(audience applauding) Our next speaker is Alan Roth, MBA, CPA, CFP. He has a lot more letters behind his name than I do. So he's at least four times smarter than me, I think is the way that what that means. He is the founder of a fee-only hourly financial advisory firm.

He has 25 years of experience in corporate finance. He was the corporate finance officer of two multi-billion dollar companies, works as a consultant. He is the author of an investing book. He is an investment and financial columnist for the AARP, for etf.com, for Financial Planning Magazine. And most importantly, my favorite reason why I like Alan is something he hasn't done for quite some time, this role he had as a columnist called The Mole, where he went undercover in the financial planning industry and basically revealed all their secrets.

So he hasn't done that for over a decade, but it's still my favorite role, Alan. And thank you for being here today. (audience applauds) - Wow, skies are opening up when I talk. Yeah, The Mole was the most fun I ever had writing. Bear the right amount of risk.

How do we typically, holy crap. How do we typically determine the amount of risk to take? We take a risk profile questionnaire. And I know it doesn't seem like it today, but these are the returns of the total US in blue, total international in red, and total bond. And we are in the single worst nine months in bonds that has ever happened before.

But still, bonds are a whole lot less risky than stocks. And by the way, there are some wonderful opportunities in this bond route. Something like TIPS a year ago, you could earn a negative 1.6 return, real return. Today it's a positive 1.7. So there are some really good things about this really bad bond market.

How do we typically determine our risk? Raise your hand if you've ever taken a risk profile questionnaire. Vast majority of people, me too. Well, Jason Zweig of the Wall Street Journal, who'll be here tomorrow, says they're worthless. And I say, Jason, I completely disagree with you. They're not that good.

They're actually dangerous. Why? Because the way we feel about risk is not stable. And the bigger one is they don't measure one's need to take risk. I've taken risk profile questionnaires. I love to take them. And I get, I should be 70% to 140% in stocks. I should have a margin account.

By the way, what would have happened to that margin account in today's market? It would have been called. I'm 45% in stocks. Why? Because we've won the game. Our need to take risk is low. So there is a company that I think has the single best risk profile questionnaire out there.

Not at liberty to mention their name, but it starts with a V. So here is an example of one question. In 2008, stocks lost over 31%. If this happened again, what would I do? And I answered it truthfully. I would buy more stocks, which is what I did in 2008.

But one, it was really, really hard. And two, if I were 80% stocks, I never would have had the cash or the courage to buy more stocks back then. So feelings about risk. Beginning of this year, I'm hearing a lot of, I've got a long investment horizon, so I'm comfortable being 100% in stocks.

Now I'm hearing, this has never happened before. Bonds and stocks at the same time, I'm going all to cash until things settle down. I'm not panicking. This is logical, rational. They're panicking. So I want to make someone in this audience a hundred billion dollar bet. And I'd rather have some diversity rather than a white male, okay.

So who would take this bet where there's a 99% chance of winning? If I tell you that if you lose, you die. Your spouse dies, your children die. Probably wouldn't take that bet. So we want to look at probabilities and consequences. So we typically ask, how would you feel if your stocks lost 50%?

Maybe the better question is, how would you feel if you couldn't send your daughter to that prestigious college that she worked so hard to get into? If you had to work another decade in that awful stressful job with that horrible boss, if you couldn't buy the lake house. So again, you have to think in terms of consequences.

So willingness to take risk. I know from a guy, getting in touch with your feelings sounds a little weird, but you really have to imagine what it would be like if things don't work out. Test the ability to rebalance in a bear. The only good thing about this bear market is that with bonds and stocks going down, there's less of a need to rebalance.

I'm so cheerful. So I had a lot of people that say to me, oh no, no, I don't panic in a bear market. Then they come to me as clients, and where did all these tax loss carry forwards come from? So in my opinion, the biggest predictor of how someone's gonna perform in the next bear market is what they did in the last bear market.

So money and happiness. I'm really disappointed Jonathan Clements isn't here 'cause he taught me so much about money and happiness. I don't know, he put his family above me. I just don't understand that. But anyways, if Elon Musk makes another billion dollars, yes, he'll be happier, but when you lose money, you get roughly twice as much misery as happiness from making money.

Daniel Kahneman won the Nobel Prize for Prospect Theory on that. So how much risk should you take? A 65-year-old with a $2 million portfolio needs $50,000 a year above Social Security, and the high willingness to take risk, they don't have much of a need, a conservative portfolio. The above with a million-dollar portfolio, they've gotta have it grow, so maybe take a little bit more risk.

If they had a low willingness to take risk, probably shouldn't take much because they will sell when stocks go down. A 45-year-old saving for retirement with a high willingness can be aggressive. A low willingness, again, conservative because they're not gonna stay. A 25-year-old, I'm not a fan of 100 minus your age, if they're saving money that they need in two years, don't wanna take a lot of risk with it.

A 25-year-old who just inherited two million, we don't know how he or she is gonna behave. So again, in concept of taking risk, the only one that should have an aggressive portfolio is someone that has the high need and as hard as it is to measure the high willingness to take risk.

And Carl Richards has it right. We buy high, sell low, we repeat 'til broke. Never take uncompensated risk. 96% of stocks have earned, on average, the same amount as the Treasury bill. There's a handful of stocks that drive the return. And guess what? I don't know what those will be going forward.

And I'm gonna brag, I owned Zoom before I even knew what Zoom was. Guess what? Vanguard Total Stock Index Fund. Okay. What about asset classes with low or negative correlations? Commodity futures, foreign currency futures, options. Can somebody tell me the one thing that all three of these have in common?

In the aggregate, not a penny has ever been made before costs. There's someone on the other side of the trade. Inverse S&P 500 funds, triple inverse S&P 500 funds. And don't laugh, I've had really sophisticated clients that were private equity managers, mutual fund managers that owned both an S&P 500 index fund and an inverse S&P 500 index fund.

That's like betting on both teams. You can't win through a bookie. Gambling half your net worth in Las Vegas, it'd be more fun than many of these other things. So low or negative correlations isn't enough. You also need a positive expected long run return. REITs sometimes have a negative correlation.

Lately, as Christine Benz has pointed out, very positive correlation. Precious metals and mining funds, I think they're great, but you've got to have a stomach of lead to stay the course there. The penalty for not knowing your risk. I'm not at liberty to say the Chicago-based research company this came from.

But overall, an individual investor underperforms the fund, not from fees, 'cause the fund has the fees baked in, by 1.73%, by either performance chasing, not knowing our risk, et cetera. So the old paradigm is unrisked. If you can't be right, at least be consistent. But these are the three, what I call the second-grader portfolios, or the three-fund portfolio from Taylor Larimer, total US, total international, total bond, and it's 90%, 60%, or 30% risky, and guess what, they all performed roughly the same.

So pick an asset allocation that's gonna match your willingness and your need to take risk. Imagine the pain of if things don't work out. Think of asset allocation as a binding contract, and I tell my clients, I enforce based on guilt. You only wish a large New York law firm were out to ruin your life by comparison.

And when I disagree with a client, I negotiate. For instance, in good times, the client might say, I wanna be 70% stocks, and I think 60% is more appropriate. I'll say, start with the 60, and then if stocks go down into 20% below where they are today, and your appetite is still there, then go to 70, I'm testing their resolve, I'm not timing the market.

And guess what, how many clients come back to me in that bear market and say they wanna increase, it's hard enough to get them to rebalance. Thank you. - Thank you. (whooshing)