Welcome, everyone, to the 72nd episode of Bogleheads on Investing. Today, my special guest is David Boyer, who is a retired naval officer with a passion for helping people pursue and achieving financial independence. In this episode, in a twist of events, David is interviewing me, which is a first for this podcast.

Hi, everyone. My name is Rick Ferry, and I am the host of Bogleheads on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts.

Before we begin, I have one announcement. Tickets for the 2024 Bogleheads Conference in Minneapolis, Minnesota, are now on sale at boglecenter.net. The conference begins at 1 p.m. on Friday, September 27th, and runs through noontime on Sunday, September 29th. We're going to hit the ground running with a full agenda.

Lots of great speakers. I hope to see you there. My guest today is David Boyer. He's really not my guest. What happened was David contacted me to interview me for his Forget About Money podcast that he published on fiology.com. The podcast came out, I thought, very well. And I asked David if it would be okay if I re-ran the first 50 minutes of that podcast, and he graciously allowed me to do that.

David's website and the free information that he puts up there is primarily for people who are trying to achieve financial independence. But many of the things we talked about are applicable to everyone. We talked about Jack Bogle. We talked about the Bogleheads. We talked about taxes. We talked about target date retirement funds.

And we talked a lot about asset allocation and how to figure out what your asset allocation should be. So with no further ado, here is David Boyer interviewing me, Rick Ferry. Welcome to the Forget About Money podcast, where we encourage you to take action today so that you can focus on what matters most to you.

Today, we have a legend in the financial space, Rick Ferry. Welcome, Rick. Thank you very much. And by the way, legend means you're old. I asked Chad GPT, who is Rick Ferry? And here's what Chad GPT had to say. Rick Ferry is a prominent figure in the world of finance, particularly in the realm of passive investing.

He is an accomplished author, financial advisor, and speaker known for his expertise in low-cost investing strategies and index funds. Ferry is recognized for his straightforward approach to investing, advocating for simplicity, diversification, and long-term thinking. Through his books, articles, and speaking engagements, he has helped countless individuals understand and implement sound investing principles to achieve their financial goals.

Ferry's insights are highly regarded within the investment community, making him a trusted source of wisdom for both novice and seasoned investors alike. Not bad, right? How can I argue with artificial intelligence? Well, did they miss anything? I'm a pretty good pickleball player, too. I think they missed that in there.

I've got it in my notes, though. I saw that in another podcast. I was going to bring it up. And one thing they did mention is you were a fighter pilot in the Marine Corps. Back in the day. Back in the day. Yeah, about 40 years ago. Yeah, you know, carrier landings and everything.

I imagine you had some harrowing experiences. I know landing on a carrier is not the easiest thing for a pilot to do. Yeah, I think the most harrowing was at least coming aboard the carrier. We were coming aboard at night. It was very bad weather. The seas were very rough, raining like cats and dogs.

And as we're approaching the back of the ship about a half a mile away, and I'm trying to navigate aboard the ship, the back of the ship came up out of the water. And we saw the screws or the propellers on the ship come out of the water. And the LSO, who's a single officer there, says, can't see you.

Sound good. Keep it coming. Ship came down. You know, it goes up and comes down, right? But as it comes down, basically, it comes down, boom, and we hit the deck and we caught the wire and all is good. There was a period during my surface warfare officer days.

It was in 2003, during the time of shock and awe out in the Gulf. And we launched Harriers. The Marines flew Harriers off of our ship, LHA-1 Tarawa. I think, I don't know how many, 70 straight days, I think, of flight operations. So I definitely understand, you know, you're flying around a starboard delta waiting to land and those kind of things.

How did you transition from the military to the finance industry? Well, actually, my undergraduate degree was in business administration. I graduated from the University of Rhode Island in 1980. And instead of going to Wall Street, I decided to serve my country and go into the Marine Corps. And that led to being an opportunity to go to flight school, which I took, and led to eight years of active duty and then 12 years of reserves after that.

But while, even while I was in the Marine Corps, I took the IRS's volunteer income tax course to be able to help fellow Marines do their own tax returns. I used to write an article for the local base newspaper about finance, personal finance and investing. So it was always an interest to me.

And when I got out in 1988 or decided to get out of active duty, I decided that I was going to go into this field. And rather than go become an airline pilot, which is what all the other pilots did in my squadrons, I decided I was going to go this direction.

And I'm I'm very pleased that I did. You know, I went into the brokerage industry back in 1988. And you can talk about what that actually is versus what people think it is. It was very depressing to be in that industry when I found out what it really was, because it really isn't about personal finance.

It's really about sales. And, you know, I decided that maybe I want to leave this industry. And my backup was to go to the airlines. Luckily, I had an epiphany that we can talk about and went a different direction with my career. Rick, you started out as a broker, and then at some point you transitioned into the Boglehead mentality.

Can you just describe that transition and why you have been set on the Boglehead mentality for so long at this point? Well, at the time, there wasn't a Boglehead mentality. This was 1996. I had been in the brokerage industry for, call it almost eight years. I knew what was going on at the time.

I had achieved at that point my charter financial analyst charter. And I was a portfolio manager, managing portfolios, as well as being a broker. So I had a lot of advanced education, if you will. I was getting my master's of science and finance. So I was going down the path.

And I was self-educating myself, too. This wasn't being encouraged by the brokerage industry. Far from it. They really don't want their brokers to be educated. But I was doing it on my own because I thought it was necessary. I thought it was behind, quite frankly. I was in the military for eight years prior to that.

And I really thought I was behind my peers. So I went out and I got all of this education on my own. So I thought I was catching up. Turned out I got to be quite far ahead of my peers in the stockbroker world, if you will. And it's depressing because I come to the realization at some point that the industry is really not about doing what's right for you, clients.

It's doing what's right for the industry, doing what's right for the company. So there's a saying that Wall Street isn't in business to make money for you. It's in business to make money from you. We do need Wall Street. We do need the creation of capital and so forth.

I mean, that's all very, very important to our economy. But I mean, the way it's sold to individual investors, my clients, really kind of put a bad taste in your mouth as to what goes on. It still goes on in that industry. But I decided that, hmm, what am I going to do?

I ended up going to a CFA conference in Charlotte, I believe. It was a CFA Institute annual conference. And this fellow by the name of Jack Bogle or John Bogle was speaking. This was 1996. And he was the founder and CEO of the Vanguard Group of Mutual Funds, which was a fairly large company, but they had created the first index fund.

And they were creating more and more index funds in different industries. So basically, very, very low cost, broadly diversified U.S. stock fund, international stock fund, bond fund, real estate funds that were just tracking the market. And I'm listening to him talk. I'm seeing the data that he's putting up there, and it just aligned 100% with what I was seeing and what I was thinking.

And I said, oh, by this, this is really important stuff. I went on and got his book, Bogle on Mutual Funds, which he had written a couple of years earlier. I read that and I had my aha moment. I said, this is what I should be doing. This is the direction I should be going, which conflicted 180 out from what the brokerage industry was all about.

And I needed to make a decision to either try to work within the brokerage industry on this, which was impossible to do, or leave the brokerage industry and start my own company. So that's how I ended up getting into this low fee industry. Is that the first time you met Jack Bogle?

Was in 1996? Yes. Yeah. I mean, I shook his hand and said, thank you. That was a great talk. But that was about it. I mean, I didn't have a conversation with him. I didn't really meet him face to face and have a conversation with him until about 2001.

I had been out of the brokerage industry and I started my own low fee advisory company, just managing portfolios using index funds. And I finally met him at a Bogleheads conference. And I wasn't called the Bogleheads back then. It was called Vanguard Diehards. But we had a conference in Chicago where he was speaking at a Morningstar conference.

I went to that Morningstar conference and I saw him out in the hallway and I walked up to him, had my very first conversation with him. But I had many conversations with him since then and until he passed in 2019. I know that you interviewed him at some point, correct?

I did. I did. I interviewed him three months before he passed away, as a matter of fact. He had come out with his last book called Stay the Course. And it was really about his life and Vanguard and his beliefs. And it was my very first podcast that I did.

My podcast, if you don't mind me mentioning it, is the Bogleheads on Investing. It's a non-profit organization called the John C. Bogle Center for Financial Literacy that I used to be the president of the organization up until a couple of years ago. Now, Christine Benz of Morningstar is the president.

But basically, we started this podcast and it was all non-commercial. And the very first person that I interviewed was John Bogle. And it happened to be just a few months before he passed. So it was a really memorable event. In fact, I went back and I listened to that podcast just the other day.

It's fantastic. And a very popular one, podcast number one of Bogleheads on Investing with Jack Bogle. People call him Jack, by the way. I mean, a lot of people know him as John, but he liked to be called Jack. Your relationship with him, did it develop over time or is it just something that you met him in 96 and then you interviewed him later?

He wrote a blurb for almost all of the books, not the first one. But after that, he wrote a blurb for almost all of my books. And then the last book that I wrote was called The Power of Passive Investing. And he wrote the foreword on that book. And I used to speak with him, not frequently, but we would email and I would see him at our conference.

We began putting together a conference called The Bogleheads Reunion. Now it's just called The Bogleheads Conference. And he would come to the conference and I would speak with him. I'd be on panels with him and so forth. You know, he's a great man. He had great vision and he's done so much for so many people.

It's hard to put a number on it. It seems that you were far ahead of your time for your passive index investing approach and not just understanding it, but then establishing a business model around that for your own business. I went to college probably right around 2000 and I was familiar with like Rick Edelman and Robert Kiyosaki.

But what I did not see, I didn't see any books about passive investing at that time. There weren't that many. I mean, I started writing my first book. It published it in 1999. I think Jack's book was published in 1993, I believe it was. There was another book, The Index Fund Revolution that was published, I want to say 1998.

But I mean, that was it. There just weren't any books. It was all about active management. It was all about beating the market. Now, since that time, a number of books have been published. But no, there just weren't a lot of books. So you wouldn't have run into them, particularly in the mainstream media, because there's an ulterior motive for promoting things to the public.

And that is to sell products. So you're not going to run into a lot of indexing books in the media that are being highly praised. Nor are you going to run into a lot of people like me on CNBC or Bloomberg Daily Interviews or anything like that, because they have a different agenda.

Their advertisers in the media expect to get their support of the media outlets to sell their products. Yeah, this has all been grassroots effort by a lot of people that have brought indexing to the forefront. It certainly hasn't been the media. There are a lot of the media like Jason Zweig and Jonathan Clements and so forth, who have talked a lot about indexing and when they could.

But the mainstream media is going to promote their advertisers. That's just the way it is. And it still is that way. When Jack Bogle first came out with the first index fund at Vanguard, the S&P 500 fund, there was a poster created by one of the mutual fund companies.

Indexing is un-American. Un-American. And your thirst for this knowledge as well as your passion for helping others led you to write a number of books. And this is how I kind of came across you is I was having a conversation with Paul Merriman up at Palm Springs maybe about a month ago.

And as we were finishing up our conversation, I get up to leave and he says, have you read all about asset allocation? I said, no. Embarrassingly, I had not heard of this book. But it's surprising. I find it is surprising because he went up and a guy like Paul Merriman says, this is the Bible of asset allocation.

Listen. And so it's a book that you wrote originally in 2005. It was updated in 2010, I believe. Well, by that time I had written two books on index investing. The first one was Serious Money, Straight Talk About Investing for Retirement, which I self-published. Unfortunately, I published it with a publisher that went out of business shortly thereafter.

So I ended up with five crates of books sitting in my driveway that ended up giving away. But the second book I published was called All About Index Funds. And I published that through McGraw-Hill. But what was missing was a book about how to put all these index funds together in a portfolio, basically asset allocation.

So I went back to McGraw-Hill and I said, look, I've got an idea for a book about how to use these index funds in an asset allocation, because that really is the most important decision that people make. And so let me write a book called All About Asset Allocation and they said, sure, go ahead.

It turned out to be my bestselling book. I mean, I think I've sold over 100,000 and I don't know how many worldwide. So it, you know, it sold well. But it really is just the basics of asset allocation and then how to apply that to index fund investing and now, of course, ETFs as well.

There was nothing earth shattering about the book. But I think I did a pretty good job explaining the uses of asset allocation and the limitations of asset allocation. For a new investor, what is asset allocation? That's a good question. So let's back up a little bit. An asset class is stocks, treasury bonds, money market funds, real estate.

These are big, major asset classes that you can invest in. And you can have U.S. stock index funds and international stock index funds that cover the international market, treasury bond index funds, total bond market index funds that also have corporate bonds, real estate index funds that cover the real estate investment trust market.

So these are asset classes. Now, how you put those asset classes together in your portfolio, how much you have in treasury bonds, how much you have in real estate, how much you have in U.S. stocks, international stocks. This is what's called asset allocation. It really is the most important decision that you're going to make in your portfolio is your asset allocation.

And then the second decision is, how do you fill that asset allocation with individual funds? So how do you fill the U.S. stock allocation and how do you fill the international allocation? And for there, you could use actively managed funds versus index funds that cover the markets. And, you know, I advocate for index funds.

So for someone who, let's say they're 25 years old and they've got a 401k and or a Roth and they're saying, okay, I just stumbled across this YouTube video that talks about asset allocation. Maybe I should pay attention. Now, how do I use this information to go back and look at how do I look at a 401k listing or my Roth options to then say I should be allocated in this ratio of U.S.

broad market index, international index, stocks, bonds, real estates? How do you do it? Okay, so we've gone from the philosophy of indexing, meaning I'm just going to buy the markets, whatever market that is, the U.S. market, the international market, the bond market, treasury market, real estate market. I'm just going to buy the market.

So the philosophy of indexing is I'm going to do this. Now, you're talking about strategy. What strategy is, is how do I do this? How do you do it? How does somebody listening to this podcast do it based on their unique situation, based on their time horizon, what their goals are, how much they're trying to accumulate, and also how they feel about risk.

People refer to it as risk tolerance, kind of two definitive words. How do you feel about risk, and what are you going to do if you have stocks in your portfolio and the stock market goes down 50%? And if the answer is, oh, I'll probably sell or I'll probably cut back the amount of stocks that I have, you probably don't need to do that because the market's doing that for you.

But even more than that, then you probably are starting with too much stock to begin with. So there's two sides to the asset allocation coin. There's academically what you should do. If you're young and you have a lot of time in front of you, you probably academically should have more equity.

You should be taking more risk because you're going to get a higher return. The expectation is to get a higher return from equities over a 30-year period of time. That's all wonderful. So you might say, okay, I'm going to be 80% in stock. But it's not wonderful if the stock market goes down 50% and then you decide to bail out.

If that's what you do, then you shouldn't have started with 80% in stock. You should have started with something that you will not bail out of. In fact, you'll do a rebalancing and get back to it. So maybe you start with 60% stock, 40% bonds, market goes down 50%.

You actually take some of your bond money and you buy more stock. You may not be comfortable doing that, but you'll do it. And so that's how you figure out what your asset allocation is. It's academic side. Yes, stocks outperform in the long term. You should have more stock if you're young.

But there's also a behavioral side. And oddly enough, I can talk about the technical side. I can't talk about the behavioral side unless I know you and we've had a conversation about it. I've had clients who are young in their 30s who have sold their companies for many millions of dollars.

And they'll be very risk averse. They don't want equity. They just want a minimum amount of equity. And then I've talked to the same situation. 30-year-old sells their company and they want all equity in 100%. So you can't tell what a person's ability to handle risk is with a model, with a mathematical model.

It doesn't work. I mean, you need to have a conversation. You need to talk about a lot of things. What are your goals? That's how you set asset allocation. So in my research, I found that there are basically two philosophies towards asset allocation. And one of them is the strategic asset allocation approach, which is what I believe that you are endorsing.

That is more of a buy and hold approach and is focused more on long-term returns of the portfolio rather than the tactical asset allocation approach, which is trying to make changes based on short-term trends that might generate a higher return. So you're advocating for the strategic asset allocation approach.

Is that correct? Yes, absolutely. Technical is, what do you know that everybody else doesn't know? I mean, what do you know about the U.S. stock market that everybody else doesn't know? Oh, interest rates have gone up. Oh, people don't know that? Of course they do. Oh, inflation is over 3%.

Oh, what? People don't know that? I mean, of course they do. It's already baked into the price. So there's nothing that you're going to know about the markets that people who are a lot smarter than you, who manage a lot more money than you, don't already know. It's already factored in.

So what do you do? You just stay the course. You have your strategic allocation, however many is much in stock, however much in bonds, and stay the course. And I will advocate here that if you're in a 401k plan and you have a low-cost indexed target retirement fund, that you use that because you don't have to do anything.

It's already done for you. So you do a target date 2060 fund. You may not be retiring in 2060, but if you just look under the hood and see what the asset allocation is, if it's a 2060 fund, it's going to stay at that asset allocation. It might be 90% stock, of which on the stock side, maybe 50% is in U.S.

and 40% is international and 10% bonds. But you don't have to do anything. You just keep plowing money into that target date 2060 fund for years and let the company who's managing it, Vanguard, BlackRock, whomever, do it for you. Simple. Keep it as simple as you can. I mean, why make it hard?

So I think academically, I think target date funds are a little too conservative for young investors. But at the same time, I understand the behavioral aspect of it is if you're going to mess with it at all, just do a target date fund and leave it alone over time because you'll probably end up better off than even someone who probably knows better and knows this stuff a little better and even enjoys it because they're going to tinker with it.

Even if it's only a few times throughout the duration, that slight tinkering could offset the, when compared to just a fire and forget target date fund, they might not perform as well. I think a statistical noise. If you're going to do everything perfect and not try to time the market and you want to buy your individual funds because they have a little bit slightly lower expense ratio than the target date fund, okay, I'm fine with that.

I mean, you're, it's going to be maybe not even measurable what the difference is, but if you're prone to do anything other than follow the strategic recipe that you created, you become a trend follower. Oh, I don't want to be an international international stinks. You know, oh, the performance stinks, but that's a bad way to invest, meaning you've got recency bias.

I mean, you're looking at the world based on what just happened in the last five, 10, even 15 years. You're not thinking about what's going to happen in the next 10, 15, 25 years. So you're looking backwards, you're driving in the rear view mirror. The point is that target date fund stops you from doing that.

I generally recommend target date funds for just about everybody who has a 401k and they have a low cost target date index fund. Now, there are the target date funds that are very expensive and I don't recommend them, but there are low cost target date index funds that are very reasonably priced by Vanguard, BlackRock.

Even Fidelity has them, I believe, but the point is, it's simple. You get a long dated target date index fund, you're going to be 90% equity. And statistically, what's the difference between a return that's 90% equity versus 100% equity? The answer is not much, not much. So for simplicity, for ease of management, I say to people, you've got these really great target date funds in your 401k or 403b.

Why don't you use those? And then if you're going to do individual funds, let's look toward your taxable account or maybe your Roth account for that, because a taxable account, you may be better off doing something else than a target date fund or your Roth account because you really don't want fixed income and your bonds and your Roth.

So you may do something else, but at least for your 401k or 403b, if there's a low cost target date index fund available, I recommend people use it. And I know Paul Merriman recommends that, or one of his many recommendations is for portfolio asset allocation would be have used target date funds.

And then on top of that, added some kind of small cap value. So if that was the strategy you're going for, would you just hold the small cap value outside and like a Roth or something because it's a little more volatile, potentially more return? You're speaking about what Paul calls the two fund for life portfolio, where you have a target date fund and then you have a small cap value fund.

And then over time, as you get older, you diminish or you reduce the amount that you have in small cap value. That's the two fund for life strategy. And yeah, if you're going to have small cap value, if you want to take that tilt in your portfolio, you take that extra risk in your portfolio, then fine.

But I wouldn't put the small cap value fund in my 401k or 403b because let's not joke around. I mean, the idea is the small cap value is expected to outperform the market. That's why you're doing it. You're taking risk. You're deviating from the market return and you're saying, I'm going to go into the small, very niche, very small portion of the market, which might be one and a half percent of the value of the entire market might be small cap values.

It's a very small niche in the market. And you say this particular niche in the market has shown academically that has outperformed the rest of the market, which is what really the bottom line, the basis of the argument is. Now, you could argue whether that's behavior or whether it's risk or whatever it is.

But the bottom line is the idea is I'm going to outperform with a small cap value tilt in my portfolio. Well, that's great if this is what you believe and you're willing to do it for, say, 25 years, because that's what it's going to take to take that tilt and actually have a high probability.

If it happens of you getting that excess return, fine. But don't do the tilt in your 401k or 403b because it's a pre-tax account and you haven't paid taxes on this money yet. If you want to do the tilt, do it in your Roth account because you don't have to pay any taxes.

So, in fact, if it actually works out and small cap value actually gives you a higher return than the rest of the stock market during this period of time that you're investing in it, at least it's in your Roth account and you don't have to pay any taxes on that extra gain.

I'm not disagreeing with Paul on this. We're just talking about his two fund for life portfolio. I'm talking about asset location, which is where are you going to put these two funds? And the answer is you put the target date fund in your pre-tax 401k or 403b or maybe an IRA rollover.

And you put the small cap value in your Roth account. You've been a financial advisor for a very long time. How do you, right? Since the way you said it, a very long time, kind of rolled your eyes there. All from a place of admiration. Oh, thank you. In your dealing with clients on those first and those initial conversations, we talked about risk.

And you said you can't tell a person's risk until you actually have a conversation with them. Correct. Whenever I talk to people and say, hey, maybe they've never started a Roth. I say, okay, go to Fidelity, go to Vanguard, go somewhere, start a Roth. One of the things that they go through is a risk tolerance survey.

And then it provides them a recommendation of something. And I have a huge issue with that. Not necessarily because risk isn't something that should be considered, but it's what does the person who is starting a Roth for the first time understand about risk in the context of financial markets and portfolios, which is almost zero at that point.

How do you have that conversation about risk and how do you balance what you know about the markets and behavioral finance and your experience with what they're telling you in that conversation of like, you can't ask a potential client, do you want to lose money? They'll say no. But they have to understand that it's still possibility that in one month to the next, they could lose a percentage, but they'd also need to understand that it will bounce back if they stick to their plan.

So how do you balance that in that conversation and get them on a solid footing that you as an experienced advisor and them as someone who's new and who might be anxious or a little bit scared about putting their money in this account, how do you resolve that? How do you close that gap?

Well, let's first talk about the risk tolerance questionnaires. They were designed to find the maximum amount of risk that you could handle. That's why they were designed. Now, whether you should actually take that risk or not is a whole different story. But that's what they were designed for. Is that the right way to go about investing to find maybe what the maximum amount of risk you could possibly handle is and go right up to that level?

I don't think that's a good way of doing things. Secondly, as far as the questionnaires themselves, they remind me of questionnaires that you might see in Cosmopolitan magazine, they're just really flaky questions. You know, if this happened, what would you do? If this happened, what would you do? I mean, you know, people are taking a risk tolerance questionnaire.

They are going to be brave when they take the questionnaire. They're going to say, oh, well, if the market went down 50 percent, I would, of course, the correct answer is to buy more. Right. I mean, that's what I'm supposed to be saying, because this is a risk tolerance questionnaire.

Anyway, they're notoriously inaccurate. But at least it gets you thinking about what happens if the market goes down. What am I going to do? David, here's how I start that conversation. Well, David, we've talked a lot about your background and your family, and we've talked about your, you know, your income and whether it's secure or not.

And if you're married, your spouse's income and your children and their education and how much you're putting away, your taxes, your, you know, we talked about your insurances to make sure you insured your income coming in through life insurance and disability insurance and an umbrella policy of some sort.

We may have talked about some estate planning to make sure that you've got everything set up correctly from your wills and trusts or maybe not a trust, but powers of attorney, guardianship for your children. And we've talked about all of these things, so I have a really good feel for where you are in life, where you're trying to go, you know, how you're trying to get there, when you expect to get there.

And we could do a little bit more work on that as far as projecting out, you know, based on how much you're saving and a reasonable rate of return in the markets. But now it comes to the point of this conversation where we need to talk about your investment portfolio.

And of course, we start with asset allocation, which is the allocation between stocks, bonds, cash, and maybe real estate. So, David, where do you think you should be? Hmm. And I let you answer the question. Why? You already have an idea of where you think you should be. Tell me anything.

We'll just keep role playing. Let's start with cash. How much do you think you should have in a reserve fund? Some people call it an emergency fund. So, how much do you think you should have there? Dollar amount. I'm good with $40,000 in an emergency fund. Okay. And you've got $540,000 saved.

So, $40,000 goes to the emergency fund. We'll put that aside. Now we have $500,000. And that's more long-term investment. Let's call it retirement. We're not going to count your kids $529,000. This is just you and your spouse or just you, perhaps. This is your retirement money. So, we're just going to focus on that.

With that, what do you think the allocation should be between, say, stocks and bonds or stocks and fixed income? It doesn't have to be bonds. It could be CDs or something. Well, right now, I've got a pension. So, I think of that. And it's adjusted for inflation over time.

So, I think of that as the bond aspect of my portfolio. So, I would like to be more aggressive with that $500,000. I don't need it right now. And I'm okay with not paying attention to it. And I would like just for it to get somewhere and grow at the rate of the market.

Okay. Very good. So, 100% equity? All of your $500,000, all in equity? I mean, how would you feel about that? I'd feel okay with that. Is that what you've been doing with your money? Is it 100% equity right now? It's not. Let's just stop that. But this is the point.

You see, you're looking up. You're thinking about it. This and that. Exactly. This is how we get to. You need to get to your asset. I can't tell you what your asset allocation should be. No risk tolerance questionnaire should tell you what your asset allocation should be. Only you can come up with your asset allocation because if you come up with it, odds are higher that you'll stick with it.

So, it has to be your decision. Not mine. You see what I'm doing here? Yeah. I'm forcing you to come up with the plan. I'm not going to come up with your asset allocation. You're going to come up with it. But I'm going to pull it out of you.

I'm going to get it out of you. Okay. And it might end up being 100% equity. Yeah, I'm okay with that. Okay, fine. I'm still a little bit of role playing. So, market goes down 50%. Your 500,000 goes to 250. I mean, is it going to affect you? I mean, what do you think about that?

And we're just going to continue like that. That's how I figure out what a client's asset allocation should be. Now, granted, in my mind, I'm saying, does this make sense? I mean, should you be 100% equity? If somebody started out with, well, right now I'm 100% in cash because, you know, when COVID came along, man, I just freaked out and I sold everything.

And now they're telling me they want to be 100% equity? No, that's not going to work. Okay. So, I have to pull it out of you. You know what it should be. I have to pull it out of you. That's how I do asset allocation. A little awkward, perhaps, but that's how I do it.

No, I like that answer. And I actually learned something right then, too, because for me, like, I feel like I better than most, at least, understand how the market plays out over time and how to make decisions based on that. And that's what I've been giving 51% of the vote towards how I think not only how I should invest, but how I think other people should invest.

And what you got to was, will they stick with it or not? And that's the number one factor. Absolutely. No question. It's not the asset allocation. It's whether you'll stick with it or not. That is the issue right there. That's what all that years of experience do. There you go.

You mentioned real estate as well as far as part of asset allocation. What is your thought on real estate and how do you incorporate that into your portfolio? Well, do you own a home? I own a number of rental properties, but no primary residence at the moment. Oh, well, that's interesting.

I actually have some clients that do that. They actually rent and they have rental properties. That's fine. Real estate is a fine way to invest. If you own rental properties, you are an active manager. I mean, it's a business. You're buying properties, maybe you're fixing them up, finding renters to go into them.

I mean, this is a business. This is not passive real estate investing, which is perfectly fine. It's a great business if you choose to go down that path. If you choose not to go down that path, but you still want more real estate in your portfolio, then you could do a REIT index fund.

Now, that's one end of the spectrum. You don't have to do anything. You just buy a real estate index fund like the Schwab REIT ETF that owns 120 REITs, real estate investment trust, that are traded within the stock market. That's easy, easy allocation. Now, the expected return of that is no higher than the stock market.

It's no higher than the stock market. But you just want a little bit different path, if you will, of return with real estate than you would, say, with the total stock market index fund. Because the total stock market index fund only has a very small amount allocated in REITs, just maybe 3%.

Whereas, so now you're getting, you know, maybe a 10% allocation to real estate. It's going to have a little different tracking than the stock market. Sometimes it'll be non-correlated. Sometimes it'll be highly correlated. So it'll go up and down together sometimes. Sometimes it doesn't. But that's why. And then there's in the middle.

In the middle is you're going to do syndicated. You're going to get partners. You're going to either buy a partnership, or you're going to participate in a partnership, or maybe a private REIT, which is sort of the same thing as a partnership, but it's not traded on the stock exchange.

So that's sort of in the middle. So you've got individual ownership, which is what you do. You've got REITs over here, which is just market-based. And then you've got the stuff in the middle. Now, which one are you going to do the best in? Which one is the rate of return going to be higher?

Well, basically, the one that's going to be higher is the way you're doing it. You're buying individual properties because you're managing it, and you're putting sweat equity into this. So the rate of return should be higher, maybe 10% versus 7% for REITs. And then in the middle, because there's management involved, maybe you're looking at maybe 8% return, although it hasn't really been that way.

REITs have actually done as well, if not better, than the syndicated real estate, at least over the last 25 years or so. But that's sort of the spectrum of expected return. Now, how much of this should you have in your portfolio? You could have, I mean, I don't know what the upward limit is.

If you're going to be on this side over here, it could be quite a bit. If you're in the middle with syndicated real estate, you know, I'd say no more than 20%. And then if you're going to do a REIT fund, you know, maybe 10% of your equity portfolio in REITs or nothing.

You just don't have any REITs or real estate, with the exception of maybe you own a house, which is real estate. I mean, realize when you buy a house, you're paying yourself rent every month to live in the house. So, I mean, and it appreciates in value. So, people say, well, that's my house.

I have to live somewhere. Well, guess what? People sell their homes later on in life. And they use that money for things like assisted living and nursing care. So, I mean, it is actually an investment and a pretty darn good one to own your own home. Because if you're married, the first $500,000 of capital gain is tax-free.

And if you're single, the first $250,000 is tax-free. So, I mean, owning a piece of property to live in is a good investment, especially from the after-tax return of it. I don't know if that answered your question, but that's fine. It does. I'm learning a lot this recording. Well, I know.

I'm just kind of, what I just said about that is a tax question. Let me talk to this for a second because I think it's important. As a financial advisor, we can figure out what your asset allocation should be, what your investments should be in your 401k or IRA, in your Roth account, in your taxable account, and all that, you know, using index funds, low-cost funds.

That's all very well and good. But what do financial advisors who really know their stuff really try to understand as best they possibly can? And that's taxes. Taxes drive so much financial advice that it has a lot to do with investing. Now, we talked about asset location. Why would you would put small cap value in your Roth account rather than your pre-tax account?

I mean, this is because of taxes. There are a lot of nuances in the tax code, but when you're, you know, working with individual investors, you really should know the tax code, you know, as best you possibly can. Of course, I'm learning every day as well, but there's an awful lot of interesting things in that tax code that helps a lot of people.

Just yesterday, I had a client who had a very large position in a stock, and it's about to retire this year, and he makes a million and a half dollars a year in his income. But next year, he's going to make zero because he's retiring, but he's got this big position in this one stock, and he's saying, I think I'm going to give some of it to charity.

And I said, well, put it in a donor advised fund. Take a big chunk of it. If you make a million and a half dollars a year, you can take 30% of a million and a half, which is $450,000. Take $450,000 of that stock, put it in a donor advised fund.

That $450,000 is a tax write-off against your ordinary income, which is 37%, because if you wait till next year to do this, it's only a tax deduction against capital gains, which is taxed at 20% based on the amount of stock that he has, plus a 3.8% at investment income tax.

So it's a much better tax deduction for you to make that donation to the donor advised fund of appreciated property this year, up to 30% of your adjusted gross income. I mean, by doing that, the difference between a 23.8% benefit if he did it next year versus the 37% benefit because he's in a state that doesn't charge any state income tax is huge.

I mean, it's $50,000 in tax saving difference by making the gift this year versus next year. Now, this has nothing to do with whether you should be in stocks or bonds or cash. This has to do with just an understanding about taxes, but it is investment related. And I'm saying that financial advisors, if they're really good, they're not just going to be trying to sell you some product.

They're not going to try to sell you a direct investing portfolio. They're not going to be trying to sell you just some annuity or something. They're going to understand your whole situation. This is why we sit down with a client for the first time and I do everything over the phone.

I might spend an hour and a half just listening to them and understanding their situation because that important when you start talking about investing the money, who's going to get the money when you die? What are your ambitions for giving money to charity? When should you give money to charity?

How should you give money to charity? What should you give to charity? This is advising. It's not selling a product. It's not selling asset management services. I mean, this is advising. So advisors really need to know the tax code as best they can and continue to learn. So I didn't want to get off my soapbox, but I just wanted to put that out there.

No, I'm glad you did because I think I'm in the financial independence space and we just kind of like lock on broad market index funds forever. I mean, yes, there is tax implications and other aspects of the portfolio and life planning. And so I think tax taxes are something that we should talk about more, particularly the financial independence space where we're usually just it's usually the two things are focused on is like life design and low cost index fund investing.

And that's almost no taxes are sort of the underground river where everything flows. These are the kinds of things that, you know, financial advisors should be talking with their clients about a whole lot of more about taxes. And I think the investing side is pretty much solved to me.

The investing side of a conversation with the client, if it's two hours long, a new client is maybe 30 minutes. The other hour and a half is devoted to all this other stuff, getting to know them, talking about taxes, looking down the road and saying, what's it going to look like for you?

What's it going to look like for your heirs? How do we go about managing your estate, distributing money from your retirement accounts? What's the most tax efficient way? Are you retiring before the age of 65 and going on Medicare? Well, we need to have a talk about Obamacare, the Affordable Care Act, and whether or not you want to distribute any money and do growth convergence before 65, because that's going to ruin your chances for getting tax credits through the Affordable Care Act.

I mean, I've got a lot of clients, a lot of financial advisors have this, who are multimillionaires. I mean, they're worth five, six, seven million dollars. That's their net worth. They're getting almost free health care from the government between the age of 60 or 55 and 65 because they qualify for the Affordable Care Act.

And you say, well, that's just not right. I'm not saying it's right or wrong. I'm saying this is the way the law is written. If you can keep your income down low enough, you're not doing Roth conversions, you delay Social Security, you have your taxable portfolio set up. So it's throwing off very little dividends.

You could qualify for basically the government to almost pay all your health care costs, even though your net worth might be five million dollars, which is not the intent of the Affordable Care Act. But that's what the way the law is written. And so, you know, this is how you, quote unquote, add value.

And I hate that phrase. But that's what we should be doing because we are financial advisors. You know, we're not investment advisors and we're not tax advisors. We're financial advisors. We're supposed to be looking at the whole thing. And again, I'm getting on my soapbox here a little bit, but I think it's important.

Do you have any children? I have three and eight grandchildren. Oh, yeah. When your children were in their 20s or if you met someone else's child or a college graduate in their 20s, we're not talking multimillionaires. We're talking young people who are starting their professional careers and their personal lives.

What advice do you give them as far as how to establish their portfolios and then how to manage that portfolio over time? Well, certainly if they have the ability to put money into a 401k or 403b at work and they're going to get a match, they definitely want to put money in there just to get the match.

Now, whether you put it into your Roth 401k, which is the after-tax side where the money can grow tax-free or you put it into the traditional pre-tax side, depends upon your tax bracket. And so for a lot of young people, they're going to put the money in the Roth side because their incomes are not that high.

They're just getting started. So they're going to put money in the Roth 401k or the Roth 403b. Their employer is going to match it. Right now, the employer has to match it to a pre-tax account, but starting in 2025, that can go into the Roth also. Anyway, now that's where you start.

And then do you qualify for just a regular Roth account, which is if you're depending on how much you make? And if the answer is yes, you put the $7,000 in your regular Roth account. Is there an HSA, health savings account, available to you because you're in a high deductible plan?

If the answer is yes, you should put money in the HSA. By that time, you probably put enough money away, you know, where you need the rest of the money to live on. But I mean, if you still have extra money, then if you're married and you have kids or just have kids and you want to start a 529 plan, that's a good idea too.

They start saving for their, your child's education. And after that, it's just basically going to go into a taxable account. And there you need an emergency fund of some sort, you know, six months worth of living expenses, just in case, just in case. You know, I don't call it an emergency fund.

I actually call it a reserve fund because that money can be tapped for things like a new car. Is getting a new car an emergency? No, but it may be nice to have. So you could, you know, you could use that money for that. I don't know if I answered your question, but the whole thing begins with what's available to me.

What types of accounts are available to me and how can I start utilizing these accounts to grow my wealth? Let's assume you did all that and now you're putting money into a taxable brokerage account. And you still want to invest in a similar philosophy. We're not adding real estate at this point.

We just want to, we've decided we're going to go simple, non-complex, passive, and we want asset allocation to be a high priority. There are, there's something out there called asset allocation ETFs. Is this the same thing as target date funds? The asset allocation ETFs are going to have a fixed allocation to stocks, bonds, rather than one that diminishes the stock allocation over time.

So it's what we call a balanced account. Is it an option? Sure. I mean, you want to make it easy? Just put it into a balanced ETF. And there finally are a few of them out there. iShares has them. And I think there's a couple of other firms that finally decided to launch these.

Now, I will say, if you're really going to get into the minutia of this from a tax standpoint, it may be better to not do that. Because if the stock market goes down and you're just in a stock fund and maybe a bond fund, you could do what's called tax loss harvesting in the stock fund only because the stock market went down.

You could move it into a different stock index fund. So you do you sell one stock fund at a loss. You turn around and you buy a similar fund, but not substantially identical. And again, I'm getting into the nuances here. But the bottom line is you could take the tax loss and you could write that off against your ordinary income up to $3,000 a year and save a little bit in taxes.

But I mean, if you don't want to get into that minutia of it, you know, the optimal tax management of your taxable account. Sure. I mean, a balanced index ETF works just fine. Do you have an overarching philosophy on what the perfect portfolio is? The perfect portfolio is one you're going to stick with.

That's the most important point. You come up with this philosophy of how you're going to invest. You develop your strategy of what your portfolio is going to look like and you just stick with it for a long period of time. And I'm not saying you stay with it for the rest of your life because you may decide to make an asset allocation change later on as you transition from accumulating assets to retirement and distributing assets.

But there might be another asset allocation after that, too, where you realize you don't need to distribute that much in assets. You're going to save more money for the next generation. So you might actually go back to a higher allocation to equity, but, you know, you can make asset allocation changes based on your situation.

But staying the course is by far the most important thing that you'll do. And one of the podcasts that I heard, you were being interviewed and you said complexity to an advisor is job security. Should that be something we interpret as stay away from advisors? No, it's not. I mean, I'm an advisor, but there are there are different types of advisors out there.

There are brokerage world advisors. And I won't name any names, but, you know, the big brokerage firms out there. I call them brokerage firm because that's what they used to call them, you know, the Merrill Lynch's. So they are naming names. Yes, you know, Wells Fargo and so forth.

These people are registered with their firms as Series 7 brokers or registered reps. And they take the Series 7 exam, which is a brokerage exam. I mean, that that's what they do. They get paid based on a percentage of the money they take in for their firm. And their goal is to maximize their own revenue, hate to say it, but that's what it is.

Now, that doesn't mean going out and selling everybody the highest cost thing because people will catch on to that and they they won't be maximizing their revenue for very long. But they're going to develop a mix within their clients of products that they're selling them were sort of guarantees them as a broker to get, you know, a certain amount of revenue per year.

And that's their focus. What is the incentive? What's the advisor's incentive? Well, their incentive is their own revenue, how they make money. That's that's their incentive. So they're going to when they look at you and you come to them and you sit down, you're looking at them and you're saying, OK, I'm the client.

You're the advisor. You're supposed to be helping me make my decision. But the advisor is saying and I was a broker for 10 years at two different brokerage firms and then I had my own money management company where I used to manage investment portfolios. So I more than know this stuff.

This isn't me just speculating on this. I mean, I lived it. They're sitting here sizing you up. Oh, you've got five hundred thousand. OK, if I can put one hundred thousand into this product, I'm going to make this commission. If I can take another three hundred thousand and I put it over here, I can make this fee per year.

And all net total, I can probably make off your five hundred thousand. I can probably make six, seven thousand dollars a year in fees. That's what they're thinking. That's how they're sizing you up, even though you over there on the other side is saying, oh, he's making these recommendations because he thinks it's in my best interest.

It is not. It is not. Now, I'm not saying they're giving you bad advice. It's just I'm not going to give you the best advice. The best advice is go buy a target date retirement fund at very low cost index fund, very low cost in your taxable account. Just put the money in a T-bill and then maybe a total stock market index fund and in the middle, maybe buy a couple of CDs.

And that's all you want to do over there. OK, what's the problem with that advice? If you're a broker, you don't make any money. It might be the right advice. You might be doing great things for your clients, but you're going to starve. So, you know, it doesn't work.

So what's the incentive to the advisor? That's your first clue that there might be a problem. Now, advisors who get you to give them their money, I get you to give me your $500,000. What is my incentive then? To keep you as a client. I want to keep you as a client.

I want to get that revenue stream in every single year. Am I just going to put you in a simple portfolio of a U.S. stock index fund and a bond fund? No, because after a while you're going to say, I'm paying you $5,000, $6,000, $7,000 a year and you just got me in these two funds or maybe this one fund, this balanced index ETF, one fund, and I'm paying you $5,000.

So why do I need you? Advisors who add complexity to the client's portfolio for the sake of their own revenue stream and the security of their own revenue stream, it's complexity for job security. So you have to figure out the advisor. How is the advisor being paid? Is it from sales of commissions?

Is it from assets under management? Is it an hourly or a subscription base where you're just paying them for their time? And that's going to be very telling as to whether or not you're getting unbiased advice. If you're okay with sharing it, looking back at your own financial moves and financial mistakes, we hate to admit it, but we've all made some.

What do you think is one of your largest financial mistakes in your own personal history, if you're willing to share? Well, I mean, if I had a crystal ball, then back when I was a young second lieutenant in 1982, when I was down in Kingsville, Texas, going through advanced jet training, and I finally had accumulated a couple of thousand dollars, I would have sent the money to Vanguard and put it into the S&P 500 index fund.

And I would have never done anything else my entire life except buy that fund. And that would have been it. And if I did that, I'd probably have three times the amount of net worth I have today. And I don't think the next 40 years is going to be any different than the last 40 years.

Rick, thank you so very much for your wisdom and insight. It's a pleasure meeting you. And I hope that our paths cross again. And I look forward to our next conversation. Well, thank you for having me. It's been a lot of fun. And thank you all for listening. This concludes this episode of Bogleheads on Investing.

Join us each month as we interview a new guest on a new topic. In the meantime, visit Boglecenter.net, Bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local Bogleheads chapters and get others to join. Thanks for listening. Bye. Bye. Bye.

Bye. Bye. Bye. Bye. you you you you you Thank you.