(audience applauding) Okay, I'm gonna go over seven mistakes and then I'm going to finally conclude with a case study of a sucker that made just about all of these mistakes. It's not you, Rick, don't panic. (audience laughing) But we buy high, sell low. We forget about arithmetic. Kind of like flies, we chase shiny objects.

We confuse knowledge with unique knowledge that hasn't already been priced into the market. We suspend common sense. We create unnecessary complexity. And we sometimes speculate instead of invest. Now, markets and behavior. Here's the Vanguard Total Stock Market Index Fund. Total return, dividends and appreciation. And if you look at when people bought stock mutual funds, sold mutual funds, it's an all-time high, dot-com bubble.

Cash flow no longer matters, let's get into stocks. Then they fall, we sell. Go up, we buy, sell, buy, sell. Repeat 'til broke. When I was at Kellogg Northwestern, not Chicago, we were told that you can't time the market. But it turns out we are really, really good at timing the market really, really poorly.

And it pains me to say that we men do it worse. We forget about arithmetic. If the market earns 10%, guess what the average dollar invested in the market before fees is going to return? 10%. So if we pay 2% in fees, our expected return is gonna be 8%.

But of course, you're not really seeing those fees. I'm taking them out without you feeling the pain. John Bogle would call it the cost matters hypothesis. Nobel Laureate, William Sharpe, proves it in a brilliant, incredibly simple three page paper. Google it, it's free. The arithmetic of active management. And we do not live and wake Wobegon, we're 90% or above average.

However, I am one of the 95% of people that think I'm an above average driver. We chase shiny objects. Anybody hear of Cathy Wood and the ARC Innovation Fund? I mean, it was hot. And I saw her in a debate at Morningstar with another advisor kind of on the opposite side value.

And she was absolutely brilliant. In fact, she got me excited about AI. This was over three years ago. And the returns that would have in the market. Brilliant. Now look at the blue line is her ARC Innovation Fund. Do you see how wonderful it had done when I heard her speak?

When do you think money poured into her fund? At the very top. She destroyed more money than she ever made for people. Now Morningstar does their annual mind the gap survey. And you can see that on average, we know that expensive funds underperform the market. But we individuals underperform the funds themselves by putting money into what has done well in the past.

We confuse knowledge with unique knowledge. I call it the markets are stupid hypothesis. I don't wanna own international stocks. There's two wars going on with such turmoil. There's a little turmoil here in the US with an election coming up. AI is gonna change the world. I want more NVIDIA.

I think that's already priced into the market. But I'm gonna show you how I owned NVIDIA from its IPO. Do you know how? My total stock index fund. As Jack Bogle would say, don't look for the needle in the haystack, buy the haystack. The Fed is lowering rates, so I know stocks and bonds are gonna increase in value.

The Fed doesn't control intermediate and long-term bonds, only the overnight rate, only short-term bonds. And they've already announced it. It's priced into the market. All right, here is where I'm gonna brag a little bit. When it comes to making predictions, I am absolutely brilliant. I can predict the past with uncanny accuracy.

It's only the future I can't do. But beyond that, I can't even explain the past. Remember when COVID hit? Stocks fell 35% in 33 days between February 19th and March 23rd, 2020. I had an asset allocation target. And by the way, there is no one perfect method of rebalancing, but I like, you can rebalance as often as you want.

I have some clients that like to do it very frequently. But think of it as a contract where you have to stay within, let's say, if 50/50 is your allocation to stocks, 6% tolerance, 6 percentage points. If you are below that, you're in breach of contract. So COVID hit.

My life had changed. Everyone's lives had changed. What did I have to do? Buy stocks. Was it easy? Was it simple? Yes. Was it easy? No. It was incredibly hard. And the stock market ended up quickly recovered before a vaccine and ended up having a very good year. Now, I had another slide.

I had to cut that out, but it was all the headlines on COVID during the year. Things were pretty, pretty bleak. Why did the stock market recover? I don't know. Because the stock market fools us often. Suspending common sense. I can get you all of the upside of the market, no downside risk.

Just sign this 144-page disclaimer document that says you read everything. By the way, the disclosure document, who's it written by? Attorneys and actuaries. Do you think they're doing it to protect their company or protect you? And then market gurus. I've been chewed out by Jim Cramer's SVP of media relations twice.

He's told me that Jim Cramer reads everything I write about him. And I said, "Thank you." (audience laughing) Or newsletters. If I knew how to beat the market, would I be pitching trying to sell you a one-year subscription to my newsletter at $199 a year? Creating complexity with a 50-page monthly statement, 43 different accounts.

Simplicity almost always is better. Speculating rather than investing. Why does gold have value? Because people say it has value. It's pretty, it's rare, it's shiny. Yeah, chasing shiny objects. Belly button lint, that's pretty rare. (audience laughing) It's just not as pretty, darn it. Crypto, there are thousands, and Bitcoin is the giant, Ethereum is second.

It does have some utility value. Also has a lot of fraud. But it's the same sort of thing. Bitcoin especially is rare, but there are thousands and thousands of different Bitcoins. I'm coming out with the Roth coin, by the way. At the end of the conference, there'll be a coupon for 10% off.

Commodities. Commodities are important if you're, let's say, an oil company in an airline. But a few commodities you can actually buy, like gold, silver, platinum. But my HOA doesn't actually allow me to put an oil storage tank in my backyard. So what you're doing is buying commodity futures. We're in the aggregate and before fees, not a penny has ever been made.

All right, I'm gonna show you a case study. This is a real sucker. It's not Rick. Rick, you're gonna enjoy this, 'cause it's me. I used to know everything. Shortly after I graduated from University of Colorado, (audience laughing) my parents were very generous. They gave me some money and I was frugal, still am.

Rather than blow it all, I thought I was investing it. So I bought 10 ounces of gold at $684 an ounce. It had about a 20% pullback from over 800, so I thought I was buying it low. Why did I buy it? Because we're printing all this money. Paper fiat currency was gonna be worthless.

I was gonna be rich. In 44 years, I made over $16,000. That may sound like a lot, but it didn't keep up with inflation. I lost buying power. Had I invested in Jack Bogle's S&P 500 Index Fund, how much more money do you think that I would have? Raise your hand if it's A, B, C, D.

D is right. Almost a million dollar mistake. What was I guilty of? Number one, I thought I was buying low because it went down about 20%, but that was over a very short time period. I should have had a longer term perspective. Arguably, I don't highlight for forgetting arithmetic because it's not the same as the 10 minus two, but someone had to sell me the gold.

The person who sold me the gold did better than me buying the gold, literally chasing shiny objects. Confusing knowledge with unique knowledge. I wasn't the only one that knew that we were running at a deficit in printing money. Suspending common sense, like I'm gonna show up to Safeway and buy milk with my gold.

Creating complexity, yes, another holding. I had to put my safe deposit box, carry with me whenever we moved. And confusing speculation with investing. Stocks are wonderful. Those companies produce products, goods, and services that keep the economy going, give us things that have value, create jobs. It's wonderful. Gold, crypto doesn't do it.

So I should have bet on capitalism. And by the way, in that asset allocation, I do push back on my clients because a client, there's two issues. Number one, a client may say, I know I have a lot of risk tolerance. I'm taking risk tolerance questionnaires. I know I'll rebalance when stocks dive versus those that say, I know it's gonna be painful.

I hope I'll rebalance when stocks dive. Which ones do you think actually do it? The ones that understand the financial freedom that has evaporated during a bear market and how they might feel. So I also look at need to take risk or as William Bernstein would say, when you've won the game, quit playing.

Doesn't mean go all in bonds. It just means you have a more conservative portfolio. Although if you have enough wealth, you're investing for future generations. I too have a client in his 90s who's over 90% stocks. So in eight words, investing is simply minimizing expenses and emotions. And as Rick said, taxes are part of those expenses and maximize diversification and discipline.

Simple, but not so easy. And remember, we humans are predictably irrational. I can't predict the market, but in the next bear, what do you think people are gonna be doing with their stock mutual funds and ETFs? What should you be doing? Absolutely. That's it. Thank you. (audience applauding) - Okay, on one clarification.

When I talked about asset allocation and I asked the client where they think they should be, that's the beginning of the discussion, not the end of it. Because then I listen and we have a conversation about it. So I wanna make sure I don't give the impression that we just go with what the client says.

Anyway, okay. Oh, absolutely not. Go ahead. Believe it or not, sometimes I negotiate with a client with their own money. So if they want 70% stocks and I think 60% is more appropriate, what I do is I say, okay, let's start with 60% and when the market is down 20% or more from today, you can buy more stocks.

I'm not timing the market, I'm testing their resolve. Guess how many people have come back to me once we were in that bear market to buy more stocks? Zero. (mouse clicking)