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RPF0265-Rick_Ferri_Interview


Whisper Transcript | Transcript Only Page

00:00:00.000 | If you're one of those who listens to the show every day when it comes out and if you're
00:00:04.920 | current with the show, then you're probably in vacation mode.
00:00:08.280 | As I record this here, it's Tuesday, November 24, 2015.
00:00:13.600 | I'm getting ready to pack up and head out of town for Thanksgiving.
00:00:16.920 | However, let's not check out too early.
00:00:20.120 | I've got one more heavy lifting show for you.
00:00:23.040 | Today is going to be a heavy lifting show.
00:00:24.480 | We're going to get into some meat and potatoes of investing and talk about why index funds,
00:00:29.960 | fund investing, and passive investing is the only appropriate way for anybody to invest
00:00:37.760 | ever.
00:00:55.920 | Welcome to the Radical Personal Finance Podcast.
00:00:58.560 | My name is Joshua Sheets and I'm your host.
00:01:02.080 | And welcome to the show.
00:01:03.080 | Yes, one more heavy lifting show.
00:01:05.200 | Let's dig into some meat on investing.
00:01:07.400 | My guest today is a man named Rick Ferry.
00:01:09.000 | Rick is a really awesome guy, a very knowledgeable investment manager and financial analyst.
00:01:15.560 | He is also the founder of a company called Portfolio Solutions.
00:01:18.760 | And today, he's going to give us a master class on investing and asset allocation.
00:01:27.560 | I was able to connect with Rick recently while I was at the XYPN 15 conference.
00:01:32.400 | He was a sponsor of that conference in Charlotte, North Carolina a few months ago.
00:01:36.320 | And while we were there, I connected with him and I was very impressed by him and I
00:01:40.280 | thought he would be a great resource for you on the show.
00:01:43.560 | So if you're in holiday mode and if for you it doesn't seem like fun to talk about investing
00:01:50.320 | and index funds and all that stuff, you might want to wait a few days and then check back
00:01:54.840 | with this next week.
00:01:56.120 | Otherwise, here's one more heavy lifting show today and then tomorrow, we'll have a light
00:02:00.000 | and fun show for you as well.
00:02:02.320 | Playing interviews this week while I head out of town with my family heading over to
00:02:05.800 | Central Florida to hang out with family in Central Florida away from the coast.
00:02:10.080 | But we'll be back after next week.
00:02:11.800 | So the show will be off on Thursday and Friday but we should be back on Monday of next week,
00:02:15.320 | 30th of November.
00:02:17.320 | So let's talk about sponsors right up here at the front and then we'll get to the interview
00:02:21.680 | and we will get you in and out today.
00:02:24.240 | I'll do sponsors quickly.
00:02:25.600 | Sponsor of the day, number one today is Jay Fleischman.
00:02:27.880 | Jay is an awesome guy.
00:02:29.040 | He is a student loan and bankruptcy attorney.
00:02:30.920 | He is also the host of the Student Loan Show podcast and he is a past guest on Radical
00:02:35.620 | Personal Finance for two episodes, episodes number 214 and 258.
00:02:41.640 | If you have student loans, you should call Jay.
00:02:44.280 | I was talking with somebody on the phone yesterday and he was mentioning that he had student
00:02:48.000 | loans and he was a listener of the show and I said, "Have you called Jay?"
00:02:51.080 | He said, "No, no, no.
00:02:52.080 | I hear you talk about that."
00:02:53.080 | I said, "Dude, what are you doing?
00:02:54.160 | Call Jay."
00:02:55.160 | I really mean that because it's probably going to be – if you call Jay and/or go to studentloanshow.com/radical,
00:03:03.320 | sign up at least for Jay's $50 federal student loan review.
00:03:07.480 | Probably going to be one of the better 50 bucks that you're ever going to spend.
00:03:10.080 | He is a really knowledgeable guy and he – if there is a loophole that you can find that
00:03:14.520 | will help you in your student loan repayment plan to pay them off quicker and to pay them
00:03:18.840 | off with less money out of pocket to cut your interest expenses, things like that, Jay is
00:03:22.720 | the guy who will help you find that.
00:03:24.480 | So if you have student loans, go to studentloanshow.com/radical.
00:03:28.240 | If you doubt that Jay is the guy who can be worth 50 bucks for a federal consultation
00:03:34.040 | – by the way, that's a $25 discount off of his normal rate for listeners of the show.
00:03:38.320 | If you doubt that, go and listen to episode 214 of the show and then listen to episode
00:03:42.800 | 258 of the show.
00:03:43.800 | You'll find them on the website or in your feed and go ahead and listen there and I bet
00:03:49.440 | you you won't doubt why I say it's worth it at the end of that.
00:03:54.240 | Also make sure you subscribe to his podcast, Student Loan Show.
00:03:56.560 | You can find it in all the major podcast directories.
00:03:58.840 | Which leads me to sponsor of the day number two is the sponsor that we introduced on yesterday's
00:04:02.040 | show, SoFi, Social Finance, S-O-F-I, SoFi.
00:04:06.160 | If you have student loans and one of the things that you want to look at is can you refinance
00:04:10.400 | them at a lower interest rate.
00:04:12.240 | The reason I led with Jay as a sponsor is you should first consult with Jay and if your
00:04:16.320 | option is in the back end to refinance it, he will tell you that and then you should
00:04:20.560 | investigate using SoFi.
00:04:22.280 | You'll find a link, a referral link for me and for you at RadicalPersonalFinance.com/SoFi,
00:04:28.720 | RadicalPersonalFinance.com/SoFi, S-O-F-I, which is short for again, Social Finance.
00:04:35.200 | At that link, if you use that link and you refinance your student loans through them,
00:04:38.200 | you can put an application in line.
00:04:39.760 | It's very easy, very fast to do and you can find out what your rates would be, see if
00:04:43.280 | it would save you some money.
00:04:44.960 | If you use that link, then I'll get a commission and you'll save 200 bucks.
00:04:49.840 | You'll get 200 bucks of credit back to your account.
00:04:52.120 | If you go through that and you want to check into their personal loan refinancing options,
00:04:55.560 | you can also find that at that link as well.
00:04:57.800 | Just go to RadicalPersonalFinance.com/SoFi.
00:05:01.680 | Those are our sponsors of the day.
00:05:03.000 | With that, let's go to the interview.
00:05:04.880 | Please welcome Mr. Rick Ferry.
00:05:06.560 | Rick, welcome to Radical Personal Finance.
00:05:10.140 | Thank you, Joshua.
00:05:11.140 | It's great to be here.
00:05:13.680 | I owe you an interview on this show since I did my best the other day.
00:05:16.560 | You were a sponsor of XYPN 15 and I did my best to eat you out of house and home at the
00:05:21.640 | Brazilian steakhouse dinner that you provided for us.
00:05:24.920 | I know.
00:05:25.920 | I got the bill and they said there was this big guy with a red beard.
00:05:28.840 | You thought the bill was going to be this, but we had to add another 15% just for him.
00:05:33.720 | Exactly.
00:05:34.720 | Well, I quit eating carbohydrates a while ago.
00:05:38.720 | When you're at a conference like this, it's challenging to find food to do that.
00:05:41.640 | My strategy is I start by having a big breakfast.
00:05:44.760 | That day, I'd had a breakfast very early in the morning and then it was all day long.
00:05:48.960 | We got to the Brazilian steakhouse and I did my best to eat about eight pounds of meat.
00:05:52.160 | I'm glad you enjoyed it.
00:05:54.080 | For dinner.
00:05:55.080 | Let's kick off.
00:05:56.080 | We're going to talk some finance today and talk about investing.
00:05:58.400 | You're a real expert.
00:06:00.680 | Don't be scared to make today a little bit heavy.
00:06:02.940 | We're not talking necessarily to a mainstream audience here.
00:06:06.300 | We're talking to people who have an above average interest in finance.
00:06:09.760 | Start by just sharing with us a little bit about your story and a little bit about your
00:06:12.640 | company Portfolio Solutions and what you guys do.
00:06:16.080 | My story is back in the 1980s when I came into the field, I went into the traditional
00:06:22.720 | brokerage model and I started using the products that I was told to use.
00:06:31.400 | What I did was I started analyzing the returns of those products.
00:06:36.480 | As I did that, I began to realize that the returns weren't matching the markets.
00:06:45.560 | I decided that I should go out and educate myself to find out how to manage money so
00:06:54.640 | that I could maybe better make better decisions for my clients.
00:06:58.880 | Then I became a CFA, a charter financial analyst, and got my masters in science and finance.
00:07:05.920 | I created a lot of analytics to analyze the performance of money managers.
00:07:09.680 | Try not to hit the table.
00:07:13.160 | You're good.
00:07:14.160 | All good?
00:07:15.160 | All good.
00:07:16.160 | That's when I began to realize through my research that the money managers were not
00:07:20.480 | keeping up with the markets and that the best thing for my clients would be to just use
00:07:24.680 | index funds, which were beginning to grow.
00:07:27.400 | That would have been about what year?
00:07:28.640 | That was in the mid-1990s.
00:07:31.000 | There wasn't the analytics out there.
00:07:32.960 | There wasn't the research that they have now.
00:07:35.000 | It was a lot of deep digging and actual experience using these products that got me to this point.
00:07:42.840 | How painful was that to be selling one thing and then doing your research and questioning
00:07:48.360 | that?
00:07:52.560 | Before I went into finance, I was in the Marine Corps.
00:07:56.880 | I flew fighter aircraft.
00:07:59.120 | I used to land on aircraft carriers.
00:08:02.080 | When you do that, everything is very precise.
00:08:04.240 | It is what it is.
00:08:05.960 | There's no joking around about it.
00:08:13.880 | The facts are the facts and you react to that exactly as they are.
00:08:20.760 | When I went into the finance industry, I thought that was the way it was.
00:08:24.760 | You were getting good, clean information and it was beneficial to you and you were able
00:08:30.400 | to do your job.
00:08:31.400 | That's exactly the opposite of that.
00:08:33.440 | That was a little bit of a reality check of what that was.
00:08:39.040 | I realized that I had to do what the numbers said, what was reality.
00:08:46.560 | When I made that decision and had that epiphany, I didn't change my mind.
00:08:51.280 | I never went back.
00:08:54.360 | I got very angry about what I was seeing and that didn't make me feel good.
00:09:03.600 | The last few years I was in the brokerage industry, I was miserable.
00:09:07.760 | I stayed because I had to figure out the plan for how I was going to use this information
00:09:13.160 | to help my clients.
00:09:16.280 | Where did you go from there?
00:09:17.280 | I actually started at Kidder Peabody.
00:09:20.280 | It's no longer with us and I went to Smith Barney who is no longer with us.
00:09:27.560 | I was in it for 10 years.
00:09:29.120 | In the last three years, I was planning to start my company Portfolio Solutions which
00:09:33.960 | did low cost, index-based money management.
00:09:40.520 | There was nothing out there at the time and I was really one of the first ones, the first
00:09:44.600 | person who was going to put an RIA together that just did this.
00:09:49.200 | Are you serving individual clients or are you serving advisors?
00:09:55.120 | For the past 15 years, we were serving individual investors.
00:09:58.640 | Mostly now, we're serving both individual investors and advisors.
00:10:02.400 | We're creating the channel to distribute through advisors.
00:10:07.320 | You are focusing on exclusively passive index funds?
00:10:10.520 | Okay, so we're getting into the technical aspect of it.
00:10:16.280 | Let's talk about that if you mind.
00:10:19.800 | The first thing I do is look at, at one level, what is an asset class and isolate out different
00:10:28.120 | asset classes.
00:10:29.120 | By the way, this is all written in one of my books called All About Asset Allocation.
00:10:36.240 | This is all this information is in one of my books called All About Asset Allocation.
00:10:43.400 | You start out at the asset class level determining what is an asset class and then which asset
00:10:49.400 | classes should you invest in because there are some that you wouldn't invest in because
00:10:55.120 | they don't give you a real return or maybe they're not investable.
00:11:00.320 | Once you come up with the asset classes that are investable, then you find the products
00:11:06.960 | that best represent the asset class in a low cost way.
00:11:10.880 | Now most of the time that points to index funds, but there are times when you may not
00:11:15.760 | use an index fund because the asset class is best represented by something that's not
00:11:21.600 | an index fund.
00:11:22.600 | I don't know if they give specifics, but let's say high yield bond, part of the market, the
00:11:30.160 | best product out there is not an index fund.
00:11:34.280 | It's actually a low cost actively managed fund.
00:11:36.640 | I can't get into for compliance purposes what one that is, but I think we all know which
00:11:41.000 | one and what big mammoth company out there has that.
00:11:46.680 | Let's start with answering that question.
00:11:47.920 | What is an asset class according to your definition?
00:11:50.640 | Because it's a term that we throw around a lot of times and as financial advisors, we're
00:11:54.760 | great at throwing terms out that people don't actually understand and we're not great at
00:11:59.600 | supporting them.
00:12:00.600 | How do you answer the question?
00:12:02.200 | That's a good question.
00:12:03.200 | Again, two, there are asset classes and then there are the ones that you would want to
00:12:07.240 | invest in.
00:12:08.240 | So, you have to look at it and you say, "Is there something unique about this asset class?
00:12:15.800 | Is it fundamentally different than another asset class?"
00:12:20.240 | For example, bonds are fundamentally different than equity.
00:12:25.200 | What backs the bonds, how bonds pay you a return, these are all fundamentally different
00:12:31.120 | than equity.
00:12:32.120 | So, equities and bonds are two different asset classes.
00:12:35.480 | Then you look at something like commodities or precious metals and you say, "What about
00:12:40.840 | that?"
00:12:41.840 | Well, they're physical.
00:12:44.840 | The return you get from those is different than the return you get from bonds and the
00:12:49.240 | return you get from stocks.
00:12:51.760 | So you isolate these things out by, "Are they fundamentally different?
00:12:55.680 | Do they have fundamentally different risks?
00:12:58.960 | How do you measure whether they're fundamentally different risks?"
00:13:02.040 | I do that through a rolling correlation analysis, not just a correlation analysis, but a rolling
00:13:08.080 | correlation analysis.
00:13:09.520 | What's the difference?
00:13:10.520 | Okay, correlation, for example, if you were going to take stocks and bonds and we were
00:13:14.640 | going to look back 50 years and we were going to say, "What's the correlation between stocks
00:13:19.480 | and bonds?"
00:13:20.760 | You did it as one flat 50-year number.
00:13:23.720 | You would come up with something like .1, which means there's not much correlation between
00:13:29.840 | stocks and bonds.
00:13:31.200 | But in fact, the correlation between stocks and bonds is never .1.
00:13:36.520 | It goes through .1 on occasion, but it's never .1.
00:13:40.920 | So you have to do a rolling correlation where you're looking at three-year periods of time
00:13:46.600 | rolling forward over that 50-year period.
00:13:49.960 | And then you can see how the correlation between two asset classes shifts.
00:13:55.480 | Sometimes it's negative, sometimes it's positive.
00:13:58.840 | And that shifting correlation, the variability of the correlation is telling you that there
00:14:05.760 | are different risks in stocks than there are in bonds because the correlation varies over
00:14:12.720 | time.
00:14:13.720 | You can do the same thing between common stocks and real estate.
00:14:18.440 | And you can see that the correlation is sometimes negative and sometimes positive, but it shifts
00:14:22.520 | over time.
00:14:23.760 | And therefore, there are different risk factors within those asset classes.
00:14:28.720 | Same thing with commodities.
00:14:30.580 | And so you use this to determine, is the asset class fundamentally different?
00:14:35.160 | And one test to determine whether the asset class is fundamentally different is whether
00:14:39.560 | there are different risks in the asset class.
00:14:42.960 | And you determine that or you validate that through a rolling correlation analysis.
00:14:48.240 | So the reason why this is important is from the scientific perspective, when we're constructing
00:14:53.920 | a portfolio, the correlation or the correlation coefficient is indicating, do these two asset
00:15:00.920 | classes tend to move together or do they tend to move in different directions?
00:15:05.200 | So if you had a stock of Pepsi and a stock of Coca-Cola, those would be highly correlated.
00:15:11.520 | You would expect them in many ways to move together.
00:15:14.500 | There might be some variability between the companies, but they're both in similar markets.
00:15:18.120 | They're going to be subject to similar economic influences.
00:15:21.880 | The idea of, say, stocks and bonds is, well, if stocks go up, do stocks go down?
00:15:28.120 | Bonds.
00:15:29.120 | Excuse me.
00:15:30.120 | Correct.
00:15:31.120 | Thank you.
00:15:32.120 | Do bonds go down?
00:15:33.120 | And when we're integrating a portfolio, a portfolio manager would love to have asset
00:15:37.160 | classes that were the exact opposite.
00:15:39.760 | That if asset class A goes up, asset class always B goes down by the same amount.
00:15:45.240 | That is brought together mathematically that lowers the total variability, the total risk
00:15:50.160 | of the portfolio.
00:15:51.600 | The problem is those asset classes, there are no asset classes that are perfectly inversely
00:15:56.520 | correlated.
00:15:57.600 | They all have some coefficient between them that sometimes they go up, sometimes they
00:16:01.460 | go together.
00:16:02.560 | And so the goal of why this is important for the listener is you want to have asset classes
00:16:08.560 | that you need to understand the correlation between asset classes on this basis, on a
00:16:13.280 | year to year basis, or on a market to market basis, so that you can figure out how to construct
00:16:17.800 | them together in a portfolio to deliver the maximum return at the minimum level of risk.
00:16:22.920 | Is that accurate?
00:16:24.120 | That's a perfect textbook explanation that doesn't actually exist in reality.
00:16:29.520 | Okay, but that's right.
00:16:31.920 | So let's talk about reality then.
00:16:33.360 | So the reality is, as you said, there are no negatively correlated asset classes, except
00:16:39.000 | if you went long the S&P and at the same time shorted the S&P, which gives you a zero return.
00:16:45.640 | And you got to pay your premiums along the way.
00:16:46.960 | You have to pay fees.
00:16:47.960 | So it doesn't make any sense to do that.
00:16:50.040 | The best that you can find is asset classes that are randomly correlated with each other,
00:16:58.680 | and that at times may be negative and at times positive.
00:17:02.560 | That's really the best you're going to find.
00:17:04.880 | The problem with that is that sometimes asset classes all go down together, and you can't
00:17:11.120 | get away from it unless you have a portion in cash.
00:17:16.200 | Not that I'm saying you should, but from a portfolio management standpoint, you can have
00:17:21.800 | contagion within all asset classes.
00:17:25.040 | Let's take 2008, for example.
00:17:27.920 | International stocks, real estate, commodities, everything went down together.
00:17:32.120 | Stock bonds, high yield bonds, everything went down.
00:17:35.400 | Treasury bonds were the only thing that did well.
00:17:37.640 | So whatever portion you actually had in treasuries did well.
00:17:40.880 | So at that time, you should have had some in treasuries.
00:17:45.820 | But you say, "Okay, well, I'll always have some in treasuries because they're negatively
00:17:48.880 | correlated with stocks."
00:17:50.440 | Well, no, not during the late 1990s.
00:17:53.960 | During the late 1990s, bonds went down and stocks went down.
00:17:57.680 | Why?
00:17:58.680 | Because it's a variable.
00:17:59.680 | That's why I say you have to look at a rolling correlation as opposed to a point correlation,
00:18:04.560 | because the rolling correlation will show you that there are times where this will occur.
00:18:08.840 | It's important to not be seduced by modern portfolio theory into thinking that it's a
00:18:15.680 | safe way all the time.
00:18:19.600 | So back to the issue that you raised before we talked about correlation, about which funds
00:18:24.200 | do we choose.
00:18:25.200 | And by the way, throughout this interview, please correct me if I get anything wrong.
00:18:29.200 | And feel any need to allow me to go on.
00:18:32.440 | But this is where I'm at currently with my own perspective on the question of active
00:18:37.620 | versus passive.
00:18:38.880 | You have to look at the actual market.
00:18:41.020 | So I could believe that for the most part, something like the stocks that are listed
00:18:46.600 | on the New York Stock Exchange, that's a highly efficient market.
00:18:50.360 | There are a limited number of issues.
00:18:52.440 | There are a massive number of analysts looking at things.
00:18:55.840 | The companies that are involved are the most public companies in the world.
00:18:59.880 | They're the most highly regulated.
00:19:02.000 | Everything is conveyed in advance.
00:19:04.040 | All of the information is there.
00:19:05.680 | So I could believe that that market is very efficient and that it's very difficult for
00:19:11.920 | a manager to bring a lot of value in that marketplace.
00:19:15.000 | However, when I look at something like the bond market, and we go from, if you know the
00:19:20.000 | numbers, a few thousand issues to many tens and tens of thousands of individual bond issues.
00:19:25.960 | Well, in this situation now, it's very hard for me to believe, well, I believe at the
00:19:31.160 | moment that underwriting is going to make a big difference.
00:19:34.480 | Individually underwriting various bond issues.
00:19:36.600 | There are so many thousands of issues that are out in the marketplace that an analyst
00:19:41.560 | can bring some value, if for nothing else, then to provide some basic screens against
00:19:46.080 | municipalities that are bankrupt and getting ready to launch a multi-billion dollar stadium
00:19:50.680 | for a team that's defunct and has no fan base.
00:19:53.360 | So something as simple as that, or moving from, say, large cap US stocks to a micro-cap
00:19:58.480 | area where underwriting now is going to make a much bigger difference.
00:20:03.160 | So I get annoyed when people paint with broad brush strokes and say, well, index investing
00:20:09.160 | and passive investing is always better than active investing.
00:20:13.220 | And I say, well, wait a second, let's look and see, is it feasible that a manager can
00:20:18.320 | add some value?
00:20:19.320 | Real estate would be another example.
00:20:20.920 | A real estate index fund might have some place if you're just simply saying, I want to figure
00:20:25.960 | out how to factor the variability of interest rates and the market in general as it reacts
00:20:31.680 | to the economy in.
00:20:32.800 | But any real estate investor knows that the actual underwriting of each rental property
00:20:37.160 | is of key importance because the property in your town that's in the ideal up and coming
00:20:43.440 | neighborhood versus the property on the outskirts of town that's in the neighborhood that's
00:20:47.160 | going to pot will make a massive difference in your returns.
00:20:51.840 | So let me annoy you.
00:20:53.320 | Please, this is good.
00:20:56.320 | You are correct in some parts of what you say, but you're incorrect in most of what you
00:21:04.240 | just said.
00:21:05.240 | The data doesn't show that even in the bond market, the active managers are able to outperform
00:21:16.320 | the benchmarks, even though the benchmarks are cap weighted, which you think about it,
00:21:21.200 | companies that are in trouble and need to issue a lot of debt end up with a bigger part
00:21:26.320 | of the bond market.
00:21:27.320 | So why would you want to buy more of them?
00:21:29.640 | But the fact is, the indexes actually outperform most of the active managers who are doing
00:21:36.360 | what you suggested, trying to find the inefficiencies and outperform.
00:21:43.040 | The same thing with emerging markets, the same thing with micro cap, the same thing
00:21:46.840 | with whatever market.
00:21:49.720 | In the long run, when you look at the data of the active managers who are paid, the professionals
00:21:54.920 | who are paid to try to outperform those benchmarks, the data shows in every asset class, in every
00:22:02.840 | category that the benchmark outperforms most managers.
00:22:09.100 | Not all, but here's the problem.
00:22:12.280 | I can't figure out, and neither can most people, which managers I'm going to use and pay who
00:22:23.960 | will be the minority who will outperform.
00:22:28.920 | You just can't tell in advance.
00:22:32.640 | So that's difficult.
00:22:34.080 | Most of the time, you're going to pick one who's going to underperform.
00:22:37.800 | But that's just one side of the coin.
00:22:39.340 | The other side of the coin is, and what's always kind of lost in the discussion, is
00:22:48.040 | the next derivative of this is, well, let's look at the managers who outperformed and
00:22:53.200 | let's see on average how much they outperformed by on an annualized basis.
00:23:00.560 | And let's look at the managers who underperformed and let's see how much they underperformed
00:23:05.600 | by on an annualized basis.
00:23:08.420 | And here's the problem.
00:23:10.640 | A minority of managers outperform.
00:23:14.280 | So therefore, the probability of you finding one is low, and therefore, you would expect
00:23:21.860 | a huge risk premium for finding one, a very high excess return if you actually found a
00:23:29.020 | manager that outperformed.
00:23:30.720 | But in fact, the alpha that they deliver is exceedingly low relative to the huge risks
00:23:39.460 | that you took going out trying to find that manager and by not using indexing.
00:23:44.960 | The average underperformance of active managers is two to three times the average alpha that
00:23:54.260 | the outperforming managers deliver.
00:23:57.140 | So even when you win, you lose, it's not a fair game.
00:24:00.660 | You're not getting paid enough for the risks that you took.
00:24:04.100 | So it's a probability, there's a low probability you're going to find an active manager that
00:24:09.060 | outperforms ex ante, which means before they outperform.
00:24:16.680 | And then the payout that they're delivering on average isn't nearly enough to compensate
00:24:23.180 | you for what the average underperformance is of all the other managers.
00:24:28.980 | And by the way, there's a lot of managers who don't even make it that far.
00:24:31.460 | They go out of business or they end up merging with another company.
00:24:34.280 | So this is all about probability and payout.
00:24:37.960 | For a portfolio that a person is going to put together for themselves or for their clients,
00:24:43.940 | if you put a portfolio together of only index funds and every single asset class, and let's
00:24:50.260 | say you're going to use 10 different asset classes and 10 different styles and you only
00:24:54.900 | use index funds, the probability that that portfolio of index funds will outperform any
00:25:02.540 | randomly selected portfolio of actively managed funds in the same asset classes is over 90%.
00:25:09.540 | But there's no reason to select a randomly selected portfolio.
00:25:12.900 | So we can go into that.
00:25:13.900 | Exactly.
00:25:14.900 | I understand you.
00:25:15.900 | We can go into, well, we can just pick the ones that have low fees.
00:25:17.420 | So we look at the funds that have low fees that are actively managed, for example, because
00:25:21.020 | we know that fees matter.
00:25:22.580 | And we find that a high percentage of the low fee actively managed funds track the indexes
00:25:28.300 | very closely.
00:25:29.300 | In other words, they're closet index funds.
00:25:31.480 | So you're paying more money for basically an index fund.
00:25:35.860 | It doesn't increase the probability by very much that those funds are going to outperform.
00:25:40.260 | So you say, okay, what else can we do?
00:25:41.940 | Well, let's look at past performance.
00:25:43.940 | Well, we study after study after study shows that if you pick managers based on their past
00:25:48.820 | performance, there's a high probability you're going to underperform in the future.
00:25:52.140 | There's what's called persistent studies by S&P that are put out every six months.
00:25:56.960 | And if you just say, we take a hundred funds and we say, okay, here are a hundred funds
00:26:01.700 | that outperformed or in the top quartile in the last three or five years.
00:26:08.620 | How did those hundred funds perform over the next three to five years?
00:26:12.240 | We find out that it doesn't even come up to a random number.
00:26:17.200 | You would figure over 25% would stay in the top 25% over the next three or five years.
00:26:23.740 | And it's less than 25%.
00:26:24.740 | I mean, it's not even random.
00:26:26.660 | So it's extremely difficult to say that past performance gives you good future performance.
00:26:31.900 | You can't say that low fees give you good future performance.
00:26:35.080 | So what is it that you're going to use that's going to determine what the performance of
00:26:39.700 | a fund is going to be going forward?
00:26:42.200 | And do you really even need to take that risk as an investor?
00:26:47.940 | So then why are you utilizing a managed bond fund of an unnamed origin in some of your
00:26:56.100 | investments?
00:26:57.100 | Because again, looking at, I want to capture the risk and the return of the asset class
00:27:01.640 | in the most diversified, lowest cost way.
00:27:04.580 | Now indexing and index funds and ETFs are not to the point yet in every single asset
00:27:09.680 | class where they are the best representation of an asset class.
00:27:17.340 | So this particular unnamed fund that I can't name for compliance reasons has 6,000 municipal
00:27:24.700 | bonds in it and the fee is, I think, 10 basis points and it's an actively managed fund.
00:27:32.660 | The best closest index fund has maybe 2,000 municipal bonds and the fee is 25 basis points.
00:27:41.380 | So my point is, well, the index fund is higher cost, has less diversification than the active
00:27:48.260 | fund.
00:27:49.260 | And so if I want to get the best representation of an asset class, I'm going to use this fund
00:27:53.660 | even though technically the active fund, technically it's active, but it's a better index fund
00:27:59.580 | of municipal bonds than the actual municipal bond index funds out there.
00:28:03.620 | And that's what I mean by, you've got to look at what's in the fund.
00:28:07.780 | What are you trying to capture?
00:28:10.780 | And most of the time, or a lot of times it's index funds, but other times it's not going
00:28:14.220 | to be.
00:28:15.460 | So do you think the management of that fund then is...
00:28:18.220 | No, they're not adding any value.
00:28:20.780 | I'm not buying them because they're adding value.
00:28:21.780 | You're just buying them because they're a massive fund and they're cheap and they represent
00:28:25.220 | the broadest access to the market in a single security.
00:28:29.140 | Okay.
00:28:30.140 | Now, I don't generally...
00:28:31.140 | Yes, correct.
00:28:32.140 | But that was true about municipal bonds.
00:28:33.940 | But let's talk about, instead of representing a market, let's talk about representing a
00:28:38.940 | risk.
00:28:39.940 | Okay.
00:28:40.940 | Okay.
00:28:41.940 | So if I do a portfolio asset allocation, it's really risk diversification.
00:28:46.940 | So you isolate out all the different risks in the marketplace and then you make a determination
00:28:52.780 | as to whether or not you're going to take a position in that risk.
00:28:56.180 | For example, in the bond market, there's two general risks.
00:28:59.700 | There's term risk, which is longevity or maturity type risk, where you invest in long-term bonds,
00:29:06.420 | you get a higher return than investing in short-term bonds.
00:29:08.960 | Then there's credit risk, where if you get less quality bonds, you get a higher return
00:29:13.260 | than high quality bonds.
00:29:14.520 | So you have to determine where you want to fit those two risks, how much of those risks
00:29:19.580 | you want to have in your portfolio.
00:29:21.660 | And then you go from there to seek out the best representation of those risks.
00:29:26.620 | And those are the funds that you buy to put in the portfolio, as long as they're well
00:29:30.580 | diversified and low cost.
00:29:32.620 | And same thing goes with factor investing.
00:29:35.380 | For example, if you believe in taking a bigger position to value stocks, and we can have
00:29:39.940 | a whole discussion about this, I mean, an hour long.
00:29:42.740 | But if you decide that you want to take a position in value stocks, the question is,
00:29:46.620 | how do you determine value?
00:29:48.640 | Which factors do you use to determine value?
00:29:51.800 | How do you measure the cost per unit of risk in each of the funds that you're looking at?
00:29:59.820 | So if I want to get more value exposure in my portfolio, I just use a value index fund?
00:30:04.620 | Well, it turns out, no, because they don't actually give you the best value exposure.
00:30:08.840 | You would use some other company that I can't name to get the best value exposure in your
00:30:14.560 | portfolio, even though it's a little more expensive.
00:30:16.560 | And even though it's quantitative or actively managed, it's the best way to get that value
00:30:22.600 | risk in your portfolio.
00:30:26.040 | And it's not an index.
00:30:27.920 | So what's the proof that you have if you're constructing a portfolio?
00:30:33.480 | Let's walk through the process of constructing a portfolio.
00:30:36.760 | And I come in and I say, Rick, here's my retirement portfolio.
00:30:41.400 | It's got a million dollars in it.
00:30:43.360 | I need to invest it in such a way that it's going to provide for my family's financial
00:30:49.760 | security and retirement.
00:30:51.680 | What's the first stage in that process?
00:30:53.360 | Okay, so you're talking now, what I've been talking so far, and all we've talked about
00:30:57.100 | now is my side, which is the academic side.
00:30:59.320 | Right, right.
00:31:00.320 | But where I want to go is I want to talk through the client side.
00:31:02.640 | But then I want to go back to the academic side and say, how do you construct the portfolio
00:31:07.520 | figuring out which proportion for value to measure the risk and goals of my portfolio?
00:31:13.080 | This is a great question.
00:31:14.320 | So now I have to flip around and put my financial advisor hat on because I'm sitting in front
00:31:18.440 | of a client and I'm talking with the client.
00:31:20.480 | So we do the basic, who are you?
00:31:25.480 | What risks do you have in your life?
00:31:28.840 | Do you have job security?
00:31:30.880 | What kind of income do you have?
00:31:33.200 | All the kind of basic financial planning issues to determine how much you're going to need
00:31:41.440 | at some retirement date, how much you're going to need to draw off that portfolio at a retirement
00:31:46.300 | date in order for you to achieve your life goals.
00:31:49.640 | So we have that conversation.
00:31:50.640 | Build the financial plan.
00:31:51.640 | Exactly.
00:31:52.640 | That's all it is.
00:31:53.640 | And then from there, it'll come up with a stock and bond mix and maybe a portion carved
00:32:01.000 | out for emergency funds.
00:32:02.480 | But just leave that out for a while and just talk about how much of the portfolio should
00:32:06.480 | be in lower risk assets and how much can we put away for higher risk assets to have a
00:32:12.000 | greater return later on down the road.
00:32:13.600 | Very basic stuff.
00:32:14.600 | Now again, I'm talking with a individual investor here.
00:32:18.560 | And we come up with not so much, well, first we come up with the number of the asset allocation.
00:32:25.000 | In my mind, I generate what kind of rate of return they're going to need and that in my
00:32:29.240 | mind generates what kind of a stock and bond mix they should have.
00:32:33.520 | But that's not the end of it.
00:32:35.080 | I have to make sure that whatever that asset allocation is fits the client's emotional
00:32:40.200 | makeup so that they're not going to capitulate with that asset allocation in a bad market.
00:32:46.460 | So we don't do clients any good.
00:32:48.520 | Not so ever if we recommend asset allocations that they can't handle in a bad market.
00:32:53.720 | And then a lot of times the clients have, they may have a high tolerance for risk, but
00:32:57.560 | they shouldn't be taking much risk based on where they are and what's going on.
00:33:00.640 | So we go through this whole process with them.
00:33:02.600 | So let's say we come up with a portfolio that's 50/50.
00:33:05.240 | 50 stocks, 50 bonds.
00:33:08.280 | Great.
00:33:09.280 | At that point, I say to them, oh by the way, also look at the tax side of it too.
00:33:13.000 | Is this taxable money, non-taxable money?
00:33:15.040 | So IRA, non-taxable.
00:33:17.460 | So the next thing is at that point, we basically stop with the client.
00:33:23.840 | Then we create the portfolio.
00:33:27.160 | So the client's not involved in that side of it, but I'm putting together based on my
00:33:31.720 | academic work what has the highest probability of maximizing the risk and return within each
00:33:40.520 | asset class, stocks and bonds.
00:33:42.280 | And then I put together the 50/50 portfolio based on that.
00:33:48.080 | So you're looking at that and you come up with the idea, okay, of these stocks we want
00:33:53.520 | 35% weighted to large cap stocks.
00:33:57.220 | Now within the 35%, what's your proof of what proportion should be designated into value
00:34:04.760 | versus other aspects of large cap stocks?
00:34:09.000 | Well let me make another plug for my book all about asset allocation because it's all
00:34:13.000 | in there.
00:34:14.000 | Nice.
00:34:15.000 | Of basically the efficient frontier of total market to value type investing.
00:34:21.260 | And it shows you that somewhere around 30% seems to be a middle of the road number.
00:34:26.240 | And everything, by the way, with asset allocation when you're talking about these things is
00:34:29.640 | a sort of a middle of the road number.
00:34:33.520 | And I can give you a rule of thumb.
00:34:34.760 | If you take the risky equity asset class and the non-riskier large cap stocks versus small
00:34:40.280 | cap value, small cap value has higher risk and higher return expectation and large cap
00:34:45.160 | has lower risk and lower return.
00:34:47.240 | So if you do an efficient frontier between those two, you come up with about 30% every
00:34:52.920 | time.
00:34:53.920 | Doesn't matter what the asset classes are.
00:34:55.560 | The efficient frontier ends up putting you somewhere around 30% roughly.
00:34:59.160 | Do you follow that, what I just said?
00:35:02.000 | Yeah.
00:35:03.000 | Yeah.
00:35:04.000 | That's how I build it.
00:35:05.720 | I actually only use 25% go into these factor type funds.
00:35:12.040 | I don't even go to 30 and that's because of psychological.
00:35:16.160 | There's too much tracking error in the portfolio if you get much above 25% in these factor
00:35:22.120 | type strategies.
00:35:23.120 | Where the client may capitulate because the equity portfolio is underperforming the stock
00:35:28.880 | market by too much when those factors don't deliver.
00:35:33.760 | I just threw a whole bunch of stuff in there by the way.
00:35:36.160 | A whole book can be written on that.
00:35:37.920 | Indeed.
00:35:38.920 | It gets pretty meaty.
00:35:41.280 | Instead of going deeper into that, I want to ask about the concept of risk, specifically
00:35:46.360 | with stocks versus bonds.
00:35:49.460 | When I was a practicing financial advisor speaking with clients with a responsibility
00:35:54.760 | on paper managing portfolios, I never could have made this statement nor could I have
00:35:58.320 | put it into practice because the firm has to protect itself based upon the need for
00:36:09.200 | the client's portfolio to match their stated risk tolerance on paper based upon standard
00:36:14.600 | investment industry norms.
00:36:16.040 | If the client says, "I'm a balanced investor," or "I'm a moderately conservative investor,"
00:36:21.320 | their portfolio needs to reflect that with an aspect of stocks versus bonds.
00:36:25.440 | However, since I no longer have that responsibility, I can make a statement like this.
00:36:31.480 | For me, I am persuaded that it is easier for me to modify my emotional makeup with regard
00:36:40.880 | to stocks and the variability of the market and also to plan appropriately in my personal
00:36:48.520 | finances to counter for the massive swings of up and down market risk.
00:36:54.720 | Such that in my own personal portfolios, I would rather be in a 100% stock allocation
00:37:01.960 | in order to generate the highest long-term return.
00:37:05.880 | I get very concerned in working with clients and looking at client portfolios with the
00:37:12.060 | amount of assets that people have dedicated towards bonds based upon this concept of,
00:37:18.520 | "I'm a conservative investor."
00:37:20.640 | I get concerned because I look at the long-term return versus the risk that they face of the
00:37:26.560 | decrease in value of their money, the inflation risk.
00:37:28.880 | I say, "It's easier for me," and if I had an iron fist over, say, my dad and mom's accounts,
00:37:36.160 | "It's easier for me to make a financial plan with enough cash on hand that I don't have
00:37:40.240 | to pull from the market if we get a down year.
00:37:43.000 | I want the 100% stock portfolio because I want the highest total maximum return."
00:37:48.520 | I don't personally buy for me or for my mom and dad, I don't buy the concept of, "Oh, we
00:37:53.080 | got to do a 60/40 split."
00:37:55.160 | Am I wrong?
00:37:56.160 | No, not for you.
00:37:57.560 | You're not wrong because you understand it and because you're at the level of your knowledge
00:38:04.040 | where you understand that you can put money aside, which by the way is like a bond.
00:38:09.160 | So therefore, you actually do have a bond portfolio.
00:38:13.160 | So you are not 100% equity.
00:38:15.520 | But the bottom line on that is that that's for you, absolutely.
00:38:20.160 | I am 58 years old and I have 100% equity.
00:38:24.200 | Wow, crazy.
00:38:25.200 | Why would a 58-year-old have 100% equity?
00:38:28.800 | Only because, well, I'm going to get a military pension.
00:38:31.200 | I've got a small pension coming in from Smith Barney.
00:38:33.200 | I've got a small pension that's going to be coming in from Peter Peabody.
00:38:36.160 | I've got a small pension.
00:38:37.160 | I'll be getting Social Security.
00:38:38.280 | My wife's going to be getting Social Security.
00:38:40.600 | I have that.
00:38:42.720 | So I don't need bonds per se in my portfolio with the exception of the emergency fund that
00:38:48.000 | I have.
00:38:49.320 | But everybody's different.
00:38:53.400 | You are at a much higher knowledge level than most of the people that you would be working
00:38:59.640 | with if you were an investment advisor or a financial planner.
00:39:05.340 | Everybody is brave in a bull market.
00:39:08.240 | The problem is if you take their bravery and you turn it into an asset allocation based
00:39:15.880 | on what they think their risk tolerance is after the market goes up 250%, you would be
00:39:22.240 | doing them a disservice because they would capitulate in the next bear market and there's
00:39:28.620 | no way they're going to get that back.
00:39:31.000 | You would have really done a disservice to the client.
00:39:36.280 | Even though it's technically correct what you said, we want to get the best return for
00:39:42.000 | the clients.
00:39:43.000 | We would like them to know as much as we do, but I can't take my brain and put it in their
00:39:47.160 | head.
00:39:48.240 | So I have to pull back and work on what is in their best interest.
00:39:56.240 | And sometimes even though having 100% equity is certainly in somebody's best interest,
00:40:00.820 | it isn't in their best interest because they're going to capitulate as soon as the market
00:40:03.620 | goes down.
00:40:04.620 | So it's not in their best interest.
00:40:05.620 | And so the other side of the coin is the emotional reaction.
00:40:09.640 | And the hardest part about what we do as financial advisors isn't the asset allocation, technical,
00:40:16.720 | efficient frontier, whatever.
00:40:17.720 | It's all the same for every company.
00:40:19.720 | Yeah, 25% small value, some reach, so whatever it is.
00:40:22.920 | That's the easy part.
00:40:25.240 | I can teach a 10-year-old how to do that.
00:40:27.880 | The hard part is reading the client and trying to figure out what is the best strategy for
00:40:33.200 | them, knowing the technical side, knowing what they need, but also knowing how people
00:40:38.340 | act.
00:40:39.340 | And that's the hard part.
00:40:40.960 | And I'm even personally, I'm a little unsure of my opinions in this area because I spent
00:40:45.740 | six years working with clients, the first three of which were focused on insurance,
00:40:49.380 | the last three of which I started to build my wealth management practice.
00:40:53.280 | And during that time, I never walked with clients through a major downturn.
00:40:57.340 | And by the time even this, all the tiniest downturns a few months or so ago, I wasn't
00:41:07.380 | working with clients.
00:41:08.380 | I'm working with client portfolios.
00:41:09.820 | So I've not walked through a difficult time period.
00:41:14.000 | It's an intellectual exercise for me.
00:41:16.060 | But looking at it intellectually, the concern that I have, and what I always felt when I
00:41:19.460 | was doing planning, is that as a financial planner, our major tool that we should be
00:41:24.380 | utilizing is not necessarily the asset classes within the IRA portfolio, but the asset classes
00:41:30.900 | that the client is more used to controlling.
00:41:34.300 | So thinking, yes, could you keep $100,000 of cash in the checking account, and/or you
00:41:40.340 | could keep the $100,000 in cash or a short-term bond in the portfolio.
00:41:45.300 | And yes, it has the same effect, but the reality is that the cash in the checking account is
00:41:49.980 | accessible for the client, so I can point and say, "Look, ignore the portfolio over
00:41:54.340 | here and look at the $100,000 in the checking account during times when the market is down."
00:41:59.580 | And I look and I say, "Okay, a 60/40 portfolio versus 100/0, is the emotional mania driven
00:42:11.400 | by the actual numbers on the statement, or is the emotional mania driven by the newscaster
00:42:17.620 | on 5 o'clock saying, "Well, the Dow Jones Industrial Average dropped today by 487 points?"
00:42:22.280 | So it's both, because you can imagine when you see that the market's down 2% in one
00:42:28.700 | day, you don't need to look at your statements or get online to know that you're down.
00:42:35.240 | You know that.
00:42:36.320 | So you're going to have that reaction anyway.
00:42:38.660 | But to your point about putting stocks in one fund, let's say your IRA or your personal
00:42:50.620 | fund, and just have all stocks there, and then your emergency money maybe being in a
00:42:56.020 | short-term bond fund or CDs.
00:42:58.940 | And so together you might have 70% stocks and 30% bonds when you put those two together.
00:43:05.180 | In somebody's head, when the market is going down, they're only looking at the stock portfolio.
00:43:12.180 | And I'll give you a story.
00:43:15.420 | So I used to fly fighter aircraft in the military, and we have had situations where pilots are
00:43:23.100 | rolling in on targets, and they roll out, and they want to hit that target so bad, they
00:43:29.980 | get fixated on that target, and they drive the plane right into the ground.
00:43:35.540 | They kill themselves.
00:43:36.580 | So what happens is the same thing here.
00:43:39.060 | The clients will fixate on just that equity portfolio, and they'll drive themselves into
00:43:45.260 | the ground and blow it up.
00:43:47.420 | So that's why I say, should you have a portfolio of just stocks over here, and maybe a portfolio
00:43:56.220 | of just bonds over there, or should you have a balanced portfolio on both sides?
00:44:02.740 | And what I find is that psychologically, it's easier for people to, even though the same
00:44:09.500 | asset allocation is 70/30, to have a 70/30 over here in your personal savings account,
00:44:15.860 | and 70/30 over here in your IRA account, because you don't get so fixated on the dive, if you
00:44:25.020 | will, that's going on.
00:44:28.140 | So what about this?
00:44:29.340 | What about the fact that clients are looking at a bond portfolio, and no matter what the
00:44:33.080 | numbers say, then it's very easy for the news mania to creep in and say, well, interest
00:44:39.220 | rates are going to rise, and your bond portfolio is going to plummet in value because interest
00:44:41.980 | rates are going to rise.
00:44:42.980 | And yeah, the Federal Reserve, if they make this tiny rate hike, then all of a sudden,
00:44:46.540 | you're going to be down 40% of your value, and your bond mutual fund has an unlimited
00:44:51.180 | duration over time, because it's always got to be-- it doesn't.
00:44:54.540 | What I mean is that instead of looking at it and saying, OK, this individual bond issue
00:44:58.340 | that I have is going to mature, they can say, well, this mutual fund, yeah, it has a duration,
00:45:03.660 | but because they're always cycling new bonds in, maybe this bond portfolio can evaporate.
00:45:07.420 | I've seen that mania, too.
00:45:09.260 | And so without data to come against that, it's so easy for us to be susceptible to even
00:45:14.700 | that, this fear of bonds.
00:45:16.820 | I agree.
00:45:19.180 | And we've probably had more bond fear than we've had stock fear in the last six years.
00:45:24.140 | But-- and we have had-- I was talking to-- I won't name them, but it's a-- I happen to
00:45:33.220 | be in the offices of one of the very large robo-advisor firms, because I know them all
00:45:37.700 | really well, so I go visit them.
00:45:39.340 | This one happens to be in New York, but I won't mention their name for compliance reasons.
00:45:42.980 | Anyway, I'm there and talking with them, and they were trying to figure out how to answer
00:45:48.480 | questions from clients who call in and have fears.
00:45:52.860 | And the fellow who I won't mention his name said, we were thinking about having a dial-in
00:45:57.580 | number where it says, if you think interest rates are going to go up and the value of
00:46:01.220 | your bonds are going to go down, press one.
00:46:03.500 | If you think the stock market is going to continue to fall, press two.
00:46:06.780 | And then get a recording, because it's the same answer.
00:46:11.140 | But yeah, these fears are difficult for people who don't have a lot of experience.
00:46:19.740 | And this is where the advisor comes in.
00:46:21.380 | This is where we make our money.
00:46:23.980 | We make our money figuring these things out.
00:46:27.740 | Like I said, the technical side of this is easy.
00:46:31.260 | It's the emotional and the coaching side for the client that's hard.
00:46:35.660 | The therapy side that's hard for the client.
00:46:39.220 | But if we can do it, if we can keep them invested and keep them on track, stay the course, like
00:46:46.220 | John Bogle says, that's really a value added to the client.
00:46:53.260 | Last question.
00:46:54.980 | So let's talk from your academic background and perspective.
00:46:58.780 | I've had a few portfolio managers or people who are on the show who talk about this.
00:47:04.540 | One of the most popular portfolios, and I've talked about it on the show, would be the
00:47:11.140 | permanent portfolio.
00:47:13.220 | The idea of 25% in each of four asset classes, including gold, including cash, and cash
00:47:19.540 | equivalents.
00:47:22.740 | Academically that portfolio, depending on what you look at, often doesn't seem to perform
00:47:28.160 | when compared against other portfolios because of the underexposure to stocks.
00:47:33.420 | However, emotionally and psychologically, I believe it's powerful.
00:47:38.180 | Even for me, I still at times consider, I wonder if I should just be running the permanent
00:47:43.860 | portfolio.
00:47:46.020 | It's so emotionally powerful that I wonder if it's not a better solution than we often
00:47:52.360 | give it credit because it fits that narrative and it allows you to look at the movements
00:47:57.380 | of the monetary system.
00:47:58.460 | It allows you to look at the government system and say, "Well, okay, I've got these protections
00:48:02.660 | in place."
00:48:03.660 | What's your perspective on that?
00:48:04.660 | All right, I'm going to back up to a 10,000 foot level.
00:48:08.660 | There's a difference between investment philosophy and investment strategy.
00:48:13.020 | What you just talked about was a strategy.
00:48:16.780 | Philosophy is, I'm going to buy these four different asset classes.
00:48:21.260 | I'm going to do it in a low cost way.
00:48:23.500 | I'm going to buy a global stock index fund, a total bond market bond fund.
00:48:30.580 | I'm going to put my money over here in, I don't know, one year of CDs and I'm going
00:48:35.940 | to buy a gold ETF.
00:48:39.340 | It's going to be passive.
00:48:40.660 | It's going to be low cost.
00:48:42.500 | It's going to be 25% in each and this is what I'm going to do for the rest of my life.
00:48:49.900 | The idea of doing passive low cost is a philosophy.
00:48:57.060 | You and I, I believe, or I don't know, but maybe you and I have the same philosophy about
00:49:03.960 | low cost passive is the way to go.
00:49:06.460 | I don't know if you believe that or not, but I do.
00:49:09.220 | When I, all my clients do because that's the way they're investing.
00:49:12.420 | That's philosophy.
00:49:14.020 | The other side of the philosophy is active management, try to pick managers who are going
00:49:17.940 | to outperform, try to time the market and all that.
00:49:21.660 | That's the other philosophy.
00:49:23.140 | I gave up on that years ago.
00:49:24.660 | I'm in this church here and I'm pretty far up the number of pews.
00:49:29.340 | In fact, I'm probably at the altar.
00:49:32.180 | That's the philosophy.
00:49:33.180 | You're preaching from the pulpit.
00:49:34.180 | I'm in the choir anyway.
00:49:37.020 | John Bogle is the high priest.
00:49:39.020 | I'm in the choir.
00:49:43.460 | Everybody in the church has the same philosophy.
00:49:46.580 | No one in that church has the same strategy, which is what you were talking about.
00:49:53.300 | How for me should I take this philosophy, divide it up into an asset allocation and
00:49:59.380 | different asset classes, implement it and maintain it?
00:50:04.100 | Everyone in that church is going to have a different strategy for how they do that and
00:50:07.380 | how they apply it to their life.
00:50:09.720 | Same philosophy, different strategy.
00:50:12.260 | To get to your question is, if it works for you, great.
00:50:16.660 | That was a really fast answer after a really great intro.
00:50:21.940 | I like it.
00:50:23.180 | Rick, tell us about your service offerings for advisors and for individuals if anybody
00:50:28.820 | wants to work with you directly.
00:50:30.180 | Books, websites, materials.
00:50:32.180 | Let's have your commercial here for the ways that you can help the listeners of this show.
00:50:36.820 | I appreciate that.
00:50:38.300 | You go to rickferry.com.
00:50:40.140 | I tried to make it simple even for myself.
00:50:42.180 | If I have my name on my website, I won't forget what it is.
00:50:45.100 | R-I-C-K-F-E-R-R-I.
00:50:46.100 | R-I.
00:50:47.100 | That's correct.
00:50:48.100 | F-E-R-R-I.
00:50:49.100 | There, I have my blog.
00:50:51.380 | I have my books.
00:50:52.380 | I have a link to our company website which is Portfolio Solutions.
00:50:56.780 | There, we actually implement this philosophy for clients using various strategies based
00:51:03.660 | on their particular needs.
00:51:05.100 | We implement it through custodians such as Schwab and TD Ameritrade.
00:51:10.100 | We charge a low fee to help them determine what portfolios they should have.
00:51:16.500 | Then we do all of the back office administration and rebalancing, purchase everything, rebalance,
00:51:22.860 | report, and all this standard portfolio management stuff that we do.
00:51:26.380 | We do it at a low fee.
00:51:27.380 | We've been doing it for 16 years.
00:51:29.940 | Recently, we've reached out to advisors and we said, "We will now do this for your clients
00:51:34.420 | directly where you have a portal and you're going to run that relationship with the client,
00:51:38.140 | but we're going to manage the portfolio using the same strategies."
00:51:41.420 | The fees for this are, for clients who come to us directly, it's 37 basis points.
00:51:46.460 | That includes access to our CFPs to figure out what their investment needs are and so
00:51:51.300 | forth.
00:51:52.300 | If an advisor is in the picture and the advisor sends us a client, it's 25 basis points management
00:51:58.180 | fee.
00:51:59.180 | That's what Portfolio Solutions does.
00:52:00.980 | We have 1.4 billion under management.
00:52:03.660 | We've got a staff of 16.
00:52:06.020 | We've been doing this a long time.
00:52:07.180 | We were the original low cost RIA out there.
00:52:13.100 | There's a lot of competition out there now that wasn't out there before.
00:52:16.020 | I'd like to believe that because we've been so successful, people have seen us and said,
00:52:20.100 | "Let's copy it."
00:52:21.100 | That would include that great big company out on the East Coast that we can't talk about,
00:52:26.540 | of course.
00:52:27.540 | >> I just love, it's never been a better time to be an equity investor.
00:52:32.660 | As far as cost, lower than ever.
00:52:35.460 | Information access to information, lower than ever.
00:52:37.340 | It's better than a worst time probably to be an uneducated investor because the manias
00:52:41.540 | seem to get worse.
00:52:43.900 | It just seems to get tougher and tougher.
00:52:46.900 | Rick Ferri, F-E-R-R-I.com.
00:52:49.340 | Thanks so much for coming on.
00:52:50.340 | You're welcome back anytime.
00:52:51.340 | >> Thank you.
00:52:52.340 | I appreciate it.
00:52:53.340 | Thank you very much.
00:52:54.340 | >> Those of you who are long time listeners to the show will have heard loud and clear
00:52:59.380 | my tongue in cheek at the beginning of the show when talking about that this is the only
00:53:03.500 | right way to invest.
00:53:05.460 | Hopefully you've gained and learned a lot from Rick.
00:53:08.500 | He's a really great guy and extremely knowledgeable.
00:53:11.020 | He presents a strong case and I would encourage you to become knowledgeable about those options
00:53:15.740 | and make sure that you're using the information that he shared with you and also other information
00:53:20.660 | that you can find as well to figure out what is best and right for you.
00:53:24.340 | So I hope that you learned a lot and I hope you really enjoyed that.
00:53:27.340 | Thank you so much for listening to Radical Personal Finance today.
00:53:29.540 | I really appreciate each and every one of you who listens.
00:53:32.000 | Thank you especially to those of you who share the show with others.
00:53:35.380 | I've done very little marketing for Radical Personal Finance.
00:53:37.940 | I decided that I could either spend time creating great content or I could spend time marketing.
00:53:42.460 | In the beginning I didn't have the capacity for both and still I don't have the capacity
00:53:46.940 | to do both really, really well.
00:53:48.720 | So anytime I have a decision of Joshua, do you want to sit down and create another show
00:53:52.140 | or should you work a little bit longer to try to create a better show or should you
00:53:55.980 | go ahead and try to figure out how to do some new marketing thing, I always choose create
00:54:00.360 | a better show.
00:54:01.360 | But what that means is I need your help to market the show.
00:54:04.060 | I need your help to share the show with others.
00:54:06.400 | The best way to do it is just simply to tell somebody else about the show.
00:54:09.820 | If you would like them to listen, just tell them all they need to do is search the App
00:54:13.020 | Store on their phone and they can download our free app and we're in every single App
00:54:17.220 | Store.
00:54:18.220 | So we're in iOS App Store, Apple App Store, Google Play, for any Android device.
00:54:23.500 | If you have a Blackberry, you'll find it.
00:54:24.980 | My dad has a Blackberry and he finds it when he has my show.
00:54:27.780 | I downloaded them Blackberry.
00:54:30.500 | Windows phones, we have an app for Windows phones and we have an app for what's the last
00:54:34.220 | one?
00:54:35.220 | Amazon Fire Phone.
00:54:36.220 | And she's got my app.
00:54:37.620 | So all of those options will work and you can find the app.
00:54:42.520 | So please tell somebody else about the show.
00:54:44.360 | Just tell them search the App Store for Radical Personal Finance and they can listen.
00:54:47.620 | I know the content is voluminous.
00:54:50.000 | At this point in time, I'd like to create some better, more synthesized, carefully built
00:54:54.180 | courses and I'm working on that.
00:54:55.420 | As soon as I can get that done, I will do that.
00:54:57.200 | Which leads me to the Patreon campaign.
00:54:59.660 | Thank you to those of you who support the show on Patreon.
00:55:02.540 | At the moment, I would ask, let's pull it up here before I run out of music.
00:55:07.060 | At the moment, there are just under $2,500 a month of pledges on Patreon from a total
00:55:12.260 | of 236 patrons.
00:55:14.060 | I would love to get that number to $4,000.
00:55:16.340 | As soon as we get to $4,000, I intend to release to you guys an awesome course.
00:55:20.580 | So if you are not yet pledging on Patreon, please go to RadicalPersonalFinance.com/patron.
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