November 12, 2025 • 53 mins
Everywhere you look, people are talking about AI. Some say it’s going to save the world; others think it might break it. But while the headlines focus on sci-fi futures and big-tech battles, we’re interested in something a little closer to home: what does all of this actually mean for us as everyday, DIY investors – today, and over the next decade? Fortunately, we don’t have to wing it. Vanguard’s global chief economist, Joseph Davis, has been studying the forces shaping our financial future – AI included. And in his new book, Coming Into View, he breaks down the megatrends that are poised to reshape the investing landscape. Today we discuss:
- How Vanguard's mission focuses on aligning investor interests with their work
- Predictions about lower future returns are based on economic fundamentals
- AI's impact on productivity will extend beyond the tech sector
- Cost management in investments is crucial for long-term success
- Demographics alone do not determine economic growth outcomes
- The importance of diversification in investment portfolios remains unchanged
- Investors should stress-test their financial goals against potential market scenarios
- And much more!
Want more How To Money in your life? Here are some additional ways to get ahead with your personal finances:
- To dig into more of how AI will impact your portfolio, check out Joe’s book: Coming Into View
- Knowing your ‘money gear’ is a crucial part of your personal finance journey. Start here.
- Sign up for the weekly HTM newsletter. It’s fun, free, & practical.
- Find a thriving community of fellow money nerds by joining the HTM Facebook group!
- Massively reduce your cell phone bill each month by switching to a discount provider like Mint Mobile.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to How to Money. I'm Joel, and today I'm
talking how AI will impact your investments with Vanguard's Joe Davis. Okay,
(00:26):
so everywhere you look, people are talking about AI. Some
say it's going to save the world, others think it's
going to break it. But while the headlines focus on
sci fi futures and big tech battles, I'm interested in
something a little closer to home. What does all of
this actually mean for us as every day DIY investors
today and over the next decade. Fortunately, we don't have
(00:48):
to just wing it. Vanguard's global Chief Economist Joseph Davis
has been studying the forces shaping our financial future, AI
included and his new book Coming into View, he breaks
down the mega trends that are poised to reshape the
investing landscape. So, Joe, I'm glad to have you. Thank
you so much for joining me today.
Speaker 2 (01:05):
No, thanks for having me.
Speaker 1 (01:06):
Okay, first question, what do you like to sport? John
minus craft beer? What's your theme? What's your jam?
Speaker 2 (01:13):
Anything to do with cooking? Okay, I've been married for
a long time. My wife and I were self proclaimed foodies.
I can't cook that well, but so you know ingredients, cookbooks,
maybe a new piece of cooking utensils. We love cooking.
What we do for date night, going out Friday, food
shopping and then so anything food related.
Speaker 1 (01:35):
That's great. Okay. Well, and that's going to save you
money too, right, Being able to cook fancy meals at
home is much cheaper than getting a fancy meal out.
Speaker 2 (01:42):
Yeah. Well, it's fun. You know, I cut the vegetables
and she actually does all the hard work. But it's
just something we can do together that's stress free.
Speaker 1 (01:50):
I love it.
Speaker 2 (01:51):
It's nice.
Speaker 1 (01:52):
That's great, that's great. Okay. Can you give us maybe
a peek inside the world of Vanguard and maybe what
it's like working as as somebody who like the read
the book Trillions and I like the index, obsessed with
kind of the Index one, the advent of the Index one.
John Bogel, Yeah, yeah, tell me what is like working
to Bay Guard.
Speaker 2 (02:11):
Well, I remember my first day. I've been here over
twenty years. It's it's a very collegial environment. We take
the mission seriously. What I mean by that is just, uh,
you know, the brilliance that Jack Bogel was the aligning
you know, the ultimate investor's interests with with how we
should do our work and how should we prioritize. And
(02:32):
so it's it's you know, the investor, the end investors
front and center, whether their individual investor, retiree, someone saving
for college. And it's palpable. That's that that has true
no matter who you are at Vanguard, and it's it's
an awesome responsibility. You know, we it's not our assets.
We manage over eleven trillion dollars today on behalf of
(02:55):
the end investors who trusted us, trusted us with the
hard earned savings and capital. You know, it's you know,
you're always thinking about in the ways we can improve
and do things better for the investor, but the investors
always front and center, and it's genuine. So that's why
myself and my colleagues, why we're so proud to have
worked at band are for someone.
Speaker 1 (03:14):
So I don't want to go down to the dystopian timeline.
But what would have happened to Vanguard and Jack Bogel
had not like completely changed the access to you know,
low cost investments for the general public.
Speaker 2 (03:28):
Well, I would have hoped that someone else would have
come along. I mean, I think the big great news
for all investors is that Vanguard and other companies have
helped lower the cost for all investors, so the you know,
the listeners on the call get to keep more of
the hard earned money. And you know, if I recall,
I did have another I had the good fortune of
having lunch with Jack Bogel himself many times before he passed.
(03:55):
I was earlier in my career. I recalled Jack saying
on more than one occasion, and then his one sort
of disappointment is he didn't see other firms emerge that
would moreant the client owned and you know, the sort
of mutual model that we have, only because he was
hoping that see those costs come down more quickly. But
the fact is that they have come down. But I
(04:17):
would like to have think that if Vangard hadn't come by,
others would have done as well. Because this is effectively
adoption of a new technology ETFs, scaled mutual funds, managing
you know, portfolios. You can lower the costs through technology
that was not the case thirty forty years ago. So
I know Vanger gets a lot of credit. I think
(04:38):
some of it's well deserved, but I would hope that
someone would have done it had we not done it.
Speaker 1 (04:43):
Yeah, Okay, you actually start the book by detailing a
conversation that you had with Jack Bocal. This was what
two decades ago? This was a lunch that you guys
were having. Yes, what happened in that lunch conversation? And
yeah two decades right, two decades ago.
Speaker 2 (04:56):
Yeah, And I don't want this to be a Vanguard commercial.
It's just I tell you the context for that lunch.
So I'm only working one year, less than one year
at Vanguard. I'm a new employee. So the fact that
Jack Bogle even answered my email and had lunch with me.
He's a founder of the company, right, you know my name,
But I was just all struck and just wanted to
(05:18):
get to know him better. And he knew a little
bit of my background, gets it, just a little bit
of the culture of the place, and we started talking
things around like what economists could do beyond just the
next three six months news flow, which I know is
a lot of focus when you read the media reports,
and I talk about that story of thinking about like,
(05:39):
how how can we help investors as they construct portfolios?
What are the returns the risk they could think about
over a medium run horizon. Knowing that this is the future.
And you knew I had more of the you know,
the technical background, but he gave me a really good grounding, Like, Joe,
when you can, can you focus on trying to extend
the industry's conversation around risk management, not performance chasing. But
(06:05):
we know that these risks matter. Hey, we're talking about
AI today, we're talking about deficis or or trade tensions.
They matter, And can we think it about it in
a way that we're not just making stuff up, which,
to be honest, sometimes is done in the industry. And
so he threw down the gallet to me, and it
took me a while to address some of his requests.
Speaker 1 (06:25):
All right, So that makes me think when like, Vanguard
has has been making predictions right about the likelihood of
lower returns in the future, and but they but you
guys have been making those predictions for a few years now,
basically saying, hey, future returns are going to be lower.
That hasn't necessarily come to pass yet. But is that
because of like mean reversion market performance in recent in
(06:49):
recent years, and like, how should we be thinking about
those predictions?
Speaker 2 (06:53):
No? And I love the fact that Joe, that you're
mentioning that it goes you to why we why we
provide these actions to begin with, they are focused on
generally ten years out, and ten years is for a
specific reason. It's where there is some reliability in the forecast.
(07:13):
I mean, we you know, I could give you one
year ahead numbers, but I think they're fairly unreliable and
the ground on economic fundamentals as well as our diagnosis
of future trends, and so you know, we're actually very
well aware and I talk about it in the book
the Elevated Odds of AI being fairly transformative from an
(07:34):
economic perspective and a market perspective. So in one sense,
we have among the most bullsh diagnosis from the economy
that I'm aware of in the asset management industry. Yet
that is also part of the reason why we're more
guarded than most on the full cycle investment returns, because
history clearly shows and that's why our projections are picking
(07:56):
up that after a period of very strong returns, no
one knows when it switches, you just get more muted
returns for a time, and so we're not bearish on
even the headlines. Actually, the stronger the the returns we see,
it's consistent with our diagnos of the economic trends. So
I wouldn't I know some just say, oh, if the
returns are high yesterday, then they're going to be low tomorrow.
(08:19):
It's not that simple, and a lot of these trends
vary over time. We try to account for those, but
we're fairly bullsh from an AI perspective, and that is
not inconsistent with saying, listen, the markets could get a
little euphoric here. I'm not saying it's saying sell investments.
What we're seeing is, though, do not expect the future repeat.
(08:40):
Now we've been alone. And when you can say when
you're early on a projection, maybe we're early, you could
say you're wrong. I'd say it's consistent with though the
logic where we have been saying that to be fair
three or four years bar. Our conviction is going up,
and I finally starting to hear others talk about what
they call the froth in the market. I think it's
(09:01):
put this way. It's nice being not the sole voice anymore.
Speaker 1 (09:03):
Yeah, well, okay. Some individual investors might see those projections though,
and they might say, oh, lower returns for stocks in
the coming decade, Maybe I should look elsewhere. What would
you say to somebody who's thinking.
Speaker 2 (09:15):
That, Well, I think you say, first of all, you
think about that these projections are primarily done from risk
management perspective. So you would take these projections and say,
first of all, I would hope most investors, if they're investing,
they have some multi year horizon, right, So first of all,
it's like, what are prudent returns? And I'd say, historical
US stocks have been roughly nine. The past few years,
(09:36):
we've been above that, the next several years, next five
seven years, we can be modestly below that. And that's
effect of what our outlook is. But that does not
mean for most investors that you should change your allocation.
How I think about it is, okay, make sure you
have that if you have an aggressive spending goal, you
want to retire even earlier, you at least want to
(09:57):
stress test those hopes or plan against those numbers. Of
a six percent return versus a nine, maybe your goal
is still valuable or still reasonable. That's how we use
these projections when we give advice to clients. Perspective to advisors,
I'd also say, rather than like selling investments, which can
(10:17):
seem pretty aggressive, I'd say, thinking about how you deploy
new capital if you get a new bonus, or when
you work next year, and your forum and key plan.
There are parts of the market that have not participated
in our projection show the relative trade off, and so
I don't view it as what some would call market timing,
because we will not be able to time this cycle,
(10:40):
and we try to disclose as much as possible the rest.
I mean, I can't you know, some may interpret it
that way, but I can't help that we disclose it.
But I would be thinking about I'd tell many clients
been on the road hundreds of times this year. I
would say, think about deploying new capital to work, and
those investment opportunities are different than what the AI stocks
are telling you now, and it's consistent with a lot
(11:01):
of former investment cycles. So there's research behind it, and
it's kind of nice. Rather than saying people have made
people have not made a mistake. They do not need
to sell their current investments. It's I would think about
more in terms of how you deploy new capital, and
then stressed, has your your aspirations and family goals, your
portfolio goals on a lower return trajectory for a time,
(11:25):
maybe they're still robust to it. If they're not, you're
going to have to increase your savings a little bit
or or or or thinking about these new investment opportunities.
That's so hopefully that was a little long Windigel, but
hopefully that gives context.
Speaker 1 (11:38):
No, that's helpful. It sounds like you're talking about moving
the runner ever so slightly instead of jerking the wheel.
Speaker 2 (11:43):
Yes, it's laurno and again it's tender, and said, you know,
I have investors okay, asked me good questions like hey,
why can't you show the one year the two year numbers?
I said, I would, I can give you the numbers.
The confidence interval is so wide. There's a lack of confidence,
and I wish we had more accuracy. We don't. Even
in the tenure numbers our stock return, there's a fifty
(12:06):
percent likelihood we're going to be between likely three and
seven percent. That's a why three percent per year? Yeah
and seven percent per ye that's huge, But it's actually
it's data Dreven's evidence based. I wish they were now,
but even the projections we've seen the past two years,
I mean, the returns are not being defensive on the forecast.
It has been above our our meeting projections for sure,
(12:29):
but it's not necessarily inconsistent with our view because of
the nature of where the returns are coming from.
Speaker 1 (12:35):
Yeah, well, I think that chose just a lot of
humility too, which makes me think about the way you
wrote this new book, and I feel like there's a
lot of humility in the process and in the presentation
as well. Talk to me about AI and globalization and
some of these trends that are feel really unpredictable, like
(12:57):
how do you try to make sense of them? And
you're thinking about investor returns moving forward when these things
feel so first or second inning and it's just really
hard to know where they go.
Speaker 2 (13:07):
Sure, well, you're you're kind Joel in your words. You know,
we began a lot of this project started over my goodness,
probably three years ago. We started looking at AI. Actually,
my researched, my research team and I ten years ago,
like a decade ago now, and I had I had
to do my own deep dive on AI. I'm not
an AI like a techno expert, but had they had
(13:31):
the prospects for more meaningful change, and so I started
down this project saying I wanted a little bit firmer
range of what the economic impacts could be, what the
stock market impacts could be, other than what I would
call simple narratives Joel from smart people, I felt increasing
like I was in a narrative space. And what I
(13:52):
mean by that, I'll give you some examples. Clients would
ask me, Hey, Joe, our deficits and debt levels in
the United States are going up. At what point does
the bond market care about that and demand higher interest
rates or AI? Is it going to be good or bad?
And they wouldn't define good or bad, And I would
find myself like saying, oh, I don't think we're deglobalizing.
(14:14):
I don't think it'll do much for inflation. But I
was just giving you sort of more narrative base. And
I felt deficient as an economist. And I know no
one knows for certain no one knows, but we can
certainly bring data and science to bear in the same
way other disciplines do a little bit more detailed. I
am not saying economists don't use data and evidence, but
(14:37):
on these longer term projections, not in an integrated way.
They may look at AI, but they're not considering debt
levels at the same time, or they may be thinking
about the agent of society, but they may be leaving
out the tensions between the United States and China. And
you and I know this is a living, breathing organism.
But to my knowledge, no one was doing this, including ourselves,
(14:58):
and so we try. We had an audacious goal to
try to create a framework that would allow for these
you know, feedback loops, because they know they happen. What
was eye opening to me was the economic diagnosis. I
was not looking for it. I did not expect it,
but it challenged my own assumptions, which I talk about
in the book, and so trying to be data driven
(15:21):
in a probabilistic way, because that's how I think, you know,
even good investors, goodness, I even talk about poker players,
they always think about ranges and probabilities, right, you think
about risks. And we're disclosing this to the whole community.
I've disclosed it with policymakers. Maybe they'll improve the framework.
I hope they do. But the diagnosis was eye opening
(15:42):
to me. And I've been in the business twenty years.
Speaker 1 (15:44):
So what was the diagnosis? What's of your assumptions were
most upended when you run.
Speaker 2 (15:49):
I think the thing is I think a widespread view
is that the demographics our destiny, that if you have
an aging society, or if you have population growth that
is slowing, that you're you're destined for like low growth
and maybe either low or very high inflation, depend upon
how you interpret those trends. Now, again those things matter,
there are components of growth, but they don't their accuracy
(16:13):
in predicting future outcomes is really weak. That challenged my assumptions.
I think it does challenge the professions assumptions. Demographs are
not destined. In fact, they're very little reliability in future outcomes.
Speaker 1 (16:26):
That's so interesting. Why does that? Because it has seemed
true for a long time that a declining birth rate
and aging population it just kind of sort of intuitively
makes sense.
Speaker 2 (16:36):
Why intuitively it's a part of growth. But it only
explains just wan this way, like it's part of the calculus,
like part of GDP is how many people you're adding
to the workforce every year. It's just that it counts
for a very little of the movement up and down
of these trends over five years or ten years. And
(16:56):
to really push it, just think about aging like aging,
you have fewer that sounds very bad for the stock market,
doesn't sound bad like it sounds bad.
Speaker 1 (17:04):
Yet sounds bad for social security too.
Speaker 2 (17:07):
Human beings have been aging on this planet for a
million years and did not stop industrialization. So I'm picking,
I'm talking. I'm making a really fall four full point.
But the stress, the point of no one is just
bringing data to bear like, Okay, they can matter, but
how much it's a small medium lares Our beauty of
our framework is that we're putting them and we're putting
up against other forces. So why demographics don't matter? Technology?
(17:32):
How innovative it makes us, the new products, you know,
how transformed that does corporations, That will matter more for
GDP the next five years than all the demographics combined. Now,
if it happens in it, if we don't get the
lift from AI and we do have the aging and
fewer immigrants and weaker population growth, people may say, oh,
we had low growth because we had weak demographics, but
(17:54):
the data would show okay, that didn't help. But it
was a lack of lift off from innovation and new
ideas that really generated it. And I try to show
simple pictures. So that was certainly one all these factors matter,
the trade patterns and globalization deficits matter. The question is
(18:16):
the magnitudes of how each of these are moving can
really give you a decent handle or where the risks
are from the economic and market perspective three five, seven
years out. And this is not magic. It is how
these things evolve, and it's our unique data. We brought
probably the most data to bear on these concepts that
(18:37):
I'm aware of in either the private sector or in
the academic field. That's why it took us a while
to do the.
Speaker 1 (18:43):
Work, I think.
Speaker 2 (18:44):
So.
Speaker 1 (18:45):
One of the things that you pointed to in the
book was status quo bias and that people often think that, hey,
what what was happening yesterday is what's going to happen tomorrow.
Things were kind of on a trend line and part
of what doesn't give And one of my questions for
you too is like, what about the completely unknown things
that blitz into our lives that we weren't prepared for,
that change everything right, like a pandemic. It's really hard
(19:07):
sometimes to make these these projections right when there's unknown
influences that might come down the pike.
Speaker 2 (19:14):
Well, and that's why and so some would say, hey,
then why bother you can so you're to You're toyer, right, Joel,
So you can do if you say that, there's two
ways you can react to it, and both of them
are fair. I'll just give you my perspective on it.
One is, you know what, future is completely unpredictable, So
why even bother? I would say, well, then, but then
(19:34):
why do financial planning exercises? Why do any risk management?
You got to think about give some attempt at probabilities
and magnitudes. And that's what was lacking in the industry.
Someone say, oh, we're gonna have a death crisis. Okay,
well what's the probability of magnitude? Because without those two numbers,
I can't even think about risk management and portfolio. Someone
may say, Joe, the probability is small. Yeah, bad outcome,
(19:56):
but probability is really small. I may not alter my
folio a lot versus no. If someone said, no, this
is a material risk, here's all the evidence why we've
controlled for other factors. It's twenty or thirty percent. Oh,
that's no longer a tail event that I can't predict. Right,
Martian could come down from the universe. I mean what like,
(20:17):
I don't know, So there's always that uncertainty we have
first acknowledge. That's why I actually I felt very strongly,
in fact, why I came to Vanguard, which at Vogel
he loved our approach of putting things in probabilities and magnitudes.
I know, you know today some in the market wants
just a number, but we're not going to apologize for
the fact that we're given an attempt. No one knows
what these true numbers are, but we are trying to
(20:40):
be as data driven as possible. And it's certainly not
like I woke up one day and say that's AI
transfermed ouh, It's gonna be seventy percent. Why seventy Well,
it's different than fifty. Like I'm trying to it's kept
myself honest. I didn't want to be in the narrative camp.
And then, if you know, it also allows investors. These
(21:00):
are all the assumptions, these are all the things moving.
They can change their probabilities based upon the discussion in
the book, and they say, you know, Joe, I'm going
to weigh these negative forces more. I think you're under estimating.
I don't know the tensions with trade. Oh fine, maybe
take that twenty to thirty percent scenario, increase it a
little bit. But at least we've started the conversation. It's
(21:23):
the end, it's your listener's money, but we've started the conversation.
They can take our probabilities or they can move them
left or right as a risk management framework. At least
it's I would view this as a starting point to
the conversation in this evolving dynamic. But at least we're
putting numbers on the page, and they're not and they're
they're grounded in all the data that we have to bear. Yes,
(21:46):
there are things in the sample. The one beauty of
going back in time is that history doesn't repeat. But
there's been piers of where the world has deglobalized before
major changes in demographics. People are shocked to see that
our demographics changed. Immigration slowed to a ground to a
halt during the Rory nineteen twenties. We've had sometimes revolutionary
(22:09):
new technologies, but they're rare, but they do give you
a glimpse. But we got to move those periods into
the modern day because today is different. And I think
we've started that conversation. Hopefully that investors can think of
it through that lens.
Speaker 1 (22:24):
There's a lot more to discuss, and I specifically want
to dig in and talk about how prior technology, the PC,
the Internet, how much can we look to the past
to determine the potential future. We get to that more
right after this. So speaking with bank guards Joe Davis,
(22:47):
and we're talking about AI, how it can impact, how
it will impact your investments. It already is Joe. It
kind of feels like an inflection point is here akin
to the PC the Internet, right, those were revolutionary technologies.
There are many others too, but those the Internet changed everything.
Like this conversation that we're having would not exist right
(23:09):
without the Internet. Just think about the abundance of podcasts,
like spheres of commerce that just weren't possible before the
Internet came out, And it's just so hard to know
in the beginning how that's going to shake out, hence
the dot com bubble. There were even companies doing things
that now successful companies are doing, but they just couldn't
make it work in the early days of the Internet.
(23:31):
So what are the possibilities, Like I'm thinking about it
through that framework of the Internet and how it changed things.
Is AI gonna is it similar in its potential impact
is greater magnitude. How are you thinking about that when
you're forecasting.
Speaker 2 (23:46):
Yeah, so I'd say, and I'd try to boil it down.
But the one power of our data driven framework is
we're looking all technologies that they're meaningful affect us, meaning
the economy, workers, and the markets through three dimensions. One
is they automate some of the work we do. That
can sound bad. Yes, it can be disruptive, but it
also leads to greater standards to living and growth. Second,
(24:08):
it augments us. It's the computer for helping you with
this podcast in the internet today, Joel. Right, that's the copilot.
And then the third is what general purpose technologies do.
And you just mentioned it create new industries or platforms, right,
like the Internet helped enable online shopping. Didn't create online
shopping without the Internet, we're not talking about it. And
(24:30):
through our framework, it says the odds are significantly tilted
in the data driven way because we have all this
data and they evolve. We're picking up signals today. Based
upon those signals, there's a likelihood that we're in the
third end of this, but we're likelihood that AI is
more transformational from an economic perspective than even the personal computer.
(24:52):
In our data, we can compare the projections versus what
it did underneath the surface to the computer, the internet,
the automobile, the electricity. It's not an electricity, but it's
it's meaningful and it's a it's not going to be
a dud. Odds are than social media, but it's got
to accelerate its development, and that's why the odds are
(25:12):
six roughly fifty five sixty percent, why they're not one hundred.
So I get two reactions to this forecast. Those that
are pessimistic on AI say, hey, you're you're too boshed,
But I said, no, you're ignoring the history and the signals. However,
those that are very bolshed, I've been to Silicondelli multiple
times and they say, how is it not one hundred percent?
They will say I will not mention individual compatability, say
(25:34):
we know the probability of AI transforming is one hundred percent.
I say, well, you are also overestimating that this, yes,
this development will happen, is not happen yet, nor have
the new platforms emerged, and so half of the growth
effect comes from which we'll get to our investment thesis.
(25:55):
Why some of the investment implications are different what the
current headlines. Half of the growth f lift is these
new companies and industries in the you know I talk
about in the book, like computers. It was something online shopping.
Some of these media and communications electricity to help power
the assembly line, which helped automobile manufacturers. But without electricity,
(26:15):
we don't have those dividends. It created the elect the
movie industry, or enabled it entertainment industry. We didn't have
an entertainment at that regard. So it's anticipating. I see
the blob of my computer screen. It goes from negative depositive.
Those are new industries and new investment opportunities. I am
racking my brain what those companies are. I have no
(26:37):
clue what those industries are. I can speculate, but I'm
telling you that is half of the left. Half of
it is just the disruption it'll do to our work.
We're saying that in eighty percent of the occupation, so
most listeners on the call will see their job change
by at least thirty percent over the next seven years.
That's a bigger change than we saw with the personal computer.
(26:58):
So it had, and not everyone will win, So I'm
not going to sugarcoat it. There's some significant change coming
if AI continues to advance.
Speaker 1 (27:07):
One of the things that investors have seen is a
handful of companies just grow to enormous sizes and enormous valuations.
And so some people might think of as an investor
like I missed out on the earning, I missed out
on the growth potential. I should have invested in in
Nvidia four years ago. Whatever, And what would you say
(27:28):
to those people? And it's also we're in this space
where there's going to be so much competition it is
hard to determine who the winners and losers are going
to be, even if the AI space in general is
going to continue to grow at SUMI a very rate.
Speaker 2 (27:43):
Listen, first of all, the stock market's been up a lot,
so thank goodness for I want keeping you know, keeping
invested and doing well. Right. It's a good point. But yeah,
if you've been overweight technology stocks in your portfolio, congratulations
if you have and you feel like, hey, I've left
money on the table, So what do you do now.
What I was surprised to find I did not expect
(28:05):
it is that the areas of outperformance and underperformance. Let's
fix it on the stock market. In a technology cycle
loosely has two phases to it, and I didn't know this.
The first phase can last now it varies, but let's
call it five to seven years. It's the producers of
(28:27):
the new technology. It is the electrical companies the gs
of the world in nineteen ten and twenties. It's the
computer companies in the dot com in the nineteen nineties,
think of today, it's the AI stocks. If it's AI
is really going to continue to advance, they do fantastically well.
For good reason. Earning's growth is explosive. The technology is spreading,
it's starting to be produced at scale, and there's huge
(28:50):
profit opportunities. However, what I was shocked to find is that,
without exception in the back half in the second five
to seven years, is that some of that out format
switches actually and it starts to spread outside of the
tech sector. And so the more bush you are on AI,
I tell investors, believe it or not, the more bush
(29:11):
you are in AI, the more I would be suggesting
less overweight or even underweight technology in your portfolio the
next five or seven years and people say what I said,
I did not misspeak. Let me walk you through it.
And there's two reasons why this rotation happens. One is
all the new entrants coming into the space show you
just mentioned it right, It's not I'm not speaking in
(29:33):
all the investment it's going to be. It transforms the economy.
But hundreds of not thousands, of companies go into the space,
not all them will merge. I'm not saying that the
large companies will go out of business. I'm I'm saying
that at all. It's not clear to me who wins.
But as a portfolio, there's a lot of creative destruction.
And you know, the past five years or so, there's
been nearly four over four thousand AI companies funded in
(29:56):
the US alone. That's more than all publicly trade US stocks.
Of them will fail, and it's not because AI is
a bust, so you just have to think about that.
But it doesn't feel like that in the first phase.
It feels like only the tech stocks are going up,
and it's it is massive out performance.
Speaker 1 (30:11):
And it feels like a bit of an arms race
right now too companies and it's.
Speaker 2 (30:15):
Not as And then some will say, well, is that
a bubble, I said, generally you get frothy investments. Is
part of the reason why we have a guarded outlook
even though we're bush on AI. But I don't you
never use the word bubble. Here's why, Joel, because it
implies maybe it maybe runs the risk of implying that
the tech. If I hear bubble, I might be as
a listener, they say, ah, then your skeptical and AI.
(30:37):
I'm like, no, no, no, no, no skeptic In AI. There's
just huge investment because people see the benefits. Some of
them will probably misinvested. But but I think everyone can
be making rational decisions. Now. What happens though, here's the
cool thing in the second half of the cycle again,
in periods where new technology, these general purpose technologies emerge,
(31:01):
they are transforming the economy. So I tell those that
are bullsh on AI, well, if AI is so great,
then how is it transforming the average profitability to the average
hospital or at the bank Vanguard, if Vanguard was publicly traded,
how we being more efficient? What new platforms, Joel, You've
got podcasts, right to say, your public company, how you
(31:23):
scale your business? So I said, I don't know what
they are but I said, this is no longer social media,
which means if we use it, but it hasn't really
lifted economic growth if it's transformative, So what happens. That's
where it's the so called value stocks, the non tech
stocks start to perform pretty well because now we're consuming
the technology. So the cycle goes from producing the technology
(31:46):
to consuming it. Now again, what new platforms emerge? I
don't know. I identify some areas of where it could be.
I think the transformation has to go through healthcare, high
unmet needs, as tough to scale, labor shortages on some
you know, potentially in the future. So you know, I
(32:06):
think it's got to go through there as one. But
I'm not an industry analyst, but that's exciting because those
those parts of the market have lagged the tech sector
by a wide margin. So I would be saying, listen,
as an investor, you have a little new capital coming
to work, and you are bullsh on AI. You start
to start thinking about the stocks outside the US and
(32:27):
outside of the text sector, precisely because of the broadening effects. Now,
if you're a bearish on AI, this stuff is hype,
then that here's the thing. It leads to the same
investment conclusion. If a if AI is hype, then the
mag seven are over or overpriced. The tech sector is
going to underperform for a significant period. So the irony
(32:48):
is that in either the scenario the book talks about,
you would want to start thinking about outside the tech
sector in either whether you're bush or bearish on tech.
And that's it's the bullsh fast that that I and
see comment.
Speaker 1 (33:01):
I think I think for the average armchair investor, the
it's like, what have you done for me lately? And
just like you look at the Kathy Woods Fund right
when it was soaring in price, and that's when everybody
got in, was at the top, and then you have
the you know, eventual devaluation of that investment, and it
(33:22):
just makes it. Yeah, like you can look back to
the computer and the internet era too, and you can
you can show companies they were at the center of
everything we did. I'm thinking about a company like AOL
that was like everybody used AOL for for email, for news,
for communication. AOL is a shell of a company at this.
Speaker 2 (33:41):
Point, it just goes to high failure rates in a
period when here's the irony is that I have had
to study a lot of these cycles is that here's
the thing that comes out of technological change. Rapid returns
in those stocks for a time. That's great, it's actually
a signal that the technology is merit huge failure rates.
(34:01):
Some stars emerged now we call them unicorns, you call
them whatever you want. They could be existing or they
become market leaders, become bigger. So you can you can
find evidence of that, but you also find high failure rates. Now,
if I have to own the portfolio in the sector,
I'm probably be stuck with a little bit of both.
What what I'm saying is you can start thinking is
(34:23):
that this is this full investment cycle is not over.
And if you first so stay invested, but you can,
if you want to be offensive, if you miss some
of the tech run up. Listen, this thing could go
on for another two years. It's in our simulations like
it wouldn't shock me. You could have further melt up.
But if you're playing the lawn game, I'm trying to
think in my in my you know, you know, my
(34:45):
own portfolios. Hey, what's what's the next extension of this
if it continues, and start thinking about, well, how is
AI going to be used? Think about then those sectors
which aren't trading that really high multiples. Yeah, and and
that's actually playing offense. It's you know, you could be
bush and think about it. I'm starting to hear active
(35:05):
managers start talking about this, and so I think we're
all on into something. And you got time on this,
like it's not going to disappear tomorrow. We've got five
seven years on this.
Speaker 1 (35:14):
But essentially, productivity is going to extend to so many
other sectors of the economy. And if you're only focused
on AI stocks, then you're too hyper focused.
Speaker 2 (35:24):
That's the thing. If it stays in Silicon Valley, we
got a problem. Yeah, but I'm saying what horizon someone's
saying for the next year, So well next year, you know,
we don't have that sort of accuracy. But yeah, one
shocked when we continue to mount up. You want to
chase the momentum, fine, go ahead, but reprepare for a
rocky ride.
Speaker 1 (35:41):
So what does a robust portfolio look like? Then? For
the average investor who does have a long time horizon,
they've got ten, twenty thirty years and do simple strategies
index funds, target date funds. Oh, do they need to
be more complex than that, or can like bogel heads
still do well.
Speaker 2 (35:59):
No. Well, First of all, the key is the asset
allocation and drive down the cost. AI has not in
any way, shape or form change to the investment principles
which will be here long after AI and then the
next tech and then the next technology and next technology.
And that's why I felt compelled to introduce in a
very respectful way, Jack bo Vanguard's founders, You've probably done
(36:20):
more for investment principles for the industry at large then
I can think of anyone in finance, and so you've
got to stay invested, right, That's the first thing. And
I'm what I thought though, is that these risks are
most of the risks we are diagnosing are different than
what some of the markets contemplate. So if this thing
about risk management, as you think about it, and I try
(36:41):
to talk about some actionable things in there, but they're not,
I won't call any of this jewels see change. So
if you're on the if you're listening here on the
Joel's podcast, as you always do, and you're thinking about, Okay,
how do I think about it for my farm work
or so forth, changes in moderation at the margin right
if at all, But stay invested. Do not listen to
those that are going to say the sky is falling,
(37:02):
and do not listen to those that get so hyped
up on AI that they see no risks in the
market and just what like on the downside, Let's not
think the world is ending just because at that levels
continue to go up. There's a way to overweight fixed
income at the margin for more conservative investors, which also
sounds contrarying, But don't run for the hills for gold
(37:23):
and other asset prices like that's the signals are not
what you invest in for the full investment cycle.
Speaker 1 (37:29):
Let's say someone does have a shorter time horizon. Let's
say somebody's listening and they're on the edge of retirement
and they're like, stocks have been good to me, and
I should I take some chips off the table, especially
given kind of some of the potential the ways that
this could play out that could be negative from like
(37:50):
a tech standpoint. Let's say we see some of the
valuations pull back and investors kind of get a little tepid.
That could have an impact for people who need that money.
Speaker 2 (37:59):
More were that and that's a part of a good
I think financial planners stressed us. And if someone's doing
it on their own, listen, you know, and any good
advisor would have all the sophisticated math. Your investors may
have spreadsheets and software and all that good stuff. Joel.
And a way to simplify with not losing any of
that that great insights is to say some simple exercise.
I even tell family and friends. So you take your money,
(38:21):
and you have your asset allocation right, you can pull
up your balance right on your account. I say, just
imagine the world next two years, we're down thirty percent
and up thirty percent. In both those words like do
the math and I do it. I actually I do
it with pen I actually put in excel. I dropped
thirty percent of my portfolio. Oh that hurts, I said,
(38:43):
let's see that number. And now now my wife and
I go through that. And now I say, hey, hunt,
is this changing our lifestyle from what we know a
week going to get? Do we have to put off
something that we were planning on doing. If the answer
is yes, then they should start thinking about mod is
changing take some risk on the table because but then
also be aware that if you do that on the downside,
(39:06):
now you okay, giving up the thirty percent upside and
look at that number two, because you have to look
at both. You can't just look at one. I tend
to be a little bit more risk loving, less risk averse.
But there's no judgment in this. No, I appreciate that
so so much, says I cannot be down thirty that's
chicks all the table. Others like, yeah, I can live
with it. It's longer term than good. They're probably looking
(39:29):
at the thirty percent on the upside. I think there's
nothing wrong. This is judgment free zone, and I say
that's a really siber exercise people can do. You can
add more math to it, but that gets to the
same endpoint. And if the answer is no, don't change anything.
If it's yes, then they're probably in the wrong asset
allocation because most people don't rebalance, which things like target
(39:50):
date funds automatically do. And it's kind of like on
an autopilot. But like my brokera's account doesn't rebalance, my
stock portfolio, is I have more risk am exposed today
than I did three years ago because the market's up
a lot.
Speaker 1 (40:04):
Makes sense.
Speaker 2 (40:05):
So if I do that thirty percent down now it's
going to look like a bigger hurt than it did
three years ago. Am I good with it? I don't know.
We're going to do that a year and my wife
and I and we'll see. I'll let you know where
we land.
Speaker 1 (40:16):
I look forward to hearing that. Okay, we've got more
to get to international stock exposure. We'll get to that
and more. Right after this, I'm still talking about the
Big Oars show. Davis and Joe, just a few more
questions for you. But one of the things I'm really
(40:38):
curious about too. We touched on this briefly, but how
crucial are low costs in a portfolio, especially given kind
of these trends that we might be experiencing. Is that
something investors under consider. There's certain funds out there, even
when you're looking at something like as basic as an
(40:59):
S and P five hundred fund, the cost can very dramatically.
How important is keeping the cost low? And does it
is it more important in this environment or less important?
Speaker 2 (41:08):
Well, it's it's it's critically important regardless, I mean, because
the fact is, it's just it's part of compound interest.
I mean, Benjamin Franklin, he said it, you know, two
hundred fifty years ago, the power of compound interests and
even Einstein's to talk about it's probably one of the
most powerful forces on finance people least appreciate, right, and
(41:28):
so all high costs can can eat at returns. And
it's just a math. And so I want to keep
as much in my heart owned money as I do.
And so I would say, and so that that Vanguard
has always been the thesis. I know sometimes it gets
in the industry. Listeners may appreciate this, ohh, I go
active management, active funds versus index funds. More important this
(41:49):
is coming from Vanguard. What we've always said, it's low
cost versus high cost. So the push to push the extreme.
If someone Joel if a listener on this call, has
I don't a ninety basis point where seventy basis points
index fund, I am saying, as a as an employee,
advantguard sell that fund. Now I cannot get financial advice,
(42:11):
but I would be strongly questioning. And that's an index fund.
Speaker 1 (42:14):
But it's high cost and those exist. Those exist.
Speaker 2 (42:17):
There are something that's well, there's some ets they go narrow, Yeah,
they have narrow space. You know thematics. Some things are
high cost I'm just saying, like, that's a hurle you're
gonna have to overcome, just like active managers have to overcome.
So I've always been there's some high quality even active
managers twenty thirty basis points, they still have to outperform
the market, but they don't have as much of a
(42:39):
headwind as say, I don't know, eighty ninety basis point manager.
Now the index fund, I know I'm going to get
the market return minus my expense ratio. And as Jack
would say, I want to get as close to the
market itself as I can. So that's that's great starting point.
But you know, I start to have personally when I
(43:01):
start going up north of I don't know, thirty five
or forty for sure, and for broad market exposure, if
I'm north of twenty or so, I'm asking myself.
Speaker 1 (43:11):
Why you briefly mentioned international just a little bit earlier,
And I know Jack was not He didn't necessarily he
didn't necessarily think most people needed international exposure to a
much exposure at international stocks has has like Vanguard's thesis
on that change that changed much or.
Speaker 2 (43:27):
No it has, And I tell you and I was respectful.
So Jack had all those years on me and he's
founder of the company. But we battled on that. Yeah,
over the same lunch he was asking me I talked
about in the book. He'd say, Ah, Joe, we don't.
We don't need international. You get a most exposure for
the US. Don't don't sell the US short. I'm like,
I'm not. I'm not. I'm not patriotic. I'm more diversifying
(43:48):
of And so I tell you so. Fact, this past
ten years US has dominated non US. And so I'm
hearing Jack, I hear I told you so. I told
you so. He's been He's been spot on right. What
I say, though, is that doesn't say why we ultimately say,
put some of your eggs outside the US. It has
nothing to do with the relative valuations. Is US more
(44:11):
expensive less? The fact is, what history shows is roughly
four percent of the companies account for half of the
stock markets, a return of the last century. Four percent.
Just think about that. Wow, now the past fifteen years.
But the benefit of hindsight, it turns out almost all
those companies have been in the US right well, great
(44:32):
to help explains the high earnings growth. It help. It's
not all, but it's a big chunk helps explain the
strong returns of the past twenty or thirty years. So
my only point is if you have one hundred percent
US exposure, I just remind people, whether you realize it
or not, that's a very strong stance on technology. Dare
(44:53):
I even say almost arrogance stance that the US is
going to dominate one hundred percent of the next great
company over the next twenty or thirty years. Now, again
I'm not saying you shouldn't have a high US weight,
but just think about that. And I'm not one hundred
percent confident they will be in the US. I think
the US is very innovative, very entrepreneurial, more so the
(45:14):
most economies, but I'm not one hundred percent confident one
hundred percent of companies will come from there. And that's
why we say non zero. And then that also then
diversifies your currency exposure a little bit given some of
our debt, you know, risks at the margin. So that
that that's why you would have non US and I
would say that you know, bless them if you were
alive today, now that you know the evaluations is secondary.
(45:39):
Is the US more expensive than the non US? We'll
talk about that, but reasonable people can say, can I
have ten percent thirty forty percent? Non US. I think
it's more just getting off the zero bound because you
you just mean not realize you have almost like this
technology bet right. And for someone that says I'm good
(45:59):
with the US, I would just really move your mind
and this is smart people, I would just say, respectfully,
the smartest minds in the world forty years ago said
you only needed investments in one country, and that was Japan,
technology leader of the world. The smartest investors are well,
by the way, do that were right for twenty years?
(46:20):
And I am not saying the US is following Japan.
But I'm saying I just like basket your eggs and
one mess so readonable people. I said, even you have
five percent to get off the zero bound a little bit,
and but but but thank goodness, the returns have been
so strong for US investors. It's been a huge house.
Speaker 1 (46:36):
Has writing this book impacted how you think about your
own investments?
Speaker 2 (46:40):
Well, I think it's uh, it's well, Firk to fall.
Writing a book is humbling. I've had to write academic
style type work for years, but to try to make
it take all the jargon out of it took me
more than a few tries. I will admit it beat
me up, But as my mom says, it's always good
to be dose, to give it a little humble high
(47:00):
every once in a while. So but I think it
was a really appreciating the opportunity for non consensus outcomes
and not to be alarmist on it. We are saying
it's actually probably the most bold economic assessment that I'm
aware of from any firm in the world right now.
We are saying that the most respected minds generally the
(47:21):
same view the central banks, you know, in National Monetary Fund,
the probability of their forecast being correct over the next
five years is only is twenty percent or less. Can
you think about from my perspective, the audacity of that
statement is fairly that's pretty autacious statement. But it's thata driven.
I was not looking for this forecast, and so that
(47:42):
was but putting it in a way that wasn't being
an alarmist. And so what I hope is there's value
in us trying to bridge the economic world into the
investment world without having me having to read five hundred pages.
Speaker 1 (47:58):
Yeah, well no, and I think that's what you did
really well in this and it gives people like, instead
of just reading headlines and negative news or boy, this
could be really bad, it gives people a framework to
help understand how this is going to impact them as
individuals over the next ten fifteen years. And so I
(48:19):
think it's great work. Joe, really appreciate you joining me.
We'll make sure to link to the book as well
in the show notes. But thanks so much for coming
on the pod. We really appreciate it.
Speaker 2 (48:26):
Oh, thanks for having me.
Speaker 1 (48:28):
All right, that was such an interesting conversation, So fun
to have somebody from Vanguard on. You know, Joe has
just been an economist there for multiple decades and done
stage great work and its Vanguard is such a unique institution.
It's been so impactful to individual investors. And so when
I saw Joe's book come out, I was like, oh,
(48:49):
that's an interesting subject matter, also interesting like where it's
coming from. Gave me even more pause to say. I
think he would be a good guest, And I hope
this was a helpful conversation for you. I think when
it comes down to it, my big takeaways from this
were really to not change your investing thesis all that
(49:10):
much based on the headlines, and that is an interesting
place to reside, especially after Joe's like, Hey, I'm super
polish on AI. I think it's going to have overwhelmingly,
based on my modeling, a really big impact on our
economy as a whole. Then you might think he would
have some hot tips, right, some specific stocks that he
would recommend, this is the direction you should go to
(49:33):
maximize earnings over the next six months or six years.
But really, he said changes at the margin. At most,
most people should be making very small changes to their holdings,
and that low costs still matter more than ever. So
even despite AI being a disruptive technology that is likely
(49:55):
to have meaningful impacts across the economy, saying like you
probably shouldn't do much. That's a whole lot different And
I love how too. He talked about, actually, if you're
gonna do anything, you might want to underweight technology. And
so the last ten twenty years has been the betting
on technology has been a winning formula. But with valuations
(50:20):
where they are and with his thesis that AI will
be impactful, actually those impacts are going to spread to
companies that aren't just the mag seven. And I think
there's a lot of truth to that, and I think
he's right that if AI is going to be impactful,
it is bound to it has to by definition, impact
(50:41):
hundreds and hundreds and hundreds of publicly traded companies across
the country and across the world, and that those productivity
gains are likely to help industor see greater returns in
non tech stocks. These are really difficult things to prognosticate,
even like we started off the episode talking about the
Vanguard's predictions about muted socc returns and he's like, yeah,
(51:03):
last two years we haven't looked that great, and so
these are really difficult projections to make. But I love
the Joe's using data. He's doing his best to try
to help people make an informed decision. And I think
more than anything, it helps me as an individual investor.
Just like you, you're an individual investor, I'm an individual investor.
(51:24):
It helps me feel solid about my choice to stay
the course, to stay low cost, to not make meaningful changes,
even if other people around you or other people on
the internet are getting rich investing in a couple of
tech stocks. Well, is that outside growth going to keep
(51:44):
going for years and years and years into the future. Maybe,
But I think what Joe has based on history and
based on smart projections. I think he's come up with
a reasonable framework for how we can think about where
things go from here. And especially when you look back
to the history of the PC and the Internet. Some
(52:05):
of those companies that started off strong aren't with us anymore.
Some are Amazon still here right. The dot com bust
hurt Amazon, but Amazon made it through. But then there
are the companies that looked like they were poised to
change the way certain business was done and they just
they didn't last, right. And so yeah, as an individual domester,
(52:26):
now is it time to maybe not change things dramatically
because of something you heard on CNBC, but it is
time to step back and look at am I doing
the basics right? So I hope this episode was helpful.
Thanks as always for tuning in. You can find links
to Joe's book and to some of the other things
(52:47):
we may have referenced on the podcast today up in
the show notes on our website at how Tomoney dot com.
Until next time, best friend out
Speaker 2 (53:00):
The
Welcome to How to Money. I'm Joel, and today I'm
talking how AI will impact your investments with Vanguard's Joe Davis. Okay,
(00:26):
so everywhere you look, people are talking about AI. Some
say it's going to save the world, others think it's
going to break it. But while the headlines focus on
sci fi futures and big tech battles, I'm interested in
something a little closer to home. What does all of
this actually mean for us as every day DIY investors
today and over the next decade. Fortunately, we don't have
(00:48):
to just wing it. Vanguard's global Chief Economist Joseph Davis
has been studying the forces shaping our financial future, AI
included and his new book Coming into View, he breaks
down the mega trends that are poised to reshape the
investing landscape. So, Joe, I'm glad to have you. Thank
you so much for joining me today.
Speaker 2 (01:05):
No, thanks for having me.
Speaker 1 (01:06):
Okay, first question, what do you like to sport? John
minus craft beer? What's your theme? What's your jam?
Speaker 2 (01:13):
Anything to do with cooking? Okay, I've been married for
a long time. My wife and I were self proclaimed foodies.
I can't cook that well, but so you know ingredients, cookbooks,
maybe a new piece of cooking utensils. We love cooking.
What we do for date night, going out Friday, food
shopping and then so anything food related.
Speaker 1 (01:35):
That's great. Okay. Well, and that's going to save you
money too, right, Being able to cook fancy meals at
home is much cheaper than getting a fancy meal out.
Speaker 2 (01:42):
Yeah. Well, it's fun. You know, I cut the vegetables
and she actually does all the hard work. But it's
just something we can do together that's stress free.
Speaker 1 (01:50):
I love it.
Speaker 2 (01:51):
It's nice.
Speaker 1 (01:52):
That's great, that's great. Okay. Can you give us maybe
a peek inside the world of Vanguard and maybe what
it's like working as as somebody who like the read
the book Trillions and I like the index, obsessed with
kind of the Index one, the advent of the Index one.
John Bogel, Yeah, yeah, tell me what is like working
to Bay Guard.
Speaker 2 (02:11):
Well, I remember my first day. I've been here over
twenty years. It's it's a very collegial environment. We take
the mission seriously. What I mean by that is just, uh,
you know, the brilliance that Jack Bogel was the aligning
you know, the ultimate investor's interests with with how we
should do our work and how should we prioritize. And
(02:32):
so it's it's you know, the investor, the end investors
front and center, whether their individual investor, retiree, someone saving
for college. And it's palpable. That's that that has true
no matter who you are at Vanguard, and it's it's
an awesome responsibility. You know, we it's not our assets.
We manage over eleven trillion dollars today on behalf of
(02:55):
the end investors who trusted us, trusted us with the
hard earned savings and capital. You know, it's you know,
you're always thinking about in the ways we can improve
and do things better for the investor, but the investors
always front and center, and it's genuine. So that's why
myself and my colleagues, why we're so proud to have
worked at band are for someone.
Speaker 1 (03:14):
So I don't want to go down to the dystopian timeline.
But what would have happened to Vanguard and Jack Bogel
had not like completely changed the access to you know,
low cost investments for the general public.
Speaker 2 (03:28):
Well, I would have hoped that someone else would have
come along. I mean, I think the big great news
for all investors is that Vanguard and other companies have
helped lower the cost for all investors, so the you know,
the listeners on the call get to keep more of
the hard earned money. And you know, if I recall,
I did have another I had the good fortune of
having lunch with Jack Bogel himself many times before he passed.
(03:55):
I was earlier in my career. I recalled Jack saying
on more than one occasion, and then his one sort
of disappointment is he didn't see other firms emerge that
would moreant the client owned and you know, the sort
of mutual model that we have, only because he was
hoping that see those costs come down more quickly. But
the fact is that they have come down. But I
(04:17):
would like to have think that if Vangard hadn't come by,
others would have done as well. Because this is effectively
adoption of a new technology ETFs, scaled mutual funds, managing
you know, portfolios. You can lower the costs through technology
that was not the case thirty forty years ago. So
I know Vanger gets a lot of credit. I think
(04:38):
some of it's well deserved, but I would hope that
someone would have done it had we not done it.
Speaker 1 (04:43):
Yeah, Okay, you actually start the book by detailing a
conversation that you had with Jack Bocal. This was what
two decades ago? This was a lunch that you guys
were having. Yes, what happened in that lunch conversation? And
yeah two decades right, two decades ago.
Speaker 2 (04:56):
Yeah, And I don't want this to be a Vanguard commercial.
It's just I tell you the context for that lunch.
So I'm only working one year, less than one year
at Vanguard. I'm a new employee. So the fact that
Jack Bogle even answered my email and had lunch with me.
He's a founder of the company, right, you know my name,
But I was just all struck and just wanted to
(05:18):
get to know him better. And he knew a little
bit of my background, gets it, just a little bit
of the culture of the place, and we started talking
things around like what economists could do beyond just the
next three six months news flow, which I know is
a lot of focus when you read the media reports,
and I talk about that story of thinking about like,
(05:39):
how how can we help investors as they construct portfolios?
What are the returns the risk they could think about
over a medium run horizon. Knowing that this is the future.
And you knew I had more of the you know,
the technical background, but he gave me a really good grounding, Like, Joe,
when you can, can you focus on trying to extend
the industry's conversation around risk management, not performance chasing. But
(06:05):
we know that these risks matter. Hey, we're talking about
AI today, we're talking about deficis or or trade tensions.
They matter, And can we think it about it in
a way that we're not just making stuff up, which,
to be honest, sometimes is done in the industry. And
so he threw down the gallet to me, and it
took me a while to address some of his requests.
Speaker 1 (06:25):
All right, So that makes me think when like, Vanguard
has has been making predictions right about the likelihood of
lower returns in the future, and but they but you
guys have been making those predictions for a few years now,
basically saying, hey, future returns are going to be lower.
That hasn't necessarily come to pass yet. But is that
because of like mean reversion market performance in recent in
(06:49):
recent years, and like, how should we be thinking about
those predictions?
Speaker 2 (06:53):
No? And I love the fact that Joe, that you're
mentioning that it goes you to why we why we
provide these actions to begin with, they are focused on
generally ten years out, and ten years is for a
specific reason. It's where there is some reliability in the forecast.
(07:13):
I mean, we you know, I could give you one
year ahead numbers, but I think they're fairly unreliable and
the ground on economic fundamentals as well as our diagnosis
of future trends, and so you know, we're actually very
well aware and I talk about it in the book
the Elevated Odds of AI being fairly transformative from an
(07:34):
economic perspective and a market perspective. So in one sense,
we have among the most bullsh diagnosis from the economy
that I'm aware of in the asset management industry. Yet
that is also part of the reason why we're more
guarded than most on the full cycle investment returns, because
history clearly shows and that's why our projections are picking
(07:56):
up that after a period of very strong returns, no
one knows when it switches, you just get more muted
returns for a time, and so we're not bearish on
even the headlines. Actually, the stronger the the returns we see,
it's consistent with our diagnos of the economic trends. So
I wouldn't I know some just say, oh, if the
returns are high yesterday, then they're going to be low tomorrow.
(08:19):
It's not that simple, and a lot of these trends
vary over time. We try to account for those, but
we're fairly bullsh from an AI perspective, and that is
not inconsistent with saying, listen, the markets could get a
little euphoric here. I'm not saying it's saying sell investments.
What we're seeing is, though, do not expect the future repeat.
(08:40):
Now we've been alone. And when you can say when
you're early on a projection, maybe we're early, you could
say you're wrong. I'd say it's consistent with though the
logic where we have been saying that to be fair
three or four years bar. Our conviction is going up,
and I finally starting to hear others talk about what
they call the froth in the market. I think it's
(09:01):
put this way. It's nice being not the sole voice anymore.
Speaker 1 (09:03):
Yeah, well, okay. Some individual investors might see those projections though,
and they might say, oh, lower returns for stocks in
the coming decade, Maybe I should look elsewhere. What would
you say to somebody who's thinking.
Speaker 2 (09:15):
That, Well, I think you say, first of all, you
think about that these projections are primarily done from risk
management perspective. So you would take these projections and say,
first of all, I would hope most investors, if they're investing,
they have some multi year horizon, right, So first of all,
it's like, what are prudent returns? And I'd say, historical
US stocks have been roughly nine. The past few years,
(09:36):
we've been above that, the next several years, next five
seven years, we can be modestly below that. And that's
effect of what our outlook is. But that does not
mean for most investors that you should change your allocation.
How I think about it is, okay, make sure you
have that if you have an aggressive spending goal, you
want to retire even earlier, you at least want to
(09:57):
stress test those hopes or plan against those numbers. Of
a six percent return versus a nine, maybe your goal
is still valuable or still reasonable. That's how we use
these projections when we give advice to clients. Perspective to advisors,
I'd also say, rather than like selling investments, which can
(10:17):
seem pretty aggressive, I'd say, thinking about how you deploy
new capital if you get a new bonus, or when
you work next year, and your forum and key plan.
There are parts of the market that have not participated
in our projection show the relative trade off, and so
I don't view it as what some would call market timing,
because we will not be able to time this cycle,
(10:40):
and we try to disclose as much as possible the rest.
I mean, I can't you know, some may interpret it
that way, but I can't help that we disclose it.
But I would be thinking about I'd tell many clients
been on the road hundreds of times this year. I
would say, think about deploying new capital to work, and
those investment opportunities are different than what the AI stocks
are telling you now, and it's consistent with a lot
(11:01):
of former investment cycles. So there's research behind it, and
it's kind of nice. Rather than saying people have made
people have not made a mistake. They do not need
to sell their current investments. It's I would think about
more in terms of how you deploy new capital, and
then stressed, has your your aspirations and family goals, your
portfolio goals on a lower return trajectory for a time,
(11:25):
maybe they're still robust to it. If they're not, you're
going to have to increase your savings a little bit
or or or or thinking about these new investment opportunities.
That's so hopefully that was a little long Windigel, but
hopefully that gives context.
Speaker 1 (11:38):
No, that's helpful. It sounds like you're talking about moving
the runner ever so slightly instead of jerking the wheel.
Speaker 2 (11:43):
Yes, it's laurno and again it's tender, and said, you know,
I have investors okay, asked me good questions like hey,
why can't you show the one year the two year numbers?
I said, I would, I can give you the numbers.
The confidence interval is so wide. There's a lack of confidence,
and I wish we had more accuracy. We don't. Even
in the tenure numbers our stock return, there's a fifty
(12:06):
percent likelihood we're going to be between likely three and
seven percent. That's a why three percent per year? Yeah
and seven percent per ye that's huge, But it's actually
it's data Dreven's evidence based. I wish they were now,
but even the projections we've seen the past two years,
I mean, the returns are not being defensive on the forecast.
It has been above our our meeting projections for sure,
(12:29):
but it's not necessarily inconsistent with our view because of
the nature of where the returns are coming from.
Speaker 1 (12:35):
Yeah, well, I think that chose just a lot of
humility too, which makes me think about the way you
wrote this new book, and I feel like there's a
lot of humility in the process and in the presentation
as well. Talk to me about AI and globalization and
some of these trends that are feel really unpredictable, like
(12:57):
how do you try to make sense of them? And
you're thinking about investor returns moving forward when these things
feel so first or second inning and it's just really
hard to know where they go.
Speaker 2 (13:07):
Sure, well, you're you're kind Joel in your words. You know,
we began a lot of this project started over my goodness,
probably three years ago. We started looking at AI. Actually,
my researched, my research team and I ten years ago,
like a decade ago now, and I had I had
to do my own deep dive on AI. I'm not
an AI like a techno expert, but had they had
(13:31):
the prospects for more meaningful change, and so I started
down this project saying I wanted a little bit firmer
range of what the economic impacts could be, what the
stock market impacts could be, other than what I would
call simple narratives Joel from smart people, I felt increasing
like I was in a narrative space. And what I
(13:52):
mean by that, I'll give you some examples. Clients would
ask me, Hey, Joe, our deficits and debt levels in
the United States are going up. At what point does
the bond market care about that and demand higher interest
rates or AI? Is it going to be good or bad?
And they wouldn't define good or bad, And I would
find myself like saying, oh, I don't think we're deglobalizing.
(14:14):
I don't think it'll do much for inflation. But I
was just giving you sort of more narrative base. And
I felt deficient as an economist. And I know no
one knows for certain no one knows, but we can
certainly bring data and science to bear in the same
way other disciplines do a little bit more detailed. I
am not saying economists don't use data and evidence, but
(14:37):
on these longer term projections, not in an integrated way.
They may look at AI, but they're not considering debt
levels at the same time, or they may be thinking
about the agent of society, but they may be leaving
out the tensions between the United States and China. And
you and I know this is a living, breathing organism.
But to my knowledge, no one was doing this, including ourselves,
(14:58):
and so we try. We had an audacious goal to
try to create a framework that would allow for these
you know, feedback loops, because they know they happen. What
was eye opening to me was the economic diagnosis. I
was not looking for it. I did not expect it,
but it challenged my own assumptions, which I talk about
in the book, and so trying to be data driven
(15:21):
in a probabilistic way, because that's how I think, you know,
even good investors, goodness, I even talk about poker players,
they always think about ranges and probabilities, right, you think
about risks. And we're disclosing this to the whole community.
I've disclosed it with policymakers. Maybe they'll improve the framework.
I hope they do. But the diagnosis was eye opening
(15:42):
to me. And I've been in the business twenty years.
Speaker 1 (15:44):
So what was the diagnosis? What's of your assumptions were
most upended when you run.
Speaker 2 (15:49):
I think the thing is I think a widespread view
is that the demographics our destiny, that if you have
an aging society, or if you have population growth that
is slowing, that you're you're destined for like low growth
and maybe either low or very high inflation, depend upon
how you interpret those trends. Now, again those things matter,
there are components of growth, but they don't their accuracy
(16:13):
in predicting future outcomes is really weak. That challenged my assumptions.
I think it does challenge the professions assumptions. Demographs are
not destined. In fact, they're very little reliability in future outcomes.
Speaker 1 (16:26):
That's so interesting. Why does that? Because it has seemed
true for a long time that a declining birth rate
and aging population it just kind of sort of intuitively
makes sense.
Speaker 2 (16:36):
Why intuitively it's a part of growth. But it only
explains just wan this way, like it's part of the calculus,
like part of GDP is how many people you're adding
to the workforce every year. It's just that it counts
for a very little of the movement up and down
of these trends over five years or ten years. And
(16:56):
to really push it, just think about aging like aging,
you have fewer that sounds very bad for the stock market,
doesn't sound bad like it sounds bad.
Speaker 1 (17:04):
Yet sounds bad for social security too.
Speaker 2 (17:07):
Human beings have been aging on this planet for a
million years and did not stop industrialization. So I'm picking,
I'm talking. I'm making a really fall four full point.
But the stress, the point of no one is just
bringing data to bear like, Okay, they can matter, but
how much it's a small medium lares Our beauty of
our framework is that we're putting them and we're putting
up against other forces. So why demographics don't matter? Technology?
(17:32):
How innovative it makes us, the new products, you know,
how transformed that does corporations, That will matter more for
GDP the next five years than all the demographics combined. Now,
if it happens in it, if we don't get the
lift from AI and we do have the aging and
fewer immigrants and weaker population growth, people may say, oh,
we had low growth because we had weak demographics, but
(17:54):
the data would show okay, that didn't help. But it
was a lack of lift off from innovation and new
ideas that really generated it. And I try to show
simple pictures. So that was certainly one all these factors matter,
the trade patterns and globalization deficits matter. The question is
(18:16):
the magnitudes of how each of these are moving can
really give you a decent handle or where the risks
are from the economic and market perspective three five, seven
years out. And this is not magic. It is how
these things evolve, and it's our unique data. We brought
probably the most data to bear on these concepts that
(18:37):
I'm aware of in either the private sector or in
the academic field. That's why it took us a while
to do the.
Speaker 1 (18:43):
Work, I think.
Speaker 2 (18:44):
So.
Speaker 1 (18:45):
One of the things that you pointed to in the
book was status quo bias and that people often think that, hey,
what what was happening yesterday is what's going to happen tomorrow.
Things were kind of on a trend line and part
of what doesn't give And one of my questions for
you too is like, what about the completely unknown things
that blitz into our lives that we weren't prepared for,
that change everything right, like a pandemic. It's really hard
(19:07):
sometimes to make these these projections right when there's unknown
influences that might come down the pike.
Speaker 2 (19:14):
Well, and that's why and so some would say, hey,
then why bother you can so you're to You're toyer, right, Joel,
So you can do if you say that, there's two
ways you can react to it, and both of them
are fair. I'll just give you my perspective on it.
One is, you know what, future is completely unpredictable, So
why even bother? I would say, well, then, but then
(19:34):
why do financial planning exercises? Why do any risk management?
You got to think about give some attempt at probabilities
and magnitudes. And that's what was lacking in the industry.
Someone say, oh, we're gonna have a death crisis. Okay,
well what's the probability of magnitude? Because without those two numbers,
I can't even think about risk management and portfolio. Someone
may say, Joe, the probability is small. Yeah, bad outcome,
(19:56):
but probability is really small. I may not alter my
folio a lot versus no. If someone said, no, this
is a material risk, here's all the evidence why we've
controlled for other factors. It's twenty or thirty percent. Oh,
that's no longer a tail event that I can't predict. Right,
Martian could come down from the universe. I mean what like,
(20:17):
I don't know, So there's always that uncertainty we have
first acknowledge. That's why I actually I felt very strongly,
in fact, why I came to Vanguard, which at Vogel
he loved our approach of putting things in probabilities and magnitudes.
I know, you know today some in the market wants
just a number, but we're not going to apologize for
the fact that we're given an attempt. No one knows
what these true numbers are, but we are trying to
(20:40):
be as data driven as possible. And it's certainly not
like I woke up one day and say that's AI
transfermed ouh, It's gonna be seventy percent. Why seventy Well,
it's different than fifty. Like I'm trying to it's kept
myself honest. I didn't want to be in the narrative camp.
And then, if you know, it also allows investors. These
(21:00):
are all the assumptions, these are all the things moving.
They can change their probabilities based upon the discussion in
the book, and they say, you know, Joe, I'm going
to weigh these negative forces more. I think you're under estimating.
I don't know the tensions with trade. Oh fine, maybe
take that twenty to thirty percent scenario, increase it a
little bit. But at least we've started the conversation. It's
(21:23):
the end, it's your listener's money, but we've started the conversation.
They can take our probabilities or they can move them
left or right as a risk management framework. At least
it's I would view this as a starting point to
the conversation in this evolving dynamic. But at least we're
putting numbers on the page, and they're not and they're
they're grounded in all the data that we have to bear. Yes,
(21:46):
there are things in the sample. The one beauty of
going back in time is that history doesn't repeat. But
there's been piers of where the world has deglobalized before
major changes in demographics. People are shocked to see that
our demographics changed. Immigration slowed to a ground to a
halt during the Rory nineteen twenties. We've had sometimes revolutionary
(22:09):
new technologies, but they're rare, but they do give you
a glimpse. But we got to move those periods into
the modern day because today is different. And I think
we've started that conversation. Hopefully that investors can think of
it through that lens.
Speaker 1 (22:24):
There's a lot more to discuss, and I specifically want
to dig in and talk about how prior technology, the PC,
the Internet, how much can we look to the past
to determine the potential future. We get to that more
right after this. So speaking with bank guards Joe Davis,
(22:47):
and we're talking about AI, how it can impact, how
it will impact your investments. It already is Joe. It
kind of feels like an inflection point is here akin
to the PC the Internet, right, those were revolutionary technologies.
There are many others too, but those the Internet changed everything.
Like this conversation that we're having would not exist right
(23:09):
without the Internet. Just think about the abundance of podcasts,
like spheres of commerce that just weren't possible before the
Internet came out, And it's just so hard to know
in the beginning how that's going to shake out, hence
the dot com bubble. There were even companies doing things
that now successful companies are doing, but they just couldn't
make it work in the early days of the Internet.
(23:31):
So what are the possibilities, Like I'm thinking about it
through that framework of the Internet and how it changed things.
Is AI gonna is it similar in its potential impact
is greater magnitude. How are you thinking about that when
you're forecasting.
Speaker 2 (23:46):
Yeah, so I'd say, and I'd try to boil it down.
But the one power of our data driven framework is
we're looking all technologies that they're meaningful affect us, meaning
the economy, workers, and the markets through three dimensions. One
is they automate some of the work we do. That
can sound bad. Yes, it can be disruptive, but it
also leads to greater standards to living and growth. Second,
(24:08):
it augments us. It's the computer for helping you with
this podcast in the internet today, Joel. Right, that's the copilot.
And then the third is what general purpose technologies do.
And you just mentioned it create new industries or platforms, right,
like the Internet helped enable online shopping. Didn't create online
shopping without the Internet, we're not talking about it. And
(24:30):
through our framework, it says the odds are significantly tilted
in the data driven way because we have all this
data and they evolve. We're picking up signals today. Based
upon those signals, there's a likelihood that we're in the
third end of this, but we're likelihood that AI is
more transformational from an economic perspective than even the personal computer.
(24:52):
In our data, we can compare the projections versus what
it did underneath the surface to the computer, the internet,
the automobile, the electricity. It's not an electricity, but it's
it's meaningful and it's a it's not going to be
a dud. Odds are than social media, but it's got
to accelerate its development, and that's why the odds are
(25:12):
six roughly fifty five sixty percent, why they're not one hundred.
So I get two reactions to this forecast. Those that
are pessimistic on AI say, hey, you're you're too boshed,
But I said, no, you're ignoring the history and the signals. However,
those that are very bolshed, I've been to Silicondelli multiple
times and they say, how is it not one hundred percent?
They will say I will not mention individual compatability, say
(25:34):
we know the probability of AI transforming is one hundred percent.
I say, well, you are also overestimating that this, yes,
this development will happen, is not happen yet, nor have
the new platforms emerged, and so half of the growth
effect comes from which we'll get to our investment thesis.
(25:55):
Why some of the investment implications are different what the
current headlines. Half of the growth f lift is these
new companies and industries in the you know I talk
about in the book, like computers. It was something online shopping.
Some of these media and communications electricity to help power
the assembly line, which helped automobile manufacturers. But without electricity,
(26:15):
we don't have those dividends. It created the elect the
movie industry, or enabled it entertainment industry. We didn't have
an entertainment at that regard. So it's anticipating. I see
the blob of my computer screen. It goes from negative depositive.
Those are new industries and new investment opportunities. I am
racking my brain what those companies are. I have no
(26:37):
clue what those industries are. I can speculate, but I'm
telling you that is half of the left. Half of
it is just the disruption it'll do to our work.
We're saying that in eighty percent of the occupation, so
most listeners on the call will see their job change
by at least thirty percent over the next seven years.
That's a bigger change than we saw with the personal computer.
(26:58):
So it had, and not everyone will win, So I'm
not going to sugarcoat it. There's some significant change coming
if AI continues to advance.
Speaker 1 (27:07):
One of the things that investors have seen is a
handful of companies just grow to enormous sizes and enormous valuations.
And so some people might think of as an investor
like I missed out on the earning, I missed out
on the growth potential. I should have invested in in
Nvidia four years ago. Whatever, And what would you say
(27:28):
to those people? And it's also we're in this space
where there's going to be so much competition it is
hard to determine who the winners and losers are going
to be, even if the AI space in general is
going to continue to grow at SUMI a very rate.
Speaker 2 (27:43):
Listen, first of all, the stock market's been up a lot,
so thank goodness for I want keeping you know, keeping
invested and doing well. Right. It's a good point. But yeah,
if you've been overweight technology stocks in your portfolio, congratulations
if you have and you feel like, hey, I've left
money on the table, So what do you do now.
What I was surprised to find I did not expect
(28:05):
it is that the areas of outperformance and underperformance. Let's
fix it on the stock market. In a technology cycle
loosely has two phases to it, and I didn't know this.
The first phase can last now it varies, but let's
call it five to seven years. It's the producers of
(28:27):
the new technology. It is the electrical companies the gs
of the world in nineteen ten and twenties. It's the
computer companies in the dot com in the nineteen nineties,
think of today, it's the AI stocks. If it's AI
is really going to continue to advance, they do fantastically well.
For good reason. Earning's growth is explosive. The technology is spreading,
it's starting to be produced at scale, and there's huge
(28:50):
profit opportunities. However, what I was shocked to find is that,
without exception in the back half in the second five
to seven years, is that some of that out format
switches actually and it starts to spread outside of the
tech sector. And so the more bush you are on AI,
I tell investors, believe it or not, the more bush
(29:11):
you are in AI, the more I would be suggesting
less overweight or even underweight technology in your portfolio the
next five or seven years and people say what I said,
I did not misspeak. Let me walk you through it.
And there's two reasons why this rotation happens. One is
all the new entrants coming into the space show you
just mentioned it right, It's not I'm not speaking in
(29:33):
all the investment it's going to be. It transforms the economy.
But hundreds of not thousands, of companies go into the space,
not all them will merge. I'm not saying that the
large companies will go out of business. I'm I'm saying
that at all. It's not clear to me who wins.
But as a portfolio, there's a lot of creative destruction.
And you know, the past five years or so, there's
been nearly four over four thousand AI companies funded in
(29:56):
the US alone. That's more than all publicly trade US stocks.
Of them will fail, and it's not because AI is
a bust, so you just have to think about that.
But it doesn't feel like that in the first phase.
It feels like only the tech stocks are going up,
and it's it is massive out performance.
Speaker 1 (30:11):
And it feels like a bit of an arms race
right now too companies and it's.
Speaker 2 (30:15):
Not as And then some will say, well, is that
a bubble, I said, generally you get frothy investments. Is
part of the reason why we have a guarded outlook
even though we're bush on AI. But I don't you
never use the word bubble. Here's why, Joel, because it
implies maybe it maybe runs the risk of implying that
the tech. If I hear bubble, I might be as
a listener, they say, ah, then your skeptical and AI.
(30:37):
I'm like, no, no, no, no, no skeptic In AI. There's
just huge investment because people see the benefits. Some of
them will probably misinvested. But but I think everyone can
be making rational decisions. Now. What happens though, here's the
cool thing in the second half of the cycle again,
in periods where new technology, these general purpose technologies emerge,
(31:01):
they are transforming the economy. So I tell those that
are bullsh on AI, well, if AI is so great,
then how is it transforming the average profitability to the average
hospital or at the bank Vanguard, if Vanguard was publicly traded,
how we being more efficient? What new platforms, Joel, You've
got podcasts, right to say, your public company, how you
(31:23):
scale your business? So I said, I don't know what
they are but I said, this is no longer social media,
which means if we use it, but it hasn't really
lifted economic growth if it's transformative, So what happens. That's
where it's the so called value stocks, the non tech
stocks start to perform pretty well because now we're consuming
the technology. So the cycle goes from producing the technology
(31:46):
to consuming it. Now again, what new platforms emerge? I
don't know. I identify some areas of where it could be.
I think the transformation has to go through healthcare, high
unmet needs, as tough to scale, labor shortages on some
you know, potentially in the future. So you know, I
(32:06):
think it's got to go through there as one. But
I'm not an industry analyst, but that's exciting because those
those parts of the market have lagged the tech sector
by a wide margin. So I would be saying, listen,
as an investor, you have a little new capital coming
to work, and you are bullsh on AI. You start
to start thinking about the stocks outside the US and
(32:27):
outside of the text sector, precisely because of the broadening effects. Now,
if you're a bearish on AI, this stuff is hype,
then that here's the thing. It leads to the same
investment conclusion. If a if AI is hype, then the
mag seven are over or overpriced. The tech sector is
going to underperform for a significant period. So the irony
(32:48):
is that in either the scenario the book talks about,
you would want to start thinking about outside the tech
sector in either whether you're bush or bearish on tech.
And that's it's the bullsh fast that that I and
see comment.
Speaker 1 (33:01):
I think I think for the average armchair investor, the
it's like, what have you done for me lately? And
just like you look at the Kathy Woods Fund right
when it was soaring in price, and that's when everybody
got in, was at the top, and then you have
the you know, eventual devaluation of that investment, and it
(33:22):
just makes it. Yeah, like you can look back to
the computer and the internet era too, and you can
you can show companies they were at the center of
everything we did. I'm thinking about a company like AOL
that was like everybody used AOL for for email, for news,
for communication. AOL is a shell of a company at this.
Speaker 2 (33:41):
Point, it just goes to high failure rates in a
period when here's the irony is that I have had
to study a lot of these cycles is that here's
the thing that comes out of technological change. Rapid returns
in those stocks for a time. That's great, it's actually
a signal that the technology is merit huge failure rates.
(34:01):
Some stars emerged now we call them unicorns, you call
them whatever you want. They could be existing or they
become market leaders, become bigger. So you can you can
find evidence of that, but you also find high failure rates. Now,
if I have to own the portfolio in the sector,
I'm probably be stuck with a little bit of both.
What what I'm saying is you can start thinking is
(34:23):
that this is this full investment cycle is not over.
And if you first so stay invested, but you can,
if you want to be offensive, if you miss some
of the tech run up. Listen, this thing could go
on for another two years. It's in our simulations like
it wouldn't shock me. You could have further melt up.
But if you're playing the lawn game, I'm trying to
think in my in my you know, you know, my
(34:45):
own portfolios. Hey, what's what's the next extension of this
if it continues, and start thinking about, well, how is
AI going to be used? Think about then those sectors
which aren't trading that really high multiples. Yeah, and and
that's actually playing offense. It's you know, you could be
bush and think about it. I'm starting to hear active
(35:05):
managers start talking about this, and so I think we're
all on into something. And you got time on this,
like it's not going to disappear tomorrow. We've got five
seven years on this.
Speaker 1 (35:14):
But essentially, productivity is going to extend to so many
other sectors of the economy. And if you're only focused
on AI stocks, then you're too hyper focused.
Speaker 2 (35:24):
That's the thing. If it stays in Silicon Valley, we
got a problem. Yeah, but I'm saying what horizon someone's
saying for the next year, So well next year, you know,
we don't have that sort of accuracy. But yeah, one
shocked when we continue to mount up. You want to
chase the momentum, fine, go ahead, but reprepare for a
rocky ride.
Speaker 1 (35:41):
So what does a robust portfolio look like? Then? For
the average investor who does have a long time horizon,
they've got ten, twenty thirty years and do simple strategies
index funds, target date funds. Oh, do they need to
be more complex than that, or can like bogel heads
still do well.
Speaker 2 (35:59):
No. Well, First of all, the key is the asset
allocation and drive down the cost. AI has not in
any way, shape or form change to the investment principles
which will be here long after AI and then the
next tech and then the next technology and next technology.
And that's why I felt compelled to introduce in a
very respectful way, Jack bo Vanguard's founders, You've probably done
(36:20):
more for investment principles for the industry at large then
I can think of anyone in finance, and so you've
got to stay invested, right, That's the first thing. And
I'm what I thought though, is that these risks are
most of the risks we are diagnosing are different than
what some of the markets contemplate. So if this thing
about risk management, as you think about it, and I try
(36:41):
to talk about some actionable things in there, but they're not,
I won't call any of this jewels see change. So
if you're on the if you're listening here on the
Joel's podcast, as you always do, and you're thinking about, Okay,
how do I think about it for my farm work
or so forth, changes in moderation at the margin right
if at all, But stay invested. Do not listen to
those that are going to say the sky is falling,
(37:02):
and do not listen to those that get so hyped
up on AI that they see no risks in the
market and just what like on the downside, Let's not
think the world is ending just because at that levels
continue to go up. There's a way to overweight fixed
income at the margin for more conservative investors, which also
sounds contrarying, But don't run for the hills for gold
(37:23):
and other asset prices like that's the signals are not
what you invest in for the full investment cycle.
Speaker 1 (37:29):
Let's say someone does have a shorter time horizon. Let's
say somebody's listening and they're on the edge of retirement
and they're like, stocks have been good to me, and
I should I take some chips off the table, especially
given kind of some of the potential the ways that
this could play out that could be negative from like
(37:50):
a tech standpoint. Let's say we see some of the
valuations pull back and investors kind of get a little tepid.
That could have an impact for people who need that money.
Speaker 2 (37:59):
More were that and that's a part of a good
I think financial planners stressed us. And if someone's doing
it on their own, listen, you know, and any good
advisor would have all the sophisticated math. Your investors may
have spreadsheets and software and all that good stuff. Joel.
And a way to simplify with not losing any of
that that great insights is to say some simple exercise.
I even tell family and friends. So you take your money,
(38:21):
and you have your asset allocation right, you can pull
up your balance right on your account. I say, just
imagine the world next two years, we're down thirty percent
and up thirty percent. In both those words like do
the math and I do it. I actually I do
it with pen I actually put in excel. I dropped
thirty percent of my portfolio. Oh that hurts, I said,
(38:43):
let's see that number. And now now my wife and
I go through that. And now I say, hey, hunt,
is this changing our lifestyle from what we know a
week going to get? Do we have to put off
something that we were planning on doing. If the answer
is yes, then they should start thinking about mod is
changing take some risk on the table because but then
also be aware that if you do that on the downside,
(39:06):
now you okay, giving up the thirty percent upside and
look at that number two, because you have to look
at both. You can't just look at one. I tend
to be a little bit more risk loving, less risk averse.
But there's no judgment in this. No, I appreciate that
so so much, says I cannot be down thirty that's
chicks all the table. Others like, yeah, I can live
with it. It's longer term than good. They're probably looking
(39:29):
at the thirty percent on the upside. I think there's
nothing wrong. This is judgment free zone, and I say
that's a really siber exercise people can do. You can
add more math to it, but that gets to the
same endpoint. And if the answer is no, don't change anything.
If it's yes, then they're probably in the wrong asset
allocation because most people don't rebalance, which things like target
(39:50):
date funds automatically do. And it's kind of like on
an autopilot. But like my brokera's account doesn't rebalance, my
stock portfolio, is I have more risk am exposed today
than I did three years ago because the market's up
a lot.
Speaker 1 (40:04):
Makes sense.
Speaker 2 (40:05):
So if I do that thirty percent down now it's
going to look like a bigger hurt than it did
three years ago. Am I good with it? I don't know.
We're going to do that a year and my wife
and I and we'll see. I'll let you know where
we land.
Speaker 1 (40:16):
I look forward to hearing that. Okay, we've got more
to get to international stock exposure. We'll get to that
and more. Right after this, I'm still talking about the
Big Oars show. Davis and Joe, just a few more
questions for you. But one of the things I'm really
(40:38):
curious about too. We touched on this briefly, but how
crucial are low costs in a portfolio, especially given kind
of these trends that we might be experiencing. Is that
something investors under consider. There's certain funds out there, even
when you're looking at something like as basic as an
(40:59):
S and P five hundred fund, the cost can very dramatically.
How important is keeping the cost low? And does it
is it more important in this environment or less important?
Speaker 2 (41:08):
Well, it's it's it's critically important regardless, I mean, because
the fact is, it's just it's part of compound interest.
I mean, Benjamin Franklin, he said it, you know, two
hundred fifty years ago, the power of compound interests and
even Einstein's to talk about it's probably one of the
most powerful forces on finance people least appreciate, right, and
(41:28):
so all high costs can can eat at returns. And
it's just a math. And so I want to keep
as much in my heart owned money as I do.
And so I would say, and so that that Vanguard
has always been the thesis. I know sometimes it gets
in the industry. Listeners may appreciate this, ohh, I go
active management, active funds versus index funds. More important this
(41:49):
is coming from Vanguard. What we've always said, it's low
cost versus high cost. So the push to push the extreme.
If someone Joel if a listener on this call, has
I don't a ninety basis point where seventy basis points
index fund, I am saying, as a as an employee,
advantguard sell that fund. Now I cannot get financial advice,
(42:11):
but I would be strongly questioning. And that's an index fund.
Speaker 1 (42:14):
But it's high cost and those exist. Those exist.
Speaker 2 (42:17):
There are something that's well, there's some ets they go narrow, Yeah,
they have narrow space. You know thematics. Some things are
high cost I'm just saying, like, that's a hurle you're
gonna have to overcome, just like active managers have to overcome.
So I've always been there's some high quality even active
managers twenty thirty basis points, they still have to outperform
the market, but they don't have as much of a
(42:39):
headwind as say, I don't know, eighty ninety basis point manager.
Now the index fund, I know I'm going to get
the market return minus my expense ratio. And as Jack
would say, I want to get as close to the
market itself as I can. So that's that's great starting point.
But you know, I start to have personally when I
(43:01):
start going up north of I don't know, thirty five
or forty for sure, and for broad market exposure, if
I'm north of twenty or so, I'm asking myself.
Speaker 1 (43:11):
Why you briefly mentioned international just a little bit earlier,
And I know Jack was not He didn't necessarily he
didn't necessarily think most people needed international exposure to a
much exposure at international stocks has has like Vanguard's thesis
on that change that changed much or.
Speaker 2 (43:27):
No it has, And I tell you and I was respectful.
So Jack had all those years on me and he's
founder of the company. But we battled on that. Yeah,
over the same lunch he was asking me I talked
about in the book. He'd say, Ah, Joe, we don't.
We don't need international. You get a most exposure for
the US. Don't don't sell the US short. I'm like,
I'm not. I'm not. I'm not patriotic. I'm more diversifying
(43:48):
of And so I tell you so. Fact, this past
ten years US has dominated non US. And so I'm
hearing Jack, I hear I told you so. I told
you so. He's been He's been spot on right. What
I say, though, is that doesn't say why we ultimately say,
put some of your eggs outside the US. It has
nothing to do with the relative valuations. Is US more
(44:11):
expensive less? The fact is, what history shows is roughly
four percent of the companies account for half of the
stock markets, a return of the last century. Four percent.
Just think about that. Wow, now the past fifteen years.
But the benefit of hindsight, it turns out almost all
those companies have been in the US right well, great
(44:32):
to help explains the high earnings growth. It help. It's
not all, but it's a big chunk helps explain the
strong returns of the past twenty or thirty years. So
my only point is if you have one hundred percent
US exposure, I just remind people, whether you realize it
or not, that's a very strong stance on technology. Dare
(44:53):
I even say almost arrogance stance that the US is
going to dominate one hundred percent of the next great
company over the next twenty or thirty years. Now, again
I'm not saying you shouldn't have a high US weight,
but just think about that. And I'm not one hundred
percent confident they will be in the US. I think
the US is very innovative, very entrepreneurial, more so the
(45:14):
most economies, but I'm not one hundred percent confident one
hundred percent of companies will come from there. And that's
why we say non zero. And then that also then
diversifies your currency exposure a little bit given some of
our debt, you know, risks at the margin. So that
that that's why you would have non US and I
would say that you know, bless them if you were
alive today, now that you know the evaluations is secondary.
(45:39):
Is the US more expensive than the non US? We'll
talk about that, but reasonable people can say, can I
have ten percent thirty forty percent? Non US. I think
it's more just getting off the zero bound because you
you just mean not realize you have almost like this
technology bet right. And for someone that says I'm good
(45:59):
with the US, I would just really move your mind
and this is smart people, I would just say, respectfully,
the smartest minds in the world forty years ago said
you only needed investments in one country, and that was Japan,
technology leader of the world. The smartest investors are well,
by the way, do that were right for twenty years?
(46:20):
And I am not saying the US is following Japan.
But I'm saying I just like basket your eggs and
one mess so readonable people. I said, even you have
five percent to get off the zero bound a little bit,
and but but but thank goodness, the returns have been
so strong for US investors. It's been a huge house.
Speaker 1 (46:36):
Has writing this book impacted how you think about your
own investments?
Speaker 2 (46:40):
Well, I think it's uh, it's well, Firk to fall.
Writing a book is humbling. I've had to write academic
style type work for years, but to try to make
it take all the jargon out of it took me
more than a few tries. I will admit it beat
me up, But as my mom says, it's always good
to be dose, to give it a little humble high
(47:00):
every once in a while. So but I think it
was a really appreciating the opportunity for non consensus outcomes
and not to be alarmist on it. We are saying
it's actually probably the most bold economic assessment that I'm
aware of from any firm in the world right now.
We are saying that the most respected minds generally the
(47:21):
same view the central banks, you know, in National Monetary Fund,
the probability of their forecast being correct over the next
five years is only is twenty percent or less. Can
you think about from my perspective, the audacity of that
statement is fairly that's pretty autacious statement. But it's thata driven.
I was not looking for this forecast, and so that
(47:42):
was but putting it in a way that wasn't being
an alarmist. And so what I hope is there's value
in us trying to bridge the economic world into the
investment world without having me having to read five hundred pages.
Speaker 1 (47:58):
Yeah, well no, and I think that's what you did
really well in this and it gives people like, instead
of just reading headlines and negative news or boy, this
could be really bad, it gives people a framework to
help understand how this is going to impact them as
individuals over the next ten fifteen years. And so I
(48:19):
think it's great work. Joe, really appreciate you joining me.
We'll make sure to link to the book as well
in the show notes. But thanks so much for coming
on the pod. We really appreciate it.
Speaker 2 (48:26):
Oh, thanks for having me.
Speaker 1 (48:28):
All right, that was such an interesting conversation, So fun
to have somebody from Vanguard on. You know, Joe has
just been an economist there for multiple decades and done
stage great work and its Vanguard is such a unique institution.
It's been so impactful to individual investors. And so when
I saw Joe's book come out, I was like, oh,
(48:49):
that's an interesting subject matter, also interesting like where it's
coming from. Gave me even more pause to say. I
think he would be a good guest, And I hope
this was a helpful conversation for you. I think when
it comes down to it, my big takeaways from this
were really to not change your investing thesis all that
(49:10):
much based on the headlines, and that is an interesting
place to reside, especially after Joe's like, Hey, I'm super
polish on AI. I think it's going to have overwhelmingly,
based on my modeling, a really big impact on our
economy as a whole. Then you might think he would
have some hot tips, right, some specific stocks that he
would recommend, this is the direction you should go to
(49:33):
maximize earnings over the next six months or six years.
But really, he said changes at the margin. At most,
most people should be making very small changes to their holdings,
and that low costs still matter more than ever. So
even despite AI being a disruptive technology that is likely
(49:55):
to have meaningful impacts across the economy, saying like you
probably shouldn't do much. That's a whole lot different And
I love how too. He talked about, actually, if you're
gonna do anything, you might want to underweight technology. And
so the last ten twenty years has been the betting
on technology has been a winning formula. But with valuations
(50:20):
where they are and with his thesis that AI will
be impactful, actually those impacts are going to spread to
companies that aren't just the mag seven. And I think
there's a lot of truth to that, and I think
he's right that if AI is going to be impactful,
it is bound to it has to by definition, impact
(50:41):
hundreds and hundreds and hundreds of publicly traded companies across
the country and across the world, and that those productivity
gains are likely to help industor see greater returns in
non tech stocks. These are really difficult things to prognosticate,
even like we started off the episode talking about the
Vanguard's predictions about muted socc returns and he's like, yeah,
(51:03):
last two years we haven't looked that great, and so
these are really difficult projections to make. But I love
the Joe's using data. He's doing his best to try
to help people make an informed decision. And I think
more than anything, it helps me as an individual investor.
Just like you, you're an individual investor, I'm an individual investor.
(51:24):
It helps me feel solid about my choice to stay
the course, to stay low cost, to not make meaningful changes,
even if other people around you or other people on
the internet are getting rich investing in a couple of
tech stocks. Well, is that outside growth going to keep
(51:44):
going for years and years and years into the future. Maybe,
But I think what Joe has based on history and
based on smart projections. I think he's come up with
a reasonable framework for how we can think about where
things go from here. And especially when you look back
to the history of the PC and the Internet. Some
(52:05):
of those companies that started off strong aren't with us anymore.
Some are Amazon still here right. The dot com bust
hurt Amazon, but Amazon made it through. But then there
are the companies that looked like they were poised to
change the way certain business was done and they just
they didn't last, right. And so yeah, as an individual domester,
(52:26):
now is it time to maybe not change things dramatically
because of something you heard on CNBC, but it is
time to step back and look at am I doing
the basics right? So I hope this episode was helpful.
Thanks as always for tuning in. You can find links
to Joe's book and to some of the other things
(52:47):
we may have referenced on the podcast today up in
the show notes on our website at how Tomoney dot com.
Until next time, best friend out
Speaker 2 (53:00):
The
Hosts And Creators
Joel Larsgaard
Matthew Altmix
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