The Art of Simple Investing | Tips from Ben Carlson

Coming up on the Vocal Lad's On Investing podcast. >> It's funny working in the wealth management industry dealing with wealthy individuals. Still they want to know like but really tell me like there has to be like some wink wink secret path here, right? There's there's there's some way to do this, right? All the upside none of the downside. I think I say let me tell you the secret to investing. >> Our guest is Ben Carlson CFA, author of Risk and Reward, blogger at A Wealth of Common Sense, and co-host of The Animal Spirits podcast. We discuss inflation hedges, tips, long short tax aware strategies, and much more. I'm John Luskin, your host for this episode. Stick around until the end for my final thoughts. And as with other episodes, you can get a little bit more out of the show by watching the video version on YouTube including getting to see some of Ben's favorite investing charts. Now, onto the episode. Ben, I love how you open your book. Why don't you read us a couple of those introductory lines and then tell us a little bit more about that. >> Sure. Like I I probably off the top of my head I I think I say uh let me tell you the secret to investing. There is no secret. It's funny working in the wealth management industry dealing with uh wealthy individuals. I think intuitively they know of course there's no holy grail. There's no like easy way to do this, right? All of the risk none of the downside all of that stuff. But still they want to know like but really tell me like there has to be like some wink wink secret path here, right? There's there's there's some way to do this, right? All of the upside none of the downside. Side step all the bad stuff, invest when the dust is settled all that thing and and my years of experience in this industry have just taught me that it really doesn't exist. >> Yeah, I certainly get that comment in working with some do-it-yourselfers sometimes. Right? They say hey I want high growth but I don't want any downside. Maybe that's a good segue into private equity. And this is certainly a question we got from from the community about it. What are your thoughts on that sort of investment? >> Sure. So I I came up in the institutional world where at a time when David Swensen was just becoming a household name for institutional investors. For those who don't know who he is, he is the CIO, former CIO of Yale Endowment Fund, and he had this idea that hey, listen, these endowment funds are in meant to invest in perpetuity. They're going to be here forever, essentially, right? Sure, we have short-term needs, but the money's long-term. So, we have the ability to take more risk. And he did that through illiquid investments. And he was one of the first ones to really get there. It was this this space that really wasn't very crowded yet, and he did it, and the Yale returns were phenomenal. And he kind of went where, you know, where people weren't, where the crowd wasn't. And took a ton of equity risk to do so, illiquidity risk and such, but but grew the Yale Endowment uh a special place. And he's written a couple books. And it's funny, he one of his books told individual investors, I've done the hard way this way, you should probably just index. And that was kind of my takeaway being in the institutional world. One of the funds that I worked at, we you know, we managed money for a billionaire family, and they kind of said, we want the hedge funds, we want the private equity, we want the venture capital. And we were a three-person investment team, and I was kind of the low man on the totem pole, and I was tasked with tracking these private investments. And this was my first really foray into it. And that made me realize how challenging it really is because the way that these investments work, it's not like you give a manager all the money on day one, and then it gets invested, and you can track it. It's hey, the the money comes due when they have an investment ready to make. So, they have to do a capital call. The money may come back to you when they sell an investment. You don't actually give them all the money, so it's hard to kind of know how you're doing. And and you have to give them the money for it. It could be 10 to 12 years that they actually get the money invested in. And you don't really know how good this fund's doing for years and years and years into the future because it's illiquid and because they're kind of claiming the marks themselves. So, it's it's an operationally challenging investment. The illiquid nature of it some people like because hey, I don't feel the volatility even though it's kind of like Schrödinger's cat in a lot of ways, right? You don't Schrödinger's portfolio, I guess. It but I think private equity is a really challenging space to be as an investor cuz you don't really ever know how you're doing. And there are there are funds now that are made for advisors and individuals that kind of try to fix some of those problems. They're evergreen funds and you give them the money and a lot of it's already invested. So, they have tried to get around this problem. But, I think for most people the illiquid nature of them and the sort of black box behind it and not understanding and knowing what you're investing in makes it way more challenging than public markets. >> We interviewed Ben Felix recently and he certainly gave his thoughts on private equity. I'll link to that in the show notes for folks to check out. There's a great quote by Dr. Bill Bernstein at the Book Nook Conference. I'm going to put that into the episode right here so you guys can enjoy it. >> And the mistake that people make when they read that book is that they assume it's about the second two words, portfolio management. No, that's not what the book was about. The book was about being pioneering. It was being the first person, okay? The first person to the buffet table gets the lobster tails and the prime rib, okay? That's what David Swensen got. And the people behind David Swensen, all the other endowments who imitated them and all the other investment managers professional investment managers who imitate him to this day got the tuna noodle casserole. >> Yeah. >> Okay? There's a whole lot of tuna noodle casserole that is still out there and it is starting to ferment, okay? And they're all trying to unload it on Vanguard. >> And I'll link to that whole session from the Book Nook Conference in the show notes for you to check out. Simple becomes complex is it something I run into a lot working with do-it-yourselfers. They just want to make the most complicated investment plans. You talk about this in the book. tell us more about that. >> Yeah, this kind of harks back to my days in the institutional world where I saw very intelligent people. And like these people were very highly educated. They had all these different designations and degrees and were very intelligent. And they almost thought that that complex was better. And I And I realized right away, especially going through the great financial crisis, that oh my gosh, complex is way harder to manage during a downturn. Because the thing you have to ask yourself in a downturn is am I going to double down here on these assets that are that are performing poorly? And it's it's much harder to reinvest into the pain when you don't understand something or you don't believe in it. And I think that's where simple tends to shine through is if you know what you want in your portfolio and why you own it, it's way easier to rebalance into the pain and say, "Listen, this is not working right now. I don't know when it's going to work again, but it's down and I'm I'm I'm willing to put it back in." And I think the thing with complex strategies is it's way easier to hit the eject button and just go, "You know what? I I'm done with this one. It's not working. I'm going to try another one that sounds even better and it's been doing better lately." And I think that's the problem is you get into this game of musical chairs when you have more complicated strategies. And simple in many ways is harder because it requires you to do a lot of heavy lifting up front and go, I you know, I'm going to pick these couple few handful of strategies and I'm going to stick with them. And there's all these other strategies out there that could be good for other investors, but they're not necessarily right for me. And I think that's really hard for people to to realize cuz it's like, oh, you really have to be disciplined and and know what you're doing. >> I certainly want to talk about bonds cuz I feel like investors are still shell-shocked from the 100-year bond flood we had. >> I think there's a lot of consternation about bonds right now and people are asking like are bonds still a good diversifier? So I looked at what the average return for was in the stock market over the past 100 years or so when the stock market was down in the United States. And the average So, here here's the line. The average return for stocks in 26 years, these are the down years, was -13.5% During those same years, bonds averaged gains of 4.3%. It's pretty good. Now, of course, the one that sticks out in everyone's mind is the last time this happened, which was 2022. Um bonds were down rough High-quality bonds were down roughly 18%. If you owned a bond index fund, that's about what it was down. Pretty much the same as the stock market. And uh here's another line from that I wrote, "Diversification doesn't work all the time. There were 4 years when stocks and bonds were both down in the same year, right?" And my whole point was everything on a portfolio was eventually And obviously, the hard part about 2022 was the bond market was one of the big reasons that the stock market fell because inflation was higher. And I do think that there was this idea for 40-plus years when interest rates were just on a steady decline that bonds were a one-decision asset class. I just put my money into some sort of high-quality bonds, government bonds, or the AGG or a total bond index fund, and that's it. And And I got a decent yield, and then the yields go down, and I get a price bump. And I think it was it was relatively easy for a bond investor. And then 2022 happened, and we go, "Oh my gosh, it's been 4-plus decades since we've had high inflation like this and rapidly rising rates." And then you realize there's another side to this, and bonds can get killed in that especially if you have some duration. So, I think there's always been this idea that diversification made sense, but I don't think people have thought too much about diversification within their bonds. And I think that's something that's now come to the forefront. That, "Oh man, maybe I have to set my bond portfolio up for different economic environments, right? Not just falling rates or flight to safety during a recession, which is when bonds have typically held up there as the balance of the portfolio. But what happens if rates do rise? What happens if inflation is a little higher than it was for the past 10, 15, 20 years? Uh what do I do then?" And I think people have had to realize that there are there are other areas of the bond market that maybe make sense from a diversification standpoint instead of just that one decision that was so easy to make for so long. >> That's really interesting. Let's talk more about that. What does that bond portfolio look like? And for context, that Bogleheads three-fund portfolio, we're looking at pretty often a total market bond fund. So, what would the alternative to that be? >> So, I still think there's a place for that as the anchor of the bond portfolio, right? And And especially now, it's funny, everyone hates bonds, but the yields on that are, you know, approaching If you are in a total bond market index fund right now, you're getting nearly 5%. I think I looked this week, the agg was uh yield to maturity of like 4.7%. So, pretty good, right? That's pretty good yield. Certainly better than the yields you were getting at any time for the past 15 years or so, right? The last 12 months has been the best yields we've gotten. And so, I do think it's a little premature for people to completely give up on bonds just cuz inflation is a little higher and there's a worry that maybe rates go even higher than they are, right? Rates are Rates have been rising kind of steadily for the past few months cuz as people realize that inflation might be here for a little longer. I I certainly think that enough investors understood that T-bills and or some sort of cash equivalent actually has a place in a rising rate environment. And I think there's always been this idea that cash is trash, and why would you ever use it in your portfolio because it just it it just loses to inflation or maybe keeps up with inflation over time. And yields were so low on cash for so long coming out of the great financial crisis that I think people kind of gave up on it. And then once we saw, oh my gosh, when the Fed raises rates like that and inflation rises and rates rise so fast, a short-term position in in a cash, like you know, I'm I'm talking money markets, CDs, high-yield savings account, T-bills, that sort of thing, those kind of cash equivalents, it's actually a pretty good hedge for those time environments because the yields are so short-term that you don't really have interest rate risk. And And you don't have the the nominal losses that you can see in bonds on a price basis. So, I think people have realized like maybe for a part of the bond portfolio, even a cash position makes sense. It's It's one of the simpler hedges against rapidly rising rates and inflation. Um and then of course the the TIPS piece. Now, I got a lot of questions about TIPS in 2022 and 2023. There was people who said, "I thought inflation was going to rise and I put my money into a TIPS fund." And then that got killed, too. And the thing is if you have duration on a TIPS fund, when rates rise, it's going to act more like a bond than it is a inflation protection. So, I I I I think for that, probably and I know a lot of Bogleheads are familiar with like a TIPS ladder, probably helps you protect you a little on that. Even maybe a the way I look at it is a short-term TIPS fund. Um might not get you a higher yield, but if you go more short duration in TIPS, it rips out the bond piece and gives you more of just that inflation protection. Um and so I think I think those areas are where people can kind of figure out how to diversify now. Though, there are plenty of other places that you can invest in in the bond fund now that bond area that it couldn't in the past, right? There's there's these floating rate notes that you can invest in. Uh private credit is something people have talked about. Uh there's a lot more complicated areas of the bond market that you can invest in these days, but I actually think the simpler approaches kind of helped [snorts] in the bond area as well, just like the stock market. >> Yeah, I agree. Simple is often better. And for those folks who want to learn more about the role cash plays in a portfolio, we interviewed Bill Bengen on a recent episode of the podcast. I'll link to that in the show notes for folks to check out. And for folks who want to learn more about creating a TIPS ladder, we had a presentation at last year's Bogleheads conference. I'll link to that as well. All right, since we're talking about bonds and you touched on this already, let's jump to a question we got from the Bogleheads forums. This one is from a username Chicago Professor. Uh he asked about ladders versus bond funds. You touched on this just a moment ago. Anything else you want to share with respect to making that decision for investors? >> It's funny because there are people who have very strong opinions about owning individual bonds versus bond funds. This is something I didn't really really I wrote a blog post about this a long time ago and I got more feedback than I'd gotten in in a long time. And there are a lot of people who like the psychological break or the psychological release you get from owning individual bonds because they say, "Listen, a bond fund can go down in price, but my if I hold my bonds to maturity, I'm fine." From a psychological perspective, that does make sense, but it's a little like the private equity illiquidity thing, right? Where where, you know, a bond fund is just a fund of individual bonds. Just they happen to be targeting a specific maturity or duration or credit quality or whatever it is that tries to keep it relatively close to some benchmark or or average. Uh and so if inflation does increase and you own these these bonds in a ladder, it's still and rates increase, it's still going to impact what you could get because you could have then gotten a higher rate in the market. I do think that ladders actually help from they can help from an interest rate risk perspective. It's kind of like dollar cost averaging in a way, right? You're you're spreading your interest rate bets. Sometimes higher, sometimes lower when you when you know, when they mature and if you reinvest. So I do think it kind of spreads your bets and it's a different form of diversification. But you can certainly create a bond ladder or a different maturity profile using mutual funds or ETFs, right? It's it's simple enough to do these days. I know they even have targeted target date maturity ETFs and so there's a lot of different ways to do it, but I I think the biggest benefit to a ladder for most people is just the psychology behind it, right? And not having to look at the price going down and thinking even though the price of your individual bonds is going down as well. In your head you think, "Well, it's fine. I'm going to get it back at par anyway." So I think it that's more of a behavioral tool than anything and maybe it does help with interest rate risk a little bit, but it's not like the the total savior that some people make it out to be. >> And that is a really great blog post that you did write on that topic. It's funny someone asked me this question recently and I just sent them that article cuz you did such a good job on that. I'll link to that in the show notes for folks to check out as well. And any hate mail on individual bonds versus bond funds send them to John, not me. Thank you. Yep. Yeah. Yeah. Or just, you know, put put them in the YouTube comments. Let me know what I'm doing wrong in the podcast. Let's talk about inflation. In your book you talk about the three best inflation hedges. Tell us what they are. >> Sure. I I think this is something that people haven't really thought put much thought into until this decade because we had four decades of so where inflation was relatively tame and really coming out of the great financial crisis, it was like 1 to 2% per year. It was really low. We go to 9% inflation and that's why I really wanted to write about that topic in the book because it seems like something that a lot of people didn't have a lot of experience with. >> [snorts] >> In in a lot of ways, I think some people want inflation to be this thing where you find the right portfolio hedge, right? It's gold or Bitcoin or tips or whatever it is. You you find the perfect hedge against inflation. And I look at it more from a personal finance household perspective where I say that the best inflation hedges are a good job where you can hopefully increase your salary at or above the rate of inflation and that you're just a, you know, desirable to an employer. Uh 30-year rate mortgage, fixed-rate mortgage. Um I think if you looked at that in investment terms, uh it's funny because a lot of other countries don't have that 30-year fixed-rate mortgage. If inflation rises and rates rise in places like Europe and Canada, um they actually have more adjustable-rate mortgages that will be cranked up and have see their their um monthly payment increase. So, if you want to look at it from an investment perspective, I do think a 30-year fixed-rate mortgage is kind of like you're shorting the US dollar, right? If you just buried your money in the backyard in in cash, it's going to go down in value because inflation will eat it up, right? I think the the number I use in the book is at a 3% inflation rate, the value of a dollar will be cut in half in 20 plus years, like 22 years or something like that, I think, right? So, you can think of of a fixed-rate mortgage as something of a short dollar bet that you know the dollar is going to go down because inflation will go up assuming growth keeps happening. Uh and then finally, uh just stocks for the long run, right? In the short run, the stock market can get dinged by higher inflation as we saw in 2022, right? Um high and/or rising inflation from one year to the next. There's some stats in the book about that. Can hurt the stock market in the short run, but in the long term, the stock market still remains your best bet to beat inflation, and I think the number of the past 100 years is, you know, in the 6 to 7% range of real returns for stocks, um which is over the rate of inflation, which is much better than than bonds or cash or any other asset there there is really. >> And if you're already retired, maybe that inflation hedge isn't necessarily good job, but it's delaying social security. Delay social security, you get a bigger benefit. That bigger benefit increases with inflation, and that's also a great inflation hedge. Earlier, you mentioned having TIPS as part of that bond portfolio. That begs the question, if I have stocks in my portfolio, do I still need TIPS? >> I think TIPS are one of the more unique asset classes that is available. It's technically a bond, but it's almost like this alternative asset class where, you know, because sometimes gold works to hedge against inflation, other times it doesn't, right? There there's no asset class that really gives you a one-to-one for inflation like TIPS do. And and I think especially when yields are a little higher like they are today, it's a pretty good value for investors when the the nominal yields are above, you know, say 2% or so, which they are today. Uh it's just it's very unique in that it just does give you that one-for-one inflation hedge. And and so, I think the fact that this it's such a unique asset class that can give you this this diversification you really can't find anywhere else. >> You mentioned something really interesting just now. TIPS look good today. So, with respect to or being a long-term investor, we're designing a portfolio for the long-term, is that something we should be thinking about? Hey, TIPS look good now or else maybe they don't look good at some other point in time and we don't necessarily want to include them in our portfolio. >> Yeah, I I guess it depends how much you want to be a bond fund manager in these things. Um the way that I look at bonds is not trying to You know, we do this for our firm, too. So, I'm on the investment committee for our firm and we always look at it in terms of the risk and reward. What >> are you even paid to take right now? And what's the reward look like? And I do think there's a probably a difference when, you know, TIPS yields were negative, you know, in the early 2020s that just not that great of a of an investment and that's one of the reasons that they they did kind of struggle. Um now the nominal yield is much better. I do think you can probably say that there's a time where TIPS make more sense than others. But I but I really think it depends how much how active you want to be in your the bond part of your portfolio and how much value you can add. So, I I I I think that's that's certainly a question, um you know, because the bond piece of the portfolio is I think supposed to be boring, right? You you you you take risk where you're in volatility where you're being paid to take it, which to me is the stock market. And so, I think trying to squeeze a little bit more juice out of the bond market and trying to time these things by jumping in and jumping out, it sounds interesting, but it's it's probably only helpful at the extremes. I think the most extreme example we've had this decade was just when bond yields were so low because of the pandemic, right? And the whole Treasury yield curve at one point was at 1% or lower. And at that point, it didn't really make sense to take anything in the in terms of duration cuz any little bump up in yields was going to crush you in bonds, which is what happened, right? Yields went up and and I don't think anyone was predicting that the Fed was going to take yields from 0% to 5% in that short of a time frame. So, that that's obviously where bond investors got kind of spooked and and caught off sides. But I think that's the kind of time where you look at the risk reward setup and you go, "Boy, taking any sort of long duration risk here just makes no sense because if yields keep falling and they go to zero or negative, I get I squeeze a little more juice out of it, you know, a little more toothpaste out of the tube. But if yields rise, I'm going to get crushed. So, it's like the the opposite of the risk profile that you want to take. That That's kind of the way that I think about if you if you want to time these things in bonds that it that it makes sense. It It's It's really those extremes. And other times, I don't think you're adding a a lot of value by just kind of jumping in and out of these different segments of the bond market. >> I had a great line in the book about just this. Let's have you read it for us. >> The more frequently you look at your portfolio, the more likely you are to experience the sting from the loss aversion since losses are more frequent in the short term. Yeah, this is a the concept that I think is I I titled in the book it's the most important concept in all finance just because losses are so painful. And And it's funny I talked to my kids about this with their favorite sports teams. I tried to explain to them the concept of loss aversion. And I I tell my daughter, you know, what feels better and what feels worse? When you see your team win, it feels good or when you see your team lose, it feels bad? And she's like, "The losses. It It It's so painful when you watch your favorite team lose." And I said, "Yeah, that's that's loss aversion." And I shared some quotes in the book about it. And um I think that's what because of the fact that the stock market is so much more volatile in the short term. And And the numbers are really surprising that you on a daily basis the stock market is up like 53 to 54% of the time, right? So, it it's a little better than a coin flip on a daily basis that the stock market is going to be positive or negative. And obviously, the longer you are out you go, the higher your odds are of success. So, the thing is if if you're looking all the time, the chances of seeing loss and having those losses sting is much higher. I think the number I I used in the book was since 1950, 7% of all trading days are all-time highs, which is which is pretty good actually, right? Inverting that means 93% of the time you're kind of looking up at an all-time high from a drawdown. Now, it doesn't mean it always has to be a big drawdown, but it shows that most of the time you're in a state of drawdown and and seeing losses. So, if you're always kind of anchoring to that really high level of the stock market or your portfolio, uh it can sting the more you look at it. And I don't know. I think I update my portfolio values once every 6 months, maybe. It'd probably better if I did it every 12 months. Um and of course, in the back of my head, I I know what it is based on the market cuz I know what the market is kind of doing. Um but it's funny. Even I I I have this thing where I just I will not look at my my uh account statements or my portfolio values when we're in a downturn. I don't think it's helpful to me to see those values being lower and seeing that cash that's been incinerated by the stock market. Uh so, I think sometimes it's good to help have like some space in between yourself to avoid having those feelings of loss because everyone has them. It's just like human nature. >> I work with someone who recently was concerned about bond volatility, and my answer was just don't look at it. So, in the book, you do a great job talking about the long term, and I think that helps people focus on that. And the book is pretty evergreen in that respect. Uh your podcast, Animal Spirits, it hits a little bit differently. It's more timely. Uh while certainly you're talking about the long term, you're also talking about things like IBM losing 23% in a day. How do you think about that divergence between encouraging investors to focus on the long term while also spending a lot of time talking about what's happening in the markets right now? >> Yeah, great question. I I think there's this this cliché that almost every financial advisor uses. I think that you get your CFP and they hand you a a plaque that says this phrase on it. It says, you know, um you tell your clients just ignore the noise, right? And it's it's great-sounding advice. Just ignore the noise. Don't worry about it. And my contention is that it's harder than ever to actually ignore the noise today because you have these little pieces of glass in your pocket that are giving you 24/7 alerts, and and people are constantly talking about the markets. I remember I got a I wrote a piece about the 1987 crash at one point and I got a an email from a guy who said, "Listen, I was I lived through the 1987 crash. I didn't know it happened until I was driving home and I turned the radio on and then they tell me that the stock market fell 20% and we might go into a depression." And obviously if something like that happens today, you're following along on a tick-by-tick basis if you if you want to, right? You're you're paying attention and I think it's it's harder than ever to avoid paying attention. So I think what you have to do as opposed to drinking out of the fire hose that's just I mean there's so much so many ways to get information these days. It's not only 24/7 news and financial media there are newsletters and social media and podcasts and you know, all this talking heads that are just constantly giving you opinions. And so the way that I like to think about it is you have to have good filters in place. And I I think maybe by talking about what's going on in the markets, I'm I'm trying to figure out filtering like this is actually useful information. This is not useful, but it's interesting. I think selfishly I just I really I love following the markets. I think it's one of the most interesting like case studies in human nature that there is because it's it's constant emotions and people's you know, people are the ones that are controlling it. So I think following the markets to me is just is really inherently interesting. But I think also this you know, I'm not a big comic book guy, but my colleague Josh Brown always likes to use this analogy. There's something in one of the Avengers movies where they asked the Hulk the Incredible Hulk like how did you finally learn to control all your rage, you know, and be just become Bruce Banner not the Hulk? And he said, "Well, the thing is I'm just angry all the time." And and I think I do think that the more you pay attention to this stuff from from my perspective, the less it is the less you are overreacting to it because you go, "Hey, listen, someone was worried about this 2 months ago. Now we're worried about it again. Guess what? This is the kind of thing that doesn't matter. So, I think the the way people get themselves in trouble, especially individual investors, is by um you know, paying attention here and there and jumping in and out, right? Like, oh, now it's time to pay attention. I really have to do something, right? And I think that's where you get yourself in trouble is if you don't know how to filter and you don't know how to pay attention to the right things and then you go, oh, wait, something's going on right now. I I see smoke and people are paying attention. There's got to be something going on. Now I need to do something. And I think that's where you get yourself in trouble. Um so so I think my way of doing it is I'm trying to be like Bruce Banner where I guess I'm paying attention to it all the time and realizing that I've kind of become immune to it because I I you know, for 15 years now I've heard people talk about uh this is the next crisis and that's the next crisis and no, this is it. That's is the bubble and and it's like if you hear enough of that talk, it's kind of like the boy who cried wolf where it you you kind of become immune to it in some ways. >> You can correct me if I misheard you. It sounded like there are times when you should and shouldn't pay attention. Is there a distinction there? If we're a long-term investor, do we need to be paying attention at all? >> It's funny. I when we talk to clients about when they're going to make changes to their portfolios, we tell them, listen, we're long-term investors. Um but there are times when the market sort of forces your hand and I talked about the bond market earlier, right? The risk reward set up. But it's tends to be the extremes. For most people, it's actually your personal circumstances that will dictate when a change to a portfolio happens. And I think that's one of the misnomers that a lot of people have in portfolio management. They think, listen, when valuations hit this level, I'm going to do this or what you know. I think a lot of the portfolio management stuff from that perspective should be set up in advance and there should be guidelines and rules in place in terms of you know, rebalancing your portfolio, right? When within certain bands or so. I think you should set up a lot of those guidelines in advance and then the the time you really have to make portfolio changes is when your life changes, right? Um I'm going to be spending more money. I'm going to be spending less money. Hey, we we're saving more now, we can take more risk. Hey, we're saving less. Maybe we have to dial down the risk a little bit. I think a lot of those risk tolerance things really come from personal circumstances as opposed to the market. But I do think that you can use the market as as a way to kind of gauge, you know, when it makes sense to do certain things. But I But I think you want to make wholesale portfolio changes because of what's in the headlines. No, I think that that's a huge mistake. >> Yeah, 100% agree. It's those life changes when you need to make those portfolio changes, right? You're getting closer to retirement, you want to take less risk. Uh, maybe you've got a big windfall, selling a business, inheritance, maybe now you can take more risk, right? It's when your life changes, not necessarily what the market is doing. Okay, let's get into some more questions from the Bogleheads community. This one is from Bogleheads Reddit, username Diego Milán asked about what you've changed your mind about recently. He references how JL Collins, who's pretty big in the FIRE community, we actually had him as a guest on a Bogleheads live show in the past. I'll link to that in the show notes. So, Collins, who's a big US-only investor, has recently changed his mind, now includes international as well. What about yourself? What's some changes you've made in your investing philosophy over time, Ben? >> You know, I I think when I first started out, the the John Bogle example of how to invest really it just the light bulb went off when I started reading his stuff early in my career. And and index funds made sense to me immediately. I know for some people it takes some time. It just It made sense to me. Plus, I was seeing all these active managers in my day job that were having a hard time outperforming the market. So, the the the idea of indexing really made sense to me right away. I think what I've learned after dealing with a lot of different investors of all shapes and sizes over the years is just that there really isn't one way to succeed in investing, but I think that there are just a small number of ways to, you know, fail in investing. And not everyone has to invest the same way to find success in their portfolio. There's There's a lot of different paths to success and I I've seen these people, you know, by working with them. So, I think personality has a lot to do with with how you do in your investments. And I think there are people who can be just spreadsheet warriors and and robots, right? They're They're the Spock that they can They can follow a plan and they they, you know, they set their asset allocation, they rebalance occasionally, and they just more or less leave it alone. And And I know that there are those people out there and and they dutifully invest and save. Um they can sit on their hands when there's a there's a correction or a crash. Uh and some people are just hardwired to be good investors like that. Then there are other people who need a behavioral release valve. And they will say, "Listen, I need to take 10% of my portfolio and just go nuts because that's going to allow me to deal with the other 90%. So, I want to be a tactical investor or I want to pick stocks. I want to speculate. I want to buy crypto." Whatever it is. If it If this piece allows me to scratch that itch and leave the other 90% alone, and I think for a lot of time I would I would kind of say, "No, that Why would you want to, you know, uh do that in your por- But now I think the idea of like sinning a little bit, if to steal a phrase from Cliff Asness, I think it makes sense if that if you understand your lesser self that's going to actually help. Like, listen, I need to have some action. I'm kind of a junkie for, you know, gambling and going crazy and I'm going to leave my retirement accounts alone, but my brokerage account, I'm going to go crazy. I actually think that makes sense for a lot of people. For For some some people. As long as you can understand and position size it well enough. Obviously, if you take too much of a risk and you're doing a big chunk of your portfolio, that's when you can get in trouble. But I think if you size it correctly, that's probably something I've changed my mind about. I was under the impression that no, we all need to be robots. We all need to follow a plan, set it and forget it. Um but I think some people just don't have the ability to do that. And so, really it's about knowing what you need to be successful as an investor. >> One thing that I get anxious about with what I would call that cowboy account or that fun money account is that it has you pay attention more to what the markets are doing, you know, with that 5% and then that may impact how you treat the rest of your money. But certainly, hey, having a little bit of play money, that's not going to make or break you if you only just stick to just that. >> The funny part that you mentioned that is that I I did this for a while. I had a 10% of my portfolio and I tried to pick stocks. And the the first thing it did was it showed me how hard it is and it showed me that I I just really underperformed all of my index funds. Um but I also I was realizing that yeah, I was spending 90% of my time worried about this 10% of my portfolio. And you're right, I'm checking it all the time. And I that's I finally decided like it's not worth it for me because I what's the point of looking at this all the time? And oh my gosh, there's an earnings release tonight. And what happens if the stock goes up 20% or down 20%? Because that for individual stocks, that kind of thing actually happens more often than you think. And that actually was enough for me to go, okay, I I got this out of my system. I I did it for a while. I realized like I have better things to do than worry about this. And it actually helped me and I hope that's what happens with a lot of young people is they they go through this and they do this with smaller amounts of money and and kind of get those mistakes out, maybe pay some tuition to the market gods, and then realize like, okay, there is actually a simpler, easier, better way to do this. And technology allows you to automate so much more of it now that you can take yourself out of the equation. >> All right, this question comes from Bogel Heads Reddit. Buffanita asks about what are some of your favorite charts with respect to passive investing, market timing, and we'll put them on screen for our YouTube viewers to check out. >> Sure. Um especially if we're talking about just the past, you know, 5 to 10 past decade or so, um I I think you could my favorite one is just to show the drawdown chart of of the fact that there have been pretty good drawdowns, you know, this decade alone. We had a 35% drawdown in COVID. 2022 was a bear market. I think this S&P was down 25%, the Nasdaq was down 35%. Uh, for Liberation Day we're down almost another 20% and yet this decade the stock market is up 15% per year. Right? Um, I I think if you kind of overlaid a lot of the economic data on the stock market, especially during COVID, the unemployment rate went to 14%. Um, while the stock market was bottoming and already moving up. Right? And and so I think one of these things that a lot of um, you know, new investors try to think of is like especially when there's a downturn, it's the idea of I'm just going to go to cash and wait till the dust settles and then I'll put it back to work, right? And and the problem is when this stuff is in the headlines it's already too late. And so I think that was one of the most more interesting uh, lessons for investors during COVID was you had all these terrible headlines and everything is going wrong and it seems like the economy is never going to come back and the all the numbers are getting worse and the unemployment rate is rising and the stock market is rising too and people are going this doesn't make any sense. And and I think during those downturn periods a lot of times the stock market moves way faster than than anyone else. And and that's the hard part to wrap your head around is is that the stock market moves before the data does and sometimes and it tries to be forward looking. Now of course the stock market is not always right. So sometimes the stock market moves and it's it's it's caught off guard and it goes back down or goes up, but I think that's that's the good lesson for me this this decade is that with all the bad stuff that's happened, the the pandemic and 9% inflation and tariffs and wars and all of these really nasty headlines, if you just kind of put those headlines on the stock market, you'd go, I mean this year's a great example too. Uh, the the war happened, oil prices spiked, gas prices spiked and people go, why is the stock market not falling? That's a good one where the headlines can really make it harder. Like you could have given me all the headlines for this decade and I go, "Oh my gosh, that's going to happen and that's going to happen and that's going to happen." And I would have I would have been completely wrong about the market's reaction to those headlines. I think that that's the the lesson is just And so, that's another one of my favorite charts. And we actually do this, my colleague Michael Batnick has this chart. Um he calls it reasons to sell. And he shows the the line of the stock market going up and then all the bad things that have happened. And I think the hard part for investors to realize is that the good news is more like a process and not an event. But the bad news is an event, it's a headline. When bad news happens, you know it. Good news takes a lot longer to happen. Good news occurs more in the long term. There's not really headlines that that will proclaim, "Hey, this great thing happened." Because it happens over over time and that's kind of the same thing with the stock market. >> Yeah, that good news being corporate profits, economic growth, etc. Not really a big headline, but that's where your investment returns are coming from. >> Exactly. >> And we'll put Buffettologist's favorite chart on screen as well. Talks about low correlation is not inverse correlation. Our YouTube viewers can check that out. And if you're listening on audio, be sure to check out the YouTube show where you can see all the charts we're talking about. All right, let's talk about active management. This question is from Jock Dock from the Bogleheads forums. He's asking about the Porterhouse portfolio. Tell us a little bit about what that Porterhouse portfolio is for context. >> Yeah, yeah, great great question. >> [snorts] >> So, it's a momentum strategy, it's totally rules-based. And uh So, I I guess the active component of of our client portfolios typically is the factor investing. And uh I guess my thoughts on indexing is that index funds themselves are nothing special, right? You can take all of the best of indexing, be that they're kind of rules-based, they're very long-term in nature, they're tax-efficient, they don't trade a ton. And you can apply those general principles to other investment strategies. And the the rules-based investing thing is probably the biggest one for me. I'm a huge proponent of making good decisions ahead of time, evidence-based decisions ahead of time, setting those guidelines, and then allowing those guidelines to act out. That doesn't mean that they're set in stone, you can never change them. But, I think any good plan, and that could be for your portfolio, that could be for investment strategies, that could be for your whole financial plan. I think any time of type of guidelines and and sort of mile markers and limitations and rules, I think that's a great way to again, pull your lesser self out of the equation. So, I think a lot of people it it it are intuitively understand if I'm going to have a factor like small cap value, I think it's been a big one for financial advisors over the years, right? Uh as as a way to I think probably try to squeeze a little more juice, but the way that I look at factors is I don't look at them as a source of alpha. I know a lot of advisors say, "Hey, if you invest in these factors, you can outperform." I've never looked at them like that because I just think this all these things are very cyclical. I look at factor investing as a source of diversification. So, first and foremost, that's the idea of if you're going to be different than the index, I want it to be a complement to a portfolio. That like if this piece of the portfolio is going to be lagging, maybe this piece picks it up a little bit. And I I think living through the first decade of of this century where the S&P 500 and like a Vanguard Total Stock Market Index Fund had a lost decade, I think living through that really just drilled home to me the importance of diversification having other asset classes to pick up the slack. Now, the funny thing is, you had that 10-year period where diversification really saved your butt. And then the next 15 years, you would have been way better off just having your money in VOO or VTI, you know, one of these in large cap growth, you know, segments of the market. So, obviously there's ebbs and flows. We had some sort of higher quality value segments of our portfolio and um the momentum factor, if you look at it, actually is a good good complement to that. And and so we look at it as kind of an offset. And so if we're going to do more of an active component to the portfolio, again, we want it to be rules-based. We don't want it to be discretionary where someone is picking the stocks on their own. I mean, I always make the joke that um no index fund has ever closed because the portfolio manager is getting a divorce and wants to spend more time with their family, right? This happens to hedge funds all the time, right? So any any sort of quantitative rules-based, you know, index fund base, to me that is again just easier to lean into the pain and understand like, okay, I this is not working right now, but I'm I'm comfortable rebalancing into it. It's kind of funny because the momentum factor itself is not nearly as intuitive as value investing. Value investing everyone gets. I'm going to buy a dollar for 50 cents or 60 cents or whatever it is, right? Warren Buffett Graham, all that. Value investing is easy and there's a ton of money in value mutual funds and ETFs, right? Because people get it. Uh momentum is kind of this this different one because it's more of a behavioral factor and it deals more with um hurting and recency and there is a little more turnover to it. But it it can be a good diversifier because it acts as something of a chameleon. Now, a lot of people think, well, momentum, that just means tech stocks. Just like tech or kind of growth stocks, but it really it's the kind of strategy that will pick whatever is doing well. So if if you're in a there could be dividend stocks that are having high momentum cuz they're working and could be consumer staples. It could be different sectors. It could be different types of stocks. So that's the thing where it just adds another element of diversification. And that strategy itself, which is relatively new for us, is another one of those kind of scratch the itch ones where it's not for every client. And some clients will say, I don't want it. I don't need it. And for us that's fine. So we have kind of the the core models that we give to all of our clients and then you have these other levers you can pull if you, you know, desire something a little more aggressive, more concentrated like that and you want another form of diversification. But, like I said, it's not all of these strategies make sense for every investor and that that I think that strategy kind of fits in that bucket. >> That also helps answer our factor investing question we got from John is on Reddit now from Bogel Heads Reddit. You mentioned index funds being tax efficient. There is a new pitch out there. Maybe it's not that new. There's direct indexing with tax loss harvesting and now more recently there's there's long short direct indexing factor strategies. What's your take on these strategies? >> It's interesting because we get tons of people coming to us now asking about this stuff. So, this is not just like an advisor-led thing. It's it's people who have There are there are plenty of people who put money in in Nvidia a few years ago or something or Tesla or Apple or maybe they just got stock options from their firm, right? They work at Google and they got stock options and they have a really low basis and they have a huge capital gains tax. And these people, credit to them, they know that they should diversify their portfolio, right? I already kind of won the game. I picked an individual stock or a handful of individual stocks. It did really well, but they just can't bring themselves to diversify and pay the tax cuz it's really painful. Like, ah, I I want to diversify. I know I should. It's a form of risk management. Right? There's the old saying, you concentrate to get rich, you diversify to stay rich. And people recognize this. And so now because it costs nothing to trade, there's zero dollar commissions, you can do these direct indexes where you pick the individual stocks and use them for tax loss harvesting purposes, but there's a limit to that sometimes, right? There especially if you're in a bull market, not that many stocks go down. I think the average in a given year is something like even if the stock market is up 30% of stocks on average will fall in a given year. So, there's a decent amount of them, but you can you can run out of these losses to harvest. So, now what you're seeing is um okay, we're going to open a margin account and we're going to do a 130/30 fund where we we borrow money, we tack on an additional 30% long strategies, but then we offset that with shorting 30% of stocks on the other side. So, it it still nets out to a 100% long portfolio, but you're just adding more stocks and giving yourself the ability to um to harvest more losses. And this is the kind of strategy that that we actually are working with. Uh Canvas is a platform we use for direct indexing. Um E*TRADE also has one. We we work with them a little bit. Uh and what we explain to clients is that this is this is one of those strategies that is certainly not for everyone. And this you and I talking earlier about simple versus complex, a lot of people will hear about this kind of strategy and immediately go, "Okay, I'm tapping out. This is way too complex for me." And and I think that that there are certain people who say like, "Man, I hate paying taxes, but I want to keep it simple." And there are other people, I'm sure you've worked with these people, too. Uh there are certain people that they will do anything to avoid a tax bill, right? Or to decrease their tax bill. There's a lot of people who just hate paying taxes and will do whatever they can. And so, we say this is very situational. It has to be the kind of thing where you have a huge capital gain because you're selling a business, you're selling a piece of real estate, or selling a concentrated stock portfolio with a low basis, or whatever it is. It's hard to see this as being some sort of baseline strategy. Uh I also think this is not the kind of strategy that you can implement yourself as a DIYer just yet. Maybe you will in the future. But I think this is something that um it may this sound self-serving because I work for an advisor, but I I've seen how hard this can be to to implement in practice because you kind of have to manage these positions and set like a budget in terms of tracking error and and how much you're going to harvest in a given year, and it's more of an active strategy. But for those people who have specific situations, it's pretty interesting from a you know, I think my stance on this is a lot of people have have learned over the years that like I'm not going to find alpha in my portfolio from from stock picking, right? The the outperformance probably isn't going to come from there. Unless I get lucky. Um so a lot of people have shifted that to okay, I'm going to find after-tax alpha. That's where I can add value is if I decrease my taxes I pay cuz everyone knows the return the only returns that matter are your net returns after all fees and after all taxes. And if you can add value on the tax side of things, you can actually improve your your net outcomes and that's where people have landed, I think. >> What are some of the downsides to this strategy and when would it not be a fit for someone? >> The obvious downside that I just mentioned is it's more complex. It's a little harder to understand. I think some people are very hesitant to oh my gosh, I'm shorting stocks and I'm using leverage. And so for some people that's an immediate nope, not going to do it. Um so I think that's that's a problem. I think the execution, you have to make sure you're working with the right not only advisor but the right investment manager who understands it cuz this is this effectively a hedge fund that you're implementing, right? Uh I think you have to understand the fees because there's certainly some investment managers that charge very high fees to do this. So you have to weigh the pros and the cons of is is are the tax savings worth the fees that I'm paying for this? And then you have to think about the fact that you may just be delaying the paying of you know, a lot of these strategies are more for deferrals than they are for It's not like you're totally getting rid of the taxes. You're just figuring out a way to diversify your portfolio from maybe something that's more concentrated to more diversified and then you're delaying so you're allowing the compounding to happen longer. But you're still going to have to pay the taxes someday and now maybe you're stuck in this strategy for a number of years because you don't want to rip the band-aid off and sell down the line cuz then what was the point of it? >> How does one assess if the fee is worth the potential tax savings? >> Yeah, I think that is is something that you you really have to run the numbers on this thing these these things, right? And and you have to kind of not just the back of the envelope, but go through like we kind of map this out for clients over the years. Like in year one, you can harvest X percentage of the portfolio in gains. Year two, this. Year three, this. And then you look at the fees and understand and again and some of these managers can really crank it up. So I mentioned there's like a 130/30. But there's these there's investment managers who go up to like a 250/50 or something or you know, 200 and and they they really crank up the the leverage and some of those that use more like a hedge fund strategy that the fees are much higher, too. So I think you do have to kind of run a really detailed cost-benefit analysis to understand. And so for our clients, we kind of we map it out. And generally, here's how long it's going to take and you can do some kind of analysis, but obviously, a lot of it is dependent on how the market performs, right? You can harvest way more losses if there's a bear market. And so you can't really prepare for these things in advance. So sometimes there has to be a little more back and forth between the advisor and the client in terms of like when do you turn the dial up and when do you turn it down based on what the market is giving you. Our tax expert always says that like it's painful to pay taxes, but guess what? It also means you did something right and you won the game. So there's also an element of that. And we have certain clients who go who will say, "You know what? Let's just do it and I'll pay the taxes and I'll I'll move on." And so for certain people, they just go, "You know what? I I don't even want to deal with all this other stuff. I just I'll pay the taxes. It's It's kind of stings to write that check, but listen, I I made a ton of money on this." So for certain people, they come to that conclusion as well and that that's fine, too. >> Ben, thanks so much for joining us for the Book Legends on Investing podcast. We're going to see you at the Book Legends conference this year. >> Yep, I'll be there. Can't wait. First time. >> Fantastic. We're excited to have you. Any final thoughts before I let you go? >> I guess the one thing I always tell people when I I I sign some of my books, I always write "Less is more." So that's those are my three words I'll leave you with. >> I love that. Thanks again for joining us. We'll see you soon. >> Thanks. >> That wraps up our interview with Ben and with that here are some of my thoughts from the interview. Let's start with Ben's comments on spreadsheet warriors. >> I think there are people who can be just spreadsheet warriors and and robots, right? They're the Spock that they can they can follow a plan and if they set their asset allocation, they rebalance occasionally, and they just more or less leave it alone. And and I know that there are those people out there and and they dutifully invest and save. Um they can sit on their hands when there is a there's a correction or a crash. Uh and some people are just hardwired to be good investors like that. >> One thing about the spreadsheet warriors is that I found a lot of people think they're spreadsheet warriors and they create a spreadsheet and they create a plan, but then they don't maintain it. So that's why as always, I encourage folks to keep it simple. Make a plan that requires less maintenance, less spreadsheet time on your part. That's going to increase your odds of success. >> So a lot of people have shifted that to okay, I'm going to find after-tax alpha. That's where I can add value is if I decrease my taxes I pay. You really have to run the numbers on these things, right? Like in year one you can harvest X percentage of the portfolio in gains. Year two, this. Year three, this. And then you look at the fees. >> I understand the pain point of taxes. The thing with any sort of tax projections is that they're just that. They're not guaranteed. But what is guaranteed? The fees. I think for that reason, for me personally, I would put any sort of tax optimization investment strategy like long short direct indexing, tax loss harvesting into a sort of a fun money bucket. That is, hey, I'm going to throw some money at this and I'm going to be okay if this underperforms. I'm going to be okay if the fees eat up any of my tax savings. That's how much I dislike taxes. I think going into it with that sort of framework can help you decide if signing up for one of these tax-optimized strategies really makes sense for you. Thank you for joining us for the Bogleheads on Investing podcast. For more free financial education, be sure to check out our videos from the 2025 Bogleheads conference, all of which are now available on YouTube. Also, you'll find countless shorts from both the conference and this podcast there, too. 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