Bogleheads University 101 2024 Building Your Portfolio with Rick Ferri

00:00:00.000 | (audience applauding)

00:00:03.160 | Now I get to introduce someone who needs no introduction,

00:00:09.640 | which is why I'll do it anyways.

00:00:11.920 | Rick Ferry is the founder of Ferry Investment Solutions LLC,

00:00:15.720 | an investment advisor firm that also charges by the hour,

00:00:19.840 | copying my model.

00:00:21.160 | He has been in the investment industry

00:00:26.600 | for more than 35 years.

00:00:28.040 | Rick has coauthored six books on index fund investing,

00:00:31.560 | exchange traded funds, asset allocation,

00:00:34.680 | and other personal finance topics.

00:00:37.240 | He is the host of the Bogleheads on Investing podcast.

00:00:41.060 | Rick has his degree from, should I change the college?

00:00:45.280 | University of Rhode Island, that RI stands for Rhode Island.

00:00:48.540 | College of Business earned a master's degree

00:00:51.800 | from Walsh College in Michigan and is a CFA charter holder.

00:00:55.960 | If that wasn't enough, prior to earning the biz,

00:00:58.640 | Rick flew fighter aircraft in the Marine Corps

00:01:01.600 | and is a retired Marine Corps officer.

00:01:04.640 | Yes, sir.

00:01:05.480 | (audience applauding)

00:01:08.300 | - Thank you, Mr. Roth.

00:01:09.400 | All right, thank you, Alan.

00:01:12.760 | We're gonna see Alan again in a couple of minutes.

00:01:15.560 | So this part of the discussion

00:01:17.920 | is called Building Your Portfolio.

00:01:20.360 | Okay, I have a kind of a unique way of talking about this.

00:01:26.320 | And here is my Venn diagram of what is actually going on

00:01:31.320 | when you are going to put together an investment portfolio.

00:01:39.160 | Before, this puts it all in perspective

00:01:44.480 | of the three key things you need to do

00:01:48.880 | in order to be a successful investor.

00:01:52.360 | And it really, quite frankly,

00:01:54.240 | doesn't matter if you're talking about real estate

00:01:56.380 | or index funds, or even active management,

00:01:59.380 | you need these three elements.

00:02:02.400 | So you need a philosophy of what you're going to do

00:02:07.400 | and how you're going to do it and why.

00:02:10.280 | Then you need a strategy,

00:02:11.420 | which is the nuts and bolts of your portfolio.

00:02:13.520 | And then you need the discipline

00:02:14.760 | to put it together and maintain it.

00:02:17.960 | So the Bogleheads, the reason we're all here

00:02:23.100 | is because we all have the same philosophy.

00:02:27.380 | We all have the same philosophy.

00:02:29.480 | And here's some bullet points you can get right off

00:02:33.120 | of bogleheads.org, the Bogle Center,

00:02:36.600 | about what the Bogleheads investment philosophy is.

00:02:41.220 | That is, as Alan already pointed out,

00:02:45.960 | invest with simplicity.

00:02:47.480 | This isn't hard.

00:02:48.640 | And don't make it hard.

00:02:50.640 | I mean, Wall Street does want to make it hard

00:02:53.140 | because complexity is job security

00:02:56.620 | in the investment world.

00:02:58.440 | The more complex they can make things,

00:03:00.160 | the more money they make.

00:03:03.220 | You shouldn't be thinking that way.

00:03:04.980 | Investing is simple, so invest with simplicity.

00:03:08.840 | Minimize cost, including taxes.

00:03:13.860 | Keep your cost as low as possible

00:03:15.260 | 'cause everything that comes out of your pocket

00:03:16.740 | to pay for cost and for taxes

00:03:18.860 | is less money that you have.

00:03:20.300 | As Alan mentioned, use index funds when possible

00:03:25.640 | because in the long term, it's extremely difficult

00:03:28.600 | to outperform the markets

00:03:30.040 | if you're trying to beat the markets.

00:03:31.360 | And if you're trying to do this in bonds and stocks,

00:03:33.800 | U.S. stocks and foreign stocks,

00:03:35.920 | each one of these categories,

00:03:37.160 | if all you did was use index funds

00:03:38.720 | in each one of these categories,

00:03:39.920 | probability is over 90 some odd percent

00:03:42.760 | that you're gonna outperform anything else that you do

00:03:45.540 | just by using all index funds in every asset class.

00:03:49.080 | So you should use them whenever you can.

00:03:51.440 | Now, you might be in a 401(k) or 403(b)

00:03:55.080 | where they don't have index funds and that's unfortunate.

00:03:57.720 | You have to use what they have.

00:03:59.720 | And then finally, as Alan pointed out,

00:04:03.400 | once you're invested in these markets,

00:04:06.000 | you don't try to time the markets.

00:04:07.480 | We don't know what's gonna happen next.

00:04:10.000 | Now, a lot of people out there make believe they do

00:04:13.120 | and they make a lot of money by making believe

00:04:14.920 | they know what's gonna happen next in the markets.

00:04:17.140 | Well, we don't at the Bogleheads.

00:04:18.860 | We just take an allocation to our stocks and bonds

00:04:22.740 | and cash, as you'll see in a minute,

00:04:24.720 | and then hold it like Jack Bogle said.

00:04:29.720 | Don't do something, just stand there.

00:04:32.500 | By the way, that complete list of what is a Boglehead

00:04:38.320 | and our philosophy is on the wiki, Bogleheads wiki,

00:04:41.140 | which we have in the website, bogleheads.org.

00:04:44.540 | And you can also find it on boglecenter.net.

00:04:47.820 | Okay, now what's the difference

00:04:50.340 | between the philosophy and strategy?

00:04:55.340 | And here's the way I describe this.

00:04:58.840 | If you believe that you're already a Boglehead

00:05:03.100 | or that you wanna be a Boglehead,

00:05:05.900 | or that if you are at a Bogleheads conference

00:05:09.680 | or would go to a Bogleheads conference,

00:05:11.620 | in other words, you wanna embrace

00:05:13.340 | this Bogleheads philosophy,

00:05:14.860 | if that's you, raise your hand.

00:05:17.520 | That's about, hopefully, everybody in this room.

00:05:21.460 | Other than that, Goldman Sachs

00:05:24.220 | has a conference down the hall.

00:05:25.860 | Sell you whatever you want.

00:05:28.260 | Okay, so everybody has the same philosophy.

00:05:30.100 | I mean, we do believe in this.

00:05:31.620 | We do believe this is in our best interest.

00:05:33.780 | That's philosophy.

00:05:35.540 | Now, how many people in this room

00:05:39.220 | have the exact same portfolio,

00:05:42.340 | the exact same allocation to the exact same funds

00:05:46.300 | as someone else in this room?

00:05:49.660 | Exactly, same amount in cash,

00:05:52.220 | maybe same amount in CDs, percentage.

00:05:54.440 | Raise your hand.

00:05:57.520 | Nobody, why?

00:06:01.060 | Because we're all different.

00:06:03.060 | We're all unique.

00:06:04.620 | We all have different situations.

00:06:06.980 | I'm older, you're younger.

00:06:10.740 | I'm still working.

00:06:12.300 | Alan doesn't need to work anymore.

00:06:13.700 | He hasn't needed to work for years.

00:06:15.960 | Anyway, you'll hear this rivalry, by the way,

00:06:21.920 | between Alan and I going back for the whole entire weekend,

00:06:24.400 | so just get used to it.

00:06:25.500 | But anyway, the point is that we are all different.

00:06:30.360 | We have different circumstances,

00:06:31.720 | different family needs, different taxes,

00:06:33.500 | different incomes, different savings, different everything.

00:06:36.300 | Different investments available to us

00:06:38.140 | in our 401(k)s, 403(b).

00:06:39.540 | I mean, it's different.

00:06:41.140 | So what is strategy?

00:06:43.540 | Strategy is how you put your portfolio together

00:06:48.540 | based on what you have available

00:06:51.620 | and what your needs are and what your situation is.

00:06:54.680 | So while the philosophy covers this entire conference,

00:06:58.740 | we're all on board with the Bogleheads philosophy.

00:07:02.020 | How you do it is going to be uniquely different

00:07:08.380 | in some way than how anybody else does it, and that's okay.

00:07:13.260 | I wanna state right from the beginning,

00:07:15.000 | there is no right way or wrong way.

00:07:18.860 | You're going to have your own way,

00:07:22.300 | and that's perfectly fine, and that is strategy.

00:07:25.560 | So strategy is what is your asset allocation

00:07:30.500 | between cash, bonds, stocks, maybe real estate?

00:07:35.500 | And then asset location, which is,

00:07:40.500 | something having to do with taxes,

00:07:44.580 | where some things work better

00:07:46.260 | in a pre-tax retirement account, like a 401(k),

00:07:50.520 | and other things work better, say,

00:07:52.380 | in a tax-free account, like a Roth account.

00:07:56.300 | I'm not talking about Alan, but a Roth account.

00:07:59.980 | By the way, did you know that person

00:08:01.700 | who created the Roth account?

00:08:02.860 | Was he a relative?

00:08:05.220 | Michael William Roth, okay.

00:08:06.880 | Did he go to the University of Colorado also?

00:08:10.500 | (laughs)

00:08:11.860 | All right, so, and then last is the investment selection.

00:08:16.620 | So you have your asset allocation

00:08:19.340 | between stocks, bonds, cash, real estate,

00:08:22.040 | and then you have where you're gonna put it,

00:08:24.220 | what type of accounts you're gonna put this in

00:08:25.860 | based on taxes, and then finally,

00:08:28.780 | what are the actual investments you're going to use?

00:08:31.320 | And again, sometimes you're restricted,

00:08:33.240 | like you're in a 401(k),

00:08:34.380 | so these are the only funds you have available to you.

00:08:37.180 | Okay, so those, that's the investment selection portion.

00:08:39.700 | One, two, three.

00:08:40.540 | Last is discipline.

00:08:44.860 | So once you come up, you have the philosophy,

00:08:47.180 | you come up with your asset allocation strategy,

00:08:49.580 | your asset location strategy, you've got your investments,

00:08:53.100 | you're satisfied with everything.

00:08:55.480 | Discipline is the last leg.

00:08:58.820 | You have to do it, you have to get it implemented fully.

00:09:02.220 | I mean, a lot of people come up with strategy,

00:09:04.820 | they just never get it done.

00:09:07.260 | They just never actually implement it.

00:09:09.940 | So you have to implement it fully,

00:09:12.180 | and then you have to regularly maintain it.

00:09:14.880 | For instance, if you wanna have an allocation

00:09:16.640 | that's half in stocks and half in bonds,

00:09:19.260 | well, it's maybe once a year you have to look at it

00:09:22.340 | and decide, okay, I need to maybe sell a little bit of stock

00:09:25.180 | in my 401(k) and buy a little bit of more bonds

00:09:28.060 | to keep it at 50/50, because the stock market went up.

00:09:31.820 | And then a periodic review of where are you going.

00:09:35.220 | In other words, you might be transitioning

00:09:37.140 | from working to retirement,

00:09:39.300 | so maybe you wanna make a change to your asset allocation,

00:09:42.340 | or maybe a change to your asset location,

00:09:44.380 | some change to strategy based on where you are in life.

00:09:47.300 | So that's discipline.

00:09:48.460 | So philosophy, overriding everything,

00:09:52.620 | strategy based on what it is you're going to do

00:09:55.260 | to keep it as simple as possible,

00:09:57.720 | and then you have to implement it and maintain it.

00:10:01.220 | And so asset allocation is really simple, right?

00:10:03.620 | It's stocks, bonds, real estate, and cash.

00:10:06.500 | How much should you have in each one of these?

00:10:08.940 | And the answer is, I don't know.

00:10:11.140 | And as strange as it seems,

00:10:13.020 | if you were talking with me and you said to me,

00:10:15.300 | "Rick, how much do you think I should have

00:10:16.820 | "in stocks and bonds and real estate and cash?"

00:10:18.980 | And I would say, "I don't know, Alan.

00:10:21.000 | "How much do you think you should have

00:10:22.260 | "in stocks, bonds, real estate, and cash?"

00:10:24.420 | Because you've already thought about it.

00:10:27.100 | You've already thought about it.

00:10:28.060 | You say, "Well, I think that I'm pretty good

00:10:29.740 | "with maybe, oh, 50% in stocks

00:10:32.620 | "and maybe 30% in bonds, 10% say in cash,

00:10:36.080 | "and then I want to probably put 10% in real estate."

00:10:38.100 | I said, "Okay, is that something you're able to maintain

00:10:40.580 | "if you did it?"

00:10:41.420 | And Alan says, "Yes, that is."

00:10:43.500 | And I say, "Well, that sounds like it's a good strategy

00:10:45.880 | "to me."

00:10:47.020 | Honestly, in the end, you have to run your own portfolio.

00:10:50.340 | That asset allocation is your asset allocation,

00:10:52.660 | and you have to stick with it with discipline.

00:10:54.560 | So I can't answer for you what your asset allocation should be.

00:10:59.360 | All I can do is help you confirm within your own mind,

00:11:02.940 | because in the end,

00:11:03.780 | it's you sticking with that asset allocation,

00:11:06.140 | which is going to drive 90% of your return

00:11:09.220 | in the very long term.

00:11:10.320 | So whether you should be high in stocks or low in stocks

00:11:17.020 | really doesn't have a lot to do,

00:11:19.060 | believe it or not, with your age.

00:11:21.660 | I have people who I've talked with who are in their 80s.

00:11:24.820 | They have no bonds, 100% stock.

00:11:27.980 | And I have people who I talked with

00:11:29.920 | who may have sold a company in their early 30s.

00:11:34.320 | They don't want stock.

00:11:35.840 | They just want bonds.

00:11:39.280 | Now, I try to talk them into a little bit of stock

00:11:41.280 | for inflation purposes,

00:11:42.280 | but my point is that there are these rules of thumb out there

00:11:45.020 | that you should probably ignore,

00:11:46.680 | like your age and bonds and this and that.

00:11:50.400 | Okay, if you have nothing else to go on,

00:11:53.080 | that's not a bad place to start.

00:11:54.600 | But in reality, because we're Bogleheads,

00:11:56.360 | we can give it a little bit more thought than that

00:11:59.540 | and say, okay, well, what is it that I need

00:12:02.060 | for the long term?

00:12:02.900 | What's my horizon?

00:12:04.180 | Is the money gonna go to the kids when I die?

00:12:06.500 | Is that what I want?

00:12:07.420 | What's my goal?

00:12:08.780 | A lot of the things Jesse was talking about.

00:12:12.620 | So you gotta come up with

00:12:14.100 | what's an appropriate asset allocation.

00:12:15.940 | But the most important thing,

00:12:17.960 | the most important thing on your asset allocation

00:12:21.140 | is staying the course, whatever it is.

00:12:24.340 | If you decide to be 80% in stocks,

00:12:26.260 | no matter what, you're gonna be 80% in stocks.

00:12:29.280 | The market goes down, you make yourself 80% in stock again.

00:12:33.440 | If the market goes way up,

00:12:35.000 | you might take a little bit off the table.

00:12:37.380 | Keeping your asset allocation is the most important thing

00:12:40.200 | that you do as far as maintaining your portfolio.

00:12:42.680 | You have to be comfortable with your asset allocation

00:12:45.080 | enough to stick with it during all market conditions.

00:12:49.000 | So what about your investments?

00:12:51.880 | Alan already talked about this,

00:12:53.480 | and I'm gonna hit it one more time.

00:12:56.320 | If you can, a simple portfolio is going to consist of

00:13:00.920 | probably some money market funds

00:13:02.440 | or some treasury bills for your cash reserve.

00:13:05.880 | Now a cash reserve, in my opinion,

00:13:07.780 | is probably more of a dollar amount than a percentage.

00:13:11.120 | So you maybe need one year's worth of living expenses,

00:13:14.640 | or maybe you need $100,000.

00:13:18.000 | You have your cash reserve,

00:13:19.560 | and it's usually not so much a percentage

00:13:22.560 | as it is a dollar amount.

00:13:25.000 | The next thing is, how much do you want in bonds

00:13:27.260 | or fixed income?

00:13:28.100 | By the way, it doesn't have to be bonds.

00:13:30.100 | If you wanna do a laddered portfolio

00:13:32.260 | or certificates of deposit, that's perfectly fine.

00:13:34.660 | That's a fixed income, that's a bond.

00:13:36.740 | If you wanna buy individual treasury bonds

00:13:38.500 | or treasury inflation protected securities,

00:13:40.760 | that's perfectly fine.

00:13:42.420 | If you wanna do a simple thing and buy a bond index fund,

00:13:45.140 | that's perfectly fine.

00:13:46.540 | But the next level is,

00:13:47.420 | how much are you going to have in bonds?

00:13:49.180 | And as I said, some people don't have any bonds,

00:13:51.620 | and that's perfectly fine if that works for you.

00:13:54.320 | And the next thing we get into is stock,

00:13:59.300 | and here, as Alan pointed out,

00:14:01.380 | really, I believe a U.S. stock market fund is perfect.

00:14:06.380 | Covers all the stocks in the United States.

00:14:10.480 | You don't need anything more.

00:14:11.940 | You're gonna do just fine.

00:14:13.900 | And the fees are very low,

00:14:15.700 | and they work great, by the way, in a taxable account

00:14:17.660 | because the dividends are low.

00:14:19.820 | International stocks, again, a total international fund.

00:14:23.820 | Now, these are all the stocks

00:14:24.780 | that are outside the United States,

00:14:26.220 | and there's more of them

00:14:27.060 | than there are stocks in the United States.

00:14:29.540 | Little bit of a diversification benefit

00:14:31.300 | because they're not traded in the U.S. dollars.

00:14:33.860 | They're traded in foreign,

00:14:35.860 | whatever the native currencies are.

00:14:37.240 | Now, when you buy 'em in a fund,

00:14:38.260 | you don't have to worry about any of this,

00:14:40.360 | but you get some diversification away from the U.S. dollar.

00:14:43.020 | And in addition to that,

00:14:44.260 | if you look at the underlying industry groups

00:14:46.060 | that make up the international market,

00:14:47.980 | they are different than the U.S. market.

00:14:50.180 | The U.S. market is very heavy tech.

00:14:52.300 | Outside the U.S., it's more materials,

00:14:54.700 | industrials, energy, things like that.

00:14:58.420 | So you can get some industry diversification

00:15:00.340 | by being an international.

00:15:01.480 | But just buy an index fund.

00:15:03.620 | Total stock market index fund.

00:15:05.780 | Now, in your 401(k), you can even make it easier,

00:15:10.140 | or if you have an IRA,

00:15:11.140 | you could buy something called a balanced fund

00:15:14.280 | or a target retirement fund, which is a balanced fund.

00:15:16.900 | And all they are is simply,

00:15:18.180 | if you're using an index fund,

00:15:19.720 | like a balanced index fund

00:15:21.420 | or a target retirement index fund,

00:15:25.020 | the mix is already there for you.

00:15:26.500 | You don't have to do anything.

00:15:27.780 | You just look under the hood and say,

00:15:29.060 | okay, what's the percentage in stocks and bonds

00:15:32.140 | in this balanced fund?

00:15:34.720 | And is that what you want?

00:15:35.880 | Well, then you buy that fund.

00:15:37.060 | They're very inexpensive.

00:15:38.540 | Say something like a Vanguard target retirement fund

00:15:42.900 | or an iShare target retirement fund.

00:15:45.580 | Fidelity also has target retirement index funds

00:15:50.580 | is what you're looking for.

00:15:52.480 | Very low cost.

00:15:53.300 | So that makes it really, really simple

00:15:55.320 | in your retirement account.

00:15:56.260 | Now, it may not work so well in your taxable account

00:15:58.260 | because these things do have a tendency

00:16:00.300 | to spin off sometimes some taxes.

00:16:02.820 | So maybe you wanna do it a little different

00:16:04.220 | in your taxable account,

00:16:05.660 | which gets me to the last thing.

00:16:07.180 | And we're gonna have a session on this at the end.

00:16:10.220 | Taxes.

00:16:11.300 | And this is where the asset location idea comes in.

00:16:14.860 | If you're working and your taxes are high,

00:16:17.260 | you're paying a lot of money to the government every year,

00:16:19.940 | you probably don't wanna be generating

00:16:21.420 | a lot of taxable income in your taxable account.

00:16:24.680 | So what you might wanna do is put in your taxable account

00:16:28.160 | things like the US total stock market,

00:16:30.880 | whereas maybe your international fund,

00:16:33.100 | you would put into your Roth account,

00:16:34.860 | which has a much higher dividend than US stocks,

00:16:37.580 | or the bonds you're gonna put into your retirement account.

00:16:39.780 | So it's called asset location.

00:16:41.780 | So in other words, you know what your asset allocation is

00:16:44.700 | between stocks, bonds, and cash.

00:16:47.300 | Question is, where are you gonna put the stocks?

00:16:49.980 | Where are you gonna put the US stocks?

00:16:51.380 | Where are you gonna put the international stocks?

00:16:53.400 | What if you bought some real estate,

00:16:54.860 | where would you put that?

00:16:56.460 | And if you had bonds, where would you put that?

00:16:58.660 | And a lot of this is driven by taxes.

00:17:01.340 | So you've got these different buckets,

00:17:02.820 | these different types of accounts.

00:17:05.020 | Tax-deferred, like a 401(k), IRA, 403(b), 457.

00:17:10.340 | Tax-free is your Roth, HSA, and even 529 plans.

00:17:14.940 | And then you've got your taxable account.

00:17:16.500 | So again, where you put these individual investments,

00:17:19.480 | a lot of times can be driven by taxes.

00:17:23.860 | And so it's called asset location.

00:17:25.980 | And you can save a lot of money if you do it well.

00:17:28.480 | So then finally, maintain your portfolio.

00:17:32.140 | Again, you're gonna have to implement it fully.

00:17:34.220 | Once you've got your plan, implement it fully.

00:17:37.460 | Automate whenever you can.

00:17:39.380 | Like I told you earlier, automate, automate,

00:17:41.740 | automate, automate, automate.

00:17:43.060 | So you don't have to think about this, it's already done.

00:17:45.700 | Have the 401(k) money, go directly out of your paycheck,

00:17:48.300 | which it will, go right into the account

00:17:50.380 | that you wanted into the fund you wanted into,

00:17:51.900 | which it will, automate everything.

00:17:54.540 | Rebalance occasionally, maybe once a year.

00:17:57.860 | There's no rocket science to when you should get it back

00:17:59.900 | to your mix between stocks and bonds.

00:18:02.860 | Once a year is probably fine.

00:18:05.100 | And tax-managed, because taxes are an expense.

00:18:08.540 | And finally, reaffirm periodically.

00:18:11.380 | What do I mean by reaffirm?

00:18:13.580 | Come to another Bogleheads meeting, once a year.

00:18:16.380 | Reaffirm all of this.

00:18:18.620 | A lot of people have been coming for a long,

00:18:21.860 | to these meetings for a long, long, long time.

00:18:25.380 | And a lot of it is reaffirming what they already know,

00:18:27.820 | but they still come.

00:18:29.300 | How many people have been to

00:18:30.260 | more than one Boglehead meeting already?

00:18:33.380 | Yeah, I think if we go to the other room next door,

00:18:35.180 | there's gonna even be more.

00:18:37.060 | So the bottom line is, it's just reaffirming,

00:18:39.340 | validating what you're doing.

00:18:40.860 | And that's good, that's just reaffirm periodically.

00:18:43.420 | And of course, stay the course.

00:18:46.780 | Once you've got your strategy,

00:18:48.340 | and once you've got the philosophy,

00:18:51.020 | you've got your strategy, you've got your discipline,

00:18:53.820 | stay the course.

00:18:55.700 | That was the name of Jack Bogle's last book.

00:18:59.140 | Great book, by the way, if you get a chance.

00:19:00.500 | It's kind of his whole life all wrapped up into one book.

00:19:03.900 | Thank you, and now I'm gonna ask Alan to come back up.

00:19:07.780 | (audience applauding)

00:19:10.940 | [BLANK_AUDIO]

Bogleheads University 101 2024 Building Your Portfolio with Rick Ferri

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