Bogleheads® Chapter Series - Allan Roth
00:00:00.000 | [music]
00:00:01.280 | Welcome to the Bogleheads Chapter Series. This episode was jointly hosted by the San Antonio
00:00:06.720 | Bogleheads and the Starting Out Life States Chapter and recorded May 20th, 2021. It features
00:00:13.680 | Alan Roth, who's also a board member of the Bogle Center for Financial Literacy.
00:00:18.240 | Bogleheads are investors who follow John Bogle's investing philosophy for attaining financial
00:00:23.840 | independence. This recording is for informational purposes only and should not be construed as
00:00:29.360 | investment advice. And we are now recording. Thank you, Alan, for joining us. A quick,
00:00:40.080 | quick introduction of Alan Roth. He is the board member and treasurer of the Bogle Center for
00:00:48.640 | Financial Literacy. He's the founder of WealthLogic. He's a certified financial accountant,
00:00:56.240 | a certified financial planner, and has his master's in business administration.
00:01:00.960 | He was a corporate finance director for multi-billion dollar companies and author of
00:01:07.680 | the book How a Second Grader Beats Wall Street. He's a big advocate for keeping it simple.
00:01:15.040 | And my favorite, he has the professional goal to never be confused with Jim Cramer.
00:01:21.440 | I always chuckled at that one. Thanks for joining us, Alan. My pleasure. And thank you,
00:01:28.080 | guys. You're the ones that do so much work to help so many people across the world. And thank you.
00:01:34.640 | Thanks, Alan. So the first question is in regards to the Bogle Center. So what are the goals of the
00:01:44.160 | Bogle Center for Financial Literacy? And what can we expect to see going forward from that
00:01:50.960 | organization? Well, the pandemic, obviously, changed things a whole lot with conferences
00:02:00.480 | and the like. But we've been spending a lot of time on mission, vision, values, goals, et cetera.
00:02:07.680 | And what we want to do is, first of all, more support to the chapters. And I think Gail is
00:02:13.040 | doing an amazing job spending an amazing amount of time on this. The conference, we want to get
00:02:20.800 | back into having in-person conferences again. It's not going to happen this year, but it will happen
00:02:27.360 | next year. And we are going to do more virtual conferences, the speaker series, et cetera.
00:02:34.240 | We would-- kind of a lofty goal, but we want to develop some tools to help people in different
00:02:40.640 | modes of decision relating to the life cycle, spending, saving, spending, et cetera.
00:02:48.080 | And then finally, just so we can get the word out more, more media exposure. So those are
00:02:54.080 | kind of the high-level lofty goals that we would like to do more of. Great.
00:03:00.080 | All right. Bartz has the next questions. Thank you again, Alan, for joining us tonight.
00:03:09.520 | John Bogle principles brought us together this evening, so we appreciate that.
00:03:13.440 | So our question is, what do you consider the basic principles of Boglehead investing?
00:03:19.360 | Well, first of all, I mean, John Bogle changed my life.
00:03:24.160 | I didn't realize how common this was, but I sent him a letter once saying, I'd love to meet you.
00:03:32.480 | And a week later, got a letter back. I'm coming to Colorado in a few weeks. Let's get together.
00:03:39.520 | So he has just been an amazing man and mentor. Meeting him was kind of like meeting my favorite
00:03:45.520 | rock star president, et cetera. But if I had to say what he taught me about investing-- and these
00:03:54.640 | are my words. Investing in eight words are minimizing expenses and emotions, maximizing
00:04:02.480 | diversification and discipline. It's that simple. When people violate that, they usually do so with
00:04:10.560 | their own peril. So it really is that simple. And it was very easy, by the way, when my son was
00:04:19.440 | eight, because money didn't mean anything to him. The older we get, the more money means to us,
00:04:25.840 | and the harder it is to behave right. But Jack Bogle, I consider him a multibillion-dollar man
00:04:37.520 | in how much he saved people, not just at Vanguard, but at other firms that had to copy Vanguard
00:04:44.000 | to stay competitive. OK, thank you. In some of your writing,
00:04:53.280 | we've noticed that you've been highly critical of investment advertisers. Can you tell us a little
00:04:58.000 | bit about that, your critical stance on investment advertising in general?
00:05:04.960 | Well, we were kind of joking before this started. I was going to sell an annuity at the end where we
00:05:13.120 | will give out the chicken dinners and the like. But the more one spends on advertising,
00:05:22.160 | the higher the fees they have to charge. And if you think about it, advertising is all about
00:05:30.240 | emotions, is all about wanting to get a better value than just the market, et cetera. So for the
00:05:41.520 | most part, advertising-- I'm very critical of the CFP board, and I am a CFP. The amount of advertising
00:05:50.960 | they're doing versus-- it's the opposite strategy of Jack Bogle. Jack Bogle wanted to do the right
00:05:57.600 | thing, and people would come. A lot of other firms and the CFP board, in my opinion, are doing the
00:06:05.120 | advertising and saying, hey, once we get more people and more money, then we'll lower fees and
00:06:09.440 | do things differently. And that's kind of like the 12v1 fee model that failed miserably.
00:06:21.040 | So I mean, investing should be boring. It really should. And that would make a really lousy ad.
00:06:28.160 | Thank you.
00:06:32.800 | Great. And Royce has our next questions.
00:06:38.640 | Hi, Alan. So my first question's a multi-part one. So before we officially started the meeting,
00:06:50.000 | Miriam had mentioned in your books how you described the second grader portfolio.
00:06:55.920 | Can you describe what that portfolio is and how someone goes about getting a proper
00:07:02.240 | stock bond allocation? And then also, is that different in different life stages? For example,
00:07:09.840 | you had mentioned your son's ad allocation. Has that changed since you wrote the book?
00:07:17.520 | Sure. Well, I mean, the basic-- you know, Taylor? Taylor, great minds think alike.
00:07:24.080 | So the basic second grader portfolio is Taylor's three-fund portfolio, is a total US and a total
00:07:30.880 | international stock index fund. With just those two, you own over 10,000 companies across the
00:07:37.280 | planet. And then a total bond index fund, where you own all investment-grade, taxable, fixed-rate
00:07:45.120 | US bonds. So it's pretty much that simple. When my son was eight, we had him at 90%. He's gotten
00:07:56.400 | a little bit more conservative now. He's 23, living out on his own in Madison, Wisconsin.
00:08:03.120 | And he's starting to think about maybe someday buying a house and such. So he wants to take a
00:08:07.360 | little risk off the table. I'm not a believer in setting asset allocation. There's a couple of--
00:08:15.520 | 100 minus your age, I don't believe in that. There's a risk profile questionnaire. And Jason
00:08:23.600 | Zweig, who's one of the three people I blame the most for getting me into writing, he and I have a
00:08:29.440 | disagreement. He says those risk profile questionnaires are worthless. And I say, Jason,
00:08:35.120 | you're wrong. They're not that good. They're actually dangerous. If you think about it,
00:08:40.640 | March 19th of last year, when stocks hit an all-time high, we thought we could take a lot
00:08:45.600 | of risk. And suddenly, 33 days later, when the market fell 35%, our risk tolerance was very
00:08:53.120 | different. But the biggest factor is our need to take risk, as Bill Bernstein puts it so eloquently,
00:09:00.560 | when you've won the game, quit playing. So you could be very young and not have to take much
00:09:06.560 | risk. You could be very old and need to take some risk. So there's not a cookie-cutter formula.
00:09:15.440 | And I used to say, if you can't be right, at least be consistent. But now I think consistency
00:09:20.000 | is even more important, changing that asset allocation, moving in and out. I've seen people
00:09:27.760 | time the market poorly far more often, probably 99 to 1 timing things poorly, because our emotions
00:09:36.720 | fail us when it comes to investing. So I don't have a cookie-cutter sort of answer. It's not 100
00:09:42.320 | minus your age. It's not take this risk profile questionnaire. And again, somebody young that
00:09:48.240 | might want to be saving up for a house they want to buy in a couple of years, but they want to have
00:09:52.960 | some safer money. So it's not that simple, setting the asset allocation. But consistency, consistency,
00:09:59.840 | consistency. Thanks. And in today's market, obviously, the markets change a little bit.
00:10:08.000 | And today, we have low interest rates. And so more people are thinking, oh, let me add more,
00:10:14.800 | go higher on my equities. And so what are your thoughts about bonds in a portfolio at the present
00:10:20.800 | time? I totally disagree. My wife calls me the most argumentative person on the planet, and I
00:10:26.560 | prove her right daily. So I was once young. So when I graduated college, I was 22 years old,
00:10:34.000 | and I could get, I think it was 12% on a CD. Now, I tell that to clients and people,
00:10:42.240 | and they smile. And I say, those actually weren't such good days. Because if you think about it,
00:10:47.840 | you invest 100,000, you got 12,000 interest. A third of it went to taxes. So you're left with
00:10:54.800 | about 8,000. And inflation was 13%, 14%. So you lost a lot more of your spending power than you're
00:11:03.120 | losing today. So I change absolutely nothing when it comes to fixed income. The purpose of fixed
00:11:10.480 | income, in my opinion, has never been income. It's been the shock absorber, the stable portion of
00:11:16.640 | one's portfolio. And I'm very much a believer, whether it's one of the alternative second-grader
00:11:24.400 | strategies were to use CDs. And I especially like CDs that have easy early withdrawal penalties,
00:11:31.680 | because if rates do rise, you don't suffer the loss that a bond fund would have. But always,
00:11:38.000 | always, always keep credit quality high when it comes to fixed income. Don't get greedy. Don't
00:11:44.160 | try to-- even a corporate bond fund, in my opinion, if you look what happened in March of last year,
00:11:53.280 | liquidity dried up. And yes, the government stepped in and started buying both the
00:11:58.960 | corporate bonds and muni bonds, which shocked me, by the way. But there's no guarantee that
00:12:06.080 | they're going to do it next time. So trying to earn an extra 0.3%, 0.5%, and risking money,
00:12:13.120 | in my opinion, is not worth it. Great. Thanks, Alan. The next couple of questions
00:12:21.760 | will be coming from Donna. Hello, Alan. Thank you for being here tonight.
00:12:27.440 | I have a question about asset allocation. Do you think that cryptocurrency can play a role
00:12:36.000 | in a diversified portfolio? And if so, how? I actually just wrote about it for AARP yesterday.
00:12:43.360 | And people are kind of shocked. Rick Ferries made fun of me in the Bogleheads meeting,
00:12:50.720 | that I own Bitcoin. Yes, in 2017, I wrote about it. And I knew nothing about Bitcoin then,
00:12:59.840 | and I wanted to make sure that what I was writing was accurate, how you go out and buy it. So I
00:13:04.000 | bought a lousy $200 worth of Bitcoin, which, even with the pullback, is still about a 10x,
00:13:12.480 | 1,000% return. So I actually walked away with a little bit more
00:13:17.760 | respect for Bitcoin than I thought when I wrote that 2017 article. Because number one, it really
00:13:27.520 | does disintermediate the banking system. I mean, people can transact with Bitcoin,
00:13:33.760 | avoiding the bank. When I buy something on Amazon, which is one of the two largest retailers in the
00:13:43.760 | country, I get 2% cash back. So you know that Amazon is paying more than 2%. So to disintermediate
00:13:51.920 | that, I think, is a wonderful thing. And finally, I love the fact that there's only a finite amount
00:13:59.680 | of Bitcoin out there. That's not true for all cryptocurrencies. Now, I certainly wouldn't tell
00:14:06.000 | anyone to even dream about putting more than 2% of their net worth in any cryptocurrency.
00:14:12.320 | And I think the odds are, in five or 10 years, it's going to be worth a lot less than it is today.
00:14:20.160 | But I could be totally wrong. And I am quite worried, by the way, with all the amount of
00:14:27.600 | money that we're printing, the fiscal and monetary policy. But that doesn't necessarily-- Japan's
00:14:35.280 | been doing that for three decades and fighting deflation. I also wouldn't extrapolate one
00:14:43.200 | country's experience to what's going to happen here. So I am quite worried.
00:14:49.600 | And crypto's kind of the digital version of gold.
00:14:52.880 | Well, it's been quite volatile lately.
00:14:57.200 | Oh, yes. Yeah, it makes gold or precious metals and mining fund is pretty volatile. But that
00:15:07.920 | even looks boring compared to crypto and Bitcoin. One tweet from Elon Musk and things change.
00:15:15.920 | Right. One more. Is there a difference between the S&P 500 index fund
00:15:23.840 | and the total stock market index fund? And do you prefer one over the other?
00:15:29.200 | Yeah, there is a difference. I actually wrote a piece many years ago, the case against the S&P 500
00:15:37.600 | index fund. And Kevin Laughlin, who was Jack Bogle's-- I like to call them chief operating
00:15:44.800 | officers rather than assistants. And by the way, could he pick some great COOs? I knew
00:15:50.880 | Kevin Laughlin very well and Mike Nolan very well. And they're just amazing people. But what I was
00:15:58.880 | writing, the case against the S&P 500 index fund is that it doesn't own the other several thousand
00:16:06.080 | companies, few thousand companies. It only makes up 20%. But owning everything is better.
00:16:12.560 | And what I wrote was, not only do you have the more diversification, but whenever a company
00:16:19.040 | is admitted into the S&P 500, the stock typically goes up in after hours trading because people know
00:16:26.400 | that all the S&P 500 index funds have to buy it. And then I think this is fairly amazing
00:16:32.800 | that if you look at what did better last year, a small cap index fund, a mid cap index fund,
00:16:41.360 | an S&P 500 index fund, which is large cap, or a total stock index fund, one would think that one
00:16:49.120 | of the first three had to do better than the total. But actually, the total beat all three
00:16:54.720 | by almost a couple of percentage points. Anyone know why?
00:16:59.040 | One company, Tesla, it wasn't in a small cap, in a mid cap, and it didn't get admitted to the S&P 500
00:17:11.120 | until December 21st, almost the end of the year. Owning everything is better. And of course,
00:17:17.040 | who brought us the total stock index fund? Jack Vogel. And of course, in the note that he wrote
00:17:24.560 | me, he said, of course, you're right, but the overall performance is pretty similar. And it's
00:17:28.720 | true, it is pretty similar. So I'm not one of those that believe in putting everything in small
00:17:35.200 | cap, putting everything in value or small cap value, but I don't want to ignore it either.
00:17:39.440 | So the S&P 500 is going to miss out on small and mid cap.
00:17:43.520 | Okay, thank you.
00:17:46.400 | Thanks, Alan. A couple other questions that we received from the Vogelheads. What is a safe spot
00:17:56.640 | for people to put large amounts of cash that they do not want to take investing risks with?
00:18:05.440 | I don't have a good answer. There's this general belief that cash is a riskless asset.
00:18:12.960 | But if you think about it, cash is going to be eaten up by inflation year after year after year,
00:18:20.640 | especially if you're young and have many, many years. There's this old saying that I don't know
00:18:26.480 | if it's true, and I'm not going to find out, but they say if you drop a frog into a pot of boiling
00:18:31.200 | water, it jumps right out. But if you put it in nice, cool room temperature water and slowly heat
00:18:37.920 | it up, it boils to death. Like I said, I don't know if it's true, and no, I have not done that.
00:18:44.080 | But when stocks plunge, oh, that cash feels warm and cozy. But Lucas, just think if you leave it
00:18:53.360 | in cash earning 0.01% in the Vanguard Treasury Money Market Fund, just think what that purchasing
00:19:01.920 | power is going to buy in 30 or 40 years. The one exception might be if you're a federal employee
00:19:08.880 | and have access to the Thrift Savings Plan, and in particular, the G Fund, which gives you a bond
00:19:16.160 | return without any risk of principal. That's a wonderful thing. I've joked on federal news radio,
00:19:25.840 | will somebody hire me, pay me $1, give me enough time to move my IRA money into the Thrift Savings
00:19:33.040 | Plan, then you can fire me. It's that good. Great. Let's see. Next question. For the typical
00:19:44.240 | accumulator, say someone aged 20 to 45, with all or mostly all of their assets in tax-advantaged
00:19:53.520 | accounts, what do you think will work best, the second-grader portfolio or low-cost target date
00:20:00.480 | fund from Vanguard? Well, if all of the assets are in tax-deferred, I think something like a low-cost
00:20:10.480 | Vanguard target date retirement fund is fine. In fact, the target date funds used to have just
00:20:18.000 | the three funds in there. Now, they've added international bonds and a couple of other
00:20:25.680 | tips and the like. But I think it's just fine for somebody to have a low-cost target date retirement
00:20:35.360 | fund if they have all their assets in their tax-deferred. I'm a believer in locating the
00:20:40.560 | assets. For example, if you look just at my IRA and 401(k) accounts, you'd say, "Wow." Not my
00:20:48.880 | traditional, not Roth. You'd say, "Roth is a weenie. He doesn't believe in stocks. He's all
00:20:53.920 | on fixed income." If you look just at my taxable accounts, you'd say, "Wow, Roth is a big risk
00:20:59.040 | taker. He's very heavily in stocks." So what I'm trying to do is locate the assets with more tax
00:21:06.160 | efficiency, which isn't important if you have everything in a traditional
00:21:10.000 | tax-deferred IRA or 401(k). However, if you have a Roth, that's a different matter. You'd rather
00:21:16.880 | put the stocks in the Roth portion of that tax-advantaged account. As long as it's low-cost,
00:21:23.760 | it's fine. The target date funds harness what I think is the most powerful force in the universe,
00:21:30.960 | inertia. In my book, I said that Albert Einstein called the power of compounding the most
00:21:36.240 | powerful force in the universe. Jason's wife told me that there's no way to know for sure,
00:21:40.880 | but that probably isn't true. Great. Let's see. Royce, I think you have the next couple of
00:21:52.640 | questions. Given the variables such as generous employer contributions or the ability of the
00:22:03.840 | employee to maximize contributions that may influence the decision-making process,
00:22:11.280 | how should an individual decide between traditional and Roth 401(k) contribution options?
00:22:19.360 | Yeah, well, I invented the Roth. I think the reason to have a Roth, a traditional and
00:22:30.480 | taxable money, in my opinion, is diversification from what Congress may ultimately do with tax
00:22:38.080 | laws. I'm a believer in all three. Now, with that said, somebody who's starting out in a lower tax
00:22:47.200 | bracket, there I tend to recommend the Roth. Now, any employer contribution is going to go into a
00:22:54.080 | traditional, but if your tax rate is low, I'd consider, as my son is starting to invest in a
00:23:04.640 | Roth, because later on, his income will probably go up. I think tax rates will go up, and I'm using
00:23:13.680 | logic and we're talking politics, and I don't know why I keep making that mistake, since logic and
00:23:18.960 | politics have little in common. So, I'm a believer overall in having different tax wrappers, and that
00:23:28.240 | includes the Roth, the traditional, and the taxable. Now, the Roth is my smallest tax wrapper,
00:23:34.880 | because it's the newest. Did that answer your question? Did you want to know more about the
00:23:42.000 | employer match? We can move on, and if people have questions on that at the end, we can address
00:23:51.520 | those. So, my second question is, with the many financial tools we have out there on the web and
00:23:58.000 | elsewhere, what tools do you typically recommend that accumulators use to determine how much to
00:24:05.920 | save and when they're able to retire? Yeah, you know, I've used a zillion different tools in
00:24:13.280 | Monte Carlo simulations. I even wrote one for Jack Bogle, you know, obviously many, many years ago.
00:24:20.560 | I think most of the online tools and such, especially the ones coming from the financial
00:24:26.480 | institutions, are in la-la land, that they make certain assumptions on returns, and
00:24:33.520 | you know, the Monte Carlo model itself can be brilliant, but you put garbage assumptions in,
00:24:38.240 | and guess what? You get garbage assumptions out. So, I think a much simpler and better way to do
00:24:45.760 | it is think of wealth in terms of years instead of dollars. So, in other words, if you need $50,000
00:24:54.160 | a year to live on, and you have $200,000, you have four years worth of living expenses.
00:25:03.040 | Four years worth of financial freedom, and that, I think, is a better framework. You know, maybe
00:25:10.000 | you can assume that it might grow after taxes and inflation, depending upon the allocation,
00:25:16.560 | at one or two percent a year, but in my opinion, that's a much better way of framing it
00:25:22.080 | and thinking about the things, and boy, can those fees and taxes take from those returns. But again,
00:25:30.080 | I think of wealth in terms of number of years of financial freedom, rather than dollars. So,
00:25:36.640 | somebody, you know, with a million dollars that needs $50,000 a year to live on has 20 years
00:25:43.680 | of financial freedom. Somebody with $10 million that has $5 million that they need to be happy,
00:25:49.840 | they're pretty poor, and you can get rich quick, really, by living frugally,
00:25:58.000 | because by changing that denominator and try to figure out what makes you happy and what doesn't,
00:26:03.680 | and with all the mistakes I've made in my life, I should be brilliant. I still remember as a kid
00:26:09.120 | thinking that if I went to the movie, that would be over in two hours, but if I bought something
00:26:14.800 | with it, like a model airplane, I'd have it forever and ever, and boy, did I have it wrong.
00:26:21.680 | Jonathan Clements taught me that. It's experiences that bring happiness, not stuff.
00:26:26.480 | All right. Thanks, John. Bart has the next couple of questions.
00:26:36.560 | Okay. Most of us mobile heads, you know, we've done a pretty good job of saving lives,
00:26:44.560 | but as we get closer to retirement, is there any spending and withdrawal strategies that we should
00:26:52.560 | be taking a look at? Yeah. I've always said that investing
00:26:56.720 | is simple. I never said taxes were. There is no cookie cutter. You always spend down the
00:27:04.960 | taxable money first, tax deferred. In general, the Roth is the last money you'd want to spend.
00:27:12.480 | That's your most valuable money under current tax law, of course, but there are many times,
00:27:18.160 | by the way, that especially if you have delayed social security, you haven't hit the RMD,
00:27:25.280 | you might want to take money out of the tax deferred account and use up that 12% marginal
00:27:31.920 | tax rate or take some of it and convert it to a Roth, and then finally, you might not want to do
00:27:42.080 | any of those because you might be at the 0% federal long-term capital gains rate. You might
00:27:47.840 | want to harvest, as Mike Piper eloquently puts it, tax gain harvesting. By the way, you don't
00:27:55.760 | have to wait 31 days. You could sell VTI or VTSAX and then buy it back immediately and recognize
00:28:02.240 | that gain at a 0% federal tax rate. For those of you in Texas, I say with envy in my eyes,
00:28:09.360 | you have the 0% state tax rate. Donna, is that why you moved?
00:28:13.840 | Yes, it was part of the reason. Yes, for sure.
00:28:21.680 | There are various strategies on the withdrawal. I would never let that,
00:28:33.360 | well, I shouldn't say ever, but generally speaking, you don't want to let that 12%
00:28:37.520 | marginal federal tax rate go to waste. I think the odds are, I reserve the right to be wrong yet
00:28:45.200 | again, that tax rates aren't going to go any lower than that.
00:28:48.720 | Speaking of Social Security and stuff that's usually pretty complicated,
00:28:57.200 | how do you feel about the rule of thumb about postponing Social Security till you're 70 years
00:29:04.480 | old? Certainly, number one, the best resource by far is Mike Piper's OpenSocialSecurity.com.
00:29:17.920 | I mean, I hate Mike because he's a lot smarter than me and he's a whole lot nicer than me.
00:29:24.400 | He gives it away, but it is absolutely brilliant. I mean, I can't describe
00:29:30.880 | some of the things in that model like an insurance company. Every other calculator assumes that I'm
00:29:36.480 | 63 years old, I'm going to die in exactly 23 years, whatever,
00:29:40.560 | but he's using actuarial tables and probabilities. The answer to your question is the only reason,
00:29:51.840 | well, obviously, if you don't have the money and you're going to live under a bridge, yes,
00:29:55.200 | I would take the money at 62 in that case, but the high, we're talking about a couple,
00:30:02.960 | the person with the highest benefit should almost always wait till age 70. The only exception would
00:30:12.240 | be if both parties in the couple were in horrible health and had a very, very short life expectancy,
00:30:19.760 | but even if one was in horrible health and the other was healthy, you would wait till age 70.
00:30:26.320 | It goes against our emotions because our emotions tell us I've been paying this FICA tax for
00:30:34.320 | decades. I want to get my money now, so the emotions say to take it immediately. When it
00:30:41.920 | comes to investing in finance, our emotions typically fail us. If something feels good,
00:30:48.720 | it's usually bad. If something feels bad, it's usually good. Yes, I totally agree, wait till age
00:30:56.080 | 70 for the higher benefit of a couple, or if you're a single person in good health,
00:31:02.320 | wait till age 70. Obviously, if you have other assets elsewhere, and I tell people to go ahead.
00:31:09.520 | Bart, let's say you had a $2,000 a month benefit, but if you waited five more years,
00:31:18.720 | it would grow significantly. I'd say go ahead and spend that $2,000 today because what you're really
00:31:24.640 | doing is buying an inflation protected deferred annuity. You used to be able to buy those on the
00:31:31.600 | open market. You can't anymore, but when I priced it, it was like buying it at about a 45% discount.
00:31:39.520 | Over what you could buy from an insurance company, and guess what? That insurance company
00:31:43.680 | is not backed by the US government.
00:31:45.440 | All right, Donna, you have the next couple of questions.
00:31:56.320 | Well, adding to the social security question and Mike Piper's calculator in particular,
00:32:05.600 | he uses the present value calculation. I was just wondering if you had a recommendation
00:32:11.520 | for what interest rate should be used when we're doing the present value calculations
00:32:18.640 | for social security or for annuities to evaluate them?
00:32:22.880 | Well, what Mike uses is a real discount rate, and that is absolutely the thing to do. When I do a
00:32:32.800 | private pension analysis for somebody, then I use a nominal rate, and that rate can vary. If the
00:32:40.800 | pension is from the federal government, I use a lower discount rate than if it's a private company,
00:32:47.680 | especially if the pension is above the Pension Benefit Guarantee Corp or isn't backed by the
00:32:54.480 | Pension Benefit Guarantee Corp. I use rates, a very, very long-term bond interest rate in doing
00:33:06.320 | the discounting. Then I actually, for conservatism, raise it just a little bit because unlike a bond,
00:33:13.280 | you can't trade it. Once you've made that decision to take the pension, you can't diversify it and
00:33:20.080 | you can't then change your mind. Okay. New topic, given the change of administration in the White
00:33:32.640 | House, has that changed any of your thoughts on long-term financial planning, perhaps policy in
00:33:42.800 | particular? Yeah. First of all, investing, not a bit. I've written pieces, people that lost a lot
00:33:51.280 | of money making a costly bet against Obama, people that lost a lot of money making a costly bet
00:33:56.720 | against Trump. When it comes to investing, you have to know something the market doesn't already
00:34:01.680 | know. When it comes to policy, all we're hearing about change in the estate exemption, changes in
00:34:12.960 | the long-term capital gains rate, step-up basis, and most of these are for those very, very wealthy,
00:34:23.680 | the upper 1%. But I've seen more people make mistakes trying to predict what politicians are
00:34:32.320 | going to do, creating irrevocable trusts so the kids lose out on the step-up basis, etc., thinking
00:34:40.480 | that the exemption was going to be a million dollars. They've created an expensive infrastructure
00:34:49.520 | that they didn't need. I've spoken to Mike Piper a lot about this. Trying to make changes based
00:34:57.600 | upon what we think is going to happen is a hard thing to do. The only thing that I was sure of,
00:35:03.440 | I forgot what year it was, that the estate tax exemption became unlimited. I was absolutely
00:35:12.560 | sure Congress was not going to let that happen, but yet they did. Trying to predict politicians,
00:35:19.360 | is a very difficult thing to do. Sure. And neither party wants to work together these days.
00:35:28.480 | I wish they could do something to solve our healthcare where we spend more than twice per
00:35:35.520 | capita of any other country on healthcare with the shortest life expectancy of any developed country.
00:35:44.000 | Great. Thank you, Alan. So that concludes the questions from the San Antonio Bogleheads
00:35:53.200 | chapter. Next up, we'll have a few questions from the Starting Out Life stage,
00:36:01.280 | and those will be asked by Miriam. Thank you, Alan. These are for young people who are starting
00:36:13.200 | out in their investing career or investors of any age who are late starters and realize they have to
00:36:24.080 | get going. My first question is, when young people get their first job, they often receive
00:36:32.800 | a big glossy 401k pamphlet. It has dozens of mutual funds. It has columns with 30-day returns,
00:36:41.680 | 5-year returns, 10-year returns, ER percent. What should they do with all that information? How can
00:36:52.560 | they assess that information when all they really want to do is select something and move on with
00:37:00.640 | their life? And their HR department, the human resources department cannot help them. They don't
00:37:06.400 | really know anything about the funds or a portfolio. Good question. There's a whole lot
00:37:13.440 | of research that shows that when a company has dozens of funds in their 401k that a large portion
00:37:25.040 | of the participants are going to throw up their hands and just say, "I'll put it in cash," which
00:37:30.240 | is that frog boiling. So they are getting better. There's a lot of default options now where if you
00:37:41.920 | don't pick anything, it will automatically go to a life cycle fund, a target date retirement fund
00:37:49.840 | based on your age, which I think is a wonderful thing as long as it's a low cost sort of plan.
00:37:57.600 | I think it was about seven, eight years ago, a Supreme Court ruling showed that
00:38:03.600 | the trustees of corporate 401k plans had a fiduciary duty to offer low cost,
00:38:12.080 | good investments. So the 401ks have gotten so much better over the period of time, offering
00:38:21.760 | low cost sorts of things. So I would tell people just probably look for starting out a low cost
00:38:30.240 | target date retirement fund if they have that. Pick that, ignore the rest of the stuff. Make
00:38:36.080 | sure that ER, that expense ratio is low. Thank you. My next question is, what is your advice
00:38:46.720 | for young investors who are so tempted to make more money and jump into GameStop
00:38:54.320 | and Robinhood adventures? I would tell them to try to get their excitement
00:39:03.600 | from someplace else other than investing. And it's hard because you hear stories about how much
00:39:11.920 | your friend made in Bitcoin, how much your other friend made in GameStop and the like,
00:39:17.840 | and some of those may be true. Most of them probably aren't, or they're not talking about
00:39:22.880 | where they lost money, et cetera. But yeah, I would tell them to try to avoid that.
00:39:29.760 | Get their excitement elsewhere. Like I said, excitement has its place, but not in investing.
00:39:39.840 | Investing needs to be boring. Thank you. And this is coming from a guy who I knew I was going to get
00:39:49.120 | rich quick when I was 22 years old and put money in gold, which over what, 30 some odd years has
00:40:00.480 | barely kept up with inflation. So I doubled my $6,000. Had I heard of Jack Bogle and his S&P 500
00:40:07.920 | index fund, instead of making 6,000, any guess how much money I would have made?
00:40:12.960 | Over a million? Very close to a million, about 700,000.
00:40:20.240 | Like I said, I ought to be brilliant with as many mistakes as I've made.
00:40:25.680 | So yeah, there's always going to be a Bitcoin, a GameStop, a gold, and I would try to avoid
00:40:34.720 | those things, except for maybe a fun little gambling portfolio. That's fine to carve out
00:40:39.280 | a little bit of money to have fun with. Regarding the issue of paying off student
00:40:47.120 | loans versus using the money to invest in your retirement accounts, what are the factors you
00:40:54.480 | believe are important to consider? And what is your opinion about this? How would you
00:41:00.160 | make that decision? How would you advise young people to make that decision?
00:41:04.720 | Well, I guess the first thing I would say is never, ever, ever miss out on an employer match.
00:41:12.640 | That's free money. So do I like paying off debt? Absolutely. But never miss out on that
00:41:20.800 | free money. The one exception might be if you don't plan to stay at the job
00:41:24.880 | long enough for the employer match to become vested. So that's free money. Never miss out on
00:41:32.320 | that. Depending upon your tax situation, that debt may or may not be tax deductible. But I consider
00:41:42.160 | all debt the inverse of a bond. Because a bond, you're lending a bank, our total bond fund,
00:41:48.800 | you're lending money to the US government, you're lending money to corporations, et cetera. They're
00:41:52.800 | paying you principal and interest. Debt, whether it's the mortgage, car, student loan, is just the
00:41:58.960 | opposite. So to the extent that you can earn greater than a bond return by paying down debt,
00:42:04.960 | should go ahead and do that. So depending on how expensive the debt is, whether or not they're
00:42:12.640 | getting a tax deduction, and whether or not they've contributed enough to their 401(k)
00:42:19.360 | to get the employer match. My next question is, is there any real value,
00:42:29.120 | or should a young investor seriously consider tilting their portfolio to value funds,
00:42:38.240 | and in particular, small cap value, since they do have a longer investing lifetime ahead of them?
00:42:47.200 | In my opinion, no. Some people experimented with drugs when they were younger. I experimented with
00:42:56.800 | DFA. And I think DFA is an amazingly good fund family, dimensional fund advisors.
00:43:03.520 | But one reason I think they are so good, Fama and French, who really popularized the small cap value
00:43:13.280 | tilted portfolio and dimensional fund advisors and the like, they never said it was a free lunch.
00:43:20.800 | They said it was compensation for taking on more risk. And I also found that the DFA funds were far
00:43:28.320 | less tax efficient. So on one hand, I don't believe in ignoring small cap. I don't believe
00:43:36.800 | in ignoring value. But I also don't believe in overweighting it. And if you think of
00:43:44.800 | the second grader math, or as Jack Bogle would say, the humble rules of arithmetic,
00:43:51.440 | I think that was his phrase. If one part of the market does better, another part of
00:43:58.640 | the market has to underperform. And lately, it has been small cap value, until just recently.
00:44:06.400 | And we don't know how far that's going to continue. But the fees are forever.
00:44:11.520 | And I'm seeing more and more tilted portfolios mixed with alternative asset classes
00:44:19.200 | and the like that are worse than, in my opinion, a lower cost Dodge and Cox,
00:44:25.920 | or even American funds, active. So I believe that, for instance, if somebody picked
00:44:36.320 | a 60/40 DFA portfolio with a small cap value tilt, that that might be equivalent to a 65/35
00:44:48.720 | market cap weighted Vanguard type of portfolio. And you'd have lower costs and more tax efficiency.
00:44:56.480 | It's a viable active strategy. And if you do it, you've got to stick with it, in my opinion.
00:45:04.480 | Moving back and forth is a recipe to do worse than both.
00:45:09.920 | Well, when young people look at those graphs, and they see that when I look at those graphs,
00:45:16.800 | and I see small cap value, just down at the bottom of the graph, for a long period of time,
00:45:24.240 | for years at a time, you wonder, well, when is it going to make the money? You want to earn some,
00:45:33.040 | have a return. And if it's not going to do it, and then 10 years later, you get out of it.
00:45:42.000 | Yeah, well, I mean, there's going to be reversion to the mean. It's not always going to
00:45:46.800 | underperform. It's not always going to outperform. And all I could say is, it was about seven years
00:45:52.560 | ago, every conference I was at, seemed like every 30, 60 seconds, I was hearing factor tilting,
00:45:58.800 | smart beta, small cap value, et cetera. And I think that was a warning sign. And by the way,
00:46:04.480 | I told you I'm not nearly as nice as Mike Piper. If I knew how to beat the market,
00:46:11.040 | the last thing I would do is tell you guys, or write about it, I would be rich.
00:46:15.280 | Because even if that small cap value, and I think there is some logic to it, but the more that it's
00:46:24.320 | known, the less likely it is to work going forward. So I'm not going to small cap value tilt. I'm not
00:46:31.600 | going to go with, what's her name? Kathy Wood didn't do the large cap growth either. So I'm
00:46:38.800 | going to get hit by people on both sides about how stupid I am. I embrace dumb beta.
00:46:48.560 | Thanks for those responses. We have about 10 minutes left. So we'll spend the next 10 minutes
00:46:58.720 | answering questions from the chat. And at this time, I will be stopping the recording. So thank
00:47:05.360 | you. [MUSIC PLAYING]