Welcome, everyone, to the 12th episode of "Bogleheads on Investing." Today, we have a special guest, Larry Suedro. Larry is the chief research officer of Buckingham Strategic Wealth and the author of 17 books on investing. Hi, everyone. My name is Rick Ferry, and I'm the host of "Bogleheads on Investing." This episode is brought to you by the John C.

Bogle Center for Financial Literacy, a 501(c)(3) corporation. Today, we have a special guest, my friend, Larry Suedro. Larry and I have known each other for many years, and we've had a lot of healthy debates. So with no further ado, let's bring Larry in. We are pleased today to have Larry Suedro as our guest.

Welcome, Larry. Great to be with you, Rick. I'm really excited to have you on the show, Larry. You and I have known each other for many years, and we've gone back and forth on the forum on many different topics. And everybody's got a different opinion and different view. And you and I have had our days.

But it's always been very cordial, and I'm really excited to have you with me today. I'd like to start with you telling us, how did you get involved in this whole investing business? Give us some of your bio. My father did something very smart. He was a real stock junkie, would follow stocks daily and go to the Merrill Lynch office in the neighborhood and watch the ticker tape.

And when I was born, he took, I think it was $500 in gifts, and he bought seven different individual stocks for me. And then when I turned 13, we had my bar mitzvah, and we got a little bit more cash. And then we sat down together, and we bought one stock.

Because at that time, while other kids were reading the sports section, I was already following the Wall Street Journal and all these stock prices. So then you decided to make it a career, or at least go to school. I then went to school. My undergraduate degree is from City College, the Business School, Bernard Baruch in Finance and Investing.

It really was just about the first finance degrees handed out anywhere, because there was no finance theory, as you know, until Bill Sharp and others created that CAPM. Before that, finance was hidden inside some accounting program or maybe an economics class. So Larry, while you were at college, I understand you were a pretty good basketball player.

Is that true? That depends on your definition of a pretty good basketball player. I was pretty good for my neighborhood, but I was so short. When I got to high school, I was 5 foot 1 and 110 pounds, so I couldn't even make my high school basketball team. But I grew in my next two years.

When I graduated high school, I was 5'10" and all of about 140, and I was still only 16. And I went to Baruch College, and I made their basketball team. You know, it's a D3 school, so it all depends upon your definition. Relatively speaking, I was good. So basically, you decided not to have a career in basketball, and so you went on and got your master's degree.

Then went to NYU for my master's. And when I got out of school, Wall Street had collapsed, '73, '74, the crisis, in addition to which the end of the fixed commission era was over, and many firms were going bankrupt. Even Ross Perot lost a fortune trying to buy a brokerage firm.

And so I ended up taking a job at CBS in their international finance department. And then I was going for my PhD in international finance and economics. Ultimately, unfortunately, the New York City subway system had gotten so bad and dangerous, I didn't quite finish my PhD, because I had to have my mother even literally drive down from the Bronx to pick me up the last semester.

It had gotten so dangerous. So Larry, I understand from knowing you that you actually got not one MBA, but you got two MBAs in a way. Is that what you're talking about with the PhD? Yeah, in effect. So I don't really technically have two MBAs, but I have an MBA in finance and investing.

And then going for my PhD, which would have been in international trade theory and economics, I have all of the required courses to have a master's in international finance and economics. So in effect, you could say I have two MBAs. So let's move on and start talking about your career on Wall Street.

I really got lucky after that. It's one of those strange things. I feel like the Zelig character in Woody Allen's movie, where he's inserted in all these major events in history. I was involved in, I think, four of the biggest revolutions in finance, just happened to be at the right place in the right time.

The first was when Brenton Woods broke down. All of a sudden, everyone had a deal with floating exchange rates and interest rates going crazy. And I was hired by CBS to be manager of international finance and helping them to manage those risks. So CBS, you're talking about the entertainment company.

Yeah, exactly right. And there's actually an interesting story behind there, Rick. We could divert for a moment. So the only reason I interviewed with CBS, I was hoping to get a job with a Wall Street firm. And I did have one offer from IBM. But Wall Street, as I mentioned earlier, was in a sad shape.

And they could hire somebody with 10 years of experience for about the same, or not much more than some young MBA. So I said, I've got to get a job. I'm getting married. And CBS happened to own the Yankees at that time. And so I said, I don't care if I drive a bus.

I'll see if I can get a job with the Yankee organization. So I go to the interview. And on my way there, I pick up the newspaper. And the headline reads, CBS sells the Yankees. So I decided I'm dressed up in my suit anyway. I'm on the subway. I might as well go.

I went, and ultimately, I did get a job there. And I had a good two years there. But then two years later, at the grand old age of 23, and with all of two years of experience, Citicorp and other banks were getting in the consulting business to help these big multinationals deal with foreign exchange risk.

And they hired me to be a consultant. So I went and joined them. This was our new exciting area. And then two years later, Citicorp asked me to go set up a whole West Coast Investment Bank at the grand old age of 25. I had never run a foreign exchange trading room.

I had never funded an offshore bank. I had never managed more than one person. And they sent me out to San Francisco to build an entire operation. And a second revolution was occurring around that time. Citicorp and Salomon Brothers were leading the way in creating what Buffett ultimately called these weapons of mass financial destruction, these derivatives.

And they were more basic at that time, interest rate floors and ceilings and collars and foreign exchange floors and ceilings and collars to manage these risks. And so I was right there with that, and even helped design and create some of these derivatives. And then 10 years later, my boss at Citicorp left to join Prudential Home Mortgage.

And that was a whole new revolution in mortgage banking, the first private mortgage-backed securities. So I got involved there. And with that big revolution, did that for eight years. And then we ultimately sold the company. And then I was going to look for something to do. I thought I'd go teach at something I'd always wanted to do.

That's why I was originally going for my PhD. And friends of mine had started this RIA, a registered investment advisory firm in St. Louis. And they were good planners doing estate and tax type of work. But they didn't really know anything about investing. So I thought this would be a great fit.

I told them I didn't want to have to do anything to do with running the company. But I would help set the investment strategy, teach them about managing all types of risk. So we joined forces. And right at that time, as you know, the early '90s, Fama and French write their groundbreaking paper.

And we're now in this three-factor world that changed the way we thought about investing. And so that was our fourth revolution that now just happened to be at the right point in time. So I view myself as very lucky and had a lot of vast different experiences, which has helped me, I think, be a much better advisor, having lived through lots of financial crises.

So the firm you're talking about is Buckingham Asset Management out of St. Louis. Well, now it's called-- we changed the name about-- I think it's now maybe two years ago. It's Buckingham Strategic Wealth, where just about a $17 billion RIA in now 35 cities. And then we have TAMP, which runs both BAM Advisor Services, helping other advisors, and a firm called Loring Ward.

Together, we're about $52 billion, I believe. How many advisors are under the TAMP program, Larry? Do you have a basic number? Yeah, I can give you some general guidelines. At Buckingham, which is BAM Advisor Services, about 135 firms around the country with about, I think, $19 billion of assets.

And Loring Ward has over 1,000 advisors, many of them small broker-dealers who really are nothing more than investment advisors. And then they have also about, I think, 100-plus advisory firms who are really more of the wealth management as well as investment advice. And they have, collectively, about $16 or $17 billion.

So what helped this whole thing grow was your book, your very first book, correct? I mean, I recall when that book came out, just before I went to a DFA conference or right after that. Yeah, what happened was I got to Buckingham. And they had no marketing material at all.

The firm had just been formed. And they had decided, like you did, to at least use some of DFA's funds. This was a DFA shop, if you will, in that it used DFA products exclusively in the early years. Today, we use many multiple advisors. But DFA clearly was the leader there.

And I went to a DFA seminar, like you did, to learn everything about them. And they had, like, three slides at the time to explain what they did. So I said, we need to have a brochure to at least tell people what we're all about. So I took what I learned in those three days at the dimensional university, if you will, and put together a 40-page brochure.

And then I said, what we really need is a book. And I had no intention of writing one. So I went and looked in the libraries and bookstores when there actually were bookstores. Well, there's still bookstores. You have to-- there are still bookstores out there. Yeah, there are a few, not many.

I think we have one left in St. Louis, one major one. But at any rate, the only good book I thought out there at that time was "Random Walk Down Wall Street." And all it did really, although it was a great book, it told you the markets were pretty efficient and you should act as if they were.

But it didn't really tell you what to do with it in the way, like, your book all about index funds did, or my book, or others like John Bogle's book. So I said, all right, I've got a 40-page outline. Let's see if I can put a book together. So I spent the next two years writing a book.

And when I completed it, we got a publisher who liked it and decided to publish it. But the interesting story there was he hated my title, which was "What Wall Street Doesn't Want You to Know." So he said, Larry, go back and give me some other options. And I went to a bookstore and came up with, like, 15.

He didn't really like any of them. And he pulled some things together. And he came up with the title, "The Only Guide You'll Ever Need to a Winning Investment Strategy." Now, the funny thing about that is, two years later, I wrote my second book. And I really liked that first title, "What Wall Street Doesn't Want You to Know." And I was obligated to show it to him, the writer of "First Refusal." And he read it and said, Larry, this is great.

I love that title. Same guy who had rejected it two years earlier. Editors are strange people. I remember when I first saw that book, I can't remember where it was. It might have been at one of those bookstores that don't exist anymore. And I looked at the title. I said, oh, what is this?

Whatever it was, "The Only Investment Guide You'll Ever Need." I looked at that and go, what the heck is this nonsense? But actually-- That wasn't my choice. I started reading it. And I realized what it was. And I said, actually, this is pretty good. You've done really well. In fact, that book, if I'm not mistaken, has-- you've done a couple of editions now, correct?

I did one edition to that seven years later in 2005, updated that, and now I've written a total of 17 books, which four are originals and three of them are updates. I wrote in 2001, I think it was, "Irrational Investing in Irrational Times," which covered 52 investment mistakes. I thought people made.

Several years later, I updated it and had 77 mistakes. That book was "Investment Mistakes Even Smart People Make." And then in 2000, I think, '15, I wrote "Reducing the Risk of Black Swans." In '18, we updated that. One of the books that I like-- in fact, I think it's a great title-- is "The Incredible Shrinking Alpha." And I've always been kind of fascinated with-- could you talk about that and what's going on out there?

The book itself is a nice little short book. I got that idea from Bill Bernstein to write these little short books that are really narrowly focused. So even a slow reader might read it in maybe three hours. So the idea is there are four big themes that are happening that are making it harder and harder for active managers to win.

The first is that academics, simply really by studying the great active managers and seeing how they beat the market, could they identify, was it a unique skill that you can't replicate? Or are they buying certain types of stocks with certain traits or characteristics? And of course, as you well know, Thamer and French summarized a lot of other people's research.

They didn't discover any of these factors themselves at all. But size and value-- so prior to the publication of the cross-section of expected stock returns in '92, you could simply say, I'm beating the market. I'm generating alpha. And therefore, get away with charging high fees, because alpha is a very scarce resource.

But after-- you could do it simply by tilting your portfolio to owning more small and value stocks in the market. You could claim out performance, and you'd be right. But after the publication of that paper and then index funds became available in these asset classes or giving you exposure to these factors, you can't claim out for any more.

Either regression analysis or attributional analysis will show the alpha was nothing more than due to exposure to these factors. And then along comes Mark Carhart, '97. He adds a fourth factor, momentum. And so once again, alpha gets converted into beta. And then really in 2012, Robert Novy-Marks adds profitability, which gets expanded into quality.

And what's important is these conversion of alpha into beta doesn't take anything away from all those great investors like the people from Graham and Doddsville who are buying value stocks that were highly profitable or quality, because they've discovered this 50 or 60 years before the academics. But if now we can replicate that and invest in exactly the same types of stocks, and there are two good studies showing that Warren Buffett's almost all, but not all, of his stock picking advantages.

So not counting the benefits from the leverage he gets from his insurance company or not counting the benefit he gets from being able to give Goldman Sachs $10 billion at a much lower price than Goldman could have raised it if they had 30 days to go get the capital.

But just looking at the public securities that he owned, most of it goes away if you simply bought an index of stocks that look like-- meaning they have the same traits and characteristics. So that's the first thing. Today, every investor can invest in very similar manners. So alpha got converted to beta, which is nothing more than exposure to factors.

So that's the first thing. Oh, we're still on the first one. You have three others? I got three out there real quick. We don't have like a day and a half. Yeah, I know. The others are real quick. Maybe you could sum her up a little. OK, so turn to the second one, which is in order to beat the market, you have to have victims to exploit.

70 years ago, 90% of all individual stocks were held directly by individuals in their brokerage accounts. Today, that may be closer to 10%. 90% plus of trading is done by big institutions. You just don't have those dumb retail investors who buy stocks that go on to underperform and sell stocks that go on to outperform, as the research shows.

They're exploited by the more sophisticated institutional investors. But that pool of victims is shrinking dramatically. So today, when Goldman Sachs is trading, it's 90% chance it's SAC Capital or Renaissance Technology on the other side of the trade. The third thing is the quality of the competition has gone way up.

When you and I got out of school, Rick, most of the people who were managing money, very few of them were world-class scientists with PhDs in finance, unaware of all this academic research. Today, everybody managing money is like a rocket scientist. DFA's CIO is an aeronautical engineer with a PhD.

And Andy Berkin, my co-author of that incredible shrinking alpha, PhD in physics. So the competition is much tougher. And that makes it much harder to outperform those people. And the last thing is, 30 years ago or so, there was only about $300 billion in hedge funds out there chasing this limited amount of alpha, which is now a smaller pool and less victims to exploit.

Today, we have 10 times that amount of money. So just not a lot of alpha to go around, and the pool is much bigger. So 20 years ago, when Charles Ellis wrote his famous book, Winning the Losers Game, about 20% of active managers were outperforming on a statistically significant basis.

Today, several studies show that numbers less than 2%, and that's even before taxes. That's pretty lousy odds, which means passive investing is the winner's game. Well, I guess I know who that 1% is, because I hear it all the time, how they've outperformed. So anyway, yeah, I think the fifth one, if there's going to be a fifth one, is the speed at which information is disseminated now is just so much faster than it used to be.

Yeah, no question that that's true as well. You could add that one, absolutely. Let's go ahead and then move on to the current book, the 17th book, which is Your Complete Guide to a Successful and Secure Retirement. And the forward is by Wade Pfau, good guy to write the forward.

What motivated you to write this book? Well, I think the key here is that so many people, at least today, are at least beginning to focus on the need to have an investment plan. There are lots of good books on investment planning. You've yourself written several that really go a long way to helping people build an investment plan.

But the key is that you can have the perfect investment plan, and it could blow up for reasons that have nothing to do with investing. You're a young man. You've got three kids, and you don't have enough life insurance. You die early. I don't care. Rick, you've got the perfect investment plan, but you don't live long enough to save and invest and watch it grow.

You're a doctor, perform surgery, and you don't have a disability policy. And you're getting an accident, and you can't perform surgery anymore. You don't have an umbrella policy. You get in a car accident. You don't have long-term care, and you have dementia. There's all kinds of risks related to elder abuse.

We even have a chapter on that. And there are so many ways that investors can make mistakes that lower their odds of success, like asset location, holding the right assets but in the wrong location, taking Social Security way too early, not using annuities where they are appropriate, and buying the right kind.

So what I wanted to do was to create a book that looked at all of those things. And the first chapter is maybe the most important one, which is why we put it there, which has nothing to do with investing or other financial issues, but having a plan to have a meaningful and successful life in retirement.

And that's so important. One, the highest suicide cohort in the United States, I would have guessed might be teenage girls. Unfortunately, I lost a sister at a very young age to that. But it's retired men, because they've lost the meaning and their purpose and sense of fulfillment and social connections, which they typically get at work.

And the highest divorce cohort is what's called silver divorce. And my line about that is, well, I married you for better or worse, but not for lunch. And you have no plan to have a meaningful life. Did you come up with that? I married you for better or worse, but not for lunch?

I don't know if I actually can take credit for that, but I steal it and use it all the time. Great. I'd like to add one more thing to your threat of elder financial abuse chapter. I wrote an article for Forbes about it. I called that article, "You May Never See Your Grandchildren Again," because I was invited to a local dinner seminar put on by a local advisor.

I live in an over 55 community out here near Austin. And we just get hit with all of these dinner seminar things. Anyway, I decided to go to this one. There's no word of a lie. The advisor must have said three times, if you want to see your grandchildren again, talking to the woman in the audience, you want to come and see me, because I have had so many widows who didn't do it the right way when their husbands died.

And by the time they came to see me, they didn't have any money, and they never got to see their grandchildren again after that. So if you ever want to see your grandchildren again, you need to come and talk with me. And the guy was a snake, because he was selling all kinds of high commission annuities and all this other stuff.

I mean, he had a management fee that was something like 2%. He was a real snake. But this is what he was pitching to the people in this community. You know, we see that, unfortunately, all the time. Literally, you and I agree on lots of things, even though we've had some good debates about most of the stuff that's relatively minor.

But this is a perfect one where I know we agree. I literally don't know how these people look themselves in the mirror when they get up in the morning and live with themselves. And unfortunately, it's not going to change. Tell me a few other highlights of the book, and then we're going to move on to some questions by the Bogleheads.

Well, yeah, a couple of things I think are important. One, I think we really cover an incredibly broad spectrum. I don't believe there is any book that is as comprehensive as this. There are other good books on estate planning or investing, but none is comprehensive. Second thing I want to highlight is the book is filled with lists and checklists, action items for people to do.

So I believe literally everyone who reads the book will walk away with some things that they can focus on. And I'll just touch on in the introduction, we talk about what I call the four horsemen of the retirement apocalypse. And I can take credit for that term. And the four horsemen here that are creating real threats to successful retirements are first equity valuations, at least in the US, are much higher than they have been historically.

And bond yields are much lower. And unfortunately, so many people look at the past and automatically project them in the future. I meant to that. I tell you, the-- and they're related, too. I mean, the high equity valuations that we have is related to the low bond yield. Yeah, exactly.

The Fed, unfortunately, pushed a lot of people to take more risk because they can't live on that 2% bond yield. But here's an amazing stat. From 1982 through now, a typical 60/40 S&P 500 intermediate treasury portfolio has earned 10%. Amazing. Most financial economists today would put that number maybe in the area of 5.

I put it at like 4 and 1/2. Well, I won't disagree. And that's a real problem. If you're counting on 10 or anything near there, your plan is likely to blow up. So those are the first two horsemen. The third is we're now living much longer. When I was growing up, even as a teenager, I almost knew nobody who was 75 years old.

And today, 65-year-old couple second to die is almost 25 years. And that means half the time, someone's going to live longer. So you really need to plan for at least 30 years, not 10 or 15. So you got higher valuations, lower bond yields, lower expected returns, and the money has to last a lot longer.

Fourth thing is the good news, of course, we're living longer. The bad news is the longer you live, the increased risk of dementia and long-term care needs, which could be very expensive. And that's where the risk to many people are. So that's got to be dealt with. We do have a chapter on long-term care, as well as annuities to help deal with that.

And there is even a fifth horseman, which I mentioned, which is the risk of Social Security. If Congress doesn't act, and this looks like another do-nothing Congress, the estimate is in about 13 years, they'll only be able to pay out about 70%. It's not going bankrupt. So my advice is being conservative.

Starting in 2032 or so, you should only plan on getting 70% of Social Security benefits. But then I remember that you and I, when we were growing up-- I say we were growing up-- when we were 30 or 40 years old, I think we were saying we weren't going to get anything either.

But we're going to get something. The question is, you may not get as much as you thought you were going to get. Exactly. And there are simple solutions here. Raise the amount of income that's taxed. You can raise the rate slightly. Those are two simple solutions that they could do.

And then, of course, you can raise the age that you're retired. You can't expect to get 30 years of payments. It was designed maybe when people live 5 to 10 years. And so you're living longer, and people are working longer. Most of my friends are working till 68, 70, 72 now.

They don't want to retire to, quote, "nothing," right? Well, I agree. In fact, this is my encore career doing what I'm doing now. As you know, I sold my company a couple of years ago. And now I'm just doing consulting and doing hourly advising. And it's an encore career.

But I admit, I like the idea of continuing to get paid enough money so that I can pay all of my bills and travel and such and not have to touch my savings. The encore career is a good idea, and a lot of people are probably going to do that if they can.

Yeah, and I would add one other thing on top of the points you made, which are critical, is it gives you that social connection. You stay engaged. And I'm sure you're just like me. You get great psychological joy out of helping people knowing you're increasing their odds of being them able to achieve their life and financial goals by putting them on the right path.

Well, it's interesting from where we sit, because we get to pair into people's lives like most people can't. There's an old joke that if you really want to get to know someone, you either marry them or manage their money. And it's true. I mean, I'm talking with three or four people a day and really getting to know all about them and all about their finances and all about how they're planning things.

And one thing you brought up, and I want to reiterate it, is this idea of disability insurance. I see a real, real lack of disability insurance out there, particularly among physicians and among people who are high wage earners. For some reason, it sort of passed them by. And I asked them, do you have disability?

And they're making $500,000 a year. And they say, well, I think I've got a policy. I think I've got a policy. And I asked them, well, what would you make? And it turns out that somebody who's making $500,000 a year and has $300,000 a year in bills because they bought a new house and they want to send their kids to college and this and that and the other, if they became disabled and they couldn't work, they would be making about $100,000 a year.

That's a problem. Yeah, and it's a Pascal's wager bet, right? It's one of those things. It doesn't matter what you think the odds of your being disabled are, you're likely not willing to live with the consequences of being disabled without disability insurance. And I would add the other thing I would imagine you also look at, one of the first questions I ask somebody, because it's the cheapest insurance there is, and everybody should have it, is an umbrella policy.

You can get a million bucks for something, I think, in the $300 to $400 range. And you should have at least as much, I think, as your financial assets, and maybe even most people up to about $10 million, because the lawsuits today are paying out such large amounts on claims.

I personally carry a $10 million umbrella policy. Mine isn't quite that large, Larry, but I haven't written 17 books. Well, you and I know, you don't get rich writing books. I've got to move into the next area of our interview. You're very popular with the Boglehead community. I've always been for 20 years.

Well, hopefully, we're going to get you out to a conference in one of these days. When your name comes up, and you're active on the Boglehead site, and a lot of people have read your books. And so when I went on the Boglehead, and I announced that I was going to be interviewing you, I got literally dozens and dozens and dozens of questions that people wanted to ask.

So I have a printout here of several pages long of questions. Now, we're not going to be able to get to every question, but I want to get to as many as we can. So here we go with the first question. A Boglehead asked, what your thoughts are on the new Vanguard factor funds, and particularly the Vanguard multi-factor funds?

These came out a little later on, and they don't seem to be publicized that much by Vanguard. But do you think that the way they're doing it is adequate? Well, I think a short answer would be this. Number one, virtually anything Vanguard does is likely to be done very well.

One, highly ethical people. And number two, they do have good researchers there. Their funds, we did take a look at them, so I can comment. They're well-designed, and they're cheap. So those are all Vanguard traits, if you will. So somebody looking to add a little bit of further diversification in their portfolios away from a market-like portfolio, this is certainly worth looking into.

The only negative, if you want to call it that, is they tend to have very low exposures to each of the factors. They're not a deep exposure to them. So one of the things you have to be careful about, people often, especially bogleheads, focus on expense ratios. I think the right way to focus on it is the expense ratio relative to the amount of exposure to these factors you're getting.

So for argument's sake, just to make it simple, if you thought all of the factors would get you 2% a year, and you're getting 10% exposure to it, well, you're getting 20 basis points. And if you're paying 8% for it, and their implementation costs, you're probably not getting very much of any benefit.

On the other hand, if you paid 20% for 30%, you're way ahead. Yeah, I call what you just talked about the cost per unit of risk. You could pay a lot of money for a small-cap value fund that basically has mostly beta and doesn't have much small cap and not much value.

Exactly. You have to look at that. I'll give one very brief example. We used to use DFA Small Value Fund. We switched in 2011 to Bridgeway because it was much smaller and deeper value. It was 8 basis points more, but the market cap was half the size of DFA.

And the price-to-book and earnings and cash flow were much lower. We estimated if the factors delivered what we expected, it would outperform by about 60 basis points. We were willing to pay 8 to get 60. I have a couple of people who asked about risk parity. So I'll let you go ahead and explain quickly what risk parity is, and you can give your opinion.

Right. So here's the basic concept of risk parity or why people should at least be thinking about it. So a typical 60/40 portfolio, when I ask people if you have $1 million, $600,000 in stocks, and $400,000 in bonds, how much of your risk-- not money, but risk-- is in stocks, they'll say 60%.

But that's not true because stocks are so much more riskier than, say, a five-year treasury. They're about four times as volatile. So about 85% of your risk in that portfolio is in your equities. If you believe that, as you and I, I think, can agree, that markets are pretty highly efficient, then you should also believe it has to follow that all risky assets have very similar risk-adjusted returns.

So small caps are riskier than large caps, so they should have higher expected returns. It doesn't make them a better investment. It means they're riskier. And once you adjust for the risk, their risk-adjusted return should be similar. Risk-adjusted returns are not just the Sharpe ratio. You have to think about liquidity and trading costs, et cetera.

But that's the idea. So risk parity, the idea is to diversify across as many unique sources of risk as you can identify that provide premiums that have evidence, using my terms from my factor book, that they're persistent over very long periods of time. They're pervasive all over the globe.

They're robust to various definitions, so you don't have likely data mining. So for value, PE, cash flow, EBITDA, all work. Momentum, you can have different formation and holding periods. They work. Has to survive transactions costs, meaning it's implementable. You don't want a 5% premium in micro caps. And of course, you're 6% to capture it.

And lastly, it has to have intuitive reasons for you to believe it will likely persist. The idea of risk parity, then, is to put equal amounts of money in every one of the assets that you could identify, so you end up having an equal amount of risk. So that's the concept.

Directionally, that makes perfect sense and logic. I would say, however, I don't have the same degree of confidence in all of these factors or asset classes. So I want to put more of my weight in my portfolio on things I have the most confidence in. Those are things that are risk-based solutions, things like small in value, where momentum is purely behavioral.

So I don't want to ignore it because it has a lot of evidence that meet that criteria. So I just try to eliminate negative momentum, as an example. And then I invest in other assets, like reinsurance, quality, profitability, et cetera, putting more weight on the ones I have the most confidence in and less weight in the others.

So each person should decide how much confidence do they have in each one, and then diversify. Logically, bottom line is risk parity is a good general idea. But I think it's not the right answer. You should not be looking to have exactly the same amount of risk in each of your assets.

You should put more weight on the ones you personally have the most confidence in that will deliver above-market returns or have unique risks that are rewarding. Talking about risk, one of the Bogleheads asks, isn't a simple portfolio of a few index funds still the best way for the general public to grab their fair share of market return without breaking the bank on expenses?

And if not, what can the general public do to try to take advantage of some of your ideas? First of all, I think you and I certainly can agree that a simple two-fund portfolio of a total US and a total international to the global market cap, which today is actually roughly 50/50, you want to tilt a little bit or, as Cliff Asness would say, sin a little bit.

So you want to have a little more US or a little more international. That's fine. And that's a very low-cost, tax-efficient way to do it. The problem is you have all of your risk then in market beta, where correlations go very high, especially in crises. But even not in crises, you can go through very long periods.

We happen to be one now. For the last 10 years, US small value has performed relatively poorly. From '66 to '82, on the other hand, a total US market fund would have underperformed totally riskless one-month Treasury bills for 17 years and underperformed small value by over 1,000%. To me, the right answer is you want to be low-cost, tax-efficient, and give yourself the chance to stay disciplined.

And the right portfolio is the one that you are most likely to stay disciplined. So no matter what you invest in, whether it's total stock market funds, there are three periods where US total market has underperformed totally riskless T-bills for at least 13 years. That's cumulative 45 of the last 90 years.

Obviously, in the other 45 years, it dramatically outperformed. We don't know which period you're going to get. Maybe the next 15 years, and you retire tomorrow, is one of those where US market beta does poorly. So to me, if you are able to deal with this tracking variance issue, that once you diversify, you know you're not going to look like the market, and you have to live with that.

If you can't do that, well, then you shouldn't tilt into smaller value or own reinsurance or anything else. Because every risk asset guaranteed will go through long periods of underperformance. There is no such asset that doesn't. And that has to be the case, or there would be no risk for the long-term investor.

On the other hand, if you do diversify-- and diversification is difficult, because you're always going to own some things that are doing poorly, which is why so few people are good at it-- then you increase your odds of getting a return that's expected. You're narrowing the dispersion of your outcomes, because you won't own all of the best, and you won't own all of the worst, if you will.

And that actually goes a long way to giving you a better chance of getting the mean return expected out of a potential dispersion. When you run money Carlo analysis, diversified across asset classes or factors, unique sources of risk, will come up with much higher odds of success. But it doesn't do you any good if you can't stay disciplined.

So don't do it if you're not going to be able to stay the course. And that means rebalancing along the way. I call it a lifelong investment strategy, because you really need to be in the thing lifelong. You've got to believe in it so strongly that you're willing to stick with it for the rest of your life.

If you don't, odds are the time you jump out is going to be the worst time. And then looking backwards, you should have never done it to begin with. I completely agree. Exactly right. So let's get on to something that I think is really important right now. It's called recency bias.

And somebody asks, do you think that investors are suffering from recency bias with the stock market going up over the last 10 years? Well, we know recency bias is prevalent to all investors, not just individuals. We spend more of our time managing people than we do managing money. Whatever is done well recently, they want to buy.

I remember-- well, today, everyone, why we own international emerging markets are a small value. If you just go back to 2007 at the end of that year period, the prior five years, S&P had a great period. It was up 82%. EFI was up 162, call it double. And the DFA Emerging Market Fund was up 565%.

And money was flowing in like crazy, as I'm sure you remember, into emerging markets. I do. It was all the rage. Yep. And then, of course, the reverse happens and then floods out. So the problem is people only buy after the good returns, and they panic and sell. So they hurt themselves.

The best thing, as you said, and I completely agree, you've got to have this kind of lifelong approach. And you've got to stick with it. Now people are fleeing emerging markets. They're fleeing small value. And by the way, I'll point out one of the techniques I use when I talk to people.

I point out value went through exactly the same period, even much worse performance, just not as long, in the late '90s. And Buffett, in many cases, is being ridiculed in the media as the time has passed him by. In the new dot-com era, you got to own Intel and all of these kinds of companies.

But it is the same thing that happened in parts of the '80s when digital equipment and those stocks were there. And we're seeing now the same thing. Buffett didn't give up on value in the '90s. And then the next eight years were the biggest value premium ever by far.

And right now, value relative to growth valuations are pretty much almost exactly where they were in '99. Now I'm not making any prediction. My crystal ball is cloudy. But valuations look really stretched. And value looks really cheap. And I ask people, what do you know that Warren Buffett doesn't know?

He's not giving up on cheap value stocks. Why should you? It doesn't matter. Some people you can't protect from themselves. Larry, question from a Boglehead having to do with the 4% rule. And I'm referring to the idea that it's safe to withdraw 4% of your portfolio. Is there now a 3% rule instead of the 4% rule?

Here's the way I would answer that. First of all, I don't believe people should use that as anything more than a guideline, number one. But the 4% rule is based on the historical evidence when valuations, of course, were much lower and expected returns much higher. And bond yields were much higher, which meant yields were much higher.

Today, if you ran a Monte Carlo simulation using the same type of life expectancy and withdrawal rates, but now just projecting returns based on today's valuations, you get a number closer to about 3.3% to be safe. I think withdrawal rates like 4% or 3% or whatever you're going to use are fine when you're in your 40s and you're still working and you're looking toward retiring in your 60s or mid-60s.

And when you're projecting out how much rate of return you might get on your portfolio and how much money you need to accumulate to get to a certain point. And then from there, if you took 4% or 3%, how much would that give you? I think that's where the 3% or 4% safe withdrawal rate works.

But in retirement, when you're actually getting ready to retire, the withdrawal rate is the amount of cash flow that the portfolio creates, to me. So we're looking at dividends and interest income. And what amount of dividend and interest income and what amount of Social Security are you getting? And how much cash flow are you getting in?

This is your sustainable amount. This is the sustainable amount that you can get out of the portfolio. If you go more than that, then you start cutting into principal. Then it becomes not as sustainable. So I think that this 3% or 4% withdrawal rate is good for planning purposes, long-term, long-range planning purposes.

But you actually get into retirement, as you said. It's sort of year by year. And you're budgeting. And what are you going to do? And I know you use Monte Carlo simulation. I don't particularly use that. But I think we all get to the same spot. When you're actually in it and you're actually taking money out of the portfolio, you've got cash flow coming in.

And then you've got things that are occurring on a year-over-year basis that might need to be looked at as they occur. I'll just add quickly, Rick. One, I certainly agree with the first half of completely what you're saying. 3% or 4% reasonable for long-term planning. In retirement, the only thing I would add to what you said is not drawing any principle, I think, becomes way too conservative.

Because we know we are not going to live forever. So you can certainly dip into some amount of principle. Unless you have that, I'm going to want to bequeath desire there. So we don't want people not to be able to enjoy their life and spend money. So you want to at least consider you can dip into that portfolio a little bit every year, and just depending upon how far you're along.

Certainly, at age 90, someone maybe got a 10-more-year horizon or most, they should be able to take out a lot more than 4% of their portfolio, right? Absolutely. Just like exactly what the required minimum distributions are on a retirement account, for sure. Now, if you could only spend it at age 90, that would be better, right?

Right. That's the question, yes. All right. Somebody is asking, what about if you're in a situation where you have nobody who can take care of your affairs in retirement? You're unable to handle your own affairs. You're unable to manage your own portfolio at some point. What do you suggest for a person or a couple who is in that situation where there's nobody who can actually come in and help them and take over for them?

What suggestions do you have for those folks? Yeah, well, first, I'm going to broaden the question because I think it's going to be helpful for every Boglehead. Just in my own particular case, we're all living longer. The risks of the dementia go up. And as we age, we become more susceptible.

The con artists are most likely to prey on the elderly. And they know women are more susceptible. So they are targeted. I have a whole chapter on the book there. But one of the things that I did personally in creating my estate documents, my wife has a right, which I have a reciprocal right.

If she believes I'm in cognitive decline and are unable to make sound financial decisions, she can request that I have or require that I have a cognitive test. And if I can't pass it, then I am to be removed from power of attorney over bank accounts, financial matters, brokerage statements, everything to protect myself and the family.

And of course, I have the right to the same thing. And that's right in my estate documents. And obviously, if you're alone, you want to have that situation where some trusted family member or friend or whoever it might be. And I would prefer it not be some corporation like a bank trust that creates all kinds of problems with family members having difficulty accessing funds at times.

But if you don't have that, then some trusted advisor could play that role. We do that for a select few of our clients. But you need absolutely to have somebody who you trust, the most trusted person in your life. I'll just add one other comment. Sadly, the person most likely to rip off the elderly is some family member who might be in trouble, either drug abuse, their business went south, they got a divorce and got in trouble, and often will, sadly, rip off the parents.

I've seen people who were financially in trouble just ruin their parents' fortune by taking over and by convincing the parents to give them control over the assets. And very soon thereafter, there were no assets left. I've seen that happen. It's really unfortunate because these are unpleasant things to think about and contemplate.

And therefore, people delay and don't do it. So I'm going to urge all the bogleheads who don't have a disability policy, don't have an umbrella policy, and don't have this request to have an exam where you could pass a cognitive test, if you don't have those in your documents, go out and get them tomorrow.

Here's a couple of questions about different asset classes. You could just answer these very quickly because I have here, there, and everywhere. So one of them is, what role does cash play in an investor portfolio? Almost none because today, you can stick with short-term bonds just as highly liquid.

So other than money in a checking account, you typically don't need much cash. As long as it's in a short-term bond fund, your volatility is going to be 1% or 2%, depending upon how short it is. So you want to keep maybe a couple of months' expenses in cash.

And beyond that, there's no need to have a lot of cash around. That's one of the most common mistakes I see, is people sit with lots of cash. And what about peer-to-peer lending? Something new that I haven't heard you talk a lot about, but I know it's in your portfolios.

Right. So this is a natural. The banks have been disintermediated by fintech providers. Partly, Dodd-Frank opened the doors for them. The banks were short of capital. And today, you can get a replacement for a 22% credit card if you're a good credit in the 13% to 14% kind of range.

And if your credit isn't quite as good, the rates go up from there. After expenses, we think a well-run fund should be able to generate 4% to 5%, again, above T-bills. And you're getting compensated for credit risk. So last question, Larry. What is the most recent version, or the most up-to-date version, of the Larry Portfolio?

So the Larry Portfolio phrase was coined by The New York Times. And it only referred to basically the equity portion of the portfolio. So it was US small value, international small value, emerging market value. So it's all in the highest expected return assets. Now, you could use that Larry Portfolio in one of two ways.

I have investors who are young, willing to live with the tracking variance. And they're 100% equities and 100% the Larry Portfolio, trying to earn that extra premium. On the other hand, you have people like me who have won the game already. And I'm trying to protect my wealth. I'm trying to create more of that risk parity portfolio.

I don't want a lot of market beta exposure. But I'm trying to keep my expected returns up. The equities I'm holding have higher expected returns. That allows me to own less market beta and then more safe bonds. So my portfolio was roughly, at the time, was 30% public equities, 70% safe bonds.

It's a little more diversified today, adding things like reinsurance and alternative lending. I also happen to own something called the Variance Risk Premium Fund, or All Asset Variance Risk Premium. It's also one of the most studied research, well-documented premiums in all of finance, which is the Variance Risk Premium.

So you're selling volatility insurance. We think that, again, has a 4% to 5% above T-bill expected return. And I also own AQR's Alternative Style Premium Fund, which is a long-short portfolio of four different factors across four different asset classes. So moving more towards risk parity. But each one of them is a few percent of my portfolio, because I want most of my portfolio in that safer bonds.

Well, Larry, it's been very great having you on here. And as always, every time we talk, we are 99% correlated and only 1% uncorrelated. Yeah, and people love to focus on the 1% because that creates the tension, right? Well, thank you so much for being a guest on the Bogle Heads-On Investing Show.

Great to have you. And hopefully, we'll have you back again soon. Yeah, my pleasure, Rick. And you can let the Bogle Heads know, if we didn't get to any of the questions, they can always shoot me an email at elswedro@bamadvisor.com. Always happy to answer questions. All right, thank you, Larry.

Take care. This concludes the 12th episode of Bogle Heads-On Investing. I'm your host, Rick Ferry. Join us each month to hear a new special guest. In the meantime, visit bogleheads.org and the Bogle Heads Wiki. Participate in the forum, and help others find the forum. Thanks for listening. you