Bogleheads® Conference 2018 - Panel of Experts

00:00:00.000 | Okay, folks, we're going to get started.

00:00:03.040 | I'm going to cut the introduction short.

00:00:05.780 | The moderator for this Q&A with the experts session

00:00:09.440 | is my good friend and Bogohed's conference team member, Mel

00:00:12.940 | Turner.

00:00:13.440 | Please welcome Mel.

00:00:14.400 | [APPLAUSE]

00:00:19.880 | Thank you.

00:00:20.840 | Before we start, if I could have everybody just wave.

00:00:23.480 | We're trying to stay in touch with Paul down in San Diego.

00:00:26.600 | We're texting back and forth.

00:00:27.960 | So if I could have everybody wave, I'm going to take a picture of you real quick.

00:00:31.160 | And I'll send it to him.

00:00:32.680 | So OK, that's good.

00:00:35.360 | Perfect.

00:00:36.000 | Perfect.

00:00:36.520 | Real quick like that.

00:00:37.480 | He'll appreciate it, I'll tell you.

00:00:39.000 | He's like hanging on the edge of his seat.

00:00:41.400 | So my name is Mel Turner, better known as Tom.

00:00:44.400 | You know the story behind that, so I won't get into that.

00:00:47.200 | Thanks for all the first timers that have come here.

00:00:50.440 | We appreciate you making the effort.

00:00:51.940 | And also for the people that are coming back, welcome back.

00:00:54.560 | We hope you enjoy it.

00:00:56.720 | I also need to recognize my wife.

00:00:58.760 | This year is our 50th year of marriage.

00:01:02.080 | [APPLAUSE]

00:01:06.800 | I'm not sure how she puts up with it, actually,

00:01:09.440 | this insanity that I go through.

00:01:12.040 | So who are we?

00:01:13.440 | We represent, inside the room, 31 states.

00:01:16.400 | We have three countries until Nicaragua had to back out.

00:01:21.720 | Mary flew all the way from Germany.

00:01:24.120 | She's by far the farthest.

00:01:25.640 | And she came out here just for the conference.

00:01:27.560 | That's pretty amazing to me.

00:01:29.320 | [APPLAUSE]

00:01:31.880 | About a third of you are the first timers,

00:01:34.440 | and 2/3 of you have been here before.

00:01:36.280 | And that stays true almost every year, year after year.

00:01:39.600 | So we're glad to have the new people that

00:01:41.300 | are in here all the time.

00:01:42.760 | I've collected the questions.

00:01:44.720 | I've got about 20 pages of single spaced questions.

00:01:48.160 | I've tried to sort them out, made some for the young people,

00:01:50.880 | for the old people, for the beginners,

00:01:52.680 | the novice investors, and also for some more experts.

00:01:55.320 | So I try to spread them out as best I can.

00:01:58.360 | I've changed the wording on a lot of them.

00:02:00.240 | I've amended them.

00:02:01.720 | But I'm sure you'll recognize your question.

00:02:04.560 | I've tried to give priority to everybody that's in this room.

00:02:07.400 | So your questions are going to be asked first,

00:02:09.680 | or at least your name will be mentioned first.

00:02:14.360 | So the goal is to finish up about 10 minutes early.

00:02:19.320 | Mel said he'd give me a heads up.

00:02:22.400 | And then we're going to allow each panelist

00:02:24.520 | to have the last two minutes each

00:02:26.400 | and just tell what they're doing, what their goals are,

00:02:29.200 | last minute thoughts, nuggets that they've saved.

00:02:32.800 | Oh, I wanted to say that.

00:02:33.920 | That's going to be their chance to be able to say that.

00:02:37.640 | So this session is all about you, is your questions.

00:02:41.440 | And we're here to listen to what the panelists have to say.

00:02:45.040 | So I'd like to go to the introductions

00:02:47.520 | in alphabetical order.

00:02:49.400 | Last year, I said in alphabetical order.

00:02:51.640 | And I introduced Bill Bernstein first.

00:02:53.760 | And I saw body language of Christine Bens saying,

00:02:56.640 | wait a minute, Bill Bernstein, what's up with that?

00:03:00.520 | And I just realized after I got home, oh, I messed up.

00:03:03.520 | So we're actually going to do it in alphabetical order today.

00:03:07.320 | So our first panelist is a Morningstar director

00:03:12.200 | of personal finance and the senior columnist

00:03:14.200 | for Morningstar.com.

00:03:15.960 | She's a prolific financial writer and, in my opinion,

00:03:19.040 | one of the best financial interviewers that's around.

00:03:21.560 | Please welcome Christine Bens.

00:03:23.080 | [APPLAUSE]

00:03:25.440 | Our next panelist is co-founder of Efficient Frontier Advisors

00:03:32.040 | and author of several successful titles

00:03:33.960 | on finance and economic history.

00:03:36.160 | His book, Four Pillars of Investment,

00:03:38.120 | I consider to be a classic.

00:03:39.880 | But he's also written books about the history of trade

00:03:42.960 | and the influence of the media.

00:03:46.160 | He has a PhD in chemistry.

00:03:48.000 | And he's also an MD.

00:03:49.400 | He practiced neurology until he retired.

00:03:51.440 | And then he went over to something real simple,

00:03:53.520 | like investing.

00:03:54.800 | And I wish I had half of his eloquence.

00:03:57.440 | So please welcome a Boglehead favorite, Dr. Bill Bernstein.

00:04:00.880 | [APPLAUSE]

00:04:03.320 | This is a second visit for our next panelist.

00:04:08.760 | And he's a Boglehead favorite.

00:04:10.400 | After 20 years of writing columns in the Wall Street

00:04:13.200 | Journal, he's also written nine books,

00:04:15.520 | including his most recent, From Here to Financial Happiness,

00:04:18.680 | which was released in September.

00:04:20.680 | And he, just on a personal note, inspired me.

00:04:24.240 | Back in the late '90s, I collected

00:04:26.360 | every one of his getting going columns.

00:04:28.080 | And I have a three-ring binder at home

00:04:29.760 | that I still save to this day.

00:04:32.080 | So please welcome Jonathan Clements.

00:04:33.960 | [APPLAUSE]

00:04:36.400 | Our next panelist is the founder of Portfolio Solutions

00:04:43.800 | and the author of several investment books,

00:04:46.240 | including The Power of Passive Investing,

00:04:49.360 | all about index funds, the ETF book,

00:04:52.080 | and all about asset allocation.

00:04:53.600 | He's been a supporter of the Bogleheads

00:04:55.000 | right from the beginning.

00:04:56.360 | And we are fortunate to, once again, have him on the panel.

00:04:59.400 | He also does a Boglehead podcast.

00:05:02.920 | And you can find his new website just

00:05:06.080 | by typing in Rick Ferry at Core 4, and it'll pop right up.

00:05:10.760 | So welcome my fellow marine aviator, Rick Ferry.

00:05:14.660 | [APPLAUSE]

00:05:17.680 | Our next panelist is the founder of WealthLogic.

00:05:22.000 | He holds a CPA, CFP, and an MBA.

00:05:24.600 | And he served as a corporate finance officer

00:05:26.600 | of two multibillion-dollar companies.

00:05:29.320 | He has decades of research in portfolio construction,

00:05:32.600 | but does his best to keep investing

00:05:34.400 | simple for his clients.

00:05:35.920 | I personally recommend his How a Second Grader Beats Wall Street.

00:05:40.920 | I loaned the book to my friend, who had a broker with UBS,

00:05:44.360 | and he wouldn't give it back to me.

00:05:45.960 | And I said, hey, Bob, give me this book back.

00:05:48.620 | I can't do it.

00:05:49.200 | I said, why are you keeping it?

00:05:50.460 | He says, I'm moving everything from UBS over to Vanguard,

00:05:53.640 | just because of the book.

00:05:56.680 | So I--

00:05:57.360 | Checks in the mail, thank you.

00:06:00.320 | So if I had to do battle with Wall Street Financial Machine,

00:06:02.920 | I want him on my side.

00:06:04.480 | His professional goal is to never

00:06:06.480 | be confused with Jim Cramer.

00:06:08.320 | Please welcome Alan Roth.

00:06:09.880 | [APPLAUSE]

00:06:15.080 | Our next panelist is here for the first time,

00:06:17.000 | became a personal finance columnist of The Wall Street

00:06:20.080 | Journal in 2008, and continues to write a weekly column,

00:06:23.160 | The Intelligent Investor.

00:06:24.920 | Before that, he wrote columns in Money, Time, Forbes Magazine,

00:06:27.880 | has written several books.

00:06:29.240 | My favorite is Your Money, Your Brain.

00:06:31.840 | And he was the editor of the revised edition

00:06:33.680 | of Benjamin Graham's Intelligent Investor.

00:06:36.680 | This is his first visit to the Volkland Conference,

00:06:39.360 | and we hope it won't be his last.

00:06:40.840 | Please welcome Jason Zweig.

00:06:42.320 | [APPLAUSE]

00:06:45.680 | So the first question--

00:06:51.360 | if Tater was on there, I always ask him the first question.

00:06:55.040 | And to honor Tater Larimore, for those who don't know,

00:06:57.920 | he was one of the founders of our Boglehead group.

00:07:00.880 | Back in April, I emailed him and said,

00:07:03.000 | Tater, I want you to have the first question.

00:07:04.840 | What do you want it to be about?

00:07:06.360 | We went back and forth several times

00:07:08.120 | about what subject we're bringing out.

00:07:10.200 | And as you know, he's a man of few words,

00:07:12.240 | but he's succinct, and he gets right to the point.

00:07:15.160 | I told him about my story of messing up.

00:07:17.600 | 28, went to a personal finance class with my wife.

00:07:22.160 | Out of that, you got a free one hour with a CFP.

00:07:25.480 | And we were lambs to the slaughter,

00:07:26.960 | walked out of there with a whole life life insurance policy,

00:07:30.040 | a limited partnership that confused my taxes for decades.

00:07:34.280 | And he sold me Oppenheimer Regency Fund

00:07:37.000 | with an 8 and 1/2% load before I knew what load was.

00:07:42.040 | So Tater decided, you know, everybody

00:07:45.720 | thinks these experts never make any mistakes.

00:07:47.840 | So he says, why don't you pass this on?

00:07:50.200 | Says, what was your biggest mistake

00:07:52.360 | of each one of the panelists, and what did you learn from it?

00:07:56.880 | Anybody can go first on this one.

00:07:58.880 | [LAUGHTER]

00:08:01.320 | I'll go first.

00:08:02.080 | Back when I was the mutual funds editor at Forbes--

00:08:07.640 | this would date back to 1992.

00:08:11.960 | Jonathan had the job before me.

00:08:14.120 | I thought about how I should work the match in my 401(k).

00:08:28.880 | And believe it or not, I've learned a lot in 26 years.

00:08:33.800 | Believe it or not, I said to myself,

00:08:36.080 | I don't want to contribute up to the max

00:08:39.440 | because I can do better with my own money

00:08:42.320 | than these guys at the firm that managed our 401(k)

00:08:47.800 | at the time, which wasn't Vanguard, by the way.

00:08:51.280 | And so I didn't contribute up to the match, up to the max.

00:08:55.800 | And about 10 years ago, I calculated

00:09:00.920 | what my opportunity cost was of relying on my own brilliance.

00:09:05.760 | And 10 years ago, it was about $280,000.

00:09:10.800 | So go for the match and the max.

00:09:16.400 | I'm competitive.

00:09:17.480 | I'm going to beat you, Jason.

00:09:20.400 | I took my college graduation money in 1980

00:09:25.640 | and put $6,684 into 10 gold coins when gold was surging

00:09:32.040 | because I was sure it was going to triple.

00:09:35.040 | Today, it's not quite double that,

00:09:37.880 | meaning that it hasn't kept up with inflation.

00:09:42.160 | I did the math.

00:09:43.240 | Had I instead invested in Jack Bogle's S&P 500 Index Fund,

00:09:50.640 | I'd have well over $400,000 more.

00:09:55.840 | All righty.

00:09:56.840 | [LAUGHTER]

00:10:00.800 | Well, I have invested in Palladium Futures,

00:10:04.080 | chased mutual fund, active mutual fund performance.

00:10:09.000 | Wasn't smart enough to buy a house in Los Angeles

00:10:11.800 | when we moved there in 1976.

00:10:14.800 | But by far, by far, the biggest mistake

00:10:17.640 | that I would made, which probably runs to seven figures,

00:10:22.200 | was not understanding that the optimal strategy for someone

00:10:27.520 | who is deep early into their saving years

00:10:31.160 | is to simply put 100% into equity every single month,

00:10:34.600 | every single year.

00:10:36.160 | And that really is probably the biggest mistake,

00:10:39.320 | dollar sign-wise, that I made, of all the dozens of mistakes,

00:10:43.400 | smaller mistakes that I've made.

00:10:44.920 | OK, I'll go.

00:10:49.680 | Would you like to go?

00:10:50.520 | OK.

00:10:51.020 | OK, go ahead.

00:10:52.200 | So before I admit to my mistake, you

00:10:54.920 | should just notice the way the panel is set up,

00:10:57.320 | what they decided to do was to make sure

00:10:58.960 | that Rick and Alan were the two extremes.

00:11:02.160 | So it's less likely to come to fisticuffs.

00:11:05.520 | No.

00:11:06.360 | But if it does, one, I'm in the wrong place.

00:11:09.680 | And two, I'd bet on the Marine.

00:11:13.360 | You're safer on this end of the table than that.

00:11:16.840 | Unless you attack first.

00:11:18.760 | I was a Cub Scout.

00:11:20.000 | [LAUGHTER]

00:11:23.440 | At least you had adult supervision.

00:11:25.560 | [LAUGHTER]

00:11:29.520 | So during the course of my adult years,

00:11:32.240 | I've managed to lose half of my wealth

00:11:34.520 | three times in the bear market that started in March 2000,

00:11:40.640 | the bear market that started in October 2007,

00:11:45.440 | and when my wife left me.

00:11:47.480 | And I've learned exactly nothing from all of those experiences.

00:11:52.520 | I am still invested in the stock market,

00:11:54.560 | and I recently got remarried.

00:11:58.200 | The triumph of hope over experience.

00:12:02.520 | So I'll talk about three mistakes

00:12:05.240 | that I made in my 20s, because I can't

00:12:06.880 | decide which one was the worst.

00:12:08.500 | So I bought fake Dolly prints in my 20s.

00:12:13.360 | I bought a-- first stock I ever bought

00:12:16.240 | was an artificial intelligence stock.

00:12:18.040 | It was highly recommended by Money magazine.

00:12:21.160 | It went to zero in about six months.

00:12:24.080 | And the third thing I bought as an investment was a timeshare.

00:12:27.920 | And those were my three big mistakes.

00:12:30.240 | I'll go ahead.

00:12:34.560 | I have a long list, but I think the one that I reflect most on

00:12:39.000 | and feel the worst about is actually

00:12:41.280 | one that didn't have such a big effect on me personally,

00:12:43.840 | but I still feel guilty and complicit about having covered

00:12:48.960 | a lot of growth-oriented mutual funds

00:12:51.320 | when I was an analyst in the late '90s,

00:12:53.440 | and just not pushing back hard enough on that whole phenomenon

00:12:58.920 | and not pushing back on fund managers enough

00:13:02.440 | and not asking all of my stupid questions for fear

00:13:06.840 | that I would somehow show myself to be not so knowledgeable.

00:13:11.200 | So I guess I've been trying to atone for that in one way

00:13:15.240 | or another ever since, because I feel

00:13:17.480 | guilty about whatever role I had in helping investors

00:13:22.600 | take part in that mania.

00:13:25.640 | So I hope you don't feel so bad now about your mistakes.

00:13:29.480 | We all make them.

00:13:30.960 | If you don't make mistakes, you're not trying very hard.

00:13:33.360 | So the next question is kind of a carryover

00:13:36.120 | from the last conference we had.

00:13:39.760 | Sue asked a question about Bitcoin.

00:13:43.080 | And everybody was getting a big laugh out of it,

00:13:45.680 | because they said, well, it's going to be the last one holding

00:13:48.400 | the bag is going to get stuck with a Bitcoin.

00:13:50.640 | One of our panelists picked up the mic and said,

00:13:53.280 | I bought some Bitcoin.

00:13:55.160 | There were so many people that inhaled it,

00:13:57.000 | sucked the air out of the room.

00:14:00.000 | In the meantime, Bitcoin has been from 4,200 up to over 19,000,

00:14:04.520 | as you saw on Jack's slide today.

00:14:06.480 | Right now, I don't follow, but it's like 6,200 or something

00:14:09.480 | like that.

00:14:10.000 | So we'd like to ask Alan Roth what

00:14:13.000 | you've learned in the last year, who's buying Bitcoin,

00:14:17.760 | and then we'd like to ask the panel as a whole,

00:14:19.920 | do you think it's a real deal or do you think it's a scam?

00:14:23.720 | For the record, I think I also disclosed about $200

00:14:27.480 | worth of Bitcoin, so that I could basically fact check

00:14:33.160 | everything people were telling me about buying Bitcoin,

00:14:37.280 | so that the article was accurate.

00:14:40.600 | With that said, and I'm up by 50% still, but again,

00:14:46.000 | I don't even know if I could have sold it

00:14:47.680 | when it hit $19,000.

00:14:51.760 | It's probably going to be worth zero in 10 years,

00:14:55.440 | but with that said, it does solve the problem.

00:14:59.520 | When I buy something on Amazon and get 2% cash back

00:15:03.720 | on my credit card, Amazon is being charged more than 2%

00:15:09.120 | on that.

00:15:09.960 | Bitcoin makes the transaction virtually free,

00:15:13.320 | or maybe a dime.

00:15:14.960 | So I'm not convinced.

00:15:18.640 | It's likely to be worth zero.

00:15:21.280 | There are thousands of different cryptocurrencies.

00:15:24.400 | I'm thinking of creating RothCoin.

00:15:26.160 | Raise your hand if you want to buy it.

00:15:30.160 | Can you show us your coin after the conference?

00:15:32.120 | I want to see what it looks like.

00:15:34.120 | It's virtual.

00:15:36.760 | And it seems like they're always being investigated,

00:15:39.160 | or challenged, or something.

00:15:40.680 | My gardener, I ask him if he's saving.

00:15:42.560 | He says, I'm investing in Bitcoin.

00:15:44.480 | That scared the daylights out of me.

00:15:46.200 | But Bill, I'd like to know your opinion.

00:15:48.440 | What's the deal in Bitcoin?

00:15:49.680 | You study the financial markets and that part

00:15:52.120 | of the academic part of it.

00:15:54.280 | Well, I think that the academicians have been trying,

00:15:59.800 | probably since the time of De La Vega,

00:16:02.520 | to mathematically define what a bubble looks like.

00:16:06.400 | And you can't do it.

00:16:08.000 | Some very smart people have tried to do it.

00:16:09.840 | And you can't define it mathematically.

00:16:11.920 | But you can define it sociologically.

00:16:14.160 | So it's when you see that it's topic A at social gatherings,

00:16:20.880 | check.

00:16:21.960 | People quit good jobs, quit doing brain surgery

00:16:25.400 | to become crypto coin investors, check.

00:16:29.680 | When you get pushback of an extreme sort,

00:16:34.520 | when you express skepticism.

00:16:36.200 | I can't keep out of my mind the image

00:16:38.920 | of what John McAfee promised to do on national television.

00:16:42.480 | If Bitcoin didn't reach a half a million dollars,

00:16:45.760 | you can look it up on-- you can Google it.

00:16:48.480 | And then finally, when you see extreme predictions.

00:16:52.040 | So it checks all of those boxes.

00:16:56.520 | And so, yeah, I mean, it's just-- it'll

00:17:00.240 | be one more item in the history of bubbles

00:17:02.360 | that gets written every 10 or 15 years.

00:17:05.360 | So while there's a limited amount

00:17:13.080 | of any particular cryptocurrency,

00:17:15.020 | there are an unlimited potential number of cryptocurrencies.

00:17:20.240 | And if there is an unlimited supply,

00:17:22.000 | economics tells us that the price will be zero.

00:17:25.120 | When even Alan Roth is going to have his own coin,

00:17:27.600 | you know that there's just-- the supply will swamp demand,

00:17:33.240 | and the price will inevitably head towards zero.

00:17:37.340 | Did Rick Perry pay you to pick on me?

00:17:40.640 | I applaud Alan Roth for buying Bitcoin.

00:17:45.280 | I would have done the same thing.

00:17:47.160 | Not really.

00:17:48.040 | Anyway, so let's not confuse blockchain technology

00:17:53.200 | with Bitcoin.

00:17:54.320 | Blockchain technology is real.

00:17:57.080 | It's a way of counting and verifying transactions.

00:18:00.400 | A lot of companies are going to blockchain technology.

00:18:03.640 | There will be, in the not too distant future,

00:18:07.420 | mutual funds that are based on blockchain technology.

00:18:10.720 | Not to invest in it, but I mean the coin itself.

00:18:14.200 | There are already things called initial coin offerings, which

00:18:17.000 | are based on company equity, as opposed

00:18:19.720 | to going onto a stock market.

00:18:21.040 | This is coming.

00:18:22.080 | So blockchain technology is real.

00:18:24.580 | It's coming.

00:18:25.520 | We're going to see more of it.

00:18:27.200 | Now, a Bitcoin is simply a currency

00:18:29.840 | which was created based on this blockchain technology.

00:18:33.320 | And the idea was that it's going to be a global currency.

00:18:37.240 | I don't know if we're ever going to see global currencies,

00:18:39.680 | because the Federal Reserve likes

00:18:41.100 | to be able to control money, to be able to control

00:18:43.560 | our own interest rates.

00:18:44.520 | So I think that the government will stop eventually

00:18:47.160 | if these things do become used for transactions

00:18:50.680 | globally, that if it begins to affect our own money

00:18:54.720 | supply and the Federal Reserve's ability to operate,

00:18:56.920 | that we're going to see a lot of clamp down on this.

00:18:59.200 | And we're already seeing it in other countries.

00:19:01.240 | So let's not confuse Bitcoin with blockchain technology.

00:19:04.200 | I just wanted to make sure that you understood

00:19:06.120 | there's a big difference.

00:19:07.480 | Yeah, and I would just add one quick note

00:19:09.640 | to what Rick just said, which is that to the extent

00:19:12.920 | that blockchain technology is real

00:19:16.400 | and has enormous potential to transform

00:19:20.200 | the way financial transactions are conducted--

00:19:22.480 | and I happen to agree, I think it probably does--

00:19:25.160 | then the ultimate form of digital currency

00:19:29.080 | we're likely to see would be Fed coin, Euro coin, BOJ coin,

00:19:37.720 | and BOC coin, with the Bank of Japan, the Bank of China,

00:19:43.440 | the Fed, and the European Central Bank all issuing

00:19:47.840 | their own cryptocurrencies.

00:19:50.240 | And when they do that, it's going

00:19:51.840 | to be very hard for private cryptocurrencies to compete.

00:19:55.600 | I think the problem that a lot of speculators

00:19:58.680 | have made, because I would not call anybody, including Allen,

00:20:01.800 | of course, who invests in Bitcoin an investor,

00:20:05.000 | because they're not investing, they're speculating.

00:20:07.480 | The problem that all these cryptocurrency speculators

00:20:11.200 | have made is that they've confused

00:20:14.360 | a very good fundamental idea, the idea that currency could

00:20:18.360 | be digital and facilitate electronic transactions

00:20:21.680 | globally, with the inevitability of any particular

00:20:26.640 | cryptocurrency being the one that succeeds,

00:20:29.920 | in exactly the same way that in 1999 and early 2000,

00:20:35.760 | people confused the undeniable, enormous potential

00:20:40.080 | of the internet for the idea that I

00:20:43.040 | can pick the internet stock that is going

00:20:46.120 | to be the great money maker.

00:20:49.880 | Christine, have you written about it at all?

00:20:52.280 | No.

00:20:53.600 | We keep passing around the Bitcoin specialty,

00:20:57.400 | but we have not delved into Bitcoin in any great depth.

00:21:04.040 | OK, let's go on to the next subject.

00:21:05.720 | And it's kind of a carryover from the last conference

00:21:09.800 | that we had, one of the questions that were there.

00:21:12.480 | It says, here's another follow-up question

00:21:14.680 | from last year's conference.

00:21:15.800 | Several panelists suggested emerging markets

00:21:17.800 | were undervalued and would be a good place to invest.

00:21:20.120 | Since last year, Vanguard Emerging Market Stock Index

00:21:23.560 | Fund Admiral shares are down 8%.

00:21:26.680 | Over the last 10 years, they've only returned 3%.

00:21:30.320 | So this is from Danielle.

00:21:32.560 | It says, last year, Jonathan Clements suggested

00:21:34.520 | that due to demographics, emerging markets

00:21:36.680 | have more potential for growth in the next half century.

00:21:40.480 | I would like the panel's views on this,

00:21:42.680 | especially Mr. Clements.

00:21:44.120 | It's a classic example of the mismatch

00:21:51.160 | between the way the financial markets operate

00:21:54.840 | and our own expectations of returns.

00:21:58.960 | If emerging markets are down 8% over the last 12 months,

00:22:03.520 | I am 8% more excited about them.

00:22:06.880 | I'll be told to buy low and sell high.

00:22:09.800 | If you thought emerging markets were a good idea last year,

00:22:12.960 | and I certainly did, I have no reason

00:22:16.040 | to think that there are any worse ideas today.

00:22:17.960 | And in fact, at the current prices,

00:22:19.200 | I'm more excited by them.

00:22:20.280 | So yeah, I have as much in emerging markets

00:22:22.080 | as I did a year ago, maybe even somewhat more.

00:22:24.680 | And I fully expect over the next 10-plus years

00:22:29.040 | that they will be a great investment.

00:22:30.760 | And I would not advise anybody to put their entire portfolio

00:22:36.640 | into emerging markets.

00:22:38.040 | But if you have, say, 10% of your stock portfolio

00:22:40.800 | in emerging markets, I don't think

00:22:42.200 | that that's unreasonable.

00:22:43.240 | The nice thing about emerging market stocks

00:22:48.200 | is that from time to time, they get to be really cheap.

00:22:52.240 | And of course, on the way getting there,

00:22:53.880 | they can lose you a lot of money.

00:22:56.760 | Now, in terms of finance theory, you

00:22:59.640 | would predict that emerging markets should

00:23:02.520 | have higher than average realized returns,

00:23:06.440 | because they're riskier.

00:23:09.480 | I'm not sure that the data are convincing on that subject.

00:23:13.280 | And in fact, when you look at the very longest time series,

00:23:16.000 | going back to the year 1900 of what

00:23:19.880 | looked like emerging markets stocks then,

00:23:21.960 | they actually have returns that are

00:23:23.840 | lower than developed markets.

00:23:26.400 | And there are possible reasons why that's so,

00:23:29.640 | having to do with rule of law and shareholder rights.

00:23:33.120 | What I like to say about Chinese stocks

00:23:35.040 | is that a country that doesn't protect its children

00:23:38.120 | from lead-contaminated toys is not

00:23:40.040 | likely to also protect the interests of foreign minority

00:23:43.600 | shareholders.

00:23:45.880 | That said, I think that a small part of them

00:23:50.520 | is a reasonable part of a diversified portfolio,

00:23:54.400 | if for no other reason than rebalancing reasons.

00:23:56.760 | They're very volatile.

00:23:58.100 | The prices go way up, and the prices go way down.

00:24:01.280 | And if you're a disciplined, long-term asset allocator,

00:24:04.760 | that's a good thing.

00:24:05.640 | I think there's also a myth out there

00:24:10.680 | that faster-growing economies relate to faster-growing stock

00:24:15.600 | markets.

00:24:16.100 | And Jason, I believe that's not necessarily true.

00:24:20.880 | And then just one other thing, people, even advisors,

00:24:25.400 | chase performance.

00:24:26.520 | I profiled dimensional fund advisors, DFA, a few years ago.

00:24:31.280 | And their largest single fund was their emerging markets fund,

00:24:36.280 | because after it had performed well, money moved in.

00:24:38.880 | I don't know when emerging markets

00:24:47.880 | are going to turn around.

00:24:50.540 | So I'm going to give you my long-term investment

00:24:53.880 | view of it.

00:24:55.000 | If you have a total international stock index

00:24:58.680 | fund, or a global equity fund, Vanguard's VT fund,

00:25:04.160 | you're invested probably as much as you should be

00:25:06.520 | invested in emerging markets.

00:25:09.680 | In the short term, when the US sort of does something

00:25:16.080 | as small as-- we're not getting political-- but tariffs,

00:25:20.540 | emerging markets get crushed from that.

00:25:24.380 | So everything we do in this country just has a domino

00:25:29.700 | effect and really hits some of these emerging markets

00:25:32.740 | very hard.

00:25:34.180 | So I don't know when they are going to recover.

00:25:36.540 | I imagine they will eventually.

00:25:39.100 | My allocation would just be whatever

00:25:41.220 | your allocation is to the international index fund.

00:25:46.460 | It's got emerging markets in it.

00:25:47.860 | You're good.

00:25:48.420 | Or if you're doing VT, whatever the emerging market

00:25:51.380 | allocation is, is good.

00:25:55.020 | Yeah, in fact, I think that's a good point.

00:25:57.620 | And I think that actually the market allocation from VT

00:26:01.620 | or from a total international fund

00:26:03.540 | is actually an upper bound.

00:26:05.500 | Because that puts your VT, your emerging markets,

00:26:09.300 | are going to be about 10% of your stock allocation.

00:26:12.140 | And I think that's kind of an upper bound.

00:26:13.900 | I think that it should never exceed that.

00:26:15.600 | And probably, in many cases, might even be lower than that,

00:26:19.220 | unless you're going to invest in VT.

00:26:23.140 | So DFA was mentioned a second ago.

00:26:24.940 | So I'll jump down a few questions.

00:26:27.460 | And DFA, based on Fama French, small cap value

00:26:31.220 | is supposed to give added return without added risk.

00:26:34.700 | So I pulled out the numbers for Vanguard's small cap value

00:26:37.980 | and also DFA's small cap value.

00:26:40.860 | So three years, Vanguard's 8/10 better.

00:26:44.660 | Over five years, Vanguard is 2% better.

00:26:47.500 | Over 10 years, Vanguard is 5% better.

00:26:50.100 | 15 years, Vanguard is 0.5% better.

00:26:54.060 | Why would anybody invest with DFA?

00:26:56.580 | Plus, you have to go through a broker that's

00:26:59.260 | been screened, some kind of exclusive thing.

00:27:01.740 | Reminds me of Costco.

00:27:03.020 | You've got to go through this broker thing

00:27:04.860 | to be able to even buy the DFA funds.

00:27:06.820 | Why would anybody do that?

00:27:09.140 | OK, so I'll answer that.

00:27:11.060 | If you don't mind, I'll start.

00:27:12.500 | First of all, it's not a broker.

00:27:13.500 | It's an advisor.

00:27:14.340 | They have to have gone through DFA's two-day course,

00:27:16.860 | and then they have to be accepted by DFA

00:27:18.620 | to be able to use their funds.

00:27:20.580 | The advisor doesn't get any commission or any kind

00:27:25.100 | of benefit from using DFA versus using Vanguard or iShares

00:27:29.300 | or anybody else.

00:27:30.140 | But it's exclusive, though, right?

00:27:33.060 | Not everybody can just start selling DFA funds.

00:27:35.140 | Don't you have to go through the course?

00:27:36.180 | You have to go through their training.

00:27:38.340 | Plus, a lot of the brokerage industry,

00:27:40.260 | you can't use them if you're a broker.

00:27:42.980 | But I should add that the rigor of that training process

00:27:47.380 | equilibrates to being able to fog a mirror.

00:27:51.580 | If you're able to survive this two-day conference,

00:27:54.380 | you can survive the DFA training.

00:27:57.340 | OK, anyway.

00:27:58.420 | So with that, as far as whether Vanguard's small-cap value

00:28:02.540 | fund outperforms DFA's small-cap value fund, it's irrelevant.

00:28:06.020 | Vanguard calculates small-cap value

00:28:07.740 | differently than how DFA calculates small-cap value.

00:28:11.420 | DFA uses a one-factor model, basically book-to-market,

00:28:16.100 | which is the reverse of price-to-book.

00:28:17.660 | Vanguard uses a multi-factor model to do it.

00:28:20.580 | So sometimes price-to-book is the better outperforming value

00:28:25.020 | factor.

00:28:25.580 | Sometimes it's not.

00:28:27.500 | And when it's not, the Vanguard model,

00:28:29.420 | which is a multi-factor model, will outperform.

00:28:31.580 | So I don't really put any-- looking at past performance,

00:28:35.340 | saying Vanguard's way of doing it

00:28:37.340 | is better than the way DFA is doing it.

00:28:40.180 | By the time you get your money invested in Vanguard

00:28:42.260 | and you took it out of DFA, I guarantee you

00:28:44.300 | that's exactly the day it's all going to reverse.

00:28:46.260 | I think DFA are one of the good guys.

00:28:51.820 | They're just not Vanguard good.

00:28:54.740 | And when I profiled them, they were quite clear

00:28:57.340 | that it wasn't a free lunch.

00:28:58.860 | It was compensation for taking on more risk.

00:29:01.900 | And roughly 15 years ago, I did an experiment.

00:29:04.980 | I put maybe 5% of my assets in DFA and 95% at Vanguard.

00:29:10.620 | Today, I'm about 2% DFA and 98% Vanguard.

00:29:16.060 | And my biggest disappointment was really

00:29:19.580 | the tax inefficiency of a firm that

00:29:23.340 | says they're very tax efficient.

00:29:25.420 | So the next question is the most often asked questions.

00:29:32.500 | And I hope I can express it.

00:29:33.860 | I'll read three people's different requests,

00:29:36.860 | but they all kind of fall into the same theme.

00:29:41.340 | They're basically worried about the rise of interest rates

00:29:43.780 | and why should it be in bonds.

00:29:45.860 | So the first one's from Fred Berry.

00:29:47.940 | He should be in the room here somewhere.

00:29:49.780 | He says, first, thanks for organizing the conference.

00:29:52.340 | My question is, for fixed income, part of our asset

00:29:54.660 | allocation, what are the pros and cons

00:29:56.700 | of using CDs or CD ladders instead of a US bond fund?

00:30:01.420 | And he says, note, I don't have any international bonds.

00:30:03.900 | And then Trey Parrish, he should also

00:30:05.700 | be in the room here somewhere.

00:30:07.220 | Is rising interest rate environment,

00:30:09.180 | is a CD or treasury ladder better

00:30:11.860 | than going into a bond fund?

00:30:14.220 | And Mark Miller is also in the room.

00:30:15.980 | With rising interest rates, what other lower risk options

00:30:19.460 | should one look at as an alternative to bonds?

00:30:22.500 | Should we just sit it out or should we put it in there

00:30:25.380 | and accept that our principal's going to go down?

00:30:28.020 | Alan has to go first.

00:30:31.300 | You can take the CD portion.

00:30:32.500 | Thank you, Jason.

00:30:35.580 | First of all, what I don't do is ladder CDs.

00:30:39.460 | We buy longer term CDs that have very easy early withdrawal

00:30:43.140 | penalties.

00:30:43.860 | And it's essentially a put, the right

00:30:45.420 | to sell it back to the bank if interest rates go up,

00:30:49.940 | rather than take the loss.

00:30:51.220 | Total bond fund, in an extreme example, would lose--

00:30:54.500 | I just calculated-- 19.27% if interest rates

00:30:57.860 | rose 4 percentage points in one year.

00:31:00.580 | With, let's say, an Ally Bank CD,

00:31:02.500 | you earn roughly the same interest.

00:31:04.980 | But with a five month penalty, you'd make 1.75%.

00:31:08.860 | That's the first part of it.

00:31:10.260 | The second part, it's an incredible myth

00:31:13.100 | that we are in a rising rate environment.

00:31:16.060 | Rates have risen just a bit.

00:31:18.500 | The Fed controls the overnight rate, nothing more.

00:31:22.300 | Top economists have called the direction of the 10 year

00:31:25.260 | Treasury right up or down 30% of the time less than a coin flip.

00:31:30.060 | So we don't know what rates are going to do.

00:31:32.900 | So I use a combination of CDs and bond funds.

00:31:37.580 | Right now with the flatter yield curve,

00:31:39.620 | if clients want some short term bond index fund,

00:31:43.060 | I'm absolutely fine with that.

00:31:44.340 | Because last I looked, there was only about a 30 BIP difference

00:31:47.940 | in yield.

00:31:50.780 | I think Alan's absolutely right.

00:31:52.540 | And I would say it comes down to time horizon.

00:31:55.340 | If someone has a time horizon of fewer than two years,

00:31:59.420 | then I think cash probably is the right investment,

00:32:02.340 | true cash instruments.

00:32:04.660 | And then stepping out from there,

00:32:06.980 | where presumably you aren't going

00:32:09.540 | to need to get at that money for spending,

00:32:11.860 | I think you can afford to endure maybe

00:32:14.580 | a little bit of interest rate related volatility

00:32:17.940 | if that continues.

00:32:20.020 | And you probably will earn a higher return over time

00:32:22.700 | in exchange for being willing to tolerate that volatility.

00:32:25.820 | So I do think time horizon and thinking

00:32:28.180 | about your spending horizon is key when

00:32:30.740 | deciding the right allocation between cash and bonds.

00:32:33.900 | I would also mind inflation.

00:32:36.100 | Because we have begun to see inflation

00:32:38.860 | look a little hotter than it has in years past.

00:32:42.420 | So for people who are actively drawing upon their portfolios,

00:32:47.420 | I think maintaining an allocation

00:32:49.780 | to inflation-protected bonds makes sense as well.

00:32:53.580 | Yeah, two minor points.

00:32:55.300 | Number one is that stocks have a very slight tendency

00:32:59.700 | to mean revert.

00:33:01.580 | Bonds have zero tendency to mean revert.

00:33:04.300 | So if rates go to 10% either at the short or the long end

00:33:07.260 | or both, you shouldn't reassure yourself

00:33:09.540 | that they can only fall, as people to their chagrin

00:33:13.460 | found out in the late 1970s.

00:33:16.220 | Second, Alan, correct me if I'm wrong,

00:33:19.020 | but I think the last I looked a couple of days

00:33:21.300 | ago at the short end, treasuries actually

00:33:23.460 | had higher yields than CDs.

00:33:24.860 | I think you can buy five-year CDs at about up to 3.2% now.

00:33:35.140 | I'm pretty sure that five-year treasury is--

00:33:38.860 | 3.06% or 3.09% plus they're state tax-free.

00:33:43.380 | Yeah, that's true if you live in it.

00:33:45.420 | And for a long time, I've been writing stash your cash rather

00:33:49.740 | than a Vanguard money market fund,

00:33:52.660 | stash it at a high-yield savings account.

00:33:55.500 | Right now, I think the Vanguard treasury--

00:33:57.820 | and that's not the default fund.

00:33:59.460 | You have to ask for it, and it's a $50,000 minimum--

00:34:03.060 | is yielding just over 2% and is state tax-exempt.

00:34:09.940 | Yeah, I mean, I guess the only thing I would add

00:34:12.900 | is that tax-exempt money market funds, particularly at Vanguard,

00:34:18.540 | are quite attractive to people who live in high-tax states,

00:34:22.580 | like me and Jonathan and many people in this room.

00:34:28.060 | I mean, you can get a pre-tax yield of 150 basis points

00:34:34.660 | and up.

00:34:36.060 | And if it's just your cash that you're

00:34:38.540 | keeping around for liquidity, that's a very attractive carry

00:34:43.140 | after tax.

00:34:45.540 | So just two quick points.

00:34:47.260 | So one, a lot of this has to do with expectations.

00:34:50.140 | I mean, Alan just described apocalypse, the bond market.

00:34:53.620 | We have a full percentage point rise in interest rates,

00:34:56.220 | and your total bond market fund is down 19%.

00:35:00.100 | I think a full percentage point rise in interest rates

00:35:03.020 | from here in the short term would be extraordinary.

00:35:06.780 | And yet, you would only lose 19%.

00:35:08.940 | I mean, if you're a stock market investor

00:35:10.640 | and you're not prepared to lose 19% tomorrow,

00:35:14.500 | you shouldn't be in stocks.

00:35:16.980 | Our expectations for the bond side of our portfolio

00:35:19.260 | are so different from our stock side of our portfolio.

00:35:22.260 | We expect our money to be there, and that's

00:35:25.380 | why people get freaked out by rising interest rates.

00:35:28.660 | But let's say you have a five-year time horizon

00:35:30.940 | and you're choosing between a five-year CD

00:35:33.100 | or buying a short-to-intermediate-term bond

00:35:36.780 | fund, I would bet that over that five-year period,

00:35:39.820 | returns are likely to be very similar.

00:35:43.740 | What you get with the CD is really twofold.

00:35:45.780 | One, there is the comfort of knowing precisely what you're

00:35:50.220 | going to have after five years.

00:35:51.980 | But you're going to get pretty similar

00:35:54.100 | with that short-to-intermediate-term bond fund.

00:35:56.060 | The result is not going to be that different.

00:35:58.180 | But two, the CD does have that valuable option,

00:36:00.900 | which is you can bail at any time

00:36:02.860 | and pay the early withdrawal penalty

00:36:04.620 | and then reinvest it at a higher rate.

00:36:06.460 | So to that extent, the CD does have a slight edge.

00:36:10.060 | But I'm not sure that, given the potentially lower yield,

00:36:13.180 | that I would pay up for that option.

00:36:14.700 | So there were three parts to this rising interest rate

00:36:20.740 | question.

00:36:21.260 | The first one was, what are the pros and cons of buying CDs?

00:36:25.020 | And Alan has been a big advocate for buying CDs as far out

00:36:29.580 | as you can and then pay the penalty.

00:36:31.180 | And I don't think there's anything wrong with that.

00:36:33.260 | I mean, you're FDIC insured.

00:36:34.900 | You just have to be careful you don't go past--

00:36:36.820 | I think it's the $250,000, and you

00:36:38.980 | need to do a different one.

00:36:40.140 | You actually need to kind of keep an eye on it

00:36:42.300 | and manage that portion of your portfolio

00:36:45.740 | rather than just putting in a fund.

00:36:47.200 | It's easy.

00:36:48.220 | So there's nothing wrong with the CD idea that Alan has.

00:36:52.100 | The second thing was, should you do a bond ladder

00:36:55.060 | versus buying a bond fund?

00:36:57.260 | Well, I think when you look at most intermediate-term bond

00:37:01.140 | funds, they're pretty much a ladder anyway,

00:37:04.020 | if you look at the structure of the maturities.

00:37:06.380 | So you can go out, and you can buy individual bonds.

00:37:08.660 | What do you do with the interest?

00:37:10.060 | Well, you would have to reinvest it.

00:37:11.660 | When bonds come due, you have to reinvest it.

00:37:13.740 | That's pretty much what an intermediate-term bond

00:37:16.900 | fund does anyway.

00:37:18.340 | So I don't see the big benefit of buying individual bonds

00:37:21.620 | versus buying a bond fund.

00:37:24.300 | I would just make it easy and go with the bond fund.

00:37:26.980 | The last thing was, well, what do you do to lower your risk?

00:37:31.540 | And Christine mentioned TIPS, Treasury Inflation Protected

00:37:34.540 | Securities, where if you think that interest rates are going

00:37:37.740 | up because inflation is going up, then TIPS make good sense.

00:37:43.820 | However, realize that there are two parts to the return

00:37:49.020 | of TIPS.

00:37:49.700 | One is the inflation component, and one

00:37:52.020 | is the real return component.

00:37:54.500 | And if inflation doesn't go up, but the real return

00:37:56.900 | on interest rates do go up, then the value of TIPS

00:37:59.900 | isn't really going to help you, because the real interest rates

00:38:05.940 | go up, and the inflation stays the same.

00:38:08.420 | TIPS are going to get beat up, just like every other bond.

00:38:10.820 | So realize there's two components to TIPS.

00:38:13.220 | So to me, if your liabilities are intermediate-term,

00:38:17.020 | just buying an intermediate-term bond index fund works.

00:38:20.500 | If your liabilities are short-term,

00:38:22.380 | or whatever amount is short-term,

00:38:24.220 | keeping that money in the money market

00:38:25.860 | or keeping it in short-term bond funds

00:38:27.500 | makes sense for that portion of your money.

00:38:29.260 | So a little change of pace.

00:38:35.540 | And the privilege of putting this together,

00:38:37.380 | I'm going to ask a personal question.

00:38:40.060 | So this isn't the average group.

00:38:42.740 | Most people can't come up with $500.

00:38:45.300 | And I have a feeling that most people in here

00:38:47.180 | are flagship members, and they've

00:38:49.100 | done very well because they focused on investing.

00:38:51.860 | So the question I have is, how do you

00:38:54.300 | teach your kids character traits like honesty, and hard work,

00:38:59.820 | and compassion for others, and not focus on money

00:39:04.020 | to convince them that money shouldn't

00:39:05.580 | be the center of their world, their character should

00:39:07.460 | be the center of their world?

00:39:08.620 | Next question.

00:39:16.300 | I haven't figured that one out yet.

00:39:17.740 | So I think you should ask our kids that question now.

00:39:24.060 | Two things.

00:39:24.580 | I think I said this last year.

00:39:26.100 | Write a book with your son called

00:39:27.500 | How a Second Grader Beat Wall Street.

00:39:30.420 | But look, I knew how to be-- I think I lucked out.

00:39:33.460 | I have a great kid.

00:39:34.660 | Like any dad, I'm very proud of my child.

00:39:38.700 | But I knew how to be an absolutely perfect parent

00:39:41.660 | until I had a kid.

00:39:42.740 | Not so easy.

00:39:43.580 | [LAUGHTER]

00:39:48.140 | I think that simply making conversations

00:39:52.500 | about financial and non-financial issues

00:39:55.660 | part of dinner time conversation is the key.

00:40:00.180 | Just talk about what's important to you,

00:40:04.260 | how you conduct yourself in your daily lives,

00:40:06.580 | how you manage your portfolio.

00:40:08.820 | Talking honestly about the mistakes you've made,

00:40:13.820 | the things you've done right, having those conversations

00:40:16.460 | on a daily basis is probably more powerful

00:40:18.820 | than anything you can do.

00:40:21.180 | You can construct elaborate reward systems

00:40:24.340 | to get your kids to do one thing or another.

00:40:26.420 | And I certainly did a fair amount of that with my kids.

00:40:28.700 | It was sort of fun manipulating them.

00:40:31.260 | But simply talking to your kids openly and honestly, I think,

00:40:36.100 | is more valuable than anything else you can do.

00:40:39.620 | Kids are really good at detecting hypocrisy.

00:40:44.460 | And I don't think--

00:40:46.420 | most of what you're going to be doing is nonverbal.

00:40:48.540 | They're going to be observing you and watching you.

00:40:50.660 | And if you're into McMansions and Beamers,

00:40:55.340 | there's nothing you're going to be able to tell them

00:40:57.460 | about frugality.

00:40:59.740 | They're going to be watching how you invest, how you save,

00:41:03.340 | and how you spend, and what you doing

00:41:06.380 | is probably what they're going to wind up doing.

00:41:08.660 | So I'll tell you one story that I did with my daughter

00:41:11.700 | about 10 years ago.

00:41:12.700 | She's 30 years old now, so she was 20 at the time.

00:41:15.420 | I'd saved about a couple of thousand dollars.

00:41:18.340 | She says, what should I do with it?

00:41:21.140 | I want this to be a long-term investment.

00:41:24.420 | So I said, put it in the Vanguard Total Stock Market

00:41:27.340 | Index Fund.

00:41:29.060 | So she did.

00:41:31.020 | Then the market went down, and she got panicky,

00:41:36.220 | and she wanted to pull the money out because her $1,000 was only

00:41:39.940 | worth $800.

00:41:41.540 | So I said to her, let's make a deal.

00:41:47.500 | You take the $800 out, and--

00:41:50.940 | no, what I said to her was, if you hold that fund for 10 more

00:41:56.700 | years, if you lost money after 10 years,

00:42:01.700 | I will make up every dollar you lost.

00:42:04.580 | So it is a risk-free investment.

00:42:07.540 | However, if it goes up, I get half of the gain.

00:42:14.580 | The stockbroker, she looked at me, and she said, I'm good.

00:42:25.460 | You would make a really lousy equity index insurance company

00:42:29.020 | salesman.

00:42:29.520 | [LAUGHTER]

00:42:31.940 | So I had a lesson go wrong.

00:42:33.460 | My daughter called me up.

00:42:34.620 | She says-- she always pooped me.

00:42:36.020 | We'd sit around at the dinner table.

00:42:37.520 | I says, tonight we're going to talk about zero-coupon bonds

00:42:40.260 | and how they work.

00:42:41.020 | They said, oh, Dad, get off your soapbox.

00:42:42.900 | We're sick of that.

00:42:43.900 | So she poopooed me until she was like 35.

00:42:46.780 | She called me up, says, I want to buy a share of Apple.

00:42:49.260 | And I said, well, that's not investing.

00:42:50.860 | You're gambling.

00:42:51.580 | I want to buy-- OK, you buy one, I'll buy 10.

00:42:54.220 | Son of a gun if it didn't split seven for one

00:42:56.580 | and go right to the moon.

00:42:58.140 | So sometimes it can go wrong.

00:43:00.140 | [LAUGHTER]

00:43:02.740 | So Mel, maybe I'll jump in because I

00:43:06.260 | think there are some people in the room who have young kids.

00:43:10.300 | And I think one message that I would send to you

00:43:15.780 | is be patient with your kids about how

00:43:20.300 | they absorb the lessons you're trying to give them.

00:43:23.580 | And I'll tell a story.

00:43:27.420 | When my older daughter was about 14, I guess,

00:43:32.620 | I walked into her bedroom and she wasn't there,

00:43:35.060 | but all the lights were on.

00:43:37.020 | And I can't-- well, this is a room full of bogleheads.

00:43:39.660 | You'd all be mad.

00:43:40.700 | I was really mad.

00:43:44.220 | And so I turned the lights off.

00:43:46.140 | And then she came back and got in an argument with me.

00:43:50.020 | And so I sat down on the bed and I told her my dad's

00:43:54.260 | favorite story about how when he was a kid growing up

00:43:59.580 | on a farm in northern New York State,

00:44:01.860 | he was the youngest of three boys,

00:44:04.100 | so he had the worst job, which was

00:44:06.580 | to fetch the water in the morning.

00:44:09.860 | And they had no indoor running water.

00:44:13.380 | He had to go out to the pump.

00:44:15.180 | And in January and February, it would be 20 or 30 below zero

00:44:21.300 | at 4:30 in the morning.

00:44:22.780 | And my dad's pants would freeze.

00:44:24.860 | And he would walk into the house with his pants legs clanking.

00:44:29.100 | And so on his 16th birthday, my grandfather

00:44:33.340 | bought a pump, a power pump, a generator

00:44:38.540 | that would pump the water.

00:44:39.900 | So my dad didn't have to do it by hand.

00:44:42.980 | And so the first day, my dad was out there.

00:44:47.060 | And he pumped the water using the electric pump.

00:44:50.620 | And he was so excited, he filled the first bucket.

00:44:53.580 | And he leaned down to fill the second bucket.

00:44:56.620 | And the next thing he knew, he was flying through the air.

00:44:59.800 | And he smashed against the wall of the barn.

00:45:02.620 | And my grandfather's fist was in the middle of his shirt.

00:45:07.020 | And my grandfather, who was an immigrant from Eastern Europe,

00:45:10.540 | held my dad up against the wall of the barn and said,

00:45:14.860 | you hear them thumps?

00:45:16.860 | And in the background, the pump was

00:45:18.620 | thumping over and over again.

00:45:20.700 | He said, every one of them thumps is a nickel.

00:45:23.620 | And my dad told me that story when I was 14.

00:45:31.100 | And I've never left a light on ever since.

00:45:34.740 | And so I tell this story to my daughter.

00:45:37.940 | And she's like, yeah, OK, Dad.

00:45:41.540 | And I come home the next night.

00:45:43.380 | And of course, all the lights are on.

00:45:46.300 | But now she's 24.

00:45:49.140 | And she pays her own utility bill.

00:45:53.820 | And now she turns off all the lights.

00:45:55.940 | So the lessons will sink in.

00:45:58.300 | But it could take years.

00:46:01.300 | Yeah, I mean, I've got a story which is not

00:46:03.420 | quite as good as that, but it's in the same vein, which

00:46:05.820 | is our youngest son was probably the spendthrift

00:46:09.300 | of our children.

00:46:10.220 | And one day, when he's 19, he's in college.

00:46:14.020 | He calls up his mother.

00:46:14.980 | And he says, you know, Mom, I just

00:46:17.060 | learned something really cool.

00:46:18.580 | When you buy frozen orange juice,

00:46:20.980 | it's cheaper than buying the cartons.

00:46:22.820 | And his mother said, yes, I know that.

00:46:29.660 | And she says, can I borrow one of your plastic cartons?

00:46:33.980 | [LAUGHTER]

00:46:36.340 | So the next question is kind of a behavioral question, too,

00:46:42.020 | just like the last one.

00:46:43.020 | So I'm going to start with a quote from Will Rogers.

00:46:45.940 | It says, too many people spend money

00:46:47.580 | they haven't earned to buy things they don't want

00:46:49.940 | to impress people they really don't like.

00:46:53.260 | And to give you an example, Alan Everson

00:46:56.980 | made $200 million in his lifetime, went bankrupt.

00:47:00.220 | Nicolas Cage made $150 million, went bankrupt.

00:47:04.060 | Kurt Schilling, $150 million, went bankrupt.

00:47:08.220 | MC Hammer, $50 million, went bankrupt.

00:47:10.700 | Lindsay Lohan, $20 million, went bankrupt.

00:47:12.900 | So here's the question.

00:47:15.060 | I heard the term hedonic adaptation

00:47:18.380 | promoting an article by Jonathan Clements.

00:47:20.620 | And I noticed the behavior the people are associated with.

00:47:23.580 | Then I also began to notice that I was bombarded by messages

00:47:27.420 | that I should buy stuff because it would make me look smart,

00:47:30.100 | make me look successful, and make me look beautiful.

00:47:33.580 | So what is your recommendation on how to not get caught up

00:47:36.740 | in the hedonic treadmill?

00:47:38.300 | And would you please start by defining it

00:47:40.740 | for our group, Jonathan?

00:47:41.820 | So the hedonic treadmill-- I'm sure many of you

00:47:48.900 | do know what it is-- is this continuous cycle

00:47:51.820 | we go through where we anticipate the next promotion

00:47:55.940 | or pay raise or purchase.

00:47:57.820 | And we have it in our minds that if only we

00:48:00.940 | do get the promotion or the pay raise

00:48:03.180 | or we buy the new car, we're going to be endlessly happy.

00:48:06.660 | And when we finally get the news that we

00:48:08.700 | can take over the car or we're getting the promotion,

00:48:11.420 | we are indeed thrilled.

00:48:13.380 | But then in the days and weeks that follow,

00:48:15.180 | we become increasingly dissatisfied.

00:48:17.100 | And we end up back in the same place where we started.

00:48:20.740 | So in other words, money has not bought happiness.

00:48:23.820 | And indeed, the long-term statistics tell us this.

00:48:27.220 | In 1972, 30% of Americans described themselves

00:48:32.220 | as very happy, according to the General Social Survey.

00:48:35.380 | In 2016, the latest General Social Survey,

00:48:38.920 | exactly 30% of Americans described themselves

00:48:41.340 | as very happy.

00:48:42.580 | In the intervening 44 years, US inflation

00:48:46.220 | adjusted per capita disposable income rose 119%.

00:48:50.580 | So we lived twice as well, more than twice as well

00:48:54.260 | as we did four decades ago.

00:48:55.980 | And yet, our point level happiness has not budged.

00:48:59.940 | So the question is, how can you get off the hedonic treadmill

00:49:03.660 | and squeeze more happiness out of the dollars that you have?

00:49:08.380 | And I contend that there are sort of three keys

00:49:12.020 | to getting greater happiness out of your dollars.

00:49:14.700 | First, money is sort of like health.

00:49:17.380 | It's only when we're ill do we realize

00:49:19.060 | how great it is to feel good.

00:49:21.500 | Similarly, it's only when we're broke

00:49:23.060 | that we realize how great it is to be

00:49:24.560 | in good financial condition.

00:49:25.760 | So simply having your finances in decent shape

00:49:28.540 | so you don't worry about money on a daily basis

00:49:31.620 | is one of the benefits you can get out of money.

00:49:35.340 | Second, money allows us to spend time with friends and family,

00:49:40.620 | and particularly times with friends and family

00:49:42.620 | where we have great experiences.

00:49:44.020 | One of the things that you discover

00:49:46.580 | when you talk to people as they grow older

00:49:48.700 | is they become less focused on buying material goods

00:49:51.620 | and more focused on creating memorable experiences

00:49:54.660 | with friends and family.

00:49:55.740 | Going out to dinner, arranging the family reunion,

00:49:58.020 | taking everybody to Disneyland, god forbid.

00:50:00.700 | They do these--

00:50:02.220 | Going to Bogleheads.

00:50:03.380 | Going to Bogleheads, bringing the whole family, right.

00:50:06.980 | And then the third way that you can use money

00:50:09.100 | is you can achieve a level of financial freedom

00:50:13.300 | where you can design a life for yourself

00:50:15.100 | where you spend your days doing what you think is important,

00:50:17.820 | what you're passionate about, what you find challenging.

00:50:21.500 | And for many people, that moment arrives when they retire.

00:50:24.920 | If you're really smart about money,

00:50:26.380 | you start saving from a young age,

00:50:28.420 | it may be that you get into your 40s and your 50s

00:50:30.500 | and you can change careers.

00:50:32.140 | Get out of that boring corporate job and stuck in that cubicle

00:50:35.340 | and go and do something that maybe may pay you

00:50:38.260 | a small paycheck, but could make you

00:50:40.740 | feel like you're contributing more to the world.

00:50:43.060 | So that is my three-part prescription

00:50:45.380 | for getting off the hedonic treadmill.

00:50:51.200 | Any other suggestions?

00:50:54.060 | I have a simple one.

00:50:55.100 | Spend less time on your cell phone.

00:50:58.540 | That's good.

00:51:00.980 | So most of us in this room use Jack Bogle's philosophy

00:51:04.460 | of investing, which is to diversify

00:51:06.060 | broad-based passively managed index funds.

00:51:09.820 | And here's a quote from an intelligent investor

00:51:13.060 | from Jason's Wags article.

00:51:14.580 | It says, "The market is a pendulum

00:51:16.100 | that ever swings between unsustainable optimism, which

00:51:19.700 | makes stock too expensive, to unjustified pessimism, which

00:51:24.260 | makes them too cheap.

00:51:26.020 | The intelligent investor is a realist

00:51:27.860 | who sells to optimists and buys from pessimists."

00:51:31.340 | Warren Buffett also said, "Buy when

00:51:33.260 | there's blood in the street, even if it's your blood."

00:51:36.580 | To the novice investor, they get confused.

00:51:41.020 | What was that?

00:51:42.660 | To the novice investor, they get confused,

00:51:44.700 | because sometimes it sounds like there's

00:51:46.360 | a little bit of market timing that's taking place in there.

00:51:49.420 | So for the novice, they're trying to figure out,

00:51:51.460 | what do I do?

00:51:52.060 | Do I buy something, stay the course?

00:51:53.740 | Or am I waiting for the stock market to go down to buy it?

00:51:56.780 | I think the answer to that is for an investor who

00:52:04.980 | wants to maybe harness that sentiment a little bit,

00:52:08.500 | but not engage in market timing, I

00:52:09.940 | think rebalancing is a great suggestion,

00:52:12.820 | especially given that we are 10 years into the current equity

00:52:16.540 | market rally.

00:52:17.900 | We're all 10 years older.

00:52:19.340 | I do think that investors, especially

00:52:22.900 | those who are, say, over 50 and starting

00:52:25.260 | to think seriously about retirement and when it will be,

00:52:28.220 | or if you're already retired, certainly,

00:52:31.380 | I think of rebalancing as kind of a chicken way of making sure

00:52:36.060 | that you are selling high.

00:52:38.900 | So I advocate rebalancing, especially

00:52:42.820 | for people who are getting close to retirement.

00:52:45.460 | For younger investors, I think it's maybe less essential,

00:52:50.500 | but perhaps worthwhile to look at sort of intra-equity

00:52:56.020 | exposure.

00:52:56.940 | So maybe the value to growth split

00:53:00.900 | in terms of your style box exposure,

00:53:02.980 | if you've been hands-off and you have multiple funds that

00:53:07.340 | compose your equity exposure, you

00:53:09.260 | might look at whether you're listing to the growth

00:53:11.540 | side of the style box.

00:53:13.660 | And similarly with the US versus international exposure,

00:53:17.820 | take a look at that and see where you stand.

00:53:20.740 | If you've been hands-off, your international equity component

00:53:24.100 | would be down, probably relative to even

00:53:28.140 | total international index.

00:53:31.900 | One of my favorite quotes is from John Templeton,

00:53:35.580 | who said that bull markets are born in despair,

00:53:40.180 | rise on pessimism, mature in optimism, and die in euphoria.

00:53:47.100 | The best time to buy is at the point of maximum pessimism.

00:53:51.940 | So that kind of suggests that maybe you

00:53:53.820 | should wait until the market crashes to buy.

00:53:56.300 | The problem is that's not what the data show.

00:53:59.060 | In most cases, you're just better

00:54:01.740 | off lump summing at whatever point that you're at.

00:54:07.140 | At least that works 2/3 of the time, 1/3 of the time,

00:54:09.980 | it doesn't.

00:54:10.480 | So the odds are in your favor.

00:54:14.460 | You can dollar cost average over a period of time.

00:54:18.020 | And that is suboptimal.

00:54:20.380 | But it's a wonderful psychological crutch.

00:54:23.860 | Because as Casey-- I think it was Yogi Berra who supposedly

00:54:28.460 | said that 90% of this game is one half mental.

00:54:33.000 | And if you can win the mental game,

00:54:34.900 | you can win the psychological game.

00:54:37.140 | Then you can generally win the investing game.

00:54:39.060 | And dollar cost averaging, although suboptimal,

00:54:41.540 | is a good way to do that.

00:54:42.800 | In other words, another way of saying

00:54:44.420 | that is that a suboptimal strategy you can execute

00:54:47.260 | is better than an optimal one you can't.

00:54:50.220 | Well, so just a quick thought.

00:54:53.740 | In his autobiography, The Confessions,

00:54:59.060 | St. Augustine famously said, "Oh Lord, make me virtuous,

00:55:03.460 | but not yet."

00:55:06.660 | When he was living a life of sin.

00:55:09.100 | And I think the easiest thing for investors to do

00:55:13.940 | is to say, I will buy when blood is running in the streets,

00:55:17.980 | even if it is my own.

00:55:21.180 | But even if it's not your own, and the blood

00:55:24.940 | is running in the streets, it is much harder

00:55:27.940 | to buy then than you could possibly imagine.

00:55:31.580 | And I think it's great if you are

00:55:37.980 | one of the people who can buy when blood is running

00:55:42.260 | in the streets, and if you do have an extremely long horizon,

00:55:47.580 | a half century or longer.

00:55:51.460 | I did it in 2008 and 2009, and it was not easy or comfortable.

00:55:58.100 | In a column I wrote about a year or two ago, I guess,

00:56:02.020 | I went back and looked, and between October 2007 and March

00:56:08.060 | 2009, I made 53 additional discretionary purchases

00:56:18.220 | in my Vanguard index funds, in addition to the dollar cost

00:56:22.420 | averaging I was doing automatically.

00:56:24.140 | So 53 separate times.

00:56:26.340 | As the market was going down, I put more money in.

00:56:29.540 | And I stopped on-- I made my last of those purchases

00:56:36.260 | on March 6, 2009, because I couldn't stand it anymore.

00:56:41.700 | And the market bottomed on March 9.

00:56:44.420 | And when I did it, I said, watch everybody.

00:56:49.060 | I'm going to make the market go up,

00:56:50.620 | because I can't stand it anymore.

00:56:52.540 | And of course, it happened.

00:56:54.260 | But the thing is, I kept it a secret from my wife,

00:57:00.180 | from whom I keep no secrets.

00:57:02.500 | Because I knew if I told her, she'd kill me.

00:57:06.300 | And now she tells everybody that she's really glad I didn't.

00:57:12.020 | The most profitable purchases you will ever make

00:57:15.780 | will be when you feel like throwing up.

00:57:18.500 | Could you ask that last-- the actual question one more time?

00:57:22.500 | I'm not sure I got it right.

00:57:23.740 | [INTERPOSING VOICES]

00:57:25.700 | I'm not sure I can go back and find it, Rick.

00:57:27.540 | I'll be honest.

00:57:28.160 | I flipped so many pages here.

00:57:29.700 | Can I just add one thing?

00:57:31.380 | Oh, here.

00:57:31.880 | We have short memories.

00:57:33.660 | Yes.

00:57:36.100 | Go ahead.

00:57:36.620 | I'm sorry, Tom.

00:57:37.580 | It says, novice investors get confused,

00:57:39.900 | because it sounds like there might

00:57:41.420 | be some market timing involved in both of those statements.

00:57:44.220 | So what is it?

00:57:44.900 | Buy and hold, stay the course, or wait for the markets

00:57:48.220 | to go down and buy?

00:57:50.740 | OK.

00:57:53.500 | I would just argue we have very short memories.

00:57:55.740 | I guess the answer is, if you've been on a-- if you had a plan,

00:58:03.420 | and your plan was to invest regularly,

00:58:06.100 | like most people who are working and putting money into a 401(k),

00:58:10.900 | just continue to do it.

00:58:13.500 | Like Jason said, you have a long time horizon.

00:58:17.060 | If you happen to get a windfall-- I'm not talking about a windfall

00:58:22.260 | from retiring and getting a 401(k) that was 60/40 in stocks,

00:58:27.260 | and then you have to convert that to cash,

00:58:30.000 | and now you've got all this cash, what should you do with it?

00:58:32.580 | In my opinion, since it was already invested,

00:58:35.040 | you just take that and invest it the way it needs to be.

00:58:38.420 | But I'm talking about an actual windfall of money

00:58:40.540 | that comes from, say, winning the lottery.

00:58:44.780 | Whatever.

00:58:45.620 | The-- that is a little bit more difficult.

00:58:48.780 | In that case, you might dollar cost average.

00:58:51.540 | I actually wrote an article about dollar cost averaging

00:58:54.300 | and when to do it.

00:58:55.020 | Bill is correct.

00:58:55.940 | Most of the time, you're not better off mathematically dollar

00:58:59.060 | cost averaging.

00:59:00.460 | But depending on how you get the money, how it comes to you,

00:59:04.340 | sometimes it just feels better to dollar cost average.

00:59:07.820 | And there's a higher probability that you're

00:59:10.380 | going to stick with your plan if you dollar cost average.

00:59:13.500 | So that's what you should do.

00:59:15.820 | Well, follow up to that.

00:59:16.820 | Everybody says, well, why don't we just put it in index funds

00:59:19.860 | and not look at it?

00:59:20.620 | So there was another question that

00:59:21.980 | asked later in the panel here, if indexing is the way to go,

00:59:26.380 | how do you explain the performance of prime cap

00:59:29.140 | and capital opportunity where they're beating the market?

00:59:33.060 | Why not just put it in an actively managed fund

00:59:35.220 | like that that's doing so well?

00:59:36.620 | OK.

00:59:37.100 | So let's get away from this future prediction of beating

00:59:42.340 | and just call it have beaten, past tense.

00:59:46.620 | We don't know-- prime cap has done very well.

00:59:51.980 | There is going to be active managers who outperform.

00:59:55.540 | We know that.

00:59:56.140 | We just don't know who they are going to be going forward.

00:59:58.980 | Is it going to be prime cap?

01:00:00.380 | I don't know.

01:00:02.180 | Just four words as an answer to that, which

01:00:04.420 | is Legg Mason Value Trust.

01:00:07.700 | For those of you who aren't familiar with it,

01:00:09.580 | it beat the S&P 500 not just over a 15-year period,

01:00:12.940 | but for 15 consecutive years.

01:00:16.420 | If anybody looked like a winner, it was Bill Miller.

01:00:19.460 | And in about three short years, he

01:00:21.340 | gave back all of that 15 years of outperformance.

01:00:26.220 | So let me ask one more question, and then

01:00:28.020 | we're going to go to the panel, each of you,

01:00:29.380 | to get about two minutes there.

01:00:30.500 | So this will be the last question that we get to ask.

01:00:32.760 | Sorry, we have 30 questions, and we only

01:00:34.540 | got to ask about 15, which was typical last year also.

01:00:38.540 | So the question is, why should I own bonds paying 3%

01:00:41.380 | when I can own a dividend-paying stock that's

01:00:44.300 | paying out more than 3% and has potential upsides besides?

01:00:48.260 | For example, Pepsi is a dividend aristocrat,

01:00:51.820 | which means it's raised its dividend every year

01:00:54.540 | for the last 25 years.

01:00:56.020 | And it's paying 3.25%, while the 10-year Treasury

01:00:59.540 | is only paying 3.05%.

01:01:02.540 | So if the share price goes down, I

01:01:04.580 | don't really care because I continue

01:01:06.340 | to get the dividend.

01:01:08.100 | There's 24 dividend aristocrats that are paying over 3%.

01:01:12.380 | So why should I own a bond if I can

01:01:14.980 | get a dividend aristocrat?

01:01:16.660 | That's an easy one.

01:01:18.540 | General Electric, Eastman Kodak, General Motors--

01:01:25.940 | so goes GM, goes America.

01:01:28.260 | Boy, I'm glad that wasn't true.

01:01:30.660 | Total Return, Master Limited Partnerships--

01:01:34.440 | they're just safe alternatives to a bond.

01:01:37.140 | It's a toll road.

01:01:38.260 | The oil and the gas has to flow through it.

01:01:40.860 | It's just a 6% safe return until they

01:01:43.500 | lost a third of their value.

01:01:47.020 | Yeah, again, I have two words for someone

01:01:49.420 | who wants to buy Pepsi-Cola, which is sugar tax.

01:01:52.060 | In the Great Recession, 2008-2009 market decline,

01:02:00.620 | the dividends paid by the S&P 500 companies

01:02:04.220 | dropped, I believe, was 23%.

01:02:07.180 | So anybody who bought S&P 500 companies thinking that they

01:02:11.480 | could just live off the dividends,

01:02:12.900 | and it was a substitute for owning bonds,

01:02:14.780 | would have seen the income they received drop 23%.

01:02:18.980 | That did not happen with Treasury bonds.

01:02:20.660 | Alan Roth-- I'm going to give him credit again.

01:02:26.380 | My gosh, what's happening to me?

01:02:27.420 | I must be getting old.

01:02:28.340 | Something's wrong here.

01:02:30.580 | Alan wrote an article about the total return.

01:02:33.860 | A dividend is the cash that a company pays,

01:02:36.220 | but what if you just sold a little bit of your equity

01:02:39.740 | every year?

01:02:40.840 | And because dividends have been going down,

01:02:42.580 | it just has to do with the way companies have

01:02:45.340 | been capitalizing themselves.

01:02:47.540 | They're buying back stock, and generally, when

01:02:50.380 | you look at stock buybacks or the buyback dividend,

01:02:52.940 | it's not included in the cash dividend.

01:02:55.220 | However, Alan wrote a good article

01:02:57.180 | about if you just treated the buyback,

01:03:00.420 | you looked at how much buyback was going on,

01:03:02.420 | and you actually sold that much stock,

01:03:04.740 | and you paid yourself a dividend, it's all the same.

01:03:08.300 | So it doesn't have to be dividends.

01:03:09.820 | I mean, if you're buying a total stock market fund,

01:03:12.460 | and you need 4% from it, you get 2% from the dividend,

01:03:15.700 | and then you just sell 2% per year.

01:03:18.260 | And a lot of that is simply the buybacks

01:03:20.120 | that have been taking place which

01:03:21.460 | caused the market to go up.

01:03:22.820 | So correct me, Alan, if I'm wrong,

01:03:25.260 | it's not about--

01:03:26.900 | - You're wrong.

01:03:27.980 | - Am I wrong?

01:03:29.060 | 'Cause I quoted you, is that what I--

01:03:31.020 | (laughing)

01:03:32.500 | But that's, you know, there's no,

01:03:35.180 | dividend-paying stocks kind of make you feel good,

01:03:38.140 | oh, I'm getting a dividend.

01:03:39.460 | But in reality, the way the stock market works

01:03:42.620 | is that the total return of the market

01:03:45.380 | is dividend, capital gains, buybacks, everything,

01:03:49.400 | and it doesn't matter whether you're buying stocks

01:03:50.780 | that pay higher dividends or you're buying stocks

01:03:52.380 | that pay no dividends.

01:03:53.820 | In theory, the total return of each group

01:03:57.580 | is going to be the same.

01:03:59.700 | So I think it just makes you feel good, that's it.

01:04:04.700 | - Okay, so that's the end of our session.

01:04:07.040 | Questions, I have a lot more questions

01:04:09.100 | I'd love to be able to get to.

01:04:11.020 | So we'd like to give each panel a couple minutes

01:04:13.140 | to reveal any projects they're working on.

01:04:15.500 | We'd like to ask them to take a moment

01:04:17.060 | to tell them what inspired them

01:04:19.280 | to take the path they've chosen

01:04:20.880 | or to share any gems of wisdom they may have.

01:04:23.140 | Or any way that we can all become better investors.

01:04:27.320 | So could each of you just give a couple minutes

01:04:29.360 | of what you're thinking we could use?

01:04:32.400 | - Well, if you want to learn to be a better investor,

01:04:34.320 | let me go first, because at the end of the table, it's Alan.

01:04:36.900 | (audience laughing)

01:04:39.900 | Okay, well, first of all,

01:04:45.600 | I'm gonna be giving a little presentation

01:04:47.640 | in about 1.30 here in the room

01:04:50.160 | about a new book that I'm working on

01:04:51.560 | called "The Education of an Index Investor,"

01:04:54.440 | and sort of the mindset of what people go through

01:04:57.360 | to get to a certain, to get to John Bogle's level,

01:05:00.560 | if you will, what actually happens in your head

01:05:02.800 | to get to that point, and it's quite a bit.

01:05:05.000 | And it's a long journey.

01:05:06.560 | In addition to that, I'm no longer the owner

01:05:08.320 | or involved at all in Portfolio Solutions.

01:05:10.500 | My company was acquired, and there's a long story there.

01:05:13.480 | It's on my website.

01:05:14.840 | But I'm working on another company called Core4 Investing,

01:05:18.160 | which is a model portfolio company

01:05:20.080 | that you'll be able to go on

01:05:21.000 | and see very simple portfolios

01:05:23.360 | using four or less index funds.

01:05:25.620 | And I'm working on that.

01:05:26.640 | It should be up.

01:05:27.460 | It's all free, free content.

01:05:29.120 | In addition to that, in April,

01:05:31.680 | when my non-compete is over with,

01:05:33.040 | I'm actually emulating Alan's model.

01:05:36.720 | And I am-- (audience applauding)

01:05:40.200 | And he's been helping me quite a bit

01:05:41.680 | in formulating the hourly advising that I'll be doing.

01:05:46.680 | And I thank Alan for giving me a lot of advice in there.

01:05:49.960 | So that's what I'm up to.

01:05:51.240 | So most of my days are devoted

01:05:56.640 | to running this website, humbledollar.com,

01:05:59.240 | which I've had going for since early last year.

01:06:04.240 | More and more people are discovering it.

01:06:06.920 | If you haven't been to humbledollar.com, please go.

01:06:09.480 | I put out a free newsletter twice a month.

01:06:12.340 | There's something new on the website every day,

01:06:14.520 | so I encourage you to check it out.

01:06:17.240 | My latest book came out last month.

01:06:20.720 | It's called From Here to Financial Happiness.

01:06:23.280 | And the book is designed to help people

01:06:26.920 | figure out what they want from their financial life

01:06:29.100 | and then help them to settle on the steps

01:06:32.680 | that they need to take.

01:06:33.880 | One of the principal drivers of the book

01:06:37.520 | is the fact that most of us are really bad

01:06:43.000 | at figuring out what we want from our lives.

01:06:46.080 | And if you disagree with me, when you get home,

01:06:50.840 | go downstairs and check out the basement.

01:06:53.520 | Basements are badly curated museums

01:06:57.520 | dedicated to the purchases that we have made.

01:07:00.760 | We can't yet bring ourselves to trash.

01:07:03.320 | We are extremely bad at figuring out

01:07:07.480 | what we want for our financial lives.

01:07:08.920 | We pursue careers that make us unhappy.

01:07:11.520 | We purchase items that we quickly become dissatisfied with.

01:07:16.520 | So one of the things that I try to encourage people

01:07:19.600 | to do in my new book is to think much harder

01:07:23.240 | about their financial lives.

01:07:25.000 | So one of the tricks that I would encourage you to use

01:07:28.280 | when you get home is get a piece of paper

01:07:31.200 | and write down what you plan to spend money on

01:07:36.200 | over the next couple of years.

01:07:38.000 | It might be a home renovation.

01:07:40.120 | It might be a vacation.

01:07:41.320 | It might be a new car.

01:07:43.160 | It might be buying some new electronic goods.

01:07:48.160 | Whatever it is, write it on the list,

01:07:50.680 | stick it on the refrigerator,

01:07:53.120 | and every couple of weeks go back and revise that list.

01:07:56.520 | And what you will do if you use that strategy

01:08:00.680 | is that you will have a much better idea

01:08:03.240 | of what you want from your money.

01:08:04.920 | Don't instinctively assume that you know what you want.

01:08:08.840 | Instead, figure out what you want from your money.

01:08:11.720 | Takes substantial amount of reflection.

01:08:14.840 | Drawing up a wish list, revisiting it regularly

01:08:17.600 | will force you to go through that process of reflection,

01:08:21.480 | and I think you'll find out,

01:08:22.640 | find that you spend your money much more wisely.

01:08:25.040 | - Yeah, so I never imagined for a minute

01:08:32.000 | that I would ever catch up to Jonathan

01:08:34.520 | who wrote 1,009, right?

01:08:37.920 | 1,009. - My first outing.

01:08:39.680 | - Yeah, 1,009 columns for the Wall Street Journal.

01:08:42.840 | If I write 486 more, I'll catch up to you.

01:08:46.880 | So that's not really a career ambition of mine by any means.

01:08:52.720 | But when I went to Bobleheads II,

01:09:00.200 | which was the last of these meetings I've been to,

01:09:03.800 | and it was a long time ago now, it was 2001,

01:09:08.440 | I ended up writing two articles based on that experience.

01:09:13.400 | One was the one some of you are probably familiar with

01:09:16.360 | called Here Come the Bogleheads, Victoria's Waving,

01:09:19.600 | and the other was one that I called

01:09:22.880 | I Don't Know and I Don't Care.

01:09:25.000 | And in that second piece, I realized something important

01:09:32.040 | that I had actually learned from those of you

01:09:35.080 | who were with me at Bobleheads II,

01:09:39.360 | which is that it's one thing as an investor

01:09:42.960 | to say I don't know.

01:09:44.600 | I don't know whether U.S. will outperform international.

01:09:48.760 | I don't know whether value will outperform growth.

01:09:52.040 | I don't know whether small will outperform large.

01:09:55.760 | Or even I don't know whether active

01:09:59.760 | will outperform passive, although that I don't really think

01:10:03.280 | is an open question at this point.

01:10:05.040 | But it's an entirely different matter to say,

01:10:09.760 | and I don't care.

01:10:11.360 | Because not caring is hard.

01:10:14.920 | Because it means you go to the barbecue

01:10:17.560 | and you listen to the guy who just bought Bitcoin

01:10:21.440 | and he bought it at $13 and now it's at $19,000

01:10:26.440 | and you didn't.

01:10:29.400 | And it means that you can't watch financial television.

01:10:34.280 | You have to be very focused, very disciplined,

01:10:39.600 | and you can't let your views be contaminated

01:10:43.000 | by what other people are saying

01:10:44.480 | or by what the market is doing.

01:10:46.640 | And so the importance is that the two beliefs

01:10:51.640 | have to go together.

01:10:55.560 | You have to renounce any interest

01:10:59.400 | in knowing the answer to questions

01:11:01.480 | that probably can't be answered.

01:11:03.440 | And you have to get to the point where you don't care

01:11:08.320 | that you believe you can't know.

01:11:11.040 | And so finding new ways to help people

01:11:16.040 | get to that resolution is sort of

01:11:19.560 | what I'm about at this point.

01:11:21.000 | - Yeah, the first question is easy.

01:11:25.480 | I think the thing that most everybody can do

01:11:27.120 | that will make them a better investor

01:11:29.040 | is to simply pick a simple strategy

01:11:30.960 | and then stop obsessing about it.

01:11:32.480 | Maybe look at your portfolio, I don't know,

01:11:34.200 | once every five years or so.

01:11:35.960 | It's a proven fact that the less you look

01:11:42.080 | at your portfolio and the less you evaluate it,

01:11:44.160 | the better your returns are going to be.

01:11:46.160 | What I'm doing is writing long-form historical nonfiction.

01:11:52.080 | And one of the joys of doing that

01:11:54.600 | is you work for three years and then for six weeks

01:11:57.240 | you get to sit bolt upright in the middle of the night

01:12:01.360 | in a cold sweat wondering whether your publisher

01:12:05.360 | is going to accept the manuscript or not.

01:12:07.680 | So that's where I'm at right now

01:12:09.160 | and the less I talk about it, the better.

01:12:11.280 | (audience laughing)

01:12:14.280 | - I continue to toil on the logistics

01:12:17.800 | of retirement decumulation.

01:12:19.560 | That's a key preoccupation for me

01:12:21.760 | in my work on Morningstar.com.

01:12:23.920 | Constructing model portfolios,

01:12:25.960 | not with an eye toward beating

01:12:27.440 | all other in-retirement portfolios,

01:12:29.720 | but just an eye toward showing

01:12:32.600 | what a sane in-retirement portfolio might look like

01:12:36.880 | and how you can go about extracting cashflow

01:12:40.620 | from that portfolio.

01:12:42.120 | Not to be confused with pure income

01:12:45.080 | because I know a lot of retirees

01:12:46.960 | are very fixated on current income.

01:12:49.840 | So I've been trying to showcase that

01:12:53.680 | and talk about that in my work.

01:12:56.160 | Separately, I've been talking about

01:12:57.640 | some of the other challenges of retirees.

01:13:01.640 | One of the big ones,

01:13:02.640 | and I've talked about this here before,

01:13:04.320 | is the challenge of confronting long-term care costs,

01:13:07.840 | which is, I think, a huge unaddressed problem

01:13:11.360 | for many middle-class to upper-middle-class households

01:13:14.560 | and retirement savers,

01:13:16.080 | people who thought they were doing all the right things

01:13:18.840 | to try to ensure a comfortable retirement.

01:13:22.440 | So unfortunately, there aren't a lot of great answers

01:13:24.880 | in the long-term care space,

01:13:27.360 | but it's an evolving landscape,

01:13:28.980 | and we've been trying to talk about

01:13:31.440 | some of the new products coming online,

01:13:33.600 | the good and the bad of them,

01:13:35.620 | some ways to think about paying for long-term care costs,

01:13:40.620 | using HSA premiums, for example,

01:13:43.280 | to pay for long-term care insurance.

01:13:46.080 | So I've been talking a lot about those issues

01:13:48.920 | and also trying to touch on the softer side

01:13:51.640 | of long-term care,

01:13:52.920 | some of the costs that it inflicts on families,

01:13:56.680 | because much of long-term care in this country

01:13:59.400 | is shouldered by unpaid family caregivers.

01:14:02.800 | So trying to address that whole set of hard issues

01:14:06.640 | related to long-term care is another focus of mine.

01:14:11.080 | In terms of lessons for investors,

01:14:14.600 | I think one thing I like to talk about

01:14:16.200 | is household capital allocation.

01:14:18.120 | So beyond just the investment portfolio,

01:14:20.480 | thinking about your total financial life

01:14:23.080 | and looking for the best ROI,

01:14:25.560 | return on investment for you,

01:14:27.840 | it may lie outside of your investment portfolio.

01:14:30.640 | So looking holistically across

01:14:32.600 | your capital allocation choice set,

01:14:35.640 | for a lot of us who have mortgages,

01:14:38.360 | for example, mortgage pay down

01:14:40.440 | is probably a better use of your cash

01:14:42.680 | than letting the money languish

01:14:44.000 | even in a higher yielding savings vehicle.

01:14:46.840 | So thinking holistically about ROI,

01:14:49.000 | I think is a piece of advice

01:14:52.080 | that I would like to impart.

01:14:53.480 | - Jack, I'm sorry you have to hear this,

01:14:58.720 | but I'm launching a market neutral fund

01:15:01.680 | that will short the stocks

01:15:03.040 | that Kramer says to buy and vice versa.

01:15:05.480 | (audience laughing)

01:15:08.480 | Look, can I short that fund?

01:15:12.120 | (audience laughing)

01:15:15.200 | I'm having the time of my life

01:15:16.760 | and if it ain't broke, don't fix it.

01:15:18.600 | I'm gonna keep doing the same thing.

01:15:20.560 | Jack, I'm having the time of my life

01:15:22.320 | because of you, because incredible advice

01:15:25.880 | that everyone including Rick Ferry

01:15:27.680 | at the end has given me and I'm so appreciative.

01:15:32.480 | So I continue, I'm gonna write,

01:15:34.320 | I'm gonna do my hourly planning.

01:15:36.840 | Rick, I couldn't be happier

01:15:38.560 | that you're going to go that route.

01:15:41.920 | I'm doing some teaching still.

01:15:45.720 | I'll chase windmills until I die,

01:15:48.160 | not as successful as Jack.

01:15:50.640 | I think a lot of regulators don't do the right thing.

01:15:54.120 | I would love to see financial planning

01:15:55.840 | be viewed as a profession.

01:15:57.840 | I am a CFP.

01:15:59.080 | I just wrote a piece, I believe it was last week,

01:16:02.120 | noting that the CFP spends a lot of money

01:16:04.440 | advertising the higher standard,

01:16:06.200 | but doesn't actually enforce it.

01:16:08.560 | So I would really like to see

01:16:11.000 | regulators and the CFP board

01:16:16.480 | do a better job of making the industry fair.

01:16:20.040 | But it's absolutely Jack Bogle and Vanguard

01:16:22.920 | and all of you that did incredible writing

01:16:25.080 | that educated people.

01:16:27.360 | We're now 44% of money in U.S. stock funds

01:16:31.400 | are in index funds.

01:16:33.840 | - Alan is too modest to admit

01:16:36.480 | that what he really enjoys more than anything else

01:16:39.280 | is provoking insurance salesmen into legal threats.

01:16:43.040 | (audience laughing)

01:16:45.240 | So we'd like to thank you,

01:16:46.800 | everybody who submitted a question, we appreciate it,

01:16:49.040 | but we especially thank our panel.

01:16:51.240 | Your opinions are well-respected,

01:16:53.000 | you're leaders in the investment community,

01:16:55.360 | and we appreciate what you had to say.

01:16:57.880 | So let's give a round of applause to our panel,

01:17:00.520 | and we'll see you after lunch.

01:17:02.080 | (audience applauding)

01:17:05.240 | (audience cheering)

01:17:08.240 | (mouse clicking)

01:17:11.000 | (mouse clicking)

01:17:13.760 | (mouse clicking)

01:17:16.520 | (mouse clicking)

01:17:19.280 | [BLANK_AUDIO]

Bogleheads® Conference 2018 - Panel of Experts

Chapters