Bogleheads University 501 2024 “The Center Lane” with Adam Grossman

00:00:00.000 | (audience applauding)

00:00:03.160 | Our next speaker is gonna be Adam Grossman.

00:00:09.480 | If you don't know who Adam Grossman is,

00:00:11.120 | you may not be following along very well

00:00:13.680 | on the website started not that long ago

00:00:16.640 | by Jonathan Clements, Humble Dollar.

00:00:19.480 | But he is a regular on that website.

00:00:21.360 | He's also the founder of Mayport,

00:00:22.900 | a flat fee wealth management firm.

00:00:25.320 | And he's gonna be talking to us today

00:00:26.960 | about an important concept that he calls the center lane.

00:00:31.960 | Now we'll be doing the same thing with questions.

00:00:34.260 | He's gonna try to save a few minutes for us

00:00:36.140 | at the end to ask questions,

00:00:37.360 | but if not, catch him afterward

00:00:39.520 | and ask your question directly to him.

00:00:41.920 | All right, he'll go out in the hallway

00:00:43.360 | and you can step out there and ask question afterward

00:00:45.440 | if you don't get it answered.

00:00:46.680 | But let's give it up for Adam Grossman.

00:00:48.640 | - Great, thank you, Jim, for that kind introduction.

00:00:52.680 | And thank you all for being here.

00:00:54.080 | I feel like I'm among family,

00:00:56.280 | except that one difference is that I don't disagree

00:00:59.320 | with anything that anybody else has said.

00:01:01.720 | So I think there will be some overlap

00:01:04.240 | in a lot of the topics

00:01:05.440 | that Christine and Jonathan talked about,

00:01:07.840 | but maybe a little bit of a different perspective.

00:01:10.680 | So the title of the session is the center lane.

00:01:14.040 | And what do I mean by that?

00:01:16.160 | When I first started in the industry on the first day,

00:01:19.640 | the boss of the firm sat me down

00:01:21.920 | and he talked to me about how the firm worked

00:01:25.100 | with the clients.

00:01:25.940 | And what I was expecting was formulas,

00:01:29.620 | investment frameworks, growth versus value,

00:01:32.400 | irrevocable trust, nuts and bolts, things like that.

00:01:36.500 | But instead, the first thing that he talked about

00:01:39.060 | was the recency bias.

00:01:41.160 | And I was kind of floored.

00:01:42.200 | I thought, I've spent all this time in school,

00:01:44.840 | all these textbooks,

00:01:45.800 | and the first thing that he wants to teach me

00:01:47.800 | as a new person is about recency bias, behavioral concept.

00:01:52.440 | And that's when a light bulb went on for me.

00:01:55.280 | I think probably everyone in this room appreciates

00:01:57.280 | that there are two answers to every financial question.

00:02:00.200 | There's what the calculator says,

00:02:02.360 | and then there's how you feel about it.

00:02:04.720 | But threading the needle is not always so easy.

00:02:07.880 | And in a lot of cases,

00:02:10.000 | what we're dealing with are situations

00:02:12.040 | where we have some data, but not complete data.

00:02:15.960 | And so how do you make a decision in situations like that?

00:02:19.840 | And so to get started,

00:02:21.840 | what I'd like to talk about is a mistake

00:02:25.040 | that I once made.

00:02:26.180 | So one year I was on vacation with my family,

00:02:31.120 | and this is the scene of the crime here.

00:02:34.440 | So we're in Florida, as you can see,

00:02:36.800 | and we're heading down the highway.

00:02:38.760 | We're looking for a place for lunch.

00:02:40.520 | And I knew which exit it was, and I saw it coming up,

00:02:43.400 | so I got in the right lane to get off.

00:02:46.020 | But as you can see there,

00:02:47.720 | the kind of the yellow part, if you can make it out,

00:02:50.040 | the exit was on the left.

00:02:51.180 | So needless to say, I missed the exit.

00:02:54.600 | Needless to say, faced recriminations from my family

00:02:58.600 | for spending, I don't know how much more time

00:03:00.600 | than the sort of sweltering heat and the traffic in Miami.

00:03:04.860 | But as I was sitting there hearing those recriminations,

00:03:09.040 | I started thinking about,

00:03:09.880 | well, if I had been in the center lane,

00:03:11.680 | then that actually would have been the better approach,

00:03:13.720 | because I would have hedged my bets,

00:03:15.540 | and whether the exit had been on the left,

00:03:18.100 | which is unusual, but it does happen,

00:03:19.620 | or it had been on the right like usual,

00:03:22.040 | then I wouldn't have missed my exit.

00:03:23.960 | And so that's when I started thinking first

00:03:26.120 | about this idea of the center lane, of hedging your bets.

00:03:29.640 | But if you think about it,

00:03:31.240 | that doesn't really seem like a rigorous way

00:03:34.240 | to make financial decisions, right?

00:03:36.100 | I mean, oh, let me hedge my bets, split the difference.

00:03:40.160 | That doesn't seem optimal, right?

00:03:42.360 | That doesn't seem like the right way to approach things.

00:03:46.580 | But as I thought more about it over the years,

00:03:48.880 | it occurred to me that maybe there is a way

00:03:50.840 | to use this in a helpful way.

00:03:54.200 | So, you know, what is the importance of the center lane?

00:03:58.840 | You know, you might think, well, gosh,

00:04:01.560 | if there's a way to optimize,

00:04:03.120 | isn't the optimal answer the better way, right?

00:04:06.400 | You know, shouldn't I at least try to optimize

00:04:09.300 | rather than just, you know, splitting the difference

00:04:12.640 | or going with some middle road?

00:04:15.800 | So let's look at the importance of the center lane.

00:04:18.980 | Does anyone know who this fellow is?

00:04:23.400 | Anyone identify him?

00:04:24.960 | Okay, not surprising.

00:04:27.120 | His name is Ronald Wayne, and he was a co-founder of Apple

00:04:30.680 | along with Steve Jobs and Steve Wozniak.

00:04:33.640 | But the reason why no one recognized him,

00:04:36.080 | we don't talk about him a lot, he's still alive,

00:04:38.960 | is because he sold out after just 12 days.

00:04:43.360 | The reasons are a little bit lost to history.

00:04:46.080 | Apparently, one explanation is that

00:04:48.600 | Steve Jobs just made him nervous.

00:04:50.840 | He's like, how can I work with this guy?

00:04:53.660 | And so he sold out, and you can look this up on Wikipedia,

00:04:58.660 | I don't think anyone debates it,

00:05:00.000 | he was paid $2,300 for his shares.

00:05:03.200 | Today, Apple, as you know, worth more than three trillion.

00:05:07.300 | So you could look at this and say,

00:05:09.240 | well, that's probably one of the biggest financial mistakes

00:05:12.160 | anyone has ever made, ever.

00:05:13.840 | But on the other hand, you'd say,

00:05:16.360 | well, gosh, that's with the benefit of hindsight.

00:05:19.120 | And Wayne himself, in an interview, once said,

00:05:22.320 | nobody could have anticipated how big Apple would become.

00:05:25.160 | And that's true, hindsight can be unkind.

00:05:27.720 | But I would like to argue that even Ronald Wayne,

00:05:31.720 | with the information that he had available to him

00:05:34.440 | at the time when they were just getting started,

00:05:36.320 | he could have made a different decision.

00:05:38.320 | So he started with 10%.

00:05:40.600 | If Steve Jobs made him nervous, he could have said,

00:05:42.400 | well, I'm gonna go down at 5%, or I'll go down to 1%,

00:05:45.960 | or I need to change the working relationship here,

00:05:48.600 | or the corporate structure,

00:05:50.520 | so that I can still remain a shareholder

00:05:53.760 | and potentially benefit,

00:05:55.800 | but not have to deal with whatever the dynamics were

00:05:59.040 | in the office.

00:05:59.880 | And so that's what I mean by the center lane.

00:06:01.640 | So the Wayne case is extreme,

00:06:04.600 | but these kinds of things happen all the time.

00:06:06.360 | Let's look at another example.

00:06:07.840 | This is a map of Fort Lauderdale.

00:06:11.200 | And if you can see in the upper right there,

00:06:13.500 | there's that area which is just sort of trees and wilderness.

00:06:17.840 | And that's known as Bonnet House.

00:06:19.680 | It's a very nice 35-acre parcel in Fort Lauderdale.

00:06:24.680 | And it used to be the winter home of the Bartlett family.

00:06:28.640 | A woman named Evelyn Bartlett lived there with her husband

00:06:32.680 | from the 1930s.

00:06:34.480 | And by the 1980s, though, she was widowed,

00:06:38.080 | and the property obviously had ballooned in value,

00:06:41.480 | and she had a hard time keeping up with the real estate taxes.

00:06:44.380 | So she went to the city, and she said,

00:06:46.160 | look, I'm having a hard time with the taxes.

00:06:50.240 | I will give you this property in my will,

00:06:52.760 | but in exchange, can I live here tax-free

00:06:55.920 | for the rest of my life?

00:06:57.840 | So the city took one look at the property,

00:07:00.240 | and they took one look at Mrs. Bartlett,

00:07:02.080 | who at the time was 95 years old,

00:07:04.660 | and they immediately accepted.

00:07:09.380 | So what happened?

00:07:11.020 | Mrs. Bartlett went on to live until the age of 109.

00:07:16.280 | And so apparently, according to accounts,

00:07:20.160 | because the property was so valuable, it was enormous,

00:07:23.400 | she avoided tens of millions of dollars in property taxes.

00:07:26.880 | And so Mrs. Bartlett got the better end of the deal.

00:07:30.040 | And so this is another example,

00:07:32.880 | kind of like the Ronald Wayne case.

00:07:34.600 | Could this city have done something different?

00:07:37.640 | What her proposal was, I don't want to pay any taxes at all,

00:07:40.400 | and they accepted it.

00:07:41.640 | What they could have done is to say,

00:07:43.560 | well, I don't know, you're 95,

00:07:45.200 | but maybe you've got some time left here,

00:07:48.960 | and so we'll make a deal with you.

00:07:51.160 | We'll cut your taxes by 30% or 50%.

00:07:54.360 | In other words, it didn't need to be a binary choice.

00:07:56.520 | It didn't need to be all or nothing.

00:07:59.200 | So as I said, these examples occur all the time.

00:08:03.120 | So we'll look at one more.

00:08:04.420 | I have a friend, his name is Danny,

00:08:07.600 | and he's authorized me to use his first name

00:08:10.160 | and not his last name.

00:08:11.240 | He's a smart guy.

00:08:13.320 | He went to Harvard.

00:08:14.400 | He has more than one degree from Harvard,

00:08:16.480 | and now he's an economics professor.

00:08:18.360 | But in the winter of his sophomore year,

00:08:21.360 | he made a financial mistake.

00:08:23.280 | So a group of his friends were putting money

00:08:26.320 | into a startup that another guy in their dorm

00:08:29.600 | had just launched.

00:08:33.240 | You may see where I'm going with this.

00:08:35.760 | And Danny took one look at it,

00:08:38.400 | and that's, he said, this is the dumbest idea in the world.

00:08:41.720 | And so he did not invest.

00:08:44.160 | The classmate, of course, Mark Zuckerberg.

00:08:48.720 | And so Danny and I have talked about this over the years.

00:08:52.360 | And as an economist, he's pretty thoughtful about it.

00:08:55.360 | And sure, we have the same problem as with Ronald Wayne.

00:09:00.360 | There's the hindsight problem.

00:09:03.200 | But I think Danny agrees

00:09:04.800 | that he could have made a different decision.

00:09:07.680 | I don't know how much savings he had as a college sophomore,

00:09:09.880 | but he could have said, well, this seems dumb to me,

00:09:13.840 | but I don't know, other people might like it,

00:09:16.080 | so maybe I'll put something into it.

00:09:18.720 | So again, doesn't need to be a binary decision.

00:09:22.000 | He could have taken a middle path.

00:09:23.440 | That's what I call the center lane.

00:09:25.880 | And so what exactly does this mean?

00:09:30.400 | If you were Ronald Wayne or the city of Fort Lauderdale

00:09:33.560 | or my friend Danny, what could you have done?

00:09:37.280 | What are the alternatives exactly?

00:09:40.280 | So I keep referring to splitting the difference.

00:09:42.920 | And is that the only answer?

00:09:45.640 | And so I think there's a distinction to be made

00:09:47.560 | when you're making financial decisions,

00:09:49.360 | which is that there are some decisions

00:09:52.040 | where there really is no data to go on.

00:09:54.760 | There is no logical basis

00:09:57.760 | on which to make a determination.

00:10:00.960 | So in this example here,

00:10:03.400 | you're splitting the last piece of pie.

00:10:05.360 | In my house with all boys, it's not always fair

00:10:08.440 | how the division goes,

00:10:09.480 | but that's the sort of situation where you'd say,

00:10:12.720 | well, just split it evenly.

00:10:15.320 | But there are lots of other cases,

00:10:16.920 | and I think this applies to a lot of financial decisions

00:10:20.080 | where you could say, well, it shouldn't just be 50/50.

00:10:22.600 | So splitting the difference

00:10:23.960 | really is not the right way to go.

00:10:27.640 | And what are some financial decisions

00:10:30.200 | that are sort of like splitting the pie?

00:10:32.480 | It might be, say you're considering a Roth conversion

00:10:35.680 | and you do the math and you say,

00:10:37.360 | well, my tax rate today

00:10:39.840 | is probably gonna be pretty similar

00:10:41.520 | to my tax rate in the future.

00:10:43.280 | And so it doesn't really argue strongly

00:10:46.800 | one way or the other.

00:10:48.040 | And so in that case, you might just split the difference.

00:10:50.400 | But there are other cases where you say,

00:10:52.320 | well, there is some data to go on

00:10:54.040 | and let's use a different approach.

00:10:56.200 | So this book was published last year.

00:11:00.200 | I'm not sure if you're familiar with Cass Sunstein.

00:11:02.160 | He's an academic.

00:11:03.200 | He's actually co-authored

00:11:04.560 | with a number of pretty well-known folks,

00:11:07.440 | including Danny Kahneman in behavioral finance.

00:11:10.560 | And so in this book, he offers one suggestion.

00:11:14.960 | He talks about when you're trying to weigh a decision,

00:11:18.720 | he says, weigh the cost of being wrong

00:11:21.000 | versus the benefit of being right.

00:11:23.080 | The cost of being wrong against the benefit of being right.

00:11:26.760 | And those are both easier to kind of get your arms around

00:11:31.120 | than just simply trying to predict the future

00:11:33.640 | with nothing else to go on.

00:11:36.000 | Because at least you can say,

00:11:37.880 | if you think back to whether it was Ronald Wayne

00:11:40.600 | or Danny or anyone else,

00:11:42.120 | you could say, well, let me try to put some numbers on this.

00:11:45.080 | And so suppose you were Ronald Wayne.

00:11:47.040 | He looked at Apple and he said,

00:11:49.080 | okay, well, I see the computer error is starting.

00:11:52.080 | This could be big.

00:11:53.280 | Obviously, a company worth trillions,

00:11:56.920 | no one ever could have estimated that.

00:11:58.880 | But he could have said,

00:12:00.400 | what if the company is worth 500,000

00:12:03.520 | or even a million at some point?

00:12:06.120 | That wouldn't have been an unreasonable guess.

00:12:08.840 | And then he could have done the math and said,

00:12:10.040 | well, what will my 10% share be worth?

00:12:12.520 | And it probably would have come out to way more

00:12:15.440 | than the 2,300 that he received.

00:12:17.840 | So that's one approach that you can take is to just say,

00:12:21.240 | well, let me put some numbers on this.

00:12:23.640 | A similar example, when it comes to Facebook,

00:12:26.800 | I remember talking to a pretty well-known venture capitalist

00:12:29.920 | was in 2005, so just a year after they got started.

00:12:34.360 | But Facebook, if you remember,

00:12:35.440 | it got off to a pretty quick start.

00:12:37.200 | And he looked at it and he said,

00:12:39.200 | yeah, based on other types of deals and IPOs,

00:12:42.040 | he said, I think the company would be worth 300 million.

00:12:45.160 | And if I'm doing my math right, I think he was way off.

00:12:48.920 | He was off by a factor of 5,000.

00:12:50.800 | So Facebook's now worth more than 1 trillion.

00:12:53.560 | But if you had done that math,

00:12:57.520 | and even though he was way, way off,

00:13:00.320 | it would have led you to a decision

00:13:01.960 | that was in the right direction.

00:13:03.080 | And so I think that this is an important idea,

00:13:06.320 | which is just to say, well, what's the cost of being wrong

00:13:10.200 | versus the benefit of being right?

00:13:12.720 | And often with investments,

00:13:15.200 | especially as the previous speakers were talking about,

00:13:17.560 | if you have a diversified portfolio,

00:13:19.880 | you're not talking about putting your entire net worth

00:13:23.360 | into something which is unproven.

00:13:25.480 | You're talking about making some bet.

00:13:27.960 | And hopefully it's a reasonable size bet.

00:13:32.000 | But the key is to think about,

00:13:35.160 | well, what would be the upside?

00:13:36.680 | And not just to dismiss it, like Danny and say,

00:13:39.280 | well, that's the dumbest idea in the world.

00:13:41.160 | And so therefore it's gotta be worth zero.

00:13:43.440 | Okay, let's look at another framework.

00:13:47.160 | Another approach,

00:13:48.000 | if you're thinking about a financial decision,

00:13:50.300 | is to say, well, how much do I need this to work?

00:13:54.080 | So in the prior slide,

00:13:56.160 | what we were looking at is to think about the upside.

00:13:59.600 | Now we wanna also think about the downside, right?

00:14:02.160 | And risk management.

00:14:03.380 | And so if you think about it, in this case,

00:14:07.440 | this person here really needs this bridge to hold.

00:14:11.260 | And so let's put that in financial terms.

00:14:15.160 | Suppose you're trying to make an asset allocation decision.

00:14:18.320 | And just as an illustration, let's imagine two people.

00:14:22.800 | One is Bill Gates and one is more like an average person.

00:14:25.800 | So when it comes to Bill Gates,

00:14:29.360 | he could have it all in socks

00:14:30.960 | or he could have it all under his mattress, right?

00:14:33.920 | It wouldn't matter either way.

00:14:35.920 | There are costs to being at either extreme,

00:14:39.280 | but it wouldn't hurt him.

00:14:41.340 | But if you look at the sort of more average person,

00:14:44.660 | suppose it's somebody who doesn't have a lot of savings

00:14:47.280 | and it's a young person.

00:14:48.640 | They just have some cash in the bank

00:14:50.480 | and they're looking to put a down payment on a home.

00:14:53.820 | Well, in that case,

00:14:55.640 | that probably should remain entirely in cash.

00:14:59.440 | There's no reason that that person

00:15:01.340 | should be investing in the stock market

00:15:03.100 | because the risk of loss is too extreme.

00:15:07.160 | And if they need to put the down payment down anytime soon,

00:15:10.460 | then that's just an intolerable loss.

00:15:13.400 | And so I think that's another filter,

00:15:15.080 | which is how much does this decision matter?

00:15:19.440 | Okay, that's the theory, but how do we apply this?

00:15:24.160 | Let's look in some more detail

00:15:25.720 | at some common financial questions.

00:15:28.160 | We'll start with the Boglehead.

00:15:31.540 | I don't know if you saw the article

00:15:33.760 | that Mike Piper published.

00:15:35.560 | I believe it was last year.

00:15:37.120 | And he compared asset allocation to making a fruit salad.

00:15:40.560 | And if you haven't read this, it's a classic.

00:15:42.260 | It's fantastic.

00:15:43.140 | And he says, if you put in more blueberries,

00:15:46.120 | he says, nothing magical happens,

00:15:47.680 | nor is there any disaster.

00:15:49.120 | And it's a great way of describing diversification.

00:15:52.400 | And I think that people really beat each other up

00:15:55.540 | over a lot of decisions.

00:15:56.800 | And we saw it in the prior discussion

00:15:59.160 | about should I have 20% in international

00:16:02.840 | or should I have 30%?

00:16:04.440 | Some people say, well, have the market weight

00:16:07.280 | in international, 40 or 50%.

00:16:09.660 | Or how about growth versus value?

00:16:11.920 | Should I have a tilt there?

00:16:13.000 | Does it matter?

00:16:14.200 | Is there gonna be mean reversion?

00:16:15.680 | And I think that people, they beat each other up about this

00:16:19.720 | and they kind of go round and round.

00:16:21.720 | But if you go back to Cass Sunstein,

00:16:25.040 | just think about what would be the cost of being wrong?

00:16:28.280 | Or if you wanna go back to my old boss,

00:16:31.160 | just think about the importance

00:16:34.000 | or I should say the impact of recency bias.

00:16:37.120 | It's really powerful.

00:16:38.120 | And in recent years, I don't know how many times

00:16:40.240 | people have said, why don't I just put it all

00:16:42.920 | on the S&P 500?

00:16:44.360 | Why am I messing around with any of this other stuff?

00:16:46.800 | It looks like that's just the simple,

00:16:48.760 | that's the easy button, just put all on the S&P 500.

00:16:51.440 | And so I think it is, I would echo what Christine had said

00:16:56.440 | in her discussions with other advisors

00:16:59.760 | that it is the hardest thing to convince people

00:17:04.000 | to keep putting money into something

00:17:05.680 | which has just been practically a perennial loser,

00:17:07.920 | whether it's value stocks or international.

00:17:10.320 | But my view and sort of the center lane approach

00:17:14.160 | would be to say, well, don't go too far out on a limb

00:17:18.000 | in any one direction, right?

00:17:19.560 | And I think the recency bias is a good caution

00:17:22.720 | for everybody because if you decide,

00:17:25.920 | well, you know what, forget everything else,

00:17:27.480 | I'll just put it all on the S&P 500.

00:17:30.160 | Well, things can change and it's better to remain balanced.

00:17:34.420 | Another perspective on asset allocation

00:17:38.080 | comes from Morgan Housel, he described an old coach

00:17:41.440 | and he said, 1/3 of your days should feel good,

00:17:44.160 | 1/3 should feel okay and 1/3 should feel terrible.

00:17:48.000 | He says, if it's always terrible, you're doing it wrong,

00:17:49.720 | if it's always great, then also you're not doing it right.

00:17:53.400 | And I think that's also another important perspective

00:17:57.160 | on diversification, right?

00:17:58.640 | Which is that there's the expression that certainly

00:18:02.560 | from the financial advisor's perspective

00:18:04.880 | that having a diversified portfolio

00:18:07.000 | means that you're always apologizing for something.

00:18:09.840 | Every year it's something different

00:18:11.080 | that you have to apologize for,

00:18:12.120 | but I think whether you're working with an advisor

00:18:14.120 | or managing your own portfolio

00:18:16.400 | and just maybe apologizing to your own spouse or to yourself

00:18:20.920 | the idea is just keep going with the diversification

00:18:24.420 | because if you become too convinced in any one direction,

00:18:28.400 | that's often when things turn around.

00:18:30.460 | We'll look at a few more cases.

00:18:34.620 | So how could you apply the center lane approach

00:18:39.080 | to the sort of magnificent seven situation?

00:18:42.160 | So actually Christine asked about direct indexing.

00:18:47.160 | And so this is something that has grown in popularity.

00:18:50.640 | Vanguard, I believe it was Vanguard's first

00:18:52.720 | and only acquisition so far in 50 years

00:18:56.160 | was to acquire a direct indexing company.

00:18:58.480 | And so I think there are definitely costs and complexity

00:19:03.480 | which were discussed, but there are also some benefits.

00:19:06.480 | There can be a tax benefit.

00:19:08.440 | It can allow you to tilt your portfolio

00:19:10.920 | or to have screens in different ways.

00:19:13.140 | If you wanted to include the S&P 500

00:19:16.440 | minus the tobacco companies,

00:19:18.440 | you could have the S&P 497 or 98

00:19:22.320 | and that might suit your values better.

00:19:24.800 | So there are reasons why direct indexing can matter

00:19:29.200 | or it can be valuable, but we shouldn't view it

00:19:32.960 | as something that we feel that we shouldn't do

00:19:38.640 | right, I mean, we're all indexing diehards,

00:19:41.840 | but at the end of the day, it's not a religion.

00:19:44.880 | It's not our spouse.

00:19:46.020 | We're not cheating if we say, okay,

00:19:48.240 | well, we'll do something that's a little bit different

00:19:50.920 | in addition to a kind of core portfolio

00:19:53.440 | that's built on indexing.

00:19:55.320 | And so I think that's another way in which you can say,

00:19:57.760 | well, I can make a balanced decision here.

00:20:00.220 | We'll look at just a few more cases.

00:20:03.560 | This one of my favorite cartoons is a little hard to read,

00:20:07.160 | but it's basically showing,

00:20:08.640 | it's the perspective of a New Yorker

00:20:10.620 | and their perspective on the rest of the world.

00:20:13.100 | And so you can see beyond the Hudson River to them,

00:20:16.840 | it's sort of like, then the next thing is the Pacific Ocean

00:20:19.320 | and then China and Japan.

00:20:21.180 | And I think what this illustrates is that,

00:20:25.000 | and Jonathan said this in the previous session also,

00:20:28.160 | that the question of international diversification

00:20:31.560 | is often an active decision.

00:20:34.360 | And so many of us feel like,

00:20:37.200 | okay, well, let's just have the market wait.

00:20:39.000 | And that actually is the Vanguard view.

00:20:41.760 | Jack Bogle himself though, personally,

00:20:44.120 | always said that his own portfolio was 100% domestic.

00:20:47.680 | He said, what do I need the rest of the world for?

00:20:49.920 | The S&P 500 is perfectly fine,

00:20:51.920 | or the total market is totally sufficient.

00:20:54.580 | And I think this is another area

00:20:57.400 | in which it's important to take a balanced view

00:20:59.960 | and to say, well, there are reasons

00:21:02.560 | to not be home biased, but there are also reasons

00:21:06.320 | why maybe because my bills are in dollars,

00:21:09.820 | I do wanna have a portfolio

00:21:11.720 | which is biased toward domestic stocks.

00:21:14.680 | And so again, there's no one right answer here.

00:21:18.120 | And I don't think home bias is a crime.

00:21:20.980 | Global market rate waiting

00:21:22.600 | is also not necessarily right or wrong.

00:21:25.520 | We'll look at just a few more examples.

00:21:30.160 | This here is a poll that I did a little while back.

00:21:34.220 | And I asked, is the total market bond fund,

00:21:37.240 | I said BND specifically, is that sufficient?

00:21:40.400 | Is that sort of the perfect bond portfolio?

00:21:43.560 | And here again, this is another area

00:21:47.640 | in which I don't disagree with anything anyone else said.

00:21:50.440 | What Jonathan described and Christine also added to

00:21:54.320 | is to say, well, don't just hold a total bond fund.

00:21:57.640 | And you can see that three quarters of people said,

00:22:00.200 | don't do that, and I would agree.

00:22:02.440 | You wanna break it up a little bit, right?

00:22:04.740 | Because there are different types of bonds,

00:22:08.400 | government versus corporate, there's different durations,

00:22:11.700 | and they behave differently in 2022, we saw that.

00:22:15.480 | You can also buy individual bonds versus bond funds.

00:22:19.160 | And so, again, this is an area

00:22:21.680 | where people beat each other up,

00:22:22.760 | but is anyone the right or wrong answer?

00:22:25.880 | No, I think that each plays a role in a portfolio.

00:22:30.160 | And so, we're running short on time,

00:22:34.760 | so I will move quickly here.

00:22:37.880 | In terms of the Magnificent Seven,

00:22:40.220 | this is another area where you don't have to have

00:22:43.560 | a sort of left lane, right lane,

00:22:46.080 | binary approach to things.

00:22:48.680 | If you have an individual stock,

00:22:50.920 | which a lot of people do,

00:22:53.120 | even though there's the tendency

00:22:55.560 | to talk about winners and not losers,

00:22:57.280 | but there are a lot of people walking around

00:22:59.240 | who ended up with some Apple shares, some Amazon shares,

00:23:01.960 | and say, I have a huge tax problem.

00:23:04.480 | It doesn't need to be just,

00:23:06.080 | I'll either sell it or I'll hold it,

00:23:08.840 | there are lots of other ways to split the difference.

00:23:11.460 | You could donate some to a donor buys fund,

00:23:13.260 | you could donate some to family members

00:23:15.800 | with lower tax brackets,

00:23:17.060 | you could sell some incrementally,

00:23:18.280 | there are lots of ways to do it.

00:23:19.720 | And so, that's the message really,

00:23:20.960 | is just always try and look for ways

00:23:23.480 | to not go too far out on a limb.

00:23:26.740 | And here, just a quick thought on portfolio construction.

00:23:31.880 | So, the guys on the right,

00:23:33.920 | sort of like a diversified portfolio, right?

00:23:36.160 | The guys on the upper left,

00:23:37.760 | not a lot of diversity there, right?

00:23:40.680 | And not very interesting.

00:23:42.320 | And I think this is another key way

00:23:44.440 | to think about diversification,

00:23:46.240 | is just to say, well, let's not go too far out

00:23:50.760 | in any one direction and let's not be too sure.

00:23:54.120 | I think people lost some faith in bonds,

00:23:56.680 | but there's a value in having bonds.

00:23:58.640 | And so, I'll move to,

00:24:02.280 | I'll skip over this and come to a conclusion.

00:24:05.640 | So,

00:24:06.480 | (audience laughing)

00:24:09.960 | sometimes one of the hardest decisions

00:24:12.600 | is something where you say,

00:24:15.380 | it looks crazy,

00:24:16.680 | and maybe it's like my friend, Danny,

00:24:17.920 | you say, it looks crazy,

00:24:19.400 | or maybe even, it just looks like the most terrible thing.

00:24:23.200 | And I've gone on record criticizing Bitcoin,

00:24:27.360 | I think as early as 2017,

00:24:30.020 | but probably what I should have done was to buy some, right?

00:24:33.800 | But I say that only half jokingly,

00:24:36.680 | which is that, what I've developed over the years

00:24:39.960 | is what I sometimes call the $1,000 rule.

00:24:42.480 | And the number can vary, but the idea is,

00:24:45.160 | well, if you think something is crazy,

00:24:47.680 | but you also feel like you might kick yourself later,

00:24:50.480 | and maybe I'm wrong,

00:24:51.840 | and maybe it actually does turn into something

00:24:53.880 | which is legitimate,

00:24:55.080 | then put something small into it.

00:24:57.200 | Again, going back to the Cass Sunstein theory, right?

00:24:59.560 | Is there a way that I can place a small bet here?

00:25:03.040 | And maybe if it turns out to be right,

00:25:05.760 | then it will really benefit you.

00:25:08.960 | And so, I'm glad my wife isn't in the audience,

00:25:11.520 | so I can admit that the first time I looked at Bitcoin,

00:25:14.440 | it was at $65.

00:25:16.320 | And so now it's, I don't know if it's 50, 60,000 today.

00:25:20.320 | So I wish I had followed the $1,000 rule myself at the time.

00:25:24.640 | I did not.

00:25:26.040 | But I think that's another way

00:25:28.320 | in which you can apply the concept of the center lane.

00:25:32.120 | And so I'll wrap up there.

00:25:34.800 | I appreciate your questions,

00:25:38.360 | and I'm not sure if we'll have time for questions,

00:25:40.100 | but I will be around and happy to speak with folks.

00:25:44.000 | - Okay, let's give Adam a round of applause.

00:25:46.400 | (audience applauds)

00:25:49.400 | The good news is, well, the bad news

00:25:53.760 | is we don't have time for questions.

00:25:54.800 | The good news is like the first three

00:25:56.440 | you answered right at the end.

00:25:57.560 | So it was beautiful.

00:25:58.860 | Good, nice work talking about Bitcoin there at the end.

00:26:01.520 | That was the first question on my docket there.

00:26:04.600 | But thank you so much for your preparation and for your time.

00:26:08.240 | - Thank you.

00:26:09.080 | (audience applauds)

00:26:12.080 | you

Bogleheads University 501 2024 “The Center Lane” with Adam Grossman

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