(audience applauding) - Okay. I'm Karen D'Amato. I came to my first Bogleheads meeting exactly 20 years ago this year. What was then called Diehards 4 in Denver. And I had the chance to come, that one and a few others as a financial journalist at the Wall Street Journal and then at Money Magazine.

And since I've moved on in my career, I've had the honor to come as an individual Boglehead and now as a member of the Bogle Center Board, which has been wonderful. And I work with an amazing group of people. And I'm delighted to be up here moderating with our esteemed panel.

They are authors, financial advisors, educators. Most of them have worn all those hats. They're widely recognized and quoted in the press. I encourage you to read all the details of their bios. Also, everyone here has already spoken or will be speaking at one or more sessions during the conference.

I want to include a particularly warm welcome to Carolyn McClanahan who is here for her first Bogleheads conference. (audience applauding) Carolyn is a physician turned financial planner. She's the founder of Life Planning Partners, and she also dodged a very hazardous hurricane to join us here. So going from your left over Bill Bernstein, Paul Merriman, Carolyn, Alan Roth and Rick Ferry.

We're gonna cover a bunch of topics and I'm gonna work hard to leave 10 minutes at the end for questions. So please write questions on the cards. People will be coming around to collect them. Let's start off with the US stock market. The last year has seen excellent performance when I looked at the Morningstar style box, all sections of the style box are up at least 25% over the past 12 months.

But we've also seen that the market is extremely concentrated with the so-called magnificent seven stocks comprising over 30% of the S&P. And I'm wondering your thoughts about should investors be concerned about that concentration because supposedly we're buying index funds for this wide diversification, but are they still delivering that?

- I wrote a piece roughly a couple months ago on is the market too concentrated. There are over 12,000 publicly traded companies between the total US and total international stock index fund. And the top 10 companies account for over 20% of the global market cap. So I researched what has happened in the past not that that could assure what's gonna happen in the future.

And when markets go up, markets get more concentrated. And we are at record concentration now. But it's not predictive of when the market is going to go down. So I'm not a believer in value investing, I'm a believer in market cap investing. So, and I love Paul. It is a problem, it concerns me, but I'm still going total market cap, boring, low cost index funds.

So I don't have a solution, but I do have a concern. - Well, speaking as someone who has a somewhat opposing point of view, someone who is tilted, although I have nothing wrong with the market cap approach, I'm sleeping a whole lot better at night these days. - I'm sorry, explain that Bill.

- Well, the fact that I'm tilted away from the magnificent seven stocks makes me a lot more relaxed about the concentration in the markets, since I'm not exposed to it. I mean, a good day for me is a day when NVIDIA's down 5%. - Bill, as you pointed out, I sleep well at night, not by counting sheep, but by counting my tips ladder.

- Oh, I'm sure we'll get to that. So, you know, on a practical standpoint, we've always just invested in the total stock market index instead of the S&P 500 index, 'cause that mitigates a lot of the risk of overconcentration, but if you look back at history, we go through periods of overconcentration in companies, and it just rotates.

So what was overconcentrated 20 years ago is not overconcentrated now, and through all that all, the stock market has just continued to go up. So if you just stay fully diversified, I mean, widely diversified in total stock market, I think you're gonna be fine in the long term. And again, the one part, though, is ideally you have a portfolio allocation that's dedicated to your ability to take risks financially and psychologically, so you have that fixed income set aside so that whatever happens, you're gonna sleep well all the time.

- I would agree that we've come to a fork in the road as investors where we are either going to be market timers or we're going to be buy-in holders, and we're either gonna build a portfolio based on what we see is gonna happen in the next five or 10 years, or we just accept what happens for the next five or 10 years, staying broadly diversified.

And I happen to live 40 feet from this gentleman on my right. (audience laughing) He unfortunately lives above me. (audience laughing) That's 'cause he's smarter. But the bottom line is that when you're massively diversified, it really doesn't matter, except none of us like the market to go down and be in it when it's happening.

But other than that, I don't even worry, I don't even look to see how the pieces of my portfolio have done this year. It doesn't matter. - Okay. Go on, Rick. Hi, Rick. (audience laughing) - Okay, if you're a global equity investor, only thing you need to worry about as far as your portfolio is money coming out of the market and money going into the market, okay?

Once the money is in the market, whether it's in mega cap seven or it comes out of mega cap seven and goes more broadly to the mid caps or the small caps or maybe goes international, money is staying in the market, so your portfolio isn't gonna go down in value because it's like, okay, the fish moved from this part of the ocean to that part of the ocean, but you own the whole ocean.

So it doesn't matter that the fact is these magnificent seven. As long as people are not pulling money out of stocks, then your portfolio will be fine 'cause they're just reshuffling the chairs is all they're doing, in my opinion. - Let's talk about tips, okay? Last year, we talked a lot about tips, treasury inflation protected securities.

At that point, their real after-inflation yields were hovering at a rich 2.4% at multiple maturities. Now they're in the 1 1/2 to 2% range. I'm wondering how you feel about tips now. Do you feel as strongly about them as just a core part of portfolios? - Rates are about where they were two years ago when I built my tips ladder.

Now, if I could time the market, I would have waited 'til a few months ago. But yeah, I don't know what they're gonna be in the future, but a 2% guaranteed real return is great. And I wrote a piece, "Wealth Without Risk," and it was using $100,000, put $53,000, not a tips ladder, but one tips that's gonna mature in 25 years.

It'll mature at $100,000. The other $47,000 in the total stock market index fund, do nothing for 25 years, and you've got no risk. If the market goes to zero, you still get your $100,000 back. But if the market does like it's done in the past, you've got a no risk, 5% above inflation real return.

- Yeah, there are a couple different ways to look at the question, but the easiest way is to think back in the year 2000 when tips yielded 4%, or in 2008, at the end of 2008, when they yielded in excess of 3%. Gosh, why didn't I buy them then?

Well, the reason why you didn't buy them then was because a dollar put into the stock market in 2000 or in 2008 is now worth, you know, $7, $8, $9 now, which will buy you a whole lot more tips. And the same thing is even true over the past year.

When we were at this conference less than a year ago, as Karen pointed out, tips were yielding a whole lot more than they are now, 2.4, 2.5. You could buy, there were places in the tips yield curve where on that date you could buy tips at almost a 2.7% yield.

Gosh, why didn't I buy them then? Well, because a dollar put into the stock market then is now worth $1.35 or $1.40 now, and you will more than make up that difference in the tips price. So the lesson that I take from this is don't buy tips unless you're old, which I am.

- I have a lot to say about this. So first off, I'm a student of complex adaptive systems science. How many peeps do I have in here? You guys don't, oh, yay, one. What is complex adaptive systems science? It is we have no idea about the future. We cannot predict unpredictable.

Things are unpredictable. So just like the markets are unpredictable, earthquakes, hurricanes, which I'm so grateful to be here 'cause I live in Florida and so I got here late last night. They're all unpredictable. Inflation is unpredictable. And so I'm gonna say something here and I'm probably gonna get so many arrows.

We have never used tips. Oh, isn't that scary? We do not time the market. We make sure our clients are invested with their ability to take risk. Again, I'm saying that over and over, but our most aggressive clients are gonna have 20% fixed income because if the market crashes, they have money to rebalance into equities and our more conservative clients are gonna maybe 80% fixed income, which a lot of people cried, but due to the low income years, but they slept very soundly, not having to worry about the unpredictable future.

And they understood what they were getting into with those portfolios. And so for us, for fixed income, for our clients who have bond portfolios better than 200 to 250,000, we use individual municipal bonds and we use individual taxable municipal bonds. We don't like the tax treatment of tips in taxable accounts.

So that's an issue. Another reason we don't use them. And then there's the whole argument of bond funds versus individual bonds. We just love that. And you can look at all the data. I don't think there's a straight answer for us. We love the capital preservation of using high quality individual municipal bonds that are insured.

I've been doing this 25 years. It hasn't failed me yet. And so that is my answer on tips. - Oh, sorry. That was loud. - Yeah, I think that first of all, leaving the tax question aside about tips and treasuries. Let's just ignore the tax side of it and just talk about diversification.

That in addition to your total bond market index fund that you could have an element of a tips index fund in your portfolio because one of the segments of the total bond market index that's not there, it's not included, is Treasury Inflation Protected Securities. I did a podcast with the people who created that index.

There's a long story behind it. They wanted to include tips in the total bond market index. It was the vendors or the people who were running total bond market index funds that didn't want tips in there. So they took it out. So in order to get that into your portfolio, to have a more complete total bond market, total bond market allocation, you would need, say, an element of tips.

So if you had 20% tips in your portfolio, you're actually rounding out your total bond market index fund with tips. After that, whether you're gonna buy individual tips or a fund, I mean, I like to keep it simple. I just rather use a fund. - And Bill, when you said about tips are for people who are older, would you not use them in a portfolio during the accumulation years?

- Yes, I would, or no, I would not use them in the accumulation phase for that simple reason that the expected return of stocks is higher than that of tips. And if you have a 20, 30, 40, 50 year horizon, you don't need them in your portfolio. When you need them in your portfolio is when you are much older and you are accumulating and you do not wish to take the risk of significant inflation, which is a near constant in economic history.

- But so in the accumulation years, if some, for the part of a portfolio that is not in equities, where would you suggest it be? - Well, in the first place, if you're in the accumulation part of your portfolio, you should be very stock heavy. As Carolyn explained, if you're 40 years old, you really should have, you're not gonna be retiring for another 20 or 30 years.

You should have very little in the way of bonds in your portfolio. You don't need that money for 20 or 30 years. Why would you invest it in a low yielding asset? Now, there is a good reason for doing it, which is the psychological aspect of it. So the question is, where do you put your money, if not in tips?

Tips aren't a bad place to put them, but treasury bills aren't a bad place to put them either. At last report, Berkshire Hathaway, Mr. Buffett had 30% of his assets in treasury bills. He's not a stupid man. - So in our portfolios for 25 years, in the fixed income portion, in the tax deferred account, we've been 50% intermediate bonds, governments, 30% short term governments, and 20% in tips.

And that's never changed again because that's there just to protect against the downside because many of us, I'm in the period of accumulation, by the way, I hope we all are. (audience laughing) And so, but I still have a limit as to how much I'm willing to lose. So those bonds are there for no other reason, and that's why they're governments, because they're the most defensive thing that I know to do to keep the losses that I will sustain when it all comes apart to the limit that my wife and I have.

And so it's been the same for many, many years. - I wanna say something to all this. It's like everybody's different. I have 40 year olds, I even have 30 year olds that have plenty of money, they know their number, they know what they need for financial independence, and they love their bonds.

They don't care about growing a gazillion dollars 'cause they're financially independent and given what they're doing now. And so that's why the important part of maintaining financial independence because you can't predict your life is knowing what it is you need to spend going forward. And the most important part of a financial plan that I don't see hardly anybody doing is you need to revisit spending and redo projections based on spending every year, and your portfolio allocation should be based on that, not whether you're trying to make the most money and trying to figure out what the market's gonna do for the next 20 or 30 years.

- Earlier this month, the Fed cut rates for the first time in over four years. The consensus is more rate cuts are ahead. Does that change your thinking about any of your investments or your allocations? - Yeah, I wanna say something to that first. So our firm is an ensemble, and so we all are specializing in something, and I actually have an investment manager, so I'm embarrassed to say I'm not our investment specialist in our firm, but we all know everything going on, right?

And so my investment manager, this wonder kid of age 26, he shows this great chart of how interest rates go up kind of a little slow, and then when they start cutting, they cut like this, and then you get flat up, and then maybe a little peak, and then flat.

And so I remember, since I'm old, I remember in 2006, '07, that interest rates were pretty decent, and we were buying a lot of, then the wonder kid was not born yet. I had a different investment manager at that point. But same philosophy, the young kid learned from the older guy.

We just loaded up on bonds, and individual bonds that were going out in 2015, 2016, so when the market dropped in 2009, interest rates went, choo, clients loved us. And so we did the same thing this time. Soon as those interest rates went up, we said to clients, now's the time, let's take as much cash off the table, 'cause everybody loves cash, 'cause if it's paying 5%, I'm like, rates are gonna drop.

We show 'em that beautiful chart that said, ooh, put more in bonds, put more in bonds, and that's what we did. - The Fed tells us what they are planning on doing with the Fed funds rate, which is the overnight rate. It's not even one day. The top economists, as measured by the Wall Street Journal, have called the direction, up or down, on the 10-year Treasury, correct, about 40% of the time, less than a coin flip.

So the only thing it changes is perhaps when to go, I'm a believer now that it's okay to have some short-term bonds, but when total bonds starts yielding, let's say, a percentage point more than the short-term, then you're being compensated for taking on a bit more interest rate risk.

Always keep credit quality high. The Total Bond Fund follows the Bloomberg Aggregate Bond Index, which used to be the Lehman Brothers Aggregate Bond Index. I mentioned that yesterday. - One of my touchtones is the famous Bernard Baruch statement, it's something that everyone knows isn't worth knowing. And so almost immediately when I hear the terms Federal Reserve, my brain immediately shuts down and I stop listening.

- I haven't made any changes and don't recommend it. Did the Fed cut a half, so what are we at, four and a half now on, say, a three-month T-bill, roughly? Well, that's a good rate. I mean, so if you've got Treasury bills and part of your allocation is just to roll Treasury bills, I mean, there's no change there.

If your Fed is starting to cut, so, I mean, usually that's good for the equity market, so there's no change there. The Fed cut, but the intermediate and long-term rates kind of stayed the same, didn't do anything, so there's no change there, so no change. - Okay, no change.

- One more thing, as Carolyn touched on, the joy of owning a long bond when there's a market crash. But there are two kinds of market crashes, okay? There's the financial panic one, where the financial system shuts down and there, Treasuries are golden. The asset that you want to own is the long bond, okay?

But there's another kind of market crash, which occurs when the Fed tightens dramatically and then bonds go down, and so you may not want to own the long bond. Long bond was not a particularly good asset to own in the year 2022. - I want to clarify, though, that we hold all bonds to maturity.

We don't trade bonds, so. - Wanted to ask a question about another thing that is going on in the world beyond us. We're now less than six weeks to a presidential election. Without saying anything about your politics or the individual candidates, does the upcoming election affect any of your thinking or things you are doing as investors?

- I think it has a lot to do, perhaps when we find out who wins, you may make some shifts to your estate planning, depending on what happens with the sunset of the, we know this is law already, right? The sunset of the Trump tax cuts. They're gonna go away in 2026, and that could affect your estate planning, and you may have to do some new estate planning.

Other than that, I don't think so. - Tax law changes, as you mentioned, Rick, could certainly cause some changes in the financial plan, but I won't know anything the rest of the market doesn't already know after the election, so I will not change a thing, and I've written pieces ad nauseam.

Don't do anything based on, you don't like the candidate that won. - I love this question, by the way, 'cause we have clients from all across the political spectrum, and they'll call when they're worried about the potential candidates gonna be elected from both sides, and we actually have this newsletter that we wrote a long time ago, 'cause if you look at all the studies, basically elections don't affect the markets, and we take that same exact newsletter every four years, and we just put new lipstick on the pig, and we send that newsletter out again every time.

And I do think that one of the most important jobs of an investment advisor is to be there to talk them through that decision. John was about my age, I think, when I was a younger advisor, and Clinton had been elected, and he called up and said, "Sell everything.

"I do not wanna be in the market "with Clinton as the president." And I talked for 45 minutes, and I won. And it wasn't that I was voting or cheering for who the president might be, but that I didn't want people to use that as a market timing tool.

And if you do, there's no evidence that it works. - Yeah, I mean, you know, it's a truism that you tell your kids, and what your mama told you, is don't discuss religion or politics with strangers, but it shouldn't have anything to do with the way you manage your portfolio.

Not a single thing, neither religion nor politics. - Okay, thank you. Changing gears a little bit, over the past few years, many Bogle heads have been dismayed by the quality of service at Vanguard. Should investors who have been loyal users of Vanguard funds consider buying those funds or other funds on platforms other than Vanguard?

- Yeah, I want Alan to answer that, 'cause he wrote an excellent article on that. - You know, I'm not gonna make any excuses. Vanguard service has really gone down, and I still have a flagship advisor, so I can imagine how hard it is for a lot of people.

You know, I can say I'm encouraged. I sent a blind email to Salim Ramji, the new CEO. He responded kind of like, just like Jack Bogle. And I wrote, I asked him 10 questions in an article that I wrote about, and one thing that's not in the article, he's saying all the right things, but one thing that's not in the article, Michael Nolan, Jack Bogle's last number two and fiercely loyal, the interview was conducted in a video, and Mike was smiling the whole time.

It was as if Jack Bogle was looking down and listening to his answers. So I'm really encouraged, but it's not gonna be an easy task to fix things at a company that size, but I think they are making progress, and I'm really encouraged. - A lot of people are moving their assets out of Vanguard and moving them to, say, Fidelity.

A lot of people moving to Fidelity, which is fine. Fidelity's a good firm. They have great service, but I have to warn you, when you do that, you are going to be asked to meet with a Fidelity financial representative. I hasten to call them financial advisors because their only advice is going to be sell whatever you got at Vanguard and get into our separately managed account program.

I had a client, a couple of weeks ago, moved 15 million from Vanguard over to Fidelity. I had a $5 million position in VTI, the Vanguard Total Stock Market ETF, in a taxable trust account that had over a $2 million unrealized gain, and the recommendation of the Fidelity advisor was, "You're under-diversified.

"You need to sell this position "and put your money in a separately managed account." I mean-- - Yeah, I have a small rolling treasury ladder at Fidelity, which they will do. It's a wonderful service, and once a month, I get a little email from them telling me that my portfolio is horribly under-diversified.

The alternative, in terms of big custodians, is Schwab, and they're fine, too. You're not gonna be harassed by their representatives much, but you will spend the rest of your life policing their sweep vehicle, which yields 40 basis points. - As investors, we are often looking for rules of thumb, guidelines for what we do.

In my conversations getting ready for this panel, I thought it was interesting that both Paul Merriman and Alan Roth said that there are a lot of situations where half this, half that can be a really useful bit of guidance, so I'm gonna ask you, Paul, can you start us off by telling us about your 50/50s?

- I am 50/50 buy and hold and market timing. (audience laughs) I am, and I am 50/50 U.S. and international, and I'm 50/50 basically growth and value, so you add all those 50s up, and I don't know how much more diversified I could be, and by the way, I was, at a point in my career, very knowledgeable about market timing, and I concluded it is not something that the individual person should ever try to do, which is why I don't do it, and even though I was an investment advisor in my retirement, the last thing I wanna worry about is our money, so I have an investment advisor to make sure that everything gets done because my emotions are such, when the market starts down, I get very protective, and I've learned to keep my hands off.

After all, I am 50/50. - So my question for you, what is your goal for your money? - Well, my first goal is to make sure that Western Washington University gets enough money to educate their students on financial literacy. That's my first goal. My second goal is, we already have it set up so that my wife will be okay.

I did what I advocate to everybody that can do it. I over-saved. I did not retire until I had way more than I really needed, so my goal is for it to grow, but not too fast because I don't like the risk if it grows too fast, but I also would like to see it grow a moderate amount, so if I got a 6% or 7% return over the years, I'd be fine.

- In the words of that great financial authority, Yogi Berra, 50% of this game is 90% mental, and splitting the difference when you have a big decision to make, 50/50 one way or the other is generally a good way of accomplishing the main psychological chore which you have, which is minimizing regret.

Alan, tell us about some of your 50/50s. - Harry Markowitz, the father of modern portfolio theory who does all these calculations to determine the optimal efficient portfolio was once asked, what's your portfolio allocation, and he said 50% to minimize regret. There are other reasons. If you look at Morningstar's safe spin rates, it tends to maximize somewhere around 50% bonds, 50% stocks, you get more of a boost from rebalancing at 50%.

Paul, my portfolio was also at 50%. Other things like if a client has, let's say as an officer of a company, and they've got 80% of their net worth in their company's stock, oftentimes we say let's sell half over the next year or two. If it goes up, they can be happy that they had it and blame Alan Roth for selling it.

If it goes down, they can pat themselves on the back. Dollar cost averaging. If you inherit a lot of money, you sell your company. I think a couple years ago, the panel was asked, do you dollar cost average or put it all in immediately? And mathematically, you put it all in immediately, but we're emotional animals, we're not logical, rational animals, so often selling half, obviously, the shares that have the highest cost basis.

And then traditional versus Roth? My answer is yes. We do not know what tax laws are going to be. We know that our income is gonna go down in retirement, but we don't know what tax laws will be. Logic says with our debt and deficit, taxes have to go up, but logic and politics really don't have much in common.

- Let me put in a pitch here now. If you have questions, please write them down. If you have a question waiting to be collected, please raise your hand. We have a couple of people coming around to collect your questions 'cause we'll try and get to those quite soon.

Wanted to talk briefly about international stocks. This year has been another one where international stocks are trailing far behind US stocks. The Vanguard Total International Stock Index is up 14%. Total US Index Fund up 20. Looking over the past 15 years on an annualized basis, US beats international 14% to 6%.

Jack Bogle was famously unconvinced that one needed to own international stocks, although Victor made some really interesting points about the valuation impact on that decision. So I'm wondering what your thinking is on should I own international stocks? - Yeah, I think the point that Victor made this morning was quite an incisive one, that you're basically buying a large part of the US economy at a discount when you buy international stocks.

But the other way to look at it is to say that the PE, by whatever measure you want, of international stocks is half that of US stocks. So what you're saying is that the US per share growth in earnings is going to grow over the foreseeable future twice as fast as those of international companies will.

And I think that's a very strong assumption. Eventually you'll be happy you bought international stocks, just not yet. (audience laughing) - Okay, so why are international stocks so important? Why are international stocks not doing as well as US stocks? And you really gotta look under the hood and see that, well, here in this country, in the United States, we are blessed with some very large, very successful, leading tech companies that are making a lot of money and that are not influenced by higher interest rates because they don't finance the balance sheet by borrowing money.

So we're in a great spot. By the way, thank you for telling me what international stocks versus US stocks have done and small cap, 'cause I don't really know. So I appreciate that. So international stocks apparently have underperformed again this year, I guess. But international stocks are in different industry groups.

If you look at what underlines what's out there outside the US, we're talking about a lot of industrial stocks, material stocks, energy stocks, things like mining companies. I mean, it's almost like what the S&P looked like 50 years ago here in the United States. That's what it looks like overseas.

We buy a lot of that stuff, by the way, that they make and they mine, so we buy that. We're consumers of that. In the long term, if you have about 30% to 40% in international, it is a good diversification benefit. You get individual stock diversification, you're now getting a lot of industry diversification, and you're getting currency diversification.

Again, we've been blessed in this country with the US dollar being strong. It's not always that way. So my opinion is you should have about, to make it simple, and I like to keep things simple, 2/3 in the US, 1/3 in international, using total stock market US, total stock market international is a very good allocation to hold for the long term.

And by the way, the one thing about international, which is interesting, the dividend yield on that now is over 3%. So now I'm telling people, well, if you're in a high tax bracket, you might wanna think about putting your international in your tax-deferred or tax-free account because the dividend yield is so high.

- Jack Bogle has been right, even since his passing, and I am the most argumentative person in the world, although I completely agree with Rick on this point. I don't only buy Colorado stocks. You shouldn't only buy stocks in your state. Diversification is very important, and the next magnificent seven or 17 or whatever might be international stock.

And don't forget, they have some wars going on, and hopefully that will get resolved and is part of the reason why international has performed so poorly. - Okay, thank you. Let's move on. - Yeah, one thing, by the way, we got a 6% return over the last 15 years.

I mean, if you think about it, the expected return from equity is only maybe 4% over the risk-free rate, okay? And assuming that the natural risk-free rate out there is 3%, that would make the return of stock about 7%. We've only been 1% below that. What's dwarfing this whole thing is the great return of U.S.

stocks. So it really hasn't been bad for international. It's just that U.S. looks so great relative to it. - Good point. Okay, we're gonna move on to some audience questions. Is there a reason to buy actively managed bond funds instead of just a bond index fund? I've been told since bond rates are somewhat predictable, active management is better.

- No. (audience laughing) - Yes, but only if you're selling them and you can make a lot of money, but absolutely not. - Well, the Vanguard Municipal Bond Funds, not their new index funds, but their Municipal Bond Funds are actively managed. So as I say, they look more like a Municipal Bond Index Fund because they have more holdings than most Municipal Bond Index Funds.

But so no, you don't need active management. - Yeah, I'm a Tobin separation theorem fundamentalist, which means that you have risky assets on one side and riskless assets on the other side. And so the only bonds that I wanna own are U.S. Treasuries. Thank you. If I wanna take credit risk, I'll buy stocks 'cause that's where you're getting the credit premium from.

It's basically an equity premium that you're taking. And so there's no need to buy a fund if you're just buying U.S. Treasuries, just buy Treasuries at auction. You don't even have to pay Vanguard three or four basis points of expense ratio. Why do it? - Another question, Warren Buffett and Charlie Munger have been cited a number of times.

What are your thoughts about including Berkshire Hathaway in a portfolio? - No. (audience laughing) It's a very low cost mutual fund type. It's not a mutual fund, but it's a type of thing. Typically, if somebody has it and they have a gain, I'm not gonna sell it, but I don't recommend owning it outside of my total stock index fund.

- You get this a lot when people do not want income in their taxable portfolio. They don't even want a dividend, even the 1.5% or so dividend that the U.S. stock market is paying. They don't even want that. So they say, well, what if I just bought all Berkshire Hathaway, and I can't agree with that.

I think you're better off buying a total stock market and paying the tax on the 1.5% dividend. - A question, we talk a lot about stocks, bonds, international stocks. Do you believe that real estate or REITs or real estate ETFs should have a place in a diversified portfolio? - You own REITs within a total stock index fund.

With that said, the vast majority of commercial real estate is not in public markets. So I certainly believe that you can put some of the Vanguard REIT index fund in there, but you've gotta stick with it. And the correlations with stocks are low, but that's not negative. Negative means they typically move in opposite directions.

So I think there is some reason to have a little bit of a ultra low cost REIT index fund. - The most popular piece we ever wrote was entitled The Ultimate Buy and Hold Strategy. And there wasn't really anything ultimate about it, but people would read it. What it did say is that here are 10 different equity asset classes.

And by the way, we still update this article every year. And those 10 equity asset classes are large-cap blend, large-cap value, small-cap blend, small-cap value, international small-cap blend and small-cap value, international large-cap blend and large-cap value, and REITs. And if you build a portfolio, 10% in each of those great equity asset classes, it has historically, in the past, worked out quite well.

And produced a very nice unit of return per unit of risk. So I do believe that in a tax-deferred or tax-free account, REITs would be a legitimate thing to own. - For us, you noticed I didn't say no at the beginning. So we do own about, for portfolios, about 5% REITs in clients tax-deferred or tax-free accounts, usually tax-deferred.

- Yeah, that's a good point. You should only own them in a tax-deferred account. REITs have had historically very high returns. And I believe that one of the reasons for that is because the federal law mandates they have to pay out 90% of their earnings in dividends. And unfortunately, large industrial corporations and technology firms have an alarming tendency of wasting internally-generated capital on less-than-optimal projects.

And so federal law saves REITs from doing that. And that's one of the reasons why the returns are so good. So I think that over-weighting them is probably not a bad idea. - So I wrote a piece for Forbes, I don't know how long ago it was, maybe 15 years ago, called The Total Economy Portfolio.

So allocating your equity allocation a little bit more to what the economy is rather than what the stock market is. Because we can't make a decision whether a company's gonna capitalize themselves privately or with debt or by going public in the stock market. So there are certain industry groups out there that have very small amount of allocation to the stock market, like real estate, but they're a huge part of the economy, well over 10% of the economy is commercial real estate when you look at national income.

So if you wanted your portfolio to look more like the economy rather than the stock market, then you could put maybe 10% of your equity allocation, could go to real estate and that nudges the portfolio more towards what the economy looks like. And I'll add to that, Paul will like this, that small cap value mirrors private equity as far as the return and risk in many ways.

So if you wanted to include private equity in your portfolio, you don't need to go out and buy private equity funds, you could buy a small cap value index fund and that, again, looks more like the economy than it does the stock market. Now, is all this necessary? No, not really, but it makes for a good story for Forbes and they liked it.

- You were doing so well, Rick. (laughing) - So you can, if you wanna add real estate, that's fine. If you don't, that's fine too. - If someone calls you up with a private real estate deal, hang up. (laughing) - A different kind of question. As the deficit grows, do you think the government could change laws to tax Roth IRAs?

Should I be worried about that? - I'm gonna, I wanna grab this one before all the guys do. So first off, you have to remember the government is not a household and that deficits, if you don't have, whoa, this is getting bad. Should everybody turn theirs off and yeah, maybe that'll help, yeah.

So deficits do matter because you have to worry about inflation, but the government year to year can change how they deal with the deficits. We don't ever have to totally pay back the whole deficit. And in fact, that would create austerity. So you can't predict the future of taxes.

I do think tax rates will go up at some point because we're at the lowest tax rates ever. We have great discrepancy in income inequality compared to a long time, which tends to cause social unrest. That's the reason taxes need to go up. So it will happen. Will they make Roths, so the question was, will they start taxing Roths?

I, you know, that's political suicide. So I don't think they're gonna go back on what's been done. They just usually, and I worked in Washington, guys, so I know a lot of how Washington works and how their brains think. And so what's gonna happen is they will change the rules going forward for the most part.

And I know everybody on this panel is gonna say something different because I'm a contrarian on tax and economic policy. - Yeah, I'm gonna tell you all how the government financed its massive deficit for the stimulus package, various stimulus packages they had during the COVID epidemic. And the way they did it was by inflating the way the value of your dollars.

You were getting 0% on treasuries. Prices went up by 20% over a three-year period. And that's how the government paid for that deficit was they just inflated it away. - They printed the money. - When I started-- - Okay, but that's okay. - Sorry. - Sorry. - When I started investing in 1963 and then I became a stockbroker in '66.

But in that period, marginal tax rates were 90% and then dropped down to 70%. And it seemed like people went to work as people go to work today trying to do the best that they could. And the bottom line is I tell young people today, get all the money you can into a Roth.

We have no idea what future tax rates are going to be, but my gut tells me they could be 70% again. I mean, I know it's hard to believe that, but they could. And I think it makes sense to try to get that money set aside and protect it.

It'll be worth the price of admission, certainly if I'm right. - Okay, I think we're gonna squeeze in one last question and then we're gonna wrap up. As more and more money is in index funds, does that mean that there's a very small percentage of the investors out there who are actually determining the value of securities?

Should we be concerned about that? - No, absolutely not. The whole thing is absurd. It's really a way for the active managers to try to say, hey, you need to invest with us because indexing is bad. Indexing is Marxism. Indexing is this. Indexing is that. I mean, I've been hearing this since what, 1976 when indexes were first formed, right?

Vogel's Folly, Vogel's Folly, right? The whole, I mean, we've been hearing this now for what, almost 50 years. So the answer is no, we don't have to worry about that. - If 90% of the market of stocks are indexed because active managers trade 10 times as much as passive managers do, that still means that 50% of price discovery is going to be done by active managers.

That's plenty. - Okay, listen, I'm gonna say thank you to our amazing panel. (audience applauding) - Thank you. - And thank you to the audience for some really excellent questions as well. (audience applauding) you