January 31, 2024 • 28 mins
Unlock the secrets of financial wellness with us, Clem Miller and expert Steve Davenport, as we guide you through the must-knows of investment statement reviews for the year ahead. Imagine a world where you effortlessly finesse your asset allocation for both strong growth and steadfast safety. Together, we dissect the nuances of investment fees, shining a light on how they nibble away at your returns and why embracing low-cost index funds and ETFs could be your ticket to financial savvy. With our conversation, you'll become adept at steering through income streams and tax efficiency like a pro, ensuring you're not leaving money on the table when it comes to your investments.
With Steve and Clem insights, we break down the complex tango between US and global investments, and how sectors like pharmaceuticals can add a layer of diversified growth to your portfolio. By the end of our discussion, you'll be equipped with a fortified strategy to withstand the ebbs and flows of market downturns and come out ahead, ready to delve further into the psychological plays of behavioral finance in our future talks.
Straight Talk for All - Nonsense for None
Please check out our other podcasts:
https://skepticsguidetoinvesting.buzzsprout.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Clem Miller (00:05):
Welcome everyone to Skeptics Guide to Investing.
I'm Clem Miller and today we'regoing to talk about reviewing
your investment statements.
How to start the new year.
Steve Davenport and I will diginto the steps you need to take
when starting the year so yougain confidence about your
statements.
Where do you start with yourstatements, Steve?
Steve Davenport (00:27):
There are a lot of ways to look at it, but
here's my process.
I look at fees first.
I always know what you pay andwhat you're getting for it.
The second thing I look at isallocation between growth or
stocks and safety and bonds.
That trade off varies based onyour age.
Then I look at income how muchand how tax efficient is the
(00:51):
income of receiving?
Then, lastly, I look at taxes,because I want to understand any
decisions I have to make thatyear and how they're going to be
affected by taxes.
Clem Miller (01:04):
Steve, is allocation really the first
thing or the most importantthing you look at?
Steve Davenport (01:09):
On my list?
It isn't.
I look at fees as the easiestway for most individuals to
improve their results.
So, yes, you look at it onceand you set it up and hopefully
it's good.
But I also think that, forindividuals, understand how much
you made for the prior year,how much you paid in fees to get
(01:30):
to that result and thendetermine where you want to go
from there.
I think, understanding thosenumbers and realizing how much
they are when you see your feesget into the $1,000 or more, you
start to realize that this issomething I can control and
something I can manage andultimately, I think that leads
(01:52):
you to a better net result.
I think people talk aboutreturns in a gross sense,
meaning with no fees, but wereally started going to start to
take this to.
Let's talk about things interms of a net Net.
To you, what did you make lastyear?
We tackled investments andpersonal finance a few weeks ago
(02:14):
, but today I think, taking thatdeeper dive.
When you look at your ownassets, how do you evaluate your
results and think about them?
I think it can make you feeloverwhelmed at first, but we're
all responsible for our ownresults.
Let's make financial wellness apriority for 2024.
Clem Miller (02:35):
Well, okay, Steve, that's great.
What should our fees tell us?
Steve Davenport (02:39):
First, at fees, I like to look at it as
different levels of fees.
If you have an advisor, you'repaying an advisor a fee and he
collects it either monthly orquarterly.
Those fees can be between 50basis points up to 150 basis
points.
Level two is what funds or ETFsdo you use to deliver those
(03:02):
results?
And they have a level of fees.
So if you're paying an advisor1% and he's putting 1% mutual
fund in your account, that meansyou're overall paying 2%, and
so that is starting to besignificant.
If the average return of yourequities and bonds is 8% and
(03:23):
you're paying 2%, 25% is goingaway to the person who's
managing it for you.
That's significant and that'ssomething you should try to
change.
Level three is where are thereany loads on the funds?
Level?
Funds have this fee that isassociated with selling their
product and therefore you paythat fee as a load, and it can
(03:48):
be significant.
Some of them are spread overthree years, five years or seven
years.
And level four are there anycommissions?
Most places have eliminatedcommissions and they're not
really a factor anymore.
They and I did a study aboutfees and they said, looking at
the returns, the most cleardeterminant of good returns is
(04:12):
lower fees.
So when we look for improvingsomething, we can hear about an
advisor or a fund that has greatreturns, aka ARC.
But when you look at it overtime and you look at what the
fees are paying, it gets harderand harder to justify higher
(04:33):
fees.
Clem Miller (04:36):
Actually, Ark might be a good example of a
manager that does well sometimesand does very poorly other
times, and so the question is doyou really want to pay a high
fee for something like that?
So I mean, Steve, back on fees.
Obviously, index funds, ETFsthat are tracking index funds,
(05:00):
have quite low fees, quite lowwhat are called expense ratios
or fees, and it strikes me thatmost people or maybe not most,
but a lot of people have alreadycaught on to the fact that
their fees are quite low.
What do you say to that?
Steve Davenport (05:19):
I think that's great.
For most people, I think it's agreat solution.
I think that what we want issimplicity and if we can leave
our assets alone, time works inour favor.
So lower fees, longer timehorizon, don't trade as often
those three things reallydetermine success.
Index funds usually varybetween two basis points to 35
(05:44):
basis points.
Mutual funds vary between 50basis points and 300 basis
points.
That's 10 times the amountyou're paying.
They better deliver moreresults if you're going to pay
10 times more.
Etfs are somewhat more thanindex funds because you have
(06:06):
daily liquidity or interdayliquidity.
Etfs go between five basispoints, but I saw a Bitcoin ETF
at 150 basis points 1.5% that'sa mutual fund like fee for an
ETF, and then loads can add 2%up to 10% to your overall
(06:28):
expenses.
These are big numbers and youjust have to understand what
you're paying for.
Clem Miller (06:35):
Yep.
So in my portfolio I useindividual stocks and so there
are only commissions for me.
I don't pay anybody elseexpense ratios or anything like
that.
That's me, I feel like I've gotgiven my professional
background, I've got a lot ofmoney.
I've got the knowledge andexperience to be able to do this
(06:55):
investing individual stock,investing myself.
But that's obviously not thecase for everybody.
A lot of folks just don't havethe time or really the resources
to actually do this kind ofwork themselves.
So they're willing to pay somefees.
It's just a question of howmuch those fees are.
Steve Davenport (07:19):
We use Morningstar for a lot of our
analysis and it costs us asignificant amount to get the
value from all the analystscovering all the names, but it's
a great asset when you have alimited amount of time to follow
every company.
So I believe that the individualhas to make a decision.
(07:39):
There's some, I believe in thePeter Lynch method of kind of in
the Charlie Munger knowing whatyou own making sure you're
familiar with it, that's fine.
I think that for most people,an index fund with low fees is
the right approach.
The main thing is look at yourassets and try ensure your
(08:03):
portfolio is helping youaccomplish your goals.
There may be cases where a fundand ETF is beating the
benchmark by 100 basis pointsand it's worth paying the 50
basis point fee, but there's alot of cyclicality and it may
beat them for three years, butfive years, seven years, 10
years, it's behind.
That tells you that there's atime and a place for every
(08:26):
strategy and, as you mentioned,ARC had its time and its place,
but it may not be the right timeand place right now.
You have to take responsibilityfor making your assets satisfy
your plan.
Clem Miller (08:41):
So, Steve, I really like those thoughts.
You mentioned asset allocationearlier.
Where does that fit into thepicture?
Steve Davenport (08:48):
I think that's the next area that you want to
understand how much risk am Itaking?
Allocation is considered theholy grail for most advisors.
It represents something like90% of the results come from
your allocation decision.
Time is your friend when you'reyounger, and caution is advised
(09:09):
as you approach retirement.
There's a time to make backyour losses if you start early.
But a simple formula that somepeople use is to take your age,
subtract it from 110, and thatequals your equity percentage.
Some people apply maximums andminimums of a maximum of 90% in
(09:33):
equities or risky stock and aminimum of 25% Is real estate,
an asset for investing or living.
I think that when you look atyour assets, we're talking about
your investable assets, but theother things you own car, home
and potentially a second homeyou need to think about how all
(09:57):
of those assets are growing andhow they affect your overall
wealth.
I think that updating yourallocation once per year and
getting it back in line, maybein January when you're doing
this review of your statements,is a good idea.
Looking at it every day or fivetimes during the day not a good
(10:18):
idea.
I think that when we look atour allocation, we wanna
understand how much is in USassets versus non-US.
The world's capitalization is55% US, 45% non-US, but most
people are more comfortableowning things that have a home
country bias, meaning they liketo own companies that are US
(10:41):
companies.
Is that a mistake?
It hasn't been, because the UScompanies tend to have a better
operating environment and also asystems and educated workforce.
So people might only wanna put20% in non-US assets.
(11:03):
And the last thing I'd say aboutasset allocation is there's
something in the middle and I'ma middle child so I call it the
messy middle.
I yield prefers utility orinfrastructure reads.
I think that there are somecharacteristics of fixed income,
some characteristics of equity.
Therefore they don't easily fitin one of those buckets.
(11:27):
But that's where we get into amore complicated decision and I
think that all of this is getstarted, understand, and then we
start to get into these nextquestions about how to allocate
more sophisticated way.
What would you invest in whenyou were young, clem?
Clem Miller (11:46):
Ah, so I don't remember when I was young.
That's just a joke.
Well, when you were more sanethan you are now let's put it
this way, and I guess back thenit was pretty much US and
passive ETFs.
(12:06):
I knew I didn't have enoughmoney or accessed information to
do individual stock selection.
But all that has changed and Ifeel like I can certainly do
that now.
I wanted to address one or twopoints I think that you raised
(12:28):
when you were just talking.
I think that you know the messymiddle, some of those things
high yield, preferredinfrastructure, you know, maybe
those things are.
It could be that those thingsare beyond the reach of some
retail investors.
There are some nuances to a lotof these asset classes that are
(12:52):
complicated or confusing, so I'mnot so sure that I would
recommend those.
And US versus non-US that'sworth the whole podcast in and
of itself.
So I knew that one would getyou excited.
I mean, I'll just point out onething, which is you don't
necessarily want to go by marketcapitalization.
(13:14):
You know 40% of the earnings ofthe S&P 500 companies come from
overseas.
So by investing just in the S&P500, you're actually getting a
lot of global economic exposure.
You're not really limitingyourself in that respect.
(13:36):
The reason to invest in in myopinion, the reason to invest in
international stocks is to beable to have exposure to stocks
that you just can't get in theUnited States.
You know, if you're going toinvest in a US pharmaceutical
company and I know we're goingto be talking in this round of
(13:59):
podcasts about Lilly and NovaNordisk but if you're going to
invest in Lilly, why not investin Nova Nordisk?
They're both companies.
One just happens to be overseasand one just happens to be in
the United States.
So what you know, what's thedifference?
You know you go where youropportunities are.
(14:20):
I agree.
Steve Davenport (14:22):
I'm really just giving people a rundown of
things that they consider intheir allocation.
I'm not recommending to anybodyto do any particular asset
class.
I'm just saying that there'srisky and they're safe.
There's cash as the safestasset and maybe there's an Ark
fund that's the most risky, orthere's an individual name that
(14:45):
you want to invest in game stuff.
All I'm saying is that there'sa spectrum and people will
invest on that spectrum, and Ithink that when I look at
retirees and their decisionmaking, it's all about income.
Am I getting enough income?
Can I get income from othersources besides bonds?
(15:07):
And that's where some of theinterest in preferreds,
infrastructure and otherutilities stuff comes from.
I'm not saying it's right foreverybody.
A young person shouldn't beinvesting in these utilities.
They should be focused ongrowth.
So I think that as we age, itshould change.
There's so many variables here.
I'm not trying to come up withanybody's asset allocation.
(15:31):
I just want people tounderstand it and I think that
when it gets to looking at someof these assets, it's not always
clear and I think that, likeyou mentioned the US companies
that have great foreign presence, like Coke, 80% of their
revenue is coming from overseas.
So, yes, is it a US domesticcompany?
(15:53):
Absolutely.
Is it really a company thatonly depends upon the US economy
?
Absolutely not.
So I think that it getscomplicated, and that's why
we're trying to do this is totry to simplify it for people
and give them some good ideas.
Clem Miller (16:10):
So, Steve, you were talking about income and I'm
wondering can you sort of runthrough the income that comes
from particular areas?
I know you've got some thoughtsabout safe versus risky Sure
Buffet approach.
What would you say to these?
Steve Davenport (16:30):
So when we're looking to be retired and cut
back on work, it's the incomeyou can generate that will give
you the freedom and the optionson your life in terms of what
you can do.
Most of people have a socialsecurity and they may have
another pension or other assets.
So I think that they look totheir portfolio to provide
(16:53):
additional income and when welook at our two main asset
classes risky they'll typicallyyield between zero and 4%.
When we look to safer assetsnow, they're yielding somewhere
between 4% and 7%.
So do we put it all in safetyor do we still keep a little bit
of risky?
(17:14):
I think the answer is thatwe're going to have a retirement
that will probably last from 65to 85.
It's a 20 to 30 year period.
That period is going to needsome growth, so I think you have
to mix the two in a way thatmakes sense for yourself.
Historical returns for riskyassets are about 8%, which about
(17:36):
1.5% is going to come from thedividend or the income, but most
of it's going to come from thegrowth and the safe assets 4%,
and most of it is going to comefrom the income.
So those two assets are goingto do different things for your
portfolio and different thingsfor you.
When we think about inflationat 2% eventually, maybe after a
(18:02):
few years and fees of 1% to 1%,there's things that are going to
eat into those returns.
And if you just have a returnof all safe assets and you've
got inflation at 2%, taking thatlittle way, that's not going to
lead you to retaining yourspending power.
(18:22):
So Buffett had a simplesolution.
He said, if he was to die andwhat he'd tell people to do,
he'd say 80% in the S&P 500 and20% in Treasuries.
And if you think about that,the yield, you know the return
will be somewhere around 7.2%,with fees somewhere under 10
(18:44):
basis points.
That's a pretty efficientportfolio that's going to have
pretty good results and the 7.2%is going to most likely cover
inflation and still give yousomething left over for growth.
So when we think about all ofthese things, we need to start
thinking about gross and net.
(19:05):
Gross means a total return andthen net, net of any taxes, fees
or other items.
So I think it's really aboutunderstanding your income is
something that you don't need todo right away, but as you're a
person of time and I know youand I are trying to figure out
where is that income going tocome from, how are we going to
(19:28):
get it and how?
Clem Miller (19:28):
Safe, is it so, Steve, you mentioned taxes as
being a key element here.
Can you talk a little bit moreabout that?
Steve Davenport (19:36):
Sure, I hope that I can help, but here we're
getting into a very specificarea where individuals have
different states and cities andmunicipalities that may tax them
in certain ways.
So I recommend that you talk toyour accountant and you
understand how your local, cityor state taxes investments.
(19:57):
When we're looking at taxes,we're talking about taxes on
gains or losses from the sale ofthe security in one of your
taxable accounts and on incomethat you receive.
So income and capital gainshave different tax rates and you
need time to understand whatthey are.
As you think about your assets,there are many choices for you
(20:20):
to defer or to pay taxes.
Today You're going to earn moreor less next year.
Is your job?
Is you or your partner changingjobs?
What are the tax rates going tobe over the next five or 10
years?
There's a lot of people who areworried about the amount of
debt the United States has andwhat that means for tax policy.
(20:41):
These are all good points andgood things to think about,
because some people say, oh, Idon't want to pay today's tax
rate.
In five or 10 years we mightlook back at 2024 as the golden
age to assault securities.
Clem Miller (20:59):
Yeah so.
Steve Davenport (21:02):
Where do you think tax rates are going?
Clem, did you put an even betbetween higher and lower?
Clem Miller (21:11):
Yes.
Steve Davenport (21:12):
Really.
Yeah, I tend to believe they'regoing to go higher.
Clem Miller (21:18):
Yeah, well, I mean, certainly, with the fiscal
deficit being what it is, itcould go higher, but also we're
seeing some pretty strongeconomic growth and that might
help to close the fiscal deficitwithout higher taxes or without
significantly higher taxes.
So I think it's I give it 50-50actually.
(21:40):
Well, you're pretty optimistic,yeah, so, Steve, I usually well
I often am optimistic.
I thought you were a skeptic Onmany things, but not on
everything.
So, Steve, let's turn to ourmailbag.
So we have here a question Areindex funds the best choice for
(22:02):
everybody?
Steve Davenport (22:05):
I think the ETFs offer a great one-stop
solution.
Like all solutions, you modifyand adjust as your needs change
and as your education andcomfortable with these ideas
changes.
I think for an individual whowants to structure something,
that they can set it and forgetit, these are a very good
(22:29):
solution.
What do you think individualsdo in stocks, Clem?
Clem Miller (22:35):
Well, I think that the younger you are, the more
you want to invest in ETFs oractively manage mutual funds,
even despite the fees.
I would do your research, ofcourse.
I think as you get older andhave more assets, then I think
(22:59):
you can expand into other assetclasses and also into specific
stocks.
Again, if you're going to buyindividual stocks, they should
be stocks that you knowsomething about, not based on
who you talk to at a cocktailparty or something like that.
(23:21):
I think you should really havedone some research before you
invest in particular stocks and,as you, there's a transition
period here too.
There's a long time periodbetween when you're young and
when you're older, in which youcan gradually move, as your
knowledge level increases andyour assets increase, from more
(23:44):
of an ETF-only approach or apassive-only approach to an
approach where you're using allactive or active mutual funds or
investing in stocks by yourself.
So it can be a transitionperiod as well.
Steve Davenport (24:04):
So, Clem, I mean I would summarize and say
that, first of all, looking atstatements and having assets
that you can look at andevaluate is a great place to be
right.
It's nice to have assets versushave no assets and worry about
the future without some of thethings that can help you.
(24:26):
The first thing is fees matter.
I think that fees are animportant part of how you manage
your life and the expenses youpay for things.
It matters a lot when you talkabout the magnitude of the
assets you have in yourinvestments.
Allocation is your comfort withrisk?
How comfortable are you withyou know, when you go to sleep
(24:48):
at night and you hear the marketwas down 3%, does it bother you
or does it not bother youBecause your time horizon
matters?
A couple of assets starts to bemore of a factor as you get
older and you start to want touse those assets to cover your
expenses.
They evolve, your needs evolveand taxes, like fees, can make a
(25:11):
difference.
So anything else to add, Tom?
Clem Miller (25:16):
I would add just a couple of things.
One is you know no asset istruly safe.
You know even treasury bills,treasury bonds, I should say
which you know have no creditrisk per se.
Credit treasury bonds do haveinterest rate risk as rates go
(25:37):
up, bond prices go down and viceversa.
So there is risk associatedwith the so-called riskless
assets.
So I'd keep that in mind.
I would say safer, I guess, isbetter, yeah.
And then I would say that Iwould agree entirely with you,
steve, about you know, if themarket goes down 3% in a day,
(25:59):
not to panic and sell.
It's really important not topanic and sell.
In fact, if the market goesdown 3%, 5%, 10%, that's the
time to be buying stock, not atime to be selling stock.
And if you're comfortable doingthat, then you're somebody who
should be investing.
But that's you know behavioral,psychological thing that you
(26:25):
know that investors should like.
You know what's a good entrypoint.
That's what professionalinvestors call it An entry point
for buying.
You know, into the market orinto individual stocks, you need
to be comfortable buying lowand selling high and not the
opposite.
Steve Davenport (26:43):
So maybe we should do a behavioral podcast.
Clem Miller (26:46):
I think we should at some point.
Steve Davenport (26:49):
Okay, well, thanks everybody for listening.
I hope you appreciate it and Ihope you give us a like and a
share.
We don't have ads and we dothis as a way to give back and
we hope you enjoy it and we lookforward to our next podcast.
Thanks, everybody.
Clem Miller (27:07):
Thanks, Steve.
Welcome everyone to Skeptics Guide to Investing.
I'm Clem Miller and today we'regoing to talk about reviewing
your investment statements.
How to start the new year.
Steve Davenport and I will diginto the steps you need to take
when starting the year so yougain confidence about your
statements.
Where do you start with yourstatements, Steve?
Steve Davenport (00:27):
There are a lot of ways to look at it, but
here's my process.
I look at fees first.
I always know what you pay andwhat you're getting for it.
The second thing I look at isallocation between growth or
stocks and safety and bonds.
That trade off varies based onyour age.
Then I look at income how muchand how tax efficient is the
(00:51):
income of receiving?
Then, lastly, I look at taxes,because I want to understand any
decisions I have to make thatyear and how they're going to be
affected by taxes.
Clem Miller (01:04):
Steve, is allocation really the first
thing or the most importantthing you look at?
Steve Davenport (01:09):
On my list?
It isn't.
I look at fees as the easiestway for most individuals to
improve their results.
So, yes, you look at it onceand you set it up and hopefully
it's good.
But I also think that, forindividuals, understand how much
you made for the prior year,how much you paid in fees to get
(01:30):
to that result and thendetermine where you want to go
from there.
I think, understanding thosenumbers and realizing how much
they are when you see your feesget into the $1,000 or more, you
start to realize that this issomething I can control and
something I can manage andultimately, I think that leads
(01:52):
you to a better net result.
I think people talk aboutreturns in a gross sense,
meaning with no fees, but wereally started going to start to
take this to.
Let's talk about things interms of a net Net.
To you, what did you make lastyear?
We tackled investments andpersonal finance a few weeks ago
(02:14):
, but today I think, taking thatdeeper dive.
When you look at your ownassets, how do you evaluate your
results and think about them?
I think it can make you feeloverwhelmed at first, but we're
all responsible for our ownresults.
Let's make financial wellness apriority for 2024.
Clem Miller (02:35):
Well, okay, Steve, that's great.
What should our fees tell us?
Steve Davenport (02:39):
First, at fees, I like to look at it as
different levels of fees.
If you have an advisor, you'repaying an advisor a fee and he
collects it either monthly orquarterly.
Those fees can be between 50basis points up to 150 basis
points.
Level two is what funds or ETFsdo you use to deliver those
(03:02):
results?
And they have a level of fees.
So if you're paying an advisor1% and he's putting 1% mutual
fund in your account, that meansyou're overall paying 2%, and
so that is starting to besignificant.
If the average return of yourequities and bonds is 8% and
(03:23):
you're paying 2%, 25% is goingaway to the person who's
managing it for you.
That's significant and that'ssomething you should try to
change.
Level three is where are thereany loads on the funds?
Level?
Funds have this fee that isassociated with selling their
product and therefore you paythat fee as a load, and it can
(03:48):
be significant.
Some of them are spread overthree years, five years or seven
years.
And level four are there anycommissions?
Most places have eliminatedcommissions and they're not
really a factor anymore.
They and I did a study aboutfees and they said, looking at
the returns, the most cleardeterminant of good returns is
(04:12):
lower fees.
So when we look for improvingsomething, we can hear about an
advisor or a fund that has greatreturns, aka ARC.
But when you look at it overtime and you look at what the
fees are paying, it gets harderand harder to justify higher
(04:33):
fees.
Clem Miller (04:36):
Actually, Ark might be a good example of a
manager that does well sometimesand does very poorly other
times, and so the question is doyou really want to pay a high
fee for something like that?
So I mean, Steve, back on fees.
Obviously, index funds, ETFsthat are tracking index funds,
(05:00):
have quite low fees, quite lowwhat are called expense ratios
or fees, and it strikes me thatmost people or maybe not most,
but a lot of people have alreadycaught on to the fact that
their fees are quite low.
What do you say to that?
Steve Davenport (05:19):
I think that's great.
For most people, I think it's agreat solution.
I think that what we want issimplicity and if we can leave
our assets alone, time works inour favor.
So lower fees, longer timehorizon, don't trade as often
those three things reallydetermine success.
Index funds usually varybetween two basis points to 35
(05:44):
basis points.
Mutual funds vary between 50basis points and 300 basis
points.
That's 10 times the amountyou're paying.
They better deliver moreresults if you're going to pay
10 times more.
Etfs are somewhat more thanindex funds because you have
(06:06):
daily liquidity or interdayliquidity.
Etfs go between five basispoints, but I saw a Bitcoin ETF
at 150 basis points 1.5% that'sa mutual fund like fee for an
ETF, and then loads can add 2%up to 10% to your overall
(06:28):
expenses.
These are big numbers and youjust have to understand what
you're paying for.
Clem Miller (06:35):
Yep.
So in my portfolio I useindividual stocks and so there
are only commissions for me.
I don't pay anybody elseexpense ratios or anything like
that.
That's me, I feel like I've gotgiven my professional
background, I've got a lot ofmoney.
I've got the knowledge andexperience to be able to do this
(06:55):
investing individual stock,investing myself.
But that's obviously not thecase for everybody.
A lot of folks just don't havethe time or really the resources
to actually do this kind ofwork themselves.
So they're willing to pay somefees.
It's just a question of howmuch those fees are.
Steve Davenport (07:19):
We use Morningstar for a lot of our
analysis and it costs us asignificant amount to get the
value from all the analystscovering all the names, but it's
a great asset when you have alimited amount of time to follow
every company.
So I believe that the individualhas to make a decision.
(07:39):
There's some, I believe in thePeter Lynch method of kind of in
the Charlie Munger knowing whatyou own making sure you're
familiar with it, that's fine.
I think that for most people,an index fund with low fees is
the right approach.
The main thing is look at yourassets and try ensure your
(08:03):
portfolio is helping youaccomplish your goals.
There may be cases where a fundand ETF is beating the
benchmark by 100 basis pointsand it's worth paying the 50
basis point fee, but there's alot of cyclicality and it may
beat them for three years, butfive years, seven years, 10
years, it's behind.
That tells you that there's atime and a place for every
(08:26):
strategy and, as you mentioned,ARC had its time and its place,
but it may not be the right timeand place right now.
You have to take responsibilityfor making your assets satisfy
your plan.
Clem Miller (08:41):
So, Steve, I really like those thoughts.
You mentioned asset allocationearlier.
Where does that fit into thepicture?
Steve Davenport (08:48):
I think that's the next area that you want to
understand how much risk am Itaking?
Allocation is considered theholy grail for most advisors.
It represents something like90% of the results come from
your allocation decision.
Time is your friend when you'reyounger, and caution is advised
(09:09):
as you approach retirement.
There's a time to make backyour losses if you start early.
But a simple formula that somepeople use is to take your age,
subtract it from 110, and thatequals your equity percentage.
Some people apply maximums andminimums of a maximum of 90% in
(09:33):
equities or risky stock and aminimum of 25% Is real estate,
an asset for investing or living.
I think that when you look atyour assets, we're talking about
your investable assets, but theother things you own car, home
and potentially a second homeyou need to think about how all
(09:57):
of those assets are growing andhow they affect your overall
wealth.
I think that updating yourallocation once per year and
getting it back in line, maybein January when you're doing
this review of your statements,is a good idea.
Looking at it every day or fivetimes during the day not a good
(10:18):
idea.
I think that when we look atour allocation, we wanna
understand how much is in USassets versus non-US.
The world's capitalization is55% US, 45% non-US, but most
people are more comfortableowning things that have a home
country bias, meaning they liketo own companies that are US
(10:41):
companies.
Is that a mistake?
It hasn't been, because the UScompanies tend to have a better
operating environment and also asystems and educated workforce.
So people might only wanna put20% in non-US assets.
(11:03):
And the last thing I'd say aboutasset allocation is there's
something in the middle and I'ma middle child so I call it the
messy middle.
I yield prefers utility orinfrastructure reads.
I think that there are somecharacteristics of fixed income,
some characteristics of equity.
Therefore they don't easily fitin one of those buckets.
(11:27):
But that's where we get into amore complicated decision and I
think that all of this is getstarted, understand, and then we
start to get into these nextquestions about how to allocate
more sophisticated way.
What would you invest in whenyou were young, clem?
Clem Miller (11:46):
Ah, so I don't remember when I was young.
That's just a joke.
Well, when you were more sanethan you are now let's put it
this way, and I guess back thenit was pretty much US and
passive ETFs.
(12:06):
I knew I didn't have enoughmoney or accessed information to
do individual stock selection.
But all that has changed and Ifeel like I can certainly do
that now.
I wanted to address one or twopoints I think that you raised
(12:28):
when you were just talking.
I think that you know the messymiddle, some of those things
high yield, preferredinfrastructure, you know, maybe
those things are.
It could be that those thingsare beyond the reach of some
retail investors.
There are some nuances to a lotof these asset classes that are
(12:52):
complicated or confusing, so I'mnot so sure that I would
recommend those.
And US versus non-US that'sworth the whole podcast in and
of itself.
So I knew that one would getyou excited.
I mean, I'll just point out onething, which is you don't
necessarily want to go by marketcapitalization.
(13:14):
You know 40% of the earnings ofthe S&P 500 companies come from
overseas.
So by investing just in the S&P500, you're actually getting a
lot of global economic exposure.
You're not really limitingyourself in that respect.
(13:36):
The reason to invest in in myopinion, the reason to invest in
international stocks is to beable to have exposure to stocks
that you just can't get in theUnited States.
You know, if you're going toinvest in a US pharmaceutical
company and I know we're goingto be talking in this round of
(13:59):
podcasts about Lilly and NovaNordisk but if you're going to
invest in Lilly, why not investin Nova Nordisk?
They're both companies.
One just happens to be overseasand one just happens to be in
the United States.
So what you know, what's thedifference?
You know you go where youropportunities are.
(14:20):
I agree.
Steve Davenport (14:22):
I'm really just giving people a rundown of
things that they consider intheir allocation.
I'm not recommending to anybodyto do any particular asset
class.
I'm just saying that there'srisky and they're safe.
There's cash as the safestasset and maybe there's an Ark
fund that's the most risky, orthere's an individual name that
(14:45):
you want to invest in game stuff.
All I'm saying is that there'sa spectrum and people will
invest on that spectrum, and Ithink that when I look at
retirees and their decisionmaking, it's all about income.
Am I getting enough income?
Can I get income from othersources besides bonds?
(15:07):
And that's where some of theinterest in preferreds,
infrastructure and otherutilities stuff comes from.
I'm not saying it's right foreverybody.
A young person shouldn't beinvesting in these utilities.
They should be focused ongrowth.
So I think that as we age, itshould change.
There's so many variables here.
I'm not trying to come up withanybody's asset allocation.
(15:31):
I just want people tounderstand it and I think that
when it gets to looking at someof these assets, it's not always
clear and I think that, likeyou mentioned the US companies
that have great foreign presence, like Coke, 80% of their
revenue is coming from overseas.
So, yes, is it a US domesticcompany?
(15:53):
Absolutely.
Is it really a company thatonly depends upon the US economy
?
Absolutely not.
So I think that it getscomplicated, and that's why
we're trying to do this is totry to simplify it for people
and give them some good ideas.
Clem Miller (16:10):
So, Steve, you were talking about income and I'm
wondering can you sort of runthrough the income that comes
from particular areas?
I know you've got some thoughtsabout safe versus risky Sure
Buffet approach.
What would you say to these?
Steve Davenport (16:30):
So when we're looking to be retired and cut
back on work, it's the incomeyou can generate that will give
you the freedom and the optionson your life in terms of what
you can do.
Most of people have a socialsecurity and they may have
another pension or other assets.
So I think that they look totheir portfolio to provide
(16:53):
additional income and when welook at our two main asset
classes risky they'll typicallyyield between zero and 4%.
When we look to safer assetsnow, they're yielding somewhere
between 4% and 7%.
So do we put it all in safetyor do we still keep a little bit
of risky?
(17:14):
I think the answer is thatwe're going to have a retirement
that will probably last from 65to 85.
It's a 20 to 30 year period.
That period is going to needsome growth, so I think you have
to mix the two in a way thatmakes sense for yourself.
Historical returns for riskyassets are about 8%, which about
(17:36):
1.5% is going to come from thedividend or the income, but most
of it's going to come from thegrowth and the safe assets 4%,
and most of it is going to comefrom the income.
So those two assets are goingto do different things for your
portfolio and different thingsfor you.
When we think about inflationat 2% eventually, maybe after a
(18:02):
few years and fees of 1% to 1%,there's things that are going to
eat into those returns.
And if you just have a returnof all safe assets and you've
got inflation at 2%, taking thatlittle way, that's not going to
lead you to retaining yourspending power.
(18:22):
So Buffett had a simplesolution.
He said, if he was to die andwhat he'd tell people to do,
he'd say 80% in the S&P 500 and20% in Treasuries.
And if you think about that,the yield, you know the return
will be somewhere around 7.2%,with fees somewhere under 10
(18:44):
basis points.
That's a pretty efficientportfolio that's going to have
pretty good results and the 7.2%is going to most likely cover
inflation and still give yousomething left over for growth.
So when we think about all ofthese things, we need to start
thinking about gross and net.
(19:05):
Gross means a total return andthen net, net of any taxes, fees
or other items.
So I think it's really aboutunderstanding your income is
something that you don't need todo right away, but as you're a
person of time and I know youand I are trying to figure out
where is that income going tocome from, how are we going to
(19:28):
get it and how?
Clem Miller (19:28):
Safe, is it so, Steve, you mentioned taxes as
being a key element here.
Can you talk a little bit moreabout that?
Steve Davenport (19:36):
Sure, I hope that I can help, but here we're
getting into a very specificarea where individuals have
different states and cities andmunicipalities that may tax them
in certain ways.
So I recommend that you talk toyour accountant and you
understand how your local, cityor state taxes investments.
(19:57):
When we're looking at taxes,we're talking about taxes on
gains or losses from the sale ofthe security in one of your
taxable accounts and on incomethat you receive.
So income and capital gainshave different tax rates and you
need time to understand whatthey are.
As you think about your assets,there are many choices for you
(20:20):
to defer or to pay taxes.
Today You're going to earn moreor less next year.
Is your job?
Is you or your partner changingjobs?
What are the tax rates going tobe over the next five or 10
years?
There's a lot of people who areworried about the amount of
debt the United States has andwhat that means for tax policy.
(20:41):
These are all good points andgood things to think about,
because some people say, oh, Idon't want to pay today's tax
rate.
In five or 10 years we mightlook back at 2024 as the golden
age to assault securities.
Clem Miller (20:59):
Yeah so.
Steve Davenport (21:02):
Where do you think tax rates are going?
Clem, did you put an even betbetween higher and lower?
Clem Miller (21:11):
Yes.
Steve Davenport (21:12):
Really.
Yeah, I tend to believe they'regoing to go higher.
Clem Miller (21:18):
Yeah, well, I mean, certainly, with the fiscal
deficit being what it is, itcould go higher, but also we're
seeing some pretty strongeconomic growth and that might
help to close the fiscal deficitwithout higher taxes or without
significantly higher taxes.
So I think it's I give it 50-50actually.
(21:40):
Well, you're pretty optimistic,yeah, so, Steve, I usually well
I often am optimistic.
I thought you were a skeptic Onmany things, but not on
everything.
So, Steve, let's turn to ourmailbag.
So we have here a question Areindex funds the best choice for
(22:02):
everybody?
Steve Davenport (22:05):
I think the ETFs offer a great one-stop
solution.
Like all solutions, you modifyand adjust as your needs change
and as your education andcomfortable with these ideas
changes.
I think for an individual whowants to structure something,
that they can set it and forgetit, these are a very good
(22:29):
solution.
What do you think individualsdo in stocks, Clem?
Clem Miller (22:35):
Well, I think that the younger you are, the more
you want to invest in ETFs oractively manage mutual funds,
even despite the fees.
I would do your research, ofcourse.
I think as you get older andhave more assets, then I think
(22:59):
you can expand into other assetclasses and also into specific
stocks.
Again, if you're going to buyindividual stocks, they should
be stocks that you knowsomething about, not based on
who you talk to at a cocktailparty or something like that.
(23:21):
I think you should really havedone some research before you
invest in particular stocks and,as you, there's a transition
period here too.
There's a long time periodbetween when you're young and
when you're older, in which youcan gradually move, as your
knowledge level increases andyour assets increase, from more
(23:44):
of an ETF-only approach or apassive-only approach to an
approach where you're using allactive or active mutual funds or
investing in stocks by yourself.
So it can be a transitionperiod as well.
Steve Davenport (24:04):
So, Clem, I mean I would summarize and say
that, first of all, looking atstatements and having assets
that you can look at andevaluate is a great place to be
right.
It's nice to have assets versushave no assets and worry about
the future without some of thethings that can help you.
(24:26):
The first thing is fees matter.
I think that fees are animportant part of how you manage
your life and the expenses youpay for things.
It matters a lot when you talkabout the magnitude of the
assets you have in yourinvestments.
Allocation is your comfort withrisk?
How comfortable are you withyou know, when you go to sleep
(24:48):
at night and you hear the marketwas down 3%, does it bother you
or does it not bother youBecause your time horizon
matters?
A couple of assets starts to bemore of a factor as you get
older and you start to want touse those assets to cover your
expenses.
They evolve, your needs evolveand taxes, like fees, can make a
(25:11):
difference.
So anything else to add, Tom?
Clem Miller (25:16):
I would add just a couple of things.
One is you know no asset istruly safe.
You know even treasury bills,treasury bonds, I should say
which you know have no creditrisk per se.
Credit treasury bonds do haveinterest rate risk as rates go
(25:37):
up, bond prices go down and viceversa.
So there is risk associatedwith the so-called riskless
assets.
So I'd keep that in mind.
I would say safer, I guess, isbetter, yeah.
And then I would say that Iwould agree entirely with you,
steve, about you know, if themarket goes down 3% in a day,
(25:59):
not to panic and sell.
It's really important not topanic and sell.
In fact, if the market goesdown 3%, 5%, 10%, that's the
time to be buying stock, not atime to be selling stock.
And if you're comfortable doingthat, then you're somebody who
should be investing.
But that's you know behavioral,psychological thing that you
(26:25):
know that investors should like.
You know what's a good entrypoint.
That's what professionalinvestors call it An entry point
for buying.
You know, into the market orinto individual stocks, you need
to be comfortable buying lowand selling high and not the
opposite.
Steve Davenport (26:43):
So maybe we should do a behavioral podcast.
Clem Miller (26:46):
I think we should at some point.
Steve Davenport (26:49):
Okay, well, thanks everybody for listening.
I hope you appreciate it and Ihope you give us a like and a
share.
We don't have ads and we dothis as a way to give back and
we hope you enjoy it and we lookforward to our next podcast.
Thanks, everybody.
Clem Miller (27:07):
Thanks, Steve.
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