 | and blame Alan Roth for selling it.

00:31:29.500 | If it goes down, they can pat themselves on the back.

00:31:32.740 | Dollar cost averaging.

00:31:34.700 | If you inherit a lot of money, you sell your company.

00:31:38.060 | I think a couple years ago, the panel was asked,

00:31:40.840 | do you dollar cost average or put it all in immediately?

00:31:44.520 | And mathematically, you put it all in immediately,

00:31:46.880 | but we're emotional animals,

00:31:49.640 | we're not logical, rational animals,

00:31:51.500 | so often selling half, obviously,

00:31:53.900 | the shares that have the highest cost basis.

00:31:58.700 | And then traditional versus Roth?

00:32:02.620 | My answer is yes.

00:32:03.780 | We do not know what tax laws are going to be.

00:32:06.340 | We know that our income is gonna go down in retirement,

00:32:10.700 | but we don't know what tax laws will be.

00:32:13.300 | Logic says with our debt and deficit,

00:32:15.840 | taxes have to go up,

00:32:18.260 | but logic and politics really don't have much in common.

00:32:22.360 | - Let me put in a pitch here now.

00:32:26.340 | If you have questions, please write them down.

00:32:29.660 | If you have a question waiting to be collected,

00:32:31.660 | please raise your hand.

00:32:32.940 | We have a couple of people coming around

00:32:34.940 | to collect your questions

00:32:36.260 | 'cause we'll try and get to those quite soon.

00:32:38.500 | Wanted to talk briefly about international stocks.

00:32:44.100 | This year has been another one

00:32:45.740 | where international stocks are trailing

00:32:47.900 | far behind US stocks.

00:32:50.060 | The Vanguard Total International Stock Index is up 14%.

00:32:54.660 | Total US Index Fund up 20.

00:32:58.500 | Looking over the past 15 years on an annualized basis,

00:33:03.220 | US beats international 14% to 6%.

00:33:08.220 | Jack Bogle was famously unconvinced

00:33:11.320 | that one needed to own international stocks,

00:33:14.980 | although Victor made some really interesting points

00:33:16.880 | about the valuation impact on that decision.

00:33:20.580 | So I'm wondering what your thinking is

00:33:23.460 | on should I own international stocks?

00:33:27.580 | - Yeah, I think the point that Victor made this morning

00:33:30.260 | was quite an incisive one,

00:33:32.100 | that you're basically buying a large part

00:33:34.220 | of the US economy at a discount

00:33:36.380 | when you buy international stocks.

00:33:38.980 | But the other way to look at it

00:33:40.780 | is to say that the PE,

00:33:42.960 | by whatever measure you want,

00:33:47.180 | of international stocks is half that of US stocks.

00:33:50.300 | So what you're saying is that the US per share growth

00:33:54.380 | in earnings is going to grow over the foreseeable future

00:33:58.780 | twice as fast as those of international companies will.

00:34:02.580 | And I think that's a very strong assumption.

00:34:05.160 | Eventually you'll be happy

00:34:06.580 | you bought international stocks, just not yet.

00:34:09.620 | (audience laughing)

00:34:12.620 | - Okay, so why are international stocks so important?

00:34:19.820 | Why are international stocks not doing as well as US stocks?

00:34:23.740 | And you really gotta look under the hood

00:34:25.660 | and see that, well, here in this country,

00:34:27.940 | in the United States, we are blessed with some very large,

00:34:31.740 | very successful, leading tech companies

00:34:36.100 | that are making a lot of money

00:34:39.900 | and that are not influenced by higher interest rates

00:34:42.100 | because they don't finance the balance sheet

00:34:43.860 | by borrowing money.

00:34:45.340 | So we're in a great spot.

00:34:49.260 | By the way, thank you for telling me

00:34:51.220 | what international stocks versus US stocks have done

00:34:53.980 | and small cap, 'cause I don't really know.

00:34:56.780 | So I appreciate that.

00:34:57.860 | So international stocks apparently

00:34:59.060 | have underperformed again this year, I guess.

00:35:01.540 | But international stocks are in different industry groups.

00:35:06.740 | If you look at what underlines what's out there

00:35:09.820 | outside the US, we're talking about a lot

00:35:11.980 | of industrial stocks, material stocks, energy stocks,

00:35:16.700 | things like mining companies.

00:35:18.200 | I mean, it's almost like what the S&P looked like

00:35:20.500 | 50 years ago here in the United States.

00:35:23.340 | That's what it looks like overseas.

00:35:25.620 | We buy a lot of that stuff, by the way,

00:35:27.260 | that they make and they mine, so we buy that.

00:35:30.100 | We're consumers of that.

00:35:32.420 | In the long term, if you have about 30% to 40%

00:35:36.500 | in international, it is a good diversification benefit.

00:35:39.940 | You get individual stock diversification,

00:35:43.820 | you're now getting a lot of industry diversification,

00:35:47.380 | and you're getting currency diversification.

00:35:49.500 | Again, we've been blessed in this country

00:35:51.060 | with the US dollar being strong.

00:35:53.220 | It's not always that way.

00:35:54.860 | So my opinion is you should have about,

00:35:58.500 | to make it simple, and I like to keep things simple,

00:36:00.660 | 2/3 in the US, 1/3 in international,

00:36:03.340 | using total stock market US,

00:36:05.260 | total stock market international

00:36:07.220 | is a very good allocation to hold for the long term.

00:36:10.300 | And by the way, the one thing

00:36:11.140 | about international, which is interesting,

00:36:12.860 | the dividend yield on that now is over 3%.

00:36:15.800 | So now I'm telling people, well,

00:36:17.020 | if you're in a high tax bracket,

00:36:19.300 | you might wanna think about putting your international

00:36:21.420 | in your tax-deferred or tax-free account

00:36:24.900 | because the dividend yield is so high.

00:36:27.460 | - Jack Bogle has been right, even since his passing,

00:36:30.380 | and I am the most argumentative person in the world,

00:36:33.140 | although I completely agree with Rick on this point.

00:36:36.260 | I don't only buy Colorado stocks.

00:36:38.260 | You shouldn't only buy stocks in your state.

00:36:41.060 | Diversification is very important,

00:36:45.460 | and the next magnificent seven or 17 or whatever

00:36:48.760 | might be international stock.

00:36:50.700 | And don't forget, they have some wars going on,

00:36:54.500 | and hopefully that will get resolved

00:36:56.100 | and is part of the reason

00:36:57.800 | why international has performed so poorly.

00:37:01.100 | - Okay, thank you.

00:37:01.940 | Let's move on.

00:37:02.780 | - Yeah, one thing, by the way,

00:37:03.620 | we got a 6% return over the last 15 years.

00:37:06.340 | I mean, if you think about it,

00:37:07.500 | the expected return from equity

00:37:09.420 | is only maybe 4% over the risk-free rate, okay?

00:37:14.220 | And assuming that the natural risk-free rate

00:37:16.780 | out there is 3%,

00:37:18.060 | that would make the return of stock about 7%.

00:37:21.460 | We've only been 1% below that.

00:37:23.360 | What's dwarfing this whole thing

00:37:24.900 | is the great return of U.S. stocks.

00:37:27.260 | So it really hasn't been bad for international.

00:37:29.780 | It's just that U.S. looks so great relative to it.

00:37:33.740 | - Good point.

00:37:34.580 | Okay, we're gonna move on to some audience questions.

00:37:37.900 | Is there a reason to buy actively managed bond funds

00:37:41.340 | instead of just a bond index fund?

00:37:43.860 | I've been told since bond rates are somewhat predictable,

00:37:48.020 | active management is better.

00:37:50.620 | - No.

00:37:51.740 | (audience laughing)

00:37:53.980 | - Yes, but only if you're selling them

00:37:55.700 | and you can make a lot of money, but absolutely not.

00:37:59.020 | - Well, the Vanguard Municipal Bond Funds,

00:38:03.860 | not their new index funds,

00:38:06.020 | but their Municipal Bond Funds are actively managed.

00:38:08.500 | So as I say, they look more like a Municipal Bond Index Fund

00:38:13.300 | because they have more holdings

00:38:14.500 | than most Municipal Bond Index Funds.

00:38:16.260 | But so no, you don't need active management.

00:38:20.260 | - Yeah, I'm a Tobin separation theorem fundamentalist,

00:38:24.220 | which means that you have risky assets on one side

00:38:27.740 | and riskless assets on the other side.

00:38:30.440 | And so the only bonds that I wanna own are U.S. Treasuries.

00:38:35.440 | Thank you.

00:38:36.320 | If I wanna take credit risk, I'll buy stocks

00:38:38.260 | 'cause that's where you're getting the credit premium from.

00:38:40.580 | It's basically an equity premium that you're taking.

00:38:45.300 | And so there's no need to buy a fund

00:38:47.940 | if you're just buying U.S. Treasuries,

00:38:49.100 | just buy Treasuries at auction.

00:38:51.360 | You don't even have to pay Vanguard

00:38:52.700 | three or four basis points of expense ratio.

00:38:54.980 | Why do it?

00:38:55.820 | - Another question, Warren Buffett and Charlie Munger

00:38:59.700 | have been cited a number of times.

00:39:02.060 | What are your thoughts about including Berkshire Hathaway

00:39:04.740 | in a portfolio?

00:39:05.940 | - No.

00:39:08.100 | (audience laughing)

00:39:10.540 | It's a very low cost mutual fund type.

00:39:14.580 | It's not a mutual fund, but it's a type of thing.

00:39:17.260 | Typically, if somebody has it and they have a gain,

00:39:19.320 | I'm not gonna sell it, but I don't recommend

00:39:21.340 | owning it outside of my total stock index fund.

00:39:24.460 | - You get this a lot when people do not want income

00:39:28.660 | in their taxable portfolio.

00:39:30.820 | They don't even want a dividend,

00:39:31.900 | even the 1.5% or so dividend

00:39:34.020 | that the U.S. stock market is paying.

00:39:35.420 | They don't even want that.

00:39:37.160 | So they say, well, what if I just bought

00:39:39.260 | all Berkshire Hathaway, and I can't agree with that.

00:39:43.380 | I think you're better off buying a total stock market

00:39:45.500 | and paying the tax on the 1.5% dividend.

00:39:48.020 | - A question, we talk a lot about stocks,

00:39:52.020 | bonds, international stocks.

00:39:53.980 | Do you believe that real estate or REITs

00:39:56.620 | or real estate ETFs should have a place

00:39:58.980 | in a diversified portfolio?

00:40:00.820 | - You own REITs within a total stock index fund.

00:40:06.740 | With that said, the vast majority of commercial real estate

00:40:11.740 | is not in public markets.

00:40:15.060 | So I certainly believe that you can put some

00:40:19.540 | of the Vanguard REIT index fund in there,

00:40:21.660 | but you've gotta stick with it.

00:40:23.440 | And the correlations with stocks are low,

00:40:28.260 | but that's not negative.

00:40:30.260 | Negative means they typically move in opposite directions.

00:40:33.300 | So I think there is some reason

00:40:35.240 | to have a little bit of a ultra low cost REIT index fund.

00:40:39.100 | - The most popular piece we ever wrote

00:40:42.740 | was entitled The Ultimate Buy and Hold Strategy.

00:40:46.660 | And there wasn't really anything ultimate about it,

00:40:50.460 | but people would read it.

00:40:51.760 | What it did say is that here are 10

00:40:57.180 | different equity asset classes.

00:40:59.740 | And by the way, we still update this article every year.

00:41:03.700 | And those 10 equity asset classes are large-cap blend,

00:41:07.140 | large-cap value, small-cap blend, small-cap value,

00:41:10.700 | international small-cap blend and small-cap value,

00:41:14.680 | international large-cap blend and large-cap value,

00:41:18.560 | and REITs.

00:41:20.400 | And if you build a portfolio,

00:41:23.320 | 10% in each of those great equity asset classes,

00:41:28.320 | it has historically, in the past, worked out quite well.

00:41:33.720 | And produced a very nice unit of return per unit of risk.

00:41:38.720 | So I do believe that in a tax-deferred or tax-free account,

00:41:44.560 | REITs would be a legitimate thing to own.

00:41:46.920 | - For us, you noticed I didn't say no at the beginning.

00:41:51.520 | So we do own about, for portfolios,

00:41:55.080 | about 5% REITs in clients tax-deferred

00:41:59.500 | or tax-free accounts, usually tax-deferred.

00:42:02.880 | - Yeah, that's a good point.

00:42:03.760 | You should only own them in a tax-deferred account.

00:42:06.440 | REITs have had historically very high returns.

00:42:09.640 | And I believe that one of the reasons for that

00:42:11.600 | is because the federal law mandates

00:42:13.960 | they have to pay out 90% of their earnings in dividends.

00:42:18.880 | And unfortunately, large industrial corporations

00:42:21.680 | and technology firms have an alarming tendency

00:42:24.600 | of wasting internally-generated capital

00:42:27.560 | on less-than-optimal projects.

00:42:30.680 | And so federal law saves REITs from doing that.

00:42:33.760 | And that's one of the reasons why the returns are so good.

00:42:35.720 | So I think that over-weighting them

00:42:37.040 | is probably not a bad idea.

00:42:38.720 | - So I wrote a piece for Forbes,

00:42:42.560 | I don't know how long ago it was, maybe 15 years ago,

00:42:45.720 | called The Total Economy Portfolio.

00:42:49.600 | So allocating your equity allocation a little bit more

00:42:54.240 | to what the economy is rather than what the stock market is.

00:42:57.960 | Because we can't make a decision

00:42:59.460 | whether a company's gonna capitalize themselves

00:43:02.220 | privately or with debt or by going public

00:43:06.320 | in the stock market.

00:43:07.440 | So there are certain industry groups out there

00:43:10.320 | that have very small amount of allocation

00:43:15.000 | to the stock market, like real estate,

00:43:17.240 | but they're a huge part of the economy,

00:43:18.760 | well over 10% of the economy is commercial real estate

00:43:21.480 | when you look at national income.

00:43:23.200 | So if you wanted your portfolio to look more like

00:43:26.080 | the economy rather than the stock market,

00:43:29.040 | then you could put maybe 10% of your equity allocation,

00:43:33.120 | could go to real estate and that nudges the portfolio

00:43:37.080 | more towards what the economy looks like.

00:43:40.440 | And I'll add to that, Paul will like this,

00:43:43.280 | that small cap value mirrors private equity

00:43:47.600 | as far as the return and risk in many ways.

00:43:51.640 | So if you wanted to include private equity

00:43:54.480 | in your portfolio, you don't need to go out

00:43:56.280 | and buy private equity funds,

00:43:57.540 | you could buy a small cap value index fund

00:44:01.220 | and that, again, looks more like the economy

00:44:04.680 | than it does the stock market.

00:44:06.200 | Now, is all this necessary?

00:44:07.780 | No, not really, but it makes for a good story

00:44:10.360 | for Forbes and they liked it.

00:44:14.020 | - You were doing so well, Rick.

00:44:15.640 | (laughing)

00:44:18.100 | - So you can, if you wanna add real estate, that's fine.

00:44:20.780 | If you don't, that's fine too.

00:44:23.020 | - If someone calls you up with a private real estate deal,

00:44:25.780 | hang up.

00:44:26.740 | (laughing)

00:44:28.400 | - A different kind of question.

00:44:30.200 | As the deficit grows, do you think the government

00:44:34.240 | could change laws to tax Roth IRAs?

00:44:38.040 | Should I be worried about that?

00:44:39.640 | - I'm gonna, I wanna grab this one before all the guys do.

00:44:42.460 | So first off, you have to remember the government

00:44:44.620 | is not a household and that deficits,

00:44:48.540 | if you don't have, whoa, this is getting bad.

00:44:51.860 | Should everybody turn theirs off and yeah,

00:44:53.780 | maybe that'll help, yeah.

00:44:55.340 | So deficits do matter because you have to worry

00:44:58.660 | about inflation, but the government year to year

00:45:03.280 | can change how they deal with the deficits.

00:45:05.580 | We don't ever have to totally pay back the whole deficit.

00:45:10.580 | And in fact, that would create austerity.

00:45:13.260 | So you can't predict the future of taxes.

00:45:17.500 | I do think tax rates will go up at some point

00:45:20.300 | because we're at the lowest tax rates ever.

00:45:22.660 | We have great discrepancy in income inequality

00:45:26.460 | compared to a long time,

00:45:27.660 | which tends to cause social unrest.

00:45:29.620 | That's the reason taxes need to go up.

00:45:32.120 | So it will happen.

00:45:33.660 | Will they make Roths, so the question was,

00:45:36.900 | will they start taxing Roths?

00:45:39.220 | I, you know, that's political suicide.

00:45:41.780 | So I don't think they're gonna go back on what's been done.

00:45:45.460 | They just usually, and I worked in Washington, guys,

00:45:49.000 | so I know a lot of how Washington works

00:45:51.940 | and how their brains think.

00:45:53.540 | And so what's gonna happen is they will change

00:45:56.180 | the rules going forward for the most part.

00:45:59.660 | And I know everybody on this panel

00:46:01.340 | is gonna say something different

00:46:02.580 | because I'm a contrarian on tax and economic policy.

00:46:06.860 | - Yeah, I'm gonna tell you all how the government

00:46:09.100 | financed its massive deficit for the stimulus package,

00:46:14.100 | various stimulus packages they had

00:46:16.580 | during the COVID epidemic.

00:46:18.940 | And the way they did it was by inflating the way

00:46:21.340 | the value of your dollars.

00:46:23.620 | You were getting 0% on treasuries.

00:46:25.640 | Prices went up by 20% over a three-year period.

00:46:29.620 | And that's how the government paid for that deficit

00:46:32.320 | was they just inflated it away.

00:46:34.340 | - They printed the money.

00:46:36.380 | - When I started-- - Okay, but that's okay.

00:46:38.260 | - Sorry. - Sorry.

00:46:39.680 | - When I started investing in 1963

00:46:42.620 | and then I became a stockbroker in '66.

00:46:45.060 | But in that period, marginal tax rates were 90%

00:46:49.860 | and then dropped down to 70%.

00:46:52.840 | And it seemed like people went to work

00:46:55.980 | as people go to work today

00:46:57.820 | trying to do the best that they could.

00:46:59.940 | And the bottom line is I tell young people today,

00:47:05.540 | get all the money you can into a Roth.

00:47:08.180 | We have no idea what future tax rates are going to be,

00:47:11.100 | but my gut tells me they could be 70% again.

00:47:16.060 | I mean, I know it's hard to believe that,

00:47:18.880 | but they could.

00:47:20.140 | And I think it makes sense to try

00:47:22.700 | to get that money set aside and protect it.

00:47:26.300 | It'll be worth the price of admission,

00:47:28.900 | certainly if I'm right.

00:47:30.980 | - Okay, I think we're gonna squeeze in one last question

00:47:33.580 | and then we're gonna wrap up.

00:47:35.020 | As more and more money is in index funds,

00:47:40.180 | does that mean that there's a very small percentage

00:47:43.320 | of the investors out there

00:47:45.240 | who are actually determining the value of securities?

00:47:49.380 | Should we be concerned about that?

00:47:51.300 | - No, absolutely not.

00:47:53.160 | The whole thing is absurd.

00:47:54.460 | It's really a way for the active managers

00:47:57.240 | to try to say, hey, you need to invest with us

00:48:01.380 | because indexing is bad.

00:48:02.940 | Indexing is Marxism.

00:48:04.140 | Indexing is this.

00:48:05.060 | Indexing is that.

00:48:05.900 | I mean, I've been hearing this since what, 1976

00:48:09.820 | when indexes were first formed, right?

00:48:12.100 | Vogel's Folly, Vogel's Folly, right?

00:48:14.220 | The whole, I mean, we've been hearing this now

00:48:15.560 | for what, almost 50 years.

00:48:17.880 | So the answer is no, we don't have to worry about that.

00:48:20.900 | - If 90% of the market of stocks are indexed

00:48:25.180 | because active managers trade 10 times as much

00:48:28.740 | as passive managers do,

00:48:30.500 | that still means that 50% of price discovery

00:48:32.820 | is going to be done by active managers.

00:48:35.180 | That's plenty.

00:48:36.460 | - Okay, listen, I'm gonna say thank you

00:48:38.340 | to our amazing panel.

00:48:39.940 | (audience applauding)

00:48:43.940 | - Thank you.

00:48:44.940 | - And thank you to the audience

00:48:47.860 | for some really excellent questions as well.

00:48:50.540 | (audience applauding)

00:48:53.700 | you

Bogleheads® Conference 2024 Bogleheads Investing Experts Panel

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