Bogleheads® Chapter Series – Framing Financial Decisions

00:00:00.000 | [music]

00:00:04.600 | Welcome to the Bogleheads Chapter Series.

00:00:07.360 | This episode was hosted by the Minnesota Bogleheads

00:00:10.000 | and recorded June 12th, 2021.

00:00:13.160 | It features Alan Roth and Mel Lindauer.

00:00:15.540 | The topic is Framing Financial Decisions

00:00:17.760 | and Bogleheads Philosophy.

00:00:20.000 | Bogleheads are investors who follow

00:00:21.500 | John Bogle's investing philosophy

00:00:23.360 | for attaining financial independence.

00:00:25.840 | This recording is for informational purposes only

00:00:28.560 | and should not be construed as investment advice.

00:00:32.400 | Alan Roth and Mel Lindauer.

00:00:34.160 | So, Alan, he's the founder of WealthLogic.

00:00:37.240 | He's been working in the investment world

00:00:38.800 | for 25 years of corporate finance.

00:00:41.700 | He served as a corporate finance officer

00:00:43.400 | of two multibillion-dollar companies

00:00:45.360 | and consulted with many others.

00:00:47.660 | Alan has decades of experience in portfolio construction

00:00:50.300 | and performance benchmarking.

00:00:51.800 | He's appeared on numerous TV and radio shows,

00:00:54.600 | which I can attest to.

00:00:56.300 | Alan's everywhere, I think.

00:00:58.540 | You turn on a show, and, hey, there's Alan.

00:01:01.240 | He takes pride in being mocked on a semi-regular basis

00:01:04.000 | by some financial professionals for his hourly fee model

00:01:07.200 | and his obvious inability to make himself rich,

00:01:09.800 | kind of like Jag Bogle.

00:01:12.340 | He is also the author of "How a Second Grader

00:01:14.100 | Beats Wall Street."

00:01:15.400 | He writes for the AARP, "Wall Street Journal," and others.

00:01:17.940 | He's taught investments and behavioral finance

00:01:19.800 | at the University of Denver.

00:01:21.800 | Despite many of his credentials, CFP, CPA, MBA,

00:01:27.040 | he has earned that he has earned.

00:01:28.800 | He claims he can still keep investing simple.

00:01:31.640 | His professional goal is to never

00:01:33.100 | be confused with Jim Cramer.

00:01:35.700 | So that's Alan.

00:01:36.340 | And before we move on to Alan's thing, Mel Lindauer.

00:01:40.000 | I call him the first bogal head, the first Vanguard diehard.

00:01:43.840 | Why is that?

00:01:44.540 | I think we have some questions where

00:01:46.040 | we'll dig into that history.

00:01:48.100 | For many of you that don't know, Mel was a marine.

00:01:51.040 | He spent a lot of time in the Marine Corps

00:01:53.440 | in the station out of Philadelphia.

00:01:54.940 | And that's where he remained after his discharge.

00:01:57.640 | At Jag Bogle's request, Mel founded and served

00:02:01.640 | as president of the John C. Bogle Center

00:02:03.740 | for Financial Literacy, from its founding way back in 2010

00:02:07.340 | until his resignation in 2019.

00:02:10.540 | Mel and his friend and co-author, Taylor Larimer,

00:02:13.300 | arranged the first get-together with Jag Bogle

00:02:15.140 | and about 20 folks down in Miami in 2000, 21 years ago.

00:02:20.240 | That was to be the first of the annual Bogleheads conferences.

00:02:24.440 | Mel also co-authored the two best-selling Boglehead books

00:02:27.340 | on investing, the former columnist for Forbes.com.

00:02:31.040 | He was a moderator and contributor

00:02:32.940 | at the original Morningstar diehard forum

00:02:35.840 | and now continues that as moderator and contributor

00:02:38.440 | at the Bogleheads.org forum.

00:02:41.940 | Money Magazine honored Mel as one of the money heroes

00:02:44.600 | for his work in investor education over the years.

00:02:47.940 | Wow.

00:02:48.500 | So these two guys, I'm going to shut up here

00:02:50.540 | so we can hear from these guys.

00:02:51.840 | So, Alan, take it away, please.

00:02:54.640 | Great.

00:02:55.140 | Thank you.

00:02:55.640 | Can you see the slide?

00:03:10.040 | Can you guys see the slide?

00:03:16.180 | Yeah, we sure can, Alan.

00:03:17.180 | Looks great.

00:03:17.680 | OK.

00:03:18.180 | Good.

00:03:18.680 | OK.

00:03:19.880 | Terrific.

00:03:21.980 | Well, first of all, thank you for having me.

00:03:23.880 | And to all of you out there, you do so much

00:03:27.200 | on the Bogleheads forum to help so many people everywhere.

00:03:31.080 | And that's a wonderful thing.

00:03:36.040 | So as a licensed financial planner,

00:03:38.760 | I've got to give a couple of legal disclosures.

00:03:43.000 | Number one, I despise coming after Mike Piper.

00:03:46.680 | The guy is so darn good and gives away

00:03:51.360 | all of his brilliance without any incentive to make profit.

00:03:55.460 | Makes me look very bad.

00:03:56.760 | He used to live out here.

00:03:58.100 | I so miss him.

00:04:00.020 | And Mel, way to go, because I think

00:04:01.420 | you're the guy that discovered him and brought him

00:04:03.740 | into the Bogleheads.

00:04:06.940 | Second of all, as a licensed financial planner,

00:04:09.180 | I can exaggerate.

00:04:10.940 | So I owe my life to Jeff, who saved my life

00:04:14.340 | about a dozen years ago.

00:04:16.380 | When I wrote a column for Money Magazine called The Mole,

00:04:20.780 | it was kind of the hidden secrets.

00:04:22.460 | It was an anonymous column of the hidden secrets

00:04:26.260 | of the financial services industry.

00:04:30.100 | And I made a post that allowed people to track who I was.

00:04:34.940 | And Jeff protected my identity from the insurance world.

00:04:41.220 | So thank you.

00:04:42.220 | A little exaggeration.

00:04:44.060 | That's OK, sure.

00:04:45.700 | So I'm going to talk--

00:04:47.020 | a lot has changed since The Mole.

00:04:49.060 | Expenses have gone way down.

00:04:51.020 | There's now more money in US stock index funds

00:04:53.740 | than active funds.

00:04:55.340 | I mean, Jack Bogle and all of you really have succeeded.

00:04:59.940 | So I'm going to talk a little bit about a mole-like--

00:05:02.980 | still how my industry tends to frame things that

00:05:06.620 | may not be good for you.

00:05:08.860 | And two of the largest pet peeves that I have now

00:05:13.020 | are munis and mortgage.

00:05:14.700 | And I'm going to start with the mortgage.

00:05:17.900 | So number one, asset allocation.

00:05:20.500 | And here's an example.

00:05:21.820 | Let's say we have a person that has a half a million dollars

00:05:24.980 | in stocks, a half a million dollars in bonds,

00:05:27.860 | and a $400,000 house with a $200,000 mortgage.

00:05:34.940 | So the common framing, the way my industry

00:05:37.660 | would like it to be framed, is you

00:05:39.220 | have a million dollar portfolio.

00:05:40.900 | It's 50% stocks, 50% bonds, and $200,000 home equity.

00:05:46.900 | And I say, baloney.

00:05:49.340 | This person has an $800,000 portfolio

00:05:53.340 | that has $500,000 in stocks and $300,000 in bonds

00:05:58.300 | and a $400,000 home.

00:06:00.700 | Of course, both have the same net worth.

00:06:04.740 | And the reason why is that the mortgage is just

00:06:08.260 | the opposite of a bond.

00:06:11.420 | When you buy a bond or a bond fund, you're lending money.

00:06:14.060 | When you take a mortgage out, you're

00:06:16.620 | paying a bank principal and interest.

00:06:19.860 | So how you finance a house has no impact on the price

00:06:23.620 | you ultimately sell it for.

00:06:26.500 | And it turns out that borrowing money at 2 and 1/2%

00:06:30.260 | and lending it out at 1, 1 and 1/4%,

00:06:33.100 | it's not a great strategy, especially the new tax law

00:06:37.660 | makes it even less great, where people aren't getting much,

00:06:41.100 | if any, of a tax deduction for.

00:06:43.660 | But the fixed income, the bond fund, is typically taxable.

00:06:47.780 | And most of my industry wants you

00:06:52.860 | to compare that 2 and 1/2% mortgage

00:06:54.900 | to the overall return of the portfolio.

00:06:58.100 | If you think about it, planners that

00:07:00.380 | charge assets under management or commission, and banks,

00:07:04.100 | of course, they all make money from this.

00:07:06.740 | And whenever I write about this, I get lots of nasty emails.

00:07:11.540 | And my favorite one was only a baboon

00:07:14.340 | would do what I recommended.

00:07:15.740 | So I went back to him.

00:07:17.300 | I said, here's a deal.

00:07:20.740 | I'll lend you money at--

00:07:23.820 | or you lend me money at 1%.

00:07:25.860 | I'll lend it back to you at 2 and 1/2%.

00:07:27.620 | You can invest it in the market and pocket the difference.

00:07:31.020 | So it really is that simple.

00:07:33.060 | There's only one reason not to pay off your mortgage

00:07:36.940 | if you have high-quality fixed income paying less after taxes.

00:07:41.740 | And that's because you need it for liquidity

00:07:44.140 | to be able to sleep at night.

00:07:45.740 | Back to a cap-weighted index fund.

00:07:52.340 | The argument is, sure, what Jack created was great.

00:07:55.860 | But there's far more opportunities now.

00:08:00.660 | If you buy a cap-weighted index fund,

00:08:02.420 | you're guaranteed to underperform the market

00:08:04.460 | by the fees.

00:08:07.260 | You're just buying more of those overvalued large-cap growth

00:08:12.860 | companies.

00:08:13.740 | And look, since 1928, the data is

00:08:16.420 | compelling that small-cap value has trounced

00:08:19.900 | the cap-weighted portfolio.

00:08:21.820 | That's what many in my industry want you to believe.

00:08:25.500 | But a cap-weighted index fund must

00:08:29.420 | beat the average dollar invested in the market.

00:08:33.780 | It has to happen that way.

00:08:35.700 | Bill Sharpe's arithmetic of active investing shows that.

00:08:40.100 | It's second-grader math.

00:08:43.780 | Picking parts of the market or weighting differently,

00:08:46.700 | it is active investing.

00:08:49.140 | And then finally, I love it when I hear data since 1928, et

00:08:53.860 | cetera.

00:08:54.580 | Well, no one that I know has been investing in small-cap

00:08:57.820 | value since 1928.

00:09:00.100 | And by the way, it would have been outrageously expensive.

00:09:04.780 | So a lot of this smart beta is just trying to beat the market.

00:09:12.420 | What Jack Bogle created, a cap-weighted index mutual fund,

00:09:16.780 | is brilliant.

00:09:18.540 | Now, when I teach behavioral finance,

00:09:22.260 | I ask people to find patterns out of this.

00:09:25.980 | And people are pretty good at saying, hey,

00:09:28.060 | the right hemisphere is far more filled in.

00:09:30.820 | The bottom right is completely filled in.

00:09:34.020 | Column C is blank.

00:09:35.460 | Column D is all filled in, et cetera.

00:09:38.700 | And we're really good at finding patterns.

00:09:41.100 | This was just a random number generator

00:09:43.660 | where each cell had a 50% chance of being filled in.

00:09:48.420 | So how incredibly unusual would it

00:09:52.300 | be to find patterns over decades and decades

00:09:57.700 | with thousands of stocks, et cetera?

00:10:00.860 | So we now have more than 600 investing factors.

00:10:04.260 | And all of these work brilliantly

00:10:06.260 | in the past, which would be a great strategy if any of us

00:10:10.020 | had a time machine.

00:10:12.500 | Mine doesn't work.

00:10:15.580 | So the term smart beta, you're finding some of these factors.

00:10:19.100 | And it turns out dumb beta wasn't so dumb.

00:10:22.180 | About six, seven years ago, I'd be at a conference, smart beta,

00:10:25.420 | factor tilting, free lunch, et cetera.

00:10:28.100 | And you can see how small cap in value

00:10:32.780 | drastically underperformed the market, and especially

00:10:35.900 | large cap growth.

00:10:38.060 | And the total dollar return is pretty amazing.

00:10:41.380 | It will take years and years and years for small cap value

00:10:46.140 | to catch up.

00:10:47.300 | Why?

00:10:49.220 | Things change.

00:10:50.740 | If we look at what were the 10 most valuable companies

00:10:54.940 | in the United States in 1980 and compare them to 40 years later,

00:11:01.700 | it's a different world.

00:11:03.380 | And we go back to 1900.

00:11:05.380 | The majority of the value of the US stock market

00:11:07.940 | was in the railroad industry.

00:11:11.020 | So things change.

00:11:12.420 | And finding patterns of what worked in the past

00:11:15.780 | is not the ticket to work going forward.

00:11:19.540 | And by the way, in 1981, I went to work

00:11:21.980 | for Exxon, number three, which later bought

00:11:24.740 | Mobil, number seven, and today is in the top 25 combined.

00:11:28.860 | And then drivers of stock market returns,

00:11:35.820 | why does market cap indexing work?

00:11:39.340 | If we look at what total stock market did last year,

00:11:45.260 | so it's the total return of the Vanguard total stock market,

00:11:49.460 | including dividend reinvestments,

00:11:51.700 | and compare it to the same smart value

00:11:55.220 | tilting of the same companies, that smart beta

00:12:00.580 | got less than half of the total return.

00:12:03.620 | Why?

00:12:04.620 | Because every year, there's a handful

00:12:06.780 | of companies that really drive the return of the total stock

00:12:11.380 | market.

00:12:12.220 | Last year, it was Apple, Amazon, Microsoft, et cetera.

00:12:18.260 | And again, if I knew what next year's would be,

00:12:21.100 | I would be having my own rocket ship company

00:12:25.780 | and going into space before Jeff Bezos.

00:12:32.180 | And we have an addiction to prediction.

00:12:36.380 | It's a human trait that we hate randomness.

00:12:40.060 | So we all have to get forecasts of what's

00:12:43.180 | going to outperform next year.

00:12:45.300 | And my friend, Christine Binns, does

00:12:47.100 | a great job of getting some of these forecasts together.

00:12:51.940 | And all of them, especially when you read the logic,

00:12:54.460 | are very, very compelling.

00:12:56.940 | And even Vanguard's estimate of future returns,

00:13:04.020 | and at least they do it better.

00:13:05.620 | They give a range, and they do it over a 10-year period.

00:13:10.460 | But if you look at what they are saying, US equity,

00:13:14.380 | and you compare it to the international equity,

00:13:18.500 | two bars above, they're saying international will outperform

00:13:23.140 | or is likely to outperform, which, by the way,

00:13:25.460 | I happen to agree with, not by the magnitude they're showing.

00:13:28.980 | But where I disagree with is if you look at the bar on the left,

00:13:33.860 | they're showing it has less downside risk.

00:13:36.900 | And again, if I knew how to get a greater return with less

00:13:40.380 | downside risk, I would be a billionaire.

00:13:45.180 | And then it's absolutely amazing to me

00:13:48.020 | when we look at these predictions

00:13:51.140 | that very, very few people go back and look

00:13:54.220 | at what their predictions were years earlier.

00:13:58.860 | And Jeremy Grantham, he paints a really compelling picture.

00:14:03.420 | And it's going to be pretty ugly for stocks, especially

00:14:06.180 | US stocks.

00:14:07.300 | But that's exactly what he said about seven years ago.

00:14:11.340 | So it's very difficult to accept that we don't know.

00:14:16.940 | But if you think about it, look at what happened last year.

00:14:21.020 | We had a pandemic.

00:14:22.460 | We had surging unemployment.

00:14:24.820 | We had plunging GDP.

00:14:27.260 | We had racial unrest.

00:14:29.020 | We had political discourse like I've never seen before.

00:14:33.580 | And the US stock market gained 21.03%.

00:14:38.700 | It really is hard to predict what's going to happen.

00:14:44.140 | Interest rates.

00:14:45.940 | I'll admit that I don't like interest rates right now.

00:14:49.620 | But they've been far worse.

00:14:51.900 | The common framing is they're an all-time low.

00:14:54.540 | They have to go up.

00:14:56.060 | It was once so easy to get income from bonds.

00:15:00.420 | And we've got to avoid bonds except for things

00:15:03.340 | like the ultra-short or floating rates.

00:15:06.380 | And there are better alternatives.

00:15:08.020 | This is how my industry likes to frame it.

00:15:10.380 | The ultra-short bond fund, which, by the way,

00:15:13.900 | Schwab had an ultra-short bond fund that completely

00:15:16.780 | blew up in 2009 during the financial crisis.

00:15:21.140 | Vanguard has one now that is yielding, I think, 0.45%

00:15:26.380 | and is in barely investment grade.

00:15:30.260 | High-yield bonds, a.k.a.

00:15:32.660 | junk or floating rates.

00:15:35.140 | All floating-rate bonds are junk bonds because guess what?

00:15:38.900 | Credit-quality companies don't need to issue variable debt.

00:15:43.580 | Dividend stocks, REITs.

00:15:45.980 | I love it.

00:15:46.540 | I keep hearing this commercial.

00:15:47.980 | NRIA, a safe 10% return.

00:15:52.980 | If it were so safe, don't you think pension plans

00:15:55.420 | would pour money in?

00:15:58.660 | Why would they be doing a zillion different advertisements

00:16:03.660 | for it, spending a lot of marketing money?

00:16:07.060 | Master limited partnerships, most annuities,

00:16:10.100 | individual bonds rather than bond funds.

00:16:14.060 | And these are things that I think are dangerous.

00:16:16.940 | The way I tend to look at bonds and interest rates

00:16:21.220 | is, first of all, they've been far worse.

00:16:24.100 | Go back to 1981.

00:16:26.460 | And I tell clients this.

00:16:28.020 | And I said, do you remember when you could earn,

00:16:30.020 | if they're this old, a 12% return on a CD or a treasure?

00:16:35.300 | And they smile.

00:16:36.460 | Then I say, think about it.

00:16:38.420 | You can put $100,000 in.

00:16:40.980 | You get $12,000 interest.

00:16:43.980 | A third of it went to the state and federal government in taxes.

00:16:47.380 | You're left with $8,000 or an 8% return.

00:16:50.420 | And inflation was about 14%.

00:16:53.740 | So you lost 6% of your spending power.

00:16:57.820 | The purpose of fixed income has never been income.

00:17:01.740 | The top economists have called the direction of interest rates

00:17:04.900 | correctly, meaning up or down 30% of the time

00:17:10.380 | over the last 50 years.

00:17:13.020 | So in other words, they've been wrong 70%

00:17:16.020 | even though they had a 50% chance of getting it right.

00:17:21.780 | And I could explain why that happens.

00:17:23.740 | I mean, it's absurd.

00:17:25.140 | If we all knew that interest rates were going to go up,

00:17:27.860 | then when the Treasury has its auction next week,

00:17:30.700 | we would bid less to get a greater return.

00:17:32.980 | And rates already would have gone up.

00:17:35.900 | Now, there are some better ways to earn more.

00:17:38.540 | A lot of 401(k), 403(b) plans had negotiated contract

00:17:43.580 | with insurance companies that they never

00:17:45.740 | dreamed rates would be this low that are still

00:17:49.140 | paying pretty high.

00:17:50.260 | TIAA, on their annuity contract, on a lot of these 403(b)s,

00:17:56.380 | you've got to read all the fine print.

00:17:58.700 | But they have a minimum guaranteed 3%.

00:18:02.980 | The Thrift Savings Plan, the G Fund yielding about 1

00:18:06.660 | and 5/8, I wish I had direct--

00:18:10.100 | I wish I had access to that.

00:18:12.220 | Direct CDs can pay more.

00:18:14.020 | Insured Savings Account, I still have, believe it or not,

00:18:17.460 | a savings account that's yielding 1% and CUA insured

00:18:24.340 | versus what Vanguard or Fidelity or any brokerage are paying,

00:18:27.300 | 0.01%.

00:18:29.460 | And then finally, like I said, paying down the mortgage

00:18:32.900 | because the mortgage is the inverse of a bond.

00:18:35.900 | Next, insurance and inertia.

00:18:42.340 | You probably heard the saying--

00:18:44.380 | in fact, it was in my book and probably wrong--

00:18:47.100 | that Albert Einstein said the power of compounding

00:18:49.380 | is the most powerful force in the universe.

00:18:52.180 | Jason Zweig has educated me.

00:18:53.940 | We don't know for sure, but he probably never said that.

00:18:59.100 | So I call inertia the most powerful force

00:19:03.300 | in the universe.

00:19:04.700 | So when it comes to insurance, the industry

00:19:07.300 | likes to say, protect yourself and your family

00:19:09.580 | no matter what.

00:19:10.940 | Buy as much insurance as you want.

00:19:14.060 | I love this one.

00:19:15.420 | If you love your family, you're going

00:19:17.100 | to buy permanent insurance rather than temporary term

00:19:20.460 | insurance because 99% of term policies

00:19:24.940 | will never pay out a dime.

00:19:28.180 | And of course, you insure your house.

00:19:29.820 | Why not insure your portfolio--

00:19:32.380 | spherical annuity, universal life, et cetera?

00:19:37.780 | Now, I say baloney.

00:19:40.860 | Number one, insurance companies are for profit.

00:19:44.260 | Even not-for-profit insurance companies,

00:19:46.900 | mutuals, have to make a profit.

00:19:51.380 | So you insure yourself for only what you cannot afford to lose.

00:19:56.540 | So as wealth grows, most insurance needs dissipate.

00:20:01.860 | I have no insurance on my cars, no--

00:20:04.100 | I'm sorry-- collision or comprehensive.

00:20:06.860 | I have liability and umbrella.

00:20:10.420 | And then permanent insurance, it's an indirect investment

00:20:14.340 | if you think about it.

00:20:15.820 | If you buy a whole life policy from Northwestern Life,

00:20:21.140 | look up Northwestern Life, what their balance sheet is in,

00:20:25.420 | and you're going to see that they're roughly 85% to 90%

00:20:28.900 | in fixed income.

00:20:30.340 | So you're going to get the return

00:20:31.740 | that you could have gotten had you invested it directly

00:20:34.860 | minus the commission's expenses and profits.

00:20:39.420 | The economics of term versus disability,

00:20:42.700 | both are very important.

00:20:44.620 | But if you think about it, if you buy a 30-year term policy,

00:20:49.260 | you get the best deal over the last few years of that policy

00:20:54.220 | because your likelihood of passing away

00:20:56.420 | increases as we age.

00:20:58.500 | Disability is just the opposite.

00:21:01.820 | We typically buy it when we're younger,

00:21:05.660 | and it pays out to age 65.

00:21:08.260 | So every year that you have it, your potential benefit from it

00:21:13.020 | gets less and less.

00:21:14.380 | I'll have doctors at 63, sometimes 64 years old,

00:21:18.100 | and they're still paying the premium, which

00:21:19.940 | has not gone down.

00:21:22.180 | And of course, yes, you insure your house,

00:21:24.340 | but you don't insure your house for a decline in value.

00:21:26.740 | All right, I said I had two main pet peeves.

00:21:33.220 | We talked about mortgage.

00:21:34.420 | The other are munis.

00:21:35.900 | And by the way, I own some of the Vanguard Intermediate Muni

00:21:40.020 | Bond Fund.

00:21:42.100 | So I'm not totally against munis,

00:21:43.900 | but I'm against putting a whole lot in munis.

00:21:46.540 | And I'm absolutely against the way my industry, even Vanguard,

00:21:49.940 | I hate to say it, will show the return of a muni bond.

00:21:54.820 | So the common frame is munis provide a safe tax-free return

00:21:59.660 | during Great Depression.

00:22:00.860 | The loss of muni bonds is only 0.5%.

00:22:03.940 | Munis are an inefficient market, where

00:22:07.100 | buying the bonds themselves yields more than twice

00:22:10.700 | what you could get on a Vanguard Muni Bond Fund.

00:22:14.820 | And then a recent portfolio was yielding over 5%

00:22:18.860 | federally tax-free.

00:22:20.660 | What's wrong with all that?

00:22:22.060 | Just about everything.

00:22:24.940 | Number one, munis, depending upon the type of calculation,

00:22:29.540 | whether you want to assume la-la land returns

00:22:33.460 | of these pensions or more realistic returns,

00:22:36.740 | they have about $2 to $6 trillion

00:22:38.580 | with a fund-funded pension and health care liabilities.

00:22:43.260 | Most companies got rid of defined benefit plans

00:22:46.980 | in favor of defined contribution, 401(k),

00:22:50.500 | 403(b) type of plans, but not so for state and local

00:22:56.900 | governments.

00:22:58.420 | So munis could have a new correlation to stocks,

00:23:01.580 | so that if stocks don't do very, very well over the next 10

00:23:05.620 | years, as the baby boomers have retired

00:23:09.220 | and those payments are going out,

00:23:10.860 | there could be a lot of stress on those munis.

00:23:13.580 | It's possible the government bails them out,

00:23:15.500 | but that's a lot of money.

00:23:18.580 | And then finally, when it comes to looking at the--

00:23:27.980 | sorry, the amount of people that have retired,

00:23:39.220 | there weren't these baby boomers that had retired back

00:23:42.700 | during the Great Depression.

00:23:44.340 | And then framing the return on principle,

00:23:47.260 | it should be completely illegal.

00:23:50.620 | So here's the way the trick works.

00:23:52.340 | And I've actually met with the executive director and all

00:23:55.140 | of her senior staff on this, who are really nice people.

00:23:59.340 | But I think what's going on is just tricking people.

00:24:03.900 | So I buy a bond.

00:24:06.700 | I sell you a bond.

00:24:07.900 | It has a $5 coupon.

00:24:10.260 | And we buy it for $112 a piece.

00:24:13.660 | So the yield is 4.46%.

00:24:17.820 | Now, this bond is going to mature or be called in three

00:24:20.900 | years at $100.

00:24:24.460 | So roughly that $12 divided by the three years,

00:24:29.420 | roughly $4 of that $5 is just return of your own principle.

00:24:35.940 | Your statement is going to show that as income.

00:24:40.580 | So the actual yield is 0.89%.

00:24:44.460 | And of course, me as your advisor

00:24:48.140 | who's building this bond portfolio,

00:24:50.020 | I may charge you 0.5% or 1% of that.

00:24:53.420 | So your actual nominal yield may be negative.

00:24:58.420 | And am I exaggerating?

00:24:59.700 | I just looked at a portfolio that

00:25:04.220 | had an average coupon of a little over 5%.

00:25:08.380 | The yield to worst, which is really the best case scenario,

00:25:12.740 | the yield to worst is a calculation

00:25:14.620 | of if the bond is called.

00:25:17.260 | And why it's a best case scenario

00:25:19.580 | is that if interest rates do go up,

00:25:22.100 | those bonds aren't going to be called

00:25:23.780 | and you're going to be stuck earning a lower than market

00:25:27.900 | rate.

00:25:28.700 | So the manager fee was 0.35% of the net yield of this client

00:25:32.940 | was 0.05%.

00:25:35.900 | In addition, spreads can easily be over 1% on a muni.

00:25:42.460 | So the stocks, there are national markets and such

00:25:46.700 | where they trade, but not so in the bond market.

00:25:50.500 | And munis can have that 1% spread.

00:25:53.420 | The largest spread I've ever seen,

00:25:55.460 | which you can't actually see until the bond is closed,

00:25:59.420 | the client came to me, had a 10.25% spread on a bond

00:26:04.940 | he had bought.

00:26:05.980 | And by the way, that client was a very senior attorney

00:26:09.620 | with the Securities and Exchange Commission,

00:26:13.580 | had no clue this was going on.

00:26:18.220 | What to do with the expensive bond fund.

00:26:21.580 | I'm not going to go through the expensive dog fund.

00:26:24.700 | You have to do a calculation of what the tax consequences are

00:26:30.380 | to getting out versus what the tax consequences are

00:26:33.540 | to staying in.

00:26:34.300 | Because they may be doing a lot of trading and the like.

00:26:39.780 | You have to look at what the life

00:26:41.860 | expectancy of the person is.

00:26:44.260 | Will the step-up basis still be there?

00:26:46.860 | But it's a fairly complex analysis.

00:26:52.100 | And usually, when I look at a portfolio,

00:26:54.260 | it's not a let's get out of everything.

00:26:58.260 | It's a what to get out of, what to stay in.

00:27:01.860 | And when you have an expensive dog fund, for gosh sakes,

00:27:05.540 | don't let dividend reinvestments keep going.

00:27:08.660 | You're just buying more of that same fund.

00:27:12.980 | A financial advisor, I'm a certified financial planner.

00:27:17.140 | You should stick with me because I'm a fiduciary.

00:27:19.900 | I'm legally obligated to put your interests ahead of mine.

00:27:26.020 | The CFP board enforces a higher standard.

00:27:30.380 | I'm thoroughly vetted.

00:27:31.900 | And look for advisors who have been publicly recognized.

00:27:37.180 | That's the pitch.

00:27:39.140 | The reality is the fiduciary standard isn't enforced.

00:27:44.100 | It isn't enforced by the SEC, state regulators,

00:27:47.620 | and the CFP board.

00:27:49.620 | For many years, I've given data to Kevin Keller, who

00:27:54.140 | is the CEO of the CFP board, showing

00:27:56.980 | that the only actions that they take

00:28:00.140 | come after that of other clients, other regulators.

00:28:07.820 | I once helped a client file a complaint

00:28:10.020 | on a double dipping where the CFP with fiduciary duty

00:28:17.060 | could make up his mind whether to charge a commission

00:28:21.540 | or percentage of assets going on.

00:28:23.380 | So he did both.

00:28:25.580 | The total fees were 5.29%.

00:28:29.060 | CFP board, first they lost the complaint,

00:28:32.100 | and then they ultimately found no wrongdoing.

00:28:38.020 | Jason Zweig, I don't know if you read some of his columns

00:28:42.260 | a couple of years ago, exposing hypocrisy of people

00:28:46.900 | that have had huge CFPs, that have had huge findings by FINRA

00:28:55.540 | and the like, but have completely clean records

00:28:58.780 | on the Let's Make a Plan CFP website.

00:29:02.380 | And some of these prestigious awards,

00:29:05.700 | I thought were for sale for any person,

00:29:08.380 | but it turns out you don't have to be a person.

00:29:13.620 | So in my office is a beautiful plaque

00:29:17.780 | of one of America's top financial planners.

00:29:21.380 | And the Consumers Research Council of America's

00:29:24.100 | prestigious address is Pennsylvania Avenue

00:29:27.820 | on Washington, Washington, DC.

00:29:30.820 | Only I got it for my dog, Max Tailwagger.

00:29:36.540 | And he also, I sent in an application for him

00:29:41.540 | to be one of America's top financial planners for doctors,

00:29:46.220 | which he was also approved for.

00:29:48.100 | And I was too cheap to spend the money on that.

00:29:51.060 | I deeply regret that decision.

00:29:53.860 | Poor Max, he passed away about a month ago.

00:29:56.500 | All right, next, Social Security.

00:30:02.260 | And by the way, I presented this slide at the White Coat

00:30:04.740 | Investor last month, or last March,

00:30:08.500 | with Mike Piper standing just a few feet from me.

00:30:12.660 | But he's actually OK with this.

00:30:13.940 | Let me explain why I took Social Security at age 62.

00:30:20.460 | Which Mike Piper and most people would

00:30:22.940 | say that was a wrong thing to do.

00:30:24.940 | But I only did it in my mind.

00:30:28.100 | So mentally, I'm receiving $2,400 a month.

00:30:34.700 | And what I'm really doing is buying an inflation-adjusted

00:30:39.180 | deferred annuity at a 40% discount

00:30:44.900 | over what you could have bought it from an insurance

00:30:47.380 | company a few years ago.

00:30:49.420 | Now the insurance companies aren't even

00:30:51.860 | offering that inflation-adjusted annuity.

00:30:55.380 | Why?

00:30:55.900 | Because the actuaries are way too afraid of inflation,

00:30:59.380 | and there's no way to hedge that.

00:31:03.220 | But what I tell clients, that it's OK to spend that money

00:31:06.540 | if they needed it.

00:31:07.900 | Take it out of their own portfolio,

00:31:09.500 | because what they're really doing

00:31:11.540 | is buying that inflation-adjusted,

00:31:15.140 | government-protected annuity.

00:31:21.100 | So the best Social Security calculator, by far,

00:31:25.260 | comes from that guy that makes me look bad, Mike Piper.

00:31:30.700 | It's absolutely brilliant.

00:31:32.380 | Having been an officer for a couple of insurance companies,

00:31:35.740 | he doesn't just assume that we're

00:31:38.020 | going to die in a certain year.

00:31:39.420 | That a 63-year-old male is going to live 26 years, whatever.

00:31:44.540 | He's doing what an actuary would do,

00:31:47.220 | looking at the probabilities of passing away each year.

00:31:51.340 | And he gives this away.

00:31:53.020 | It's just absolutely-- it's a brilliant calculator.

00:31:58.380 | Tax strategies when you retire--

00:32:00.700 | again, it's ironic that a very young guy, Mike Piper,

00:32:05.460 | really is the world's leading expert on some of this.

00:32:09.100 | But there's tax gain harvesting.

00:32:11.260 | You can take capital gains at a 0% tax bracket

00:32:18.380 | when your income is low and you're delaying Social Security

00:32:20.980 | before the RMD.

00:32:23.740 | And that's just tax gain harvesting.

00:32:25.740 | And you don't have to wait 31 days, by the way.

00:32:28.300 | Only for tax-- there's a tax loss wash sale, not a tax gain

00:32:33.300 | wash sale.

00:32:35.420 | Partial Roth conversions.

00:32:38.180 | Certainly, if you're at a low tax bracket,

00:32:41.820 | I think, in general, try to use up that 12% marginal federal

00:32:47.300 | tax bracket.

00:32:49.060 | Tax deferred withdrawals managing to marginal tax rates.

00:32:54.900 | Again, that 12%.

00:32:57.220 | Roth conversions.

00:32:59.820 | Yes, I invented the Roth.

00:33:01.180 | And if anyone believes that, I've

00:33:02.500 | got some oceanfront property in Minnesota.

00:33:05.340 | Well, you do have 10,000 lakes.

00:33:09.220 | But anyways, I'm a believer in tax diversification.

00:33:14.020 | You can never predict what Congress is going to do.

00:33:16.140 | That's harder than predicting the market.

00:33:19.860 | So a Roth conversion for tax diversification,

00:33:25.540 | what's the size of your Roth money

00:33:27.020 | compared to your tax deferred and taxable money?

00:33:30.020 | Is the current marginal tax bracket low?

00:33:35.260 | The higher your income in retirement,

00:33:37.300 | the less attractive it is to do the conversions.

00:33:41.500 | The more burdensome of the RMDs, the greater the argument

00:33:46.820 | to do a Roth.

00:33:49.940 | And then you really should have some after-tax money

00:33:53.540 | to pay the taxes on the conversion.

00:33:57.260 | Before 59 and 1/2, you'd actually

00:33:59.180 | be hit with a penalty if you paid for it with the IRA money.

00:34:05.220 | You've got to look at whether your state has a tax

00:34:07.620 | exemption.

00:34:09.220 | For very wealthy people, there can be some estate tax planning

00:34:15.100 | benefits to do the conversion.

00:34:17.540 | Now, one of the things I don't have to consider

00:34:19.980 | is what we think Congress is going to do,

00:34:21.940 | because that's unpredictable, in my opinion.

00:34:28.820 | Financial wealth, the common framing

00:34:32.980 | is we measure net worth, at least in the US, in dollars.

00:34:38.580 | So someone with-- if I have $10 million

00:34:41.980 | and you only have $1 million, I would be 10 times richer

00:34:46.340 | than you.

00:34:48.620 | And of course, there's no quick way to get rich.

00:34:51.180 | And I think all of that is wrong.

00:34:54.660 | I would measure your net worth in years.

00:34:59.500 | So it's your total net worth divided by how much a year

00:35:03.340 | you need to support your life.

00:35:05.900 | So who's richer?

00:35:08.420 | I have $10 million, but I have a very wealthy lifestyle.

00:35:13.220 | I need $5 million a year to support my lifestyle.

00:35:19.220 | I've got two years worth of financial freedom.

00:35:22.660 | You're only worth a million dollars,

00:35:24.940 | but you can be happy with $50,000 a year.

00:35:29.060 | You have 20 years worth of financial freedom,

00:35:31.700 | because we can't take it with us.

00:35:33.780 | You're 10 times wealthier than me,

00:35:35.900 | and probably 100 times happier, by the way,

00:35:38.500 | if I needed $5 million a year to support my lifestyle.

00:35:43.700 | And you really can get rich quickly by cutting down

00:35:48.940 | what you're spending.

00:35:51.900 | Now, all sorts of frugal strategies are out there.

00:35:56.820 | And things like the Starbucks factor,

00:35:59.900 | not buying as much pop, those are things

00:36:04.540 | that can cut down expenditures.

00:36:08.340 | But the gorilla in the room is really the car.

00:36:13.380 | And I'm going to brag.

00:36:14.460 | I've been driving millionaire cars all my life.

00:36:19.900 | My last car was a Pontiac Grand Prix

00:36:24.500 | that I bought mostly with GM credit card points.

00:36:28.260 | My current car is an eight-year-old Chevy Volt,

00:36:31.660 | getting well over 250 miles per gallon,

00:36:36.260 | running mostly on electricity.

00:36:40.540 | But I pride myself on having the worst car in the neighborhood.

00:36:45.740 | The goal is not to look good.

00:36:49.300 | The goal of a car, in my opinion,

00:36:51.020 | is to be safe and get you from A to B.

00:36:53.420 | And my Chevy Volt gets me from A to B,

00:36:57.220 | maybe eight seconds less than the Lamborghini.

00:37:01.980 | So finally, money and happiness.

00:37:04.340 | If you think about it, as Bill Bernstein says,

00:37:09.540 | when you've won the game, quit playing.

00:37:11.180 | And he doesn't mean get out of stocks completely.

00:37:14.300 | He just means take risk off the table.

00:37:18.180 | So, you know, if somebody is close to winning the game,

00:37:24.100 | if their money goes up by 70%,

00:37:27.700 | they're going to be marginally happier.

00:37:30.220 | If Jeff Bezos makes another billion dollars,

00:37:32.820 | I'm sure he'll smile,

00:37:34.020 | but it's not going to change his lifestyle.

00:37:37.700 | But losing money causes a lot of unhappiness.

00:37:43.700 | And, you know, we take these risk profile questionnaires.

00:37:46.780 | I think they're worse than worthless.

00:37:51.380 | You know, we've really got to think about,

00:37:53.540 | I'm sorry the market didn't perform as we thought.

00:37:57.260 | You can't buy that vacation house.

00:37:58.980 | You can't send your kids to college,

00:38:01.820 | the expense of college, et cetera.

00:38:05.460 | Second, greater portfolio.

00:38:07.580 | Again, that's the same as Taylor's three-fund portfolio.

00:38:13.260 | The aggressive is 90% stocks,

00:38:16.780 | moderate 60% stocks and conservative 30% stocks.

00:38:21.220 | They all performed roughly the same over this period.

00:38:26.180 | But yet we as investors, even bogal heads, by the way,

00:38:30.780 | are predictably irrational.

00:38:33.900 | And I had several bogal heads call me up in March of last year.

00:38:38.580 | This time really is different.

00:38:40.780 | We've never had a pandemic before.

00:38:42.940 | One sold millions and millions of dollars in stocks

00:38:45.540 | just at the wrong time.

00:38:48.100 | So, you know, buy and hold is good,

00:38:51.220 | but buy, hold and rebalance is better.

00:38:55.900 | And our human nature is probably not likely

00:39:00.340 | to change significantly going forward.

00:39:04.220 | So I'm a believer in setting that asset allocation

00:39:07.500 | and sticking with it no matter what,

00:39:10.460 | which the book "Noise" is brilliant.

00:39:14.860 | And, you know, a computer-generated

00:39:18.140 | asset allocation, a robo-advisor,

00:39:21.700 | didn't know the pandemic was going on

00:39:23.620 | and did all the right things.

00:39:26.740 | So that's what I have for you guys.

00:39:31.220 | -Wonderful. Thank you, Alan.

00:39:32.940 | If there's questions, I did see a few came in.

00:39:36.660 | Feel free to chat them.

00:39:38.300 | We are monitoring the chat.

00:39:40.940 | Meanwhile, I'm going to switch gears here a little bit

00:39:43.420 | and switch back to Mel.

00:39:46.100 | Mel, I call him the first bogal head,

00:39:48.980 | but I should probably call him the first

00:39:50.540 | or second bogal head based on who I just saw

00:39:52.860 | come into the chat room here.

00:39:54.460 | So, Mel, can you give us some history lessons

00:39:57.780 | on the diehards, how that came into being,

00:40:01.020 | the move to bogal heads?

00:40:03.380 | How did we get 100 people here from across the country?

00:40:06.900 | -Mel, calling yourself "bogal heads."

00:40:11.620 | Oh, you're muted, Mel.

00:40:13.220 | I don't know if, Diane, if you could unmute him.

00:40:19.460 | -Actually, I'm not sure who created the phrase "bogal heads,"

00:40:29.780 | but initially it was a derogatory term.

00:40:34.300 | -Really? -Yeah.

00:40:35.540 | There was no diehard or bogal head forum,

00:40:39.620 | Morningstar, initially, back in 1998.

00:40:43.500 | And the bogal heads who were posting

00:40:50.060 | were considered outlaws or bad guys or whatever

00:40:55.820 | from the other people who were trying to figure out

00:40:57.940 | all the ways to beat the market and so forth.

00:41:01.140 | So, the bogal heads were asking for their own forum,

00:41:07.980 | and Morningstar finally relented and created it.

00:41:13.620 | But they were afraid to use the term "bogal heads"

00:41:16.700 | and to call us "bogal heads"

00:41:17.900 | because it was used as a derogatory term.

00:41:21.540 | So, instead, they called us the Vanguard Diehards

00:41:25.900 | because we wouldn't give up asking for our own forum.

00:41:29.580 | And they put a subtitle on the forum,

00:41:35.500 | which was "Bogal Heads Unite,

00:41:37.060 | Talk About Your Favorite Fun Company."

00:41:41.540 | So, that was their way of calling us bogal heads

00:41:45.180 | but not making it really a bogal heads forum.

00:41:48.540 | So, it was called the Vanguard Diehards because of that,

00:41:52.100 | and it stayed that way all the time

00:41:54.140 | that we were on Morningstar.

00:41:57.540 | They were deathly afraid that Jack would be upset

00:42:00.100 | by the term "bogal heads" too because, again,

00:42:03.140 | it was used as a derogatory term.

00:42:05.820 | And Jack and other Vanguard people

00:42:09.900 | used to monitor our forum from time to time.

00:42:13.300 | So, they knew Jack would see that.

00:42:15.540 | So, therefore, that's how we became the Vanguard Diehards.

00:42:19.540 | -Yeah, okay. When was that?

00:42:21.420 | Was that about '98, '97, do you remember?

00:42:24.380 | -1998. What was that? 20-something years ago.

00:42:28.620 | -Yeah, 23 years ago. Well.

00:42:30.860 | So, then the move to bogalheads.org

00:42:33.860 | happened probably right around the early 2000s?

00:42:37.220 | -2007. -Okay.

00:42:39.780 | -Again, that was a real fluke.

00:42:44.220 | Morningstar's software was really out of date,

00:42:49.580 | and we kept asking for them to update the forum software.

00:42:55.940 | And they kept saying they were going to do it,

00:42:59.700 | but they never did.

00:43:00.620 | They just dragged their feet.

00:43:02.580 | So, one of the bogalheads, as a joke, set up bogalheads.org --

00:43:09.180 | the forum, what's now bogalheads.org --

00:43:11.620 | set it up as a joke to show Morningstar,

00:43:14.260 | "This isn't rocket science.

00:43:15.900 | I can do it for nothing in five minutes."

00:43:18.860 | So, he set up this dummy forum,

00:43:22.540 | and all of a sudden, a couple of bogalheads found it.

00:43:26.380 | They started posts.

00:43:27.500 | They said, "Hey, there's a new Bogaheads forum."

00:43:30.460 | So, now I went over, and I took a look at it,

00:43:33.580 | and I went, "Oh, my God.

00:43:35.220 | This is our future because we control this thing now,

00:43:40.700 | and we're not beholden to Morningstar,"

00:43:43.540 | even though Morningstar was very good to us.

00:43:45.380 | I don't mean to downgrade that.

00:43:47.500 | But the guy who set it up set it up as a joke,

00:43:53.020 | and he was just going to kill it.

00:43:55.140 | He just wanted to do this to show Morningstar

00:43:58.020 | what could be done, and I said, "No, don't let it go.

00:44:01.900 | We need to hang on to this."

00:44:04.260 | So, he didn't want to host it, and I had no way of hosting it.

00:44:08.860 | That's not my lane.

00:44:12.060 | So, I got a hold of Alex and Larry to see about hosting this,

00:44:18.260 | and that's how we took it over,

00:44:20.700 | and then I was member number seven,

00:44:25.100 | and then the word got out on the Morningstar forum,

00:44:28.700 | "Hey, Mel's over there."

00:44:30.460 | So, a number of people who thought

00:44:33.420 | that this gave it legitimacy started coming over,

00:44:37.140 | but Taylor, who I understand is on this now,

00:44:43.900 | Taylor was reluctant to join

00:44:47.380 | because he felt an allegiance to Joe Mansuito,

00:44:50.660 | the chairman of Morningstar, who had been very good to us,

00:44:54.540 | and so did I, really.

00:44:56.420 | So, I kept trying to get Taylor to come over.

00:44:58.180 | He wouldn't come over.

00:44:59.500 | Finally, I said, "Taylor, we'll make a deal with you.

00:45:02.580 | You and I, out of respect for Joe,

00:45:06.580 | we'll continue to post on both forums."

00:45:09.340 | So, Taylor agreed, and that was our deal.

00:45:12.580 | Taylor came over, and of course, then the floodgates,

00:45:15.780 | because now it was totally legitimate, the floodgates,

00:45:19.020 | and for a number of --

00:45:22.140 | I don't remember how long it was,

00:45:24.220 | but for a while, Alex and Larry put up a split screen

00:45:30.940 | which showed posts on the Morningstar forum on one side

00:45:34.700 | and posts on the Diehards forum on the other side

00:45:38.100 | so people could go there and choose where they wanted to --

00:45:42.660 | which threads they wanted to see.

00:45:47.380 | But what happened is, after a while,

00:45:49.700 | there was nothing on the Morningstar side,

00:45:51.580 | and everything was on the Bogeyhead side,

00:45:54.420 | so we stopped that.

00:45:56.580 | And that's basically how the forum got started.

00:46:01.860 | It started as a joke.

00:46:03.940 | Fortunately, I realized that this was our future,

00:46:06.860 | and obviously, that's the case now.

00:46:10.900 | The number of posts we get, the number of hits we get,

00:46:14.020 | the number of members we have are all just through the roof.

00:46:18.860 | So it's been quite a ride,

00:46:23.620 | and Taylor and I are still posting on there.

00:46:29.300 | -Did you have in your wildest dreams

00:46:30.660 | the idea that you'd go from that fake,

00:46:33.780 | almost protest forum back in 2002 to what it is right now?

00:46:37.340 | I mean, when did it dawn on you that this thing

00:46:39.580 | is out of control in a great way?

00:46:42.140 | When did that dawn on you?

00:46:44.100 | -And it still is.

00:46:46.100 | For instance, it was maybe a week or so ago,

00:46:48.460 | a couple weeks ago, I just opened the latest chapter

00:46:51.140 | in Germany.

00:46:52.940 | We have something like 90 chapters now,

00:46:56.500 | 10 of which are, I think, about 10 are in foreign countries.

00:47:01.460 | It's just mind-blowing when you consider

00:47:05.020 | that we were just a few guys on Morningstar

00:47:09.180 | trying to help other investors,

00:47:11.220 | and now we have this worldwide organization.

00:47:14.180 | We have best-selling books.

00:47:17.860 | We have national conferences.

00:47:22.340 | And of course, being connected to Jack Bogle

00:47:26.540 | was really the key to our success.

00:47:29.980 | I mean, how many people have written books

00:47:32.380 | and can't get anybody to even look at them?

00:47:34.340 | And here we have a publisher calling

00:47:36.220 | and asking us to write books,

00:47:38.180 | and I hung up on them a number of times.

00:47:41.780 | I thought it was a hoax because I know that publishers

00:47:45.260 | just don't call you and ask you to write a book

00:47:47.140 | when you're an unknown.

00:47:48.980 | But, yeah, so it was writing the book

00:47:55.060 | and then having it come out

00:47:57.220 | and then becoming one of the top 10 books

00:48:01.620 | selected by Amazon for 2006.

00:48:04.260 | Of course, all of that stuff just gave us more publicity.

00:48:08.740 | When we had our first conference in Miami,

00:48:14.780 | there's a back story to this, which I'd like to share.

00:48:18.940 | Taylor and I, I made a post in 1999,

00:48:27.140 | I guess it was, at Thanksgiving,

00:48:29.020 | saying, "Happy Thanksgiving.

00:48:30.740 | Here's what I'm thankful for."

00:48:32.140 | And then everybody was chiming in,

00:48:34.980 | and Taylor chimed in and said,

00:48:36.900 | "I'm thankful for my wife and my kids and all that,

00:48:39.980 | but I'm thankful to Jack Bogle,

00:48:41.940 | also thankful to Jack Bogle

00:48:44.580 | because I live in the house that Jack built."

00:48:47.260 | Well, again, as I said, Jack monitored our --

00:48:49.580 | watched our forum from time to time, and he saw that.

00:48:52.700 | And he sent a handwritten note to us

00:48:55.380 | asking if there was any interest in getting together

00:48:58.060 | with him at a non-resort place.

00:49:00.780 | Well, for us, that was like getting an invitation

00:49:03.180 | to an audience with the Pope or an invitation to the White House.

00:49:07.220 | So Taylor and I tried to figure out

00:49:08.660 | how we were going to pull this off.

00:49:12.140 | And I was a snowbird at that time.

00:49:14.700 | It's been the winters in Florida.

00:49:16.660 | Taylor knew that.

00:49:18.300 | And Jack was going to be the keynote speaker

00:49:21.060 | at the Miami Herald Making Money Seminar.

00:49:24.020 | So Taylor said, "Hey, Mel, why don't we use this

00:49:26.180 | as an opportunity to try to get together with Jack?"

00:49:29.980 | So I said, "Well, that's great. We'll do that."

00:49:32.420 | So I got in touch with the Miami Herald people,

00:49:34.780 | and I asked them if they could give us a room somewhere

00:49:38.940 | where we could get together with Jack

00:49:40.340 | for an hour or two for lunch.

00:49:42.460 | And they shoot us away like a bunch of groupies,

00:49:44.860 | which actually we were.

00:49:46.460 | And they said, "No, we've got Jack all tied up.

00:49:49.260 | We don't have time.

00:49:51.060 | So you'll have to just go about your business."

00:49:56.340 | So anyway, I called Jack and said,

00:49:58.700 | "Hey," they said, "We can't get together."

00:50:00.700 | And he said, "Well, hey, I'll go wherever you want me."

00:50:03.580 | So now we made a post.

00:50:06.980 | We only had about 20-something people

00:50:08.820 | because it was very short notice.

00:50:10.820 | So we decided to hold it at Taylor's 35th-floor condo

00:50:16.460 | overlooking Biscayne Bay.

00:50:18.700 | And we hired a chef and a maid

00:50:23.460 | and had this nice thing with Jack.

00:50:27.620 | But in the meantime, the Miami Herald got word

00:50:29.980 | that we're having this event with Jack,

00:50:32.220 | and they want to cover it.

00:50:34.660 | So they come hat in hand and said,

00:50:36.700 | "Mel, can we send a reporter and a photographer?"

00:50:39.980 | Well, instead of being jerks like they were to us,

00:50:42.340 | we said, "Sure."

00:50:43.740 | So they send the photographer and the reporter,

00:50:47.540 | and we ended up with a front-page story

00:50:49.380 | in the business section of the Miami Herald

00:50:51.180 | carried over into the inside.

00:50:53.260 | So all of these things just gave us a little more publicity,

00:50:56.980 | and we became a little better known.

00:50:59.220 | The next year, Jason Zweig,

00:51:01.060 | who's now with Wall Street Journal,

00:51:03.060 | was with Money Magazine then.

00:51:06.620 | Jason wanted to come and cover our conference

00:51:10.540 | and bring a photographer.

00:51:13.060 | So we ended up with a six-, eight-page spread

00:51:15.860 | in Money Magazine with all kinds of photos and that.

00:51:18.300 | So again, more exposure.

00:51:21.020 | And then the book, and it just continued to build,

00:51:24.180 | and it still continues to this day.

00:51:25.940 | So, yeah, it's just mind-blowing

00:51:29.300 | when you think of where we started and where it is now.

00:51:32.900 | - No, it's amazing.

00:51:33.900 | Just this morning, I did some metrics here,

00:51:35.860 | and there just happened to be 703 people who were online

00:51:38.740 | when I looked right before the meeting here.

00:51:40.820 | There's been 5,941,000 posts since that forum was created.

00:51:45.820 | And there's 109,000 members that have actually registered.

00:51:50.340 | That probably gets 10 times the amount of traffic

00:51:51.980 | of people that don't register.

00:51:53.180 | So there's probably over a million people, I'm sure,

00:51:55.580 | have hit that page in the last year.

00:51:57.380 | So that's amazing, isn't it?

00:51:59.980 | - Yeah, it is.

00:52:00.820 | And when anytime I can see the back numbers,

00:52:03.700 | and anytime you see 700 people online,

00:52:08.220 | for members, there's usually about 10 guests

00:52:12.860 | for each member that's online.

00:52:15.060 | 'Cause they can read, people can read anytime they want.

00:52:18.820 | They don't have to sign up.

00:52:20.020 | You only sign up if you want to make a post.

00:52:24.260 | So there are more and more visitors,

00:52:27.940 | and they're from all around the world,

00:52:30.340 | which is amazing too.

00:52:32.380 | - You know, personally, I used to have to look for like,

00:52:34.660 | what's the expense ratio of VTI, Boglehead.

00:52:37.500 | And I put that on there.

00:52:38.420 | Now I don't have to put Boglehead.

00:52:39.860 | When I look at my Google results,

00:52:41.780 | for the top five links,

00:52:43.060 | you're going to Boglehead Wiki or somewhere.

00:52:44.620 | It's just awesome.

00:52:45.820 | - Yeah, it's been an amazing ride.

00:52:48.540 | And to have all those conferences.

00:52:50.300 | We thought, Taylor and I thought,

00:52:51.820 | that to get together with Jack in Miami

00:52:55.100 | was gonna be a one-time off.

00:52:57.460 | And then everybody's asking on the forum,

00:52:59.780 | when's the next one?

00:53:00.620 | When's the next one?

00:53:01.460 | And they're, oh my God, we weren't even-

00:53:03.420 | - Yeah, 20 years later.

00:53:05.300 | Well, let me ask you a question.

00:53:06.380 | When is the next one?

00:53:07.460 | - This year is not gonna be an in-person.

00:53:12.180 | It'll probably be a virtual.

00:53:13.940 | I have to say in the beginning,

00:53:18.500 | I am no longer running the conferences.

00:53:22.220 | I'm not on the team anymore.

00:53:23.780 | But from what I understand,

00:53:27.220 | it's gonna be virtual this year.

00:53:28.740 | Next year will be a conference.

00:53:30.780 | And initially we moved the conferences

00:53:33.740 | all around the country.

00:53:35.980 | But then when Jack's health started deteriorating,

00:53:38.380 | we stayed in Philly.

00:53:40.060 | There's no reason to stay in Philly now

00:53:43.420 | because Jack is no longer with us.

00:53:47.020 | So it's probably gonna be moved around the country again.

00:53:51.460 | It's probably gonna be a lot longer.

00:53:53.180 | There's different team running the operation.

00:53:56.780 | And I think their goal or their idea

00:54:01.340 | is to have this big deal.

00:54:04.540 | I tried to purposely keep it smaller

00:54:06.900 | so that it would be intimate

00:54:08.060 | and people could talk to Jack and Bill Bernstein

00:54:10.500 | and Rick and the other people that were there.

00:54:12.980 | So now I don't know where it's gonna be,

00:54:18.820 | but we'll have to see when they finally figure it out.

00:54:23.820 | 'Cause they want it to be somewhere

00:54:25.700 | where people can connect direct flight

00:54:27.660 | without having to go through

00:54:29.940 | a number of transfers and so forth.

00:54:32.940 | So that's all in the works.

00:54:35.980 | And I really am not privy to what's going on

00:54:40.180 | other than I know it's gonna be a big one in 2022.

00:54:44.980 | - No, that sounds great.

00:54:45.820 | Thanks for that update.

00:54:47.620 | - Can I just pipe in?

00:54:48.860 | Yeah, the goal is a October 2022 larger conference

00:54:55.180 | at a location yet to be determined.

00:54:57.540 | - Good to know.

00:54:59.780 | Getting back to books, Mel.

00:55:03.420 | So there's been three successful books.

00:55:05.100 | Is there any, are they keep calling

00:55:06.940 | or is there gonna be a fourth in the series?

00:55:08.700 | Do you know anything about that?

00:55:10.300 | - Well, first of all, I have to tell you

00:55:12.220 | that our publisher is Wally

00:55:13.660 | and Wally publishes the Dummies books

00:55:16.260 | as you know the Dummies books.

00:55:18.260 | Well, the Dummies books,

00:55:19.820 | each one is written by a specialist in the topic.

00:55:24.140 | But Wally figured that the Bogleheads

00:55:26.420 | was gonna be a series like the Dummies books.

00:55:29.380 | And of course, there are only a few of us

00:55:31.140 | writing these things.

00:55:32.060 | So it takes nine months to a year to write a book.

00:55:36.620 | And it's-

00:55:37.580 | - By the way, if you can see what Taylor's doing,

00:55:40.020 | I think he's holding up a Boglehead book in Chinese.

00:55:43.300 | - Well, our books have been converted

00:55:45.780 | and I had boxes of books show up on my doorstep.

00:55:50.340 | And I had no idea what they were.

00:55:53.700 | I thought somebody got the wrong shipment here.

00:55:57.380 | And it turns out it was one of our versions.

00:55:59.820 | We have several versions in Chinese.

00:56:02.380 | But yes, Taylor's book will probably end up,

00:56:09.580 | the latest book, "The Three Fund Portfolio"

00:56:11.660 | will probably end up in Chinese

00:56:13.180 | because our other books have.

00:56:14.660 | But over time, I've been kind of busy.

00:56:21.180 | I worked with Taylor on his book,

00:56:23.220 | but it was Taylor's book.

00:56:25.140 | That's his baby.

00:56:27.220 | I also worked with a couple of Boglehead doctors

00:56:30.300 | who have a new book coming out.

00:56:33.500 | It should be out any day now.

00:56:35.140 | And it's specifically geared towards doctors

00:56:41.260 | and financing.

00:56:44.340 | So I've been busy with that.

00:56:45.660 | I've been busy with a lot of this stuff,

00:56:47.060 | but I keep feeling that any day

00:56:50.060 | we're gonna get that call from Wally saying,

00:56:52.380 | "Hey, how about another book?"

00:56:54.460 | Or else asking us to update, go to the third edition.

00:57:01.220 | And I called Michael ahead of time to ask him,

00:57:04.900 | "Michael, are you gonna be up to another book?"

00:57:07.100 | Because I got a feeling I'm gonna get a call.

00:57:09.380 | So sure enough, a day after I talked to Michael,

00:57:13.580 | I get a call from Wally.

00:57:15.620 | And they said, "Mel, Barnes & Noble

00:57:20.100 | "has got this huge, wants this huge order of your book,

00:57:23.940 | "but they want a paperback version.

00:57:27.740 | "And we don't have a paperback version

00:57:30.780 | "of the second edition."

00:57:31.900 | So he said, "Mel, we need something for the cover."

00:57:36.900 | And I said, "Well, you've got,

00:57:40.220 | "Jack Bogle wrote the foreword.

00:57:44.900 | "So just pull something out of there

00:57:46.260 | "and put it on the cover.

00:57:47.260 | "One of Jack's 50 sayings, you know,

00:57:49.220 | "the Bogleheads, whatever."

00:57:51.620 | And so we do have a paperback coming out

00:57:54.980 | and it'll be available at some point at Barnes & Noble.

00:57:59.660 | But I really, you know, I have a political career now.

00:58:04.660 | I got elected in 2016 as a city council member,

00:58:10.740 | 2018 got reelected.

00:58:12.340 | And then 2020, I became vice mayor.

00:58:15.300 | So I'm helping run a city,

00:58:18.180 | helping other people with their books,

00:58:21.420 | doing work on the forum.

00:58:23.620 | I am pretty busy and I just don't know

00:58:27.500 | whether I have time for another book.

00:58:30.100 | - Well, now talking about busy,

00:58:31.220 | that sounds incredibly busy.

00:58:33.180 | Before we pivot back to Alan, Mel,

00:58:35.460 | you knew Jack really well.

00:58:36.540 | Is there one thing you could tell us about him

00:58:38.460 | that maybe a lot of people don't know about him?

00:58:41.700 | - Well, I don't know that everyone knows

00:58:44.260 | that Jack had a heart replacement.

00:58:48.580 | And because of the heart replacement,

00:58:52.100 | he had to take drugs to keep the anti-rejection drugs.

00:58:56.020 | But the anti-rejection drugs cause all kinds of things

00:59:00.500 | that are minor to you and me turn into major deals

00:59:05.260 | when you get, once he would get an infection.

00:59:09.340 | Jack used to end up in the hospital a lot.

00:59:13.180 | And of course our planning was nine months long

00:59:15.780 | for the conferences.

00:59:17.460 | And Jack was the, of course, the focal point.

00:59:21.900 | Well, I would get calls.

00:59:23.060 | I got calls a number of times in the summer

00:59:26.940 | saying Jack is in the hospital

00:59:29.540 | and we don't think he's gonna be able to make the conference

00:59:32.700 | and things aren't good.

00:59:35.420 | So we had a number of scares over the years

00:59:40.420 | with Jack's health.

00:59:41.860 | And Jack had attended, despite being in the hospital,

00:59:47.780 | he would get out and he would get better

00:59:50.340 | and he would make the conferences.

00:59:51.700 | But it was real close to our Dallas Fort Worth conference

00:59:56.140 | when I got the call that Jack

00:59:57.900 | is not gonna be able to make it.

01:00:00.340 | So we had to go to plan B

01:00:04.140 | and create a different agenda

01:00:08.220 | and get different speakers and so forth, which we did.

01:00:11.140 | But at the conference, Kevin, who was Jack's assistant,

01:00:15.500 | said, "Jack wants to call on your cell phone

01:00:18.460 | "from the hospital.

01:00:19.900 | "And he wants you to hold your phone up to the microphone

01:00:24.900 | "and speak to the bogo heads."

01:00:28.980 | So I said, "Well, that's gonna get squeals

01:00:30.660 | "and everything else."

01:00:31.500 | So I quickly got a phone line

01:00:33.860 | and put in the hotel and the conference room,

01:00:36.100 | had it wired to the speakers in the conference room.

01:00:39.260 | And sure enough, Jack calls at the appointed time

01:00:43.260 | and proceeded to speak to his bogo heads.

01:00:48.180 | And there wasn't a dry eye in the place.

01:00:50.980 | And we were trying to figure out

01:00:52.660 | how Jack even got a cell phone in intensive care.

01:00:55.860 | But anyway, so since Jack got the call,

01:01:01.700 | spoke to us over the phone,

01:01:04.940 | we considered that his attendance

01:01:08.580 | and not break his perfect attendance record.

01:01:11.060 | So Jack's attendance record is still intact

01:01:13.620 | because of that speaking to the bogo heads

01:01:16.220 | over from the hospital.

01:01:18.180 | So he loved his bogo heads.

01:01:20.060 | They meant so much to him.

01:01:21.540 | And of course he did to us too.

01:01:24.020 | So he was really special.

01:01:27.220 | - Yeah, those are great stories.

01:01:28.740 | Thanks so much for that, Mel.

01:01:30.900 | And now I don't know how to awkwardly

01:01:32.660 | pivot away from those great stories back to finances,

01:01:35.340 | but I'm just gonna plunge into some of these questions.

01:01:37.660 | So for Alan or Mel, feel free to jump in here too.

01:01:40.780 | Bond portion of the portfolio,

01:01:43.540 | should it be total bond market

01:01:46.460 | or is it short-term bonds based on today's environment

01:01:49.420 | or a mix?

01:01:50.260 | And if it's a mix, what ratio is the question that came in?

01:01:53.060 | - You want me to take that?

01:01:57.060 | - Yeah, yeah.

01:01:57.900 | - Okay, Alan, if you could take that, that'd be great.

01:02:00.420 | - Sure.

01:02:01.260 | Total bond is my core bond fund.

01:02:07.900 | I also use some direct CDs

01:02:10.900 | that have easy early withdrawal penalty,

01:02:14.060 | but all of my fixed income is high credit quality.

01:02:19.060 | The thing about a short-term bond is it's kind of like cash.

01:02:25.660 | You're guaranteed to underperform the inflation

01:02:30.660 | and lose spending power.

01:02:34.860 | So in general, I believe in an intermediate bond fund,

01:02:37.980 | especially 'cause our yield curve

01:02:39.700 | is positively sloped right now.

01:02:42.740 | I don't have the guts to go long-term

01:02:45.220 | and then short-term, like I said,

01:02:48.660 | it's practically guaranteed to underperform

01:02:51.900 | and you're better off doing something like a,

01:02:55.260 | there's several savings accounts,

01:02:57.420 | FDIC or NCUA insured paying between 0.5 and 0.85.

01:03:02.420 | So I would argue that's better

01:03:04.300 | than a Vanguard short-term bond index fund,

01:03:08.060 | which I'm guessing is paying somewhere around 0.45, 0.5%

01:03:12.700 | and has some risk.

01:03:13.940 | - Well, I agree with Alan on the investment grade.

01:03:19.540 | I think that duration has to be considered.

01:03:22.980 | So for most people, the intermediate is gonna work,

01:03:26.300 | but for short-term needs,

01:03:28.300 | I like a short-term investment grade bond at Vanguard.

01:03:32.860 | But one thing that isn't mentioned

01:03:35.500 | and Alan touched on inflation

01:03:37.180 | and one way right now to (indistinct)

01:03:40.740 | is I-bonds.

01:03:43.300 | So I think there's a place in most portfolios for I-bonds.

01:03:49.780 | There is the purchase limit of 10,000 per person per year,

01:03:53.420 | but you can get one for the husband, one for the wife,

01:03:56.740 | you can get 5,000 back in your tax return.

01:04:00.060 | And if you have trust, you can also get another 10,000.

01:04:03.340 | So it doesn't take long to accumulate

01:04:06.020 | a fair amount of inflation protection with the I-bonds.

01:04:11.340 | - I've been hearing you hawk the I-bonds

01:04:13.860 | for about 20 years now, I think, Mel.

01:04:15.660 | They never put a little flavor.

01:04:17.420 | - Yeah, well, the thing is,

01:04:19.380 | is that the people who backed up the truck

01:04:21.900 | when I suggested they do,

01:04:24.580 | they're sitting on those 3033, 3436 real yield bonds

01:04:29.500 | that are paying 7% now.

01:04:31.940 | They are sitting, looking for profit.

01:04:36.860 | - That's amazing in today's low interest environment

01:04:38.900 | for the people that took your advice,

01:04:40.300 | I guess, back in the day.

01:04:41.540 | Shifting to capital gains tax,

01:04:45.700 | it's been possibly doubling for high earners

01:04:48.780 | at some future point.

01:04:50.020 | And if that's an eventuality,

01:04:52.060 | is there anything we could be doing now

01:04:54.820 | to prepare for a higher capital gains in the future?

01:04:57.740 | For either Alan or Mel.

01:05:04.060 | - Mel, do you want to take it?

01:05:04.900 | I'm happy to take it.

01:05:06.860 | - That's money.

01:05:07.700 | - You know, the only thing harder than-

01:05:13.300 | - I'm sorry, go ahead, Alan.

01:05:14.900 | - The only thing harder than predicting the market

01:05:16.620 | is predicting what politicians will do.

01:05:19.820 | - Yeah, in fact, we don't even allow discussions

01:05:23.860 | of regulations on the forum

01:05:26.940 | simply because people might make a bad decision

01:05:29.460 | based on something that may never happen.

01:05:32.300 | So you have to go with the law the way it is.

01:05:37.300 | - The current Biden proposal

01:05:39.900 | is for those with over a million dollars

01:05:44.460 | of income, and the current Biden proposal

01:05:48.820 | has it retroactive to April 28th.

01:05:51.540 | Now, again, I don't predict,

01:05:56.300 | you know, everything in that proposal

01:05:57.980 | I think is unlikely to go through,

01:06:00.340 | especially in our current political climate.

01:06:04.260 | But I mean, if that were going to happen,

01:06:06.300 | and if you were going to sell it while you were alive,

01:06:08.940 | then yes, you would want a tax gain harvest.

01:06:11.660 | But I think that would be

01:06:12.580 | an incredibly dangerous thing to do.

01:06:16.220 | So what I'm telling clients is do nothing right now.

01:06:22.380 | - Okay, good.

01:06:23.380 | Follow up to that with inflation starting to perk up,

01:06:27.260 | there's a question around

01:06:28.100 | any proposed changes to the portfolios.

01:06:30.020 | Is now a time to get more into tips

01:06:32.020 | if you haven't been historically here with inflation,

01:06:34.260 | perking up, what do you recommend

01:06:36.580 | for changes to the best allocation?

01:06:41.500 | - Mel, do you want me to take it?

01:06:43.260 | - Yeah, go ahead.

01:06:44.220 | - Okay.

01:06:45.460 | Absolutely nothing.

01:06:46.660 | Inflation has perked up.

01:06:48.620 | I think I mentioned that I,

01:06:52.780 | along with the top economists in the world,

01:06:54.820 | have a horrible track record of predicting interest rates,

01:06:58.020 | and those interest rates are tied to inflation.

01:07:01.260 | So certainly we have had some, you know,

01:07:05.620 | greater inflation in the last few months.

01:07:07.860 | Whether or not it will continue,

01:07:09.340 | the bond market is actually saying we don't think so.

01:07:12.940 | You know, the way I learned economics

01:07:16.100 | is that more money chasing the same amount of goods

01:07:18.940 | and services causes a lot of inflation.

01:07:21.740 | But Japan has been printing more money than we have

01:07:25.020 | for decades and fighting deflation.

01:07:28.020 | So I would resist the urge to try to predict inflation.

01:07:33.860 | The I bonds are certainly better than the tips.

01:07:35.980 | I think I looked at the Vanguard Intermediate Tips Fund.

01:07:40.980 | It had a negative yield of something like 1.65%,

01:07:45.660 | meaning that if we had 2% inflation,

01:07:48.980 | then that's going to yield 0.35%.

01:07:52.100 | So CDs that have easy early withdrawal penalties,

01:07:55.220 | I bonds, you know, to the extent

01:07:58.060 | that it can be a material part of your portfolio,

01:08:01.140 | you know, I think are ways to go.

01:08:03.220 | And again, that's why I wouldn't go long-term

01:08:06.340 | on a bond fund, a long duration.

01:08:09.140 | - Yeah, I think Alan touched on the thing

01:08:13.700 | that's important to me

01:08:14.860 | and should be important to other investors

01:08:16.820 | is that at the current time,

01:08:19.860 | tips are not attractive to me

01:08:23.620 | simply because they have the negative yield

01:08:25.940 | guaranteed to get less money back than you put in.

01:08:30.380 | So at this point, I think the first 10, 20, 30, 35,000,

01:08:35.380 | whatever that you can afford to buy an I bond

01:08:39.460 | are the place to go for inflation protection now.

01:08:42.500 | And even with the current ones

01:08:46.180 | that they are selling with the zero fixed rate,

01:08:50.180 | you're still getting 3.54%, which is nothing to sneeze at.

01:08:54.660 | It's probably the most attractive rate

01:08:57.940 | that's out there that's risk-free.

01:08:59.660 | So my first 10, 20 or 30,000 would be in I bonds.

01:09:04.660 | - Okay, good to know.

01:09:09.420 | And I hesitate to ask this question

01:09:11.660 | with the room full of bullets

01:09:13.220 | 'cause I think I know the answer

01:09:14.180 | with someone that suggested or asked,

01:09:15.900 | what do you think of cryptocurrencies

01:09:17.260 | like Bitcoin, Dogecoin, et cetera?

01:09:19.700 | Do they have a place in mass allocation?

01:09:22.460 | - Yeah, in the trash.

01:09:23.660 | - I own a little bit of Bitcoin,

01:09:29.460 | but only because I had to write about it

01:09:32.020 | and I wanted to actually make sure

01:09:33.620 | that what I was being told on how you buy it works.

01:09:36.740 | And Bitcoin, I'm not convinced it's gonna be worth zero.

01:09:40.940 | I think the odds are it'll be worth zero,

01:09:44.060 | but it does disintermediate the financial services industry

01:09:47.580 | and solve something.

01:09:49.140 | Dogecoin, like the Vogelheads, was started as a joke

01:09:52.500 | and it just absolutely amazes me

01:09:54.340 | that it has significant value.

01:09:57.460 | I don't think it's gonna be as successful

01:09:59.420 | as Mel and Taylor, what you guys created

01:10:02.300 | with the Vogelheads.

01:10:03.460 | - Well, I have a question for somebody

01:10:06.740 | who might have an answer.

01:10:10.700 | How do you buy or sell something,

01:10:12.460 | not the coin itself, but with the coin,

01:10:15.420 | when the value is changing dramatically

01:10:18.740 | every day, every hour?

01:10:20.460 | So you have something for sale for 10,000

01:10:24.380 | and somebody is gonna give you 10,000 in Bitcoin

01:10:28.780 | and five minutes later, it's worth 8,000.

01:10:32.260 | How do you set a price either as a buyer or a seller

01:10:36.260 | when the value is constantly changing?

01:10:40.340 | That's the question I would ask.

01:10:45.740 | For something to be effective, you have to have stability.

01:10:50.140 | And right now you have no stability

01:10:52.300 | and I don't know if you're ever gonna have it.

01:10:54.460 | - Yeah.

01:10:56.940 | Another question came in, I think based on a slide

01:10:59.220 | from your talk, Alan, would be,

01:11:00.860 | can you please explain why dividend stocks

01:11:02.820 | would not be a good investment?

01:11:04.380 | - Well, dividends are value stocks

01:11:10.460 | and they may outperform, they may underperform.

01:11:14.220 | They have grossly underperformed.

01:11:16.460 | I mean, there are certain really safe dividend stocks

01:11:19.020 | like Eastman Kodak, General Motors,

01:11:23.700 | more recently GE that are just blue chips

01:11:27.060 | that are gonna pay forever and that's just not true.

01:11:30.460 | And if you think of dividends, they're very tax inefficient

01:11:34.940 | because you would rather pay less taxes on the dividends.

01:11:40.820 | So I'm not totally against dividend stocks.

01:11:45.940 | In fact, I believe in growth.

01:11:48.980 | I believe in large cap, mid cap, small cap.

01:11:51.780 | The diversified portfolio is guaranteed

01:11:56.700 | to beat most investors.

01:11:58.540 | And you're far better off, by the way,

01:12:01.100 | controlling when you wanna recognize the gains

01:12:03.580 | by selling the long-term capital gains than the dividends.

01:12:08.220 | So I'm against a dividend tilted portfolio.

01:12:12.380 | I believe in everything.

01:12:15.020 | Taylor's refund portfolio is all you need.

01:12:18.980 | - That's a question from down below.

01:12:23.380 | And I think this question was asked

01:12:24.540 | not knowing Taylor would be here.

01:12:25.740 | So people are asking if you're a fan

01:12:27.500 | of the two fund portfolio from Jack Bogle,

01:12:30.180 | I think it was, is it VT everything

01:12:32.740 | and then total bond in the U.S.

01:12:34.060 | Or the three fund from Taylor

01:12:35.780 | or the four fund portfolio from Rick Ferry.

01:12:38.780 | I guess, are you a fan of that?

01:12:42.820 | Was it either the two fund, the three fund

01:12:45.060 | or the four fund was a question out there.

01:12:48.100 | And I think you already gave your answer, Alan.

01:12:49.620 | You said the three fund, but is there a space

01:12:52.100 | or one much you consider a two fund or a four fund?

01:12:55.440 | - Well, what can have a single fund,

01:12:59.140 | a target date portfolio or a fund of funds

01:13:04.140 | that Vanguard offers and the like.

01:13:08.780 | And Jack, let's face it, I've been wrong.

01:13:10.720 | Jack Bogle has been right on international

01:13:13.580 | continuing to underperform.

01:13:15.260 | - Yeah, again, go ahead now.

01:13:20.860 | - There's a very long thread going right now

01:13:25.180 | on the argument, either the international yes or no.

01:13:30.180 | And there are, I mean, it's really contentious.

01:13:35.680 | The people are dug in one way or the other.

01:13:39.140 | And it might be interesting to follow

01:13:40.960 | because there are a lot of good thoughts on both sides.

01:13:44.680 | So there's not necessarily a right or wrong.

01:13:48.380 | There's what's right for you.

01:13:50.640 | And one of the things that I posted on that thread

01:13:54.520 | was that I think that it's whatever you're comfortable with.

01:13:57.800 | If you are gonna not be a buy and holder

01:14:00.600 | when international goes down, it tanks.

01:14:06.600 | You don't believe in it, that's your choice.

01:14:10.880 | I do believe that Jack was right

01:14:15.880 | and has been proven right.

01:14:20.200 | Personally, I think that for people

01:14:23.560 | who are a little queasy with the do one international,

01:14:26.480 | I think that what Alan touched on a life strategy

01:14:29.760 | or a target date fund might be appropriate.

01:14:34.880 | Because one of the advantages of those

01:14:36.640 | is that you don't see the different element

01:14:39.200 | going down within that portfolio.

01:14:41.320 | You just look at the whole.

01:14:44.160 | And if the whole is doing okay,

01:14:45.600 | you're gonna hang in there even though, excuse me,

01:14:49.240 | even though it's the US that's doing great

01:14:52.800 | and international is not doing so good,

01:14:55.640 | your portfolio is still doing okay.

01:14:57.640 | So I think that that's a good reason to hold

01:15:01.940 | for certain investors, a life strategy or a target date fund.

01:15:05.980 | - And it harnesses the power of inertia

01:15:08.700 | automatically rebalances for you.

01:15:12.100 | And when it comes to international yes or no,

01:15:15.380 | my belief is that it's more important to be consistent.

01:15:18.700 | Back in 2007, when international had tripled,

01:15:23.100 | when US stocks had only doubled,

01:15:25.340 | I saw a lot of portfolios very heavily invested

01:15:27.840 | in international.

01:15:28.680 | Now I'm seeing portfolios very light in international

01:15:32.640 | and performance chasing is alive and well

01:15:36.440 | and we need to be consistent.

01:15:38.140 | I typically go for a third and there's some comfort

01:15:42.320 | between somewhere between Vanguard's 40%

01:15:46.840 | and Jack Bogle's 0%.

01:15:49.840 | (laughs)

01:15:50.800 | - Yeah, sounds good.

01:15:52.200 | There's a question here from Adele Al-Mahdi from Bahrain.

01:15:56.280 | So that's why I love this Zoom stuff.

01:15:57.640 | I don't think you'd be coming from Bahrain to Minnesota

01:16:01.360 | to visit us in person,

01:16:02.680 | but here we can communicate in Zoom.

01:16:04.960 | And he had asked around,

01:16:06.000 | doesn't a small cap value diversify

01:16:09.240 | because the total stock market is so, like you said,

01:16:13.000 | growth in large cap dominating now.

01:16:15.480 | And there's another question I'll combine with this

01:16:17.120 | around the Fama French three model,

01:16:19.120 | tilting to small cap and value,

01:16:21.560 | just not even when you're in a overweighted,

01:16:24.800 | large cap growth environment.

01:16:26.360 | What do you think about tilting for diversification?

01:16:29.980 | - Whenever you pick parts of the market,

01:16:34.120 | you are not diversifying.

01:16:36.240 | You're doing the opposite of diversifying.

01:16:38.920 | You are speculating.

01:16:40.640 | I believe in the Fama French three factor model,

01:16:44.040 | which says that it's compensation for taking on more risk,

01:16:49.000 | that it's not a free lunch.

01:16:54.120 | So I choose to do an overall portfolio,

01:16:58.680 | which is far more tax efficient, far lower in fees.

01:17:02.520 | So I certainly believe that in the very long run,

01:17:07.560 | certainly almost it's impossible for small cap value

01:17:10.480 | to underperform as much as it has

01:17:12.680 | in the last five or 10 years.

01:17:14.840 | And I do think the odds are it's going to do better,

01:17:18.800 | but it's going to be a whole lot more volatile.

01:17:22.080 | And if you think about it,

01:17:24.360 | if things go wrong in our economy,

01:17:27.360 | it's smaller companies and value companies that are weaker,

01:17:31.280 | and the plunge could be a whole lot worse.

01:17:34.280 | Have I ever mentioned the Taylor Laramore

01:17:36.480 | three fund portfolio was what I recommend?

01:17:38.860 | - That's right.

01:17:41.320 | - I just like to let Jeff and everyone know

01:17:44.480 | that the last questioner from Bahrain

01:17:48.820 | was probably from one of the latest chapters

01:17:52.580 | that we opened up.

01:17:53.860 | But we do have a Boaz local chapter in Bahrain now.

01:17:57.880 | - Yeah, well, that's so great in such a small world.

01:18:01.020 | Here's kind of a nice standalone question for someone.

01:18:03.740 | What's your recommended safe withdrawal rate

01:18:05.620 | for a 65 year old who just retired in today's environment?

01:18:09.560 | - To me, anything above 2% might be speculative,

01:18:18.180 | but so much depends on your family history,

01:18:21.860 | your life expectancy,

01:18:23.100 | based on your own medical conditions and everything else.

01:18:26.940 | I think that 2% you could live forever,

01:18:31.940 | 3% might be okay.

01:18:34.100 | I think you have to look at the market valuations now.

01:18:40.440 | It's very high.

01:18:42.340 | We're overdue for a correction.

01:18:44.900 | Whether we'll get it or not is,

01:18:47.460 | when we'll get it is a question, excuse me,

01:18:50.860 | is obviously unknown.

01:18:53.540 | But if somebody wanted to be safe in the early years,

01:18:55.880 | I would say 2% is about as safe as you can get.

01:18:59.020 | 3% might work for you.

01:19:02.020 | 4% might work for you

01:19:03.300 | if you've got a shorter life expectancy.

01:19:05.940 | That's everything is a guess at this point.

01:19:10.980 | 'Cause it would be really great

01:19:12.780 | if we knew how long we were gonna live.

01:19:14.740 | And then we would probably have a heart attack.

01:19:17.040 | - That's right.

01:19:19.340 | I'd say start at a 3%.

01:19:24.340 | If, and only if,

01:19:25.820 | you're an incredibly low cost disciplined investor.

01:19:30.220 | And then there are things that you can do such as,

01:19:33.860 | and David Blanchett, who just left Morningstar,

01:19:36.700 | has done some brilliant work on this.

01:19:39.380 | If you can kind of carve out

01:19:43.740 | what are discretionary and non-discretionary,

01:19:46.100 | what you would cut if the market doesn't perform well,

01:19:49.100 | and then how much of your income is guaranteed,

01:19:52.160 | either through social security or pensions,

01:19:54.780 | that those can then adjust from that 3%,

01:19:58.180 | what you could safely spend.

01:20:00.040 | I'm not a believer in,

01:20:01.520 | if the market doesn't do well,

01:20:04.060 | you don't increase your expenditure.

01:20:05.420 | 'Cause then over time you're cutting your lifestyle.

01:20:08.020 | - Okay, good.

01:20:12.300 | Shifting gears here a little bit,

01:20:14.140 | there's some discussion on the chat around global bonds.

01:20:16.460 | And I know Vanguard, I think,

01:20:17.580 | introduced a global or international bond fund,

01:20:20.020 | and they're putting it in, I think,

01:20:21.180 | some of their target retirement funds, maybe.

01:20:23.620 | Maybe I'm speaking out of context here,

01:20:26.180 | but what do you think about global or international bonds?

01:20:29.260 | And is there a spot for that in a U.S. asset allocation?

01:20:33.760 | - I'll let Alan take that because no, I don't like that.

01:20:38.740 | - Yeah, I was lobbied very heavily

01:20:40.740 | when Vanguard came out with it to write about it.

01:20:43.900 | And I did write about it,

01:20:44.980 | but I kind of gave it a ho-hum sort of recommendation.

01:20:49.740 | And their argument is good that if you look at U.S. stocks,

01:20:53.060 | international stocks, U.S. bonds, international bonds,

01:20:56.180 | the largest part of the pie is international bonds.

01:20:59.840 | But international bonds are more expensive.

01:21:02.560 | I agree with Vanguard's hedging of them.

01:21:06.100 | And if you look at the purpose of the bond portfolio,

01:21:09.620 | it's the shock absorber, the stable value,

01:21:13.140 | the what you're gonna have to live on.

01:21:16.260 | And let's face it, most of my bonds,

01:21:18.620 | the vast majority are backed by the U.S. government.

01:21:21.020 | And if the U.S. government goes out of business

01:21:23.140 | and the portfolio is gonna fail.

01:21:25.060 | So I don't see an incredible need

01:21:26.940 | to buy the international bond.

01:21:28.660 | If you're gonna buy it,

01:21:29.660 | I would buy the Vanguard Total International Bond Fund.

01:21:33.240 | And if clients wanna have them,

01:21:34.680 | I'm happy to let them keep it.

01:21:36.820 | - What would be the top percentage of your bonds

01:21:39.480 | you'd recommend in international bonds

01:21:42.060 | if you decide to go that way?

01:21:43.560 | - You know, I've never been asked that question.

01:21:48.080 | So I'm gonna on the fly say,

01:21:50.180 | I certainly wouldn't go more than 10% of a bond portfolio.

01:21:54.020 | - Okay.

01:21:54.860 | - And again, it's high credit quality and it's hedged.

01:21:57.740 | So it's not a bad thing,

01:21:59.340 | but the fees are just a bit higher.

01:22:03.860 | - Okay.

01:22:04.700 | - I think one of the other, the important things too,

01:22:06.700 | is for investors should understand what they're buying.

01:22:10.720 | And I don't think that they would necessarily understand

01:22:14.300 | international bonds.

01:22:15.940 | So I just am not a fan of them.

01:22:19.460 | - Got it.

01:22:20.300 | Okay.

01:22:21.120 | This one came in specifically for Alan.

01:22:23.060 | Can you give us some examples of lower hanging fruit

01:22:25.340 | mentioned in his articles,

01:22:26.580 | recommendations for the current environment?

01:22:28.740 | - Well, you know, like I mentioned,

01:22:31.620 | I'm earning 1% on my cash

01:22:33.420 | versus leaving it at a Vanguard of fidelity at 0.01%.

01:22:38.260 | There are other things like if you have access

01:22:40.420 | to that TIAA traditional with a 3% guarantee

01:22:43.580 | or the G fund, if you're in, you know,

01:22:47.020 | the only thing that makes less sense

01:22:50.360 | than an expensive active fund is an expensive index fund,

01:22:54.500 | which is guaranteed to underperform.

01:22:57.140 | But low hanging fruit is something that I,

01:22:59.020 | or paying down the mortgage,

01:23:00.900 | getting that 2.5% return.

01:23:04.260 | Those are, you know, I define low hanging fruit

01:23:07.340 | as increasing your return without increasing any risk.

01:23:11.140 | So in other words, you're guaranteed,

01:23:13.340 | virtually guaranteed to do better with low hanging fruit.

01:23:16.660 | Don't go with Mercedes Benz financing, you know,

01:23:19.460 | paying 2% on your cash

01:23:21.740 | 'cause it's not even backed by Mercedes Benz,

01:23:23.860 | much less a government.

01:23:25.460 | Don't get greedy on those things.

01:23:27.580 | Those aren't low hanging fruit.

01:23:29.640 | The master limited partnerships,

01:23:31.940 | all those things that were just safe.

01:23:34.540 | It's like a toll road.

01:23:35.980 | You know, the oil has to flow through it, et cetera.

01:23:39.540 | Those are not low hanging fruit.

01:23:41.540 | Those are taking on a great amount of risk.

01:23:44.780 | - Okay, great.

01:23:47.060 | So I wanted to ask if you have your own website

01:23:49.060 | and Lady Geek posted to the wiki on your name

01:23:51.900 | and also daretobedull.com

01:23:54.020 | is where you can see Alan's blog posts and so on.

01:23:57.940 | The last question,

01:23:58.780 | 'cause we're coming up on our time limit here,

01:24:00.440 | it's gonna be a little, maybe a strange question,

01:24:02.480 | but why not end with a strange question?

01:24:04.680 | What have you learned?

01:24:05.760 | And this is, I think I'd like both of you to answer

01:24:07.440 | if you could.

01:24:08.260 | What have you learned in your life

01:24:09.160 | outside of personal finance

01:24:11.040 | that most helps you with personal finance?

01:24:13.720 | - Boy, that's a good one.

01:24:17.800 | - Without any warning, just throw it out there for you guys.

01:24:22.840 | - I think for me, I learned my lesson in finance

01:24:25.920 | very, very early and my parents

01:24:28.560 | had gone through the depression

01:24:30.600 | and they didn't trust banks.

01:24:33.560 | So I saw the Lindar Bank at home

01:24:38.200 | and I saw my mother budgeting.

01:24:40.720 | Of course, my father worked very hard.

01:24:42.960 | My mother was a homekeeper,

01:24:44.680 | but she had an envelope for every expense

01:24:49.680 | and that was the budget.

01:24:52.680 | So when dad cashed his check,

01:24:54.840 | he would give her the money

01:24:56.720 | and she would put so much in the envelope for food,

01:24:59.840 | so much for the electricity,

01:25:02.120 | so much for the house and so forth.

01:25:04.360 | So I saw that managing your money

01:25:07.200 | and if you got to an envelope,

01:25:11.600 | you didn't have any money left,

01:25:13.560 | you had to readjust the stuff

01:25:16.320 | that you had already put in the previous envelopes.

01:25:18.680 | So I learned that it was very important

01:25:21.080 | to manage your money

01:25:24.040 | and even when you didn't have a lot of it.

01:25:26.520 | And also I learned that you have to save up

01:25:31.520 | for things that you want

01:25:33.680 | and instead of using credit.

01:25:37.180 | When I was in the Marine Corps,

01:25:40.000 | I came home at 18 to buy a car

01:25:43.720 | and my dad had to co-sign for me

01:25:45.640 | and he had no credit

01:25:46.800 | because they had paid cash all his life.

01:25:49.800 | So I learned that when you want something,

01:25:53.040 | you save for it, you work for it.

01:25:55.440 | So to me, that was a very important lesson that I learned

01:25:59.840 | and live by all your means.

01:26:02.000 | I think it's lesson number one.

01:26:04.480 | - That's great.

01:26:05.320 | Thanks for that.

01:26:06.160 | That's all good advice.

01:26:07.000 | You should write a book or something, Alan.

01:26:09.120 | - Thank you.

01:26:10.680 | - I was kidding.

01:26:11.520 | I said you should write a book with all that advice

01:26:13.280 | and then I'm like, "Oh, yeah."

01:26:15.520 | Any last shots on your side, Alan?

01:26:18.080 | - Yeah, I would say like every Bogle head,

01:26:21.080 | I was born wired to be frugal

01:26:23.920 | and buying things on sale was a good thing.

01:26:30.800 | And when it comes to investing,

01:26:34.960 | those low fees and the rebalancing,

01:26:38.080 | buying after a market plunge,

01:26:39.720 | which I will admit was hard as heck for me to do last March

01:26:43.440 | or every time I have to do that.

01:26:46.280 | But yeah, it's those simple things that being frugal,

01:26:51.240 | buying things on sale, it works in investing as well.

01:26:55.640 | It's not exciting, but it just works.

01:26:59.280 | - Agree 100%, Alan.

01:27:02.640 | - That's great.

01:27:05.080 | I just want to kind of wrap this up

01:27:07.600 | and thank Taylor for popping in there.

01:27:09.680 | We're honored with your presence, Taylor.

01:27:11.120 | It's great to see you.

01:27:13.200 | We'll see you on the forum.

01:27:15.360 | And Mel and Alan specifically,

01:27:17.240 | thanks for your time and energy to this.

01:27:18.800 | This has been an awesome Minnesota Bogle head meeting.

01:27:21.840 | We're thrilled that you took the time

01:27:23.760 | out of a nice weekend to join us.

01:27:25.440 | And it is recorded.

01:27:27.320 | Diana, I think is hovering over the end recording

01:27:29.440 | and then the magic she does.

01:27:31.000 | And I think we have a zinger at the beginning,

01:27:34.520 | now in the end for these fancy videos

01:27:36.640 | and we'll get them online somehow and back out to people.

01:27:39.160 | So stay tuned for a wrap up with that.

01:27:42.920 | - Thanks, Jeff.

01:27:43.760 | Thanks, Diane, for doing all this.

01:27:45.920 | And Taylor, thank you for being here.

01:27:47.840 | - Alan, I'm honored to be here.

01:27:52.080 | - Awesome, on that, well said.

01:27:55.920 | We will see you next time.

01:27:57.600 | (upbeat music)

01:28:00.200 | (upbeat music)

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01:28:15.820 | (upbeat music)