 I was so internalizing the message to like just get on with things and get out of the way that I forgot to introduce myself. So I'm Christine Benz and I am director of personal finance and retirement planning at Morningstar. I'm also the president of the board of the John C. Bogle Center for Financial Literacy. So I'm thrilled to introduce Rick Ferry who has been my partner in planning this conference for the past couple of years. Rick is a prolific author. He has how many books, Rick? Six? Six books. With a focus on asset allocation and low-cost investing, he holds, he hosts the Bogle Heads on Investing podcast and he has an investment advisory practice that is hourly, which is a little bit different and difficult to find. He was my predecessor as president of the board on the John C. Bogle Center for Financial Literacy and has donated a ton of his time to Bogle Heads over the years. So Rick is going to talk to us about investment selection. I think this comes out good. So that works. Well, thank you again for coming to the conference and hope you enjoy it. I know you're going to get an awful lot of information over the next three days. This conference used to only be two days, now it's three days. And my talk today is on investment selection, which is how do you actually go about investing in the things that Alan talked about? So I'm going to give you just a quick review of investments that are out there. And so I call these things the income-producing investments, which is trying to loan Alan a thousand dollars and hope you get it back. So income-producing investments, that's all they do is produce income, would be treasury bonds, corporate bonds, certificates of deposit, municipal bonds, and so forth. These are loaning people money and they pay you back with interest and eventually get your money back. That's the idea. So those are the income-producing investments. So first I'm going to go over, again, the list of different investments that are out there in the public markets, the public markets, meaning you can go buy this stuff in the public markets. Not loaning it to Alan, that would be a private investment. But in the public markets, these are the things that you can buy. The next thing, type of investment pays both dividends and it has growth, it could go up in value. And that is stocks, U.S. stocks, international stocks, you own part of these companies. Master-limited partnerships are like stock, a little bit complicated on the tax side. But the idea is you are a partner in a company and it's a publicly traded company. So the stock is, if you will, publicly traded on the exchange. And then there's real estate that you can buy on public exchanges and they're called REITS, Real Estate Investment Trust, where you can get paid rents. And those rents flow through to you, treated a little bit differently for taxes. But again, all of this stuff you can buy in the public markets, on the stock market or the over-the-counter type markets. And then there's these things that just change price, the more speculative things. They don't pay any dividends, they don't pay any interest. You are buying something with the hope that it goes up in value. And then you turn around and sell it at a higher price. So anything you buy, somebody else is selling, and anything you are selling, somebody else is buying, and as Alan said, it's a zero-sum game. Okay, there's no real growth in that. And that would be commodities, precious metals, collectibles. Maybe a little bit different with collectibles. That, by the way, you can't get on the public market. There are very few available out there. And currencies, including the cyber currencies, like the bitcoins and things like that. The idea is you buy them at one price. They go up in value, you sell them at another price, you make money. And you're buying and selling based on price only. No cash flow is coming off of those things. So publicly available investments. Now, my talk today is about how you buy. Those are the what's. That's what you can buy. And now this is how you can buy them. So this is a pretty structured market out there, pretty structured. The first way you can buy them is direct. So you go to the stock exchange and you buy individual securities. You buy physical metals. So you're buying Apple stock on the stock exchange. You're buying Google stock on the stock exchange. You open up a brokerage account and you buy stock. You could open up a brokerage account and buy treasury bonds. You can buy individual corporate bonds. You can buy mortgages. All of these individual securities trade. And if you have a brokerage account someplace, you can buy them in your brokerage account. Okay? You can buy Bitcoin. You can buy gold through an exchange traded fund. You can buy real estate through real estate investment trust. So they're mostly exchange traded. They're fully liquid. If you bought them now, you could sell them 10 minutes from now if you wish. You would pay a small commission or so, or a spread between the bid and the ask price when you sold them because there's a market maker in the middle. But that's so that's the cost of trading. So you could buy individual direct or you could buy them in a partnership. Okay. Now what is a partnership? This is where you get together with 500 or less individuals or other investors and you buy a piece of a partnership. Usually what trades inside of a partnership are things like real estate, private real estate, not real estate that's traded on the market, venture capital, hedge funds and so forth. It's generally these partnerships are securities that you can purchase but they're not very liquid. There's usually a general partner who gets paid a fairly high fee. You'll get your money back eventually hopefully but and there is a market for these things but it's not liquid like the stock market or the bond market. So partnerships are another way you can pool your money or really the first way, you pool your money with 500 or so other people and you go out and you buy these different things in the partnership and now you own a piece of it. You don't have any say in how the partnership actually works but you get the cash flow from it. If there is cash flow, you get the appreciation if there's appreciation because there's somebody that's managing that partnership for you. That's called a limited partnership. Okay, one more. Let's go. Okay, now the next thing is a little bit simpler than that's called a traditional mutual fund. These were first created back in 1924. So they've been around now for 100 years and here's where a company said, we can go out and we can buy stocks and we can pool them together in one account and we can invite people to buy into that account, to buy shares of that account. Pretty much an unlimited number of people. So you get a company like a Fidelity, Massachusetts Investment Trust or any number of mutual fund companies to create a pool of capital and they sell shares of that pool to you and it's liquid on a daily basis. You can buy these shares at the end of the day, you could sell them at the end of the next day and you will own a large number of stocks or if it's a bond mutual fund, you'll own the bonds in there. There's all different size, 4,000 different types of mutual funds. Some of them are actively managed like Alan was saying, some of them are index funds and mutual funds are the most common investment in 401K plans, 403B plans, 457 plans, things that you have at work. They're mutual fund investments, traditional mutual funds and they have liquidity at the end of the day at what's called net asset value. Now there's a manager of that fund and they charge a management fee. Some of them are high management fees some of them are very low like the index fund management fees and that's how the people who are managing that pot of money get paid. So this is a mutual fund, sometimes there's a commission to buy them. If it's in your 401K or 403B or 457 plan there's not going to be a commission but the mutual funds are what you'll find in those plans. All right, the last thing is relatively new it's only been around for about, call it 25 years now I think it is, it's called an exchange traded fund, an exchange traded fund. This first and foremost is a mutual fund. It's a pot of money that is being managed in stocks or bonds but the big difference between an exchange traded fund and a traditional mutual fund is the exchange traded fund is trading shares on the exchange, on an exchange during the day when the market is open is when you buy exchange traded funds and sell exchange traded funds whereas traditional mutual funds you're buying and selling at a price that is determined after the market closes. So that's the big difference. So exchange traded funds trade on an exchange during the day they're kept very tight as far as the value of what the fund is trading at is very tight to what the market is trading at and the underlying securities are trading at through this arbitrage mechanism that actually goes on in the ETF industry and I don't wanna get into the mechanics of it but just feel pretty safe if you're buying and selling exchange traded funds in the middle of the trading day not at the beginning or the end but in the middle of the trading day that you're gonna get fairly good pricing when you're buying and selling your exchange traded funds. This is very popular in taxable accounts because a lot of people like to get on their Vanguard account or Schwab account or Fidelity account they like to buy something like a bond fund or a stock fund and they like to know exactly how much they paid for it right then and there and you would do that with an exchange traded fund if you bought a mutual fund in your Schwab account or you bought a mutual fund in your Vanguard account you wouldn't know what you paid for it until the end of the day, okay? Because that's when it's priced. So if you're doing rebalancing which Alan talked about when the market goes down you wanna sell bonds and buy more stocks and when the market goes up you wanna sell some stock and buy more bonds and you wanna be super quick about how you do that then you could do it with exchange traded funds and you just get right on your Vanguard account you get right on your Schwab account or your Fidelity account you could sell a few shares of the stock fund to buy a few shares of the bond fund to rebalance your portfolio and you're done. Most of the brokerage firms don't charge anything for a commission to buy and sell ETFs but there is a very small spread between the ask what you would pay for the fund the shares and what you would sell them for maybe a penny a share, okay? All right, so those are the sort of the mechanisms of getting into the markets, the public markets stock market, bond market, partnership market these are the ways that people do it. Okay, now Alan hit on this a little bit I'm gonna go into it a little bit more on an advanced slide. What is the difference between an actively managed fund and an index fund and Alan hit on this a little bit I'm gonna dive into it a little bit more. Why are Boglehead so kind of gung-ho on using index funds rather than active funds? I'm gonna go to the right side first actively managed fund let's say a stock fund actively managed is all about beating the market I wanna outperform the whole stock I wanna beat the market, beat the benchmark and I'm gonna hire I'm gonna put my money in a mutual fund or an ETF or I'm gonna go out and buy individual stocks that I think are gonna beat the stock market, they're gonna outperform, okay? And usually if it's a mutual fund or an ETF the fees internal in that are gonna be anywhere between a half a percent to 1% so they're gonna be fairly high you gotta pay a manager, pay a company for their expertise to go out and investigate all these different companies and decide which companies are gonna go up which companies are gonna go down how to put together the portfolio and put it into this fund I mean you have to pay for all of that research and management of that actively managed fund with the hope of outperforming the stock market alternatively you buy the whole market you say I don't know how to pick managers who are gonna outperform I'm not sure the managers know how to pick stocks that are gonna outperform which I'll show you in a minute so I'm just gonna buy an index fund an index fund that covers the entire US stock market or maybe a portion of the market like the largest 500 stocks and they call that the S&P 500 because there's about 3,600 stocks on the stock market so the largest ones are in the S&P 500 that's an index fund you can buy them for bonds, stocks, commodities I mean you name it but what you're doing is you're just buying that basically the entire market and the money management fee for the fund manager in the index fund is very, very low as Alan was saying is 0.03% there is low as 0.015 and Fidelity actually has some index funds that have a 0% management fee so they're really inexpensive you get broad diversification and what's the best part about buying index funds which is what the Bogleheads like Bogleheads like besides low fee is that they actually outperform the market okay so here's a little bit of a how the S&P 500 index fund is created so you have all these stocks that trade on the stock exchange Google, Home Depot, Apple you name it out there, Nvidia, blah, blah, blah and on and on there's 3,600 stocks they all trade on a stock market that's called the secondary market when these things come public when a company who has never traded stock before comes public ever that's called the primary market what you see and the Dow Jones industrial average the S&P 500, the NASDAQ the market is up today, the market is down what we're looking at is what's called the secondary market that's the stock that's already public it's already out there and it's trading between buyers and sellers that's what's going on on the stock market well what companies like Standard & Poor's have done is they've kind of ranked these companies by the largest companies which may be Apple to the smallest companies which I can't even tell you Bob's Bicycle Shop or something might be the smallest company but they rank them from the largest to the smallest and what they do is they say let's take the top 500 generally, I mean there's a little bit of nuances to this but take the top 500 stocks and let's call that the S&P 500 those are the 500 biggest companies basically in the United States so they say how did those companies do relative to their size so the big companies are gonna count more in the S&P 500 than the number 500 company so the Apple computer will count more in the S&P 500 than whatever the 500th company is okay and so then they take all that and they rank it and then every basically 15 seconds they calculate what the value of the S&P 500 is and that is an index and they call it the S&P 500 and when those stocks pay dividend it gets calculated into the total return of the index and this is where you get your indexes so Standard & Poor's S&P is an index provider they provide the index that the index funds are going to track and so you can have an index that tracks 500 stocks you can have an index that tracks 3,600 stocks and tomorrow we're gonna be talking with Jerry O'Reilly who is the manager of the total US Stock Market Index Fund largest mutual fund in the country in the world actually and it tracks about 3,600 stocks anyway so here then is Vanguard Vanguard comes along and they say I wanna use your index S&P to create a mutual fund so they license the index from S&P and they get all the data from S&P and they create that mutual fund and that ETF that is the Vanguard 500 Index Fund or the Vanguard 500 ETF so that's how it all works the stocks come out first they trade down the market second the index providers pick them up in an index next and then the fund provider or the fund sponsor we call them Vanguard or State Street or Fidelity or Schwab or whomever is doing the index fund licenses the index they create the mutual fund and they offer those shares to sale for you to you now getting back to the performance of index funds versus the active manager so who wins? are the active managers able to pick stocks? this is just US large cap stock mutual funds US small cap stock mutual funds international stock mutual funds real estate mutual funds government bond mutual funds corporate bond mutual funds and municipal bond there's just a sampling of the different categories of mutual funds that are out there over to the right are the percentage of times the index beat the mutual fund so the indexes have beaten the mutual fund in US large cap over a five-year period of time 87% of the time the index has beaten 87% of the mutual funds out there over a 20-year period of time 94% so if you're going to hold something for a long term would you rather try to pick that 6% of the large cap stock active managers and hope that your fund manager is going to be in that 6% or you just buy an index fund and you're going to be in the top 10% and it's not just large cap it's small cap and international and real estate now we don't have data on 20 years for government bonds corporate bonds and municipal bonds but if you look it's the same thing over and over and over again over time the indexes outperform the active managers so if you can buy the index rather than use the active managers there's a high probability your portfolio will do better than going out trying to pick managers or pick funds that are going to outperform okay so that's why we the Boglehead say this makes a lot of sense to us Jack Bogle created the first US stock market index fund that S&P 500 index fund I showed you earlier it has been out since 1976 and it is way up there in the top percentage of large cap funds has outperformed almost everything and you don't have to do anything just buy the index fund now this by the way was produced by an independent source Dow Jones S&P who provides indexes have been gathering this data for years and so have in other companies like Morningstar and Morningstar's data shows the same thing the same thing if you're just buying index funds and all your asset class categories then you're probably going to outperform trying to beat the market now I did a study it's been a while now but by the way one of the reasons why is because again what Alan referred to the active funds have to charge more money they have a lot of people they have to employ to go out and figure out which stocks are going to go up and which stocks are not so they end up paying on average about 0.7% per year is what a cost to have an active fund because there's a lot of people that need to be paid whereas an index fund it's a lot cheaper that difference in cost is the major reason the biggest reason why the index funds over time outperform the active managers okay last slide this is just a study that I did with Alex Benke back well ten years ago now actually I'd like to see I'd like to see it redone because I think the data is even going to be better all I did here was say if all we did was go out and buy three different index funds a US stock market index fund that covers a whole entire US stock market an international index fund that covers a whole international stock market and a bond fund that covers the investment grade corporate investment grade bond market which is a total bond market index fund and I just held those three funds and that's all that I did or I went out and I tried to pick a US stock fund that was going to beat the market I tried to pick an international fund that was going to beat the market and I tried to pick a bond fund that was going to outperform the market again this data is from 2012 and it's gotten better what is the probability that my portfolio of index funds would outperform that portfolio of my stock my active funds that I was trying to pick and what we found at least during that period of time through 2012 I think this is a I want to say a five-year period of time oh I'm sorry it was a ten-year period of time from 2003 to 2012 that eighty-eight percent of the time the all index fund portfolio outperformed any other strategy that you could have had to try to go out and beat the market so trying to pick the active funds and as you go out further and further if you go out fifteen years and twenty years that line moves over these are all the losing portfolios and these are the winning portfolios so even the winning portfolios didn't win by much there was a few that really did so this is what people are shooting for this is what they see this is what they're trying to oh look at that these funds beat the market by two percent per year okay there's a possibility you might pick a fund that beats the market by two percent per year but there's a low probability that you will and you have to understand the difference between possibility and probability and in here with the bogelheads we're all talking about the probability what's the probability you're going to get to your uh... financial independence what's the probability you're going to get to retirement if you're using index funds you have a much higher probability making more in the markets than you will if you're using a combination of active funds that's the talk today that i have on investment products and why indexing works and why we the bogelheads uh... believe in this is part of our philosophy so we have a bogelheads we have an investment philosophy and there are ten points to it but there are just four of them that fit into what we just talked about today invest with simplicity don't make it complicated make it easy when i leave here i go next door to the five oh one people and i try to convince them of that when i debate paul merriman on uh... small cap value investing in factor investing keep it simple secondly minimize cost and taxes as alan uh... talked about keep that down that's uh... and you'll do better thirdly use index funds when possible and last stay the course thank you