Bogleheads® Chapter Series – Paul Merriman Presents Ten Life-Changing Lessons
00:00:00.000 | Welcome to the Bogleheads Chapter Series.
00:00:04.240 | This episode was hosted by the Metro Boston Bogleheads Chapter and recorded September
00:00:08.800 | 17th, 2022.
00:00:10.200 | It features Paul Merriman from the Merriman Financial Education Foundation discussing
00:00:15.520 | the 10 most important lessons they have learned over the past decade.
00:00:19.960 | Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence.
00:00:24.800 | This recording is for informational purposes only and should not be construed as personalized
00:00:28.840 | investment advice.
00:00:30.400 | Okay, it's 12 o'clock so we're going to go ahead and get started.
00:00:36.280 | I wanted to welcome everyone to the Boston Bogleheads Chapter meeting.
00:00:39.640 | I'm Therese Reynolds, the Boston Chapter Coordinator, and a few things before we begin today's meeting.
00:00:46.400 | The presentation will be recorded, including the questions and answers.
00:00:50.560 | If you don't want to be seen on the recording, you can turn off your video.
00:00:54.120 | The chat will be saved, but all names will be removed.
00:00:57.520 | The recording will be saved on the Boglehead Chapter Series on YouTube, and I will also
00:01:03.800 | provide a link to the recording when it's available as well as a copy of today's presentation.
00:01:11.600 | And you'll have an opportunity to ask Paul questions after his presentation.
00:01:15.840 | Please put your questions in the chat or raise your hand.
00:01:19.080 | And just a few Zoom tips before we start.
00:01:22.400 | Please mute yourself during the presentation and stay muted unless you're speaking.
00:01:27.160 | On a laptop, you can raise and lower your hand by clicking on the reactions button at
00:01:31.200 | the bottom of the screen, and then click to raise the hand icon.
00:01:35.960 | And you can change your name by right-clicking on your photo and then selecting rename.
00:01:41.720 | And you can keep your video off during the presentation, but if you ask a question at
00:01:45.320 | the end, it would be nice to have your video on.
00:01:48.040 | All right, I'm going to go ahead and start.
00:01:51.520 | I'm very pleased to welcome Paul Merriman today and a little background on Paul.
00:01:56.800 | In 1983, Paul founded Merriman Wealth Management.
00:02:01.200 | After Paul sold his firm and retired in 2012, he established a financial education foundation,
00:02:07.920 | and the mission of the foundation is Merriman Financial Education Foundation believes knowledge
00:02:14.600 | is power and is dedicated to providing comprehensive financial education to investors at all stages
00:02:21.280 | of life, with information and tools to make informed decisions in their own best interest
00:02:27.040 | and successfully implement the retirement savings program.
00:02:30.960 | In the 10 years since Paul founded the foundation, he and his team have produced five books,
00:02:37.360 | and all but one are available at no cost through his website, and more than 700 articles, podcasts,
00:02:44.320 | and videos.
00:02:45.320 | His website also includes recommended mutual funds and best in class ETF portfolios at
00:02:52.160 | Vanguard, Fidelity, and Schwab.
00:02:55.040 | And I've been listening to Paul's podcast for over three years while driving to work
00:02:58.720 | each day, and I've learned so much from him about investment strategies and how to invest
00:03:04.240 | more money with less risk.
00:03:06.120 | And I'm also so impressed with the time Paul gives to educate investors of all ages with
00:03:11.000 | free information and tools to successfully implement the retirement savings programs.
00:03:16.920 | And when I contacted him to talk about our group, he not only said yes, but he was so
00:03:21.400 | enthusiastic and excited to do it, and we're really lucky to have him here today.
00:03:27.040 | The Merriman Financial Education Foundation is celebrating their 10-year anniversary this
00:03:31.760 | year, so Paul decided to take the opportunity to discuss the 10 most important new lessons
00:03:38.240 | they've learned over the past 10 years.
00:03:41.380 | And again, after Paul's presentation, we'll open it up for questions.
00:03:45.860 | And I will now turn it over to Paul.
00:03:48.360 | Thank you, Therese, and thank you for all that you've done to make this possible.
00:03:53.160 | I am excited.
00:03:54.280 | I've never made this presentation before, and as I thought about the 10 years that we've
00:04:01.000 | been working to help investors, I realized there's probably some things that are unique
00:04:07.840 | to our teaching.
00:04:10.200 | And so I thought I'd focus on the things that have come out of our foundation that we think
00:04:17.360 | are some of the best work in terms of helping investors understand the process of investing.
00:04:26.120 | And I do want to get my pointer up here for once in one second.
00:04:33.040 | You've already read the mission statement, Therese, so let me just add something about
00:04:40.320 | our mission and what we're trying to do.
00:04:42.640 | It's different, I think, from any other organization that I know.
00:04:46.880 | Yes, I was an investment advisor and worked with many investment advisors to help people
00:04:54.040 | do the actual not only the planning but the implementation and the managing of the money.
00:05:00.640 | And so I had to, we had to learn a lot about investing as a part of that process.
00:05:07.300 | And my goal is this, I am now here to help do-it-yourself investors do better.
00:05:13.440 | I mean, that's the goal.
00:05:16.480 | And that means from my viewpoint that when you are a do-it-yourself investor, it means
00:05:23.080 | you need now to be the professional.
00:05:25.520 | You need to know the information that the people that worked with me needed to know
00:05:30.280 | to give advice to others.
00:05:31.880 | Because in your case, you have one client, theoretically, maybe some kids and relatives,
00:05:38.640 | but basically you are the advisor to the most important investor on earth.
00:05:44.780 | And so I want to make sure that you have all of the data, all of the studies.
00:05:51.400 | And when I say all, I don't mean every study that was ever done, but the information that
00:05:57.640 | if you were an advisor to others, you would want to have that available to help them.
00:06:05.280 | So let me speak with you, share with you as a teacher.
00:06:11.800 | I'm not an investment advisor.
00:06:13.580 | I don't give anybody individual personal advice except very close friends.
00:06:20.320 | So I am a teacher and I know this old saying about when the student is ready, the teacher
00:06:25.680 | will appear.
00:06:26.680 | Well, I'm hoping that today for at least a handful of you, there's an opportunity to
00:06:33.200 | do some serious teaching here.
00:06:35.320 | And I thought it would only be fair if I share with you some of the major teachers in my
00:06:42.640 | life.
00:06:43.640 | Dr. Fama and Dr. French from the Dimensional Funds that actually they're academics who
00:06:51.200 | were the ones who developed the early research on factor investing, the premium for small,
00:06:57.760 | the premium for value, the premiums that now people understand commonly in building a portfolio
00:07:04.700 | to take advantage of not just being in the market, but what part of the market.
00:07:12.340 | And then of course, I mean, it's not just because I'm here with the Bogleheads I say
00:07:16.200 | this, but John Bogle, he was one of the best teachers.
00:07:23.000 | And yet my class with him was only 90 minutes in his office, but that 90 minutes truly changed
00:07:30.080 | my life.
00:07:31.760 | And then Jason Zweig, he writes for the Wall Street Journal.
00:07:35.380 | I hope if you haven't read Your Money and Your Brain that you will, because it is a
00:07:41.160 | wonderful paperback book cost next to nothing, and I think you will learn about why it appears
00:07:48.400 | so many people are just a little bit crazy when it comes to money topics.
00:07:54.680 | And then one of the best in the industry as a teacher is Larry Swedrow.
00:08:01.080 | I think he's written 15, 16 books, and every one of them is in its own way a classic.
00:08:08.080 | If you want to be good to yourself, in fact, I reached for this one.
00:08:14.360 | It's your complete guide to a successful and secure retirement.
00:08:19.600 | It is just terrific.
00:08:22.240 | And by the way, I am not a financial planner.
00:08:24.480 | I am not an estate planner.
00:08:26.040 | I am not a tax expert.
00:08:27.960 | I am not a CFP.
00:08:29.880 | I'm a guy that likes the process of investing.
00:08:34.040 | And then two other folks, I know you heard of one of them, many of you did, that's Chris
00:08:38.920 | Pedersen.
00:08:39.920 | Chris Pedersen has been an amazing teacher for me.
00:08:44.720 | He is our Director of Research.
00:08:46.640 | Daryl Balls is our Director of Analytics.
00:08:50.800 | You're going to see some of his work today.
00:08:53.200 | He has figured out such clever ways to teach people about how investing really works, and
00:09:01.720 | this is not my creation, this is his creation, and Chris has done what he's done.
00:09:07.880 | They both are working for our foundation without pay.
00:09:14.720 | And the final person, I suspect nobody there knows her because Atwood happens to be her
00:09:19.960 | maiden name.
00:09:20.960 | Sarah Louise Atwood is my mother, and there are two things she taught me.
00:09:26.720 | She taught me about the respect for others, and she taught me that it's my responsibility
00:09:32.200 | to serve others, and I am so happy she taught me that because without her, I probably would
00:09:40.480 | not be here today.
00:09:42.700 | So I'm going to focus on a handful of lessons.
00:09:46.160 | These lessons, I think, are some of the most important, and yet not all of them are taught
00:09:52.680 | or not taught the way I would like to see them taught, and lesson number one is about
00:09:57.760 | the importance of an extra one half of one percent.
00:10:03.720 | People throw returns around, and they oftentimes don't realize that just small changes in what
00:10:11.400 | we do with the portfolio could lead to little additional returns, and pretty soon, you've
00:10:16.320 | got an extra half of one percent, and what does an extra half of one percent potentially
00:10:21.080 | lead to?
00:10:23.040 | Early retirement for some, having more to spend in retirement for some, leaving more
00:10:30.040 | to others at the end of your life.
00:10:32.880 | In my case, my IRA all goes to the foundation at my passing, and so to the extent that I
00:10:40.360 | can, I want that to be as big as it possibly can to be there to help others, but for every
00:10:47.380 | extra half of one percent, I can make the case that whether you're a first-time investor
00:10:53.440 | or you're a first-time retiree, it can be a million-dollar payoff.
00:11:00.080 | Let me just show you quickly.
00:11:01.540 | Let's just assume we have two investors.
00:11:04.960 | One of those investors, and I want to get my pointer here for me if I can, just one
00:11:09.040 | second please.
00:11:10.040 | Well, I guess I'm not going to get my pointer right now, but one of these investors makes
00:11:15.640 | 8% during the accumulation period, and then in retirement makes 6%, and from that 6%,
00:11:24.080 | they take 4% each year to live on.
00:11:27.440 | The second investor makes an extra half of one percent.
00:11:31.840 | Now, I'm sure you have lots of ideas how one might make more money, but if there is an
00:11:38.200 | extra half a percent, that means 8.5% during the accumulation period and 6.5% during the
00:11:44.840 | distribution period.
00:11:46.840 | We make the assumption that $5,000 a year was invested, and they started at age 21,
00:11:53.200 | and they retired 46 years later, and they lived in retirement to enjoy the money to
00:12:00.880 | live on.
00:12:02.600 | What is the long-term impact on that?
00:12:05.200 | Well, first of all, there was an investment in both cases of $230,000.
00:12:11.880 | In the case of the first person, at retirement, they had about $2.3 million.
00:12:18.240 | They took withdrawals of 4%, and by the way, that means a little money is there to build
00:12:25.020 | and become of greater value in the future, but they took withdrawals of about $3.5 million.
00:12:32.740 | They left $3.8 million.
00:12:36.280 | From my viewpoint, when people ask me how I've done with my investments, I'm not going
00:12:41.340 | to really know how I did until I die, because at that point, they could figure out how much
00:12:47.820 | did he take out to live on and how much did he leave to others, and that is the real return
00:12:54.120 | on that $230,000, which if you add those two together, totals over $7 million, but the
00:13:02.320 | person who figured out a way to earn an extra half a 1%, instead of having $7.4 million,
00:13:11.320 | they have $9.6 million.
00:13:14.280 | They have $2.3 million more because some way, somehow, they found an extra half of 1%.
00:13:23.640 | And so when we wrote the book, We're Talking Millions, Rich Buck and I, 12 Simple Ways
00:13:29.440 | to Supercharge Your Retirement, it was really about looking for those one half of 1% opportunities,
00:13:38.520 | and they're legitimate, which in theory, if there are 12 of them, and in every case we
00:13:44.880 | can figure out a way when you come to a fork in the road to do better with one fork than
00:13:49.200 | the other, you could in each case have an extra million dollars.
00:13:55.200 | And by the way, I'm hoping that you will take the free copy of the book.
00:13:59.840 | I am hoping you will not go to Amazon and pay for the book.
00:14:04.160 | I am hoping you will take the free audio that you can get, and the reason I want you to
00:14:09.960 | get it free is because my hope is you will pass it on to family members.
00:14:15.200 | All you have to do is send them the link, and they're in.
00:14:19.680 | And my goal, my goal is if I can last 10 more years with this foundation, that we're going
00:14:25.280 | to get a million books out to people.
00:14:28.040 | Now, you all can get a copy of the book, it'll take you a couple of hours to read theoretically,
00:14:33.880 | but I can give you in just a few minutes what you're going to learn.
00:14:37.920 | Where can you get an extra 0.5%?
00:14:40.240 | And it turns out that the first one, choosing stocks over bonds for the long term, bonds
00:14:46.960 | compound at around five or less historically, stocks 10 and more as a group, depending what
00:14:54.280 | group you look at, you'll see that in a second, there is a 5% difference right there.
00:15:00.800 | If in fact a 0.5% will add a million, think what 10 0.5% or 5% would mean over a lifetime.
00:15:09.720 | It's huge.
00:15:11.240 | And yet a lot of young people refuse to go into the stock market because it's so risky.
00:15:17.320 | And choosing mutual funds over individual stocks, young investors think they're going
00:15:22.040 | to make the most money if they get on some hot horse and ride it.
00:15:27.660 | And yet every study I've seen says the probabilities over time are going to be greater with a diversified
00:15:33.000 | portfolio than a non-diversified portfolio.
00:15:37.320 | And what do Bogle heads know above all?
00:15:39.880 | That lower expenses are likely to lead to higher returns.
00:15:45.440 | That is true.
00:15:46.920 | That is absolutely true.
00:15:48.720 | That doesn't mean because you could get a bond fund with 1/10 of 1% fee compared to
00:15:53.880 | a stock fund of 2/10 of 1% that you should be in the bond fund, no.
00:15:58.680 | First it's the asset class, then it is the expense.
00:16:02.040 | There's no question based on what we know at Morningstar that an extra half a percent
00:16:06.840 | is just sitting there for a lot of people who are in mutual funds that are charging
00:16:11.560 | one even more than 1%.
00:16:14.140 | One thing a lot of people don't know is that when you're in a taxable account, Morningstar
00:16:19.520 | actually keeps track of the tax efficiency of funds.
00:16:23.880 | Some funds have very high tax efficiency.
00:16:27.480 | Some funds have very low tax efficiency.
00:16:30.600 | When you look at the difference between index and actively managed funds and you look at
00:16:35.680 | the after tax return, there's typically about 1% lost to taxes in an actively managed fund.
00:16:46.540 | And so that is just one more advantage for the index fund over actively managed.
00:16:51.840 | And of course, we want young people to take advantage of tax favored accounts.
00:16:59.120 | I'm going to be talking in a few minutes about a young investor, 17 years of age, who is
00:17:05.120 | making that choice to do tax favored investing.
00:17:08.640 | And I think you're going to love the outcome, potential outcome, and maybe find someone
00:17:14.260 | in your family to do the similar thing, adding small cap and value asset classes to a portfolio.
00:17:22.760 | Another way historically of adding a half a percent or more.
00:17:29.160 | Now these decisions here are not exactly about getting something that you can compare so
00:17:35.520 | easily, but I can tell you that choosing saving over spending is one of the biggest decisions
00:17:40.760 | we make.
00:17:41.760 | Warren Buffett says, don't say what's left over after spending, spend what's left over
00:17:46.100 | after saving, pay yourself first and start it early.
00:17:51.340 | This 17 year old young lady who started at 17 instead of waiting until she's got a full
00:17:58.220 | time job.
00:18:00.220 | It's going to make a huge difference.
00:18:02.020 | In fact, most people who see this today are not going to believe it.
00:18:07.180 | And then choosing buy and hold over market timing.
00:18:12.040 | Almost everybody says, oh, don't market time.
00:18:14.200 | Market timing doesn't work.
00:18:15.200 | You hear that all the time.
00:18:17.480 | Yet what do most people do?
00:18:19.500 | Yeah, most people do market timing.
00:18:22.900 | If they think interest rates are going up, they want to get out of bonds.
00:18:27.040 | If they think international is going to be better than U.S., they want to get out of
00:18:30.600 | U.S. and have it in international.
00:18:32.460 | They want to move things around.
00:18:34.380 | That all has to do with market timing.
00:18:37.000 | Now you can do it technically, mechanically, or you can think it all out, but it doesn't
00:18:41.760 | change the fact that you're taking steps to try to perform better.
00:18:46.560 | All of the evidence is it does not help.
00:18:54.000 | Lesson number two.
00:18:55.840 | I think this is huge.
00:18:57.840 | How to compare equity asset class returns.
00:19:03.520 | There's not enough information as far as I'm concerned.
00:19:07.460 | But what Darrell Balls has done to help us, first, he gives us this information.
00:19:12.320 | This is pretty simple information, but it's a good start about equity returns.
00:19:17.800 | Here's the S&P 500 large cap lend here in the first column.
00:19:22.720 | They call them as large cap value, small cap lend, then small cap value.
00:19:28.000 | And over the last 94 years, those returns ranged from 10.2 up to 13.4%.
00:19:37.360 | Looking for a half a percent?
00:19:39.320 | Sounds like there's some in there.
00:19:42.280 | But these are very, very high-risk investments on a short-term basis.
00:19:47.760 | This is what scares so many young people away.
00:19:50.280 | I might lose a lot of money.
00:19:52.120 | You will lose a lot of money.
00:19:53.720 | We just don't know when.
00:19:55.960 | But we know looking backwards that the best year that the S&P 500 ever had was up 54%.
00:20:02.680 | The worst calendar year was down 43.
00:20:06.040 | And each of these asset classes, you can see there, and here's, by the way, the gold ring
00:20:13.560 | of asset classes is U.S. small cap value.
00:20:18.880 | Because that compound rate of return is about 3% more than the S&P 500.
00:20:24.720 | That's a lot.
00:20:27.200 | And the risks on the downside are not that much higher when you think about the potential
00:20:35.400 | return.
00:20:36.400 | Now, I'm just going to give you a little taste right here.
00:20:38.520 | But notice to the far right, we have these combinations of these four different asset
00:20:45.040 | classes.
00:20:47.160 | And if you put 25% in each of those four, the compound rate of return over the last
00:20:52.960 | 94 years has been 11.9%.
00:20:57.240 | And the returns against on the upside and the downside, well, on the upside, they're
00:21:01.440 | much better.
00:21:02.440 | On the downside, they're not that much worse.
00:21:06.200 | More on that later.
00:21:08.160 | When we go out, and this is the lesson young people need to understand, when we go out
00:21:13.640 | and look at 15-year periods, all of a sudden, you're not looking at a plus 50 and a minus
00:21:19.160 | 40.
00:21:20.440 | You're looking at the best 15-year compound rate of return was 18.9 with the S&P 500.
00:21:26.960 | And the worst was a break, a little better than break even.
00:21:31.720 | And the other ones were not that different, by the way.
00:21:35.000 | Large cap value was a little loss.
00:21:38.680 | Small cap blend was a better profit, 1.6% a year.
00:21:42.840 | Small cap value, a loss of 1.9%.
00:21:45.320 | Now, that's 1.9% for 15 years.
00:21:49.020 | So that's not a small loss, but that's the compound rate of return.
00:21:54.520 | And here again, we have these combinations of asset classes.
00:21:59.080 | Look over here.
00:22:00.080 | I love this.
00:22:01.080 | I just love it.
00:22:02.080 | Here's the strategy, half in S&P 500, half in small cap value.
00:22:07.840 | Compound rate of return, the best was 21.6%.
00:22:11.440 | The worst was virtually the same as the worst for the S&P 500.
00:22:18.560 | But the best information is the longer term information, because that difference between
00:22:24.520 | the best and the worst continues to shrink.
00:22:27.360 | That's an important thing for young investors in particular to understand, that your risk
00:22:33.640 | in reality goes down a lot.
00:22:36.840 | And the best 40-year return was a gain of 12.5%.
00:22:41.280 | The worst was a gain of 8.9%.
00:22:44.360 | So the worst 40 years was still profitable.
00:22:48.480 | And by the way, if you inflation adjust those returns for those periods, there was only
00:22:53.280 | about a 1% difference.
00:22:55.640 | So these are nominal returns without adjustment for inflation.
00:23:00.740 | And notice the average 40-year return of the S&P 500 happens to be the return of the last
00:23:07.440 | 52 years, 11%.
00:23:11.760 | Small cap value was 16.2% average.
00:23:16.360 | That didn't, the last 52 years didn't produce 16, but it produced about 14.
00:23:23.480 | And large cap value and small cap blend are in between.
00:23:27.800 | And again, when you look at these combinations, you go from 11 with the S&P 500 to 13.7 with
00:23:36.960 | the combination of the four asset classes.
00:23:40.840 | And look, the worst 40 years was 10.8, about 2% better than the worst 40 years for the
00:23:46.920 | S&P 500.
00:23:48.560 | I'm thinking that that four fund strategy is worth at least taking a look and finding
00:23:54.400 | out more about that risk in return.
00:23:58.720 | Now here's, and I mentioned this before, short-term returns are random.
00:24:04.200 | They're all over the place.
00:24:06.680 | Now when you ask people, well, what do you think the market will do next year?
00:24:09.880 | Invariably, most people will say, ah, probably up about 10%.
00:24:13.880 | Why do they say that?
00:24:15.440 | Because that's the compound rate of return basically for the long-term.
00:24:20.600 | But the reality is it's going to be all over the place.
00:24:24.520 | And I want some way, some tool, some information that would help me and help others understand
00:24:31.880 | that randomness.
00:24:32.880 | And here it is, Daryl Balls, our director of analytics built this table.
00:24:38.880 | I just love this table because I can look at this from 30,000 feet.
00:24:44.960 | I realized that these different colors, green is the S&P 500.
00:24:50.720 | The kind of yellowish tan is the large cap value.
00:24:53.600 | The reddish color is small cap blend.
00:24:57.400 | The electric blue is small cap value.
00:25:00.120 | And then we have that four fund combo that's purple.
00:25:05.160 | But when I look just at the green, because green is what I know, the S&P 500.
00:25:11.640 | By the way, I also know that the S&P 500, that that expected return is lower because
00:25:18.320 | it's of higher quality.
00:25:20.720 | And if it is lower because it's of higher quality, that means that it's probably not
00:25:25.880 | going to be number one very often.
00:25:28.320 | Well, it is number one often, regardless of what the long-term return is.
00:25:35.280 | But we never know when.
00:25:36.280 | I mean, there was a period here from 1940 to 1945, where it's green every year at the
00:25:42.120 | bottom for six years.
00:25:45.640 | But then if we fast forward to 2014 here through 2019, in all but one year, it was at the top
00:25:53.000 | of the pile.
00:25:55.520 | And of course, anytime it's at the top of the pile, people say it's the only place to
00:25:59.880 | be.
00:26:00.880 | They say small cap value is dead.The premium for small cap value is no longer available
00:26:06.480 | because the S&P 500 recently has been doing well.
00:26:10.240 | That is one of the biggest traps.
00:26:12.280 | It makes you believe that there is something, a trend that is going to last longer than
00:26:18.280 | it is likely to last.
00:26:20.840 | So I just want to use this to show how this stuff just moves around from year to year.
00:26:29.480 | And those who think they're going to market time or find some sort of a pattern here--
00:26:35.360 | and I'll talk about the pattern that I get here that just knocks my socks off.
00:26:40.240 | But as far as a pattern to know where you should be, green, blue, brown, red, whatever,
00:26:45.720 | it isn't here.
00:26:49.600 | Asset classes drive returns, lesson four.
00:26:55.000 | If you look at all those years, you will see, if you look at one year at a time, that it
00:27:03.120 | is the asset classes that make you or lose you money, not the stock picking, not the
00:27:09.760 | market timing.
00:27:10.760 | And let me just take you through four years, just four years of that quilt chart that Darryl
00:27:18.280 | put together.
00:27:19.840 | '97, small cap value up 39%, large cap value up 38.4%.
00:27:28.720 | Hey, looks to me like it was a year that value was kind of king of the hill or queen of the
00:27:36.480 | hill because it was the two value funds sitting at the top there of performance.
00:27:42.240 | Down here at the bottom, these were not horrible years.
00:27:45.800 | But remember, when you see the S&P 500, I want you to think growth.
00:27:50.840 | It is not a value index.
00:27:52.160 | Yes, it has some value in it, but it is cap weighted, and those returns are driven by
00:27:57.960 | the most growth-oriented companies.
00:28:02.100 | And the same is true with small cap land.
00:28:04.200 | You've got the power of small growth.
00:28:07.620 | So that was not the place to be.
00:28:11.160 | And by the way, when I say that, understand, there's no risk in the past.
00:28:15.800 | I always know what we, and we always know what we should have done.
00:28:19.760 | And all we have to do is look at the past and see what we should have done.
00:28:23.680 | Well, in 1997, we should have been in value.
00:28:28.040 | But what good did that do us for '98?
00:28:30.040 | Because in '98, it wasn't small.
00:28:33.600 | It wasn't value or growth that drove the positive returns.
00:28:38.600 | It was large, large blend, and large value that created the positive returns.
00:28:45.800 | Now true, yes, large growth did better than large value.
00:28:50.560 | But notice, the small cap indexes actually lost money.
00:28:56.400 | So if you looked at the list of the best performing funds for 1998, guess what?
00:29:02.120 | They are going to be large cap kind of growth-oriented funds.
00:29:07.440 | The worst performers are going to be in the small cap.
00:29:12.480 | And yet these people who were in the large cap growth or blend, they'd like to think
00:29:17.880 | that they were reason that they were so good was because they picked the right stocks.
00:29:23.040 | No, they were in the right asset class.
00:29:26.920 | 1999, all of a sudden, it looks like growth was the winner because small cap blend and
00:29:34.840 | large cap blend, never driven by growth mostly, did well compared to the value.
00:29:40.880 | Yeah, value was up, but about a third of what the growth was up.
00:29:46.880 | And finally, in our fourth year, here we see it again, values leading the pack.
00:29:52.760 | In fact, small cap value up 20.5 and the S&P 500 down 9.1.
00:30:01.000 | And you could ask yourself, are they in the same market?
00:30:05.320 | How can that be?
00:30:06.960 | But if you look back at that 1928 to 2019 quilt chart that Darrell put together,
00:30:14.680 | you will see that is not an unusual outcome.
00:30:19.400 | In fact, between the S&P 500 and the small cap value,
00:30:25.120 | the average difference in return per year is about 15%.
00:30:31.080 | Lesson number five, diversification of asset classes is a million dollar decision.
00:30:40.560 | See, a lot of people have told, all you really need is the total market index.
00:30:46.120 | All you really need, Warren Buffett says, is the S&P 500.
00:30:51.840 | Because those are really good companies and they drive a good long-term return.
00:30:59.400 | But they totally ignore the idea of diversification.
00:31:04.040 | Well, they'll say, of course, there's diversification in the S&P 500.
00:31:07.640 | There's 500 companies.
00:31:09.680 | But they are 500 companies that are basically in the same asset class.
00:31:15.480 | And sometimes those asset classes fall apart for long periods of time.
00:31:23.240 | But I want you to see the impact of diversification.
00:31:28.480 | And you can say that I am optimizing or data mining.
00:31:33.000 | And I don't think I am at all.
00:31:36.960 | Because I'm looking at this whole 1928 to 2019 period.
00:31:43.760 | And I'm seeing the green and the blue and all these colors all over the place.
00:31:48.480 | But when I look at the diversified portfolio of all four of those asset classes,
00:31:56.280 | I see a lower risk investment.
00:32:00.160 | I see a strategy that is likely to help me stay the course when there are times
00:32:06.120 | that people want to bail out of other investments.
00:32:09.920 | And I'll show that to you in a few minutes with the S&P 500 from 2000 to 2009.
00:32:15.640 | You'll see it in action.
00:32:18.720 | It fell apart.
00:32:21.040 | Well, yeah, it fell apart after it was up over 17% for 25 years from 1975 to '99.
00:32:31.040 | So it's not like it's a miracle that it was out of sorts and out of favor
00:32:36.560 | for the decade of 2000 through 2009.
00:32:40.960 | But a diversified portfolio of asset classes, what's the key?
00:32:46.560 | Lesson number six.
00:32:54.080 | Now, I've already given it to you.
00:32:56.760 | But I'm going to add something to it.
00:32:59.080 | It's a little uncomfortable.
00:33:01.040 | But there's no question from looking backwards.
00:33:03.200 | If you want to use the past as any indication of the future,
00:33:06.720 | that small cap value is the best of these major asset classes for the long term.
00:33:11.800 | And the academics would say, well, it's easy to understand why.
00:33:16.720 | Because you get the market return in it.
00:33:20.240 | You get the small cap premium in it.
00:33:22.120 | And you get the value premium all wrapped up in one.
00:33:27.000 | You don't get the value premium in the S&P 500 in the same way.
00:33:31.480 | You don't get the small cap premium in the S&P 500.
00:33:39.600 | Let's just look.
00:33:41.040 | Instead of one year at a time, let's look at 10 years.
00:33:43.800 | Look at the decades from 1930 to '39, 1940 to '49, '50 to '59, et cetera.
00:33:51.120 | And we can see in each decade, which of these asset classes--
00:33:54.840 | by the way, in this particular study, Daryl
00:33:59.000 | was kind enough to add fixed income so you could get an idea that,
00:34:02.720 | for young people who think that fixed income is a good thing to do,
00:34:05.640 | that for the long term, it probably is not.
00:34:09.880 | And these are nominal returns.
00:34:11.360 | Again, Daryl's always there to make that difference, not inflation adjusted.
00:34:17.400 | Look at their small cap value at the top.
00:34:21.200 | By significant amounts, by the way, in five of the nine decades.
00:34:28.800 | But there are a couple of decades the S&P 500 was at the top.
00:34:34.560 | There was also a decade that it was at the bottom.
00:34:36.840 | Another decade it was at second from the bottom.
00:34:39.640 | In fact, T-bills from 1970 to 1979 had a better compound rate
00:34:44.800 | of return than the S&P 500.
00:34:50.080 | And over the whole period, small cap value, 13.7, S&P 500, 9.8.
00:34:58.840 | 1930 through 2019.
00:35:02.920 | But I want you to notice again about that four fund strategy.
00:35:09.160 | I think this is important.
00:35:11.360 | The four fund combo outperformed significantly
00:35:16.840 | in many of the decades, the S&P 500.
00:35:21.920 | I'm here at 1949, 1949, 14.3 for the four funds versus 9.2.
00:35:30.440 | 1960 to '69, 11.3 versus 7.8.
00:35:35.280 | '70 to '79, 10.6 versus 5.9.
00:35:39.480 | Yes, in 1990 to '99, it was number one.
00:35:42.680 | And in 2010 through 2019, it was number one.
00:35:46.320 | But look where four fund combo is.
00:35:48.480 | It was just right in there, just almost, not quite the same,
00:35:51.920 | but almost the same.
00:35:53.120 | So when somebody says, put all your money
00:35:57.760 | in the total market index, put all your money in the S&P 500,
00:36:02.160 | I just want you to see there are other things you
00:36:05.520 | might do if the future looks like the past.
00:36:11.480 | And when you do it, you are increasing
00:36:14.120 | your diversification, not only with more companies,
00:36:18.120 | but with more asset classes.
00:36:20.120 | And then Darrell did something.
00:36:28.080 | This is just a part of the entire study,
00:36:29.960 | but it's kind of the bottom line.
00:36:32.840 | And I love this study, too, because it tells us,
00:36:35.760 | in a way, what we might expect, depending
00:36:39.040 | on how radical a position that we take.
00:36:44.160 | It turns out, if we take the position that the S&P 500 is
00:36:48.080 | a place to be, that in 36 of these years,
00:36:55.920 | that you would be in the top 20%.
00:36:58.680 | And in 48 of the years, you'd be in the bottom 20%.
00:37:08.280 | Interestingly enough, with very few in the center.
00:37:12.120 | At the other end of the spectrum is the small cap value,
00:37:17.280 | 45 times number 1, 31 times number 5.
00:37:22.760 | As opposed to what?
00:37:25.360 | As opposed to a portfolio that's all value, small and large.
00:37:31.880 | You didn't get 13.4, but you got 12.5.
00:37:35.600 | That's pretty doggone good.
00:37:38.440 | Or the two fund strategy, the S&P 500
00:37:41.880 | with small cap value, 12.2, 2% better.
00:37:47.040 | There, you were never in the top quintile.
00:37:50.800 | You were never in the bottom.
00:37:52.160 | You were always somewhere in the middle.
00:37:54.960 | And then the four fund strategy.
00:37:58.160 | Made a little less, 12% instead of 10.2.
00:38:01.840 | Again, rarely at the top or the bottom.
00:38:05.640 | And then finally, the S&P 500.
00:38:08.880 | Now, I'm rooting for people.
00:38:10.920 | I get paid nothing to do the work that I'm doing.
00:38:14.760 | In fact, I'm the one that has written most of the checks
00:38:17.880 | to keep this process going.
00:38:20.800 | I am trying to change the financial future.
00:38:25.520 | So many of you, you're in your 40s, your 50s, and your 60s.
00:38:29.560 | And you're going to say, well, that's interesting,
00:38:31.680 | I've already got a portfolio that I
00:38:33.280 | know enough about that I don't need to improve mine.
00:38:35.920 | But I am hoping that you'll suggest to your kids
00:38:38.880 | that maybe this is a better idea than what you've been doing.
00:38:42.240 | Maybe.
00:38:43.960 | And by the way, this is not me with a big know-it-all head.
00:38:49.080 | In fact, just the opposite.
00:38:52.040 | I can't know it all.
00:38:53.440 | In fact, I know what people want to know.
00:38:55.840 | I've been in the business.
00:38:56.840 | I was in it from 1983 until 2012.
00:39:01.920 | People, the most asked question is,
00:39:04.160 | what do you think the market's going to do?
00:39:07.240 | And if I answer, how the hell should I know?
00:39:10.040 | They say, well, I don't want to do business with you.
00:39:12.920 | I want to do business with people who know
00:39:14.960 | what the market's going to do.
00:39:17.760 | Well, most Vogel heads and most members of the AAII,
00:39:22.520 | where I've been teaching since 1983 or '84,
00:39:26.560 | they know better.
00:39:28.680 | But we're all longing for someone to know.
00:39:33.960 | I think what you can know.
00:39:36.600 | You can know kind of how the volatility is--
00:39:41.720 | what it's going to look like.
00:39:43.160 | Not when is it going to be up 20 and down 20.
00:39:46.400 | But what should I expect in terms of down years and up
00:39:49.200 | years?
00:39:50.280 | And how long may a bad period go?
00:39:52.880 | There are a lot of questions that
00:39:54.680 | can get answered from looking at the past.
00:39:57.640 | That's the part of the past I want you to know.
00:40:01.040 | But it was the academics who noted the small cap
00:40:04.160 | and the value factor, premium.
00:40:08.280 | And you can choose to say, there is no premium for small cap.
00:40:12.600 | There is no premium for value.
00:40:15.120 | Or you could say, by the way, you
00:40:16.640 | could because nobody knows.
00:40:18.360 | There also is no premium for stocks over bonds.
00:40:23.240 | Well, in fact, since the year 2000, that's been largely true.
00:40:29.440 | Yeah, I mentioned earlier for 25 years,
00:40:31.680 | the market was up over 17% a year.
00:40:34.120 | But since it was up over 17% a year for 25 years, since 2000,
00:40:38.720 | the compound rate of return is less than 7 and 1/2%
00:40:42.320 | for the S&P 500.
00:40:44.000 | Is it reasonable to conclude that the premiums
00:40:48.760 | that we've known in the past from equities are gone?
00:40:52.600 | I don't know.
00:40:53.720 | Nobody knows.
00:40:56.080 | I don't think so.
00:40:57.120 | Lesson 7, why most people who try small cap value
00:41:05.320 | will be disappointed.
00:41:09.880 | There are people who should never touch small cap value
00:41:14.480 | because the moment that they're going to want to touch it
00:41:18.320 | is when it's red hot.
00:41:21.040 | And that's when we get burned, right?
00:41:23.840 | Let me show it to you.
00:41:24.840 | This is thanks to Darrell Balls again.
00:41:28.200 | This is called a telltale chart.
00:41:30.080 | To the best of our knowledge, the first telltale chart
00:41:33.760 | was developed or was displayed by John Bogle.
00:41:37.360 | But we don't know that for a fact.
00:41:39.520 | But here's what it shows.
00:41:41.520 | And it's magic in the story it tells.
00:41:45.840 | It compares the relative growth of two asset classes
00:41:50.000 | in this particular case, small cap value and the S&P 500.
00:41:55.720 | When the line is going down, when the graph is going down,
00:42:00.800 | it doesn't mean that they're losing money.
00:42:04.400 | It means that the relative growth for the S&P 500
00:42:10.200 | is better than that for small cap value.
00:42:14.920 | When the lines are going up, it means small cap value
00:42:19.360 | has better relative growth.
00:42:22.400 | Now, if all I want to see is the bottom line,
00:42:25.240 | I go to the far right over here, and I look at this 14 number,
00:42:29.640 | and it says, basically, if you put money into small cap value
00:42:33.720 | back in 1927, you would end the period
00:42:36.840 | with 14 times more money in small cap value
00:42:40.520 | than you had in the S&P 500.
00:42:43.080 | Oh, well, I want some of that, of course.
00:42:47.240 | But you have to understand that for about 17 years and six
00:42:54.720 | months from the beginning time in 1927
00:42:58.200 | until sometime in the '40s, you would have been better off
00:43:03.200 | to be in large cap blend in the S&P 500.
00:43:09.240 | But small cap value finally caught up and did better,
00:43:14.240 | only to move sideways for another 19 years.
00:43:19.520 | Then it spurred up again for a very short period of time,
00:43:24.040 | and then it moved sideways for 7 years, 11 months.
00:43:28.120 | Then another spurt, and another sideways for 17 years.
00:43:32.160 | Then another spurt, then another sideways for over 16 years.
00:43:38.480 | And what do you think?
00:43:40.240 | When do you think that investors are
00:43:42.880 | going to be most interested in adding small cap
00:43:47.520 | value to their portfolio?
00:43:51.120 | You see, this is why I want you to think like an advisor.
00:43:55.040 | I want you to know what an advisor knows
00:43:57.480 | about these numbers.
00:44:00.000 | Because when you get tempted by the emotion of investing,
00:44:05.840 | you see, that's why people theoretically
00:44:08.080 | come out ahead with a professional investment
00:44:10.960 | advisor, financial planner, than doing it themselves.
00:44:14.400 | Because they're supposed to be objective, one.
00:44:17.240 | And two, they're supposed to be educated.
00:44:19.280 | And this is the information they're
00:44:21.240 | supposed to know, that they can say to you, wait a minute.
00:44:25.920 | I just want you to realize, you're
00:44:27.880 | wanting to add an asset class that
00:44:30.720 | has been making tons of money at a time
00:44:33.440 | that maybe it's not going to make
00:44:35.360 | tons of money for many years.
00:44:38.160 | By the way, for those very long periods where it moves sideways,
00:44:42.680 | at the end of that period, it means basically
00:44:45.760 | that the S&P 500 and small cap value ended at the same place.
00:44:50.640 | Thank you, Darrell Balz.
00:44:55.880 | Lesson number eight.
00:45:04.400 | Few funds, a couple of funds, three funds, four funds,
00:45:08.760 | maybe five funds, can be just as profitable as having 10 funds
00:45:16.080 | and without taking any more risk.
00:45:19.640 | Now, this was a lesson that changed my life.
00:45:23.160 | Because I was out there telling people about the strategy
00:45:28.400 | that I was using for my clients, not
00:45:33.960 | thinking about the implications of people
00:45:37.320 | being a do-it-yourself investor.
00:45:39.800 | So here was the pitch I used to make.
00:45:43.320 | And we updated this table every year.
00:45:46.200 | The pitch I used to make was, you put $100,000
00:45:49.080 | into the S&P 500 in 1970.
00:45:52.080 | How would you have done if you just let it be?
00:45:54.040 | You didn't add any money, you didn't take any money out
00:45:56.280 | without paying any taxes, and 11% compound rate of return
00:46:00.080 | grew to $23 million.
00:46:02.680 | $100,000 to $23 million, that's all you need to know.
00:46:06.840 | But if I made one very small step, a baby step,
00:46:10.640 | and I added large cap value as an asset class for 10%
00:46:16.080 | of the portfolio, the return goes up from 11 to 11.2.
00:46:22.560 | And you may be saying, well, so what?
00:46:24.920 | I mean, that's not all that much.
00:46:27.120 | Yes, it is.
00:46:27.920 | The $23 million goes to $25 million.
00:46:31.400 | And then when you add 10% small cap blend,
00:46:33.920 | and it goes up 1/10 of 1% more, it
00:46:38.000 | adds over another about $1.7 million.
00:46:40.800 | And then you add small cap value,
00:46:43.240 | and it goes up about $5 million.
00:46:48.000 | And by the time you've added REITs
00:46:49.680 | and the international asset classes, big, small, value,
00:46:52.840 | et cetera, and then you add also emerging markets.
00:46:59.840 | You have gone from an 11% compound rate of return
00:47:04.120 | to a 12.6, and you're more diversified.
00:47:13.160 | You're a little more volatile, but most of that volatility,
00:47:17.000 | as you're going to see, is on the upside,
00:47:19.280 | not on the downside.
00:47:20.840 | But I tried to take this 10 fund strategy
00:47:24.160 | and shove it down the throat of do-it-yourself investors.
00:47:29.080 | And that's when I got the what for from John Bogle
00:47:33.400 | when I spent 90 minutes with him in 2017 in his office.
00:47:37.960 | He was the best teacher in that 90 minutes I ever had.
00:47:42.800 | He not only changed my life--
00:47:45.560 | and by the way, Chris Pedersen was
00:47:47.480 | trying to get me to do the same thing--
00:47:50.760 | but he changed the life of a lot of people
00:47:53.160 | who were now willing to do something
00:47:54.800 | more than the total market or the S&P 500.
00:47:57.760 | Maybe not with much, maybe just with a little,
00:48:01.520 | but give themselves an opportunity
00:48:03.360 | to make a better rate of return.
00:48:06.040 | Another lesson on this page, by the way,
00:48:08.760 | I want you to look down here.
00:48:09.960 | Notice instead of 12.6, this particular same--
00:48:13.880 | by the way, same asset class.
00:48:15.680 | 3/10 of 1% less.
00:48:17.840 | Instead of 47.7 million, you end up with 42.6 million.
00:48:22.480 | The difference is the portfolio was rebalanced
00:48:25.720 | on a monthly basis instead of an annual basis.
00:48:28.600 | The top one is annual, the lower one is monthly.
00:48:33.280 | But it's less risky because you keep
00:48:36.120 | taking money away from the more risky asset classes that
00:48:39.840 | are producing the higher returns.
00:48:42.640 | Daryl is working on a wonderful study right now.
00:48:47.160 | The implications of rebalancing every couple of years,
00:48:53.680 | every three years, every five years.
00:48:56.120 | I think you'll like it.
00:48:58.920 | So out of this came, between John Bogle's motivation
00:49:05.880 | and Chris's willingness, along with Daryl Ball's to work hard
00:49:11.320 | to help us see what these small portfolios, what they could do.
00:49:18.360 | We developed all these different portfolios.
00:49:21.360 | And now what we need to do is to be
00:49:23.320 | able to show people how with a few funds,
00:49:26.360 | we're still getting access to value.
00:49:28.400 | We're still getting access to small.
00:49:30.840 | We're not ignoring it.
00:49:31.960 | We're not ignoring it.
00:49:33.080 | We're still getting access to small.
00:49:35.680 | We're not ignoring those things that we
00:49:37.480 | want in that portfolio.
00:49:40.600 | And once again, Daryl Ball's hits a home run.
00:49:45.200 | I'm not kidding.
00:49:46.280 | The first time I saw this table, and I love tables of numbers,
00:49:51.760 | and saw what Daryl did in trying to help people,
00:49:54.560 | to educate people, I was just blown away
00:49:58.680 | I now understood risk from a whole new way.
00:50:04.920 | Here's what he did.
00:50:06.640 | He took each one of these portfolios, the S&P 500,
00:50:11.160 | the 10 Fund Strategy, the 4 Fund Worldwide, the 4 Fund US,
00:50:16.160 | the 5 Fund Worldwide All-Value, the 2 Fund All-Value US,
00:50:22.520 | the Worldwide 2 Fund Small Cap Value.
00:50:25.120 | That could actually be three.
00:50:27.720 | And the combination of the US large blend and small value.
00:50:33.360 | And there's one more here.
00:50:36.960 | No, there's the all small cap value.
00:50:39.560 | And the last one here is the US 2 Fund, half S&P 500,
00:50:45.000 | half small cap value.
00:50:47.280 | And here's what he did.
00:50:48.440 | He created, and he sent this to me with these boxes,
00:50:52.280 | because he knew it would help me.
00:50:53.880 | And I hope it helps you.
00:50:56.040 | Because one way to look at return
00:50:57.760 | is to break this down over some periods of time that
00:51:00.960 | would be meaningful to see how different they might be
00:51:04.720 | for what we'll call a relatively short period of time.
00:51:07.680 | In this particular case, he looked at 10 year periods.
00:51:10.520 | He looked at the S&P 500, looked at the whole period
00:51:13.560 | from 70 to 21, got an 11% compound rate of return.
00:51:17.480 | But he looked at 70 to 79, and 80 to 89, and 90 to 99,
00:51:22.440 | 2009, and 2010 to '21, just to catch what we had.
00:51:29.640 | And the first thing that just stood right out to me
00:51:33.960 | was not only the difference between 11
00:51:37.120 | and these other compound rates of return, but 70 to 79.
00:51:43.160 | Here is this problem of owning one asset class.
00:51:48.720 | It wasn't good during that period.
00:51:52.760 | And yet the worldwide all value, or the US four fund strategy,
00:51:58.240 | or the worldwide all small cap value,
00:52:02.080 | they were clear winners during a period of time
00:52:05.160 | that people thought it was the end of the stock market,
00:52:09.120 | literally.
00:52:11.280 | The end of equities was the front cover of US news
00:52:15.920 | and world report.
00:52:18.560 | But-- and by the way, the same thing
00:52:20.960 | happened in 2000 through 2009.
00:52:24.120 | The S&P 500 had a terrible 10 year period.
00:52:28.440 | But everybody else, all these other combinations,
00:52:31.040 | because they were other asset classes, in many cases,
00:52:34.440 | along with the S&P 500.
00:52:38.440 | So I thought the blue area was really
00:52:41.960 | helpful in understanding the kind of randomness of this,
00:52:45.320 | how different these different strategies might perform.
00:52:49.360 | I thought maybe people might start thinking about, well,
00:52:52.040 | maybe I'll have some of the four fund US
00:52:55.600 | and the worldwide all value.
00:52:58.160 | I mean, I didn't know how people might use this information.
00:53:03.720 | But then Darrell did a second thing.
00:53:06.440 | He looked at only the up years.
00:53:09.600 | So he looked at the S&P 500 and each of the other,
00:53:12.440 | and he looked at how many years--
00:53:15.600 | pardon me, were they up?
00:53:16.840 | They were up in 42 years out of the 52.
00:53:21.840 | And the average gain was 18.7%.
00:53:24.880 | That's an important number.
00:53:27.120 | The sum of all of those years was 787% when they made money.
00:53:37.080 | And the best year was up 37.5%.
00:53:42.440 | Now I can look at other strategies.
00:53:45.080 | And the first thing I noticed is in every case, in every case,
00:53:52.080 | the averages were much, much higher.
00:53:55.680 | Well, I guess we should have because the returns were higher.
00:54:00.720 | But in some cases by a lot.
00:54:05.960 | But that tells us about the good times.
00:54:07.960 | And nobody has any trouble with the good times.
00:54:11.000 | In fact, I would bet that if somebody owned the S&P 500
00:54:15.200 | and they were up 18.7% a year, average on those 42 up years,
00:54:20.360 | they would be pleased as punch.
00:54:23.240 | OK?
00:54:25.400 | But it's the down years that causes
00:54:27.240 | people to leave the industry, to give up on their investing,
00:54:31.640 | which is that reason I'm so pro four fund strategy,
00:54:36.480 | to try to protect from things getting too far out of whack.
00:54:40.880 | Well, here's what we know.
00:54:44.080 | If you looked at all of the down years,
00:54:47.480 | you would see the sum of all of the 10 down years with the S&P
00:54:53.360 | 500 was 141%.
00:54:58.280 | Well, that's a nice relationship.
00:55:00.880 | 10 losing years, 141%.
00:55:03.920 | 42 profitable years, 787.
00:55:07.440 | The gains are 18.7.
00:55:09.280 | The losses are 14.1.
00:55:10.960 | You know, I've got a feeling for that asset
00:55:13.000 | class and that strategy.
00:55:16.480 | On the other hand, just for fun, go all the way
00:55:19.440 | to the right side of the page and you'll see the number
00:55:21.920 | of up years, 41.
00:55:24.320 | For the two fund strategy that is half S&P 500
00:55:28.720 | and half small cap value, total sum of the bad years,
00:55:38.000 | 130% versus 141 for the S&P 500.
00:55:46.200 | Whoa.
00:55:48.240 | I mean, the part I don't like is losing money.
00:55:51.760 | And that tells me that it is not unreasonable to believe
00:55:57.040 | that the losses that I will sustain in the future
00:56:00.240 | will be similar, whether I am in the two fund strategy or the S&P
00:56:04.360 | 500 alone, but one gets 11% and the other gets 12.7,
00:56:11.800 | at least during this period of time.
00:56:15.560 | And here's the other part that we should understand.
00:56:20.360 | If the down years are about the same,
00:56:24.840 | but if the standard deviation for that two fund strategy
00:56:29.080 | is higher than the standard deviation for the S&P 500,
00:56:33.280 | people are thinking, oh, it's more risky.
00:56:36.840 | Well, in a sense, it was more volatile,
00:56:40.000 | but it was more volatile in the good years.
00:56:43.000 | It was the good years that made the difference
00:56:46.520 | in that standard deviation, not the bad years.
00:56:52.200 | I love this work, Daryl.
00:56:53.760 | Thank you.
00:56:54.280 | I know I'm running out of time.
00:57:00.280 | I'm going to keep going here.
00:57:01.480 | I'm going to make this one real short.
00:57:03.400 | Lesson number nine, the bogo heads in Boston
00:57:08.040 | already heard from Chris Pedersen.
00:57:10.720 | He developed a strategy called Two Funds for Life.
00:57:13.840 | It is one of the most clever strategies I have ever seen.
00:57:18.560 | What he did was he combined a target date fund, a fund that
00:57:22.400 | changes its asset class, its mix as you get older.
00:57:26.600 | It starts adding more fixed income to the portfolio
00:57:30.560 | as you would expect a pension fund who
00:57:32.560 | was taking care of your pension payout
00:57:35.600 | would get more conservative as you get older.
00:57:40.160 | But he adds a little something that just isn't there
00:57:43.120 | in that target date fund.
00:57:45.600 | He adds small cap value, and he's
00:57:47.520 | got a couple of ways to add it.
00:57:50.080 | One is you just put 10%.
00:57:52.200 | Let's say you're investing 10% of your money.
00:57:54.640 | 9% goes into the target date fund.
00:57:57.160 | 1% goes into the small cap value.
00:58:01.200 | And over a period of investing, you
00:58:07.160 | will probably pick up an extra 1/2% return over time.
00:58:14.200 | And if you put in 20% instead of 10,
00:58:16.920 | you even make more from everything
00:58:19.800 | we know about the past.
00:58:21.200 | And you would be making a weak fund stronger.
00:58:26.440 | I love target date funds.
00:58:28.200 | I am not being critical of them.
00:58:31.480 | But for reasons of not wanting to deal with questions
00:58:35.600 | from investors-- why is this in there?
00:58:38.080 | It didn't do well last year.
00:58:40.320 | They don't put small cap value into the fund
00:58:44.520 | for any significant amount.
00:58:49.280 | And by the way, Chris then came up with another super idea.
00:58:54.080 | And that is for people who are young and more aggressive--
00:58:58.400 | and by the way, the last half of We're Talking Millions
00:59:03.520 | is dedicated to this particular strategy in a really basic way.
00:59:10.960 | In Chris's book, Two Funds for Life,
00:59:13.240 | he digs in like a good engineer would
00:59:15.760 | and really tears the strategy apart
00:59:18.480 | for people who are really interested.
00:59:20.240 | It's a wonderful book.
00:59:22.400 | It's the only one of our books that aren't free.
00:59:24.400 | But I can tell you that every book that's
00:59:26.440 | sold at Amazon, the royalties all go to the foundation.
00:59:30.240 | Chris does not get a cent.
00:59:34.040 | You multiply your age times 1.5.
00:59:37.440 | You're 30.
00:59:38.160 | That'd be 45.
00:59:40.040 | 45% goes into the target date fund.
00:59:43.000 | 55% goes into small cap value.
00:59:45.680 | As you get closer and closer to age 60 and 65,
00:59:50.040 | you are in the process of eliminating the small cap
00:59:53.040 | value.
00:59:54.200 | And if you really want to spend the time,
00:59:57.720 | go watch his presentation to Bogleheads, the Boston chapter
01:00:02.880 | that was done earlier this year.
01:00:05.360 | And in, I think, the chat notes, you all have access to a PDF.
01:00:12.440 | So if you want to capture these links, all you have to do
01:00:17.200 | is download that PDF, and it will give you
01:00:19.440 | all the links I'm going to mention as we go along.
01:00:23.640 | How much in stocks and bonds?
01:00:25.840 | Huge.
01:00:26.800 | This is a huge decision.
01:00:28.400 | I want you to be all in stocks when you're 20 and 30.
01:00:34.480 | I want you to be all in stocks probably to your 40
01:00:37.000 | and then start cooling your jets a little bit.
01:00:41.360 | But here's what we provide.
01:00:43.240 | And I know this looks like a lot of numbers,
01:00:46.760 | but that's what an investment advisor wants to see.
01:00:51.000 | They learn from these numbers.
01:00:53.120 | And by the way, the numbers are way better than the graph
01:00:55.920 | because the graph hides a lot of stuff
01:00:58.440 | that you can see when you see the numbers.
01:01:02.520 | But we have fine tuning tables for every one
01:01:05.440 | of our strategies, equity strategies, combinations
01:01:09.040 | of those different equity asset classes.
01:01:13.360 | And on the right-hand side of this table
01:01:15.440 | is the 100% equity portfolio.
01:01:18.560 | So you can look year by year from 1970 to 2021
01:01:22.880 | and see how the S&P 500 did.
01:01:26.800 | And we loaded it with a minimal expense
01:01:28.920 | that you would pay today.
01:01:31.960 | On the far left-hand side is 100% bonds.
01:01:34.800 | And as you move to the right from the left,
01:01:37.800 | every time you move one line, you are adding 10% equities.
01:01:43.840 | So those of you who are afraid of equities,
01:01:47.280 | I want you to see the bottom of this page.
01:01:49.720 | This is where the learning is really good, I think.
01:01:55.640 | I want you to notice 100% bonds over that 52-year period
01:02:00.840 | had a 7.1% compound rate of return.
01:02:04.640 | That's probably too high, isn't it, today?
01:02:07.720 | By a lot.
01:02:10.000 | Maybe not for long.
01:02:11.040 | We don't know.
01:02:12.480 | I want you to see what happens.
01:02:13.720 | Every time you add 10% in stocks, the return goes up.
01:02:18.280 | Half of 1%, half of 1%, 4/10 of 1%, 5/10 of 1%, 4/10,
01:02:24.600 | 3/10, et cetera.
01:02:28.080 | And every time you add more equities,
01:02:31.680 | not only does the return go up, but so does the risk.
01:02:36.440 | So my wife and I, we are not in the S&P 500.
01:02:40.760 | We're in the 10-fund strategy.
01:02:43.600 | But with the S&P 500, if you have a 50/50 stock bond
01:02:47.920 | portfolio, you've got to be ready to lose
01:02:49.960 | 23% of your money in a year.
01:02:53.320 | Well, I mean, you do if you think the past is relevant.
01:03:00.720 | And I love to be able to show these negative numbers to go
01:03:05.000 | along with the positive numbers.
01:03:07.800 | You see, when you get a sales pitch and not a real advisor,
01:03:13.040 | you'll be learning about the upside.
01:03:14.840 | You will not be learning about the downside.
01:03:18.120 | And I want you to prepare--
01:03:20.600 | hope for the best, of course, but prepare for the worst.
01:03:23.400 | Make sure-- in some cases, it makes sense for people
01:03:26.600 | to take less risk and save more money.
01:03:29.560 | Because if they take too much risk,
01:03:31.080 | they're going to throw in the towel.
01:03:32.840 | And then where are they?
01:03:35.560 | And I have-- like I said, I've got these same tables.
01:03:37.880 | Daryl puts them together.
01:03:39.800 | This table's for the US 4-fund portfolio.
01:03:42.960 | You can see the exact same relationship
01:03:45.160 | between return and risk, except that as you
01:03:50.360 | move across the table, you're picking up more than 5/10 of 1%
01:03:54.200 | because the underlining strategy had a higher compound
01:03:57.760 | rate of return.
01:03:58.400 | 11, young investors.
01:04:06.040 | Please share this with them.
01:04:08.200 | Another one of Daryl's goodies.
01:04:14.080 | I told him I wanted to figure out a way to help young people
01:04:16.600 | understand what it's like to put a little bit of money in
01:04:19.320 | and keep adding some money.
01:04:21.040 | And he came back with this, and I love it.
01:04:25.360 | We take the strategy.
01:04:26.320 | We do the skin with all the different strategies.
01:04:30.120 | Some of them, by the way, are 50/50 US international.
01:04:34.720 | Some of them are 70/30.
01:04:36.040 | We look at it from every direction or many directions.
01:04:42.280 | Here's what happened.
01:04:44.200 | You put away $1,000, $83.33 a month.
01:04:49.600 | At the end of the first year, after taking
01:04:52.480 | the risk of the stock market, you had $1,022.
01:04:55.720 | In other words, you put in $1,000 of your money,
01:04:59.840 | and all you got was $22 in profit.
01:05:05.360 | And you could say, what is going on here?
01:05:07.480 | I did this to make money.
01:05:10.840 | Well, when you see the rest of the table
01:05:13.360 | and you understand what patience--
01:05:15.080 | and maybe these tables help build patience.
01:05:18.720 | And that is always what an advisor is trying to do,
01:05:22.360 | is to build patience with the investor.
01:05:25.600 | Notice what it looks like at the end of 10 years, $16,000.
01:05:30.840 | At the end of the next 10 years, almost $120,000.
01:05:35.440 | At the end of the next 10 years, almost $700,000
01:05:39.600 | after 30 years of putting away from $1,000 to $2,300.
01:05:48.480 | And then the worst thing happened for the next 10 years.
01:05:52.880 | Remember, this is the S&P 500 only.
01:05:57.760 | No asset class diversification.
01:06:01.000 | The next 10 years ends with $662,853.
01:06:07.240 | You lost money overall.
01:06:11.560 | But what if?
01:06:13.280 | What if instead you had the US four fund strategy?
01:06:16.360 | Remember, it's a big, small value, growth, et cetera.
01:06:21.000 | Where were you at the end of 30 years?
01:06:23.120 | Well, you were a little over $700,000 at $783,000.
01:06:28.280 | Maybe not as much over as you thought you would be.
01:06:32.000 | But at the end of the next 10 years, instead of losing money,
01:06:35.840 | you had $1,282,000.
01:06:41.120 | And at the end, if you look at the whole 52-year period,
01:06:45.840 | the S&P category, all equities, $3.7 million in value
01:06:51.240 | versus almost $6 million in value.
01:06:55.480 | Little things mean so much.
01:07:00.280 | And then there's the distributions.
01:07:03.880 | We have over 100 tables devoted to looking at different ways
01:07:09.400 | to distribute money.
01:07:11.560 | I know it's overkill, but we're trying
01:07:14.600 | to make sure we have information that will help
01:07:18.280 | as many investors as we can.
01:07:20.920 | Fixed means you start with an amount of money.
01:07:23.440 | Let's say on $1 million, you start with $40,000.
01:07:26.600 | You take that out.
01:07:27.400 | There's that old 4%.
01:07:29.880 | And then you adjust for inflation each year.
01:07:35.440 | Flexible means that you totally ignore inflation.
01:07:40.120 | You just take out 4% a year or 5% a year.
01:07:44.640 | That's what my wife and I do.
01:07:46.400 | We ignore inflation because we over-save.
01:07:49.240 | We don't have to worry about inflation.
01:07:51.960 | That, I think, is one of the greatest financial luxuries
01:07:55.200 | we have, is to have over-saved when we retire,
01:07:59.080 | because we don't have to worry about inflation so much.
01:08:02.200 | But with the flexible, you take out 4%,
01:08:08.400 | whatever the portfolio was worth the end of the previous year.
01:08:12.360 | The market goes up.
01:08:13.360 | You get 4% the following year of a higher number.
01:08:16.680 | If it goes down, you get 4% of a lower number.
01:08:21.320 | And here it is, the S&P 500 on a fixed basis.
01:08:25.280 | Again, you see all of these columns
01:08:27.560 | because it is replicating the fine-tuning tables,
01:08:30.720 | putting the fine-tuning tables to work.
01:08:35.720 | And we can see how bad it got with a 100% stock portfolio.
01:08:43.320 | You got down all the way to $718,000 from a million
01:08:47.760 | at the end of 1974.
01:08:50.800 | Ah, but if you had fixed income, you got down 50/50.
01:08:56.120 | That's what my wife and I had.
01:08:57.720 | You got down to 956.
01:08:59.760 | It still wasn't pretty, but it wasn't 718.
01:09:04.760 | That's why we have fixed income in there
01:09:06.720 | is to protect against those kind of periods.
01:09:10.720 | But I can look at the bottom, oh, I can go out 30 years.
01:09:14.320 | The 50/50 ended up with 5.4 million.
01:09:18.560 | The 100% stock, 6.3 million.
01:09:21.080 | But you went through hell to get there.
01:09:23.360 | Here it is if you made one small change, exactly
01:09:30.840 | the same investments.
01:09:32.480 | But instead of taking out $40,000,
01:09:34.200 | you take out $50,000.
01:09:36.280 | You run out of money.
01:09:37.720 | Now, you won't probably let yourself run out of money.
01:09:40.640 | You'll simply reduce your lifestyle.
01:09:42.840 | And instead of taking $50,000, you'll be taking less.
01:09:48.200 | Maybe moving in with your kids.
01:09:49.520 | Then there's the flexible.
01:09:55.720 | As I say, we have over 100 tables
01:09:57.960 | to support you in this arena.
01:10:00.560 | And here we look, for example, this is the 5% a year.
01:10:04.640 | Remember?
01:10:05.360 | Starting with $50,000, you ran out of money.
01:10:07.680 | Notice every column goes to the bottom.
01:10:10.480 | Why?
01:10:11.280 | Because there was an adjustment downward after a bad year,
01:10:15.480 | not an adjustment upward.
01:10:17.360 | Makes a difference.
01:10:18.720 | Lesson 13, I'm almost done.
01:10:24.000 | This is for young people.
01:10:26.120 | You want to do something special.
01:10:28.240 | You want to do something for one year of a kid's life, just one.
01:10:33.640 | I want you to do something that means
01:10:36.320 | you will be able to give that child for one
01:10:40.680 | year of their life a million dollars.
01:10:45.600 | What I want you to do is I want you to put, please,
01:10:49.640 | I want you to put $365 into an account in small cap value.
01:10:55.840 | And I want you to hold that in your name
01:10:58.000 | until that child is earning some money where
01:11:00.600 | you can take whatever that $365 is
01:11:03.720 | and you put it into a Roth IRA.
01:11:06.080 | And through that whole period, you're in small cap value.
01:11:09.120 | And from that point for the rest of that child's life,
01:11:11.680 | I want that money to be in small cap value.
01:11:16.200 | And if small cap value for 70 years compounds at 12%,
01:11:22.600 | that is over a million dollars.
01:11:25.600 | Now, Daryl would say, but yeah, what after inflation?
01:11:28.720 | OK, about $100,000.
01:11:32.560 | Now, just for one year, do something like that for them.
01:11:36.760 | And then if you feel like it, the next year
01:11:40.480 | you put in $365 for when they're 71.
01:11:44.360 | And then the next year for when they're 72.
01:11:46.560 | You get it?
01:11:49.320 | Now, by the way, a $3,000 upfront payment
01:11:54.400 | will get you a huge amount of money
01:11:57.000 | in terms of funding a Roth IRA to turn
01:12:02.000 | into tens of millions of dollars.
01:12:06.360 | I will be funding this for my new grandchild.
01:12:13.480 | Every one of my grandkids gets a little pot of money
01:12:16.200 | to grow for them for the future.
01:12:18.960 | But then I want to talk about this first five
01:12:21.240 | years of a Roth IRA.
01:12:22.560 | This could be for when that little kid grows up.
01:12:26.880 | But the bottom line is that if you
01:12:29.920 | are able to early in a child's life put away the $6,000,
01:12:36.000 | and in this particular case I'm going to tell you about,
01:12:38.840 | it's a real case.
01:12:40.040 | It just started in the last months.
01:12:42.720 | But I believe, as much as anything
01:12:44.400 | I believe about the future, that this young lady is
01:12:47.040 | going to do what she says she's going to do,
01:12:49.200 | because she's been working and earning money.
01:12:52.680 | And she's going to put away $6,000 a year
01:12:55.720 | into a Roth IRA.
01:12:56.920 | Now, she is getting some help from grandma and grandpa
01:12:59.680 | and mom and dad for college.
01:13:01.320 | OK?
01:13:03.480 | So they're actually very proud that she's doing this.
01:13:07.080 | She is going to put the $6,000 a year for five years.
01:13:13.240 | And then she's going to stop that Roth IRA.
01:13:18.000 | And she is going to let it go in small cap value.
01:13:23.520 | And if she does that, and she does it until she is 65,
01:13:27.680 | and then she takes out 4%, and she continues
01:13:30.720 | to own that small cap value, I mean, after the five years,
01:13:35.480 | she can go ahead and do whatever conservative things she wants.
01:13:40.000 | I want her to own this package of companies.
01:13:42.560 | It's not like they're a bunch of losers.
01:13:45.880 | It's not by-- it's a bunch of bums.
01:13:49.440 | These are little companies that are all--
01:13:52.480 | they are, let's say, $3 billion in size on average right now.
01:13:59.280 | So what I'm saying is, is that if this works
01:14:03.560 | and the 12% is achieved, she will have in that account
01:14:08.200 | $5.3 million at retirement.
01:14:10.720 | She will take withdrawals from age 65 to 95 of $22 million.
01:14:15.920 | And she takes a 4% annual withdrawal.
01:14:18.600 | And she will have $46 million left over for her heirs.
01:14:23.680 | All right, your child cannot afford $6,000.
01:14:28.880 | If they could afford $600, you just simply divide it by 10.
01:14:35.160 | It's still a huge amount of money.
01:14:39.120 | And a great lesson with patience.
01:14:42.920 | And it's not unusual for people to believe in putting money
01:14:46.200 | aside and living it forever.
01:14:48.840 | People do that all the time in corporations
01:14:52.440 | that they like for the long term.
01:14:55.160 | I like this asset class for the long term.
01:14:59.920 | If it's too late for you to do it at 17, do it at 20.
01:15:02.920 | Do it at 25.
01:15:03.880 | Do it at 30.
01:15:05.360 | Darrell took it over all these periods, what you would have
01:15:08.720 | at the end, including the legacy amount from when
01:15:12.840 | you could get started.
01:15:13.840 | We have a lifetime investment calculator
01:15:20.520 | that I hope every one of you will give a shot.
01:15:24.360 | It is wonderful.
01:15:25.960 | It allows you to do all of these things
01:15:28.320 | I'm talking about that I talked about today,
01:15:31.120 | except to do it with your own numbers.
01:15:34.000 | And there's one other thing it does that I just love.
01:15:38.640 | Let's say you thought the numbers I'm showing just
01:15:41.320 | don't seem reasonable for the future,
01:15:43.720 | but you like the idea that all the volatility is there.
01:15:46.600 | And yeah, life is probably going to be something like that.
01:15:50.040 | Or maybe I should start in 1973 and see how it works out,
01:15:53.920 | or 1990 and see how it works out.
01:15:56.600 | All of those things can be done.
01:15:58.160 | But it allows you to go in and say, take a half of 1% off
01:16:03.680 | of all the returns to the table.
01:16:05.560 | Take a percent off.
01:16:08.400 | Well, there you go.
01:16:10.080 | Make the assumption I want to hire an advisor
01:16:12.280 | and pay them 1%.
01:16:13.640 | Take 1% off the top and see how I'll do.
01:16:17.120 | This is all that stuff.
01:16:24.520 | As a matter of fact, Therese went
01:16:27.960 | through all of this in the introduction,
01:16:29.640 | so I'm not going to do anything except.
01:16:31.680 | I want to mention one thing of what I think
01:16:34.400 | is of great importance.
01:16:35.440 | It's the last one.
01:16:37.520 | We have a best advice link on our site.
01:16:42.560 | When you go there, that's on our home page, when you go there,
01:16:46.440 | you're going to see a dropdown with a bunch of topics.
01:16:49.840 | These are topics I talked about today.
01:16:53.080 | I did not talk at any length.
01:16:55.520 | Or in fact, I didn't talk about the portfolios,
01:16:58.320 | the recommendations that we make for investors
01:17:01.120 | and our best in class ETFs.
01:17:03.520 | I don't think I touched on that.
01:17:05.600 | But if you go to any of these links,
01:17:10.040 | you're going to get an article about the fine-tuning tables,
01:17:13.320 | you're going to get a podcast about the fine-tuning tables,
01:17:16.320 | and you're going to get the updated fine-tuning tables
01:17:19.400 | through the end of the previous year.
01:17:21.160 | Every year, we go in and update all this work
01:17:24.400 | with a new podcast, with a new article,
01:17:27.320 | in the hopes that it will get you up to date in the work
01:17:30.200 | that we're doing.
01:17:31.080 | And what can you do for us?
01:17:33.200 | Easy, share our information with others.
01:17:36.800 | Leave comments and kudos on social media.
01:17:39.560 | You all know how to do it, whether it's
01:17:41.920 | YouTube or a podcast.
01:17:43.880 | We need that help.
01:17:46.080 | And give us feedback.
01:17:48.920 | I am more than happy to find out that--
01:17:52.880 | I'm happy when you tell me you like what we're doing,
01:17:55.360 | but I'm also happy when you tell me what you
01:17:57.800 | would like us to do more of.
01:17:59.720 | And we are a 501(c)(3) foundation,
01:18:03.680 | and we do use the donations that are given to us.
01:18:08.480 | About a third of the money that we spend each year
01:18:10.920 | comes from outside donations.
01:18:12.960 | The other money comes from inside.
01:18:17.720 | And there's my email.
01:18:19.720 | I'm available.
01:18:21.640 | I'm not available to be an advisor.
01:18:24.480 | I'm available to answer generic questions,
01:18:26.920 | and most of the answers will go into a podcast or a newsletter
01:18:32.240 | or a video.
01:18:34.640 | And every once in a while, I pick up the phone
01:18:36.720 | and call somebody because I'm confused.
01:18:40.240 | So I appreciate it when you leave a phone number.
01:18:43.400 | Again, I do not give personal advice, but I know how to nudge.
01:18:50.000 | All right, Therese.
01:18:51.760 | Thank you.
01:18:53.480 | I'm going to stop sharing.
01:18:55.880 | And open this up, if we might, for questions.
01:19:01.920 | OK.
01:19:02.440 | Thanks so much, Paul.
01:19:04.560 | Just having you go through all those tables
01:19:06.720 | is really helpful because it's a lot of information.
01:19:09.280 | I know they can all be found on your website,
01:19:11.840 | but it can be overwhelming.
01:19:13.320 | So I think it's helpful to go through that, especially
01:19:16.600 | for young investors, some really good information.
01:19:19.840 | I know that my two sons are actually on this Zoom call,
01:19:23.480 | so hopefully they're learning a lot.
01:19:26.000 | That's great.
01:19:28.120 | We do have a few questions that have come to me
01:19:31.560 | either through email or I've gotten some of them
01:19:33.480 | out of the chat.
01:19:34.720 | So I'm going to start--
01:19:36.720 | I'll just start with the first one here.
01:19:39.640 | I've been listening to Paul's podcast
01:19:41.360 | and am interested in his for-fund approach
01:19:43.680 | to investing in equities.
01:19:45.480 | I currently have my Roth and Vanguard's Total Stock Market
01:19:48.680 | Index, VTSAX, for simplicity.
01:19:52.560 | My questions are, one, does VTSAX
01:19:56.160 | approximate the for-fund approach?
01:19:59.560 | And two, which would have provided the best returns
01:20:03.160 | in historical analysis?
01:20:06.640 | Well, the Total Market Index is going
01:20:09.320 | to give about the same return as the S&P 500.
01:20:11.880 | They tracked it all the way back to 1928.
01:20:14.920 | And there is a 1/10 of 1% a year advantage to the S&P 500
01:20:19.880 | in those long studies.
01:20:21.600 | So what that really says is, even though the Total Market
01:20:24.800 | Index does give people some exposure to small-cap value
01:20:28.760 | and to some large-cap value and mid-cap holdings
01:20:32.600 | that the S&P 500 does not, because these things
01:20:36.640 | are cap-weighted and are driven by the growth
01:20:39.440 | part of the portfolio, that's not enough small-cap value.
01:20:43.480 | That's not enough small-cap land.
01:20:45.160 | That's not enough large-cap value to move the needle.
01:20:49.240 | So what happens is, by moving the needle
01:20:54.760 | and putting 25% each into each of those four asset classes,
01:21:00.400 | you move the needle over 1.5% a year in terms of return.
01:21:05.800 | Now, that's from the past.
01:21:08.000 | And we don't know what we should expect out of the future.
01:21:11.480 | But the academics tell us that they expect there
01:21:14.920 | will be a small-cap premium.
01:21:16.480 | They expect there will be a value premium.
01:21:19.040 | What they don't know is by how much.
01:21:22.920 | We know that for the period of 1928 to 2021,
01:21:30.600 | the average 40-year premium was 16% return for a 16%
01:21:39.920 | for small-cap value versus 11%.
01:21:42.400 | That's a 5% difference.
01:21:45.160 | But over the last 40, 50 years, it's
01:21:48.680 | been about a 3% difference.
01:21:51.400 | So the return of the four-fund strategy
01:21:54.120 | should be somewhere between 1% and 2%
01:21:57.920 | better rate of return than the total market
01:22:00.920 | index or the S&P 500, and at virtually no more risk.
01:22:07.520 | I mean, if you go back to that quilt chart that
01:22:10.440 | showed that the four-fund kind of goes along the middle,
01:22:14.920 | and the green one, the S&P 500, or total market,
01:22:17.840 | is up at the edges, the top and the bottom,
01:22:20.440 | I'm thinking the four-fund strategy
01:22:22.680 | is a lot less volatile one year at a time.
01:22:26.360 | One day at a time, that's a different matter.
01:22:28.840 | But one year, I would pick the four-fund
01:22:31.960 | over that big S&P 500 or total market, either one of them.
01:22:38.360 | OK, thanks.
01:22:40.680 | We have a question that was in the chat.
01:22:44.360 | Paul, do you know of any target date funds
01:22:47.160 | which incorporate the four-fund concept in their equity
01:22:50.920 | portion?
01:22:51.760 | As much as I'd like to do it yourself,
01:22:54.640 | investing equities to bonds as I age,
01:22:57.240 | I prefer the automated set-it-and-forget-it
01:23:00.000 | solution which target date funds provide.
01:23:03.480 | Yeah, unfortunately, no.
01:23:06.520 | That is not available.
01:23:07.640 | And there's a good reason.
01:23:09.280 | And this came up in the conversation with John Bogle
01:23:13.920 | when I was there in 2017, because I've
01:23:17.000 | been very outspoken about the target date funds at Vanguard.
01:23:22.840 | Because why would you put 10% of a portfolio of a 21-year-old
01:23:27.200 | in bonds?
01:23:28.680 | And all you have to do is look at those fine-tuning tables.
01:23:31.600 | Every 10% of equities or bonds is
01:23:34.840 | going to reduce your return by a half of 1%.
01:23:38.720 | Well, we don't want to cost a 21-year-old a half of 1%
01:23:42.720 | because of a 10% bond position.
01:23:45.120 | How much of a bear market is that going to protect?
01:23:48.720 | And should you even be protecting a 21-year-old
01:23:51.920 | against a bear market?
01:23:53.120 | You should be encouraging them to take advantage
01:23:55.840 | of the bear market.
01:23:56.920 | It's old people like me that don't want the bear market.
01:24:01.080 | So the fact is-- and what Bogle said
01:24:04.640 | was these have to be created to make them
01:24:09.120 | acceptable to all investors.
01:24:12.600 | So we have to do things that make it highly likely
01:24:16.960 | that they will stay the course.
01:24:18.600 | We want them to understand that bonds
01:24:21.280 | are a part of this portfolio over a long period of time.
01:24:25.800 | And we're going to start with just a little bit,
01:24:28.120 | and then we're going to grow from there.
01:24:30.840 | But that little bit is costing the investors.
01:24:34.960 | And they also don't want to load up on smaller value
01:24:39.480 | because all of a sudden, the portfolio
01:24:41.360 | is going to look different than the S&P 500
01:24:44.720 | or the total market index.
01:24:46.880 | And any time you start looking different than the index
01:24:50.240 | that people rely on, see on TV, hear on the radio,
01:24:55.280 | then they start saying, what's wrong with my portfolio?
01:24:57.960 | Why am I making less?
01:24:59.480 | Oh, it's that small cap value.
01:25:01.840 | What idiot put that small cap value in the portfolio?
01:25:05.840 | So what they do is they solve the problem.
01:25:08.280 | They don't expose the investor to what the investor really
01:25:12.400 | should have.
01:25:14.000 | And they understand that, by the way.
01:25:15.920 | But they're doing it for the sake of the investor
01:25:20.040 | because they are trying to make it very easy for people
01:25:24.280 | to stay the course.
01:25:25.320 | Thank you.
01:25:30.360 | Krista, do you want to ask your question?
01:25:34.200 | Yeah, absolutely.
01:25:35.520 | Thanks, Paul, for all of the great info.
01:25:38.680 | One thing--
01:25:39.200 | Nice to see you.
01:25:40.400 | Yeah, thanks for having me.
01:25:42.200 | One thing that I wanted to circle back on
01:25:44.080 | was, how do you approach the international funds
01:25:47.920 | in the four-fund approach?
01:25:50.360 | Are you saying just stick in US?
01:25:53.080 | Or where does international factor in?
01:25:56.400 | Oh, no, that's a great question.
01:25:59.040 | I went to the US because I wanted
01:26:00.920 | to compare it to the S&P 500 and keep it US.
01:26:04.160 | That made it kind of work for me for today.
01:26:06.720 | No, I absolutely believe in international.
01:26:09.440 | We have the same portfolios built
01:26:11.560 | with 30% in the international equity portion and some in 50%.
01:26:15.960 | I happen to personally use 50%.
01:26:18.360 | But the difference between 50% international and 30%
01:26:22.000 | international is almost nothing.
01:26:24.080 | It's amazing how close they come over a long period of time.
01:26:29.400 | When you-- and I didn't spend any time on this.
01:26:31.880 | So Chris Pedersen has done an analysis
01:26:36.720 | of the universe of ETFs.
01:26:40.200 | So in every asset class that we have,
01:26:44.040 | he has picked what he considers to be the best
01:26:48.360 | ETF in that asset class.
01:26:51.440 | He doesn't mean the one that's going to be the best
01:26:53.720 | performer in the next year.
01:26:56.680 | He wants to find the best small cap value that
01:27:00.240 | over the long term is likely to do better
01:27:02.480 | because it has the right amount of value, deeply discounted.
01:27:06.640 | It's the right size company inside of the fund.
01:27:10.360 | The expenses are low.
01:27:12.000 | The turnover is low.
01:27:13.240 | There are all these things that he looks at.
01:27:15.560 | The profitability of the companies are a consideration.
01:27:19.720 | So when you go to our website and you go to portfolios,
01:27:24.600 | you can drill down to ETFs.
01:27:27.000 | Then you can drill down to best in class.
01:27:29.720 | And there you will see the recommendations
01:27:32.280 | that Chris has made.
01:27:33.600 | Now, he updates those periodically.
01:27:37.600 | So he will probably, in the next year, make a few changes.
01:27:43.200 | But he doesn't make them all the time,
01:27:45.480 | even if he found an ETF that he would like to.
01:27:50.160 | It's just too confusing if you move around very much.
01:27:54.480 | And by the way, tax inefficient if you're
01:27:57.120 | in a taxable account.
01:27:59.760 | But yes, as a matter of fact, you would see--
01:28:02.840 | let me just think about the worldwide four fund strategy
01:28:09.160 | has the same asset classes as the four fund US portfolio.
01:28:16.240 | Well, how can that be?
01:28:18.080 | Well, in the worldwide, the first fund is the S&P 500.
01:28:25.480 | That's large blend.
01:28:27.320 | The second fund is large cap value,
01:28:30.360 | but we use an international large cap value.
01:28:35.480 | That's the second fund.
01:28:36.480 | And the third fund, small cap blend,
01:28:39.560 | is a international small cap blend.
01:28:42.960 | And then small cap value is US.
01:28:45.400 | So you still have the small cap value, and the blend,
01:28:48.440 | and the big value, and blend big.
01:28:51.360 | But you have them balanced between US and international.
01:28:54.920 | And the returns come out almost the same.
01:28:57.440 | You can see it on that page that I included of how they did.
01:29:02.360 | So you can get almost the same return.
01:29:04.960 | The key is having the exposure to value,
01:29:08.320 | having the exposure to small.
01:29:10.040 | And we're doing all that we can to make it easy.
01:29:15.560 | Thanks, Paul.
01:29:19.400 | Oh, I did.
01:29:19.960 | I should mention, too.
01:29:21.040 | This is important.
01:29:22.760 | You can go to Vanguard and get all of these recommended ETFs
01:29:27.320 | commission free.
01:29:28.560 | Now, you've got to enter it online.
01:29:31.160 | You can't call up.
01:29:33.080 | But if you do it online, whether you're
01:29:35.120 | at Fidelity or Vanguard, you can do it commission free.
01:29:41.960 | OK.
01:29:42.960 | Awesome.
01:29:44.040 | Because we are at Bogleheads here,
01:29:46.560 | Chris has also made the recommendations
01:29:49.280 | with the corresponding Vanguard ETFs.
01:29:52.120 | If you are stuck emotionally on owning Vanguard,
01:29:56.080 | we're doing all we can to help you.
01:29:58.280 | But it's about a 1% lower compound rate of return
01:30:02.920 | than using the best in class.
01:30:04.480 | Miriam, do you have a question?
01:30:11.280 | Yes.
01:30:15.360 | Hi, Paul.
01:30:16.600 | Thank you for your presentation.
01:30:18.200 | It was very interesting.
01:30:19.600 | Thank you.
01:30:20.760 | I have a question about small cap value.
01:30:23.960 | The small cap value is a fund--
01:30:27.320 | they're funds made up of small companies, value companies.
01:30:33.720 | And what is it about those companies
01:30:37.360 | and small cap value funds--
01:30:39.760 | what is it about those companies that gives a premium?
01:30:44.120 | What do those companies do that gives the premium?
01:30:47.720 | And what happens when they are out of small cap value,
01:30:51.160 | when they grow too much and they're out of it?
01:30:54.360 | Well, that small cap premium, according to the academics,
01:31:00.240 | is simply the premium for small over large.
01:31:06.160 | Small companies are more risky.
01:31:08.840 | So if they didn't pay a premium, then
01:31:11.840 | nobody would ever invest in small companies.
01:31:14.240 | Because why would you take the risk?
01:31:16.280 | I mean, there is historically a higher rate of return.
01:31:20.680 | And it comes at higher volatility.
01:31:23.720 | So it's not a freebie.
01:31:26.080 | You're being paid for taking the risk of small.
01:31:29.440 | Value is another premium, whether it's
01:31:33.200 | large value or small value.
01:31:35.720 | Value is defined by a number of ways,
01:31:38.480 | but according to the academics, the book value
01:31:42.080 | versus the market value.
01:31:45.120 | If the book market is relatively high--
01:31:48.040 | that's the book value, the net value,
01:31:50.440 | asset value of the company--
01:31:52.600 | if it's relatively high versus the market price,
01:31:57.160 | or if the P/E ratio is low versus the market price,
01:32:02.040 | that would typically be value.
01:32:04.880 | Growth companies might sell for twice the P/E ratio,
01:32:09.760 | twice the book to market.
01:32:11.840 | People are willing to pay a lot of money for those companies
01:32:14.720 | because they have an amazing future.
01:32:18.120 | That's the good news.
01:32:19.880 | But when growth companies fail, they fail miserably,
01:32:25.160 | and people can lose huge amounts of money.
01:32:28.280 | In fact, sometimes you've probably
01:32:30.200 | seen it after the close.
01:32:32.280 | A company comes out with disappointing earnings.
01:32:34.600 | They miss it by a penny, and the company drops by 25%.
01:32:40.320 | That's because people had huge hopes for that company.
01:32:44.440 | And you could look at companies like Amazon.
01:32:46.360 | People are counting on Amazon to become many, many times
01:32:49.840 | bigger than it is right now because it's
01:32:52.760 | priced with the idea that it's going to.
01:32:55.800 | There's going to be a return.
01:32:57.880 | Well, with value companies, people don't see that return,
01:33:01.040 | so they're not willing to pay much.
01:33:04.320 | And what the academics tell us--
01:33:06.840 | don't buy value companies one at a time.
01:33:11.120 | Because if you took 100 value companies that
01:33:13.480 | were out of favor, they're out of favor for some reason.
01:33:16.640 | Selling for a low P/E, selling for a high book to market.
01:33:21.000 | Out of 100, five years later, 50 of them are still dogs.
01:33:25.920 | The other 50 have done something special
01:33:29.240 | that turned those companies around,
01:33:31.040 | changed the view of investors, started making money
01:33:34.920 | when they weren't.
01:33:37.520 | And so it's the half that do that bring the premium up
01:33:43.840 | because there's the other half that don't, that are still
01:33:46.800 | keeping the premium down.
01:33:48.440 | But overall, there has been a premium, historically,
01:33:52.240 | for taking the risk of investing in dogs.
01:33:57.280 | And when Warren Buffett, who's a value investor,
01:34:00.880 | it isn't that he won't get into a company that
01:34:04.960 | becomes a fast-growing company.
01:34:07.280 | But when he gets into it, it's typically
01:34:09.600 | when it's not a fast-growing company.
01:34:13.000 | When it sells for a fair price.
01:34:15.480 | And it's interesting because these small-cap value,
01:34:21.320 | like the 17-year-old young lady who
01:34:23.760 | is going to put that money in small-cap value,
01:34:26.600 | she probably won't know the name of any of those 500
01:34:30.560 | to 1,000 companies.
01:34:33.200 | They're not household names.
01:34:35.880 | And at some point, you brought up the point,
01:34:38.200 | they're going to become growth.
01:34:40.960 | And they're going to move out of the value portfolio
01:34:44.840 | into a portfolio that is some other index.
01:34:47.240 | So could you define value for us who--
01:34:55.560 | It could be a low price-to-earnings ratio.
01:34:59.440 | It could have to do with cash flow per share.
01:35:04.240 | It could have to do with the book value versus the market.
01:35:09.800 | There are many ways that professionals identify value.
01:35:15.080 | From my viewpoint, when we recommend an Avantis fund,
01:35:20.480 | and we recommend several of their funds,
01:35:22.760 | they are probably--
01:35:24.040 | this is one of the finest fund families
01:35:26.520 | for what we're looking for, for the people who follow our work.
01:35:31.200 | We know step-by-step what they do, and how they buy,
01:35:36.480 | and how they sell, and at least as much
01:35:39.160 | as they're willing to share that isn't truly proprietary.
01:35:43.240 | So at that point, we say, obviously, you do it.
01:35:48.280 | Dimensional funds may do it different from Avantis.
01:35:52.000 | And there are other small-cap value funds.
01:35:56.600 | Vanguard, if you read Chris Patterson's article
01:36:01.880 | about how he chooses ETFs that fill each one of these
01:36:07.040 | brackets, he explains what he's looking for.
01:36:10.320 | But for example, at Vanguard, I think it's VBR.
01:36:15.440 | The average size company is about $6 billion,
01:36:20.600 | as opposed to the fund that we use, that we recommend,
01:36:25.160 | is about $3 billion.
01:36:26.520 | It's smaller.
01:36:27.640 | It's more deeply discounted.
01:36:30.760 | And so-- and they overlay the size and the value
01:36:36.320 | with a profitability factor.
01:36:39.520 | That's something else that might be there.
01:36:41.960 | Now, are we expecting the people who
01:36:44.920 | follow our work to become experts on factor investing?
01:36:50.800 | Probably not.
01:36:53.680 | But if they read Larry Suedro, they can kind of become one.
01:36:57.520 | He does a great job of digging into the ETFs.
01:37:02.800 | And what we're hoping--
01:37:05.560 | when I say that I'm trying to turn the do-it-yourself
01:37:08.360 | investor to help them have the same knowledge an advisor has,
01:37:15.120 | an advisor needs to understand the risk and the return.
01:37:18.960 | They need to be prepared for all the things that naturally
01:37:22.320 | happen in a portfolio, where the individual investor says,
01:37:26.040 | what the hell is going on here?
01:37:27.960 | I don't understand.
01:37:30.040 | Well, you should understand, because you
01:37:32.080 | should have seen the past gains and losses
01:37:36.320 | and noticed that things, for different reasons, go down.
01:37:40.000 | But they seem to go down very similarly.
01:37:43.920 | And that's the part of investing that we can know the history.
01:37:49.240 | Nobody, professional or amateur, can know the future.
01:37:53.080 | Nobody.
01:37:54.080 | And anybody who talks like they know the future
01:37:57.240 | is just blowing smoke.
01:37:59.920 | It is nothing more than telling people
01:38:02.640 | what they think you want to hear as an investor,
01:38:06.560 | so they can sell you something.
01:38:08.120 | Thank you.
01:38:12.120 | You're welcome.
01:38:12.720 | Thank you, Miriam.
01:38:14.800 | OK, we have another question from the chat.
01:38:16.920 | Is there an advantage to a four-fund strategy
01:38:19.720 | if you're retired and maybe have a 15-year horizon?
01:38:23.880 | Ah, funny he should mention 15.
01:38:27.160 | I'm 78.
01:38:28.360 | I'm thinking in terms of a 15-year horizon.
01:38:32.040 | Well, I'll tell you what I know.
01:38:34.640 | I know that if I look at that table that I used early on
01:38:40.400 | and I looked at 15-year periods, and there
01:38:43.360 | were ranges of what the good times looked like
01:38:47.040 | and the bad times looked like.
01:38:49.720 | And so I have to ask myself when I
01:38:52.400 | look at some of the money that's in our portfolio,
01:38:56.600 | are we investing for ourselves or are we investing
01:38:59.400 | for children and charities?
01:39:02.000 | And in large part, we're OK if we just sat on fixed income.
01:39:06.640 | If we just took the half of the money that's in fixed income
01:39:09.720 | and put it aside, we could live on that.
01:39:13.160 | The other money is really for others.
01:39:16.280 | And so I look at the 15-year numbers
01:39:19.120 | in that table that showed the S&P 500
01:39:22.400 | and shows the four-fund strategy.
01:39:24.520 | It was that first of the equity returns from 1928 to 2021.
01:39:31.320 | What you'll see is the four-fund strategy
01:39:34.360 | had virtually the same worst 15 years as the S&P 500,
01:39:40.600 | but the returns were better in the good times.
01:39:44.520 | So yes, I would, if I had 15 years,
01:39:48.480 | take the risk with money I don't need to live on.
01:39:52.800 | But if they decided they want to put the S&P 500 in,
01:39:58.920 | when you go back to that quilt chart,
01:40:01.400 | the four-fund strategy is more dependable than the S&P 500
01:40:08.360 | because it has many asset classes.
01:40:11.920 | The S&P 500 would likely be the worst of the four asset
01:40:16.200 | classes.
01:40:18.000 | The four asset classes together are
01:40:20.240 | likely to be better than the S&P 500 on its own.
01:40:26.320 | But we have to also remember, we all
01:40:29.960 | want the best of the next 15 years for ourselves.
01:40:33.680 | We want the near future to be good.
01:40:38.000 | This 17-year-old young lady that I talked to,
01:40:41.760 | and I've got her set up with her first $6,000 small cap value
01:40:46.840 | investment, I told her, for the first five years,
01:40:51.840 | it will feel so good if it looks like '95 through '99
01:40:58.200 | because '95 through '99, small cap value
01:41:01.160 | compounded at over 20% a year.
01:41:07.240 | Yeah, yes.
01:41:09.440 | Or on the other hand, it could look like 1970 through '74.
01:41:16.760 | Which is better for her, a terrible five years
01:41:20.840 | or a great five years?
01:41:22.640 | Well, the great five years sounds
01:41:24.400 | like that would be better.
01:41:26.360 | But the terrible five years means the first $30,000
01:41:29.880 | is buying stuff cheap that later is supposed to be worth more.
01:41:35.080 | If it isn't, then we've missed on the whole thing.
01:41:38.920 | So that's a part of what being a real professional advisor
01:41:43.360 | is, to understand what is this part of a portfolio for?
01:41:47.800 | I have part of our portfolio in a hedge fund
01:41:51.120 | that I helped start in 1995.
01:41:55.160 | It is not for me.
01:41:58.720 | And it is built to use leverage plus market timing.
01:42:05.280 | I mean, two things that people don't want to do.
01:42:08.880 | But I happened to help start it.
01:42:10.440 | And I happen to know the people that run it.
01:42:12.920 | And I trust it as much as I trust anybody trying
01:42:15.480 | to manage money for people.
01:42:17.520 | But it's a part of my portfolio.
01:42:19.280 | It's 10% of my portfolio, less than 10% now.
01:42:24.960 | And so that's where it becomes important to decide,
01:42:29.920 | where does it make sense to take more risk?
01:42:33.440 | I tried.
01:42:34.240 | When I was an advisor, I would try
01:42:36.880 | to get old people to invest more aggressively
01:42:42.200 | with the part of the money that they really felt was for others.
01:42:46.480 | But a lot of them would say, well, I'm not sure.
01:42:48.960 | I don't need it now.
01:42:49.880 | But I might need it later.
01:42:51.400 | All right, let's compromise.
01:42:52.880 | How about if we use more of a balanced approach
01:42:56.120 | than you would do for a young person,
01:42:58.280 | but more risk than you might, knowing that it's not
01:43:03.000 | likely to be used in your life?
01:43:05.760 | This is the magic, I think, of being a good advisor.
01:43:10.320 | And that is why, when I think about an individual being
01:43:13.840 | their own advisor, how much of this stuff do they know?
01:43:17.720 | What is it that we can help teach them that if they wanted
01:43:21.760 | to, they could literally go out and be an advisor someday?
01:43:26.360 | Because you know the ropes.
01:43:27.840 | You know what to expect, because you know history.
01:43:31.720 | OK, thanks, Paul.
01:43:39.800 | Let's go ahead and let Brian ask his question.
01:43:42.360 | He has his hand raised.
01:43:43.600 | OK.
01:43:46.240 | Hi, Paul.
01:43:46.840 | I love your work.
01:43:47.600 | We're talking millions.
01:43:48.640 | I thought it was absolutely fabulous.
01:43:50.280 | And I'm doing what you recommended
01:43:53.400 | by putting about 20% of the small cap value in the Roth IRA.
01:43:58.320 | And if it's not for me, it will be for the next generation.
01:44:01.680 | And I think that's absolutely terrific.
01:44:04.600 | I'm using-- and you also mentioned FISVX, the small cap
01:44:08.640 | value index fund of Fidelity.
01:44:12.240 | You have that.
01:44:13.320 | But my question is, as I noticed in your best in class
01:44:16.840 | portfolios, you have IJS, which is the iShares version.
01:44:21.360 | But that follows the S&P 600.
01:44:24.040 | So when you look at your quilt charts and all
01:44:26.560 | of the terrific work you and the guys are doing, what is--
01:44:31.840 | am I better off in the FISVX, which is following the Russell
01:44:36.680 | 2000 value index, or do I want to be more in the S&P 600,
01:44:41.480 | following the S&P 600 value index, or a mixture of both?
01:44:46.240 | Well, I will tell you that from everything
01:44:49.720 | I know about the work that Chris does,
01:44:54.880 | at the beginning of this presentation,
01:44:56.800 | I talked about my teachers.
01:44:59.440 | There may be people who don't believe
01:45:01.160 | that I look at the people that are working with me
01:45:03.400 | as my teachers.
01:45:04.720 | But they are truly teachers that have helped me understand
01:45:09.880 | this whole process better.
01:45:13.520 | I'm embarrassed to say that I am basically a salesperson trying
01:45:18.800 | to help.
01:45:19.920 | I am not the technician.
01:45:21.360 | I am not the person figuring this all out.
01:45:24.360 | I am a teacher.
01:45:26.400 | And teachers aren't necessarily the ones that do stuff.
01:45:29.600 | They teach stuff.
01:45:31.080 | Chris does stuff.
01:45:32.960 | And when he digs into those best in class, I trust when I--
01:45:38.720 | because every time I go through why, why, why, why,
01:45:41.360 | and he explains patiently.
01:45:43.200 | You've seen Chris present.
01:45:45.040 | I think Chris is one of the finest presenters.
01:45:48.000 | He's so calm.
01:45:49.200 | He's so patient.
01:45:51.080 | I would, if I had the choice, I'd
01:45:53.600 | be taking his recommendations.
01:45:55.880 | And you have them available to you at the Fidelity,
01:46:02.600 | or you have them available at Vanguard.
01:46:07.240 | Now, the fact that we've also done portfolios for Fidelity
01:46:11.200 | and Vanguard is only because there
01:46:13.000 | are all the people that have these.
01:46:14.840 | That's what they have available.
01:46:16.240 | So we've tried to give some help.
01:46:19.080 | And that may be your case, is that you just
01:46:22.120 | don't have all these different ETFs available to you
01:46:25.520 | where you're investing.
01:46:26.640 | Is that the case?
01:46:27.480 | For me personally, well, my 401(k),
01:46:35.200 | it's limited to just total market index funds.
01:46:39.400 | But yeah, so obviously my Roth IRA,
01:46:42.120 | which has all the options through Fidelity,
01:46:43.920 | I guess I could purchase the Advantis.
01:46:46.280 | And I guess your options are obviously much more open when
01:46:51.920 | you're with Fidelity or Vanguard than just the general 401(k)s.
01:46:56.320 | Yeah, and let me make it ever so clear.
01:46:59.680 | There is not one thing we do that is done to benefit us.
01:47:07.080 | Now, when I say that, I'm sure there is something
01:47:09.920 | we do to benefit us.
01:47:11.280 | Well, from time to time, we ask for money.
01:47:13.800 | From time to time, we get people to get the books
01:47:17.880 | and pass them on.
01:47:19.200 | But the bottom line is, Chris is doing everything he knows
01:47:25.800 | and continues to work with the people
01:47:28.920 | from these different companies like DFA,
01:47:32.400 | like Advantis to understand exactly what they're doing
01:47:36.600 | or as exact as they will let us see.
01:47:39.560 | Now, I love DFA and what they've tried to do for investors.
01:47:44.560 | And the people at Advantis or Avantis,
01:47:46.680 | however you're supposed to say it, they're out of DFA.
01:47:50.440 | They're almost all of them out of DFA.
01:47:53.440 | And these are the people who have built portfolios
01:47:56.400 | with the work of Dr. Fama and Dr. French and others like them.
01:48:01.280 | There are more doing it today than just those two guys.
01:48:05.720 | So Chris is learning.
01:48:09.280 | And when I sit and start listening
01:48:11.240 | to Chris and these guys talk, I realize
01:48:14.440 | I'd rather be someplace else because they're really
01:48:18.080 | getting into the weeds.
01:48:20.080 | He cannot sit and get into the weeds
01:48:22.200 | with all that stuff with the people who follow our work.
01:48:26.000 | I don't know that it's appropriate
01:48:27.760 | because we'll start appealing to the wrong people.
01:48:31.000 | We really are trying--
01:48:32.880 | it's not that we don't want to help everybody.
01:48:35.640 | But we are trying to help the people that
01:48:40.480 | need to understand the basics of investing and returns and risk.
01:48:47.520 | And I will tell you, very few investment advisors
01:48:53.080 | understand what's in the weeds.
01:48:56.520 | You try to get somebody who tries to sell you
01:48:59.000 | an indexed annuity to actually explain an indexed annuity
01:49:04.040 | or read the contract and then ask them, what does this mean?
01:49:07.680 | They don't have a clue.
01:49:10.760 | They do understand how an indexed annuity works.
01:49:13.880 | And they can sell them rightly or wrongly.
01:49:17.480 | But when I say we're trying to develop the knowledge
01:49:23.600 | of an investment advisor, I'm not
01:49:26.000 | talking about a person who works in the research department
01:49:29.000 | at DFA or Avantis, but the kinds of people
01:49:32.400 | who are in the trenches dealing with these questions of risk
01:49:36.240 | and return and asset allocation.
01:49:41.040 | I hope that helps at some level.
01:49:43.040 | In other words, what I'm saying is, take Chris's advice
01:49:47.520 | is the best advice that I have.
01:49:49.960 | Now, every once in a while--
01:49:51.640 | recently, somebody wrote to us and made a claim.
01:49:55.560 | And in fact, I don't know if this has come out yet
01:49:58.360 | in a podcast.
01:49:59.200 | But what they did was, they said,
01:50:01.120 | why do you have small cap blend in the portfolio?
01:50:04.640 | Because small cap value almost always beats it.
01:50:09.440 | And Daryl, who's an engineer, said, I'll take that.
01:50:14.680 | And he did the study.
01:50:16.440 | And he made it really simple.
01:50:18.080 | And he showed the guy that he was wrong.
01:50:21.240 | Often, small cap blend does better than small cap value.
01:50:25.680 | But Daryl took all the years that it did.
01:50:28.200 | And he boxed them.
01:50:29.360 | So you could look at that quilt chart
01:50:31.240 | and see exactly all the years.
01:50:34.600 | I would not have had the patience to do that.
01:50:37.000 | I hope that helps, Brian.
01:50:41.120 | Thank you for your kind comments.
01:50:43.120 | Thank you so much.
01:50:44.560 | Really appreciate the work you guys do is terrific.
01:50:47.680 | You're welcome.
01:50:48.360 | I appreciate it.
01:50:50.280 | OK.
01:50:52.280 | Do you want to take one more?
01:50:54.280 | One more.
01:50:55.560 | Make it the hardest one you possibly can.
01:50:58.240 | Right, and then I know there's a couple others
01:51:01.840 | that I'll get to Paul.
01:51:05.480 | And he can-- well, I think it would
01:51:07.200 | be best if we didn't get to your question, if you email Paul.
01:51:11.000 | And then he can directly answer your question.
01:51:13.680 | And by the way, and I may either answer it--
01:51:16.040 | I may answer it directly if it's real easy.
01:51:18.600 | If it's a longer comment, I will likely use it.
01:51:22.760 | And I won't use anybody's name.
01:51:25.040 | Nobody will know who it is.
01:51:26.840 | I'll answer it in a podcast or in a newsletter.
01:51:30.720 | OK, great.
01:51:31.960 | OK, so the last question is regarding
01:51:33.960 | equities and taxable accounts versus tax advantage accounts,
01:51:38.320 | do you mirror the four fund across both types of accounts?
01:51:43.040 | Will I have a large tax bill from portfolio turnover
01:51:46.280 | in the taxable account?
01:51:48.040 | Well, remember, these are ETFs, so they're
01:51:51.360 | going to be more tax efficient.
01:51:55.440 | But I do want to recommend the book.
01:51:58.200 | I want to recommend--
01:51:59.640 | I did this before, but Your Complete Guide
01:52:02.720 | to a Successful, Secure Retirement, Larry Swedro.
01:52:07.760 | It's cheap, like $11 or something.
01:52:10.400 | It tackles almost any complex subject, dividend stocks
01:52:16.560 | versus non-dividend stocks and how much to take out
01:52:20.560 | and all sorts of things.
01:52:22.000 | One of the things it covers in here
01:52:23.800 | is investment asset class placement.
01:52:28.360 | Where does an asset class belong in a portfolio?
01:52:32.600 | What part should be in taxable?
01:52:35.120 | What part should be in a 401(k) or a Roth?
01:52:40.360 | And I really think it is worth the time
01:52:43.400 | to read his part of the book on that.
01:52:46.440 | It's done very well.
01:52:48.120 | And again, we do not try to help people make those decisions.
01:52:53.600 | And Larry Swedro has looked at this very carefully.
01:52:58.200 | And then the question is, do you want
01:53:01.880 | to take the time as an investor to build a portfolio that
01:53:05.640 | to take the four parts of that portfolio
01:53:08.200 | and spread part of it using the taxable account
01:53:12.360 | and part of it doing in the tax deferred or tax free,
01:53:16.080 | that tends to become work to be.
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