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🥊 Financial Gurus Collide: JL Collins and Paul Merriman Debate Wealth Strategies📈
1.2k Plays8 months ago
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💰Today, we bring you an exclusive conversation between two investment gurus, JL Collins and Paul Merriman. They debate the secrets of building wealth, focusing on investment strategies, index funds, and the potential power of small-cap companies.
If you're looking to sharpen your investment acumen, this episode is full of knowledge and insights! Join us as we navigate through the crucial aspects of long-term investing, risk management, and the dynamics of the S&P 500 and Total Stock Market Index Fund.
Paul and JL dissect the importance of diversification, disciplined strategies, and the psychology behind successful investing. Whether you're a seasoned investor or just starting out, this episode is packed with valuable tips and strategies for a robust financial future.
Free Fiology Money Course: https://www.fiology.com/free-fiology-workbook/
Paul Merriman's Free Books: https://www.paulmerriman.com/free-books
S&P 500 vs US SCV Equity Portfolio Table discussed in episode: https://irp.cdn-website.com/6b78c197/files/uploaded/-G-%20S-P500%20vs.%20SCV%20TableG1b.pdf
JL Collins' Blog: https://jlcollinsnh.com/
JL Collins' Books:
A Simple Path to Wealth: https://a.co/d/aSz8jhC
Pathfinders: https://a.co/d/3hS5p1g
📚 Don't forget to like, share, and subscribe for more insightful discussions on personal finance and investment strategies. Drop your thoughts in the comments below and let us know what topics you'd like us to cover next!
#InvestmentStrategies #WealthBuilding #JLCollins #PaulMerriman #FinancialIndependence #IndexFunds #SmallCaps #MarketVolatility #InvestmentPsychology #PersonalFinancePodcast
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Transcript
Simple vs Complex Wealth Paths
00:00:00
Speaker
The simple path to wealth versus a slightly less simple path to wealth. J.L. Collins and Paul Merriman discuss why you would prefer one over the other. Here we go.
00:00:12
Speaker
Well, this is the first time, so I hold you both in my mind in very similar spots. Like I've known both of you for a while. And the first time I ever met Paul, it was, I believe it was Raleigh, North Carolina, Paul, you had just, it was a library. Yeah.
00:00:31
Speaker
And we had connected over messenger or something a few days before. And I drove from Chesapeake to sit in on your talk. And then after the talk, you and I went and had dinner at a local restaurant. Right. And two hours flew by. And I just remember thinking, what a great conversation. What a great guy. It was thank you. It was it was really fun because you've got the spirit and you got the right age to do this.
Young Investors' Advantages
00:00:58
Speaker
I mean, I envy your young
00:01:00
Speaker
your youth, but I'm glad you've kept it up. I wasn't sure for a while whether you were going to, so happy to see you made it. Paul, wouldn't you kill to be at that age at this point, knowing what these guys have the benefit of knowing? Yeah, and I do a piece talking about the efficiency compared to when I came into the industry back in the mid-60s.
00:01:27
Speaker
And the inefficiencies then and the efficiencies now, the only problem is we got tough competition in the field of education when young people believe that cryptocurrency is less risky than the S&P 500. And so I mean, here we have these great low cost index funds and a lot of competition to do something worse.
00:01:54
Speaker
Yeah, you mean you're telling me that crypto is not the thing to do? Well, actually, if we could just buy the past, it is the thing to do.
Impact of Vanguard's Index Fund
00:02:04
Speaker
In fact, I just looked to see how Trump's stock is doing before I came on. And up in mid 10 percent swing in a day is going to be normal for that thing. Pretty, pretty remarkable.
00:02:18
Speaker
You know, I'm no longer a stock picker, but talking about something that just screams sell short, given the revenue and the losses they're going through. But on the other hand, it's a bit of a meme stock. And I would be afraid to sell short because, of course, you know better than most. They don't always move, at least in the short term, on fundamentals. So it'll be interesting to watch what that one does.
00:02:47
Speaker
Talk about high risk. But back to your point, I mean, it is the tools we have available now and thank you, Jack Bogle, just breathtakingly better. And I started investing in 1975, which was the same year that Mr. Bogle brought out the first index fund and established Vanguard. I wasn't smart enough to know, knowledgeable enough to know that at the time. And I would not have been smart enough to embrace it.
00:03:17
Speaker
time, but would that I knew about it and would that I were smart enough, but now the research is in and it's such a powerful thing to understand and it's so readily available.
Future Generations in Wealth Management
00:03:34
Speaker
Well, it's hopefully a new age for young investors. I love the emails I get from my kids when they've gotten a job. And the first thing they tell me is whether there's a match at the company and what they're going to do in the 401k. And I sense that
00:03:53
Speaker
It's your daughter, right? You started this whole thing with a letter to her, if I recall, right? A series of letters, yeah. A series, right. And I assume that she has come along and no longer needs your guidance.
00:04:10
Speaker
She is well on the path. You know, an interesting thing along those lines a few years ago when she was still in college and I wasn't quite sure how responsible she'd be with money as an adult. And one of our chautauquies I was having a conversation with some of the people and they were asking whether I was gonna leave money to her. And I said, well, that depends. If she shows that she can handle it, then yes.
00:04:38
Speaker
If she doesn't, I think leaving money to someone who is unprepared to handle it or unwilling to deal with it is doing them no favor. Now, the great irony is, thankfully, she's turned out to be well able to handle it, but because she is, she doesn't need it. She's doing her own.
00:04:57
Speaker
You know, there's, and I think there's a lot of truth in the people that we serve. I don't know about your base of followers jail, but I find maybe because we have so many tables of numbers,
00:05:12
Speaker
The people that are following our work, if they hadn't found us, they would have found somebody very similar because they're mostly engineers and people who are really wanting to make their decisions based on some sort of evidence, not just a sales pitch.
Introduction of 'Pathfinders'
00:05:33
Speaker
So it may be, by the way, is she an engineer? No, no, she's not. She's in tech sales.
00:05:41
Speaker
Oh, that's great. Yeah. Well, you know, that's an interesting that you say that because I think you're right that people, if you and I were not doing what we're doing, people would at this point in time, certainly this information is available.
00:05:57
Speaker
But my experience with the people in the community is not that they're just engineers. I have a new book out, Pathfinders, which is stories from a hundred different people all over the world who've read The Simple Path to Wealth and are following it.
00:06:13
Speaker
one of the reasons i was excited to do that is i think the idea that this path is only for tech engineers only for fairly high paid people is a myth that was not my experience it should talk with that was not my experiences i met people.
00:06:32
Speaker
going to different events and got to know them in the field. I was frankly stunned by the diversity of people that are on the path. And this book, Pathfinders, there's a couple of stories from that kind of group, you know, the Tech Silicon Valley, but only a couple. Most of them are from very, very different and very varied backgrounds, which I think is awesome.
00:06:55
Speaker
because it really shows that this is accessible to anybody. Certainly, anybody who has the interest and the technology to listen to this conversation is perfectly able to follow a path to financial independence.
00:07:10
Speaker
And I do find it interesting how the two of us both only trying to do one thing and that is to help people do better with their investments. My sense is it's important they understand these differences because
00:07:31
Speaker
You're a truth teller. I'm a truth teller. Larry Suedro's a truth teller. There are a lot of people I believe are telling people to do something in the future. All of us know that we cannot know the future. None of us know what is going to happen.
00:07:49
Speaker
I think there are some people that what you're recommending is just going to be a perfect fit.
Investment Recommendations and Peace of Mind
00:07:55
Speaker
I think some people a target date fund for the rest of their life, whatever problems they have are still better than anything else they're likely to do.
00:08:05
Speaker
I'm glad to have a chance here today to talk with you about the differences between what you recommend and what I recommend, and for people to understand what those differences might mean in terms of peace of mind.
00:08:23
Speaker
in terms of return in terms of volatility all of those things so i'm not the boss here david is so but i do really i've looked forward to this opportunity for a long time and i have my appreciation of david in and getting us together it's so.
00:08:45
Speaker
I'm sorry, I didn't mean to cut you off Paul. Well, I was just going to say that you are considered to be, was it mob boss? No, no, it was godfather of the financial freedom movement. So, you know, that's a big position in this world. You know, so I'll circle back to that in a second.
00:09:07
Speaker
I think when before we started recording, one of the things that we were talking about this might, uh, uh, might David be one of the things that you were hoping we'd say again, as I, when you suggested this conversation happened, David, I, I was stunned because I've been aware of Paul in his work for a long time. And I think he's been aware of me in mine. And it's a little stunning to me that he and I have never actually had a conversation.
00:09:33
Speaker
So this is something I've also looked forward to and probably well overdue. But the godfather of I-thing, Christy Shen, who wrote Quit Like a Millionaire, is the one who coined that phrase. And when she first did, I absolutely cringed.
00:09:52
Speaker
But now I've come to appreciate the marketing value that it
Success of 'The Simple Path to Wealth'
00:09:56
Speaker
has. Terrific. I don't deserve any credit for it, but I got lucky that she plastered that label on me.
00:10:08
Speaker
So Paul, do you have any nicknames for yourself that you've either accumulated over the years? You know, all of my nicknames go back to when I was in junior high school or high school, and they were really tender, caring, like pudge, high pockets. High pockets was one I liked a lot.
00:10:28
Speaker
But no, I don't know that I have any nicknames in this field. I do think, when I look at how many books, because it's probably outdated, but when I saw how many of JL's original book have sold, it's over 400,000. I've been trying to give away my books.
00:10:58
Speaker
And I haven't gotten 400,000 people willing to take my book for nothing. So I just think it's remarkable the traction that you've gotten with the message. And it may not be that you've helped 400,000 people retire with a lot more money and a lot more peace of mind, but it's probably half of that. And if it's half of it, I just think that's remarkable work, Jill.
00:11:26
Speaker
You know, well, thank you, Paul. Actually, actually, it's over 700,000. Oh, my God. And nobody is more stunned by that than I am. You know, when I wrote this book, it
00:11:37
Speaker
And I've shared this with David before. It took me three years to write it. Two of those years were because I'd throw it down in disgust and step away from it for months at a time. Because I thought, who's going to care? Nobody's going to care about this. And so I had no idea that it would enjoy the success it had. And when I was getting ready to publish it and I self-published it, I started asking around as to what does this successful book look like?
00:12:06
Speaker
And people said, well, if you sold 10,000 copies, you've hit it out of the ballpark. That's great. I bet I can do 10,000 copies just based on my blog readership. So that was my ambition. And I really wrote it for just one person, my daughter. So it's a book that's focused on somebody at the beginning of their journey, doesn't have any lifestyle things to unwind or bad investments, and who's an American.
00:12:36
Speaker
as the new book, Pathfinders, illustrates people
Index Funds vs S&P 500
00:12:40
Speaker
from all over the world in all different stages of life have found value in it. And I'm a little floored and very humbled by that. So, yeah, nobody's more surprised than me.
00:12:52
Speaker
Well, it's interesting because in a sense, you have thrown down the gauntlet here. I love it when I have a chance to talk to somebody who's read your book. And it's not that I know any more about the future of investing than anybody.
00:13:14
Speaker
But I do honestly believe that if I could just make a very small difference in their portfolio, it really isn't much jail. Now, you may say, well, yeah, but you're going to make them do something. And if they have to do something, then they're probably going to screw it up, or they're going to forget something. Well, I'm putting the confidence in the student at this point. And here is what I would like them to do. You recommend.
00:13:44
Speaker
a great fund in the total market index. That's US. And we have returns for that fund going back to 1928. Now, obviously, it isn't that fun, but it's what the academics have done. And here's the part that was so confusing to me. How come
00:14:08
Speaker
The return, whether we go back 15 years or we go back 96 years or whatever it's been, how come the return of the total market index, which has large and small and mid cap and value and growth, why isn't it more than the S&P 500? If small cap is such a big deal, and it is for me,
00:14:32
Speaker
Even small cap value makes it a bigger deal to me. But here's the bottom line. The total market index has small cap. It has small cap value. If there's actually a premium, how can it be it hasn't made any more money?
00:14:50
Speaker
And I think it's an important piece of information because while you have in the total market index, I think about 10% devoted to small cap. But what they've done is that first of all, their cap weighted basically, but they've balanced the small cap growth with the small cap value and small cap growth.
00:15:16
Speaker
its performance has not been good. And so it is, in essence, neutralizing the small cap value that's there. And so because if you didn't have the small cap growth, you would have the impact. And that impact, at least since 1970, where we can track some real numbers, that impact of that much small cap value itself without the small cap growth would be about four-tenths
00:15:45
Speaker
of 1% a year. And that's a big, big deal to me. And I know it is to you as well. But all that means to me is
00:15:56
Speaker
If I had a chance to talk to your daughter, I'd love to talk to her. I'd say, look, I want you to have the small cap, but I'd rather have you on the S&P 500 and put the small cap together with it. Take 10% small cap value, add it to the S&P 500. The S&P 500 has actually made one-tenth of 1% more
00:16:22
Speaker
than the total market index over this long. Well, that could be noise. But there's no big advantage. And I was talking to Chris Pederson, who works, in fact, he is the fellow that developed the two funds for life that we teach people about.
Small Cap vs Large Cap Performance
00:16:40
Speaker
And he said, you know,
00:16:43
Speaker
JL is right about one thing. People are gonna know that they've got all these different asset classes. And when people say, well, do you have any, yeah, yeah, I got that. Yeah, this, yeah, I got that. And they'll have peace of mind. They'll have a feeling like they've got all that they need. And I'm sure you have a thoughtful response. Well, so actually my first response is a question
00:17:09
Speaker
For you and because we do know that large cap and small fat cap in terms of performance overall, you know large cap and small cap Companies cycle in and out of favor. So sometimes large caps outperform for an extended and sometimes small caps do
00:17:25
Speaker
Do you not think that that's true of growth and value of small caps? Is growth, small cap, never going to have its day in the sun? Well, there's a difference between never having a day in the sun and having an expected long-term return
00:17:43
Speaker
that when they do have good years won't be enough to make up as much as you would like, by the way, as overall. So here's the sad part about small cap value and the reason I have to be careful who I convinced to do it. We can build what they call a telltale chart.
00:18:01
Speaker
And it can compare the relative returns to the s&p 500 going back to nineteen twenty seven and over the ninety some years the return of an investment on a lump sum basis back then.
00:18:19
Speaker
20 times, let's say, I don't remember the exact number right now, but 20 times with small cap value, then if you put your money into the S&P 500, again, they're both hypothetical because there was no small cap index, nor was there an S&P 500.
00:18:38
Speaker
But here's the tough part. And this is where we have to figure out whether an investor is tough enough to deal with this. Small cap value, when you look at that telltale chart, the relative returns, it spends more than half of the time trailing, not having bad returns.
00:18:58
Speaker
but trailing the S&P 500. So you can have a point in time, and by the way, when is the point that people like small cap value when it's had a big run? Of course. If it hasn't been running, why would I want to own that? It's not making any money. And yet, where's money? Exactly the time to be buying it. Exactly. Exactly. And there are two periods
00:19:22
Speaker
Where it's 17 years before the returns get back to being exactly the same. And then small cap value will have a surge and they're generally fairly short surges of maybe five to 10 years of.
00:19:37
Speaker
massive high performance oftentimes by the way coming out of big sell-offs like 73 and 74 and 2000 through 2002 and so I just wish that we could get somebody to put together a total market index that has small cap value as that exposure. I think it would make a difference in these young people's
00:20:00
Speaker
lives. And that's kind of my shtick on that. And by the way, I think it's also now that I'll stop talking here, David. You're probably wishing that you have actually had a conversation going here. But we have a table that shows in 10% increments what the risk and return is by adding 10% more small cap value from zero
00:20:26
Speaker
to 100% all small cap value. So you can see what it adds in return and you can also see what it costs in risk because if you go out to 20% small cap value and 80% S&P 500, you have added over 1%, about 0.8, I apologize, 0.8 in the return.
00:20:51
Speaker
The additional risk you had to take, at least over the last 54 years, the additional risk you had to take was losing in the worst 12 months 3% more and the worst drawdown of 5% more.
00:21:07
Speaker
I don't think an average investor would even know the difference all they would know was oh my god what happened because i asked people how what kind of return have you gotten on your investment it's rare that i find anybody who knows and i'm sure you've had the same kind of feedback.
00:21:26
Speaker
Yeah. So, and of course, some people, in fact, a lot of people listening probably won't appreciate how significant that 0.8% increase can be over time. It sounds like nothing when you're just throwing it out, but compounded over time, that can make a significant difference in a portfolio.
00:21:44
Speaker
So you've enlightened me on something I've kind of wondered about. And as you've correctly observed, I have a preference for the total stock market index fund.
401k Investment Options
00:21:56
Speaker
And specifically, because it does have mid and small cap companies in it, fairly small percentage, because again, the fund is cap weighted as you observed. And I think of that as Tabasco. The same reason I put Tabasco in my food, it's just a little extra spice.
00:22:12
Speaker
Yeah. But it's always struck me that I get questions all the time from people who are looking at their 401k options. And they'll say, JL, I don't have a total stock market option, but I've got an S&P 500 option. Is that OK?
00:22:28
Speaker
And I'm forever saying, that's fine. That's great. Don't know worries. You've got it. And like you, I've observed that the two perform in lockstep. And I've never really looked into the reason why, but I've kind of wondered why that would be. Because I would expect that extra spice in my portfolio with the small cap would be
00:22:51
Speaker
more meaningful. And I'm also struck by the fact that Jack Bogle held an index 500 fund till the end of his life. And Warren Buffett is recommending not a total stock market fund, but an index 500 fund for his heirs. So these things are certainly very valid. And so looking back, I can't say, well, why have I bothered?
00:23:14
Speaker
Can we take two minutes each and go back, identify the philosophy that you endorse and why? JL, why don't you go first?
00:23:24
Speaker
Well, sure. That's probably a good idea. So basically, as we've kind of already alluded to, I recommend the total stock market index fund. And I think that's really the only stock fund you need. And as I just said, you can equally use the S&P 500 index fund. Your performance over time, from what I've seen, is going to be essentially the same. So whatever your preference is, and if
00:23:53
Speaker
It's good enough for Warren and good enough for Jack. It's good enough for anybody listening to us. Again, I like the little bit of extra spice that the small and mid-cap stocks in the total market give me. But to be honest, I haven't really tasted that spice very much to say it. And then I recommend that as your only investment. And this is the advice I give my daughter. I was once asked, why is your advice so specific? Most people writing about this stuff give this
00:24:23
Speaker
kind of general advice. You're very specific. Buy VTSAX, which is Vanguard's version of the funds we're talking about. And it's because I'm writing for one person, my daughter. This is exactly what I tell my kid to do. And I tell her, buy as much as you can, whenever you can, and hold it forever. Now, when it comes time to live on your portfolio, you might want to add something to smooth the ride because when you're working,
00:24:52
Speaker
And presumably you're putting a fair amount of money into your investments each month when the market drops you get to take advantage of those lower prices so those market drops which are perfectly normal part of the process not something to worry about or panic about.
00:25:09
Speaker
will you you're now you're able to take advantage of those because the thousand dollars a month or whatever it is buying more shares when you stop working and of course for the people i write to in the f i community sometimes that's in your thirties and you're living on your portfolio now you might want to add some bonds to pick up the slack of that income flow that's no longer there right
00:25:32
Speaker
And if you retire at 30 and then you say, you know what, I'm bored, I'm going back to work, or you just evolve into doing something that provides income again, you can shift back. And that's how I think a lot of younger people will probably go through their lives. It's not the kind of life that Paul and I grew up with, which is more typical, you know, you get through school, you get a job, you work until you're 60 something and then you retire and
00:25:58
Speaker
And it's just a different world, and I think a better world for it. So that, in a nutshell, is how I see things. And by the way, when you add bonds, shouldn't surprise anybody. I go for the total bond market index fund.
00:26:11
Speaker
And Paul, you're an advocate of what has been coined to funds for life. And can you just give a quick overview of the strengths of that and why you support it? We have about 10 really different portfolios for different kinds of investors. And we have over 200 tables that show people how all of these things work during accumulation, how they work during distribution period.
00:26:39
Speaker
But what you have just brought to the attention here is two funds for life, which was developed by Chris Pederson, who is one of the directors, volunteer folks. All of our folks are volunteers.
00:26:53
Speaker
And the way he set that up, and I think it's absolutely brilliant, he believes in target date funds, as I do too. And he also believes that when you're young, you should take more risk. Just as JL was mentioning, during a declining market, it is good to have a chance to buy more shares. And when you can buy more shares of companies that historically have made higher returns,
00:27:23
Speaker
during the bad market, that's even better if an investor really understood. And Chris wrote a free book on this called Two Funds for Life. We offer that on our website. But there's a formula. The formula is you multiply your age times one and a half and that's how much you put in the target date fund and the rest you put into small cap value.
00:27:49
Speaker
And as you age and life is much you don't want to be taken the higher risk when you're twenty you would be thirty percent in the target date fund by the time you're forty you're going to be you're going to be sixty percent in the target date fund by the time you're sixty.
00:28:08
Speaker
you're going to be 10% in the small cap value fund and when you're 66 you no longer have small cap value. So it works beautifully or and that's it and never rebalance. That's it and it's a beautiful simple process but it's for people who take the time to understand what it is
00:28:32
Speaker
And as far as I'm concerned, this is no different than running a business. And we all in businesses, some of us have been in simple businesses. Certainly the business that I am is about as simple as they get. The brokerage business where I started, that is not a complex business. You can be licensed and outselling and helping people in a month. So it's not like you have to go pass a test like a CPA would or a brain surgeon.
00:29:02
Speaker
It's not difficult stuff, but there's some people who just want a target date fund, period. That's it.
Diversification Importance
00:29:09
Speaker
That's great. But at some point, JL, I'm asking for the glide path that you would be recommending to those people because the target date fund has a glide path. My own personal feeling is that when you would be recommending a glide path to me, I really believe that.
00:29:27
Speaker
That's something that you could easily do obviously and it would be helpful but it becomes a little more complex for the people who are following the strategy and I think you're really working hard to keep it simple and that's great.
00:29:43
Speaker
I'm not sure that we accomplished David's goal to get your full investment philosophy on the table, but if I can respond and then maybe we'll circle back to that.
00:29:59
Speaker
Yeah, I am. I think one of the differences we have is I'm not a fan of glide pass. And taking you as an example, you know, like me, you're closer to the exit than the entrance, as I like to say.
00:30:14
Speaker
But your portfolio doesn't die with you. It goes on. And so I'm not managing my portfolio for my lifetime. I'm managing it for my heirs, whether it's my daughter or the charities that I support. And their needs are different than the 70-plus-year-old guy that you're talking to.
Portfolio Management for Heirs
00:30:34
Speaker
So I suppose if your goal, and there's a book out there called Die with Zero, and if your goal is to spend all of your money
00:30:43
Speaker
in your lifetime, on your own needs, then yeah, maybe a glide path makes some sense. But most of the people that I talk to that are in our age group at least, that's not their goal. And if you've been successful in doing this, and compounding is an extraordinarily powerful thing, and I think you'd agree with this, Paul,
00:31:03
Speaker
I'm stunned at the results that at this age I've wound up with. I didn't expect it and go back to purely stocks because I can afford to take on any volatility that might acquire, and that's going to give the best returns for the portfolio that is going to live long past my lifespan.
00:31:29
Speaker
JL, you are one of the calmest people I've ever spoken with. And I think that's really an important aspect of who you are. I was for 30 years an investment advisor.
00:31:44
Speaker
I sat in the trenches with people who thought that investing in the stock market was no different than going to Las Vegas. I can tell you that, from my experience, that's all I've got in this regard. From my experience, when you talk to people about how much they're willing to lose,
00:32:07
Speaker
Yes we focus on the need for growth for the future and for the next generation and for the charities that's that's a major part of what i always did as an advisor on the other hand wake up in the morning.
00:32:20
Speaker
and find out the market is down 22% in one day, having all of their money in equities, because they don't understand that. Our fine tuning tables that we build, where we compare each of our 10 different or nine different portfolios, we show each portfolio in combination with bonds in 10% increments.
00:32:48
Speaker
So, if you're 50-50 stocks and bonds with the S&P 500, I know what the worst periods look like. I know what the worst 3-5 year periods, I know 3 and 6 and 12 months, we can show people, this is what I did, I don't do this anymore, I'm retired now, but we still produce these tables.
00:33:08
Speaker
And these tables show, look, I just want you to understand, if you use this strategy, you are likely in your lifetime going to experience a loss of X. Now what I'm trying to help somebody do, now it's for do-it-yourself investors.
00:33:25
Speaker
let's figure out what kind of rate of return you want or you need and let's try to figure out what your risk tolerance is and once we figure that out then we hopefully and we're helping do it yourself or so i'm not talking to them one by one anymore we're hopefully giving them the information that because by the way they want to save that one percent management fee and i i noticed in your your uh
00:33:51
Speaker
your list of manifesto, yeah. My manifesto? Yeah, you say you keep those, keep all, don't have somebody you got to pay 1%. I don't remember how you said it, but I saw your finger wagging when you wrote it. But I don't think everybody is made to deal with a 100% portfolio.
00:34:16
Speaker
You know, Paul, I think there's an interesting difference between us that comes out from your commentary. You come from a background of being a financial advisor and dealing with a lot of different people. I think that informs the way you look at these things because you're trying to accommodate the needs of all those different people.
00:34:40
Speaker
I come from the other side
00:34:53
Speaker
But I believe you shouldn't adapt your investment strategy to your psychological needs. You should adapt your psychology to an investment strategy that works. So one of the things that I say repeatedly is, and again, as we talked about earlier, I never dreamed my book would have attraction that it has, or that my voice would have the influence that it
Staying Invested During Volatility
00:35:15
Speaker
has.
00:35:15
Speaker
And one of the things that I've done in recent years is repeatedly made the point that the market is volatile. It always comes back. If someday it doesn't, then none of this stuff is going to matter. But it always comes back. So you're not going to lose unless you panic and sell. And if you're not absolutely sure that you're going to stay the course when the market drops and the market will drop, there's not a question of if. It's just a question of when.
00:35:44
Speaker
And as you pointed out, it's very possible to wake up tomorrow and find out the market's down 22, 25%. It happened in 1987, right? It's very possible that over the next couple of months, it could be down 50%. If you're not absolutely convinced that you can live with that and stay invested, stay the course, you don't wanna follow my advice. My advice will leave you bleeding at the side of the road.
00:36:09
Speaker
So the first thing if you're thinking about following the simple path to wealth is understand that and look deep in your heart and say am i able to do this and one of the things i worry about is can people really know that without living through a crash.
00:36:25
Speaker
I had to live through it and in 1987, I bailed. I mean, I stayed the course for a couple of months because I knew that's what you're supposed to do. And then I lost my courage and I bailed. But that was what I needed to do so that when 0809 rolled around, when the tech crash of 2000 rolled around, I didn't do that. I'm hoping that people don't have to make that mistake themselves. They can read what you and I write about.
00:36:53
Speaker
and stay the course, but I honestly don't know the answer to that question. So that's kind of, we're coming at it from two different directions and I can respect where you're coming from and why you think that way. But again, I'm looking at it saying, this is what I do, this is what I tell my daughter to do.
00:37:11
Speaker
This is how you're going to have to adapt your psychology if you want to follow this path. And if you can't do that, then that's okay. I mean, there's nothing wrong with saying, you know what, I'm done. I mean, there's no, there's nothing wrong with that, but you don't want to do what I'm doing. If, if that's the way you're going to, you're going to think about it.
00:37:32
Speaker
And the other thing I'll say is you mentioned that a lot of people think about investing in the stock market is the same thing as going to Vegas and gambling. And that's because the way most people invest in the stock market is exactly what it is. We get exactly the same negative results, which is why there are billion dollar casinos in Vegas.
00:37:53
Speaker
So, let me tell you about one of the tables that we have. It shows owning the S&P 500 or all S&P 500. We don't have one for total market, but as you say, we agree they're basically the same.
00:38:10
Speaker
And then we have it, 90% equity, 80, 70, all the way down to 100% fixed income.
Impact of Bonds on Portfolios
00:38:16
Speaker
If you started in 1970 and started taking money 4% out each year, plus inflation adjustments,
00:38:26
Speaker
At one point in that first decade, you'd be down to about $700,000 out of a million. I'm just wondering what that conversation sounds like between a husband and a wife. Should we hang on? We were told that it always comes back.
00:38:43
Speaker
That's a lot to ask from a lot of people. If you look then at the end of every decade going on down through 2023, you would see it did come back and there was lots of money left over for the kids. That's the good news. If you had had 60-40, 60 equity, 40 fixed income, the 60% all in the S&P 500,
00:39:11
Speaker
you would have almost exactly the same amount of money, and you would have taken out almost exactly the same amount of money because what happened was that 40% fixed income, it lowered the losses during the worst of times. So when the market did turn around and go up, you had more money to do it with. And the problem is that, and it did go down to about 900,000 at one point.
00:39:37
Speaker
Or it turned around. But that's not 700, though. I mean, there's a big difference between the seven and the 900. But I would just say that a lot of people who are looking for a way to solve their retirement cash flow problems, too much inequity is if you get the wrong sequence of returns. You already mentioned 1975 to 1999, and how wonderful the S&P 500 was.
00:40:04
Speaker
Well, I experienced that too. The return of that period was 17.2% compound rate of return from 75 to 99. But from 2000 to 2023, it's more like seven. It's a random event, which we can't count on. And some people say, oh, internationals are great. If you look at the long term, if you had internationals,
00:40:31
Speaker
you would have made good money and maybe lowered the risk a little bit.
00:40:36
Speaker
But remember, those returns in 1970s, the 1980s, those returns internationally include the Japanese market. This is one of the challenges we have in taking the past and trying to make decisions in the future. And I just think we need to be careful that we, and by the way, I am the biggest chicken. I am an aggressive chicken, but I am a chicken. I got half our money in equities at age 80. I think that's,
00:41:05
Speaker
being fairly aggressive i was in a target date funded at that uh... uh... vanguard they'd have me seventy percent in fixed income so but i these are huge decisions that the people then have to sleep with and how do we this is the challenge we all have i think
00:41:23
Speaker
How do those of us who are trying to help do it yourselfers, help them make the decisions that truly they can live with, because Bogle said it, you gotta stay the course. Okay, what do I do that I will stay the course? It's not enough to say I believe, because that's what people oftentimes say every day, they're gonna stop drinking today. And the next day they still got the problem. I mean, we can believe stuff,
00:41:51
Speaker
But if we can help them do it, I'm almost done here, David, sorry. But if we can help them do it in a way that it gives them every opportunity to make the money that they deserve,
00:42:06
Speaker
And you and I would agree, expense is low, diversification high, turnover low, taxes low. Most people in actively managed funds don't realize they have about a 1% lower return after taxes, more than an endowment. There's so many of these things that are so simple. The thing that is not simple, the investment return we can control. It's the investor return about their habits.
00:42:36
Speaker
that, that make the difference for most of these people. And so we're both trying. It's not neither one of us know. And I want to jump in here. I know that in the past it's been a concern because even right now in today's world, those, those of us who are either financially independent or pursuing financial independence or saving aggressively, however you want to define that it's still a rarity. However, now,
00:43:03
Speaker
we can at least have conversations like this on podcasts we can go to campfires we have facebook groups we have a community around this type of thinking versus in the past it was probably exponentially more solitude felt by the individual who is facing that significant percentage decrease therefore more likely to bounce into an action that's not necessarily the most ideal for long term
00:43:29
Speaker
gains for their portfolio, meaning selling when there's a crash. So I think that might be one fundamental difference between now, and I'm not even gonna say it's a great difference, because it's still lonely out here for those of us who care about this stuff and are really making great strides to better ourselves. But there is a difference between now and 1983 and 1971, as far as the psychology behind some of this stuff. We now have books out there that are easily accessible, many of them.
00:43:59
Speaker
And they're written in much less now i'm not i didn't go back and like research all of the financial books that were written in the sixties and seventies and eighties but i do know at least for the financial independence community some of these texts didn't really even come out until the nineties as far as like what we got this as far as like common sense money understanding for the masses.
00:44:18
Speaker
I'm not talking about your line of work, Paul, where you're looking at graphs and charts and you're going for the .08 or the .8 difference or comparing this or that. You love to do that. And there's a, there's a large number of people out there that love to do that as well for their own personal finances.
00:44:33
Speaker
The point of everything I'm saying after hearing just what you and JL went back and forth with is maybe that concern isn't as great now as it was then as far as the psychology of people either holding on to a downturn. No, it doesn't feel good. And let's say now, and I started investing when I was 25. I'm now 45. I've seen a couple.
00:44:55
Speaker
uh, recessions or depressions or whatever it is. And I've, I've personally gone through that and then flashing forward another 40 years, you know, 35, 40 years, maybe I will because I've already. Toughed out a few of the dips and I'm now I'm confident in myself. My psychology is confident that if I'm 70 or 75, I don't necessarily need to go into equities. Again, it goes to what your ultimate goal is for your net worth upon expiration. Is that a nice way to put it? But, uh,
00:45:24
Speaker
But i think it may not be as big a
Similar Philosophies, Personal Preference
00:45:27
Speaker
concern and maybe that might just be my bias to because where i sit in the space i do want to focus on two i want to mention to the listener if you if this is the first podcast you ever listen to about money or you have no idea what.
00:45:40
Speaker
what great gentlemen and what great minds these two guests are. First off, good for you for following up upon this podcast or this YouTube video. Second, I want to also express that you didn't just step into a conversation where investing philosophies aren't on either end of the spectrum.
00:45:58
Speaker
Absolutely not. This is not an apples to oranges comparison. This is an apples to pear comparison. And the only difference is apples you can reach and grab. And then maybe in this case, pears you might need to grab a little ladder to climb up to reach a little bit higher to grab them.
00:46:13
Speaker
It's just really personal preference on what you want. But consuming either these apples or these pears will still make you rich without a whole lot of work. So I just want to get some relative information out there so that I know there's a lot of jargon going on and click on some links down, do your own homework on these two gentlemen. And you'll find that it's very, both of their philosophies are very accessible and not at all challenging to carry out. Can I, can I,
00:46:43
Speaker
share one study, David. I don't know if you're closing us down at this point. Not at all. Not at all. One piece of information that makes me so, so hopeful. Wharton did a study on target date funds. They went to Vanguard and Vanguard let them look at 1.2 million of their 401k plans.
00:47:11
Speaker
And they looked at people who had all their money in target date funds versus people who had nothing in target date funds, which basically says, I know how to do it better than target date funds, and some who had both. The difference between the people who had target date funds and the people who didn't in terms of return, 2.3% a year difference in expected returns long term. Now that tells me
00:47:40
Speaker
that for the majority of people i mean the work that i'm doing is for a very small we have forty forty two thousand subscribers free by the way newsletter so it's not like we're serving a huge market it's very small but for the huge market out there
00:48:00
Speaker
People are coming to work today for corporations and the corporations are automatically signing them up and they have to opt out of the 401k. And what happened? It went from something like 25% of the people were using the plan up to 83% of the people were using the plan. This is truly life changing and they automatically go into 401 to target date funds.
00:48:28
Speaker
I could list 20 things I don't like about target date funds, but I can list probably 40 about everything else. So I really think that for most people, and my hope is I can convince a few thousand, maybe a few hundred thousand
00:48:47
Speaker
to throw in 10% in small cap value. If I could do that, I would feel like I'd done something to help. And so I am very hopeful because of the target date fund now becoming something that anybody at age 20
00:49:03
Speaker
for the rest of their life. They have their money professionally managed, whether it's at Vanguard or Tyrol Prize or BlackRock or Fidelity for eight tenths of 1%. I don't know that they all charge eight tenths, but for professional management, I understand when you wrote that list, JL, when you were saying keep the money out of the hands of professional managers, you were talking about professional managers who wanted to charge more than Vanguard was gonna charge because they are professional.
00:49:33
Speaker
professional managers. The only thing they aren't is in most of the mutual funds, the managers have no responsibility to address risk exposure. All they have is responsibility to own all the S&P 500.
00:49:50
Speaker
But when you have a target date fund, the manager says, I will try my best to manage this money just like a pension fund manager would be. And think of all the people who are living off of pensions of major corporations and the US government because some pension like manager manage that money so it could be done. That is what target date funds are about. And I love them, but I hate them too because they have lots of things about them that don't make them perfect.
00:50:20
Speaker
So, I take your point and I agree with you fundamentally on target date funds. I have a little preference for their twin sister, which I think Vanguard calls life strategy funds. And the difference for the people who are listening between the two is a target date fund, these are what's called fund of funds.
00:50:43
Speaker
So they each hold about five different funds old equity funds old international bonds international bonds old cash. And in a target date fund that allocation between those underlying funds will change you will become more conservative as you get older so you own more and more of the bond funds less less of the equity funds basically.
00:51:08
Speaker
Not surprisingly, I'm not as enamored of that for reasons that I mentioned earlier. I don't think of my portfolio as being just for my lifetime. A life strategy fund, on the other hand, has the same mix of underlying funds, but the percentage, and you can buy different life strategy funds that
00:51:26
Speaker
rep that have different levels of equity versus bonds depending on what your preferences but they don't change overtime and so in my book and then also my blog i've talked about these things and basically what i said is.
Life Strategy vs Target Date Funds
00:51:41
Speaker
If you read my stuff for you try to read my stuff and
00:51:45
Speaker
even as simple as I've tried to make it, it feels too complex to you, then these are great options because as Paul correctly observes, you put your money in, it's professionally managed, you don't have to think about anything ever again.
00:52:01
Speaker
In my strategy, at some point, you got to think about adding some bonds to it. And then you're going to have to figure out what percentage of bonds suit your particular risk profile. And if you don't want to deal with any of that, these are ideal. And I think, Paul, and I would imagine you're going to agree with this, the reason that they have outperformed in the way you suggest that they have is probably simply because people are much more likely to stay the course with them.
00:52:28
Speaker
because they're so much simpler. And I think going back to one of David's points and in terms of for listeners who might not know us, the difference between what you advocate and what I advocate is a slender one at best.
00:52:44
Speaker
And no question, anybody who follows Paul's advice and sticks with it over time will get an awesome result. And I like to think that if you do the same thing with my advice, you'll get an awesome result. So to a certain extent, you'll get a great result if you go into a target date fund or a life strategy fund.
00:53:05
Speaker
But to David's point, and I think, David, you might be right that maybe in this day and age with the more readily available information, people will be more sanguine when the market takes one of its periodic expected plunges, which it does. And I think that's true.
00:53:24
Speaker
I don't think it's universally true. Every time the market has even a small blip, and I'll bet Paul has the same experience, I get people coming to me saying, oh my God, what do I do now? Is the simple path to wealth still valid?
00:53:40
Speaker
Yeah. And I think to myself, you know, I wrote this book that only works if you stick to it for decades. And the book's not even been out a decade and people are saying, is it still? Yes, it is. If you believe in it, it is still valid. But people are so ready to panic and flee for the excess, which is why I repeatedly have this mantra
00:54:04
Speaker
You've got to stay the course. And I think, Paul, you'd agree with this, even though I'm much more heavily in equities and my recommendations than you are, even with your other portfolios, if you don't stay the course with those, it's not going to work either. If you panic and sell every time the market has a hiccup or even a 0708 level crash, none of this stuff is going to work for you, right?
00:54:31
Speaker
Yeah, and I think what we've done that is different than almost any other educational provider for do-it-yourselfers is we have identified what we consider to be about eight major decisions. We are not tax experts. We are not financial planners. We are not estate planners.
00:54:54
Speaker
but we focus on eight different decisions that you're going to make that are all truly million dollar decisions, then we do our best to show you how to do it without you having to actually do any investigation. For example, after you've decided you want a portfolio that's 25% each in small cap blend and small cap value and large cap blend, large cap value, whatever,
00:55:22
Speaker
We also give you the names of the ETFs or the Vanguard or the Fidelity or the Schwab funds that you can do it with on your own.
00:55:32
Speaker
We really have tried to cover all of those decisions that keep people from finishing the job. And I think that does make us different. And that's why we have 200 tables. And you're lucky because, JL, you don't have to put up with all of that. And we have to update them every year.
00:55:53
Speaker
it's it's a big project that i'm not saying that that we have to be brilliant to do it but there's just a lot of detail to try to help the people who want to be at another level and you and you hit it david it's a different level of wanting to be a do-it-yourselfer and again it goes back to that
00:56:12
Speaker
People who believe in math, one of the things I teach the college kids first, the first thing I teach, follow the math of investing, forget about mutual funds, forget about just follow the math of making an extra one half of 1%. Follow the math of adding 3% each year to your what you're putting in.
00:56:33
Speaker
There are these basic things that we've got to help people understand. And you're a small organization. We're a small organization. David, you're a small organization. We're doing our best, but it's a big project.
00:56:49
Speaker
Well, and I think one of the, you know, I remember my, when my daughter was in college, she came home to visit one day. And of course, as I was wanting to do, I launched into one of my financial lectures, which is how I managed to turn her off to all this stuff, you know, when she was younger. And she stopped me and she said, she said, dad, she said, I get it. I understand this stuff is important. I just don't want to have to think about it all the time.
00:57:18
Speaker
Yeah, for me, there was an epiphany. And maybe, Paul, this is one of the differences between us because you're writing for people, I think, from what you just said, who do want to think about it a lot. But I sat back when she said that, and I said, you know, my daughter is an exceedingly bright young woman.
00:57:36
Speaker
She's doing very well in her career. This is not something she wants to think about. She is never going to rebalance four different funds or even two different funds over the decades. Just not going to happen. I have enough trouble convincing people who are interested in my work to just stay the course with one fund. So when I sat down to write
00:58:00
Speaker
the simple path to wealth and the blog for that matter. Again, I was writing for one person and that's my daughter. And then by extension for people like her who are very smart, who understand this stuff is important, but they don't want to think about it. They just want to have something they could set up on autopilot and forget about it. And I tell people that my daughter has a superpower and her superpower is that she doesn't care about this investment stuff.
00:58:30
Speaker
And what makes that a superpower is the next time the market crashes, people like us are gonna be hearing from the people who listen to us that do care about it. And it sounds like a lot of your clients fall into this category, Paul, who are gonna be obsessing about that.
00:58:47
Speaker
My daughter's not even going to notice. And because she doesn't notice, she's not going to be tempted to do something silly like panic and sell. That's a superpower. And I tell her, all you need to do with the simple path to wealth is get a couple of things set
Ignoring Market Fluctuations
00:59:02
Speaker
up. You want to buy a total stock market fund or an S&P 500 fund.
00:59:06
Speaker
at as much as you can whenever you can, automate it. So that stuff goes from your paycheck in automatically and then forget about it. And as Jack Bogle famously once said, back in the days when we used to get paper statements that you and I remember, Paul, maybe a lot of people listening don't, he used to say, when you get your statements from Vanguard, don't even open them. You'll put them in a stack and then 20 years from now open them and have a cardiologist standing by.
00:59:34
Speaker
because you'll be stunned, stunned at the results. But if you pay attention in that 20 years, you're going to be very tempted to stray from the path. And that would be my concern about having multiple funds, because you're going to say, well, when equities are down, that's when you're going to shift money, right? But that's hard for people to do psychologically. Yeah, that's right. And I would concede that your approach
01:00:03
Speaker
over, followed faithfully over 20, 30 years will give a better result in my approach. I would suggest that there's going to be a very small number of people who are able to do that. And that would be my concern. And of course, you know, that's who we're trying to serve. And then people, it seems to me that the people who don't want to do that again, the target date fund is a
01:00:29
Speaker
is a great way to go. I have one thing I would love to hear from you, JL. I do a lot of work recommending different ways for grandparents and parents to invest for their children and their grandchildren.
Investing for Younger Family Members
01:00:44
Speaker
And I am curious, what is your best strategy for that newborn grandchild?
01:00:51
Speaker
Wow i was something i haven't thought about i do not have grandchildren and i haven't thought about it but you know off off the top of my head you know it just won't surprise you i would i would start
01:01:07
Speaker
a S&P or S&P 500 or a total stock market index fund and starting and start putting money into it for them. I would probably, by the way, keep it in my name. It would be mentally earmarked for them. I'm not a big fan of the uniform gift to miners that kind of things because
01:01:26
Speaker
You don't know how that kid's going to turn out and to present a kid with a million dollars when they're 18, which might seem like a large amount of money, but you know, it's not an impossible number following the strategies that you outline that I outline. You better be sure that 18 year old is ready for it.
01:01:45
Speaker
And legally, it's going to be theirs whether they're ready or not. If you keep it in your name, then you have more control. The other thing that I would say that I did with our daughter is when your child starts working, and I'm a big believer in having children work at an early age, I think it's a great experience. My daughter was a waitress, for instance. Well, now they have earned income, and that means they can buy a Roth IRA. And they don't have to use their own money for the Roth IRA.
01:02:14
Speaker
They just have to have earned income that theoretically could go into it. So I think the contribution limit on a Roth is 6,500, 7,000, something like that these days. So if your kid makes $5,000 in the course of a year, you can take $5,000 and fund a Roth for them. And we did that for our daughter. And I think that's a great thing to do. And it's a great way to encourage the kids to see how it grows without it having to come out of their pocket, which
01:02:44
Speaker
when they're earning it, they're kind of reluctant to do initially. At least that was my experience. And Paul, I did something very similar. I also, my daughter, when she turned 15, got a W-2 job, and I contributed, in addition to a portion of her own earnings, to a Roth and to VTSAX, actually. And I presume that it's still there. And additionally... Still there.
01:03:09
Speaker
Additionally, I did do a Uniform Gift to Miners Act or AGMA account for her. However, I have since changed my opinion on whether I would do that again for all the reasons that JL just mentioned. So while I did start one for my son who is now 10, I have stopped contributing to it and he already has a nice little sum there. But I do like the idea of while we love our children and
01:03:39
Speaker
we believe and want them to be the adult that we envision them to be when they turn 21, 22, 18, that might not turn out to plan. And so that's a way of mitigating downside risk by keeping that in an independent brokerage account under your name. And then as you see them hitting milestones of maturity as they grow up, then maybe transfer that wealth to them in that way.
01:04:03
Speaker
I think that's important because there's nothing worse than a large amount of money into the wrong hands. I mean, you literally can kill your child doing that.
01:04:16
Speaker
For people who don't have a lot of money, there is a very, very inexpensive, potentially good investment, and that is that year they're born, give them $365 in an account in your name. And you put that money, I would put it in small cap value, but it could be the S&P 500.
01:04:39
Speaker
And that 365 dollars is going to do what it's going to do and if you do it at fidelity you can buy ETFs and partial shares so it makes it real easy to buy ETFs there.
01:04:54
Speaker
You let that grow until the child makes some money, and then you convert it over, sell it, and put it into a Roth IRA. Now, if you did that and you left it there, the purpose is for when they're 70 years old, to have that money become income for them the year they're 70. They can do what they want when they're 70.
01:05:16
Speaker
at a 12% compound rate of return, which is historically possible with small cap value, it would be worth a little over a million dollars. It would be worth, I believe, something $300,000 or $400,000 at 10%. And then if you really feel good after the first year, you start a second fund for when they're 71.
01:05:41
Speaker
And you may find yourself being willing to do that for 18 or 21 years. I don't think you ever have to leave them anything more. And people will say, well, that's a long time, 70 years. Yeah, that's what we're trying to get people to do. Get that money someplace where there's no tax and let it rip.
01:06:03
Speaker
I love that. I love that idea. I have a comment and then I have a question for you, Paul. So my comment, you mentioned the 12% and that it was fall cap value that was possible.
S&P 500 Historical Returns
01:06:15
Speaker
When I was in 2015, when I was putting the finishing touches on Simple Bath to Wealth before publishing it,
01:06:23
Speaker
I went back and looked historically at what the S&P 500 had done for the 40 years from 1975, which again was the year I happened to start investing until 2015. I didn't know what that number was. And a little bit to my horror, it was just under 12%. Now this presented a dilemma because I wanted to use this number in the book, right? Whatever it was. But I had no idea it was going to come out of 12%.
01:06:49
Speaker
Well, there's no way that I want to suggest that people can expect to earn 12% on their equities going forward. But on the other hand, that is the actual number for this kind of random 40-year period. And I did wrestle with that. And ultimately, I used that number in the book with two major disclaimers that
01:07:10
Speaker
this is not suggesting that you can you can expect going forward but it is amazing to me and then after the book came out i did a blog post called time machine in the future return of stocks the conceit of that blog post is.
01:07:28
Speaker
A bunch of us are sitting around in 1975 around a campfire, and we're smart enough to know that Jack Bogle just brought out this thing called an index fund, and we're sitting around thinking, yeah, I wonder how that's going to turn out over the decades. I perk up and say, well, I'm just having to be back from 2015 in my time machine, and I can tell you what happened over this past 40-year period.
01:07:52
Speaker
What's all the terrible things that happened you know i inflation in the seventies the death of equities the famous cover from business week i think it was you know the black monday in eighty seven the largest single day drop the tech crash the multiple wars you know the seven oh eight anyway all these terrible things.
01:08:12
Speaker
And of course, you remember around the campfire as well. Thank goodness that you came back and told Zach, because there's no way we're going to invest in stocks, given that that's what's going to happen over 40 years. And of course, the punchline is it returned 12%. The point being that you don't need some perfect stress-free period of time for the market to provide
01:08:35
Speaker
some pretty incredible returns. I'll certainly let you respond to that, but the question I have for you, and you touched on this very briefly or in the beginning of the conversation, is what do you think of Bitcoin?
01:08:49
Speaker
I don't know how to evaluate it. Benjamin Graham talks about the difference between price and value. Price is what you pay, value is what you get. And I don't understand Bitcoin sufficiently to say that I can describe what I get.
01:09:08
Speaker
And I certainly know that I don't want a currency that when I go to buy something that I don't know really what I'm going to be able to buy because the price may change significantly. So it's not ready for prime time as a currency. But that doesn't mean that an industry hasn't figured out how to make money off of people. I mean, we see this.
01:09:33
Speaker
Trump's new company, I think, has $31 million in revenue through the nine months of last year, and the business is worth right now so many, many, many billions of dollars. I don't know how to do that. I don't know how to
01:09:51
Speaker
GameStop. How would you figure out what was a good price to sell GameStop? You bought it for $9 a share. DFA, the fund family, did buy it for under $10 a share. They sold it for over $300. When they bought it, they had no idea that GameStop was going to go to $300.
01:10:12
Speaker
I do believe, what I do know about returns going back to 1928, the S&P 500 is right about spot on at 10, large cap value at 11, small cap blend at about 12, and small cap value at 13. Now, that's a big move from 10 to 13 if it happens in your lifetime. And some people say, well, you can't, that's not going to work.
01:10:41
Speaker
Well, from my viewpoint, if I looked at the return of bonds, $100 in bonds over 96 years, in T-bills, it grows to about $2,000. In intermediate, maybe it's $8,000.
01:10:56
Speaker
In long-term treasuries, it's maybe $12,000 from $100. And why are the difference? Because there are different levels of risk, and that's the premium you got it. Okay, now we're talking about stocks. $100 in the S&P 500 from 1928 grows to be worth almost a million dollars, and in small cap value, about $14 million.
01:11:21
Speaker
Well, that's not possible. That's outrageous. From $100? Yes. I mean, there's two things. Time and a premium for risk. And so I don't know how to judge what that premium will be. Right now, the PE ratio on the S&P 500, or I'm sorry, a growth index at Vanguard is about 31. 31. What do we know about 31 as a PE ratio? Is that low? High? No, that sounds high to me.
01:11:51
Speaker
historic maybe it'll be low in the future we don't know and that's the magic of the sole price by the way i do think one thing that a lot of people overlook. Everybody has it's easy for them to believe you should have lots of stocks because that gives you lots of different industries and lots of different kinds of companies.
01:12:11
Speaker
The idea of having lots of asset classes, big, small, value, growth, now you don't want to do that. Well, the fact is, you do want to do it because you're doing it in your total market index right now. The question we have to ask ourselves
01:12:29
Speaker
is what should that come, and how much should we have in large cap blend? The challenge that happens to people is large cap blend stumbled from 1970 to 79, stumbled from 2000 to 2009, and it tested people's ability to stay the course. If you had mixed it up with other major, it doesn't have to be little tiny companies, it could just be large cap value.
01:12:54
Speaker
You change things. You give opportunities for things to do all right. And literally, 2000 through 2002, a terrible period in the market was actually okay if you were diversified. Anyway, it's a pleasure. Pleasure being here. David, I really thank you for getting us together.
01:13:14
Speaker
And I want to make a pledge to you. I really, and I'm serious, JL, I'll do it right here. Uh-oh, I'm in trouble now. Oh, no, you're not in trouble. When I retired, I promised my wife I would never, ever work for money again.
Post-Retirement Promises
01:13:28
Speaker
And I have kept that promise. I don't do anything to earn a living. She thought I said that I would never work again. That part is not worked out so well for her. But I will tell you this, if you decide that you want to delve into the world of
01:13:46
Speaker
Diversification or glide paths. I'm not an expert in anything, but I'm happy to be a member of the team to help you and the price will always be the same. I really admire what you're doing. You're helping a lot of people. God, I wish I could help as many people as you do.
01:14:02
Speaker
Well, I appreciate that, Paul, and the same to you. I mean, you help a lot of people, and you bring an awful lot to the table, and I've really enjoyed the conversation. And now, more than ever, I regret that we haven't connected earlier than today, because of all the... Excuse me.
01:14:22
Speaker
You're choking him up, Paul. Yeah, I'm choking up. But I think of all the conversations we could have had if we'd started this relationship sooner.
Conclusion: Investment Strategies Overview
01:14:33
Speaker
But yeah, I think David made the most salient point probably in the whole conversation is that you and I are just two sides of the same coin. And I think there's no question that people will get a good result following your strategy.
01:14:51
Speaker
My concern would be that it's slightly more difficult to follow and it's hard to get people to do that over time. But if they do it, not only will they get a good result, they'll candidly, they'll get a better result than following mine. But I think I have a better chance of having more people actually follow mine. Yes, I totally agree. Yeah, therein lies the difference. So I would, if anybody said to me, hey, I'm listening to this Paul Merriman guy and I want that extra fraction of a percent.
01:15:21
Speaker
And I can see the difference it's going to make. I'm going to say, you know, are you sure you're going to, are you going to do it? You're going to stay the course for 20, 30, 40 years. And if you answer that is yes, then you're going to get a great result. Well, I appreciate that jail. And David, because we're going to distribute this to our, uh, people on our list, uh, are you still offering your book, your workbook?
01:15:47
Speaker
I am. It's still, it's on Amazon for purchase and it's also free as a PDF download when somebody signs up for the free weekly lessons for the year. Yeah. Oh, okay. And you said it's free if they sign up for the, for the lessons. Correct. Which are also free. Okay. Okay. Very good. Well, you're doing great work and you're helping a lot of people too. And I appreciate it.
01:16:11
Speaker
I know. Now, I feel silly for not doing it sooner, even if, you know, even maybe not in this, maybe just through a text thread would have been would have been good. Well, there was no other force on Earth that was able to do it until you came along. So here we are. Oh, wow. Well, we almost ended up, I think, at the Bogleheads Conference, I think.
01:16:29
Speaker
Yeah, we did. We did that way. You're talking about the one last year. Yeah. I spoke there. I'm going back this year. Are you going to be there? No, you know, I am actually at the point where I am trying to do less.
01:16:45
Speaker
You know i am a young man well you're here you're trying to say it and they're very few people who are able to say that to me anymore but you're one of them and uh... but no i just you know i have the new book out i just finished two months of pretty intense interviews you know six months from now i'll probably be bored wondering what to do next but
01:17:08
Speaker
But for right now, the idea of not doing much of anything. Yeah, that's great. Well, thank you. Thank you guys for your time. And it's good to see your face again. It's been a while. I know. I know we've talked on the phone a good bit, not a good bit, but I mean, periodically over the last few years. And it's great to see your face again. You don't look a day over a day over the last time I saw you.
01:17:38
Speaker
I want to share really quick, if I were to actually list accolades for both of you, it would be another, how long has this been, hour plus podcast, just doing that. Yeah, we got time. Let's do it. JL Collins, who is, he is the man behind JL Collins, nh.com. So go check out his blog. He's also the author of the simple path to wealth.
01:18:01
Speaker
one of the foundational texts of the financial independence community. But if you're not a member of the financial independence community, if this is all new to you, don't let that scare you. Go pick up the book. It's a great one. And Pathfinders is his newest release. And that's a series of, I want to say like a hundred stories of people who are on
01:18:18
Speaker
their path to financial independence or who have achieved it. And you will find a story that relates to you. And Paul Merriman, who has a history of being a financial advisor and an educator in his soul, I think for at least two decades, you've been doing hard set education of the masses for finance. And you've published a number of books, which I'm not going to, I think like a dozen. So I will just list a few of the more recent ones is
01:18:46
Speaker
We're Talking Millions, for which I did an actual book review on my blog for you. And it was a good book. And then, while I don't believe you're listed as the primary author, Two Funds for Life by Chris Peterson, is really where you can find the information for the Two Funds for Life strategy that we have been discussing here primarily. So you cannot go on by listening to either one of these wonderful gentlemen
01:19:13
Speaker
They've got years and experience on their side, and we can all benefit from that and reduce our strife by a whole lot. So gentlemen, thank you so, so much. Always a pleasure. And I want to do this again. Yeah, so thank you, David and Paul. It's been an honor. It'd be great for the three of us to get together in the real world one of these days. I'm envious that the two of you were able to have dinner together. Oh, that would be great. Are you still doing your Chautauquas?
01:19:41
Speaker
No, those have come to an end. I did them for about a decade. And again, that's part of, you know, I love doing them, but they're a lot of work. And it was very intense. We did two back to back, each one a week. And so that'd be 14 consecutive days of being on from dawn till well into the night.
01:20:05
Speaker
And I owe a labor of love, but taxing nonetheless. But what a wonderful experience it was. And I still have great friends from those events. Great. Maybe we can get you, Stephen, to let us drop in on one of the campfires. I think that would be a huge celebrity sighting. Wouldn't that be a great fun? That would be great fun. How far away from me are you right now? I might be able to drive to you. Well, you know, I think it's probably three hours.
01:20:33
Speaker
Oh, I'm on my way. See you tomorrow, Saturday morning. We'll do it. Oh, once again, I'm left out. Thanks, guys. It's pretty telling there, JL. Yeah, right. I'll try not to take it personally. All right. Thank you both very much. Thanks, David. Great meeting you. Nice to meet you, JL. Bye bye.