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🗣️ Building Wealth with Rick Ferri: Expert Asset Allocation Strategies 💡
1k Plays8 months ago
Watch this episode and Subscribe on YouTube
🌟 In this episode we chat with Rick Ferri, a renowned passive investing expert and ex-Marine Corps fighter pilot. In this dynamic interview, Rick shares key strategies for building wealth through smart asset allocation. Don't miss the insights!
📚 Chapters:
0:00 - Introduction with Rick Ferri
2:06 - Fighter Pilot to Finance Transition
4:45 - Embracing the Boglehead Investment Philosophy
7:01 - Influence and Insights from Jack Bogle
14:55 - Authoring Key Investment Guides
16:17 - Mastering Asset Allocation
30:24 - Effective Risk Management Strategies
38:47 - The Role of Real Estate in Diversification
50:37 - Investment Planning for Young Adults
1:04:54 - Foundations of Financial Independence
Understanding Asset Allocation:
Join Rick Ferri as he unfolds the essentials of asset allocation to optimize your investment returns over the long haul. Learn from his journey from fighter pilot to financial guru, embracing the wisdom of Jack Bogle along the way.
Key Takeaways:
Rick highlights the significance of precise asset allocation and offers expert advice on diversification and tax efficiency. He details practical strategies for using indexed retirement funds to simplify and strengthen your financial planning.
Watch and Learn:
🔗 The John C. Bogle Center For Financial Literacy Website
🔗 Rick Ferri’s Insightful Podcast Interview with Jack Bogle
🔗 A Few Good Funds, The Genius of Simple Investing
Essential Reads by Rick Ferri:
The Power of Passive Investing
✨ Whether you're just starting out or seeking to refine your investment strategy, this interview with Rick Ferri is packed with actionable advice to guide you to financial success. Tune in and transform your approach to investing!
#RickFerri #AssetAllocation #InvestmentTips #FinancialIndependence #PassiveInvesting #Bogleheads #RetirementGoals #RiskManagement #RealEstateInvesting #FinancialEducation
Recommended
Transcript
Introduction and Rick Ferry's Background
00:00:00
Speaker
Passive investing titan, Rick Ferry, covers asset allocation strategies, long-term wealth building, and shares what he would have done differently in his own portfolio. Here we go.
00:00:12
Speaker
Welcome to the Forget About Money podcast, where we encourage you to take action today so that you can focus on what matters most to you. Today, we have a legend in the financial space, Rick Ferry. Welcome, Rick. Thank you very much. And by the way, legend means you're old. I just wanted to let you know that.
00:00:33
Speaker
I asked Chad GPT who is Rick Ferry and here's what Chad GPT had to say. Rick Ferry is a prominent figure in the world of finance, particularly in the realm of passive investing. He is an accomplished author, financial advisor, and speaker known for his expertise in low-cost investing strategies and index funds. Ferry is recognized for a straightforward approach to investing, advocating for simplicity, diversification, and long-term thinking.
00:01:00
Speaker
Through his books, articles, and speaking engagements, he has helped countless individuals understand and implement sound investing principles to achieve their financial goals. Ferry's insights are highly regarded within the investment community, making him a trusted source of wisdom for both novice and seasoned investors alike. Not bad, right? No, thank you. That's what, how can I argue with artificial intelligence, right? Well, did they miss anything?
00:01:28
Speaker
I'm a pretty good pickleball player too. Nice. I think they missed that in there. I've got it in my notes though. I saw that in another podcast. I was going to bring it up.
From Military to Finance
00:01:39
Speaker
And one thing they did mention is you were a fighter pilot in the Marine Corps. Back in the day, 40 years ago. Yeah. I don't carry your landings and everything. Yes. I imagine you had some harrowing experiences and I know landing on a carrier is not the easiest thing for a pilot to do.
00:01:56
Speaker
Yeah, I think the most harrowing was at least coming about the carrier, we were coming aboard at night. It was very bad weather. The seas were very rough, raining like cats and dogs. And as we're approaching the back of the ship about a half a mile away, and I'm trying to navigate aboard the ship, the back of the ship came up out of the water and we saw the screws or the propellers on the ship come out of the water.
00:02:23
Speaker
The lso was a single officer there says can't see you sound good keep it coming it came down we know it goes up and comes down right but as it comes down basically comes down boom when we hit the deck and we caught the wire and all is good but we were the last plane aboard that night they shut down operations after that.
00:02:44
Speaker
Yeah. There was a period during my, my surface warfare officer days where it was in 2003 during like the time of shock and all out in the Gulf. And we did, we launched Harriers. The Marines flew Harriers off of our ship. LHA one, Tarawa. And I think, I don't know how many, 70 straight days I think of flight operations. So I definitely understand, you know, you're flying around a starboard Delta waiting to land and those kinds of things. How did you transition from the military to the finance industry?
00:03:15
Speaker
Well, actually, my undergraduate degree was in business administration. I graduated from the University of Rhode Island in 1980. And instead of going to Wall Street, I decided to serve my country and go into the Marine Corps. And that led to being an opportunity to go to flight school, which I took and led to eight years of active duty.
00:03:34
Speaker
12 years of reserves after that. But a while even while I was in the Marine Corps, I took the IRS's volunteer income tax course to be able to help fellow Marines do their own tax returns. I used to write an article for the local
00:03:51
Speaker
Base newspaper about finance personal finance and investing so it was always an interest to me and when i get out 1988 or decided to get out of active duty i decided that i was going to go into this field and rather than go become an airline pilot which is what all the other pilots did in my squadrons i decided i was going to go this direction and i'm i'm very pleased that i did
00:04:14
Speaker
I went into the brokerage industry back in 1988 and we can talk about what that actually is versus what people think it is. And when I had my, I was very depressing to be in that industry when I found out what it really was, because it really isn't about personal finance, it's really about sales. And when I decided that maybe I want to leave this industry and my backup was to go to the airlines, luckily I had an epiphany.
00:04:41
Speaker
that we can talk about and when a different direction with my career.
00:04:46
Speaker
Rick, you started out as a broker and then at some point you transitioned into the Bogle head mentality. Correct. Can you just describe that transition and why you have been set on the Bogle head mentality for so long at this point?
Influence of John Bogle and Commitment to Low-Cost Investing
00:05:01
Speaker
Well, at the time there wasn't a Bogle head mentality. This was 1996. I had been in the brokerage industry for call it almost eight years. I knew what was going on at the time. I had, uh,
00:05:14
Speaker
achieved at that point my chart of financial analyst charter and I was a portfolio manager kind of managing portfolios as well as being a broker. So I had a lot of
00:05:30
Speaker
Advanced education if you will I was getting my masters of science and finance so I was going down the path and I was self educating myself to this wasn't being encouraged by the brokerage industry far from it that you know, they really don't want their brokers to be educated so I But I was doing it on my own because I thought it was necessary. I thought it was behind quite frankly I you know was in the military
00:05:52
Speaker
For eight years prior to that, I really thought I was behind my peers. So I went out and I got all of this education on my own. So I thought I was catching up. Turned out I got to be quite far ahead of everybody who was my peers in the brokerage. Stock broker world, if you will. And.
00:06:11
Speaker
It's depressing because you really realize, you come to the realization at some point that the industry is really not about doing what's right for you, it's doing what's right for the industry, doing what's right for the company. So there's a saying that, you know, Wall Street isn't in business to make money for you, they're in business to make money from you. No, that's not true. I mean, we do need Wall Street, we do need,
00:06:34
Speaker
a lot of what the creation of capital and so forth. I mean, that's all very, very important to our economy. But I mean, the way it's sold to individual investors, my clients really kind of put bad taste in your mouth as to what goes on. It still goes on in that industry. But I decided that, hmm, what am I going to do?
00:06:56
Speaker
I ended up going to a cfa conference in charlotte i believe it was the cfa institute annual conference in this fellow by the name of jack bogle john bogle was speaking this was nineteen ninety six and he was the founder and CEO of the vanguard group of mutual funds which is up.
00:07:18
Speaker
fairly large company, but they had created the first index fund and they were creating more and more index funds in different industries. So basically very, very low cost, broadly diversified US stock fund, international stock fund, bond fund, real estate funds that were just tracking the market.
00:07:35
Speaker
And i'm listening to him talk and i'm showing i'm showing seeing the data that he's putting up there and it just aligned a hundred percent what what i was seeing and what i was thinking and i said oh by this this is really important stuff i want to got his book bugle on mutual funds which he had written a couple years earlier i read that and i had my moment i said this is what. I should be doing this is the direction i should be going which conflicted
00:07:59
Speaker
hundred and eighty out from what the brokerage industry was all about and i needed to make a decision to either try to work within the brokerage industry on this which was impossible to do or leave the brokerage industry and start my own company so that's how i ended up getting into this. Low fee industry is that the first time you met jack bogle was in nineteen ninety six.
00:08:25
Speaker
Yes. Yeah. I mean, I shook his hand and said, thank you. That was a great talk. But that was about it. I mean, I didn't have a conversation with him. He I didn't really meet him face to face and have a conversation with him until about 2001. I had been out of the industry brokerage industry and I started my own low fee advisory company just managing portfolios using index funds. And I finally met him at a Bogleheads conference. And I wasn't called the Bogleheads back then. It was called Vanguard Diehards.
00:08:50
Speaker
But we had a conference in Chicago where he was speaking at a Morningstar conference. I went to that Morningstar conference and I saw him out in the hallway and I walked up to him and had my very first conversation with him. But I had many conversations with him since then until he passed in 2019.
00:09:08
Speaker
Yeah. I know I, I'm not sure if the podcast was released in 2021 or if it was re-released from a previous, previous recording, but I know that you have, you interviewed him at some point, correct? I did. I did. I interviewed him a couple of, about three months before he passed away. As a matter of fact, he had come out with a, his last book called stay the course. And it was really about his life and Vanguard and his beliefs. And it was a,
00:09:36
Speaker
My very first podcast that I did, my podcast, if you don't mind me mentioning it, is the Bogle Heads on Investing. It's a nonprofit organization called the John C. Bogle Center for Financial Literacy that I used to be the president of the organization up until a couple of years ago. Now Christine Benz of Morningstar is the president. But basically we started this podcast and it was all non-commercial in the very first person that I interviewed.
00:10:01
Speaker
was John Bogle and it happened to be just a few months before he passed. So it was a really memorable event and I'm really glad. In fact, I went back and I listened to that podcast just the other day. It's a fantastic podcast and a very popular one. So podcast number one of Bogle Heads On Investing with Jack Bogle. People call him Jack, by the way. I mean, a lot of people know him as John, but he liked to be called Jack.
00:10:29
Speaker
Your relationship with him, did it develop over time? Or is it just something that you met in 1996 and then you interviewed him later? He wrote a blurb for almost all of the books, not the first one, but after that he wrote a blurb for almost all of my books. And then the last book that I wrote was called The Power of Passive Investing and he wrote the forward on that book. And I used to speak with him about
00:10:57
Speaker
things in the industry, not frequently, but we would email and I would see him at our conference. We began putting together a conference called the Bogleheads reunion. Now it's just called the Bogleheads conference and he would come to the conference and I would speak with him. I'd be on panels with him, interview him and so forth. So
00:11:25
Speaker
He's a great man. He had great vision and he's done so much for so many people. It's hard to put a number on it.
Asset Allocation and Investment Strategies
00:11:33
Speaker
It seems that you were far ahead of your time for your passive index investing approach and not just understanding it, but then establishing a business
00:11:45
Speaker
model around that for your own business. I remember being, I went to college probably right around 2000, graduated high school in 96. And I was familiar with like Rick Edelman and Robert Kiyosaki. But what I did not see, I didn't see any books about passive investing at that time.
00:12:05
Speaker
Maybe I just wasn't looking in the right places. There weren't that many. I mean, there just weren't. I mean, I started writing my first book. It published it in 1999. I think Jack's book was published in 1993, I believe it was. There was another book, The Index Fund Revolution, that was published, I want to say 1998, but I mean, I think that was it. There just weren't any books.
00:12:29
Speaker
I was all about active management is all about beating the market now since that time a number of books have been published but no they just weren't a lot of books so you wouldn't have run into them particularly. In the mainstream media because there is a motive for promoting things to the public and that is to sell products.
00:12:54
Speaker
So you're not going to run into a lot of indexing books in the media that are being highly praised, nor are you going to run into a lot of people like me on CNBC daily interviews or Bloomberg daily interviews or anything like that because they have a different agenda. Their advertisers in the media expect
00:13:21
Speaker
To get their support of the media outlets to sell their products and so yeah this is all been grass roots effort by a lot of people that have brought indexing to the forefront it certainly hasn't been.
00:13:37
Speaker
the media, there are a lot of the media like Jason Swag and Jonathan Clements and so forth, Penny Wong. And there was a lot of people who really talked a lot about indexing and when they could, but the mainstream media is going to promote their advertisers as well. And that's just the way it is. And it still is that way. And your thirst for this knowledge as well as your passion for helping others led you to write a number of books. One of those books,
00:14:07
Speaker
And this is how I kind of came across you is I was having a conversation with Paul Merriman up at Palm Springs maybe about a month ago. And as we were finishing up our conversation, I get up to leave and he says, have you read all about asset allocation?
00:14:24
Speaker
I said, no. Embarrassingly, I had not heard of this book. It is surprising because when a guy like Paul Merriman says, this is the Bible of asset allocation, listen. And so it's a book that you wrote originally in 2005. It was updated in 2010, I believe.
00:14:45
Speaker
Why did you write that book? What were you thinking about at the time? What service, what message were you trying to get across? Well, by that time I had written two books on index investing. The first one was Serious Money, Straight Talk About Investing for Retirement, which I self-published. Unfortunately, I published it with a publisher.
00:15:05
Speaker
that went out of business shortly thereafter. So I ended up with five crates of books sitting in my driveway. I ended up giving away. But the second book I published was called All About Index Funds. And I published that through McGraw Hill.
00:15:23
Speaker
But what was missing was a book about how to put all these index funds together in a portfolio, basically asset allocation. So I went back to McGraw-Hill and I said, look, I've got an idea for a book about how to use these index funds in an asset allocation because that really is the most important decision.
00:15:41
Speaker
that people make and so let me write a book called all about asset allocation and they said sure go ahead it turned out to be my best selling that book i mean i think i've sold over a hundred thousand and i don't know how many worldwide so it sold well but it really is just the basics of asset allocation and then how to apply that to. Index fund investing and now course ETFs as well there was nothing earth shattering about the book but i think i did a pretty good job explaining
00:16:10
Speaker
the uses of asset allocation and the limitations of asset allocation in the book. For a new investor, what is asset allocation? Well, I'm sorry, that's a good question. So let's back up a little bit. The asset allocation, an asset class is stocks, treasury bonds, money market funds, real estate. These are big major asset classes that you can invest in.
00:16:38
Speaker
And you can have us stock index funds and international stock index funds that cover the international market treasury bond index funds total bond market index funds that also have corporate bonds real estate index funds that cover the real estate investment trust market so.
00:16:56
Speaker
These are asset classes. Now, how you put those asset classes together in your portfolio, how much you have in treasury bonds, how much you have in real estate, how much you have in US stocks, international stocks. This is what's called asset allocation. It really is the biggest decision, the most important decision that you're going to make in your portfolio is your asset allocation.
00:17:23
Speaker
And then the second decision is how do you fill that asset allocation with individual funds? So how do you fill the US stock allocation and how do you fill the international allocation? And for there you could use actively managed funds versus index funds that cover the markets. And I advocate for index funds. So for someone who, let's say they're 25 years old and they've got a 401k and or a Roth and they're saying, okay, I just stumbled across this.
00:17:52
Speaker
this YouTube video that talks about asset allocation, maybe I should pay attention. Now, how do I use this information to go back and look at, how do I look at a 401k listing or my Roth options to then say, I should be allocated in this ratio of US broad market index, international index, stocks, bonds, real estates.
00:18:19
Speaker
How do you do it? Okay, so we've gone from the philosophy of indexing, meaning I'm just gonna buy the markets, whatever market that is, the US market, the international market, the bond market, treasury market, real estate market. I'm just gonna buy the market. So the philosophy of indexing is I'm going to do this. Now you'll be talking about strategy. What strategy is, is how do I do this? How do you do it? How does somebody listening to this podcast do it?
00:18:47
Speaker
Based on their unique situation based on their time horizon with their goals are how much they're trying to accumulate and also how they feel about risk.
00:19:06
Speaker
People refer to it as risk tolerance, kind of two definitive words. How do you feel about risk and what are you going to do if you have stocks in your portfolio and the stock market goes down 50%?
00:19:18
Speaker
And if the answer is, oh, I'll probably sell or I'll probably cut back the amount of stocks that I have. We probably don't need to do that because the market's doing that for you, but even more than that, then you probably are starting with too much stock to begin with. So there's two sides to the asset allocation coin is technically.
00:19:37
Speaker
What you should do if you're young and you have a lot of time in front of you, you probably technically academically should have more equity. You should be taking more risks because you're going to get a higher return. The expectation is to get a higher return from equities over a 30 year period of time. That's all wonderful. So you might say, okay, I'm going to be an 80% in stock, but it's not wonderful if the stock market goes down 50% and then you decide to bail out.
00:20:07
Speaker
If that's what you do, then you shouldn't have started with 80% in stock. You should have started with something that you will not bail out of. In fact, you'll do a rebalancing and get back to it. So maybe you start with 60% stock, 40% bonds, market goes down 50%, you actually take some of your bond money and you buy more stock. You may not be comfortable doing that, but you'll do it.
00:20:29
Speaker
And so that's how you figure out what your asset allocation is. It's the technical academic side. Yes, stocks outperform in the long term. You should have more stock if you're young, but there's also a behavioral side. And oddly enough, I can talk about the technical side. I can't talk about the behavioral side.
00:20:48
Speaker
unless I know you and we've had a conversation about it. I've had clients who are young and they're 30s who have sold their companies for many millions of dollars and they'll be very risk averse. They don't want equity, they just want a minimum amount of equity. And then I've talked to, same situation, 30 year old, so sells their company and they want all equity.
00:21:17
Speaker
in 100%. So you can't tell what a person's ability to handle risk is with a model, with a mathematical model. It doesn't work. I mean, you need to have a conversation. You need to talk about a lot of things. What are your goals? That's how you set asset allocation.
00:21:38
Speaker
So in my research, I found that there are basically two philosophies towards asset allocation. And one of them is the strategic asset allocation approach, which is what I believe that you are endorsing. And that is a more of a buy and hold approach and is focused more on long-term returns of the portfolio, rather than the tactical asset allocation approach, which is
00:22:00
Speaker
trying to make changes based on short-term trends that might generate a higher return. So you're advocating for the strategic asset allocation approach, is that correct? Yes, absolutely. Technical is, what do you know that everybody else doesn't know? I mean, what do you know about the US stock market that everybody else doesn't know? Oh, interest rates have gone up. Oh, people don't know that? Of course they do.
00:22:24
Speaker
Oh inflation is over three percent of what people don't know that i mean of course they do it's already baked into the price so there's nothing that you're gonna know about. The markets that the people are a lot smarter than you manage a lot more money than you.
00:22:44
Speaker
don't already know, it's already factored in. So what do you do? You just stay the course. You have your strategic allocation of however many is a bunch of stock, however much in bonds, and stay the course. And I will advocate here that if you're in a 401k plan and you have a low cost indexed target retirement fund, that you use that because you don't have to do anything. It's already done for you.
00:23:11
Speaker
So you do a target date 2060 fund. Now you may not be retiring in 2060, but if you just look under the hood and see what the asset allocation is, if it's a 2060 fund, it's going to stay at that asset allocation. It might be 90% stock of which.
00:23:26
Speaker
on the stock side, maybe 50% is in US and 40% is international and 10% bonds. But you don't have to do anything. You just keep plowing money into that target date, 2060 fund for years and let the company who's managing it, Vanguard, BlackRock, whomever, do it for you. Simple. Keep it as simple as you can. I mean, why make it hard?
00:23:55
Speaker
So I think academically, I think Target 8 funds are a little too conservative for young investors. But at the same time, I understand the behavioral aspect of it is if you're going to mess with it at all, just do a Target 8 fund and leave it alone over time because you'll probably end up better off than even someone who
00:24:12
Speaker
probably knows better and knows this stuff a little better and even enjoys it because they're going to tinker with it. Even if it's only a few times throughout the duration, that slight tinkering could offset the win comparative to just a fire and forget target date fund. They could, they might not perform as well.
00:24:30
Speaker
I think a statistical noise. I mean, yes, the behavioral aspect. If you're going to do everything perfect and not try to time the market and you want to buy your individual funds because they have a little bit slightly lower expense ratio than the target date fund, okay, I'm fine with that.
00:24:48
Speaker
It's going to be maybe not even measurable what the difference is. But if you're prone to do anything other than follow the strategic recipe that you created, you become a trend follower. Oh, I don't want to be an international, international. Oh, stinks. Oh, the performance stinks. That's a bad way to invest.
00:25:14
Speaker
Meaning you're you're you've got recently biased i mean you're looking at the world based on what just happened. In the last five ten even fifteen years you're not thinking about what's gonna happen in the next ten fifteen twenty five years so you're looking backwards you're driving in the rearview mirror. Using the rearview mirror i mean the point is that target date one stop you from doing that.
00:25:37
Speaker
I generally recommend target date funds for just about everybody who has a 401k and they have a low cost target date index fund. Now they're the target date funds that are very expensive and I don't recommend them, but there are
00:25:51
Speaker
low-cost target date index funds that are very reasonably priced by Vanguard, BlackRock, even Fidelity has them, I believe. But the point is, it's simple. I mean, if you get a long-dated target date index fund, you're going to be 90% equity.
00:26:10
Speaker
And what's statistically, what's the difference between a return that's 90% equity versus a hundred percent equity? And the answer is not much, not much. So for simplicity, the ease of management.
00:26:24
Speaker
I say to people, look, you've got these really great target date funds in your 401k or 403b. Why don't you use those? And then if you're going to do individual funds, let's look toward your taxable account or maybe your Roth account for that. Because a taxable account, you may be better off doing something else than a target date fund or your Roth account.
00:26:49
Speaker
because you really don't want fixed income, your bonds and your Roth. So you may do something else, but at least for your 401k or 403b, if there's a low cost target date index fund available, I recommend people use it.
Discussing Client Risk Tolerance and Asset Location
00:27:03
Speaker
And I know Paul Merriman recommends, or one of his many recommendations for portfolio asset allocation would be have used target date funds. And then on top of that, add some kind of small cap value. So if that was the strategy you're going for, would you just hold the small cap value outside in like a Roth or something because it's a little more volatile, potentially more, you know,
00:27:25
Speaker
Since Paul commented on me, I'll comment on him. So you're speaking about what Paul calls the two fund for life portfolio, where you have a target date fund and then you have a small cap value fund. And then over time, as you get older, you diminish or you reduce the amount that you have in small cap value. That's the two fund for life strategy.
00:27:52
Speaker
And yeah, if you're going to have small cap value, if you want to take that tilt in your portfolio, you take that extra risk in your portfolio. Then fine, but I wouldn't put the small cap value fund in my 401k or 403b because let's not joke around. I mean, the idea is the small cap value is expected to outperform the market. That's why you're doing it. You're taking risk. You're deviating from.
00:28:19
Speaker
The market return and you're saying I'm going to go into the small, very niche, very small portion of the market, which might be one and a half percent of the value of the entire market might be small cap values. Very small niche in the market. And you say this particular niche in the market has shown academically that has outperformed the rest of the market, which is
00:28:42
Speaker
what really the bottom line the basis of the argument is now you could argue whether that's behavior or whether it's risk or whatever it is but the bottom line is the idea is i'm going to outperform with a small cap value tilt in my portfolio well that's great if this is what you believe and you're willing to.
00:29:00
Speaker
Go that direction when you really need to do it for say twenty five years because that's what it's gonna take to take that tilt and actually have a high probability if it happens of you getting that excess return fine but don't do the tilt in your 401k or 403b because it's a pre-tax account and you haven't paid taxes on this money yet.
00:29:22
Speaker
If you want to do the tilt do it in your raw account because you don't have to pay any taxes or in fact if it actually works out in small cap value actually gives you a higher return than the rest of the stock market during this period of time that you're investing in it at least it's in your raw account. I don't have any taxes on that extra game.
00:29:41
Speaker
So I'm not disagreeing with Paul on this. We're just talking about his two fund for life portfolio. I'm talking about asset location, which is where are you going to put these two funds? And the answer is you put the target date fund in your pre-tax 401k or 403b or maybe an IRA rollover and you put the small cap value in your Roth account. You've been a financial advisor for a very long time.
00:30:11
Speaker
How do you, right? Just the way you said it, a very long time, kind of rolled your eyes there. All from a place of admiration. Thank you. In your dealing with clients on those first and those initial conversations, we talked about risk and you said you can't tell a person's risk until you actually have a conversation with them. Correct.
00:30:38
Speaker
Whenever I had talked to people and say, hey, maybe they've never started a Roth. I say, okay, go to Fidelity, go to Vanguard, go somewhere, start a Roth. One of the things that they go through is a risk tolerance survey, and then it provides them a recommendation of something. And I have a huge issue with that.
00:30:55
Speaker
Not necessarily because risk isn't something that should be considered, but it's what does the person who is starting a Roth for the first time understand about risk in the context of financial markets and portfolios, which is almost zero at that point. How do you have that conversation about risk and how do you balance what you know about risk?
00:31:19
Speaker
the markets and behavioral finance and your experience with what they're telling you in that conversation of like, you can't ask a potential client, do you want to lose money? They'll say no. But they have to understand that it's still possibility that
00:31:35
Speaker
in one month to the next, they could lose a percentage, but they'd also need to understand that it will bounce back if they stick to their plan. So how do you balance that in that conversation and get them on a solid footing that you as an experienced advisor and them as someone who's new and who might be anxious or a little bit scared about putting their money in this account, how do you resolve that? How do you close that gap?
00:32:00
Speaker
So let's first talk about the risk tolerance questionnaires they were designed to find the maximum amount of risk that you could handle that that's why they were designed not whether you should actually take that risk or not is a whole different story but that's what they were designed for so is that the right way to go about investing to find maybe.
00:32:24
Speaker
what the maximum amount of risk you could possibly handle is and go right up to that level. I don't think that's a good way of doing things. Secondly, as far as the questionnaires themselves,
00:32:34
Speaker
They remind me of questionnaires that you might see in Cosmopolitan magazine, right? They're just really flaky questions. You know, if this happened, what would you do? If this happened, what would you do? I mean, you know, people are taking a risk tolerance questionnaire. They are going to be brave when they take the questionnaire. They're going to say, oh, well, if the market went down 50%, of course, the correct answer is to buy more, right? I mean, that's what I'm supposed to be saying because this is a risk tolerance questionnaire.
00:33:04
Speaker
Anyway, they're notoriously inaccurate. But with lack of anything, at least it gets you thinking about what happens if the market goes down. What am I going to do? So David, you're my client? Here's how I start that conversation.
00:33:23
Speaker
Well, David, we've talked a lot about your background and your family, and we've talked about your income and whether it's secure or not. And if you're married, your spouse's income and your children and their education and how much you're putting away, your taxes. We talked about your insurances to make sure you're insured, your income coming in through life insurance and disability insurance and an umbrella policy of some sort.
00:33:46
Speaker
And then we may have talked about some estate planning to make sure that you've got everything set up correctly from your wills and trusts or maybe not a trust but powers of attorney guardianship for your children. We talked about all of these things. So I have a really good feel for where you are in life, where you're trying to go.
00:34:08
Speaker
and how you're trying to get there when you expect to get there. And we could do a little bit more work on that as far as projecting out based on how much you're saving and a reasonable rate of return in the markets. But now it comes to the point of this conversation when we need to talk about your investment portfolio. And of course we start with asset allocation, which is the allocation between stocks, bonds, cash, maybe real estate. So David, where do you think you should be? And I let you answer the question.
00:34:38
Speaker
Why? You already have an idea of where you think you should be. Okay, so tell me anything. I don't care. Just tell me anything. We'll just keep role playing. David, where do you think you should be with your asset allocation? Say between stocks, bonds, and cash. Let's start with cash. How much do you think you should have in a reserve fund? Some people call it an emergency fund. So how much do you think you should have there? Dollar amount.
00:35:02
Speaker
I'm good with 40,000 in an emergency fund. Okay. And you've got 500,000 or $540,000 saved. So 40,000 goes to the emergency fund. We'll put that aside. Now we have 500,000 and that's more long-term investment. Let's call it retirement. We're not going to count your kids 529. This is just you and your spouse or just you perhaps, this is your retirement money. So we're just going to focus on that, correct? Okay. With that,
00:35:29
Speaker
What do you think the allocation should be between, say, stocks and bonds, or stocks and fixed income? It doesn't have to be bonds, it could be CDs or something.
00:35:39
Speaker
Well, right now I've got a pension. So I think of the, and it's adjusted for inflation over time. So I, so I think of that as a, the bond aspect of my portfolio. So I will, I would like to be more aggressive with that 500. I don't need it right now. And I'm okay with not paying attention to it. And I would like just for it to get somewhere and grow at the rate of the market. Okay. Very good. So a hundred percent equity. I mean, all, all of your 500, all in equity. I mean, how would you feel about that?
00:36:10
Speaker
I feel okay with that. I've got an emergency fund. Is that what you've been doing with your money? Is it 100% equity right now? It's not exactly what I'm doing right now. Let's just stop there. But this is the point. You see, you're looking up, you're thinking about it, this and that. Exactly. This is how we get to. You need to get to your asset. I can't tell you what your asset allocation should be. No risk tolerance questionnaire should tell you what your asset allocation should be.
00:36:37
Speaker
only only you can come up with your asset allocation because if you come up with it odds are higher that you'll stick with it so it has to be your decision not mine you see what I'm doing here yeah I'm forcing you to come up with the plan I'm not I'm not gonna come up with your asset allocation you're gonna come up with it but I'm gonna pull it out of you
00:37:00
Speaker
I'm going to get it out of you. Okay. And it might end up being a hundred percent equity. Yeah. I'm okay with that. Okay, fine. I'm still a little bit of role playing. So market goes down 50%. I mean, your 500,000 goes to 250. I mean, is it going to affect you? I mean, what do you think about that? And we're just going to continue like that with, that's how I figure out what a client's asset allocation should be. Now granted in my mind, I'm saying, does this make sense? I mean, should you be a hundred percent equity?
00:37:28
Speaker
You know, I mean, if somebody started out with, well, right now I'm 100% in cash because, you know, when COVID came along, man, I just freaked out and I sold everything. And now they're telling me they want to be 100% equity. No, that's not going to work. Okay. So I have to pull it out of you. You know what it should be. I have to figure, I have to pull it out of you. That's how I do asset allocation. A little awkward perhaps, but that's how I do it.
00:37:56
Speaker
No, I like that answer and I actually learned something right then too, because for me, like I feel like I better than most at least understand how the market plays out over time and how to make decisions based on that. And that's what I've been giving 51% of the vote towards how I think, not only how I should invest, but how I think other people should invest. And what you got to was, will they stick with it or not? And that's the number one factor.
00:38:22
Speaker
Absolutely. No question. It's not the asset allocation. It's whether you'll stick with it or not. That is the issue right there. That's what all that years of experience do. There you go. You mentioned real estate as well as far as part of asset allocation. What is your thought on real estate and how do you incorporate that into your portfolio? Well,
00:38:49
Speaker
Do you own a home? I own a number of rental properties, but no primary residence at the moment. Oh, well, that's interesting. I actually have some clients that do that. They actually rent and they have rental properties. So that's fine. Real estate is a fine way to invest. If you own rental properties, you are an active manager. I mean, it's a business, right? I mean, you're buying properties,
00:39:16
Speaker
maybe you're fixing them up your finding renters to go into them i mean this is a business this is not passive real estate investing which is perfectly fine it's a great. Business if you choose to go down that path if you choose not to go down that path but you still want more real estate in your portfolio.
00:39:35
Speaker
then you could do a REIT index fund. Now that's one end of the spectrum. You don't have to do anything. You just buy a real estate index fund like the Schwab REIT ETF that owns 120 REITs, real estate investment trusts, that are traded within the stock market. That's easy allocation. Now the expected return of that is no higher than the stock market.
00:39:57
Speaker
It's no higher than the stock market. But you just want a little bit different path, if you will, of return with real estate than you would say with the total stock market index fund. Because the total stock market index fund only has a very small amount allocated in REITs.
00:40:14
Speaker
maybe 3%, whereas though now you're getting maybe a 10% allocation to real estate, it's going to have a little different tracking than the stock market. Sometime it'll be non-correlated, sometime it'll be highly correlated. So it'll go up and down together sometimes, sometimes it doesn't, but that's why. And then there's in the middle. In the middle is you're going to do syndicated. You're going to get partners. You're going to either buy a partnership or you're going to participate in a partnership.
00:40:37
Speaker
I may be a private reach which is sort of the same thing as a partnership but it's not traded on the stock exchange so that's sort of in the middle you got individual ownership which is what you do you got reach over here which is just market based and then you got the stuff in the middle now.
00:40:58
Speaker
Which one are you gonna do the best at which one is the rate of return going to be higher well basically the one that's gonna be higher is the way you're doing that you're buying individual properties and. Because you're managing it and you're putting sweat equity into this so the return should be higher maybe ten percent versus.
00:41:14
Speaker
seven percent for reach and then in the middle because there's management involved maybe you're looking at. May be a eight percent return although have really been that way we have actually done as well if not better than the syndicated real estate at least over the last twenty five years or so so but that's that sort of the spectrum of expected return.
00:41:35
Speaker
Now how much of this should you have in your portfolio you could have. I don't know what the what the upward limit is if you're gonna be on this side over here it could be quite a bit if you're in the middle with syndicated real estate you know i think no more than twenty percent.
00:41:49
Speaker
And then if you're going to do a refund, you know, maybe, maybe 10% of your equity portfolio in REITs, but, um, yeah, or nothing or not. You just don't have any REITs or real estate with the exception of maybe you own a house, which is real estate. I mean, realize when you buy a house, you're paying yourself rent.
00:42:05
Speaker
every month to live in the house so i mean it appreciates in value so people say well that's my house i have to live somewhere well guess what people. Sell their homes later on in life and they use that money for things like assisted living and nursing care so i mean it is actually a.
00:42:23
Speaker
investment and a pretty darn good one to own your own home because if you're married the first five hundred thousand dollars of capital gain is tax-free and if you're single the first two hundred fifty thousand is tax-free so I mean owning a piece of property to live in is a is a good investment especially from the
00:42:39
Speaker
after tax return of it. I don't know if that answered your question, but that's what my view is. And if your spouse dies, you've got two years from the date of death to sell it and still get the 500. That's good. I didn't know that either. Nice. Thanks. I'm learning a lot this recording. Well, I know what I just said about that is a tax question. Let me talk to this for a second because I think it's important.
Tax Strategies in Financial Advising
00:43:02
Speaker
As a financial advisor we can figure out what your asset allocation should be what your investment should be in your 401k or ira and your roth account and your taxable account and all that using index funds low cost funds. That's all very well and good but.
00:43:20
Speaker
What do financial advisors who really know their stuff really try to understand as best they possibly can? And that's taxes. Taxes drive so much financial advice that
00:43:40
Speaker
It has a lot to do with investing and we talked about asset location why would you would put small cap value in your roth account rather than your pre-tax account and this is because of taxes. All because of taxes right the real estate.
00:43:54
Speaker
the $250,000 versus the $500,000 capital gain, and that if a widow can keep doing that for two more years, even though they're going to be filing as a single person after the first year, unless they were qualifying widow, which means they have children under the age of 18 still living there, which would be qualifying widow, they still get this two-year window.
00:44:18
Speaker
Which they wouldn't get if they own stock which is kind of unusual to think about it so if if you're if your husband died and that you have a house and you have stock and if you sold the stock.
00:44:36
Speaker
a year after they died, it's gonna be subject to your tax rate if there's a capital gain, it'll be subject to your tax rate as a single person. But if you sold the house, it's still joint, so you still get the $500,000. Okay, so a lot of nuances in the tax code, but when you're working with individual investors, you really should know the tax code.
00:45:01
Speaker
as best you possibly can. Of course, I don't know everything. I'm learning every day as well. But there's an awful lot of interesting things in that tax code that helps a lot of people.
00:45:12
Speaker
Just yesterday had a client who had a very large position in a stock and it's about to retire this year and he makes a million and a half dollars a year and in his Income but next year he's gonna make zero because he's retired but he's got this big position in this one stock and he's saying I think I'm gonna give some of it to charity and
00:45:32
Speaker
And I said, well, put it in a donor advised fund, take a big chunk of it. If you make a million and a half dollars a year, you can take 30% of a million and a half, which is 450,000. Take 450,000 of that stock, put it in a donor advised fund, that $450,000 is a tax write off against your ordinary income, which is 37%. Because if you wait till next year to do this, it's only a tax deduction against capital gains, which is tax set,
00:45:59
Speaker
20% based on the amount of stock that he has plus the 3.8% at investment income tax. So it's a much better tax deduction for you to make that donation to the donor advised fund of appreciated property this year up to 30% of your adjusted gross income.
00:46:14
Speaker
I mean, by doing that, the difference between a 23.8% benefit if he did it next year versus a 37% benefit because he's in a state that doesn't charge any state income tax is huge. I mean, it's $50,000 in tax saving difference by making the gift this year versus next year. Now, this has nothing to do with
00:46:36
Speaker
Whether you should be in stocks or bonds or cash it has to do with just an understanding about taxes but it is investment related and i'm saying it's financial advisors if they're really good they're not just gonna be trying to sell you some product. I can try to sell you a direct investing portfolio that i can try to sell you just some new or something to understand your whole situation is why we sit down with the client for the first time i do everything over the phone.
00:47:03
Speaker
I might spend an hour and a half just listening to them and understanding their situation because that important, when you start talking about investing the money, who's gonna get the money when you die? What are your ambitions for giving money to charity? When should you give money to charity? How should you give money to charity? What should you give money? What should you give to charity? This is advising.
00:47:29
Speaker
It's not selling a product it's not selling asset management services i mean this this is advising so advisors really need to know the tax code as best they can and continue to learn. I don't want to get off my soapbox but i just want to put that out there i'm glad you did because i think.
00:47:47
Speaker
I'm in the financial independence space and we just kind of like lock on it, broad market index funds forever. And yes, there is tax implications and other aspects of the portfolio and life planning. And so I think taxes are something that we should talk about more, particularly the financial independence space where we're usually just, it's usually the two things we're focused on is like life design and,
00:48:14
Speaker
low-cost index fund investing, and that's almost... No, taxes are huge. Taxes are sort of the underground river where everything flows. These are the kinds of things that financial advisors should be talking with their clients about. A whole lot more about taxes. I think the investing side is pretty much solved. To me, the investing side of a conversation with a client, if it's two hours long, a new client, is maybe 30 minutes.
00:48:40
Speaker
The other hour and a half is devoted to all this other stuff getting to know them talking about taxes looking down the road and saying what's it gonna look like for you what's gonna look like for your heirs how do we. Go about managing your state distributing money from your retirement accounts what's the most tax efficient way are you retiring before the age of sixty five and going on medicare what we need to have a talk about obama care.
00:49:04
Speaker
the Affordable Care Act, and whether or not you want to distribute any money and do Roth conversions before 65, because that's going to ruin your chances for getting tax credits through the Affordable Care Act. I mean, I've got a lot of clients who don't, a lot of financial advisors have this, who are multi-millionaires. I mean, they're worth five, six, seven million dollars. That's your net worth. They're getting almost free healthcare from the government between the age of 60 or 55 and 65, because they qualify for the Affordable Care Act
00:49:33
Speaker
And you say well that's just not right i'm not saying it's right or wrong i'm saying this the way the law is written. If you can keep your income down low enough you're not doing roth conversions you delay social security you have your taxable portfolio set up so it's throwing off very little dividends.
00:49:49
Speaker
you could qualify for basically the government to almost pay all your healthcare costs, even though your net worth might be $5 million, which is not the intent of the Affordable Care Act, but that's the way the law is written. And so now this is how you, quote unquote, add value, and I hate that phrase. But that's what we should be doing, because we are financial advisors. We're not investment advisors, and we're not tax advisors. We're financial advisors. We're supposed to be looking at the whole thing. And again, I'm going to get on my soapbox here a little bit, but I think it's important.
00:50:20
Speaker
Do you have any children? I have three and eight grandchildren. Oh, yeah. When your children were in their twenties or if you met someone else's child or a college graduate in their twenties.
00:50:36
Speaker
We're not talking multi-millionaires. We're talking young people who are starting their professional careers and their personal lives. What advice do you give them as far as how to establish their portfolios and then how to manage that portfolio over time?
Advice for Young Investors
00:50:53
Speaker
Well, certainly if they have the ability to put money into a 401k or 403b at work and they're going to get a match,
00:51:02
Speaker
They definitely want to put money in there just to get the match. Now, whether you put it into your Roth 401k, which is the after tax side where the money can grow tax free, or you put it into the traditional pre-tax side depends upon your tax bracket. And so for a lot of young people.
00:51:18
Speaker
they're going to put the money in the Roth side because their incomes are not that high. They're just getting started. So they're going to put money in the Roth 401K or the Roth 403B. Your employer is going to match it. Right now, the employer has to match it to a pre-tax account, but starting in 2025, that can go into the Roth also. Anyway, now that's where you start. And then do you qualify for just a regular Roth account?
00:51:44
Speaker
which is depending on how much you make. And if the answer is yes, you put the $7,000 in your regular Roth account. Is there an HSA, health savings account, available to you because you're in a high deductible plan? If the answer is yes, you should put money in the HSA. By that time, you probably put enough money away where you need the rest of the money to live on. But I mean, if you still have extra money,
00:52:09
Speaker
then if you're married and you have kids or just have kids and you want to start a 529 plan, that's a good idea too, to start saving for their, your child's education. And after that, it's just basically going to go into a taxable account. And there you need an emergency fund of some sort, you know, six months worth of living expenses, just in case, just in case. Now, I don't call it an emergency fund. I actually call it a reserve fund because that money,
00:52:35
Speaker
can be tapped for things like a new car. Is getting a new car an emergency? No, but it may be nice to have, so you could use that money for that. And then after that, you probably will start to look at more long-term investments. I don't know if I answered your question, but the whole thing begins with what's available to me. What types of accounts are available to me, and how can I start utilizing these accounts to grow my wealth?
00:53:00
Speaker
How would you, let's assume you did all that and now you're putting money into a taxable brokerage account and you still want to invest in a similar philosophy. We're not adding real estate at this point. We're just wanting, we've decided we're going to go simple, non-complex, passive, and we want asset allocation to be a high priority. There's something out there called asset allocation ETFs. Is this the same thing as target date funds?
00:53:30
Speaker
The asset allocation ETFs are going to have a fixed allocation to stocks, bonds, rather than one that diminishes the stock allocation over time. So it's what we call a balanced account. Is it an option? Sure.
00:53:47
Speaker
I mean, you want to make it easy? Just put it into a balanced ETF. And there finally are a few of them out there. iShares has them, and I think there's a couple of other firms that finally decided to
00:54:04
Speaker
launch these now i will say if you really gonna get into the minutia of this from a tax standpoint it may be better to not do that. Because if the stock market goes down in your justin a stock fund and maybe a bond fund you could do what's called tax loss harvesting in the stock fund only because the stock market went down.
00:54:28
Speaker
and move it into a different stock index fund. So you do, you sell one stock fund at a loss and you turn around and you buy a similar fund, but not substantially identical. And again, I'm getting into the nuances here, but the bottom line is the, you could take the tax loss and you could write that off against your ordinary income up to $3,000 a year and save a little bit of taxes. But I mean, if you don't want to get into that minutia of it, you know, the optimal tax management of your taxable account, sure. I mean a balanced,
00:54:54
Speaker
indexed ETF works just fine. Do you have an overarching philosophy on what the perfect portfolio is?
Defining the Perfect Portfolio
00:55:04
Speaker
Yeah, perfect portfolio is one you're going to stick with your entire life. That's the most important point. You come up with this philosophy of how you're going to invest
00:55:14
Speaker
You develop your strategy of what your portfolio is going to look like and you just stick with it for a long period of time. I'm not saying you stay with it for the rest of your life because you may decide to make an asset allocation change later on as you transition from accumulating assets to retirement and distributing assets. And there might be another asset allocation after that too where you realize you don't need to distribute that much in assets.
00:55:37
Speaker
save more money for the next generation so you might actually go back to a higher allocation to equity. But you can make asset allocation changes based on your situation. But staying the course is by far the most important thing that you'll do.
00:55:54
Speaker
And one of the podcasts that I heard you were being interviewed and you said, complexity to an advisor is job security. Should that be something we interpret as stay away from advisors? No, I mean, I'm an advisor. But there are different types of advisors out there.
00:56:15
Speaker
There are brokerage world advisors, and I won't name any names, but the big brokerage firms out there. I call them brokerage firms because that's what they used to call them. They are mainly names. UBS, Wells Fargo, and so forth.
00:56:32
Speaker
registered with their firms as series seven. Brokers are registered reps and they take the series seven exam which is a brokerage exam i mean that that's what they do they get paid based on a percentage of the money they take in for their firm.
00:56:52
Speaker
Add their goal is to maximize their own revenue hate to say it but that's what it is not that doesn't mean going out and selling everybody the highest cost thing because people catch on to that in the.
00:57:06
Speaker
They won't be maximizing the revenue for very long, but they're going to develop a mix within their clients of products that they're selling them were sort of guarantees them as a broker to get a certain amount of revenue per year. And that's their focus.
00:57:22
Speaker
So you know what is the incentive what's the advisers incentive what their incentive is their own revenue how they make money that's that's their incentive so they're going to when they look at you.
00:57:37
Speaker
And you come to them and you sit down, you're looking at them saying, okay, you're looking at them and you're saying, okay, I'm the client, you're the advisor, you're supposed to be helping me make my decisions. But the advisor is saying, and I was a broker for 10 years at two different brokerage firms. And then I had my own money management company where I used to manage investment portfolio. So I more than know this stuff. This isn't me just speculating on this. I mean, I lived it.
00:58:01
Speaker
They're sitting here sizing you up. Oh, you've got 500,000. Okay, if I can put 100,000 into this product, I'm gonna make this commission. If I can take another 300,000 and I put it over here, I can make this fee per year. And all net total, I can probably make off your 500,000. I can probably make six, $7,000 a year in fees. That's what they're thinking. That's how they're sizing you up. Even though you over there on the other side is saying, oh, he's making these recommendations because he thinks it's in my best interest. It is not.
00:58:31
Speaker
It is not. Now, I'm not saying they're giving you bad advice. It's just they're not going to give you the best advice. The best advice is go buy a target date retirement fund at very low cost, index fund, very low cost. In your taxable account, just put the money in a T-bill and then maybe a total stock market index fund. And in the middle, maybe buy a couple of CDs. And that's all you want to do over there. Okay.
00:58:56
Speaker
What's the problem with that advice if you're a broker you don't make any money it might be the right advice you might be doing great things for your clients but you're gonna starve. Yeah it doesn't work so what's the incentive to the advisor that's your first clue that they might be a problem now advisors who decide okay they get you to give them their money.
00:59:23
Speaker
I get you to give me your $500,000 and I'm going to go and I'm going to put in all this stuff. What is my incentive then? To keep you as a client. I want to keep you as a client. I want to get that revenue stream in every single year. Am I just going to put you in a simple portfolio of a US stock index fund and a bond fund? No.
00:59:48
Speaker
After a while you're gonna say, I'm paying you five, six, $7,000 a year and you just got me in these two funds or maybe this one fund, this balanced index ETF, one fund, and I'm paying you $5,000. Why do I need you? Look, I was an advisor, I used to manage portfolios for people. We used to have 12 funds in a retirement account and we used to have 10 funds in their taxable account. Did we need 12 funds? No, but it was enough.
01:00:16
Speaker
It was enough to have enough complexity in the portfolio so that you believe we're adding value, this phrase that gets thrown around in the advisor industry all the time. We're adding value. We're not adding any value. I mean, no, no. Okay, you're not. But with 12 funds, it's complex enough so that complexity is job security. You think we're adding value, so you're gonna stay with us, okay?
01:00:46
Speaker
And advisors who add complexity to the client's portfolio for the sake of their own revenue stream and the security of their own revenue stream, you know, it's complexity for job security. So you have to figure out the advisor. How is the advisor being paid?
01:01:02
Speaker
Is it from sales of commissions? Is it from assets under management? Is it an hourly or a subscription base where you're just paying them for their time? And that's going to be very telling as to whether or not you're getting unbiased advice.
01:01:19
Speaker
And now you are fee-only? I do an hourly thing, so I charge by the hour. I've done commissions as a broker for 10 years and then included some AUM fees as well. And then I went strictly just asset under management fees where people paid me a fee. And I only charged a quarter of a percent management fees. It wasn't 1% or 1.5%, I only charged a quarter. And I built these portfolios of index funds, which we managed, my company managed.
01:01:43
Speaker
I sold the company back in 2017 but the you know it wasn't it wasn't one or one and a half percent with a lot of advice is charge and now i'm in my twilight tour you can appreciate that i'm just doing hourly so i'm just helping people by the hour in here you can be brutally honest.
01:02:04
Speaker
Brutally honest about everything. People don't like it. I don't get invited to speak at conferences anymore. If there's an advisor conference, I don't get invited. If there's an ETF conference, I don't get invited to speak anymore. I used to.
01:02:18
Speaker
but not anymore because now I'm telling people, oh, you could do this. This is really easy. Or I'm telling advisors, Hey, you know, just do something simple for your client. You know, just, just help them in other ways, help them with taxes, help them, you know, with the state planning, help them, you know, think about life planning and things like that would be really useful because this investing stuff is easy.
01:02:37
Speaker
You know, it's easy to solve. So, you know, don't try to make yourself look like a wizard. Don't do complexity for job security, okay? Be an advisor. I mean, actually help your client with things that they actually need help with. Yes, they do need some help with investing, but investing, you can do it very simply, very tax efficient, very low cost. You don't really need bells and whistles. Don't base your fee on the investment side. Base it on the holistic,
01:03:06
Speaker
you know, financial advising and what you're bringing to the table there. So that's, I'm on my soapbox again, but that's what I believe. No, I really appreciate that. And I wish that there was some way for me to take that last four minutes of speaking and get it into everybody's ears because when you're young and you're passionate about learning these things, somehow,
01:03:28
Speaker
These conversations aren't the first thing that they hear because there are companies trying to sell products and that's generally the first people that they hear talk to them because they have the money to promote the sales. That's usually the first voice that they'll see. Because if you go to Google,
01:03:45
Speaker
sponsor, sponsor, sponsor, sponsored at the top. They can actually go on something. And that's going to be their first, but this is not going to be their first thing that they hear. And this is what they need to hear. Which saves them hundreds of thousands of dollars of the course of a lifetime. Well, that's why the Bogleheads exist, right? You'd mentioned the Bogleheads, a nonprofit organization. It's people helping people who believe in this philosophy. We've been around now for
01:04:09
Speaker
Oh, more than 20 years. And we have a conference every year. This year it's going to be up in Milwaukee at the end of September. Um, we get 500 people that attend, but I mean, it's all, it's no one has paid. Everybody's doing it to help everybody else. Uh, and you know, to getting the word out, it's a grassroots thing. This is not something that Merrill Lynch wants to promote. This is not something that you're actively managed mutual fund companies are going to promote.
01:04:41
Speaker
When Jack Bogle first came out with the first index fund of Vanguard, the S&P 500 fund, there was a poster created by one of the mutual fund companies. Indexing is un-American. Un-American.
01:04:55
Speaker
Look at it now, right? Why? Grassroots. People understand it. They get it. Keep your fees down. Keep taxes down. Don't be trying to time the market. Just go with the markets and you're going to be a lot better off.
Rick's Take on Cryptocurrencies
01:05:11
Speaker
You wrote a number of books that have done very well.
01:05:15
Speaker
You mentioned your most well-known is all about asset allocation. The original was published in 2005. You revised it in 2010. If you were going to revise it for a third edition this year, what would you include that's not in the second edition?
01:05:33
Speaker
Oh, clearly, I'd include cyber currencies. I mean, I talk about them are cyber securities, you know, Bitcoin and NFTs and all that. I would include it. Now, would I recommend you buy it? The answer would be no. But I would include it and talk about what it is, why it exists, why it's viable. I mean, you know, I'm not saying that Bitcoin isn't worth anything because I think it is worth something. But the question is, is this what you should be including in your portfolio?
01:06:01
Speaker
And for my view, the answer is no, it's not something you would include not any more than 20 something years ago, you would have included the euro in your portfolio because of Eastern Europe and part of the UK went on the euro. So they sort of consolidated currencies and they issued a euro, which had been very successful, but.
01:06:25
Speaker
Back then, I wasn't telling clients to load up on the Euro, this new currency. So in other words, if you're not going to be a currency,
01:06:33
Speaker
If you're not trading currencies, because remember currencies don't produce any interest. They don't produce any dividend. One Bitcoin doesn't become two Bitcoins if you hold it long enough. No, nothing like that. It just sits there. It's just one Bitcoin, just like one ounce of gold. It just sits there. Now, so what are you trying to get from it? I mean, how do you get a rate of return? Well, theoretically, just like currencies, you have to be able to trade these things. You have to get into them at the right time. You have to get out of them at the right time. And I'm not, that's not how,
01:07:03
Speaker
You make money in the long term. You make money in the long term by buying things that pay cash flow. Bonds pay cash flow. Stocks have earnings. They distribute earnings in the form of dividends that gives you cash flow. Real estate gives you cash flow in the form of rents. And you get appreciation. Same thing on the stock. You get appreciation. I mean, these things give you cash flow. It's the cash flow that in the long run produces the return above the inflation rate.
01:07:31
Speaker
And so Bitcoin doesn't fit into that model and neither does gold and neither does other currencies or commodities. It just doesn't fit in. You have to be able to trade those things and you're just betting against everybody else. It's just a big, you know, we're at a poker table, somebody's going to win, somebody's going to lose.
01:07:51
Speaker
It's not investing, it's speculating. Even though it's viable, just like gold and other commodities, we need them to exist. And I don't know where the cyber securities are going to go in the future. But it's not an investment per se, a long-term buy and hold investment that produces cash flow. So I don't recommend it for my portfolio. That's how it would
01:08:17
Speaker
That's the chapter that would be on cybersecurity. If you're okay with sharing it, what would, looking back at your own financial moves and financial mistakes, we hate to admit it, but we've all made some. What do you think is one of your largest financial mistakes in your own personal history, if you're willing to share? Well, I mean, if I had to crystal ball,
01:08:44
Speaker
Then back when I was a young second lieutenant in 1982, when I was down in Kingsville, Texas, going through advanced jet training, and I finally had accumulated a couple of thousand dollars of savings, I would have sent the money to Vanguard and put it into the S&P 500 Index Fund.
01:09:09
Speaker
And I would have never done anything else my entire life except buy that fund. And that would have been it. And if I did that, I'd probably have three times the amount of net worth I have today. And I don't think the next 40 years is gonna be any different than the last 40 years.
01:09:23
Speaker
Yeah, I think very similar as well. And if I could do it all again, I would have kept it simple, just poured into an index fund, S&P or broad market. Broad market now, that's correct. Yeah. And just done that and nothing else. I would have just poured it into those. Never time the market, never questioning the approach.
01:09:44
Speaker
and have a lot more money today to show for it. And I believe the next 40 years are gonna be the same way. Rick, thank you so very much for your wisdom and insight. It's a pleasure meeting you. And I hope that our paths cross again. And I look forward to our next conversation. Well, thank you for having me. It's been a lot of fun. And thank you all for listening.