August 30, 2024 • 23 mins
Ever wondered how to tell if your investment advice is leading you down a garden path? This episode of Bullshit on Stilts has you covered, as we spotlight the essential practice of assessing your investment performance against independent benchmarks. Learn how 401k accounts display performance metrics and why comparing your returns with indexes like the S&P 500 or the Russell 1000 is critical. We dive into the challenges of active management versus passive investment and highlight the importance of evaluating your investment performance over appropriate intervals, such as year-to-date and multi-year periods. By focusing on these longer intervals, we help you avoid the pitfalls of short-term thinking and gain a clearer picture of your investment efficacy.
Choosing between benchmarks can be a maze, but we simplify it in a way that's both informative and entertaining. Discover why institutions might lean towards the Russell 1000 while retail investors often prefer the S&P 500, and learn about creating composite benchmarks tailored to your portfolio. We use practical examples like a 60% stock and 40% bond allocation to illustrate how to blend different indexes for accurate performance measurement. By the end of this episode, you'll know exactly what you own, why you own it, and how it measures up against relevant benchmarks. Tune in for a mix of serious analysis, hijinks, and tomfoolery, and take control of your investments with newfound confidence.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Keli Alo (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by two
guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice Identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it All, right.
So today, on Bullshit on Stilts, we're going to continue on
(00:44):
with our sequence of breakingdown spotting sloppy investment
advice.
Right, that was our episodeseven, where we really
introduced the Fab Fivequestions.
Right, and Mark, walk throughthose Fab Five questions real
quick when it comes to helpingpeople have control in their
investments and spotting sloppyinvestment advice.
Mark Robinson (01:05):
Sure.
Number one is what do you own?
Number two why do you own it?
Number three how you doing.
Number four compared to whatand number five is what?
Keli Alo (01:18):
am I paying for?
That's right, yeah.
What are my total costs?
So today we want to focus onquestion number four, right
Critical question of comparinghow you're doing question number
three to something that ismeaningful.
It's a independent measure ofwhether you're doing good or bad
(01:40):
or whatever, rather than justconjecture right, right, which
can overstate or understate howyou did, sure.
So do 401k accounts and theirstatements.
Do they show you how you'redoing compared to something, or
do they just say, hey, here'show you're doing Indeed, and in
fact they are mandated to.
Mark Robinson (02:00):
So when you are selecting funds or when you are
shown your return, they willshow a representative benchmark,
and by that I mean if you're,let's say, in large cap stocks,
you'd be measured against anindex like the S&P 500 or the
Russell 1000.
So it gives you how am I doingand compared to what?
Keli Alo (02:21):
Yeah, so real quick, you can take a look.
And if I don't know how it'srepresented, I'm sure different
401k providers have differentways to present that.
But let's say your chart islower than the index chart, you
know you're probably not doingas well as the index over
whatever time period themeasurement is provided for.
Is that fair to say Correct,okay.
(02:42):
Is that fair to say Correct,okay.
And if your bar or your pieshape or whatever is larger than
the comparative index orbenchmark, then you're doing
better Victory.
Mark Robinson (02:52):
For that snapshot .
You're doing better, yes.
Keli Alo (02:54):
Okay, you had mentioned during the last
podcast, which was how you'redoing, that while active
management has outperformedindex or passive investment
management for maybe one, two orthree years, but over longer
periods of time, it's extremelydifficult to actually outperform
(03:15):
the index when you take intoaccount the cost of the active
management, the trading going on, which there is a cost to the
internal trading of things andso forth.
So I think that this becomes,like you just said, for the time
period that's measured in your401k account that we're talking
about, if your bar is biggerthan the index bar for that time
(03:35):
period the last year, year todate, last three years, whatever
they're showing you at least inthat time period you've done
better.
If you expand the measurementfive years or 10 years maybe
you're not doing as well as inthat short time period.
Mark Robinson (03:51):
So what would be an appropriate interval?
So if we're talking aboutreturns, so how did I do?
And compared to what, what isan interval?
So certainly a monthlystatement.
All we're showing is noise forthe most part.
Yeah, just the ups and downs.
I'm sorry, but I cannot fixthis problem for you.
Keli Alo (04:03):
So certainly a monthly statement all we're showing is
noise for the most part.
Yeah, just the ups and downs.
Mark Robinson (04:05):
I'm sorry, but I cannot fix this problem for you.
So what would be an appropriateor useful probably a better
word a useful interval formeasuring that?
Would it be one year, threeyears, five?
Keli Alo (04:17):
years.
From my standpoint, when we'vedone the work for clientele and
helping them assess and measurethings, we typically look at
year-to-date one year, threeyear, five year.
We also look at calendar yearsBecause when you take something
that's five years, it hides theroller coaster.
(04:39):
It just says, well, over thefive years you've averaged 8.38%
on average.
But averages really don't tella story.
They just give you kind of athumbprint.
That's really not that telling.
However, if you look at fiveyears of calendar year returns
or five 12-month periods of time, you'll start seeing that
(05:02):
roller coaster.
So when the market correctedyear four, did your account
correct more or less than yourbenchmark?
That's important to know.
Going back to your question,tended to do one, three, five
years.
Beyond that, it becomestypically very different market
cycles, very different interestrates, maybe even different
(05:23):
portfolio management team at thehelm of the investment
portfolio you're using.
So all of those create a lot ofnoise beyond that.
Mark Robinson (05:31):
Yeah, and I think it can misstate the efficacy or
the inefficacy of what you'redoing if you measure over too
short of a time horizon.
And I think our focus ought notbe over the short term horizon
and I think our focus ought notbe over the short term.
Most things in life where wetruly accrue value are not
measured in short intervals.
It's more of a compounding overa multiple whatever the
(05:53):
interval is multiple month orquarter or yearly basis where we
can truly see if things areworking for us or not.
Keli Alo (06:00):
I agree with you, Juan , that investors, consumers out
there, non-professionalinvestors, let's say are very
focused on the near term.
What are you doing Last month,this quarter, last year, this
year, whatever?
They're very because it's, theycan feel it, it's tangible,
they're living it right now.
So they tend to look at thatand then want to make decisions
(06:24):
based on their belly andemotions.
Mark Robinson (06:26):
And I feel sorry for you.
Keli Alo (06:28):
Around what they're doing.
It's not working.
It is working, and yet when wetalk average investing returns,
typically we're talkinglong-term averages 10, 15, 20
years and if you're alwayschanging the method by which you
want to get from a to b, younever get to be all the time.
Even more so now right.
Mark Robinson (06:49):
Sure we can get caught up in the short-term
returns, like many did in thelate 90s when technology stock
funds were going up 50, 70, 100percent a year.
Keli Alo (06:59):
Yeah, the old monkey throwing the dart at the
newspaper yes, you make fun ofme.
You're bringing up monkeysagain you just don't like
monkeys for some reason I don'tget it.
Well, you did mention it wasyour birthright.
It was, yeah, born of themonkey.
I mean that means a lot.
And what a lot of people don'tnecessarily appreciate is when
you look at an index, whetherit's the S&P 500, the Russell
(07:30):
1000, the Russell 3000, theWilshire 5000, I mean they're
just oodles and oodles ofindexes out there.
But when you're measuring that,what you're actually looking at
is a large like 90 plus percentof the US stock market in my
example.
As a result, what's in it isevery industrial sector and
segment is typically representedin that one investment holding,
typically represented in thatone investment holding.
Peanut Gallery (07:45):
Hey guys, this is the Boots Kelly.
You're getting this wrong again.
Industrials is one of 11sectors in the S&P 500 index.
There's a whole bunchtechnology, financial services,
communication services but onlyone industrial sector Jeez.
Keli Alo (08:12):
So do you really need more technology when the S&P's
value has been driven by Netflix, amazon, google I mean all of
these companies are in there Doyou need to have a specific
exposure to it?
That's up to you as anindividual whether you want to
have more exposure to a segmentof the market.
But if you buy the S&P, if youbuy the Russell 1000 as an index
(08:36):
investment and a passiveinvestment, saving on management
fees and saying you know, longterm I'm going to be just fine,
you have technology, you haveoil and gas, you have consumer
cyclical and defensive you haveall of those segments
represented.
Mark Robinson (08:53):
I think one of the problems that individual
investors run into and certainlymarketing doesn't help is we
want to get in there and help.
Am I even on?
Yeah, I am.
Keli Alo (09:04):
I actually didn't turn it off.
I don't know where that's goingthis time.
I didn't turn it off.
We're interested in what youhave to say.
Mark Robinson (09:09):
Mark, we want to get in there and help, but it
might not be the most effectivestrategy if what we're trying to
do is build wealth over thelong term for your serious money
.
I'm not disparaging stocktraders at all but I think for
your serious money, it's betterto buy large indices, whether
it's through active managementor through passive index
(09:31):
investing, than to try to useyour expressions in the
marketplace and what you thinkyou ought to be investing in as
a way of building toward aterminal wealth value.
More often than not, the betterapproach is just to let the
markets do their thing.
Peanut Gallery (09:49):
Hell yeah, that's what I'm talking about.
Mark Robinson (09:52):
The better approach is just to let the
markets do their thing.
Keli Alo (09:56):
I agree with that.
Generally speaking, I've workedwith people that are very, very
good at selecting stocks andrunning their accounts.
Mark Robinson (10:04):
How do you know?
They were very good.
Keli Alo (10:06):
Based on looking at their statements and analyzing
it for them on a quarterly basis.
So you compared it, yeah.
So, getting back to the,compared to what?
Yeah absolutely.
Mark Robinson (10:12):
In my experience, most didn't it.
So, getting back to the,compared to what, in my
experience, most didn't, it feltgood, so it was good.
How am I doing in compared towhat?
That has more meaning when it'smeasured over longer intervals
of time and it takes thecompetitiveness out of it and it
adds in more of what we shouldbe thinking about or evaluating
(10:33):
is efficacy, not thecompetitiveness.
Did I beat the S&P 500 thisquarter or this year?
It might be an excitingobservation, but is it important
, right?
What about my asset allocation?
Not so much about the securityselection, but I'm measuring
against a broad index.
(10:54):
Yes, and that's more at theasset allocation level, not at
the security selection or how mymanager did.
Why don't you repeat againwhere does return come from?
Right?
Keli Alo (11:04):
Where do we derive return from in investment
portfolios?
So these are portfolios, stocks, bonds, cash and so forth.
But if my memory serves,portfolios, stocks, bonds, cash
and so forth, but if my memoryserves, roughly 88% of your
return and your risk over timeis attributable simply to the
decision of your mix.
What percentage do you have instocks, bonds, cash and or
(11:26):
alternative investments, yourasset allocation or your
allocation plan?
88% goes there, not who managesit, not what investment house
manufactures it, not even thatthey decided to buy Lowe's and
not buy Home Depot.
The manager and the securitiestogether were less than a 10%
(11:47):
determinant of long-term returnand risk.
So what we've been talkingabout quite a bit has simply
been let's focus on the8,800-pound gorilla in the
equation and let's not worryabout the 9, 10% or 90 to
100-pound gorilla, which ismanager, security, selection and
so forth.
Mark Robinson (12:07):
Show me that you're approximating the
benchmarks that represent yourasset allocations to stocks,
bonds, alternative investments.
Show me that Once you showefficacy there with the basics,
the compulsories, then we cantalk about how you selected your
small cap technology stock.
Keli Alo (12:27):
Let's talk about how do you compare?
So, compared to what, I'llthrow some things out, or if you
want to throw things out.
Mark Robinson (12:33):
We're going to start with this whole podcast oh
excuse me.
Keli Alo (12:39):
In fact, just disregard everything you've
heard thus far and we're goingto start now.
When you're comparing yourinvestments, there are different
comparisons and we've referredto the S&P 500, boatload right,
but that's not the only index.
S&p 500, boatload right, butthat's not the only index.
As we've talked about, if I'min large company stocks in the
(12:59):
US, s&p 500, claire is an indexI can use to compare my large
company stock holdings to theS&P 500.
Mark Robinson (13:08):
Fair Fair Is that the only one, no, but it is the
most recognized and mostreported by yes with the S&P 500
.
Keli Alo (13:17):
Yeah, every night on news you'll hear what the S&P.
Mark Robinson (13:20):
Now you can get into other indexes, like the
Russell 1000, which is puttogether differently than the
S&P 500 is.
Yes, and if you choose to usethe Russell 1000, and here's
where we start getting into thefineries of this that I don't
know whether they addincremental value.
Now, once you've demonstratedto me that you are saving on a
regular basis and you havearrived at the amount that you
(13:44):
need to be saving on a regularbasis, your asset allocation
comports with your need for acertain rate of return for a
given risk level.
And you're aware of yourreturns, now that we're starting
to measure them againstsomething, the compared to what.
Now you've matriculated up towhere we can start to talk about
(14:05):
what is a more appropriatebenchmark.
Is it the S&P 500, or do youwant to use the Russell 1000?
And Kelly real quick, 500, ordo you want to use the Russell
1000?
And Kelly real quick, explainthe difference between how the
S&P 500 is constituted and howthe Russell 1000 is.
Keli Alo (14:21):
When we're thinking about the S&P 500 versus the
Russell 1000,.
Both represent the US stockmarkets, both represent large
companies that are listed in theUS, us domicile companies, and
both, really, when you look atperformance, when you look at
risk factors, when you look atvolatility, they're right on top
(14:41):
of each other.
It's like they're playingpiggyback.
Mark Robinson (14:43):
Yeehaw.
Keli Alo (14:46):
It becomes academic.
I can tell you thatinstitutions prefer to compare
their investments in largestocks in the US to a Russell
1000 or a Russell 3000.
They prefer that over the S&PInvestment managers that sell
products to retail investorsprefer the S&P 500 because it's
(15:08):
reported and it's widely knownand it's somewhat familiar.
Almost nobody outside ofinstitutional land relies on the
Wilshire 5,000.
Now what's interesting is againanother US stock market index
that you could use to compare.
It now houses over.
Well, last time I looked it waslike over 7,200 stocks make up
(15:30):
the Wilshire 5,000, which is alittle confusing to my brain.
Mark Robinson (15:34):
Well, you're making progress because, you
used to call it theWorcestershire 5000.
Keli Alo (15:38):
I did, yeah, and if you mix that with ketchup it is
absolutely delicious with steak.
Just another purpose for ourindex Absolutely, absolutely.
So there are other indexes tomeasure by what's your
preference.
We typically will use the S&P500 when it comes to US large
cap stocks.
When it comes to US medium sizeor mid cap companies, we'll
(16:02):
typically rely on the S&P 400.
And if we're looking at smallcompanies listed in the US small
stock companies, otherwiseknown as small cap we'll rely on
the S&P 600.
We can use other indexes, soRussell 1000, we can use Russell
2500 for small and mid cap.
We can use all sorts of indexes, but we typically refer to the
(16:24):
S&P simply because of thefamiliarity and it's easy to
find.
And at least on the 500, you'regoing to hear what happened
there every night on local andnational news.
The Fab Five questions when itcomes to spotting sloppy
investment advice is reallyaround confirming for yourself
that you are indeed in controlof your investments.
(16:44):
And so it's built inchronological order.
What do you own?
There's the first question.
You can't go on to how you'redoing unless you know what you
own.
You can, but then it's kind ofself-defeating.
It's like I really like thatdish you made.
Can you give me the recipe.
I don't have a recipe.
No recipe, don't know how Imade it, but I'm glad you
enjoyed it.
(17:05):
So it's chronological.
What do you own?
Why do you own it?
How are you doing now comparedto what?
Here's something that I thinkwe haven't touched on and I
think it's important when itcomes to compared to what.
When you look at your statement,there's oftentimes ITD as an
acronym associated with somekind of a return that's reported
(17:27):
to you ITD standing forinception to date.
So what happens if I invest mymoney and I'll just use 401k as
an example?
Let's say I started tocontribute to my 401k and my
money's automatically going in.
It's going to be really simpleand I'm investing in an S&P 500
index fund and the first date ofmy purchase is October 6th of
(17:52):
XYZ year, and now it's December31st, two years later.
How do I compare my inceptionto day performance compared to
an index when my first dayinvested was October 6th?
How do I come up with figuringout what the index did if it's
not presented for me and I'lltell you how I do it I will
(18:15):
sometimes look at the indexitself, but it's non-investable,
as we've kind of alluded to inthe past.
The S&P 500 has an index.
You can't invest in it, butthere are mutual funds and
exchange traded funds, indexfunds, that do just that.
So you pick one of those fundsand you go back to the
historical value of the price.
On october 6th of that year,your start year, let's say the
(18:38):
price was a hundred dollars foran s?
P exchange traded fund, anindex fund, and then you take it
all the way to today, whatyou're trying to measure, and
what's the s?
M?
P funds share price now, let'ssay it's 150, I now have my
start and my end values and I goback to how am I doing?
(18:59):
I take my end value 150, minusmy beginning value 100, divided
by 100 times 100.
And guess what?
In this example, I'm going tocome up with my index that I'm
comparing my personalperformance against as a
estimated simple return number.
And now I know how tall thatS&P index is from October 6th to
(19:24):
this year, two and a half yearslater.
Mark Robinson (19:26):
So you can do an interim point in time rather
than doing it on a quarterlybasis or an annual basis based
on your inception, if that'simportant to you.
Keli Alo (19:36):
But the point is, if you have an index, if you can't
find the actual index numbersfor a beginning end, you can use
a low-cost index fund toaccomplish roughly the same
thing.
This isn't precision.
It's like when you put a markon the wall, when you're
measuring your kids as they'regetting taller.
It's rarely scientific.
(19:56):
It's just put a ruler againsttheir head and then draw a mark.
Mark Robinson (20:00):
That's probably not as accurate as them going to
the hospital and getting aheight measurement, but good
enough so let's summarize thisif you are investing in a 401k,
on your statement or when you'regoing through the selection
process for what you want toinvest in, they have all the
active managers or the indexesthat you can invest in, but they
(20:21):
also have benchmarks.
So you have the benchmarks thatare typically provided by
whomever the 401k vendor is, andthere are appropriate
benchmarks for the mutual fundsin that category.
Pick one.
You can use that If you want todo this yourself.
Often it's right there for youhow your asset allocation did in
(20:42):
relative to a benchmark.
That's right.
Or you can do it yourself.
You can pick another benchmark.
That's right, because usuallythey have two or so
representative benchmark or acategory yeah, investment
category, average in there.
So you can do it that way inyour 401k.
You can do that.
Also, if you have an IRA, youcan find an appropriate
benchmark Because often if youjust go into a service and you
(21:05):
put in the name of your mutualfund, the ticker or the name of
it, it'll show you what theinvestment category is and the
index.
All right.
So now you already have yourindex so you can cobble together
your performance relative tothat index.
That compared to what, if youso choose to do that yourself.
So, as our example before was60% in stocks and 40% in bonds,
(21:28):
so if most of your stocks are inthe S&P 500, grab that number
40% are in bonds and they saythat's the bar cap intermediate
bond.
Okay, I got that number.
Now you can do the math as wetalked about in our last podcast
and see what your blendedbenchmark you called it a
sandwich.
When you bring the two together, measure them separately and
then bring them together intheir weighted percentages, it
(21:52):
can be interesting, it can befun, if you like numbers.
Keli Alo (21:56):
Yeah, and I know I'm pretty hard on that, but You've
been examined several times forconsidering calculating returns
as fun.
Mark Robinson (22:06):
But, as you said last week, you rarely pay
attention.
Keli Alo (22:09):
I try not to listen.
I'm never disappointed when I'mnot listening to you.
Welcome to Bullshit on Stilts, a podcast hosted by two
guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice Identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it All, right.
So today, on Bullshit on Stilts, we're going to continue on
(00:44):
with our sequence of breakingdown spotting sloppy investment
advice.
Right, that was our episodeseven, where we really
introduced the Fab Fivequestions.
Right, and Mark, walk throughthose Fab Five questions real
quick when it comes to helpingpeople have control in their
investments and spotting sloppyinvestment advice.
Mark Robinson (01:05):
Sure.
Number one is what do you own?
Number two why do you own it?
Number three how you doing.
Number four compared to whatand number five is what?
Keli Alo (01:18):
am I paying for?
That's right, yeah.
What are my total costs?
So today we want to focus onquestion number four, right
Critical question of comparinghow you're doing question number
three to something that ismeaningful.
It's a independent measure ofwhether you're doing good or bad
(01:40):
or whatever, rather than justconjecture right, right, which
can overstate or understate howyou did, sure.
So do 401k accounts and theirstatements.
Do they show you how you'redoing compared to something, or
do they just say, hey, here'show you're doing Indeed, and in
fact they are mandated to.
Mark Robinson (02:00):
So when you are selecting funds or when you are
shown your return, they willshow a representative benchmark,
and by that I mean if you're,let's say, in large cap stocks,
you'd be measured against anindex like the S&P 500 or the
Russell 1000.
So it gives you how am I doingand compared to what?
Keli Alo (02:21):
Yeah, so real quick, you can take a look.
And if I don't know how it'srepresented, I'm sure different
401k providers have differentways to present that.
But let's say your chart islower than the index chart, you
know you're probably not doingas well as the index over
whatever time period themeasurement is provided for.
Is that fair to say Correct,okay.
(02:42):
Is that fair to say Correct,okay.
And if your bar or your pieshape or whatever is larger than
the comparative index orbenchmark, then you're doing
better Victory.
Mark Robinson (02:52):
For that snapshot .
You're doing better, yes.
Keli Alo (02:54):
Okay, you had mentioned during the last
podcast, which was how you'redoing, that while active
management has outperformedindex or passive investment
management for maybe one, two orthree years, but over longer
periods of time, it's extremelydifficult to actually outperform
(03:15):
the index when you take intoaccount the cost of the active
management, the trading going on, which there is a cost to the
internal trading of things andso forth.
So I think that this becomes,like you just said, for the time
period that's measured in your401k account that we're talking
about, if your bar is biggerthan the index bar for that time
(03:35):
period the last year, year todate, last three years, whatever
they're showing you at least inthat time period you've done
better.
If you expand the measurementfive years or 10 years maybe
you're not doing as well as inthat short time period.
Mark Robinson (03:51):
So what would be an appropriate interval?
So if we're talking aboutreturns, so how did I do?
And compared to what, what isan interval?
So certainly a monthlystatement.
All we're showing is noise forthe most part.
Yeah, just the ups and downs.
I'm sorry, but I cannot fixthis problem for you.
Keli Alo (04:03):
So certainly a monthly statement all we're showing is
noise for the most part.
Yeah, just the ups and downs.
Mark Robinson (04:05):
I'm sorry, but I cannot fix this problem for you.
So what would be an appropriateor useful probably a better
word a useful interval formeasuring that?
Would it be one year, threeyears, five?
Keli Alo (04:17):
years.
From my standpoint, when we'vedone the work for clientele and
helping them assess and measurethings, we typically look at
year-to-date one year, threeyear, five year.
We also look at calendar yearsBecause when you take something
that's five years, it hides theroller coaster.
(04:39):
It just says, well, over thefive years you've averaged 8.38%
on average.
But averages really don't tella story.
They just give you kind of athumbprint.
That's really not that telling.
However, if you look at fiveyears of calendar year returns
or five 12-month periods of time, you'll start seeing that
(05:02):
roller coaster.
So when the market correctedyear four, did your account
correct more or less than yourbenchmark?
That's important to know.
Going back to your question,tended to do one, three, five
years.
Beyond that, it becomestypically very different market
cycles, very different interestrates, maybe even different
(05:23):
portfolio management team at thehelm of the investment
portfolio you're using.
So all of those create a lot ofnoise beyond that.
Mark Robinson (05:31):
Yeah, and I think it can misstate the efficacy or
the inefficacy of what you'redoing if you measure over too
short of a time horizon.
And I think our focus ought notbe over the short term horizon
and I think our focus ought notbe over the short term.
Most things in life where wetruly accrue value are not
measured in short intervals.
It's more of a compounding overa multiple whatever the
(05:53):
interval is multiple month orquarter or yearly basis where we
can truly see if things areworking for us or not.
Keli Alo (06:00):
I agree with you, Juan , that investors, consumers out
there, non-professionalinvestors, let's say are very
focused on the near term.
What are you doing Last month,this quarter, last year, this
year, whatever?
They're very because it's, theycan feel it, it's tangible,
they're living it right now.
So they tend to look at thatand then want to make decisions
(06:24):
based on their belly andemotions.
Mark Robinson (06:26):
And I feel sorry for you.
Keli Alo (06:28):
Around what they're doing.
It's not working.
It is working, and yet when wetalk average investing returns,
typically we're talkinglong-term averages 10, 15, 20
years and if you're alwayschanging the method by which you
want to get from a to b, younever get to be all the time.
Even more so now right.
Mark Robinson (06:49):
Sure we can get caught up in the short-term
returns, like many did in thelate 90s when technology stock
funds were going up 50, 70, 100percent a year.
Keli Alo (06:59):
Yeah, the old monkey throwing the dart at the
newspaper yes, you make fun ofme.
You're bringing up monkeysagain you just don't like
monkeys for some reason I don'tget it.
Well, you did mention it wasyour birthright.
It was, yeah, born of themonkey.
I mean that means a lot.
And what a lot of people don'tnecessarily appreciate is when
you look at an index, whetherit's the S&P 500, the Russell
(07:30):
1000, the Russell 3000, theWilshire 5000, I mean they're
just oodles and oodles ofindexes out there.
But when you're measuring that,what you're actually looking at
is a large like 90 plus percentof the US stock market in my
example.
As a result, what's in it isevery industrial sector and
segment is typically representedin that one investment holding,
typically represented in thatone investment holding.
Peanut Gallery (07:45):
Hey guys, this is the Boots Kelly.
You're getting this wrong again.
Industrials is one of 11sectors in the S&P 500 index.
There's a whole bunchtechnology, financial services,
communication services but onlyone industrial sector Jeez.
Keli Alo (08:12):
So do you really need more technology when the S&P's
value has been driven by Netflix, amazon, google I mean all of
these companies are in there Doyou need to have a specific
exposure to it?
That's up to you as anindividual whether you want to
have more exposure to a segmentof the market.
But if you buy the S&P, if youbuy the Russell 1000 as an index
(08:36):
investment and a passiveinvestment, saving on management
fees and saying you know, longterm I'm going to be just fine,
you have technology, you haveoil and gas, you have consumer
cyclical and defensive you haveall of those segments
represented.
Mark Robinson (08:53):
I think one of the problems that individual
investors run into and certainlymarketing doesn't help is we
want to get in there and help.
Am I even on?
Yeah, I am.
Keli Alo (09:04):
I actually didn't turn it off.
I don't know where that's goingthis time.
I didn't turn it off.
We're interested in what youhave to say.
Mark Robinson (09:09):
Mark, we want to get in there and help, but it
might not be the most effectivestrategy if what we're trying to
do is build wealth over thelong term for your serious money
.
I'm not disparaging stocktraders at all but I think for
your serious money, it's betterto buy large indices, whether
it's through active managementor through passive index
(09:31):
investing, than to try to useyour expressions in the
marketplace and what you thinkyou ought to be investing in as
a way of building toward aterminal wealth value.
More often than not, the betterapproach is just to let the
markets do their thing.
Peanut Gallery (09:49):
Hell yeah, that's what I'm talking about.
Mark Robinson (09:52):
The better approach is just to let the
markets do their thing.
Keli Alo (09:56):
I agree with that.
Generally speaking, I've workedwith people that are very, very
good at selecting stocks andrunning their accounts.
Mark Robinson (10:04):
How do you know?
They were very good.
Keli Alo (10:06):
Based on looking at their statements and analyzing
it for them on a quarterly basis.
So you compared it, yeah.
So, getting back to the,compared to what?
Yeah absolutely.
Mark Robinson (10:12):
In my experience, most didn't it.
So, getting back to the,compared to what, in my
experience, most didn't, it feltgood, so it was good.
How am I doing in compared towhat?
That has more meaning when it'smeasured over longer intervals
of time and it takes thecompetitiveness out of it and it
adds in more of what we shouldbe thinking about or evaluating
(10:33):
is efficacy, not thecompetitiveness.
Did I beat the S&P 500 thisquarter or this year?
It might be an excitingobservation, but is it important
, right?
What about my asset allocation?
Not so much about the securityselection, but I'm measuring
against a broad index.
(10:54):
Yes, and that's more at theasset allocation level, not at
the security selection or how mymanager did.
Why don't you repeat againwhere does return come from?
Right?
Keli Alo (11:04):
Where do we derive return from in investment
portfolios?
So these are portfolios, stocks, bonds, cash and so forth.
But if my memory serves,portfolios, stocks, bonds, cash
and so forth, but if my memoryserves, roughly 88% of your
return and your risk over timeis attributable simply to the
decision of your mix.
What percentage do you have instocks, bonds, cash and or
(11:26):
alternative investments, yourasset allocation or your
allocation plan?
88% goes there, not who managesit, not what investment house
manufactures it, not even thatthey decided to buy Lowe's and
not buy Home Depot.
The manager and the securitiestogether were less than a 10%
(11:47):
determinant of long-term returnand risk.
So what we've been talkingabout quite a bit has simply
been let's focus on the8,800-pound gorilla in the
equation and let's not worryabout the 9, 10% or 90 to
100-pound gorilla, which ismanager, security, selection and
so forth.
Mark Robinson (12:07):
Show me that you're approximating the
benchmarks that represent yourasset allocations to stocks,
bonds, alternative investments.
Show me that Once you showefficacy there with the basics,
the compulsories, then we cantalk about how you selected your
small cap technology stock.
Keli Alo (12:27):
Let's talk about how do you compare?
So, compared to what, I'llthrow some things out, or if you
want to throw things out.
Mark Robinson (12:33):
We're going to start with this whole podcast oh
excuse me.
Keli Alo (12:39):
In fact, just disregard everything you've
heard thus far and we're goingto start now.
When you're comparing yourinvestments, there are different
comparisons and we've referredto the S&P 500, boatload right,
but that's not the only index.
S&p 500, boatload right, butthat's not the only index.
As we've talked about, if I'min large company stocks in the
(12:59):
US, s&p 500, claire is an indexI can use to compare my large
company stock holdings to theS&P 500.
Mark Robinson (13:08):
Fair Fair Is that the only one, no, but it is the
most recognized and mostreported by yes with the S&P 500
.
Keli Alo (13:17):
Yeah, every night on news you'll hear what the S&P.
Mark Robinson (13:20):
Now you can get into other indexes, like the
Russell 1000, which is puttogether differently than the
S&P 500 is.
Yes, and if you choose to usethe Russell 1000, and here's
where we start getting into thefineries of this that I don't
know whether they addincremental value.
Now, once you've demonstratedto me that you are saving on a
regular basis and you havearrived at the amount that you
(13:44):
need to be saving on a regularbasis, your asset allocation
comports with your need for acertain rate of return for a
given risk level.
And you're aware of yourreturns, now that we're starting
to measure them againstsomething, the compared to what.
Now you've matriculated up towhere we can start to talk about
(14:05):
what is a more appropriatebenchmark.
Is it the S&P 500, or do youwant to use the Russell 1000?
And Kelly real quick, 500, ordo you want to use the Russell
1000?
And Kelly real quick, explainthe difference between how the
S&P 500 is constituted and howthe Russell 1000 is.
Keli Alo (14:21):
When we're thinking about the S&P 500 versus the
Russell 1000,.
Both represent the US stockmarkets, both represent large
companies that are listed in theUS, us domicile companies, and
both, really, when you look atperformance, when you look at
risk factors, when you look atvolatility, they're right on top
(14:41):
of each other.
It's like they're playingpiggyback.
Mark Robinson (14:43):
Yeehaw.
Keli Alo (14:46):
It becomes academic.
I can tell you thatinstitutions prefer to compare
their investments in largestocks in the US to a Russell
1000 or a Russell 3000.
They prefer that over the S&PInvestment managers that sell
products to retail investorsprefer the S&P 500 because it's
(15:08):
reported and it's widely knownand it's somewhat familiar.
Almost nobody outside ofinstitutional land relies on the
Wilshire 5,000.
Now what's interesting is againanother US stock market index
that you could use to compare.
It now houses over.
Well, last time I looked it waslike over 7,200 stocks make up
(15:30):
the Wilshire 5,000, which is alittle confusing to my brain.
Mark Robinson (15:34):
Well, you're making progress because, you
used to call it theWorcestershire 5000.
Keli Alo (15:38):
I did, yeah, and if you mix that with ketchup it is
absolutely delicious with steak.
Just another purpose for ourindex Absolutely, absolutely.
So there are other indexes tomeasure by what's your
preference.
We typically will use the S&P500 when it comes to US large
cap stocks.
When it comes to US medium sizeor mid cap companies, we'll
(16:02):
typically rely on the S&P 400.
And if we're looking at smallcompanies listed in the US small
stock companies, otherwiseknown as small cap we'll rely on
the S&P 600.
We can use other indexes, soRussell 1000, we can use Russell
2500 for small and mid cap.
We can use all sorts of indexes, but we typically refer to the
(16:24):
S&P simply because of thefamiliarity and it's easy to
find.
And at least on the 500, you'regoing to hear what happened
there every night on local andnational news.
The Fab Five questions when itcomes to spotting sloppy
investment advice is reallyaround confirming for yourself
that you are indeed in controlof your investments.
(16:44):
And so it's built inchronological order.
What do you own?
There's the first question.
You can't go on to how you'redoing unless you know what you
own.
You can, but then it's kind ofself-defeating.
It's like I really like thatdish you made.
Can you give me the recipe.
I don't have a recipe.
No recipe, don't know how Imade it, but I'm glad you
enjoyed it.
(17:05):
So it's chronological.
What do you own?
Why do you own it?
How are you doing now comparedto what?
Here's something that I thinkwe haven't touched on and I
think it's important when itcomes to compared to what.
When you look at your statement,there's oftentimes ITD as an
acronym associated with somekind of a return that's reported
(17:27):
to you ITD standing forinception to date.
So what happens if I invest mymoney and I'll just use 401k as
an example?
Let's say I started tocontribute to my 401k and my
money's automatically going in.
It's going to be really simpleand I'm investing in an S&P 500
index fund and the first date ofmy purchase is October 6th of
(17:52):
XYZ year, and now it's December31st, two years later.
How do I compare my inceptionto day performance compared to
an index when my first dayinvested was October 6th?
How do I come up with figuringout what the index did if it's
not presented for me and I'lltell you how I do it I will
(18:15):
sometimes look at the indexitself, but it's non-investable,
as we've kind of alluded to inthe past.
The S&P 500 has an index.
You can't invest in it, butthere are mutual funds and
exchange traded funds, indexfunds, that do just that.
So you pick one of those fundsand you go back to the
historical value of the price.
On october 6th of that year,your start year, let's say the
(18:38):
price was a hundred dollars foran s?
P exchange traded fund, anindex fund, and then you take it
all the way to today, whatyou're trying to measure, and
what's the s?
M?
P funds share price now, let'ssay it's 150, I now have my
start and my end values and I goback to how am I doing?
(18:59):
I take my end value 150, minusmy beginning value 100, divided
by 100 times 100.
And guess what?
In this example, I'm going tocome up with my index that I'm
comparing my personalperformance against as a
estimated simple return number.
And now I know how tall thatS&P index is from October 6th to
(19:24):
this year, two and a half yearslater.
Mark Robinson (19:26):
So you can do an interim point in time rather
than doing it on a quarterlybasis or an annual basis based
on your inception, if that'simportant to you.
Keli Alo (19:36):
But the point is, if you have an index, if you can't
find the actual index numbersfor a beginning end, you can use
a low-cost index fund toaccomplish roughly the same
thing.
This isn't precision.
It's like when you put a markon the wall, when you're
measuring your kids as they'regetting taller.
It's rarely scientific.
(19:56):
It's just put a ruler againsttheir head and then draw a mark.
Mark Robinson (20:00):
That's probably not as accurate as them going to
the hospital and getting aheight measurement, but good
enough so let's summarize thisif you are investing in a 401k,
on your statement or when you'regoing through the selection
process for what you want toinvest in, they have all the
active managers or the indexesthat you can invest in, but they
(20:21):
also have benchmarks.
So you have the benchmarks thatare typically provided by
whomever the 401k vendor is, andthere are appropriate
benchmarks for the mutual fundsin that category.
Pick one.
You can use that If you want todo this yourself.
Often it's right there for youhow your asset allocation did in
(20:42):
relative to a benchmark.
That's right.
Or you can do it yourself.
You can pick another benchmark.
That's right, because usuallythey have two or so
representative benchmark or acategory yeah, investment
category, average in there.
So you can do it that way inyour 401k.
You can do that.
Also, if you have an IRA, youcan find an appropriate
benchmark Because often if youjust go into a service and you
(21:05):
put in the name of your mutualfund, the ticker or the name of
it, it'll show you what theinvestment category is and the
index.
All right.
So now you already have yourindex so you can cobble together
your performance relative tothat index.
That compared to what, if youso choose to do that yourself.
So, as our example before was60% in stocks and 40% in bonds,
(21:28):
so if most of your stocks are inthe S&P 500, grab that number
40% are in bonds and they saythat's the bar cap intermediate
bond.
Okay, I got that number.
Now you can do the math as wetalked about in our last podcast
and see what your blendedbenchmark you called it a
sandwich.
When you bring the two together, measure them separately and
then bring them together intheir weighted percentages, it
(21:52):
can be interesting, it can befun, if you like numbers.
Keli Alo (21:56):
Yeah, and I know I'm pretty hard on that, but You've
been examined several times forconsidering calculating returns
as fun.
Mark Robinson (22:06):
But, as you said last week, you rarely pay
attention.
Keli Alo (22:09):
I try not to listen.
I'm never disappointed when I'mnot listening to you.
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