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Welcome to personal finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life. Every episode teaches you personal
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finance and long-term investing in
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simple terms. Now, here's your host,
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Jesse Kramer. Hello and welcome to
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Personal Finance for Long-Term
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Investors, episode 130. My name is Jesse
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Kramer. By day, I work at a fiduciary
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wealth management firm helping clients
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nationwide. You can learn more at
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bestinterest.blog. blog/work. The link
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is in the show notes. By night, I write
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the best interest blog and I host this
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podcast. I also put out a weekly email
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newsletter. And all of those projects
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help busy professionals and help
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retirees avoid mistakes and grow their
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wealth by simplifying their investing,
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taxes, and their retirement planning.
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Later on in today's episode, Cullen Ro
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will be joining me. Cullen is a a plain
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spoken systemsoriented financial
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thinker, and I'd say he focuses on how
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money actually works rather than how
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people wish it worked. Unlike many, you
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know, maybe macroeconomic commentators,
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though, Cullen's lens is very much
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grounded in portfolio management and
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real world investing that applies to
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individual investors like us. He's
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concerned with how narratives about
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money can mislead investors into bad
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decisions. And I'm excited to share some
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of his latest thoughts with you all
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today. But first, we'll do a quick
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review of the week. This one comes from
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BAB3546,
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who says, "Excellent financial guidance,
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relevant, and transparent. This is the
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only financial podcast I listen to.
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Jesse is great at explaining difficult
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financial topics and his guidance aligns
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with what I believe helps the majority
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of investors. Also, I appreciate how
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transparent he is about any incentives
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he has related to his podcast or
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newsletter. I recommend signing up for
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the weekly email. Thank you, Jesse.
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Well, thank you, bab.
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I'd be happy to send you a supersoft
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podcast t-shirt. Just shoot me an email
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with your shirt size and address and I
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will get that t-shirt mailed off to you.
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And before Cullen joins us today, I
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wanted to share a couple thoughts about
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the intellectual side of investing in
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portfolio management. I think there's a
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funny conundrum that I found in the
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world of personal investing. You know,
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usually investors who overthink what it
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takes to build a portfolio, they usually
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end up underperforming in some way or at
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the very least they find that all that
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effort earned them essentially zero
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marginal gain. It was just wasted
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effort. And then again, investors who
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don't think at all about investing can
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actually, you know, do reasonably well,
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I would argue. But also, they they tend
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to float through the investing world
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with these really big misconceptions.
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And at times, those misconceptions can
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cause them massive damage. Personally, I
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think there's a Goldilock zone, though.
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I do think there's a Goldilock zone. I
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think it's important to to learn about
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investing and to keep learning about it.
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And you don't have to spend every moment
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thinking about it. you don't have to
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update your your spreadsheets on a daily
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basis and and rebalance on a weekly
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basis. But I think there are lessons
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that these eternal lessons that you can
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build upon and and keep learning about.
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I've built one upon the other and it's
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provided me with this I'm going to use
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the word steelier, right? The steely
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reserve against the the slings and arrow
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that the market can throw my way. So,
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we're not necessarily reinventing the
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wheel here with our investing thoughts
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or with being intellectual about the
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investing pursuit, but we are building
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up this framework of really solid ideas.
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And even if it doesn't make our
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investing complex, I still think
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learning more and more about it can only
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help us out. So, first I'm going to read
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to you guys from an article today that I
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titled Buffett's Way versus Index Funds.
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And it was inspired by a reader
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question. This reader wrote in and said,
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"Jesse, I appreciate everything you have
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to say on stock investing and lowcost
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diversified index funds. I also love all
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the Warren Buffett wisdom you share, but
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at least when it comes to investing,
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isn't Buffett a counter example to
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diversified indexing? How do we square
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that circle? An amazing question. And
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it's amazing question. And I I kind of
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think of this question. It's like that
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young eager dad walking up placing a
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baseball sitting on top of a tea. So
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that little Timmy, you know, that's me.
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I can step up with my $29 Walmart
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aluminum bat and hit a double out to
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left center field. Bam. So, thank you
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for that very nice setup. But this
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reader has a great point because the
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long-term investing, the long-term kind
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of passively based, lowcost diversified
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investing that we talk about here on the
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podcast that I write about on the Best
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Interest blog, that is not how Warren
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Buffett has invested over his long
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career. And I would actually argue that
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the last 10 or 15 years of financial
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media has basically misrepresented
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Warren Buffett's investment approach. I
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can go into that story a little bit, but
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basically it has started to say and and
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you will often find things that say
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things like Warren Buffett has all his
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money in an S&P 500 index fund. That's
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not exactly true, but if you follow me
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today, you'll see that there is a lot of
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common ground between Warren Buffett's
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investment approach and the kind of
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stuff we talk about here. You'll also
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see where the divergences exist and why
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they exist. And I'll present maybe some
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sort of unified theory of stock
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investing that connects diversified
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index investing with some sort of more
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individualized stock picking and
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business picking and it it unifies them
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with some same core logic. So anyway,
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let's talk about a couple of the core
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commonalities up front. Whether picking
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individual stocks or buying an index
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fund, investors ultimately buy ownership
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in real businesses. That's what we're
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doing here, right? Stocks are not
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lottery tickets. They are shares of
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companies. They are fractional ownership
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of those companies, of their current
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earnings, of their future earnings, of
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their future cash flows, of all their
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assets. That's what you are buying when
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you're buying a stock. And both Buffett
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style investing and indexing rely on the
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idea that a company is worth the present
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value of its future cash flows. I'll say
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that again. A company is worth the
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present value, the value today, of all
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of its future cash flows. We added up
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all the company's profits from now until
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judgment day, as Warren Buffett would
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say, and then we discounted those
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dollars back to today. That's what a
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business's intrinsic value is worth. But
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does a stock's price always match that
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stock's value or the company's value as
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we just described it 30 seconds ago?
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Well, that's where some of today's
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contention and confusion exists. I'd
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answer that question this way. I'd say
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that investors vote with their dollars.
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They'll buy or sell a stock if they
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perceive it as undervalued or
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overvalued. And on average over time,
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yes, we expect a stock's price to be
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somewhat correlated with the company's
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value, right? That's clearly the
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expectation. You wouldn't expect a
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stock's price to always be wildly
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different and uncorrelated to the value
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of the company itself. But there are
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periods periods of time when a stock
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price is disjointed from its underlying
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value. This is especially recognizable
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in retrospect, right? It's very very
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hard to recognize it in the moment. It
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can be very hard to recognize it with
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any sort of foresight, but given enough
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time in retrospect, that's when you can
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start to see it. This idea called the
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efficient market hypothesis or EMH. The
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efficient market hypothesis is the idea
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that all the buyers and all the sellers
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and all the traders on the in the stock
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market, they use all available
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information as best as they can to hone
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in on the proper price for a given
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stock. Now, it doesn't mean that today's
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price is guaranteed to be correct or
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perfect, per se, but instead it suggests
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that poor schmucks like me, and I'd
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argue like you, can't possibly know
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enough to know whether the market is
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right or wrong. Or put another way, the
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market, all those buyers and sellers and
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traders, the market has all the
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information about any given company,
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while you and I only have some of that
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information. Over time, there's no way
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that you and I can consistently outsmart
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the market or consistently beat the
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market's prices or just be more accurate
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than the assessments that the market is
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bringing to us. That idea, that is the
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pillar of index investing. You can't
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beat the market. So, why bother trying?
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Just buy everything at the market's
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given prices and then hold on for the
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long run. Now, let's pivot and talk
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about more specifically how Warren
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Buffett invests his money or how he has
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always invested his money because the
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efficient market hypothesis is is just
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one example of where Warren Buffett and
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his famous business partner Charlie Mer
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would very much disagree. They don't
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need to outsmart the market all the
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time. And they're not sure that they
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could outsmart the market all the time
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for what it's worth. But what they do
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argue is that they need to outsmart the
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market sometimes. They'd also say that
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they don't need to make really smart
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decisions about every single stock, but
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instead they should make very few
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investment decisions, but when they do
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make those decisions, they are smarter
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than the market. And sometimes they
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suggest that the stock market loses its
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mind. Basically, there's some sort of
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temporary insanity, some sort of ex
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irrational exuberance or some sort of
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panic. It could be widespread. It could
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be relatively narrow. Maybe most of the
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market is behaving efficiently, but this
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small corner over here is acting kind of
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berserk. But either way, Warren Buffett
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would say that there are times when the
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market is not efficient, is certainly
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not accurate in its pricing, does not
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give appropriate prices to particular
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stocks. And earlier I I mentioned, you
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know, this poor schmucks like me and you
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not having enough info to know whether
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the market was right or wrong on any
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given day. Well, Warren Buffett would
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say, I'm different than that. I do have
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enough info at times to know whether the
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market is right or wrong about a
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particular stock. And when Warren
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Buffett identifies one of those
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opportunities and if that opportunity
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has a sufficient margin for error around
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it just in case his math ends up a
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little too optimistic, well, that's when
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he pounces. And that's the method by
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which Warren Buffett has built his
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investing legend. Now, I really like
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this story. When faced with the idea
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that an investor could skillfully pick
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individual stocks like Warren Buffett
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did, and I will say for those who are um
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who really want to know, Warren Buffett
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did a lot less stockpicking than he did
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of buying individual private companies
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almost maybe like a private equity
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company would nowadays. Yes, he did some
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stock picking, but but a lot of his
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empire involved um you know buying the
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Nebraska furniture mart for example. It
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was a private furniture company in
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Nebraska. wildly successful business
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that Warren bought for a pretty
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reasonable price and now he's owned it
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for 40 years or something like that. Or
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Se's Candies is another one. If you're
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out on the West Coast, you know Se's
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Candies. I think Warren Buffett bought
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it in the '7s, I want to say. And it's
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just been this wildly successful
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investment that he bought an entire
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private candy company and he's owned
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that for the last 50 years. So anyway,
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that's how most of Buffett's success has
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been has been buying individual
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businesses, but yeah, he's picked some
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stocks, too. Anyway, back to what I was
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saying before. When when faced with the
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idea that an investor could skillfully
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pick individual stocks, the hardline
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index fund investor, the efficient
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market acolyte would invoke the famous
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coin flipping metaphor. And in fact,
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there's a famous debate where a business
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school professor, it was 1984 at
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Columbia University, and a University of
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Rochester, my alma mater, a University
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of Rochester finance professor named
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Michael Jensen challenged Buffett's
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investing record. And Jensen said, "If a
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large group of monkeys flipped coins and
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predicted if the coins would land heads
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or tails over time, a small number of
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those monkeys would by random chance or
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luck correctly predict the outcome of a
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lengthy series of flips." And and in
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essence, that metaphor is saying that
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Buffett's record, his stock picking
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record, his investing record is nothing
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more than Warren Buffett being the one
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lucky monkey, right? It's just a a lucky
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series of flips. But Buffett in his
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Midwestern folksy way, he took that
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metaphor and ran with it. What if he
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postulated, you follow Jensen's monkey
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metaphor and you get down to the best
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coin flipping chimpanzees in the world,
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only to find out that all of the best
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coin flipping chimps were raised in the
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same zoo? Well, it would beg the
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question, how could coin flipping be
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pure luck if all the best coin flipping
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chimps are from the same zoo? Surely,
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there must be something in the water at
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that zoo. There must be some sort of
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special training from the zookeeper.
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There must be some non-luck skill-based
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reason connecting all these winning
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chimpanzees. Buffett then laid out nine
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individual investors who not only beat
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the market but crushed the market for
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multi-deade periods between the late
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1950s and the early 1980s. They weren't
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nine random or cherrypicked investors.
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Instead, all nine investors were
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students of Benjamin Graham and David
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Dodd, the two founding fathers of value
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investing. Ben Graham famously wrote the
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intelligent investor. He was Warren
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Buffett's kind of mentor and idol uh
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when Buffett was in grad school. But
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anyway, th those nine investors were all
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quote unquote raised in the same zoo,
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right? That is they all followed very
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similar value investing philosophies all
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from Graham and Dodd. And clearly
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Buffett would argue there must be some
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skill in their common investing
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approach. And that parable came to be
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known as the super investors of Graham
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and Dodsville. But there are some
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important caveats here too. Buffett does
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recognize that many people can't or
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won't invest the way he does. So, he's
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on the record recommending index funds
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to most investors. And that's where that
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story comes from where he has instructed
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that 90% of his estate be invested in an
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S&P 500 index fund for his heirs and for
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you know charitable giving in the
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future. So, basically what he's saying
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there is I can be smarter than an index
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fund, right? Buffett can be smarter than
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an index fund, but he recognizes that
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not everybody can be. I I think that's
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kind of a fair assessment. Also, another
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caveat. Buffett started investing in an
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era with basically no computer power,
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way less instant data, far fewer active
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investors looking for opportunities. The
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market was less efficient when he
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started investing. I think that's hard
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to argue with. But the real question for
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you listening at home is, can you follow
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that same path? It's not that the market
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is infallible. All you have to do is
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look at daily price movements to realize
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that the market is constantly wrong. But
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it is rapid to amend its previous
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mistakes. If it was perfect, why are the
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prices moving so much? How can it be off
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by multiple percentage points in a given
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day? The bigger question is whether you
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possess the insight and the information
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to recognize the market's mistakes,
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whether you have the patience to wait
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for the big mistakes and whether you
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have the fortitude to pounce on those
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mistakes when you recognize them. You
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know, do you want to invest that way?
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Most people don't. In fact, the data is
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clear that even most professionals who
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attempt to consistently outperform the
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market will fail to do so. It's really
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hard to do. Instead, most people should
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accept the returns of their diversified
00:13:59
portfolio, build a financial plan around
00:14:02
those returns, and then just move on. In
00:14:04
other words, the efficient market
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hypothesis is probably wrong, or at
00:14:08
least it has some clear flaws, but 99%
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of people should act as if it's
00:14:13
perfectly right. Here's a quick ad, and
00:14:16
then we'll get back to the show. Did you
00:14:17
know my written blog, The Best Interest,
00:14:20
was nominated for 2022 Personal Finance
00:14:23
Blog of the Year, and it's been
00:14:24
highlighted in the Wall Street Journal,
00:14:26
Yahoo Finance, and on CNBC. I love
00:14:29
writing, especially when that writing is
00:14:31
to share financial education. And I
00:14:33
usually write one or two articles per
00:14:35
week. You can read them all at
00:14:37
bestinterest.blog.
00:14:39
Again, the web address is
00:14:41
bestinterest.blog.
00:14:43
Check it out. And with that, let's bring
00:14:45
Cullen Ro on to the show. Cullen is the
00:14:47
founder and chief investment officer of
00:14:49
Discipline Funds. And through his
00:14:51
writing and research, he brings this
00:14:53
rigor and nuance and realworld
00:14:55
perspective to topics that are often
00:14:56
either overly simplified or completely
00:14:58
misunderstood. And Cullen recently
00:15:00
published a book called Your Perfect
00:15:02
Portfolio, which explores over 20
00:15:04
different investment strategies in a
00:15:06
quest to find the best way for you to
00:15:09
invest.
00:15:13
All
00:15:15
right, Colin, thanks for uh thanks for
00:15:16
stopping by the podcast, man. And uh
00:15:18
let's start with this cool term that I
00:15:20
I've kind of uh previewed for the
00:15:22
audience a little bit. You call it
00:15:23
define duration and and just reading
00:15:25
some of your research. It's almost like
00:15:27
taking some sort of almost fixed income
00:15:29
concepts of duration and applying it to
00:15:32
stocks in order to maybe level the
00:15:34
playing field when it comes to building
00:15:35
the portfolio. But I thought if you
00:15:37
could maybe you can start with just
00:15:39
reminding the audience what duration
00:15:41
really means especially kind of from a
00:15:42
fixed income world. But then could you
00:15:45
pivot and explain this term you use the
00:15:47
point of indifference and how to apply
00:15:50
the concept of duration to stocks. In
00:15:52
the fixed income world the concept of
00:15:56
duration basically means interest rate
00:15:58
risk. It's really you're trying to apply
00:16:00
a time horizon over which the instrument
00:16:03
has principal risk. And so you can
00:16:05
actually understand that for instance a
00:16:08
a bond with a duration of five basically
00:16:11
means that if the interest rate relative
00:16:14
to that fixed income instrument moves by
00:16:16
1% in either direction the duration
00:16:18
being five means the principal will
00:16:20
change by 5%. So if interest rates go up
00:16:24
by 1% the bond's principal value will
00:16:26
fall by 5% inside of that period inside
00:16:29
of like a one-year period. And so you
00:16:31
have this very strict understanding of
00:16:33
the the way the principle is related to
00:16:37
the the time horizon over which the
00:16:40
instrument might have a certain sequence
00:16:41
of returns risk. And that's really the
00:16:43
the kicker is that you can think of
00:16:45
bonds in terms of a sequence of return
00:16:47
risk outcome where when something bad
00:16:50
happens you kind of know mathematically
00:16:53
well what is my break even point in the
00:16:55
long run? How long is it going to take
00:16:57
me for for the interest that this bond
00:16:59
is paying for me to get back to my break
00:17:01
even point? And so you have this very
00:17:03
quantifiable concept of risk across
00:17:06
certain time horizons when you
00:17:07
understand things like duration inside
00:17:09
of bonds. And in the stock market, we
00:17:12
don't really know how to apply that. We
00:17:14
really don't even nobody even really
00:17:16
applies time horizons at all to the
00:17:18
stock market for the in a quantifiable
00:17:20
way. And so when I talk about defined
00:17:22
duration, I'm kind of trying to extend
00:17:25
the the idea of bond duration to all
00:17:28
instruments. And so when I'm defining
00:17:30
the duration of the stock market for
00:17:33
instance, what I'm basically doing is
00:17:35
we're taking an assumed max draw down
00:17:39
and an expected future real return and
00:17:42
we're trying to to sort of estimate what
00:17:45
is a reasonable time horizon over which
00:17:47
this instrument might generate a real
00:17:50
return, a real break even. And that's
00:17:52
what William Bernstein has called your
00:17:53
it's your point of indifference. It's
00:17:55
where you become indifferent to the
00:17:57
principal change of the instrument in
00:17:59
real terms. And so this is basically a
00:18:02
quantified way of applying the same
00:18:05
principle where you're applying a
00:18:06
sequence of returns to the instrument.
00:18:09
So for instance, if the stock market
00:18:11
fell like 50% and you had a certain
00:18:14
expected real return, you could quantify
00:18:17
what is the time horizon over which that
00:18:19
instrument would generate a real return
00:18:22
where you kind of break even. And the
00:18:23
the historical defined duration of the
00:18:25
global stock market has typically come
00:18:27
out to like 15 to 20 years. And so if
00:18:30
you apply this sort of a a reasonable
00:18:33
max draw down, something like a 50% draw
00:18:36
down and then an expected average annual
00:18:38
return, the real return break even point
00:18:41
is about 15 to 20 years on average
00:18:44
applying that sort of a methodology. And
00:18:46
so this allows you to start to apply a
00:18:49
time horizon to the the stock market. In
00:18:52
essence, you're applying a sequence of
00:18:54
returns risk expectation to the stock
00:18:56
market because this is what every
00:18:58
especially retirees, it's what every
00:19:00
retiree worries about is am I going to
00:19:02
retire into 2008? The stock market falls
00:19:05
50%. I I'm undergoing a 4% withdrawal
00:19:08
rate, which suddenly turns into an 8 to
00:19:12
10% withdrawal rate when my portfolio
00:19:14
gets cut in half or something like that.
00:19:15
It's every investor's worst nightmare.
00:19:18
And when you can start to quantify this
00:19:20
out, what it allows you to do is it
00:19:22
allows you to start doing what's called
00:19:25
more of a an asset liability matching
00:19:27
methodology where just for background, I
00:19:30
I worked with banks after the the
00:19:31
financial crisis because I did a lot of
00:19:34
wonky sort of macroeconomic analysis on
00:19:36
quantitative easing and what was the
00:19:38
impact of interest rates and whatnot on
00:19:39
on bank balance sheets and bond
00:19:41
portfolios primarily. And I realized
00:19:44
working with banks that all my retail
00:19:47
investors that I work with have the same
00:19:49
problem, the same temporal mismatch cuz
00:19:51
bonds banks borrow short and they lend
00:19:55
long. They have an asset liability
00:19:56
mismatch in their and they have they
00:19:58
have to be very very conservative about
00:20:01
how much that mismatch is actually
00:20:03
differentiated because if you're not
00:20:05
careful about it, you end up like
00:20:07
Silicon Valley.
00:20:07
>> Silicon Valley. Sure. But the funny
00:20:09
thing is that retail investors have the
00:20:11
exact same issue. I realize when a
00:20:15
retail investor sells into a bare
00:20:17
market, what's really happening
00:20:18
psychologically is they're selling
00:20:21
stocks, they're selling a long duration
00:20:23
instrument because they want the
00:20:25
certainty of a short duration
00:20:27
instrument. They're buying cash, selling
00:20:29
stock because they're realizing that
00:20:32
hey, they don't have enough certainty in
00:20:33
their portfolio. they don't have enough
00:20:35
safe assets to give them the certainty
00:20:37
to ride out the volatility of the stock
00:20:39
market. And so when you can begin to
00:20:42
then build in sort of an asset liability
00:20:45
matching process to a retail investor's
00:20:48
investing methodology, you can start to
00:20:50
build what is basically like a I mean
00:20:53
it's kind of like a bucketing strategy
00:20:54
or like a a structured ladder portfolio,
00:20:57
but you're embedding the stock market
00:20:59
into all of this now where you know, for
00:21:01
instance, you can build out a let's say
00:21:04
a 0 to 10year bond ladder that is pure
00:21:06
fixed income and you just have this
00:21:07
rolling ladder and then if you're able
00:21:10
to quantify the defined duration of the
00:21:12
stock market, you can actually start
00:21:14
layering other assets in where you can
00:21:16
sort of quantify the sequence of returns
00:21:18
out to like 30 or 40 years in theory.
00:21:21
So, and then you can start thinking
00:21:23
about everything and reframing
00:21:25
everything in time horizons rather than
00:21:27
the way we currently do asset management
00:21:30
for the most part is basically like okay
00:21:32
here's a diversified portfolio of let's
00:21:35
say 60 40 stocks and bonds and I've run
00:21:38
your retirement analysis through 10
00:21:40
million Monte Carlo simulations and you
00:21:43
have a 99% odds of success and not
00:21:46
running out of money and that's great.
00:21:49
It's a good process, but it doesn't give
00:21:51
people an understanding of what they
00:21:53
really want, which is when am I going to
00:21:55
have money at certain times in my life.
00:21:58
Am I going to have $50,000 to buy a car
00:22:02
in 2 years? Am I going to have $150,000
00:22:05
to send my four-year-old to college in
00:22:07
15 years? Am I going to have $2 million
00:22:11
in 20 years when I'm 65? And that's what
00:22:14
people want to know. And when you can
00:22:16
start to sort of reframe everything in
00:22:19
time horizons and then quantify it, you
00:22:22
know, there's still there's guesswork
00:22:23
that goes into all of this obviously
00:22:25
because you're guessing, you know,
00:22:27
you're assuming max draw downs, you're
00:22:28
assuming expected future returns, but
00:22:30
you're beginning to quantify this in a
00:22:33
way where it becomes much more
00:22:35
rigorously sort of attached to a
00:22:38
quantifiable process rather than the the
00:22:40
guesswork that goes into just saying
00:22:43
here's a diversified portfolio. I
00:22:45
understand your risk profile to some
00:22:46
degree. And we're pretty sure that
00:22:48
you're going to have enough money, but
00:22:50
we're not really sure if you're going to
00:22:51
have the money in certain buckets when
00:22:53
you really need it. It's just a
00:22:55
fantastically deep answer. But let me
00:22:57
play a devil's advocate on behalf of
00:23:00
some listeners because I skew maybe a
00:23:02
little more conservative than some of my
00:23:04
listeners and they give me some grief.
00:23:06
And some of the numbers when you just
00:23:08
mentioned that 15 to 20 year duration
00:23:10
for stocks, I bet you you perked up a
00:23:12
few ears. So a few of the quite a number
00:23:14
of listeners maybe they come from that
00:23:16
the FIRE background maybe they're bogal
00:23:18
heads they've seen some data that says
00:23:20
like well in twothirds of years stocks
00:23:22
outperform bonds or maybe in twothirds
00:23:24
of years stocks have a positive nominal
00:23:26
return. So that's one baseline. Another
00:23:29
way of thinking about it is if I look at
00:23:31
all fiveyear periods over stock market
00:23:33
history stocks are positive 88% of the
00:23:36
time. If I look at all 10ear periods
00:23:37
stocks are positive 93% of the time. I
00:23:40
know those numbers might not be precise,
00:23:41
but the point is that I would wager a
00:23:44
lot of people if you just describe asset
00:23:47
liability matching to them, which is a a
00:23:49
terrific topic. I've I've brought it up
00:23:50
a couple times before, even I sometimes
00:23:53
when I'm describing it say, "Yeah, once
00:23:55
you're 8, 10, 12 years out, time to
00:23:57
start sprinkling in stocks." Mhm.
00:23:59
>> When you said that 15 to 20 year
00:24:01
duration, does that mean that typically
00:24:03
when you might be doing a financial
00:24:05
plan, you're going to wait until year 15
00:24:07
before sprinkling in stocks or what
00:24:08
exactly does that look like? And and
00:24:10
maybe also where does that 15-year
00:24:13
number 15 to 20-year number where does
00:24:15
that actually come from? Yeah. So you're
00:24:18
actually running the math on the I mean
00:24:20
it's basically just the assume a max
00:24:22
draw down and then assume an expected
00:24:24
real return and that that will you can
00:24:27
then quantify what is the defined
00:24:29
duration based on the math there. So
00:24:31
that's where the actual figure comes
00:24:33
from and and I'm extrapolating this from
00:24:35
for instance in the current environment
00:24:37
it's kind of a nice time to to be
00:24:39
articulating this because there's this
00:24:41
really big disparity in valuations for
00:24:44
instance across the tech world uh even
00:24:46
the the domestic United States has you
00:24:49
know a huge disparity in valuations but
00:24:51
the global uh stock market especially
00:24:53
where you know US cape ratios are like
00:24:56
40 and foreign markets for the most part
00:24:59
are something like the low 20s and this
00:25:01
is It's a gigantic unheard of sort of
00:25:03
disparity. And when you extrapolate that
00:25:06
out, what the one of the things that we
00:25:09
know is that the expected future risk
00:25:12
adjusted returns of stocks, they're
00:25:14
pretty highly correlated to cape ratios
00:25:15
cuz cape ratios reflect basically
00:25:18
expectations. When expectations are
00:25:19
really high, stocks tend to generate not
00:25:22
necessarily lower returns. I think this
00:25:23
is the mistake some people make.
00:25:25
>> It's not that stocks necessarily have to
00:25:27
generate lower returns. it's that
00:25:29
they're likely to generate more volatile
00:25:31
returns, meaning that your sequence risk
00:25:33
is higher. So, if you bought the very
00:25:36
tippy top of the NASDAQ bubble back in
00:25:39
2001, you generated an 8% return since
00:25:44
then, but you had to go through what was
00:25:46
it 15 years of absolute trauma to even
00:25:50
break even in real terms. And so you
00:25:53
went through a not necessarily a lower
00:25:56
return, but you went through a much more
00:25:58
volatile period of returns. And so
00:26:00
that's part of what we're trying to
00:26:02
extrapolate out here. And so the I think
00:26:04
what we're we're doing to some degree is
00:26:06
we're trying to communicate the
00:26:08
potential risks here. And the you know
00:26:10
that 15 to 20 year number what it does
00:26:12
is it gives you kind of a baseline for
00:26:14
understanding well what is a reasonable
00:26:16
time horizon over which to judge the
00:26:18
stock market. We we say things like, you
00:26:21
know, stocks for the long run or, you
00:26:23
know, whatever it might be, but rarely
00:26:25
is that number ever quantified or put
00:26:27
into some sort of context. You know,
00:26:29
you're framing it nicely in s terms of
00:26:31
like the the probability of certain
00:26:33
outcomes over certain periods. And yeah,
00:26:35
you're right. It with the stock market,
00:26:38
you know, over rolling 5, 10, and 20
00:26:40
year periods, the stock returns are
00:26:42
something like 88 to 95 to 99% positive.
00:26:46
And but what that 15 to 20 year number
00:26:49
does is it it gives you a baseline
00:26:51
number for understanding where the stock
00:26:53
market fits into a portfolio. And then
00:26:55
you can start to blend things. And
00:26:57
that's what's that's where this whole
00:26:58
process gets kind of cool for me at
00:27:00
least is that you can start blending
00:27:02
instruments. You create multi-asset
00:27:04
instruments inside of a portfolio where
00:27:06
for instance a 60/40 portfolio right now
00:27:09
has roughly like a a 14-year this is a
00:27:13
global 6040 has roughly like a 14-year
00:27:16
defined duration. So and if you did
00:27:19
something that was like a you know an
00:27:21
8515 bond stock portfolio that might
00:27:24
have more of like a 5-year defined
00:27:26
duration. And so when you blend things,
00:27:28
you can start building multi-asset
00:27:31
instruments that or embedding time
00:27:33
horizons into the portfolio methodology
00:27:35
where you can communicate to somebody
00:27:36
that hey in my Roth IRA, which I'm not
00:27:40
going to touch for 40 years, I'm loaded
00:27:43
to the gills with AI stocks, technology,
00:27:47
I'm actually loaded to the gills with
00:27:49
VTI or like the the absolute riskiest
00:27:52
stuff in a portfolio that you could
00:27:54
possibly have because I know that the
00:27:56
time horizon of that is extraordinarily
00:27:58
long. I don't have to worry about the
00:28:00
sequence of returns risk. Whereas, you
00:28:02
know, if someone's got a taxable account
00:28:04
where let's say they're they're drawing
00:28:06
it down every month and they're living
00:28:08
off of the portfolio, they need a lot
00:28:10
more certainty in there, you probably
00:28:12
need something that has an average
00:28:14
defined duration in there that is much
00:28:16
shorter on average because you're
00:28:17
probably frontloading it with who knows
00:28:19
like treasury bill ladders or CDs or
00:28:21
something like that. It's much more
00:28:23
front-loaded. So, you've got liquidity
00:28:24
in there. you can start to build this
00:28:26
out in a way where you're communicating
00:28:28
the time horizons over which all of this
00:28:30
is certain serving very specific
00:28:33
financial purposes. And so that's kind
00:28:35
of the the goal of trying to quantify
00:28:38
this to some degree is to communicate it
00:28:40
better to the client so that they can
00:28:42
kind of compartmentalize things and see
00:28:44
and understand okay I know the role of
00:28:47
the T bills in my portfolio. And this is
00:28:49
the other kicker is that it actually
00:28:51
gets you away from per performance
00:28:53
chasing because when you look at it
00:28:55
through the lens of the time horizons,
00:28:58
you sort of know, well, I don't care
00:29:00
that my my T bills are going to
00:29:02
underperform. Of course, they are. My
00:29:03
taxable account that's loaded to the
00:29:04
gills with short duration stuff, it's
00:29:06
going to underperform the S&P 500. I
00:29:08
know that it's designed to do that.
00:29:11
Whereas, you know, maybe my Roth IRA
00:29:13
that's loaded to the gills with
00:29:14
technology and, you know, growth stuff.
00:29:17
That's where you can get sort of the
00:29:19
sexy high performance from a portfolio.
00:29:21
But you segment things in a way where
00:29:23
it's communicated very clearly that hey,
00:29:26
each bucket or each portfolio is sort of
00:29:28
serving a very specific role as it
00:29:30
pertains to my financial plan. I think
00:29:33
if I can summarize part of your answer,
00:29:36
it's that the defined duration of 100%
00:29:38
global stocks, yeah, that's 15 to 20
00:29:41
years. But the defined duration of 30%
00:29:45
stocks, 70% treasuries, well, that might
00:29:47
have a defined duration of 8 years. So
00:29:49
if I'm matching that future liability in
00:29:52
2035 of my retirement, eight or nine
00:29:55
years from now, to a particular asset,
00:29:58
maybe that what did I just say? 30%
00:30:00
stock, 70% bonds. maybe that's the right
00:30:02
asset to match to that future liability.
00:30:04
And so in that way, as I'm building my
00:30:06
asset liability ladder, stocks do enter
00:30:09
the picture before year 15. It's just in
00:30:12
a muted way. It's not dissimilar to what
00:30:14
target date funds do to some degree
00:30:16
where a target date fund, you know, a
00:30:18
2060, it was funny actually, somebody
00:30:20
asked me this. They sent me an email the
00:30:21
other day about Van, one of Vanguard's
00:30:23
2060 target date funds. And it's like
00:30:26
9010 stocks bonds. And I thought about
00:30:28
that through the lens of a defined
00:30:30
duration process and I said gosh that
00:30:32
thing's got a 35 year time horizon that
00:30:35
10% bonds are serving zero purpose. They
00:30:38
that portfolio should be probably 100%
00:30:42
equities. It might even need to be
00:30:44
there's an argument that it could be
00:30:45
just growth stocks and like or like you
00:30:48
know higher growth stuff because it's d
00:30:50
defined duration would be so long. But
00:30:52
target date funds are a good sort of
00:30:54
corlary to this because what I'm really
00:30:56
trying to do is I'm almost trying to
00:30:57
like break down target date funds into
00:31:00
components where you can now take the
00:31:03
same sort of concept of a target date
00:31:05
fund but apply it to your portfolio in a
00:31:08
way where okay I have a target date fund
00:31:11
for the car purchase that I'm making in
00:31:13
two years. I have a target date fund for
00:31:16
my daughter's college in 15 years. I
00:31:18
have a target date fund I'm applying to,
00:31:21
you know, my retirement in 30 years or
00:31:24
whatever. And you can customize this and
00:31:26
blend it though in ways where the
00:31:28
portfolio is very temporally weighted in
00:31:31
this more structured manner. Here's a
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00:32:24
One thing you said multiple times,
00:32:25
Colin, is real returns, right?
00:32:26
Everything you're talking about today is
00:32:27
real returns, inflation adjusted
00:32:28
returns, which brings up inflation risk.
00:32:31
So for our audience of kind of DIYers,
00:32:33
retire, retirees, people thinking about
00:32:35
retirement largely on their own,
00:32:37
inflation risk is definitely a scary
00:32:39
one. How do you tend to incorporate
00:32:42
inflation risk into I'd say your your
00:32:44
research writ large and and your
00:32:46
financial planning thoughts writ large?
00:32:48
>> Yeah, I mean it's hard because you you
00:32:51
have to predict inflation in a financial
00:32:55
plan. Anytime anyone goes through
00:32:57
financial planning software, we all have
00:32:59
to sort of embed you know an assumption
00:33:01
about what is the future inflation rate
00:33:03
going to be. So you know this sort of
00:33:05
macroeconomic analysis comes into all of
00:33:07
this to some degree. don't want to get
00:33:09
like too deep in the weeds about like
00:33:11
how to do that or you know a a very
00:33:14
simple way is sort of a what's called
00:33:15
like an extrapolative expectations
00:33:17
process where you're you're basically
00:33:18
just extrapolating the past into the
00:33:20
future you know that probably comes out
00:33:22
to what like three 3 and a half%
00:33:24
something like that you know that's not
00:33:26
a bad approach I think that the you know
00:33:29
going forward I've made arguments that
00:33:31
the probability of kind of returning to
00:33:34
like a precoid type of inflation
00:33:37
environment is relatively high just cuz
00:33:38
I think that the two big trends that are
00:33:41
going on presently the basically the
00:33:43
demographic trends where the United
00:33:45
States is just we're not producing as
00:33:47
many people and the population itself is
00:33:49
getting older that's a recipe for kind
00:33:51
of lower demand and that's been
00:33:53
something that's kind of been in
00:33:54
progress for basically 40 years and but
00:33:58
the other big one is technology
00:33:59
technology and especially AI once the
00:34:02
robots really come online and they start
00:34:05
to really ramp up production of
00:34:07
everything, you know, because the robots
00:34:08
will never stop working. They'll never
00:34:10
stop making stuff. We really are in a
00:34:13
world of abundance there where you get
00:34:15
this potentially lower rate of inflation
00:34:17
because the supply problem is just
00:34:19
solved across so many different sectors
00:34:21
of the economy. But that creates a
00:34:23
paradox also where inequality is
00:34:25
probably much higher and you probably
00:34:28
have more demand for something like a
00:34:30
universal basic income. government
00:34:32
fiscal policy is probably much more
00:34:34
important, much larger in that sort of a
00:34:37
world and you potentially get inflation
00:34:39
from that. So I wrote in a you know a
00:34:42
recent sort of blog post the 2026
00:34:44
financial planners outlook that
00:34:46
something in that 3 to 3 1/2% range is
00:34:49
probably pretty reasonable because even
00:34:51
if we get a return to like 2 2 1/2%
00:34:53
inflation you should expect sort of co-l
00:34:56
like shocks along the way and that could
00:34:59
come from a recession in which the the
00:35:02
Fed and the Treasury respond with big
00:35:05
time stimulus and you get these sort of
00:35:07
a bumpy sort of inflation where you
00:35:10
maybe not a COVID, you know, style jump
00:35:12
in inflation, but you get a response
00:35:14
mechanism that results in say, you know,
00:35:17
a shock of four to 5% temporary
00:35:19
inflation that then, you know, those big
00:35:21
tailwinds they or those big inflation
00:35:24
headwinds that I talked about before,
00:35:25
they ultimately operate like a magnet.
00:35:26
They suck the inflation rate back down
00:35:28
because they're such they're just huge
00:35:31
secular headwinds to inflation in the
00:35:33
long run that they're going to they're
00:35:34
going to continue to sort of pull the
00:35:36
inflation rate back down to, you know,
00:35:38
say 2 to 3%. But I think that's a pretty
00:35:40
reasonable expectation, but it's a it's
00:35:43
something that we all have to estimate
00:35:45
and it's a hugely important part of the
00:35:47
equation. I think it's typically better
00:35:50
to be a little more conservative about
00:35:53
the estimate. So even if the Fed has a
00:35:55
2% target or something or let's say that
00:35:57
inflation over the last 15 years has
00:35:59
averaged like 2 and a.5%. I still think
00:36:02
it's reasonable to sort of air on the
00:36:04
more cautious side. And so that's just
00:36:07
typically how I operate as an adviser
00:36:09
anyway is I you know like part of why I
00:36:11
use a I use a 50% max draw down in the
00:36:13
defined duration concept because I'm
00:36:15
assuming almost like a sort of a worst
00:36:18
case scenario you know or a realistic
00:36:21
large draw down that's not uncommon
00:36:23
especially in in real terms and so it's
00:36:26
sort of plan for the worst and hope for
00:36:28
the best approach and yeah if you cover
00:36:30
those bases then you know you really do
00:36:33
have a much higher probability of
00:36:35
actually understanding what are the
00:36:37
likely outcomes across even you know the
00:36:39
worst sort of scary types of
00:36:41
environments.
00:36:42
>> You mentioned uh fiscal stimulus in
00:36:44
there. You said you know it's possible
00:36:45
that inflation might rear its head if
00:36:47
there's a a recessionary shock and the
00:36:50
government responds with a big injection
00:36:51
of fiscal stimulus. This doesn't come up
00:36:54
every day but I think there's a pretty
00:36:56
good subsegment of maybe the American
00:36:58
populace and retirees too who look at
00:37:02
government stimulus. They might not know
00:37:04
what the modern monetary system is, but
00:37:06
that's kind of part of it. They worry
00:37:08
about fiscal policy. They worry about
00:37:10
increasing levels of government debt in
00:37:13
and how that might affect long-term
00:37:15
market outcomes, long-term inflation,
00:37:17
and therefore how those things might
00:37:18
affect their retirements. What are your
00:37:21
thoughts again kind of from some of your
00:37:22
macro research, from some of this
00:37:24
long-term research you do? I mean,
00:37:26
should retirees be concerned about those
00:37:27
things? Gosh, I mean I I feel a ton of
00:37:30
questions about like is social security
00:37:32
going to be a thing, you know, in 20 in
00:37:35
five years? You know, I have people who
00:37:37
worry it's going to go away tomorrow.
00:37:39
It's weird from a sort of understanding
00:37:41
the principles of the monetary system.
00:37:43
The I think a lot of people think of the
00:37:46
government as something that is going to
00:37:47
run out of money, which is also it's a
00:37:49
weird narrative because most people also
00:37:51
understand that the government has a
00:37:52
printing press. And so the whole idea of
00:37:54
the government running out of money is
00:37:56
sort of nonsensical. It's the thing that
00:37:59
makes the government unique is that they
00:38:01
they don't run out of a line of credit.
00:38:04
They can run into an inflation problem
00:38:07
where they're creating so much money
00:38:09
that the demand is functionally falling
00:38:12
for that money because they're just
00:38:13
creating so much more of it that the
00:38:15
amount of money relative to the supply
00:38:16
of goods and services out there is
00:38:18
shrinking and that results in higher
00:38:21
consumer prices for instance. But the
00:38:23
government doesn't run out of money. And
00:38:25
so the the capacity for us to afford
00:38:28
things like social security or Medicare
00:38:32
is theoretically infinite. It's just a
00:38:34
it's a balancing act to the for the
00:38:36
especially for the United States where
00:38:38
we're such a productive economy that
00:38:41
that's the thing that really matters is
00:38:43
it's it's how much are we producing
00:38:45
relative to the amount of money we're
00:38:47
also creating. And so it's a balancing
00:38:49
act for the government to to balance
00:38:51
that out. But it's a big part of why we
00:38:54
haven't had high inflation in the United
00:38:56
States over the last 40 years is because
00:38:59
we are the wealthiest, most productive
00:39:01
economy in all of human history,
00:39:04
basically. And so there's that's another
00:39:06
sort of big headwind to high inflation
00:39:09
ever taking off is that part of that
00:39:12
assumption that we're going to encounter
00:39:13
something like a return to the 1970s or
00:39:16
a you know a huge high inflation rate a
00:39:19
hyperinflation sort of event is that
00:39:23
most Americans are going to wake up and
00:39:25
suddenly start being like I don't like
00:39:26
making money. I don't like making stuff.
00:39:28
I don't want to be rich. Uh I don't want
00:39:30
to be productive. which is just there's
00:39:32
something in our DNA that sort of seems
00:39:34
antithetical to that for better or
00:39:36
worse. I don't know if that's even
00:39:38
necessarily a good thing, but it's it's
00:39:40
a certainly a good thing in terms of
00:39:42
being able to produce lots of stuff. And
00:39:45
being able to produce lots of stuff
00:39:46
means that it's very hard to produce
00:39:48
very high inflation because the
00:39:50
government just can't create enough
00:39:52
money. And so it's an important thing to
00:39:54
understand I think especially I don't
00:39:55
like to get too sort of deep in the
00:39:57
weeds about monetary dynamics with
00:40:01
especially with clients and people like
00:40:03
that because it's it can be
00:40:06
counterproductive to a large degree
00:40:07
because it's just not a it's not
00:40:09
something that I think most people
00:40:11
really need to worry about. It's
00:40:13
worthwhile understanding the dynamic so
00:40:15
you're comfortable with it so that you
00:40:17
feel comfortable enough to sort of you
00:40:19
know like I feel this question with
00:40:21
bonds a lot like are the you know are
00:40:23
interest rates going to surge because
00:40:24
you know the government is going to run
00:40:26
out of money and then the you know all
00:40:28
the credit instruments are going to go
00:40:29
to zero or something and it's like well
00:40:31
no that's not functionally possible. So,
00:40:34
you know that you could have a high
00:40:36
inflation in which the Fed has to reset
00:40:38
interest rates and stuff and that will
00:40:40
obviously have a big impact on the bond
00:40:42
market, but that's a totally different
00:40:43
dynamic than a company running out of
00:40:46
money and experiencing a credit event.
00:40:48
So, it's a very different dynamic and
00:40:49
it's it's important to understand that
00:40:51
stuff, but you don't want to get too
00:40:54
deep in the weeds on that because then
00:40:55
you you get into the, you know, the
00:40:57
Zimbabwe rabbit holes that become sort
00:41:00
of counterproductive.
00:41:01
>> No, it is funny. I think there's a a
00:41:03
totally un understandable kind of human
00:41:06
psychology trap which is you know we
00:41:09
take the rules and regulations that
00:41:10
apply to us as individuals and we try to
00:41:13
apply those rules and regulations to
00:41:15
other circumstances in life thinking
00:41:16
that there's a parallel. Unfortunately
00:41:19
the rule that as an individual you
00:41:21
probably shouldn't spend more than you
00:41:22
earn and you certainly shouldn't spend
00:41:24
more than you earn for a really really
00:41:26
long time and go further and further
00:41:27
into debt. It's a great rule in personal
00:41:29
finance. Yeah. But it very much
00:41:30
legitimately does not apply to the way
00:41:32
that the US government works. As weird
00:41:35
as that is to think about.
00:41:36
>> Well, that's weird, too, cuz the
00:41:38
government should try to nudge us to be
00:41:42
productive and they should incentivize
00:41:44
us to do things that are productive in
00:41:47
the long run and whatnot. But at the
00:41:48
same time, the government is a weird
00:41:50
instrument or a weird entity because
00:41:52
they're in a lot of ways they're like a
00:41:53
nonprofit. They don't have to generate a
00:41:55
profit, but in a lot of ways, they have
00:41:57
to actually do a lot of the things that
00:42:00
capitalists don't want to do or the
00:42:02
things that capitalists actually are not
00:42:04
very good at making money at or can't
00:42:06
make money at. For instance, like
00:42:07
running a military, building things that
00:42:09
you're going to destroy, you know, like
00:42:11
armaments or bombs or whatever, and then
00:42:13
having a workforce that you might
00:42:15
literally see get killed is a really bad
00:42:18
way to run a business. And so, you know,
00:42:21
running a military is obviously not a
00:42:22
profitable endeavor from the government
00:42:24
perspective and it's not designed to be,
00:42:26
you know, so the government to some
00:42:28
degree, not just in terms of running the
00:42:30
military, but also running like a safety
00:42:32
net and, you know, trying to take care
00:42:33
of some of the people who can't take
00:42:35
care of themselves in society and
00:42:37
whatnot. You know, those are functions
00:42:38
that are not going to be profitable. And
00:42:40
so it to for the rest of us out there,
00:42:43
there is a certain degree of sort of
00:42:44
like loss acceptance involved in that
00:42:47
that we're going to say, okay, well
00:42:48
maybe we accept a lowish rate of
00:42:50
inflation, understanding that well,
00:42:52
every retiree is getting social security
00:42:55
and that's a good thing or you know, we
00:42:57
have a military that can defend us and
00:42:59
that's a good thing even if there's an
00:43:00
inflation impact from the costs that are
00:43:02
incurred along the way. Well, I know
00:43:04
we've kind of gotten into a couple more
00:43:06
complex subjects there, Colin, but uh
00:43:08
one thing I think about is how to find
00:43:11
that balance between, yes, understanding
00:43:13
the complex things and in some cases
00:43:15
tackling the complex things inside our
00:43:17
financial plans, inside our retirement
00:43:18
plans, but still balancing enough
00:43:21
simplicity so that we can actually
00:43:24
function within our retirement plan. or
00:43:26
you know I think about you know how does
00:43:27
a DIY investor for example balance
00:43:30
simplicity of like indexing with some
00:43:32
sort of tactical risk management not
00:43:35
necessarily chasing returns like you
00:43:36
know how much juice is worth the squeeze
00:43:39
in terms of these this financial
00:43:40
planning exercise that we're doing so
00:43:42
I'm just curious because like I said you
00:43:44
you get into some really interesting
00:43:45
complex topics but then you distill it
00:43:47
down into some pretty simple outcomes
00:43:50
and and pretty simple takeaways so I
00:43:52
just I'm looking for any tips or tricks
00:43:53
that our listeners can walk away with
00:43:55
today of of how to find that balance.
00:43:57
>> It's hard. You know, Christine Benz from
00:43:59
Morning Star wrote a a great article. Uh
00:44:02
it was about a month ago, I think, about
00:44:04
optimizers versus what she calls
00:44:05
satisficers. And you know, and it's the
00:44:08
that balancing act between, you know,
00:44:10
trying to optimize and tinker with every
00:44:12
aspect of your portfolio versus the just
00:44:14
defaulting to something really really
00:44:16
simple. And it's hard. Everyone's
00:44:19
different. That's the thing that is
00:44:21
really important to understand about
00:44:22
especially portfolio management. I
00:44:24
actually am in New York right now in a
00:44:26
hotel room because I'm promoting a book
00:44:28
called Your Perfect Portfolio. And the
00:44:30
whole gist of the book is basically that
00:44:32
your portfolio needs to be perfect for
00:44:35
you. It can't be what somebody else is
00:44:37
selling. You know, don't listen to the
00:44:40
guy talking about defined duration and
00:44:41
be like, "Oh, I need to buy that because
00:44:43
it's he seems smart or he, you know,
00:44:45
seems smart enough and, you know, seems
00:44:47
like a good strategy or I read this risk
00:44:49
parity strategy from Ray Dalio. He
00:44:51
sounds he's he runs the biggest hedge
00:44:53
fund in the world. I got to buy that
00:44:54
one. You know, you got to find what
00:44:56
works for you. And that is very much
00:44:58
like the analogy I use in the book is
00:45:00
it's very much like finding a spouse in
00:45:02
life. You have to find someone who works
00:45:04
for you. And you have to understand that
00:45:06
there's going to be ups and downs and
00:45:08
you have to stay loyal and committed.
00:45:09
You know, I I interviewed William
00:45:11
Bernstein in the book and he wrote about
00:45:13
how the the suboptimal portfolio that
00:45:15
you can stick with is going to be better
00:45:17
than the op the theoretical optimal
00:45:19
portfolio that you can't stick with. And
00:45:21
he's trying to communicate that, you
00:45:23
know, you might have this theoretically
00:45:25
optimal portfolio where you've back
00:45:26
tested it. You looked at all the numbers
00:45:28
on it and that thing whipsaws you once
00:45:31
and you say, "I can't do this." So you
00:45:32
sell it into a bare market. And when you
00:45:34
do that, that theoretically optimal
00:45:36
portfolio is serving you worse than
00:45:38
something that, you know, if you just
00:45:40
gone out and bought like a, you know, a
00:45:42
60/40 portfolio or, you know, I also
00:45:45
interviewed Taylor Laramore who came up
00:45:47
with the three the bogalhead three fund
00:45:48
portfolio in the book and that's like
00:45:50
the simplest portfolio that exists out
00:45:52
there. So it's but it's a balancing act
00:45:54
too cuz like I wrote in the book that
00:45:57
the bogalhead three fund portfolio is
00:45:59
brilliant in so many ways but arguably
00:46:02
the biggest flaw in it is that it might
00:46:04
be too simple because it's basically
00:46:06
just two buckets. It's you know in
00:46:08
inside of my framework I would say well
00:46:10
he's really only constructed two time
00:46:12
horizons. And so what happens in a 2022
00:46:16
when both of those buckets go down a lot
00:46:19
and does that scare you? I think for a
00:46:22
lot of people it does. Or does it make
00:46:23
you question it to a point where you
00:46:25
say, you know what, I only own stocks
00:46:27
and bonds. I don't even have a lot of
00:46:29
temporal diversification in here. I kind
00:46:32
of wish I had bought gold or I wish I
00:46:34
had bought, you know, managed futures or
00:46:36
some sort of something that was truly
00:46:38
uncorrelated. And so it's a process that
00:46:41
everybody has to go through for
00:46:43
themselves and sort of understand, you
00:46:45
know, the the risks and the, you know,
00:46:47
the different ways that all these
00:46:49
instruments and strategies work. And you
00:46:51
have to find something that works for
00:46:52
you. And that's part of also being a a
00:46:56
decent financial advisor is that you can
00:46:59
help people sort of understand how to do
00:47:02
that. And you can most importantly even
00:47:04
if the process is imperfect which is
00:47:06
it's always going to appear imperfect at
00:47:09
sometimes in fact that's part of the
00:47:11
benefit of diversification is that Brian
00:47:13
Portoi says that diversification is
00:47:16
learning to hate some part of your
00:47:17
portfolio all the time and weirdly
00:47:21
that's exactly right because when
00:47:23
everything's operating the exact same
00:47:25
way it probably means that when things
00:47:28
go haywire they're going to be operating
00:47:30
all the same way and that means you
00:47:32
maybe you're not diversified enough. And
00:47:34
so learning to hate some part of your
00:47:36
portfolio that is down is weirdly sort
00:47:38
of a good thing because it means that
00:47:40
your portfolio is oper it's operating
00:47:42
the way that it should be in a
00:47:43
diversified strategy and so but at the
00:47:46
same time everyone has to find you know
00:47:48
the right balance of that and you know
00:47:50
you have to mix in things like taxes and
00:47:53
fees and it can get very very complex
00:47:56
very very quickly. So I I don't know if
00:47:58
I would describe myself as an optimizer
00:48:01
or a satisficer. I think I'm kind of in
00:48:04
the middle to some degree where I've
00:48:06
tried to sort of distill a strategy that
00:48:09
is can be very very simple but is still
00:48:12
optimized to a specific financial plan.
00:48:15
But that's just me. There's a lot of
00:48:17
people who will hear terms like define
00:48:20
duration and sequence of returns and be
00:48:22
like, "Oh, okay. This is this is just
00:48:24
nonsense jargon." And you know, I need
00:48:27
something that boglehead three fund
00:48:28
portfolio sounds really nice to me. And
00:48:30
if you can stick with it, I mean, that's
00:48:32
great. That's, you know, that's the
00:48:33
whole Bill Bernstein thing is if you can
00:48:35
you build something that's simple,
00:48:37
lowcost, tax efficient, and you can
00:48:38
stick with it through thick and thin,
00:48:40
you know, like that's really hard to
00:48:42
beat. That's awesome. So, it sounds like
00:48:44
on the spectrum of optimizing to
00:48:46
satisficing, you have found an asset mix
00:48:50
that is perfect for you, Colin. And
00:48:52
that's the name of the game. You have
00:48:53
found your perfect portfolio.
00:48:55
>> Yeah. With perfect for me. Yeah.
00:48:58
>> Perfect for you. If listeners are
00:49:00
curious and they want to I mean you're a
00:49:02
prolific writer. You mentioned your
00:49:04
blog. I've read your white papers and
00:49:06
now with this book I mean let's let's
00:49:07
talk about the book cuz in case
00:49:09
listeners want to pick up a copy, but
00:49:10
then also if people just want to start
00:49:12
following your work more closely, where
00:49:14
can people find you?
00:49:15
>> Uh so the book is called Your Perfect
00:49:16
Portfolio. And the book I wrote 10 years
00:49:19
ago, Pragmatic Capitalism is sort of
00:49:22
wonky and macroeconomics and frankly
00:49:25
like I was reading parts of it. I was
00:49:26
like, man, this book is terrible,
00:49:29
just boring. But this one's a lot more
00:49:31
fun and it's it's explorative. I
00:49:33
basically I write about some principles
00:49:34
of portfolio construction and then I
00:49:36
write very specifically about 20 or so
00:49:39
different strategies and, you know, they
00:49:41
range from very simple to much more
00:49:43
complex, but for the most part, it's all
00:49:45
very approachable. And I wrote it in uh,
00:49:47
you know, sort of I'm a dad now. That
00:49:50
was the biggest difference between now
00:49:51
and writing my my first book. And so I
00:49:53
write lots of terrible dad jokes in
00:49:55
there. So I tried to be a little more
00:49:57
playful. I try to not dumb it down, but
00:50:00
I try to write it in a very approachable
00:50:02
and understandable way, but also I write
00:50:04
a a sort of bloggy newsletter called
00:50:06
Discipline Alerts or from the the
00:50:08
Discipline Funds website. And I
00:50:10
sometimes they're more wonky, sometimes
00:50:13
they're, you know, they're just sort of
00:50:15
weekend thoughts of kind of my
00:50:17
ruminations about what's going on in the
00:50:19
world, why tariffs are good or bad or
00:50:22
why, you know, the debt ceiling is
00:50:24
another nonsense, you know, conversation
00:50:26
that we're having once every 3 months or
00:50:28
so. And this is why it's a nonsense
00:50:30
conversation. And so I get into a little
00:50:34
bit of politics, a little bit of just,
00:50:36
you know, everyday life, and a lot of
00:50:38
sort of, you know, important investing
00:50:40
concepts.
00:50:41
>> Well, we'll link to all those resources
00:50:43
in the show notes, Cullen. And, uh,
00:50:44
thank you so much, Cullen Rosh, for
00:50:46
joining us here on Personal Finance for
00:50:48
Long-Term Investors.
00:50:49
>> Thanks, Jesse. Great talking to you.
00:50:51
>> Thanks for tuning in to this episode of
00:50:53
Personal Finance for Long-Term
00:50:54
Investors. If you have a question for
00:50:57
Jesse to answer on a future episode,
00:50:59
send him an email over at his blog, The
00:51:01
Bestinest. His email address is
00:51:03
00:51:06
Again, that's jessevestinterest.blog.
00:51:09
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00:51:20
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00:51:22
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00:51:25
Finance for Long-Term Investors is a
00:51:27
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00:51:29
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00:51:31
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00:51:33
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00:51:34
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