Bogleheads University 101 2024 Key Portfolio Mistakes to Avoid with Allan Roth

00:00:00.000 | (audience applauding)

00:00:03.160 | Okay, I'm gonna go over seven mistakes

00:00:08.420 | and then I'm going to finally conclude

00:00:11.100 | with a case study of a sucker

00:00:15.060 | that made just about all of these mistakes.

00:00:17.800 | It's not you, Rick, don't panic.

00:00:20.860 | (audience laughing)

00:00:23.820 | But we buy high, sell low.

00:00:26.020 | We forget about arithmetic.

00:00:28.700 | Kind of like flies, we chase shiny objects.

00:00:32.780 | We confuse knowledge with unique knowledge

00:00:34.940 | that hasn't already been priced into the market.

00:00:37.500 | We suspend common sense.

00:00:40.260 | We create unnecessary complexity.

00:00:43.220 | And we sometimes speculate instead of invest.

00:00:47.760 | Now, markets and behavior.

00:00:51.860 | Here's the Vanguard Total Stock Market Index Fund.

00:00:55.340 | Total return, dividends and appreciation.

00:00:59.140 | And if you look at when people bought stock mutual funds,

00:01:04.140 | sold mutual funds, it's an all-time high, dot-com bubble.

00:01:09.620 | Cash flow no longer matters, let's get into stocks.

00:01:14.780 | Then they fall, we sell.

00:01:16.540 | Go up, we buy, sell, buy, sell.

00:01:19.340 | Repeat 'til broke.

00:01:21.740 | When I was at Kellogg Northwestern, not Chicago,

00:01:28.540 | we were told that you can't time the market.

00:01:32.860 | But it turns out we are really, really good

00:01:35.300 | at timing the market really, really poorly.

00:01:37.860 | And it pains me to say that we men do it worse.

00:01:44.180 | We forget about arithmetic.

00:01:49.860 | If the market earns 10%, guess what the average dollar

00:01:54.500 | invested in the market before fees is going to return?

00:01:58.660 | 10%.

00:01:59.500 | So if we pay 2% in fees,

00:02:03.940 | our expected return is gonna be 8%.

00:02:08.100 | But of course, you're not really seeing those fees.

00:02:10.420 | I'm taking them out without you feeling the pain.

00:02:13.020 | John Bogle would call it the cost matters hypothesis.

00:02:18.700 | Nobel Laureate, William Sharpe,

00:02:22.100 | proves it in a brilliant, incredibly simple

00:02:26.100 | three page paper.

00:02:28.140 | Google it, it's free.

00:02:30.220 | The arithmetic of active management.

00:02:32.780 | And we do not live and wake Wobegon,

00:02:35.260 | we're 90% or above average.

00:02:37.820 | However, I am one of the 95% of people

00:02:40.220 | that think I'm an above average driver.

00:02:42.180 | We chase shiny objects.

00:02:48.320 | Anybody hear of Cathy Wood and the ARC Innovation Fund?

00:02:52.840 | I mean, it was hot.

00:02:54.080 | And I saw her in a debate at Morningstar

00:02:58.800 | with another advisor kind of on the opposite side value.

00:03:02.800 | And she was absolutely brilliant.

00:03:06.160 | In fact, she got me excited about AI.

00:03:09.960 | This was over three years ago.

00:03:12.440 | And the returns that would have in the market.

00:03:16.680 | Brilliant.

00:03:17.600 | Now look at the blue line is her ARC Innovation Fund.

00:03:25.280 | Do you see how wonderful it had done when I heard her speak?

00:03:29.640 | When do you think money poured into her fund?

00:03:33.700 | At the very top.

00:03:37.800 | She destroyed more money than she ever made for people.

00:03:44.960 | Now Morningstar does their annual mind the gap survey.

00:03:49.960 | And you can see that on average,

00:03:52.800 | we know that expensive funds underperform the market.

00:03:57.080 | But we individuals underperform the funds themselves

00:04:01.600 | by putting money into what has done well in the past.

00:04:05.900 | We confuse knowledge with unique knowledge.

00:04:11.480 | I call it the markets are stupid hypothesis.

00:04:15.320 | I don't wanna own international stocks.

00:04:19.600 | There's two wars going on with such turmoil.

00:04:23.480 | There's a little turmoil here in the US

00:04:25.880 | with an election coming up.

00:04:27.240 | AI is gonna change the world.

00:04:31.640 | I want more NVIDIA.

00:04:33.220 | I think that's already priced into the market.

00:04:38.840 | But I'm gonna show you how I owned NVIDIA from its IPO.

00:04:44.460 | Do you know how?

00:04:46.660 | My total stock index fund.

00:04:50.600 | As Jack Bogle would say,

00:04:53.940 | don't look for the needle in the haystack,

00:04:56.100 | buy the haystack.

00:04:57.520 | The Fed is lowering rates,

00:05:00.420 | so I know stocks and bonds are gonna increase in value.

00:05:03.540 | The Fed doesn't control intermediate and long-term bonds,

00:05:10.060 | only the overnight rate, only short-term bonds.

00:05:13.440 | And they've already announced it.

00:05:15.060 | It's priced into the market.

00:05:16.500 | All right, here is where I'm gonna brag a little bit.

00:05:23.140 | When it comes to making predictions,

00:05:26.340 | I am absolutely brilliant.

00:05:30.260 | I can predict the past with uncanny accuracy.

00:05:34.580 | It's only the future I can't do.

00:05:36.820 | But beyond that, I can't even explain the past.

00:05:42.280 | Remember when COVID hit?

00:05:43.780 | Stocks fell 35% in 33 days

00:05:50.200 | between February 19th and March 23rd, 2020.

00:05:55.100 | I had an asset allocation target.

00:05:59.620 | And by the way, there is no one perfect method

00:06:04.340 | of rebalancing, but I like,

00:06:06.900 | you can rebalance as often as you want.

00:06:08.840 | I have some clients that like to do it very frequently.

00:06:11.700 | But think of it as a contract

00:06:14.780 | where you have to stay within, let's say,

00:06:16.780 | if 50/50 is your allocation to stocks,

00:06:20.660 | 6% tolerance, 6 percentage points.

00:06:23.640 | If you are below that, you're in breach of contract.

00:06:28.320 | So COVID hit.

00:06:29.500 | My life had changed.

00:06:33.260 | Everyone's lives had changed.

00:06:36.600 | What did I have to do?

00:06:40.920 | Buy stocks.

00:06:42.560 | Was it easy?

00:06:43.440 | Was it simple?

00:06:44.280 | Yes.

00:06:45.100 | Was it easy?

00:06:45.940 | No.

00:06:46.760 | It was incredibly hard.

00:06:48.320 | And the stock market ended up quickly recovered

00:06:53.760 | before a vaccine and ended up having a very good year.

00:06:57.720 | Now, I had another slide.

00:07:02.000 | I had to cut that out,

00:07:03.040 | but it was all the headlines on COVID during the year.

00:07:06.080 | Things were pretty, pretty bleak.

00:07:08.620 | Why did the stock market recover?

00:07:11.600 | I don't know.

00:07:12.800 | Because the stock market fools us often.

00:07:15.480 | Suspending common sense.

00:07:21.100 | I can get you all of the upside of the market,

00:07:23.500 | no downside risk.

00:07:25.440 | Just sign this 144-page disclaimer document

00:07:31.780 | that says you read everything.

00:07:36.220 | By the way, the disclosure document,

00:07:39.520 | who's it written by?

00:07:40.780 | Attorneys and actuaries.

00:07:45.200 | Do you think they're doing it to protect their company

00:07:47.240 | or protect you?

00:07:48.360 | And then market gurus.

00:07:53.520 | I've been chewed out by Jim Cramer's

00:07:57.560 | SVP of media relations twice.

00:08:00.880 | He's told me that Jim Cramer reads everything

00:08:03.400 | I write about him.

00:08:04.280 | And I said, "Thank you."

00:08:05.900 | (audience laughing)

00:08:07.980 | Or newsletters.

00:08:09.480 | If I knew how to beat the market,

00:08:12.780 | would I be pitching trying to sell you

00:08:16.180 | a one-year subscription to my newsletter

00:08:18.340 | at $199 a year?

00:08:21.780 | Creating complexity with a 50-page monthly statement,

00:08:30.980 | 43 different accounts.

00:08:35.300 | Simplicity almost always is better.

00:08:39.940 | Speculating rather than investing.

00:08:45.260 | Why does gold have value?

00:08:47.060 | Because people say it has value.

00:08:53.540 | It's pretty, it's rare, it's shiny.

00:08:58.500 | Yeah, chasing shiny objects.

00:09:01.060 | Belly button lint, that's pretty rare.

00:09:03.500 | (audience laughing)

00:09:05.120 | It's just not as pretty, darn it.

00:09:07.220 | Crypto, there are thousands,

00:09:12.100 | and Bitcoin is the giant, Ethereum is second.

00:09:17.100 | It does have some utility value.

00:09:20.900 | Also has a lot of fraud.

00:09:22.600 | But it's the same sort of thing.

00:09:25.700 | Bitcoin especially is rare,

00:09:28.860 | but there are thousands and thousands

00:09:30.620 | of different Bitcoins.

00:09:32.420 | I'm coming out with the Roth coin, by the way.

00:09:34.620 | At the end of the conference,

00:09:35.720 | there'll be a coupon for 10% off.

00:09:37.820 | Commodities.

00:09:40.520 | Commodities are important if you're, let's say,

00:09:46.960 | an oil company in an airline.

00:09:49.060 | But a few commodities you can actually buy,

00:09:54.280 | like gold, silver, platinum.

00:09:56.040 | But my HOA doesn't actually allow me

00:09:59.640 | to put an oil storage tank in my backyard.

00:10:03.900 | So what you're doing is buying commodity futures.

00:10:08.820 | We're in the aggregate and before fees,

00:10:11.180 | not a penny has ever been made.

00:10:13.120 | All right, I'm gonna show you a case study.

00:10:17.660 | This is a real sucker.

00:10:19.100 | It's not Rick.

00:10:21.660 | Rick, you're gonna enjoy this, 'cause it's me.

00:10:23.960 | I used to know everything.

00:10:27.400 | Shortly after I graduated from University of Colorado,

00:10:32.680 | (audience laughing)

00:10:35.680 | my parents were very generous.

00:10:38.880 | They gave me some money and I was frugal, still am.

00:10:43.240 | Rather than blow it all, I thought I was investing it.

00:10:48.240 | So I bought 10 ounces of gold at $684 an ounce.

00:10:54.700 | It had about a 20% pullback from over 800,

00:11:00.600 | so I thought I was buying it low.

00:11:03.280 | Why did I buy it?

00:11:04.280 | Because we're printing all this money.

00:11:07.200 | Paper fiat currency was gonna be worthless.

00:11:09.980 | I was gonna be rich.

00:11:13.840 | In 44 years, I made over $16,000.

00:11:18.840 | That may sound like a lot,

00:11:23.600 | but it didn't keep up with inflation.

00:11:25.200 | I lost buying power.

00:11:28.360 | Had I invested in Jack Bogle's S&P 500 Index Fund,

00:11:33.360 | how much more money do you think that I would have?

00:11:37.920 | Raise your hand if it's A, B, C, D.

00:11:44.800 | D is right.

00:11:49.880 | Almost a million dollar mistake.

00:11:53.040 | What was I guilty of?

00:11:57.780 | Number one, I thought I was buying low

00:11:59.960 | because it went down about 20%,

00:12:02.640 | but that was over a very short time period.

00:12:05.320 | I should have had a longer term perspective.

00:12:08.800 | Arguably, I don't highlight for forgetting arithmetic

00:12:12.400 | because it's not the same as the 10 minus two,

00:12:15.600 | but someone had to sell me the gold.

00:12:17.480 | The person who sold me the gold

00:12:19.400 | did better than me buying the gold,

00:12:22.220 | literally chasing shiny objects.

00:12:27.560 | Confusing knowledge with unique knowledge.

00:12:30.620 | I wasn't the only one that knew

00:12:32.820 | that we were running at a deficit in printing money.

00:12:38.320 | Suspending common sense,

00:12:41.460 | like I'm gonna show up to Safeway

00:12:45.500 | and buy milk with my gold.

00:12:48.600 | Creating complexity, yes, another holding.

00:12:53.500 | I had to put my safe deposit box,

00:12:56.300 | carry with me whenever we moved.

00:12:58.340 | And confusing speculation with investing.

00:13:02.920 | Stocks are wonderful.

00:13:05.480 | Those companies produce products, goods, and services

00:13:09.400 | that keep the economy going,

00:13:11.200 | give us things that have value, create jobs.

00:13:15.100 | It's wonderful.

00:13:16.440 | Gold, crypto doesn't do it.

00:13:19.300 | So I should have bet on capitalism.

00:13:26.080 | And by the way, in that asset allocation,

00:13:31.080 | I do push back on my clients

00:13:33.120 | because a client, there's two issues.

00:13:37.300 | Number one, a client may say,

00:13:40.360 | I know I have a lot of risk tolerance.

00:13:43.940 | I'm taking risk tolerance questionnaires.

00:13:47.200 | I know I'll rebalance when stocks dive

00:13:49.840 | versus those that say, I know it's gonna be painful.

00:13:54.100 | I hope I'll rebalance when stocks dive.

00:13:57.320 | Which ones do you think actually do it?

00:13:59.320 | The ones that understand the financial freedom

00:14:03.680 | that has evaporated during a bear market

00:14:06.720 | and how they might feel.

00:14:09.560 | So I also look at need to take risk

00:14:13.200 | or as William Bernstein would say,

00:14:15.240 | when you've won the game, quit playing.

00:14:17.040 | Doesn't mean go all in bonds.

00:14:18.600 | It just means you have a more conservative portfolio.

00:14:22.040 | Although if you have enough wealth,

00:14:23.320 | you're investing for future generations.

00:14:25.680 | I too have a client in his 90s who's over 90% stocks.

00:14:30.520 | So in eight words,

00:14:38.600 | investing is simply minimizing expenses and emotions.

00:14:41.920 | And as Rick said, taxes are part of those expenses

00:14:45.280 | and maximize diversification and discipline.

00:14:49.840 | Simple, but not so easy.

00:14:52.960 | And remember, we humans are predictably irrational.

00:14:57.720 | I can't predict the market, but in the next bear,

00:15:00.620 | what do you think people are gonna be doing

00:15:03.640 | with their stock mutual funds and ETFs?

00:15:06.260 | What should you be doing?

00:15:08.800 | Absolutely.

00:15:10.700 | That's it.

00:15:13.080 | Thank you.

00:15:13.920 | (audience applauding)

00:15:21.360 | - Okay, on one clarification.

00:15:23.140 | When I talked about asset allocation

00:15:27.580 | and I asked the client where they think they should be,

00:15:30.040 | that's the beginning of the discussion, not the end of it.

00:15:33.000 | Because then I listen and we have a conversation about it.

00:15:38.000 | So I wanna make sure I don't give the impression

00:15:39.940 | that we just go with what the client says.

00:15:42.820 | Anyway, okay.

00:15:44.440 | Oh, absolutely not.

00:15:48.180 | Go ahead.

00:15:50.200 | Believe it or not, sometimes I negotiate with a client

00:15:52.720 | with their own money.

00:15:53.820 | So if they want 70% stocks

00:15:58.000 | and I think 60% is more appropriate,

00:16:00.960 | what I do is I say, okay, let's start with 60%

00:16:05.960 | and when the market is down 20% or more from today,

00:16:09.880 | you can buy more stocks.

00:16:11.640 | I'm not timing the market, I'm testing their resolve.

00:16:14.620 | Guess how many people have come back to me

00:16:17.400 | once we were in that bear market to buy more stocks?

00:16:20.240 | Zero.

00:16:22.040 | (mouse clicking)

00:16:24.800 | [BLANK_AUDIO]

Bogleheads University 101 2024 Key Portfolio Mistakes to Avoid with Allan Roth

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