August 16, 2024 • 32 mins
Ever wondered why you own the investments you do? On this episode of "Bullshit on Stilts," we unravel the mystery behind your portfolio choices, helping you maintain control and avoid decision regret. We'll discuss the importance of aligning your investments with your time horizon and objectives, ensuring your portfolio reflects your financial goals and risk appetite. By understanding the ‘why’ behind your investments, you can create a robust strategy that stands the test of time.
Is a US Treasury bond always the safest bet? Think again. We tackle the complexities of interest rate risks, comparing Walmart bonds with short-term maturities to long-term US Treasury bonds. You’ll discover how inflation can erode the perceived safety of long-term Treasuries over time. With practical advice on balancing risk tolerance and meeting financial goals, we’ll help you navigate the psychological challenges of staying disciplined in your investment journey.
Did you know that asset allocation is the key driver of long-term returns and risk? Inspired by the landmark Singer Bebauer Brinson study, we emphasize the importance of making strategic allocation decisions based on your time horizon, objectives, and risk tolerance. From saving consistently to choosing between similar index funds, we’ll explore how adjusting savings rates can mitigate risk for conservative investors. Join us for a blend of serious analysis and playful banter, aiming to optimize your portfolio and keep you on course towards your financial aspirations.
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.
Speaker 1 (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 welcome to Bullshit onStilts.
Today we're going to focus onwe're still in our course of
(00:47):
focusing on the Fab Five forinvesting.
This one is arguably the mostimportant.
Number two in the discussion iswhy do you own it so, mark?
Why is this so important?
Why does it make a differenceif I know why I own it?
I know what I own.
I got all my percentages inplace.
I get it.
Speaker 2 (01:07):
Why do I need to know why I own it?
Because we all need to be alittle bit freaky when it comes
to control.
That's why so this is a controlthing.
Speaker 1 (01:15):
You bet it is so if you don't know what you own.
Speaker 2 (01:18):
You can't explain why you own it, which means you
don't have control.
So this is about, not therationalizations of why you have
something in your portfolioWell, it was sold to me, or you
know.
I don't know which is probablythe most honest answer out of
all of it.
Most frequent too?
Yeah, most frequent, but youneed to know why.
(01:39):
And if you can't articulate why, then you're not in control.
So the why is a very scaryquestion that you need to answer
to confirm that what is in yourportfolio is what ought to be
in your portfolio.
Speaker 1 (01:53):
So this is sort of like a validating question.
You know what you own and nowyou got to validate why you own
it.
If you own all bonds but yourinvestment objective is growth,
we may have a disconnect andalso, in articulating it, while
it does validate, it also isreconfirming.
Speaker 2 (02:10):
Or have things changed for me?
Yeah, and I need to rethinkthis.
And if I'm rethinking the whys,I got to rethink the what I
don't wanna.
What do I own?
Speaker 1 (02:20):
Indeed, you do.
Yeah, one of the things thatI've seen in people is people
want the cake and they want toeat it too, and they don't want
any risk.
And so sometimes what Iencounter or have encountered
has been people that want an allstock portfolio return, without
the all stock portfoliovolatility, and oftentimes, when
you are able to go, I know whatI own and I understand why I
(02:44):
own it, and they validate eachother, they confirm that they're
working in concert so I can goon to the next step, so to speak
.
Within the social media area,right, there's all sorts of
quote unquote experts espousingdifferent returns and if you
just do this, you can be amillionaire too at this age, and
so forth and so on, but none ofthat is know why you own it.
(03:05):
None of that has anything to dowith know your why.
It's simply saying 12%, this ishow much you need to save.
You'll be a millionaire.
That's how simple they putthese things.
How does a person avoid decisionregret In our world?
We look at it and say there's aFab Five.
(03:26):
What do we own?
Why do we own it?
How's it doing compared to whatthe total expense is?
So then, when we're talkingabout.
Why do you own it.
What's a good answer?
Look like All right.
Speaker 2 (03:36):
So let's set a context for the why.
The context should include yourtime horizon, your investment
objective and then, within theinvestment objective, typically
it includes an acknowledgementof the amount of risk and I call
it volatility, not risk thevolatility that you are willing
(04:00):
to accept in the portfolio toeither avoid or to bring it on.
So in the investment objectivethat's intellectual we're
talking about well, I want along-term growth, or I want
moderate growth.
Well, that all sounds verybenign until the markets don't
make it look anything like thatas to what you have experienced.
So we need to often considerthe amount of volatility that
(04:24):
you're willing to take on.
And that's more visceral.
And, kelly, that's whyvolatility and visceral both
start with Vs.
Speaker 1 (04:33):
So let's back up for a second.
We talk risk, we talkvolatility.
When the investment world talksabout risk to the consumer,
they're really talking aboutvolatility, right?
The difference between thehighs, the lows, the changing
variation of the value ofinvestments that you own.
Is that correct, correct, okay,and so when we're thinking
about you, you said time horizon.
Give me some examples of timehorizon, because to us it's
(04:58):
important, but to Mr and MrsConsumer out there, I don't know
.
Speaker 2 (05:02):
Good question.
Usually time horizon and thisis general and give me some
slack on the number of years butshort term is usually one to
three years.
Ultra short could be justwithin a 12 month period.
You have intermediate term thatmight be from five to 10 years
and then we have longer term,which is typically 10 years and
(05:23):
longer.
Now what's interesting is thebehavior of markets.
Different types of markets orinvestment asset classes for
example, cash, bonds and stockshave a level of predictability
within particular time horizons.
Very difficult to predict whatindividual stocks or an index is
(05:44):
going to be doing over a12-month period.
What's the return going to be?
I think it's measured on twohands the time over the last 100
years where stocks actuallyreturned their average rate of
return, yeah, it's like a 4%.
So for predictability we needto know the time horizon so we
can more adequately match up amix of asset classes that might
(06:07):
perform close to what ourexpectations were, also based on
your objective within that timehorizon.
So time horizon is veryimportant.
Investment objective oftenthere's no set definition of
long-term growth for aninvestment objective.
There's no set definition formoderate growth and income.
It's really set by theinvestment house.
Speaker 1 (06:28):
What the?
Speaker 2 (06:29):
hell.
Speaker 1 (06:29):
Merrill Lynch has theirs, wells Fargo has theirs
In terms of what they title,each type of account Of what
they title those are and what itmeans.
Speaker 2 (06:36):
Yeah, so as part of this, when we talk about your
investment objective, when youare filling out your new account
form, to determine what issuitable or appropriate for you,
you've got to read what theinvestment objective is and then
repeat back to the advisor.
Does this mean this, or frameit in your own words so that
(06:58):
you're really matched up withwhat that investment objective
is trying to convey?
Your investing in or yourobjective is?
Speaker 1 (07:06):
I think that for people out there that are not
professionals in financialservices, I think it's very hard
to understand that stuff.
I think, ultimately, when itcomes to a short-term objective
let's say one to three yearsfrom an investment
implementation standpoint,professionals out there are
trained to reduce volatility inthat goal, because you can't
(07:29):
afford to wake up in two yearsand have your $100,000 worth
$80,000 because the marketcorrected.
So what you'll find is theprofessionals will recommend
things like certificates ofdeposit, short-term bonds,
things that have very littlereaction to market environment.
Speaker 2 (07:48):
You mean short-term?
Speaker 1 (07:49):
individual bonds.
Short-term individual bonds,absolutely yeah, they could be
in a fixed annuity if they'reworking with an insurance agent,
because that's an insurancecompany's form of a certificate
of deposit, for instance acertificate of deposit, for
instance.
So the point is is that yourshort-term goal will normally
draft a strong-handed advisor torecommend a very risk-averse
(08:12):
investment plan for that money,because the biggest issue for a
short-term goal is to lose themoney that you set aside to take
care of that goal.
Conversely, when we have along-term time horizon, you'll
typically find people have morestocks involved in that plan.
It might be a lot moredepending on the time horizon
(08:33):
we're talking about.
But as an investor, why doesSusan advise or recommend just
putting money into some CDs forgoal one, which is two years
away, and then, on the flip side, susan's recommending that I
put 80% of my money into stocksin my retirement account because
I don't plan to retire foranother 40 years?
(08:54):
As an example, it really drivesit and if you're in a medium
term, don't be surprised if theadvisor comes back and
recommends something that'ssomewhat balanced, maybe roughly
about 50% stocks and 50% bonds.
As an example, you get some ofthe oomph, but not all the
downside of 80, 90% stockportfolios when market's correct
.
Speaker 2 (09:14):
Does that make sense?
You bet it doesn't.
That's what pension funds do,is they have what are called
dedicated portfolios.
They know what theirliabilities are over the next
year or two years and theyallocate accordingly, and that
is in short, instruments thatcome due at or before.
They need that money For thelong-term liabilities.
It's pretty much in equities,and the reason is do you want
(09:37):
the best performing asset classwhen measured over 20 and
30-year periods, or the secondor third best?
Speaker 1 (09:43):
That's right, that's exactly it, and so time horizon
is a critical component to howwe develop the recipe, which is
your investment plan right,correct With know what you own
and why you own it.
Here you were talking about how, let's say, your investment
objective is growth.
You're 20, 30 year old, you'rejust starting out, you're
(10:03):
putting money into your 401k andyou really want to grow that
money.
What would be an example ofmaybe a likely recommendation
from an advisor, or even a 401kplatform once you go through
your questionnaire and youarrive at growth, is my.
What would that look like forthat person?
Speaker 2 (10:21):
Depending on certain preferences or idiosyncrasies
that they have.
It would be primarily a stockportfolio and that could be
mixes of domestic or US largecap.
It could be mid cap, dependingon how complicated you want to
make this or how specific youwant to get.
It could have small cap stocksin that with index funds and
(10:42):
some mix therein.
It could have small cap stocksin that with index funds and
some mix therein.
It could be internationalstocks, large cap, foreign
emerging markets.
This is where you can, as anartist kind of form the matter
of your portfolio to yourcertain preferences or just what
you think is kind of cool andyou want in your portfolio.
And that is helpful because thewhy you can say I kind of
(11:08):
helped with this.
So it's an expression of myview of the investment world
over the short term or the longterm, or a combination, and I
can keep that very narrow orvery broad.
If I have a long-terminvestment objective and I'm
still very conservative, though,I've got some thinking to do.
What do I want to be afraid of?
(11:28):
What are you talking about?
What do I want to be afraid of?
Interim volatility over thenext 20 years or having
insufficient funds to retire on?
I got to choose one.
I can't have them both.
Speaker 1 (11:41):
You do ultimately have to make choices right when
you're planning on yourinvestment objectives, and you
used to have a discussion withfolks around risk and how risk
is defined by the individual,their needs, their goals, their
ability to save.
All these things come into thepicture and I think, if I recall
right, most of the investmentworld focuses people on
(12:04):
volatility as risk how much it'sup or down, how much you could
lose in a bear market, thosekinds of measurements.
That's how they're taught toview things.
But you make a great argumentaround risk.
If you're averse to risk, youdon't like risk, and you have 40
years to grow your money andyou put your money in the
savings account in your bankpaying you 0.05% a year, what
(12:26):
risk does that investor havewhen it comes to their 40-year
goal of retiring someday with Xdollars or whatever?
Can you comment on thedifferences where the market
always looks at risk fromvolatility, tipping the ups and
downs, the roller coaster,whereas depends on, as you were
talking about earlier, what isyour unique circumstance?
And in the example earlier, ifyou're conservative, trying to
(12:48):
circumvent interim volatilityand play it really safe, what
kind of risk is that personfacing?
Speaker 2 (12:53):
Let's put risk into context.
Let's put it into interest raterisk.
What's more risky from interestrate risk?
A Walmart bond 5% coupon thatmatures in 18 months, or a US
Treasury 30-year bond at a 4%coupon that matures in 30 years?
From an interest rate risk,which one's more risky?
(13:15):
A long-term bond, the USTreasury?
Yeah, Not the Walmart A-rated,but the US Treasury is more
risky.
Tied to what?
To the term right?
Speaker 1 (13:25):
Yes, that long term, because the longer a bond is,
the more violent it reacts tochanges in the interest rate.
Speaker 2 (13:31):
Sure.
So the propaganda is that theUS Treasury is the more secure
investment over Walmart.
That's what we're told.
But in an interest rateenvironment and long term, which
one has more risk from aninflation?
It's the US Treasury, yes.
So the other thing is withinflation, also in time horizon,
(13:52):
what's more risky being inmoney markets and CDs If what
you're trying to do isaccumulate sufficient assets
over a multiple year period toretire?
What's more risky?
A US Treasury, bond or thestock market?
Yeah?
Speaker 1 (14:10):
What are treasury bonds?
So I used to work with anorganization and they started to
focus on speaking to consumersthe way consumers think about
investing, not the way thefinancial service industry likes
to talk, which is with theirjargon and their definitions and
so forth.
So the organization identifiedthree true risks to investing.
(14:33):
It really is simple.
The first risk is you don'taccumulate enough or the amount
you need for the future use.
Speaker 2 (14:40):
So there's a shortfall.
Speaker 1 (14:41):
There's a shortfall in the accumulated amount of
monies that you were able toaccumulate in your investment
account.
Retirement's a great example.
Maybe funding college isanother example of that.
The next risk was not achievinga required return, and a
required return is simply thisMathematically, we can figure
out if you're going to save somuch money and you have so much
(15:03):
time horizon and you have a goalof, let's say, accumulating a
million dollars in a retirementaccount.
Based on how much you can saveand how much time you have, we
can figure out.
Here's the required return youneed to achieve in order to have
a high probability of attainingthat value of a million dollars
or to meet liabilities.
(15:25):
Yes.
And then the last one is simplynot having access to your money
.
Speaker 2 (15:30):
Give it back.
Speaker 1 (15:31):
Liquidity.
As an example, a number ofthings come to mind Limited
partnerships, hedge funds,private equity funds, but also
annuities, really, that havetypically surrender penalties If
you want to take your money outof the annuity before five
years or seven years or nineyears, and some have 15 years of
surrender penalties.
Speaker 2 (15:51):
Oh my God.
Speaker 1 (15:52):
Meaning you can only take a little bit out before you
start getting penalized.
So these are things that are anatural part of investing, and I
think that for people out therehow do you come at know what
you own, but why you own it?
Part of that's going to be well, how much do you need?
What rate of return do we haveto get in order to achieve this?
Putting a couple thingstogether.
(16:14):
If you're a person thatnaturally is risk averse, like
my sister she doesn't trust thestock market, but she needs
that's not what she said.
Speaker 2 (16:21):
She said she doesn't trust you with her money in the
stock market.
That was it.
Speaker 1 (16:25):
That's what it was.
See, I need that insight.
So in her case, she wants toaccumulate so much money, but
her money is in cash.
It's earning less than 2% ayear.
She needs a 7% return.
I can tell her, without beingmean, you're not going to reach
your goal, just not going tohappen in your time horizon,
(16:46):
based on 2%, when you reallyneed a 7%.
So for you to apply this inyour own world, knowing why you
own it is going to be, how muchdo you need?
Is liquidity of issue and doyou know your required rate of
return which, by the way, your401k platforms?
All you have to do is enter alittle bit of information and
the calculator will tell you.
Speaker 2 (17:04):
It's pretty simple when we talk about risk and your
sister again on getting 1% and2%.
You just like talking about herbecause she doesn't like me.
Speaker 1 (17:13):
Let me just say we have some things in common.
Speaker 2 (17:15):
Kelly.
So she's willing to get one andtwo percent, knowing that
really she needs six or sevenpercent.
But you know what that'smindset?
It's a mindset, a view of theworld, almost a metaphysics.
And I remember a counselor whowas formerly a priest who said
many of us, most of us, navigatewith practice sails the shallow
(17:37):
waters of our lives, neverstriking out for deep blue.
And so we can leave so much onthe table and experience and all
of the opportunity therein bymaybe moving out of that 1% and
2% rate of return so that lifecan open up for us and we may
have a more spacious, morequality experience in our lives.
(17:58):
You're not going to talk themout of it.
Speaker 1 (18:00):
People come to the table when it comes to saving
money.
First of all, you have tochoose not to spend it.
That's a tough decision,especially in today's economies
that we've been living in, withinflation and so forth.
There's two rules to being agreat investor.
First rule is save money.
Second rule is invest and keepit invested.
Pretty simple, well, that'seasy.
Speaker 2 (18:20):
Yeah, it is, that's real easy.
Problem is nobody does that.
That's right and one of thehardest things, because the
brain is not wired for long-termcommitment and consistency in a
thought and the application ofthat.
It just isn't.
So when we say we can get 10,11, 12% in the stock market and
you have to take the volatilitythat goes with it Roger got it.
(18:43):
Okay, yeah, until the marketgoes down, that's right.
And then you sell.
Speaker 1 (18:47):
Yeah, we've had conversations where, just as a
practical matter and this is alittle bit far field for a
second, but one of the bestthings going out there is all
the coupons that come to houseright, and one of the biggest
coupons outsized because itsticks out is always Kohl's.
Kohl's always has a 20% giftcard for someone, and so people
(19:07):
count and look forward to theirKohl bucks, their Kohl coupons
and all of the rewards so thatthey can go out and spend money.
Why do people rush to Kohl's?
Because they're going to get a20% savings on today's purchase.
Well, what's a bear market?
It's defined as arbitrarily, asmore than a 20% decline in the
(19:27):
general price of the overallstock market or bond market,
whatever market we're talkingabout.
So if you're 20, if you're 30,if you're 40, if you're 50, and
the stock market experiences abear, that's Kohl's coupon
Stocks are on sale.
This year they're on sale for30% off.
In 20 years.
Will the stock market be higheror lower?
(19:48):
Well, historically, the answeris it'll be higher.
I don't know by how much, butif you view it as everything's
on sale, then you startinstitutionalizing in your brain
.
View it as everything's on sale, then you start
institutionalizing in your brain.
If the bear market's happeningnow and I'm 38 years old, I
should be buying more of themarket just systematically as a
part of my contribution to my401k or my savings account.
Speaker 2 (20:08):
So a bear market is a decline in the stock market.
And what is the stock marketcomposed of?
Stocks from corporations,publicly traded corporations, so
the very ones that you'll runout and buy when they go on sale
.
Yes, true, you're buying thosevery corporations and their
products, but suddenly you'rescared because those stocks of
(20:29):
those corporations are down.
That's right.
Speaker 1 (20:32):
So if you view it as the stock market's on sale, if
the news media actually reportedgreat news stock market's on
sale.
Today it's down 10% you knowhow many wives would be out
there buying the stock marketBecause of sale.
I don't know how many times Iwas told how much money I saved
today with four bags of shoppinggoods in hand.
But if media started reportingit's not a bear market, market's
(20:55):
on sale, market's discountedthis month all the way to 30%.
If you're looking to build yourportfolio, this is a great time
to buy those stocks, yeah, butyou know that's that doesn't
sell.
Screaming hysteria and fears.
You got it right there.
Yeah, that's what sells andthat's part of the problem.
But if you're listening to thisand if you're willing to do
(21:17):
anything and you're willing tosay, hey, the bear market's
happening like in 08, nobody intheir right mind was putting
money to work, the people withthe right minds, like Warren
Buffett.
He waited 25 years to buy,strike the deal with Goldman
Sachs, to get preferred stocksin Goldman Sachs, and he put, I
think, $10 billion into thatcompany, but he waited 25 years
(21:37):
to do it.
So there are great investorsout there that think just like
we're talking about Market's onsale time to buy.
Speaker 2 (21:48):
The problem is most investors.
The problem is not in themarket.
It's in ourselves and ourperceptions and reactions to the
market.
And that's always the bugger.
We as humans, we're confoundingmessy little things.
What's the deepest part?
Speaker 1 (21:58):
of our brain right, the amygdala right is the one
that really triggers fight orflight and that's the base stem
of our brain, and so it's reallychallenging to fight that
emotional factory Cortisolflowing and my 401k is a 301k.
Oh my God, what should I bedoing?
Are you 38?
The answer is go to your HR andsay, hey, I want to increase my
(22:18):
contribution Because, ifnothing else, you know, things
are on sale for 20, 30, 40.
Well geez, at the trough of 08,I think, the S&P was down 54%
at its worst point, Finished theyear down 30 something.
But the point is, if you hadcontributed more to your 401k
when the S&P was down 30%, 40%,50%, you're contributing $500 a
(22:40):
month.
Maybe this year you shouldcontribute $700 a month because
it's getting decimated, whichmeans you're buying a lot more
for less.
If you're 65 and you're goingto retire in a year, still
something to think about,frankly, because retirement's
going to be 20, 30, maybe 40years for you, that's a
long-term time horizon.
Speaker 2 (22:58):
Which is one of the values of a mutual fund and
periodic investing.
Speaker 1 (23:02):
Yeah, it is.
It's a great value.
You know what?
Before we wrap this up, let'stalk about what do you own and
why you own it.
There's seminal work out therearound.
What are the?
Speaker 2 (23:12):
contributors, I'm so glad we're finally going to get
around to what do you own andwhy you own it.
That's right, we haven't beentalking about that.
No, we haven't.
Speaker 1 (23:18):
But there's contributors to.
How do you arrive at whatpercentage you put in stocks,
bonds and cash?
And we've talked about it theSinger Bebauer Brinson study
back in the late 80s I think itwas mid-80s and there's been
studies since then.
But in that study what wasfound is look like 88% of your
(23:39):
long-term returns and risk areattributable to what percentage
you have in stocks versus bonds.
Is that?
Speaker 2 (23:46):
fair to say.
And why is that?
Speaker 1 (23:48):
Because when you look at the market, it's not
security selection, it's not.
Everybody always focuses oninvestments and they think, well
, I think I'm going to buy Apple, or I'm going to sell Apple, or
I'm going to put a short onApple, or what.
That's trading, that'sspeculating.
Investing is very different.
It's like sailing a boat, right?
So I think when you, whenyou're looking at this and
(24:10):
you're saying, okay, as anon-professional person, and I
need to accumulate money forretirement, let's make that as
an example here.
So you're going to put moneyaway, that's first.
Remember to be a good investor.
You got to save money.
The second thing is you got toinvest and stay invested.
So if you save the money, youdon't have to worry whether you
should buy Home Depot or Lowe's.
(24:32):
You don't have to worry ifyou're going to buy Ford or
Chrysler.
All you got to worry about iswhat percentage do you want in
stocks?
And then make a choice as towhat fund provides you that
stock exposure.
It's about the allocationbetween stocks, bonds, cash and
alternatives, which is the800-pound gorilla when it comes
(24:53):
to how did you do as an investor?
Speaker 2 (24:55):
So it explains most of your return comes down to
your allocation between cash,bonds and stocks.
Why?
Because bonds typically returnover multiple year periods
higher than cash and stocks overmultiple year periods return
higher than bonds.
It's that simple.
And then the security selectionwithin there is where our
(25:16):
industry likes to focus, andthen the security selection
within there is where ourindustry likes to focus and that
attributes for what.
Speaker 1 (25:20):
Kelly.
Speaker 2 (25:20):
It's like 6%, 6% or 7% of that.
Speaker 1 (25:22):
4% to 6%, yeah, somewhere in there, I think
security selection is actuallysubordinated in percentage
weight to the manager themselves.
I think the manager is around6% and I think security is
around 4%.
Speaker 2 (25:31):
So if how you want to express yourself is in security
selection, please understandthat most of it is at the asset
allocation level.
Speaker 1 (25:39):
Yes, I mean let's ask this question Is there any
difference between FidelityInvestments 500 versus Vanguard
500 index mutual funds?
Speaker 2 (25:48):
If there is Kelly, it is measured in expense ratios
or in hundredths of a percentageof return.
Speaker 1 (25:56):
Effectively no difference, so that if the index
has 4.3% weight to Apple, thenthe index funds of Vanguard
Fidelity enter any otherinvestment manufacturer name
Invesco, t Rowe, price all ofthose funds are going to have
4.3% in Apple, plus or minus athousandth of a percentage,
right, so it makes it a littlebit easier.
(26:19):
You don't have to get wrappedaround the axle that well.
We have Fidelity funds in my401k.
I don't have the Vanguard 500.
Peace, take the Spartan 500.
Same thing, no difference.
It doesn't matter who the coachis in Fidelity or Vanguard.
What part of the market do youhave exposure to?
Roughly the same expenses,similar names, in fact, exact,
(26:39):
similar.
Speaker 2 (26:39):
It's not a big deal.
Let's go from why you own itall the way down to know what
you own.
So presumably you should bemaking decisions at the asset
allocation level based on timehorizon, investment objective
and, at an emotional or viscerallevel, how much volatility
(26:59):
you're willing to experience.
Speaker 1 (27:02):
Yes, so time horizon right Short-term, medium-term,
long-term.
Then it was investmentobjective, the investment
objective being defensive,conservative, moderate growth,
using words like growth andincome and moderate or it could
be income income and growth,growth and income growth and
(27:24):
aggressive growth.
It just depends on what housesyou're working with.
And then the last one was oh,that's right.
Speaker 2 (27:29):
A gut check more of the your tolerance, yeah, your
tolerance.
Your volatility and tolerance,yeah, yeah, yeah.
Speaker 1 (27:34):
So that brings up a great point on saving and how
these all kind of intersect.
If your risk tolerance is lower, then obviously the
recommendation or the portfolioyou choose will probably be a
little bit lower on thevolatility scale.
Speaker 2 (27:47):
Okay, but we do know if we're going to use risk as
realized loss, which is the onlyway I know it or materially not
hitting a marker, that's riskfor me.
Speaker 1 (27:58):
Yeah, the point that I was going to make is this If
you're risk averse, you need togrow your money, but you're in
the step below a balancedstrategy.
Rather than 70, 80% stock,you're in 50-60% stock, just as
an example.
The way to compensate for thatis simply, if you can, to
increase the amount you save.
So the amount you save isinversely related to the
(28:19):
required return you get.
If you're able to save a lot ofmoney, your required return is
going to be smaller than ifyou're a person that is scraping
the barrel to save a fewshekels a month.
If you're a person that isscraping the barrel to save a
few shekels a month and you havea goal of having a substantial
accumulated wealth, you aregoing to be forced to take on
greater risk because you need ahigher return, everything else
(28:41):
being equal.
Well, that's no surprise at all.
So that's what I was trying tomake a point of.
Speaker 2 (28:47):
Let me rephrase that so if you have a lower risk
tolerance yet based on your ageand what you've been
contributing to your 401k, let'ssay you're not comfortable with
that terminal value, well, youcan make up for that.
Stay a little bit more moderateinstead of aggressive by saving
more Correct.
Conversely, if you're a latesaver and you're into your 40s
(29:09):
and 50s and you got a hubbahubba here to get to some
terminal value you'recomfortable with, you need to
take on more risk.
Speaker 1 (29:17):
Yes, the other thing I'll say is this our industry
has gotten people to focus onthe point and the age of
retirement, forgetting about inretirement.
In today's world, you'relooking at 20, 30 years of doing
nothing but taking money out ofaccounts, essentially investing
it, growing it, taking moneyout of it.
So, as a result, rather thangetting so focused on, I want to
(29:39):
retire at 67.
And at that point, all my moneyshould be in cash or I should
be very defensive.
Don't forget you've got another20 or 30 years of investing in
growth you need in order towithdraw the amount you need to
live on every year so that youdon't outlive your invested
asset.
One of the things that theinsurance industry focuses on is
the term guarantee.
(30:00):
Why?
Because they can use the termguarantee and investment
professionals typically can'tuse the term guaranteed unless
they're in guaranteed productslike a US Treasury or a
certificate of deposit, butthere are no guarantees on
stocks or other bonds.
So the point is, if you'refocused on not outliving your
money, you may find that there'slots and lots of advisors out
(30:23):
there all too willing to sellyou an annuity because it
guarantees that you won'toutlive your money.
The problem is almost all thoseguarantees associated with no
cost of living adjustments onthe money that you're getting
sent by the annuity company.
So it sounds good.
I'm guaranteed not to run outof my money.
And yet, at a 3% inflation rateover the next 30 years, I
(30:46):
guarantee you your money willbuy 10% of what it did
originally, because inflationhas robbed those dollars of its
buying power.
Does that make sense?
Speaker 2 (30:53):
Yeah, that makes perfect sense, and that falls
into also know what you own, whyyou own it, how you're doing.
Speaker 1 (30:59):
You can figure out real quick whether that's
working out for you, becauseyou're falling behind inflation,
that's right, that's right andthat's going to be our next
piece that we'll be talkingabout is how are you doing which
is just such a critical thingfor you to keep tabs on yourself
.
Speaker 2 (31:14):
Okay, so, to wrap up where we are on, know what you
own, why you own it.
We're making decisions on timehorizon investment objective
whether it's moderate oraggressive or conservative, or
growth or income.
We're making decisions based onhow much volatility and the
(31:35):
scariness of the markets and ourperception of these markets.
That's an overlay to it andthen from that it validates what
our holdings are.
Holdings are an expression ofjust what we talked about your
time horizon, your investmentobjective and the amount of
volatility that your gut canhandle.
Speaker 1 (31:56):
No, that's exactly it , a hundred percent.
I think we're good.
Did we kill it?
That was the best podcast we'veever done.
Speaker 2 (32:01):
Well, except when we were talking about.
Oh, I think I interrupted you.
Yeah, remember I interruptedyou because I was talking about
how we were defining risk Wasthat when I whipped my pen
across the room.
Yeah, that wasn't good either.
That wasn't either.
Speaker 1 (32:13):
Yeah, you know what, kelly, you know what that
actually wasn't that good of apodcast.
Speaker 2 (32:17):
This podcast kind of sucks.
You're starting to convince me.
All right, this is, we'll makeit work.
Let trash.
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 welcome to Bullshit onStilts.
Today we're going to focus onwe're still in our course of
(00:47):
focusing on the Fab Five forinvesting.
This one is arguably the mostimportant.
Number two in the discussion iswhy do you own it so, mark?
Why is this so important?
Why does it make a differenceif I know why I own it?
I know what I own.
I got all my percentages inplace.
I get it.
Speaker 2 (01:07):
Why do I need to know why I own it?
Because we all need to be alittle bit freaky when it comes
to control.
That's why so this is a controlthing.
Speaker 1 (01:15):
You bet it is so if you don't know what you own.
Speaker 2 (01:18):
You can't explain why you own it, which means you
don't have control.
So this is about, not therationalizations of why you have
something in your portfolioWell, it was sold to me, or you
know.
I don't know which is probablythe most honest answer out of
all of it.
Most frequent too?
Yeah, most frequent, but youneed to know why.
(01:39):
And if you can't articulate why, then you're not in control.
So the why is a very scaryquestion that you need to answer
to confirm that what is in yourportfolio is what ought to be
in your portfolio.
Speaker 1 (01:53):
So this is sort of like a validating question.
You know what you own and nowyou got to validate why you own
it.
If you own all bonds but yourinvestment objective is growth,
we may have a disconnect andalso, in articulating it, while
it does validate, it also isreconfirming.
Speaker 2 (02:10):
Or have things changed for me?
Yeah, and I need to rethinkthis.
And if I'm rethinking the whys,I got to rethink the what I
don't wanna.
What do I own?
Speaker 1 (02:20):
Indeed, you do.
Yeah, one of the things thatI've seen in people is people
want the cake and they want toeat it too, and they don't want
any risk.
And so sometimes what Iencounter or have encountered
has been people that want an allstock portfolio return, without
the all stock portfoliovolatility, and oftentimes, when
you are able to go, I know whatI own and I understand why I
(02:44):
own it, and they validate eachother, they confirm that they're
working in concert so I can goon to the next step, so to speak
.
Within the social media area,right, there's all sorts of
quote unquote experts espousingdifferent returns and if you
just do this, you can be amillionaire too at this age, and
so forth and so on, but none ofthat is know why you own it.
(03:05):
None of that has anything to dowith know your why.
It's simply saying 12%, this ishow much you need to save.
You'll be a millionaire.
That's how simple they putthese things.
How does a person avoid decisionregret In our world?
We look at it and say there's aFab Five.
(03:26):
What do we own?
Why do we own it?
How's it doing compared to whatthe total expense is?
So then, when we're talkingabout.
Why do you own it.
What's a good answer?
Look like All right.
Speaker 2 (03:36):
So let's set a context for the why.
The context should include yourtime horizon, your investment
objective and then, within theinvestment objective, typically
it includes an acknowledgementof the amount of risk and I call
it volatility, not risk thevolatility that you are willing
(04:00):
to accept in the portfolio toeither avoid or to bring it on.
So in the investment objectivethat's intellectual we're
talking about well, I want along-term growth, or I want
moderate growth.
Well, that all sounds verybenign until the markets don't
make it look anything like thatas to what you have experienced.
So we need to often considerthe amount of volatility that
(04:24):
you're willing to take on.
And that's more visceral.
And, kelly, that's whyvolatility and visceral both
start with Vs.
Speaker 1 (04:33):
So let's back up for a second.
We talk risk, we talkvolatility.
When the investment world talksabout risk to the consumer,
they're really talking aboutvolatility, right?
The difference between thehighs, the lows, the changing
variation of the value ofinvestments that you own.
Is that correct, correct, okay,and so when we're thinking
about you, you said time horizon.
Give me some examples of timehorizon, because to us it's
(04:58):
important, but to Mr and MrsConsumer out there, I don't know
.
Speaker 2 (05:02):
Good question.
Usually time horizon and thisis general and give me some
slack on the number of years butshort term is usually one to
three years.
Ultra short could be justwithin a 12 month period.
You have intermediate term thatmight be from five to 10 years
and then we have longer term,which is typically 10 years and
(05:23):
longer.
Now what's interesting is thebehavior of markets.
Different types of markets orinvestment asset classes for
example, cash, bonds and stockshave a level of predictability
within particular time horizons.
Very difficult to predict whatindividual stocks or an index is
(05:44):
going to be doing over a12-month period.
What's the return going to be?
I think it's measured on twohands the time over the last 100
years where stocks actuallyreturned their average rate of
return, yeah, it's like a 4%.
So for predictability we needto know the time horizon so we
can more adequately match up amix of asset classes that might
(06:07):
perform close to what ourexpectations were, also based on
your objective within that timehorizon.
So time horizon is veryimportant.
Investment objective oftenthere's no set definition of
long-term growth for aninvestment objective.
There's no set definition formoderate growth and income.
It's really set by theinvestment house.
Speaker 1 (06:28):
What the?
Speaker 2 (06:29):
hell.
Speaker 1 (06:29):
Merrill Lynch has theirs, wells Fargo has theirs
In terms of what they title,each type of account Of what
they title those are and what itmeans.
Speaker 2 (06:36):
Yeah, so as part of this, when we talk about your
investment objective, when youare filling out your new account
form, to determine what issuitable or appropriate for you,
you've got to read what theinvestment objective is and then
repeat back to the advisor.
Does this mean this, or frameit in your own words so that
(06:58):
you're really matched up withwhat that investment objective
is trying to convey?
Your investing in or yourobjective is?
Speaker 1 (07:06):
I think that for people out there that are not
professionals in financialservices, I think it's very hard
to understand that stuff.
I think, ultimately, when itcomes to a short-term objective
let's say one to three yearsfrom an investment
implementation standpoint,professionals out there are
trained to reduce volatility inthat goal, because you can't
(07:29):
afford to wake up in two yearsand have your $100,000 worth
$80,000 because the marketcorrected.
So what you'll find is theprofessionals will recommend
things like certificates ofdeposit, short-term bonds,
things that have very littlereaction to market environment.
Speaker 2 (07:48):
You mean short-term?
Speaker 1 (07:49):
individual bonds.
Short-term individual bonds,absolutely yeah, they could be
in a fixed annuity if they'reworking with an insurance agent,
because that's an insurancecompany's form of a certificate
of deposit, for instance acertificate of deposit, for
instance.
So the point is is that yourshort-term goal will normally
draft a strong-handed advisor torecommend a very risk-averse
(08:12):
investment plan for that money,because the biggest issue for a
short-term goal is to lose themoney that you set aside to take
care of that goal.
Conversely, when we have along-term time horizon, you'll
typically find people have morestocks involved in that plan.
It might be a lot moredepending on the time horizon
(08:33):
we're talking about.
But as an investor, why doesSusan advise or recommend just
putting money into some CDs forgoal one, which is two years
away, and then, on the flip side, susan's recommending that I
put 80% of my money into stocksin my retirement account because
I don't plan to retire foranother 40 years?
(08:54):
As an example, it really drivesit and if you're in a medium
term, don't be surprised if theadvisor comes back and
recommends something that'ssomewhat balanced, maybe roughly
about 50% stocks and 50% bonds.
As an example, you get some ofthe oomph, but not all the
downside of 80, 90% stockportfolios when market's correct
.
Speaker 2 (09:14):
Does that make sense?
You bet it doesn't.
That's what pension funds do,is they have what are called
dedicated portfolios.
They know what theirliabilities are over the next
year or two years and theyallocate accordingly, and that
is in short, instruments thatcome due at or before.
They need that money For thelong-term liabilities.
It's pretty much in equities,and the reason is do you want
(09:37):
the best performing asset classwhen measured over 20 and
30-year periods, or the secondor third best?
Speaker 1 (09:43):
That's right, that's exactly it, and so time horizon
is a critical component to howwe develop the recipe, which is
your investment plan right,correct With know what you own
and why you own it.
Here you were talking about how, let's say, your investment
objective is growth.
You're 20, 30 year old, you'rejust starting out, you're
(10:03):
putting money into your 401k andyou really want to grow that
money.
What would be an example ofmaybe a likely recommendation
from an advisor, or even a 401kplatform once you go through
your questionnaire and youarrive at growth, is my.
What would that look like forthat person?
Speaker 2 (10:21):
Depending on certain preferences or idiosyncrasies
that they have.
It would be primarily a stockportfolio and that could be
mixes of domestic or US largecap.
It could be mid cap, dependingon how complicated you want to
make this or how specific youwant to get.
It could have small cap stocksin that with index funds and
(10:42):
some mix therein.
It could have small cap stocksin that with index funds and
some mix therein.
It could be internationalstocks, large cap, foreign
emerging markets.
This is where you can, as anartist kind of form the matter
of your portfolio to yourcertain preferences or just what
you think is kind of cool andyou want in your portfolio.
And that is helpful because thewhy you can say I kind of
(11:08):
helped with this.
So it's an expression of myview of the investment world
over the short term or the longterm, or a combination, and I
can keep that very narrow orvery broad.
If I have a long-terminvestment objective and I'm
still very conservative, though,I've got some thinking to do.
What do I want to be afraid of?
(11:28):
What are you talking about?
What do I want to be afraid of?
Interim volatility over thenext 20 years or having
insufficient funds to retire on?
I got to choose one.
I can't have them both.
Speaker 1 (11:41):
You do ultimately have to make choices right when
you're planning on yourinvestment objectives, and you
used to have a discussion withfolks around risk and how risk
is defined by the individual,their needs, their goals, their
ability to save.
All these things come into thepicture and I think, if I recall
right, most of the investmentworld focuses people on
(12:04):
volatility as risk how much it'sup or down, how much you could
lose in a bear market, thosekinds of measurements.
That's how they're taught toview things.
But you make a great argumentaround risk.
If you're averse to risk, youdon't like risk, and you have 40
years to grow your money andyou put your money in the
savings account in your bankpaying you 0.05% a year, what
(12:26):
risk does that investor havewhen it comes to their 40-year
goal of retiring someday with Xdollars or whatever?
Can you comment on thedifferences where the market
always looks at risk fromvolatility, tipping the ups and
downs, the roller coaster,whereas depends on, as you were
talking about earlier, what isyour unique circumstance?
And in the example earlier, ifyou're conservative, trying to
(12:48):
circumvent interim volatilityand play it really safe, what
kind of risk is that personfacing?
Speaker 2 (12:53):
Let's put risk into context.
Let's put it into interest raterisk.
What's more risky from interestrate risk?
A Walmart bond 5% coupon thatmatures in 18 months, or a US
Treasury 30-year bond at a 4%coupon that matures in 30 years?
From an interest rate risk,which one's more risky?
(13:15):
A long-term bond, the USTreasury?
Yeah, Not the Walmart A-rated,but the US Treasury is more
risky.
Tied to what?
To the term right?
Speaker 1 (13:25):
Yes, that long term, because the longer a bond is,
the more violent it reacts tochanges in the interest rate.
Speaker 2 (13:31):
Sure.
So the propaganda is that theUS Treasury is the more secure
investment over Walmart.
That's what we're told.
But in an interest rateenvironment and long term, which
one has more risk from aninflation?
It's the US Treasury, yes.
So the other thing is withinflation, also in time horizon,
(13:52):
what's more risky being inmoney markets and CDs If what
you're trying to do isaccumulate sufficient assets
over a multiple year period toretire?
What's more risky?
A US Treasury, bond or thestock market?
Yeah?
Speaker 1 (14:10):
What are treasury bonds?
So I used to work with anorganization and they started to
focus on speaking to consumersthe way consumers think about
investing, not the way thefinancial service industry likes
to talk, which is with theirjargon and their definitions and
so forth.
So the organization identifiedthree true risks to investing.
(14:33):
It really is simple.
The first risk is you don'taccumulate enough or the amount
you need for the future use.
Speaker 2 (14:40):
So there's a shortfall.
Speaker 1 (14:41):
There's a shortfall in the accumulated amount of
monies that you were able toaccumulate in your investment
account.
Retirement's a great example.
Maybe funding college isanother example of that.
The next risk was not achievinga required return, and a
required return is simply thisMathematically, we can figure
out if you're going to save somuch money and you have so much
(15:03):
time horizon and you have a goalof, let's say, accumulating a
million dollars in a retirementaccount.
Based on how much you can saveand how much time you have, we
can figure out.
Here's the required return youneed to achieve in order to have
a high probability of attainingthat value of a million dollars
or to meet liabilities.
(15:25):
Yes.
And then the last one is simplynot having access to your money
.
Speaker 2 (15:30):
Give it back.
Speaker 1 (15:31):
Liquidity.
As an example, a number ofthings come to mind Limited
partnerships, hedge funds,private equity funds, but also
annuities, really, that havetypically surrender penalties If
you want to take your money outof the annuity before five
years or seven years or nineyears, and some have 15 years of
surrender penalties.
Speaker 2 (15:51):
Oh my God.
Speaker 1 (15:52):
Meaning you can only take a little bit out before you
start getting penalized.
So these are things that are anatural part of investing, and I
think that for people out therehow do you come at know what
you own, but why you own it?
Part of that's going to be well, how much do you need?
What rate of return do we haveto get in order to achieve this?
Putting a couple thingstogether.
(16:14):
If you're a person thatnaturally is risk averse, like
my sister she doesn't trust thestock market, but she needs
that's not what she said.
Speaker 2 (16:21):
She said she doesn't trust you with her money in the
stock market.
That was it.
Speaker 1 (16:25):
That's what it was.
See, I need that insight.
So in her case, she wants toaccumulate so much money, but
her money is in cash.
It's earning less than 2% ayear.
She needs a 7% return.
I can tell her, without beingmean, you're not going to reach
your goal, just not going tohappen in your time horizon,
(16:46):
based on 2%, when you reallyneed a 7%.
So for you to apply this inyour own world, knowing why you
own it is going to be, how muchdo you need?
Is liquidity of issue and doyou know your required rate of
return which, by the way, your401k platforms?
All you have to do is enter alittle bit of information and
the calculator will tell you.
Speaker 2 (17:04):
It's pretty simple when we talk about risk and your
sister again on getting 1% and2%.
You just like talking about herbecause she doesn't like me.
Speaker 1 (17:13):
Let me just say we have some things in common.
Speaker 2 (17:15):
Kelly.
So she's willing to get one andtwo percent, knowing that
really she needs six or sevenpercent.
But you know what that'smindset?
It's a mindset, a view of theworld, almost a metaphysics.
And I remember a counselor whowas formerly a priest who said
many of us, most of us, navigatewith practice sails the shallow
(17:37):
waters of our lives, neverstriking out for deep blue.
And so we can leave so much onthe table and experience and all
of the opportunity therein bymaybe moving out of that 1% and
2% rate of return so that lifecan open up for us and we may
have a more spacious, morequality experience in our lives.
(17:58):
You're not going to talk themout of it.
Speaker 1 (18:00):
People come to the table when it comes to saving
money.
First of all, you have tochoose not to spend it.
That's a tough decision,especially in today's economies
that we've been living in, withinflation and so forth.
There's two rules to being agreat investor.
First rule is save money.
Second rule is invest and keepit invested.
Pretty simple, well, that'seasy.
Speaker 2 (18:20):
Yeah, it is, that's real easy.
Problem is nobody does that.
That's right and one of thehardest things, because the
brain is not wired for long-termcommitment and consistency in a
thought and the application ofthat.
It just isn't.
So when we say we can get 10,11, 12% in the stock market and
you have to take the volatilitythat goes with it Roger got it.
(18:43):
Okay, yeah, until the marketgoes down, that's right.
And then you sell.
Speaker 1 (18:47):
Yeah, we've had conversations where, just as a
practical matter and this is alittle bit far field for a
second, but one of the bestthings going out there is all
the coupons that come to houseright, and one of the biggest
coupons outsized because itsticks out is always Kohl's.
Kohl's always has a 20% giftcard for someone, and so people
(19:07):
count and look forward to theirKohl bucks, their Kohl coupons
and all of the rewards so thatthey can go out and spend money.
Why do people rush to Kohl's?
Because they're going to get a20% savings on today's purchase.
Well, what's a bear market?
It's defined as arbitrarily, asmore than a 20% decline in the
(19:27):
general price of the overallstock market or bond market,
whatever market we're talkingabout.
So if you're 20, if you're 30,if you're 40, if you're 50, and
the stock market experiences abear, that's Kohl's coupon
Stocks are on sale.
This year they're on sale for30% off.
In 20 years.
Will the stock market be higheror lower?
(19:48):
Well, historically, the answeris it'll be higher.
I don't know by how much, butif you view it as everything's
on sale, then you startinstitutionalizing in your brain
.
View it as everything's on sale, then you start
institutionalizing in your brain.
If the bear market's happeningnow and I'm 38 years old, I
should be buying more of themarket just systematically as a
part of my contribution to my401k or my savings account.
Speaker 2 (20:08):
So a bear market is a decline in the stock market.
And what is the stock marketcomposed of?
Stocks from corporations,publicly traded corporations, so
the very ones that you'll runout and buy when they go on sale
.
Yes, true, you're buying thosevery corporations and their
products, but suddenly you'rescared because those stocks of
(20:29):
those corporations are down.
That's right.
Speaker 1 (20:32):
So if you view it as the stock market's on sale, if
the news media actually reportedgreat news stock market's on
sale.
Today it's down 10% you knowhow many wives would be out
there buying the stock marketBecause of sale.
I don't know how many times Iwas told how much money I saved
today with four bags of shoppinggoods in hand.
But if media started reportingit's not a bear market, market's
(20:55):
on sale, market's discountedthis month all the way to 30%.
If you're looking to build yourportfolio, this is a great time
to buy those stocks, yeah, butyou know that's that doesn't
sell.
Screaming hysteria and fears.
You got it right there.
Yeah, that's what sells andthat's part of the problem.
But if you're listening to thisand if you're willing to do
(21:17):
anything and you're willing tosay, hey, the bear market's
happening like in 08, nobody intheir right mind was putting
money to work, the people withthe right minds, like Warren
Buffett.
He waited 25 years to buy,strike the deal with Goldman
Sachs, to get preferred stocksin Goldman Sachs, and he put, I
think, $10 billion into thatcompany, but he waited 25 years
(21:37):
to do it.
So there are great investorsout there that think just like
we're talking about Market's onsale time to buy.
Speaker 2 (21:48):
The problem is most investors.
The problem is not in themarket.
It's in ourselves and ourperceptions and reactions to the
market.
And that's always the bugger.
We as humans, we're confoundingmessy little things.
What's the deepest part?
Speaker 1 (21:58):
of our brain right, the amygdala right is the one
that really triggers fight orflight and that's the base stem
of our brain, and so it's reallychallenging to fight that
emotional factory Cortisolflowing and my 401k is a 301k.
Oh my God, what should I bedoing?
Are you 38?
The answer is go to your HR andsay, hey, I want to increase my
(22:18):
contribution Because, ifnothing else, you know, things
are on sale for 20, 30, 40.
Well geez, at the trough of 08,I think, the S&P was down 54%
at its worst point, Finished theyear down 30 something.
But the point is, if you hadcontributed more to your 401k
when the S&P was down 30%, 40%,50%, you're contributing $500 a
(22:40):
month.
Maybe this year you shouldcontribute $700 a month because
it's getting decimated, whichmeans you're buying a lot more
for less.
If you're 65 and you're goingto retire in a year, still
something to think about,frankly, because retirement's
going to be 20, 30, maybe 40years for you, that's a
long-term time horizon.
Speaker 2 (22:58):
Which is one of the values of a mutual fund and
periodic investing.
Speaker 1 (23:02):
Yeah, it is.
It's a great value.
You know what?
Before we wrap this up, let'stalk about what do you own and
why you own it.
There's seminal work out therearound.
What are the?
Speaker 2 (23:12):
contributors, I'm so glad we're finally going to get
around to what do you own andwhy you own it.
That's right, we haven't beentalking about that.
No, we haven't.
Speaker 1 (23:18):
But there's contributors to.
How do you arrive at whatpercentage you put in stocks,
bonds and cash?
And we've talked about it theSinger Bebauer Brinson study
back in the late 80s I think itwas mid-80s and there's been
studies since then.
But in that study what wasfound is look like 88% of your
(23:39):
long-term returns and risk areattributable to what percentage
you have in stocks versus bonds.
Is that?
Speaker 2 (23:46):
fair to say.
And why is that?
Speaker 1 (23:48):
Because when you look at the market, it's not
security selection, it's not.
Everybody always focuses oninvestments and they think, well
, I think I'm going to buy Apple, or I'm going to sell Apple, or
I'm going to put a short onApple, or what.
That's trading, that'sspeculating.
Investing is very different.
It's like sailing a boat, right?
So I think when you, whenyou're looking at this and
(24:10):
you're saying, okay, as anon-professional person, and I
need to accumulate money forretirement, let's make that as
an example here.
So you're going to put moneyaway, that's first.
Remember to be a good investor.
You got to save money.
The second thing is you got toinvest and stay invested.
So if you save the money, youdon't have to worry whether you
should buy Home Depot or Lowe's.
(24:32):
You don't have to worry ifyou're going to buy Ford or
Chrysler.
All you got to worry about iswhat percentage do you want in
stocks?
And then make a choice as towhat fund provides you that
stock exposure.
It's about the allocationbetween stocks, bonds, cash and
alternatives, which is the800-pound gorilla when it comes
(24:53):
to how did you do as an investor?
Speaker 2 (24:55):
So it explains most of your return comes down to
your allocation between cash,bonds and stocks.
Why?
Because bonds typically returnover multiple year periods
higher than cash and stocks overmultiple year periods return
higher than bonds.
It's that simple.
And then the security selectionwithin there is where our
(25:16):
industry likes to focus, andthen the security selection
within there is where ourindustry likes to focus and that
attributes for what.
Speaker 1 (25:20):
Kelly.
Speaker 2 (25:20):
It's like 6%, 6% or 7% of that.
Speaker 1 (25:22):
4% to 6%, yeah, somewhere in there, I think
security selection is actuallysubordinated in percentage
weight to the manager themselves.
I think the manager is around6% and I think security is
around 4%.
Speaker 2 (25:31):
So if how you want to express yourself is in security
selection, please understandthat most of it is at the asset
allocation level.
Speaker 1 (25:39):
Yes, I mean let's ask this question Is there any
difference between FidelityInvestments 500 versus Vanguard
500 index mutual funds?
Speaker 2 (25:48):
If there is Kelly, it is measured in expense ratios
or in hundredths of a percentageof return.
Speaker 1 (25:56):
Effectively no difference, so that if the index
has 4.3% weight to Apple, thenthe index funds of Vanguard
Fidelity enter any otherinvestment manufacturer name
Invesco, t Rowe, price all ofthose funds are going to have
4.3% in Apple, plus or minus athousandth of a percentage,
right, so it makes it a littlebit easier.
(26:19):
You don't have to get wrappedaround the axle that well.
We have Fidelity funds in my401k.
I don't have the Vanguard 500.
Peace, take the Spartan 500.
Same thing, no difference.
It doesn't matter who the coachis in Fidelity or Vanguard.
What part of the market do youhave exposure to?
Roughly the same expenses,similar names, in fact, exact,
(26:39):
similar.
Speaker 2 (26:39):
It's not a big deal.
Let's go from why you own itall the way down to know what
you own.
So presumably you should bemaking decisions at the asset
allocation level based on timehorizon, investment objective
and, at an emotional or viscerallevel, how much volatility
(26:59):
you're willing to experience.
Speaker 1 (27:02):
Yes, so time horizon right Short-term, medium-term,
long-term.
Then it was investmentobjective, the investment
objective being defensive,conservative, moderate growth,
using words like growth andincome and moderate or it could
be income income and growth,growth and income growth and
(27:24):
aggressive growth.
It just depends on what housesyou're working with.
And then the last one was oh,that's right.
Speaker 2 (27:29):
A gut check more of the your tolerance, yeah, your
tolerance.
Your volatility and tolerance,yeah, yeah, yeah.
Speaker 1 (27:34):
So that brings up a great point on saving and how
these all kind of intersect.
If your risk tolerance is lower, then obviously the
recommendation or the portfolioyou choose will probably be a
little bit lower on thevolatility scale.
Speaker 2 (27:47):
Okay, but we do know if we're going to use risk as
realized loss, which is the onlyway I know it or materially not
hitting a marker, that's riskfor me.
Speaker 1 (27:58):
Yeah, the point that I was going to make is this If
you're risk averse, you need togrow your money, but you're in
the step below a balancedstrategy.
Rather than 70, 80% stock,you're in 50-60% stock, just as
an example.
The way to compensate for thatis simply, if you can, to
increase the amount you save.
So the amount you save isinversely related to the
(28:19):
required return you get.
If you're able to save a lot ofmoney, your required return is
going to be smaller than ifyou're a person that is scraping
the barrel to save a fewshekels a month.
If you're a person that isscraping the barrel to save a
few shekels a month and you havea goal of having a substantial
accumulated wealth, you aregoing to be forced to take on
greater risk because you need ahigher return, everything else
(28:41):
being equal.
Well, that's no surprise at all.
So that's what I was trying tomake a point of.
Speaker 2 (28:47):
Let me rephrase that so if you have a lower risk
tolerance yet based on your ageand what you've been
contributing to your 401k, let'ssay you're not comfortable with
that terminal value, well, youcan make up for that.
Stay a little bit more moderateinstead of aggressive by saving
more Correct.
Conversely, if you're a latesaver and you're into your 40s
(29:09):
and 50s and you got a hubbahubba here to get to some
terminal value you'recomfortable with, you need to
take on more risk.
Speaker 1 (29:17):
Yes, the other thing I'll say is this our industry
has gotten people to focus onthe point and the age of
retirement, forgetting about inretirement.
In today's world, you'relooking at 20, 30 years of doing
nothing but taking money out ofaccounts, essentially investing
it, growing it, taking moneyout of it.
So, as a result, rather thangetting so focused on, I want to
(29:39):
retire at 67.
And at that point, all my moneyshould be in cash or I should
be very defensive.
Don't forget you've got another20 or 30 years of investing in
growth you need in order towithdraw the amount you need to
live on every year so that youdon't outlive your invested
asset.
One of the things that theinsurance industry focuses on is
the term guarantee.
(30:00):
Why?
Because they can use the termguarantee and investment
professionals typically can'tuse the term guaranteed unless
they're in guaranteed productslike a US Treasury or a
certificate of deposit, butthere are no guarantees on
stocks or other bonds.
So the point is, if you'refocused on not outliving your
money, you may find that there'slots and lots of advisors out
(30:23):
there all too willing to sellyou an annuity because it
guarantees that you won'toutlive your money.
The problem is almost all thoseguarantees associated with no
cost of living adjustments onthe money that you're getting
sent by the annuity company.
So it sounds good.
I'm guaranteed not to run outof my money.
And yet, at a 3% inflation rateover the next 30 years, I
(30:46):
guarantee you your money willbuy 10% of what it did
originally, because inflationhas robbed those dollars of its
buying power.
Does that make sense?
Speaker 2 (30:53):
Yeah, that makes perfect sense, and that falls
into also know what you own, whyyou own it, how you're doing.
Speaker 1 (30:59):
You can figure out real quick whether that's
working out for you, becauseyou're falling behind inflation,
that's right, that's right andthat's going to be our next
piece that we'll be talkingabout is how are you doing which
is just such a critical thingfor you to keep tabs on yourself
.
Speaker 2 (31:14):
Okay, so, to wrap up where we are on, know what you
own, why you own it.
We're making decisions on timehorizon investment objective
whether it's moderate oraggressive or conservative, or
growth or income.
We're making decisions based onhow much volatility and the
(31:35):
scariness of the markets and ourperception of these markets.
That's an overlay to it andthen from that it validates what
our holdings are.
Holdings are an expression ofjust what we talked about your
time horizon, your investmentobjective and the amount of
volatility that your gut canhandle.
Speaker 1 (31:56):
No, that's exactly it , a hundred percent.
I think we're good.
Did we kill it?
That was the best podcast we'veever done.
Speaker 2 (32:01):
Well, except when we were talking about.
Oh, I think I interrupted you.
Yeah, remember I interruptedyou because I was talking about
how we were defining risk Wasthat when I whipped my pen
across the room.
Yeah, that wasn't good either.
That wasn't either.
Speaker 1 (32:13):
Yeah, you know what, kelly, you know what that
actually wasn't that good of apodcast.
Speaker 2 (32:17):
This podcast kind of sucks.
You're starting to convince me.
All right, this is, we'll makeit work.
Let trash.
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