 Welcome everyone to the 12th episode of Bogleheads On Investing. Today we have a special guest, Larry Svedro. Larry is the chief research officer of Buckingham Strategic Wealth and the author of 17 books on investing. Hi everyone, my name is Rick Ferri and I'm the host of Bogleheads On Investing. This episode is brought to you by the John C. Bogle Center for Financial Literacy, a 501C3 corporation. Today we have a special guest, my friend Larry Svedro. Larry and I have known each other for many years and we've had a lot of healthy debates. So with no further ado, let's bring Larry in. We are pleased today to have Larry Svedro as our guest. Welcome Larry. Great to be with you Rick. I'm really excited to have you on the show Larry. You and I have known each other for many years and we've gone back and forth on the forum on many different topics and everybody's got a different opinion and different view and you and I have had our days. But it's always been very cordial and I'm really excited to have you with me today. I'd like to start with you telling us how did you get involved in this whole investing business? Give us some of your bio. My father did something very small. He was a real stock junkie. He would follow stocks daily and go to the Merrill Lynch office in the neighborhood and watch the ticket tape. And when I was born, he took like, I think it was $500 in gifts and he bought like seven different individual stocks for me. And then when I turned 13, we had my bar mitzvah and we got a little bit more cash and then we sat down together and we bought one stock. At that time while other kids were reading the sports section, I was already following the Wall Street Journal and all these stock prices. So then you decided to make it a career or at least go to school? I then went to school. My undergraduate degree is from City College, the Business School, Bernard Baruch, and Finance and Investing. It really was just about the first finance degrees handed out anywhere because there was no finance theory, as you know, until Bill Shopp and others created that CAPM. Before that, finance was hidden inside some accounting program or maybe an economics class. So Larry, while you were at college, I understand you were a pretty good basketball player. Is that true? Well, that depends on your definition of a pretty good basketball player. I was pretty good for my neighborhood, but I was so short and I got to high school I was five foot one and 110 pounds so I couldn't even make my high school basketball team but I grew in my next two years when I graduated high school. I was 5'10 and all of about 140 and I was still only 16 and I went to Baruch College and I made their basketball team. You know, it's a D3 school, so it all depends upon your definition. Relatively speaking, I was good. So basically you decided not to have a career in basketball and so you went on and got your master's degree? I then went to NYU for my master's and when I got out of school Wall Street had collapsed. 73-4, the crisis in addition to which the end of the fixed commission era was over and many firms were going bankrupt. Even Ross Perot lost a fortune trying to buy a brokerage firm and so I ended up taking a job at CBS in their international finance department and then I was going for my PhD in international finance and economics. Ultimately, unfortunately, the New York City subway system had gotten so bad and dangerous I didn't quite finish my PhD because I had to have my mother even literally drive down from the Bronx to pick me up the last semester and it had gotten so dangerous. So Larry, I understand from knowing you that you actually got not one MBA but you got two MBAs in a way. Is that what you're talking about with the PhD? Yeah, in effect. So I don't really technically have two MBAs but I have an MBA in finance and investing and then going for my PhD which would have been in international trade theory and economics I have all of the required courses and I have a master's in international finance and economics so in effect you could say I have two MBAs. So let's move on and start talking about your career on Wall Street. I really got lucky after that it's one of those strange things I feel like the Zellig character in Woody Allen's movie where he's inserted in all these major events in history I was involved in I think four of the biggest revolutions in finance just happened to be at the right place in the right time. The first was when Brent Woods broke down all of a sudden everyone had to deal with floating exchange rates and interest rates going crazy and I was hired by CBS to be manager of international finance and helping them to manage those risks. So CBS you're talking about the entertainment company. Yeah exactly right and there's actually an interesting story behind there Rick we could divert for a moment so the only reason I interviewed with CBS I was hoping to get a job with a Wall Street firm and I did have one offer from IBM but Wall Street as I mentioned earlier was in a sad shape and they could hire somebody with ten years of experience for about the same or not much more than some young MBA so I went to I said I gotta get a job I'm getting married and CBS happened to own the Yankees at that time and so I said I don't see if I don't care if I drive a bus I'd see if I can get a job with the Yankee organization so I go to the interview and on my way there I pick up the newspaper and the headline reads CBS sells the Yankees so I decide I'm dressed up in my suit anyway I'm on the subway I might as well go I went and ultimately I did get a job there and had a good two years there but then two years later at the grand old age of 23 and with all of two years of experience City Corp and other banks were getting in the consulting business to help these big multinationals deal with foreign exchange risk and they hired me to be a consultant so I went and joined them this was our new exciting area and then two years later City Corp asked me to go set up a whole West Coast investment bank at the grand old age of 25 I had never run a foreign exchange trading room I had never funded an offshore bank I had never managed more than one person to pay out to San Francisco to build an entire operation and the second revolution was occurring around that time City Corp and Solomon Brothers were leading the way in creating what Buffett ultimately called these weapons of mass financial destruction these derivatives and they were more basic at that time interest rate floors and ceilings and collars and foreign exchange floors and ceilings and collars to manage these risks and so I was right there with that and even helped design and create some of these derivatives and then 10 years later my boss at City Corp left to join Prudential Home Mortgage and that was a whole new revolution in mortgage banking the first private mortgage backed securities so I got involved there and with that big revolution did that for eight years and then we ultimately sold the company and then I was going to look for something to do I thought I'd go teach something I'd always wanted to do that's why I was originally going for my PhD and friends of mine had started this RIA a registered investment advisory firm in St. Louis and they were good planners doing a state and tax type of work but they didn't really know anything about investing so I thought this would be a great fit I told them I didn't want to have to do anything to do with running the company but I would help set the investment strategy teach them about managing all types of risk so we joined forces and right at that time as you know the early 90s Fama and French right there groundbreaking paper now in this three factor world it changed the way we thought about investing and so that was a fourth revolution that now just happened to be at the right point in time so I do myself as very lucky and had a lot of vast different experiences which has helped me I think be a much better advisor having lived through lots of financial crises So the firm you're talking about Buckingham asset management out of St. Louis well now it's called we changed the name about I think it's now maybe two years ago it's Buckingham strategic wealth we're just about a $17 billion RIA and now 35 cities and then we have TAMP which runs both BAM advisor services helping other advisors and a firm called Loring Ward together we're about $52 billion I believe How many advisors are under the TAMP program? Larry do you have a basic number? Yeah I can give you some general guidelines at Buckingham which is BAM advisor services about 135 firms around the country with about I think 19 billion of assets and Loring Ward has over a thousand advisors many of them small broker dealers who really are nothing more than investment advisors and then they have also about I think a hundred plus advisory firms who are really more wealth management as well as investment advice and they have collectively about 16 or 17 billion So what helped this whole thing grow was your book your very first book correct called when that book came out just before I went to a DFA conference more right after that Yeah what happened was I got to Buckingham and they had no marketing material at all the firm had just been formed and they had decided like you did to at least use some of DFA's funds this was a DFA shop if you will and that had used DFA products exclusively in the early years today we use many multiple advisors but DFA clearly was the leader there and I went to a DFA seminar like you did to learn everything about them and they had like three slides at the time as to explain what they did so I said we need to have a brochure to at least tell people what we're all about so I took what I learned in those three days at the University if you will and put together a 40 page brochure and then I said what we really need is a book and I had no intention of writing one so I went and looked in the libraries and bookstores when there actually were bookstores No there are still bookstores there are still bookstores out there Yeah there are a few not many I think we have one left in St. Louis one major one but at any rate the good book I thought out there at that time was Random Walk Down Wall Street and all it did really although it was a great book it told you the markets were pretty efficient and you should act as if they were but it didn't really tell you what to do with it in the way like your book all about index funds did or my book or others like John Bogle's book so I said alright I've got a 40 page outline let's see if I could put a book together so I spent the next 2 years writing a book and when I completed it we got a publisher who liked it and decided to publish it but the interesting story there was he hated my title which was what Wall Street doesn't want you to know so he said Larry go back and give me some other options and I went to a bookstore like any of them and he pulled some things together and he came up with the title the only guy you'll ever need to a winning investment strategy now the funny thing about that is 2 years later I wrote my second book and I really liked that first title what Wall Street doesn't want you to know and I I was obligated to show it to him he had to write a first refusal and he read it and said Larry I love that title same guy who had rejected it 2 years earlier editors are strange people I remember when I first saw that book I can't remember where it was one of those bookstores that don't exist anymore and I looked at the title and I said what is this whatever it was the only investment guide you'll ever need I looked at that and I go what the heck is this nonsense I started reading it and I realized what it was and I said actually this is pretty good you've done really well in fact that book if I'm not mistaken has you've done a couple of additions now correct I did one addition to that 7 years later in 2005 updated that and now I've written a total of 17 books which 4 are originals and 3 of them are updates I wrote in 2001 I think it was rational investing in irrational times which covered 52 investment mistakes I thought people made several years later I updated it and had 77 mistakes that book was investment mistakes even smart people make and then in 2000 I think 15 I wrote reducing the risk of black swans and in 2018 we updated that one of the books that I like in fact I think it's a great title is the incredible shrinking alpha and I've always been kind of fascinated with could you talk about that and what's going on out there the book itself is a nice little short book I got that idea from Bill Bernstein to write these little short books that are really narrowly focused so even a slow reader might read it in maybe hours so the idea is there are 4 big themes that are happening that are making it harder and harder for active managers to win the first is that academics simply really by studying the great active managers and seeing how they beat the market could they identify was it a unique skill that you can't replicate were they buying certain types of stocks with certain traits or characteristics and of course as you well know farm in French summarized a lot of other people's research they didn't discover any of these factors themselves at all but size and value so prior to the publication of the course section of expected stock returns in 92 you could simply say I'm beating the market I'm generating alpha and therefore get away with charging high fees because alpha is a very scarce resource but after night you could do it simply by tilting your portfolio to owning more small and value stocks in the market you could claim out performance and you'd be right but after the publication of that paper and then index funds became available in these asset classes or giving you exposure to these factors you can't claim alpha anymore either regression analysis or attribution analysis will show the alpha was nothing more than due to exposure to these factors and then along comes Mark Carhart 97 he adds a fourth factor momentum and so once again alpha gets converted into beta and then really in 2012 Robert Novie Marks adds profitability which gets expanded into quality and what's important is these conversion of alpha into beta doesn't take anything away from all those great investors like the people from Graham and Doddsville who are buying value stocks that were highly profitable or quality because they've discovered this 50 or 60 years before the academics but if now we can replicate that and invest in exactly the same types of stocks and there are two good studies showing that Warren Buffett almost all but not all of his stop picking advantages so not counting the benefits from the leverage he gets from his insurance company or not counting the benefit he gets from being able to give Goldman Sachs $10 billion at a much lower price than Goldman could have raised it at if they had 30 days to go get the capital but just looking at the public securities that he owned most of it goes away if you simply bought an index of stocks that look like meaning they had the same traits and characteristics so that's the first thing today every investor can invest in very similar so alpha got converted to beta which is nothing more than exposure to factors so that's the first thing we're still on the first one you have three others we don't have like a day and a half maybe you could summer up a little okay so turn to the second one which is in order to beat the market you have to have victims to exploit 70 years ago 90% of all individual stocks were held directly by individuals in their brokerage accounts today that maybe closer to 10% 90% plus of trading is done by big institutions you just don't have those dumb retail investors who buy stocks that go on to underperform and sell stocks that go on to outperform as the research shows they're exploited by the more sophisticated institutional investors but that pool of victims is shrinking dramatically so today when Goldman Sachs is trading it's 90% chance it's SAC capital or renaissance technology in the other side of the trade the third thing is the quality of the competition has gone way up you know when you and I got out of school most of the people who are managing money very few of them were world-class scientists with PHD's in finance and where of all this academic research today everybody managing money is like a rocket scientist DFA's CIO is orinautical engineer with a PHD and Andy Berkin my co-author of that incredible shrinking alpha PHD in physics so the competition is much tougher and that makes it much harder to outperform those people and the last thing is 30 years ago or so there was only about 300 billion and hedge funds out there chasing this limited amount of alpha which is now a smaller pool and less victims to exploit today we have 10 times that amount of money so just not a lot of alpha to go around and the pool is much bigger so 20 years ago when Charles Ellis wrote his famous book winning the losers game about 20% of active managers were outperforming on a statistically significant basis today several studies show that numbers less than 2% and that's even before taxes that's pretty lousy odds which means passive investing is the winners game I guess I know who that 1% is because I hear it all the time how they've outperformed so I think the fifth one if there's going to be a fifth one is the speed of which information is disseminated now it's just so much faster than it used to be I have no question that that's true as well you could add that one absolutely let's go ahead and then move on to the current book the 17th book which is your complete guide to a successful and secure retirement and the forward is by Wade Vow good guide to write the forward what motivated you to write this book well I think the key here is that so many people at least today are at least beginning to focus on the need to have an investment plan there are lots of good books on investment planning you've yourself written several that really go a long way to helping people build an investment plan but the key is that you could have the perfect investment plan and it could blow up for reasons that have nothing to do with investing you're a young man you've got three kids and you don't have enough life insurance you die early I don't care Rick you've got the perfect investment plan but you don't live long enough to save and invest and watch it grow you're a doctor perform surgery and you don't have a disability policy and you're getting an accident and you can't perform surgery anymore you don't have an umbrella policy you get in a car accident you don't have long term care and you have dementia there's all kinds of risks related to elder abuse we even have a chapter on that and there are so many ways that investors can make mistakes that lower their odds of success like location holding the right assets but in the wrong location taking Social Security wait too early not using annuities where they are appropriate and buying the right kind so what I wanted to do was to create a book that looked at all of those things and the first chapter is maybe the most important one which is why we put it there which has nothing to do with investing or other financial issues but having a plan to have a meaningful and successful life in retirement and that's so important one the highest suicide cohort in the United States I would have guessed might be teenage girls unfortunately I lost a sister at a very young age to that but it's retired men because they've lost the meaning and their purpose and sense of fulfillment and social connections which they typically get at work and the highest divorce cohort is what's called silver divorce and my line about that is well I married you for better or worse but not for lunch and you have no plan to have a meaningful life did you come up with that I married you for better or worse but not for lunch I don't know if I actually can take credit for that but I steal it and use it all the time great I'd like to add one more thing to your threat of elder financial abuse chapter I wrote an article for forging about it I call that article you may never see your grandchildren again because I was invited to a local dinner seminar put on by a local advisor I live in an over 55 community out here near Austin and we just get hit with all of these dinner seminar things anyway decided to go to this one there's no word of a lie the advisor must have said three times if you want to see your grandchildren again talking to the woman in the audience you want to come and see me because I have had so many widows who didn't do it the right way when their husbands died and by the time they came to see me they didn't have any money they never got to see their grandchildren again after that so if you ever want to see your grandchildren again you need to come and talk with me and the guy was a snake because he was selling all kinds of high commission annuities and all this other stuff I mean he had a management fee that was something like 2% he was a real snake but this is what he was pitching to the people in this community you know we see that unfortunately all the time literally you and I agree on lots of things even though we've had you know some good debates about most of stuff that's relatively minor but this is a perfect one where I know we agree I literally don't know how these people look themselves in the mirror when they get up in the morning and live with themselves and unfortunately it's not going to change tell me a few other highlights of the book and then we're going to move on to some questions by the Bogleheads well yeah a couple of things I think are important one I think we really cover an incredibly broad spectrum I don't believe there is any book that is as comprehensive as this there are other good books on estate planning or investing but none is comprehensive. Second thing I want to highlight is the book is filled with lists and checklists action items for people to do so I believe literally everyone who reads the book will walk away with some things that they can focus on and I'll just touch on in the introduction we talk about what I call the Four Horsemen of the Retirement Apocalypse and I can take credit for that term and the Four Horsemen here that are creating real threats to successful retirements are first equity valuations at least in the US are much higher than they have been historically and bond yields are much lower and unfortunately so many people look at the past and automatically project them in the future. I meant to that I tell you the and they're related to I mean the high equity valuations that we have are is related to the low bond yield. Yeah exactly the Fed unfortunately pushed a lot of people to take more risk because they can't live on that 2% bond yield but here's an amazing stat from 1982 through now as typical 6040 S&P 500 intermediate treasury portfolio has earned 10% amazing most financial economists today would put that number maybe in the area of five. I put that like four and a half. Well I won't disagree and that's a real problem if you're counting on 10 or anything near there your plan is likely to blow up so those are the first two horsemen the third is we're now living much longer when I was growing up even as a teenager I almost knew nobody who was 75 years old and today 65 year old couple second to die is almost 25 years and that means half the time someone is going to live longer so you really need to plan for at least 30 years not 10 or 15 so you got higher valuations lower bond yields lower expected returns and the money has to last a lot longer fourth thing is the good news of course we're living longer the bad news is the longer you live the increased risk of dementia and long term care needs which could be very expensive and that's where the risk to many people also that's got to be dealt with we do have a chapter on long term care as well as annuities to help deal with that and there is even a fifth horseman which I mentioned which is the risk of social security if congress doesn't act and this looks like another do nothing but if congress the estimate is in about 13 years they'll only be able to pay out about 70% it's not going bankrupt so my advice is being conservative starting in 2032 or so you should only plan on getting 70% of social security benefits but I remember that you and I when we were growing up when we were 30 or 40 years old I think we were saying we weren't going to get anything either but something the question is you may not get as much as you thought you were going to get exactly you know and there are simple solutions here you know raise the amount of income that's tax you can raise the rate slightly those are two simple solutions that they could do and then of course you can raise the age that you're retired you can't expect to get 30 years of payments because design may be when people live 5 to 10 years and so you're living longer and people are working most of my friends are working till 68, 70, 72 now they don't want to retire to quote nothing well I agree in fact you know this is my encore career doing what I'm doing now as you know I sold my company a couple years ago and now I'm just doing consulting hourly advising and it's an encore career but I admit I like the idea of continuing to get paid enough money so that I can pay all of my bills and travel and such and not have to touch my savings the encore career is a good idea and a lot of people are probably going to do that if they can yeah and I would add one other thing on top of the points you made which are critical is it gives you that social connection you stay engaged and I'm sure you're just like me you get great psychological joy out of helping people knowing your increase in their odds of being them able to achieve their life and financial goals by putting them on the right path well it's interesting from where we sit because we get to pair into people's lives like most people can't there's an old joke that if you really want to get to know someone you either marry them or manage their money and it's true I'm talking with three or four people a day and really getting to know all about them and all about their finances and all about how they're planning things and one thing you brought up and I want to reiterate it is this idea of disability insurance I see a real, real lack of disability insurance out there particularly among physicians and among people who are high wage earners for some reason it sort of passed them by and I ask them do you have disability and they're making $500,000 a year and they say well I think I've got a policy I think I've got a policy and I ask them well what would you make and it turns out that somebody who's making $500,000 a year and has $300,000 a year in bills because they bought a new house and they want to send their kids to college and this and that and the other if they became disabled and they couldn't work they would be making about $100,000 a year that's a problem yeah and it's a Pascal's wager bet it's one of those things it doesn't matter what you think the odds of you being disabled are you're likely not willing to live with the consequences of being disabled without disability insurance and I would add the other thing I would imagine you also look at it's one of the first questions I ask somebody because it's the cheapest insurance there is and everybody should have it is an umbrella policy you can get a million bucks for something I think in the three to four hundred dollar range and you should have at least as much I think as your financial assets and maybe even most people up to about ten million because the lawsuits today are paying out such large amounts on claims I personally carry a ten million dollar umbrella policy mine isn't quite that large Larry but I haven't written seventeen books you and I know you don't get rich writing books I've got to move into the next area of our interview you're very popular with the Boglehead community I've always been for twenty years hopefully we're going to get you out to a conference again one of these days when your name comes up and you're active on the Boglehead site and a lot of people have read your books and so when I went on the Bogleheads and I announced that I was going to be interviewing you I got literally dozens and dozens and dozens of questions that people wanted to ask so I have a print out here of several pages long of questions and now we're not going to be able to get to every question but I want to get to as many as we can so here we go with the first question a Boglehead asked what your thoughts are on the new Vanguard factor funds and particularly the Vanguard multifactor funds these came out a little later on and they don't seem to be publicized that much by Vanguard but do you think that the way they're doing it is adequate well I think a short answer would be this number one virtually anything Vanguard does is likely to be done very well one highly ethical people and number two they do have good researchers there their funds we did take a look at them so I can comment they're well designed and they're cheap so those are all Vanguard traits if you will so somebody looking to add a little bit of further diversification in their portfolios away from a market like portfolio this is certainly worth looking into the only negative if you want to call it that is they tend to have very low exposures to each of the factors they're not a deep exposure to them so one of the things you have to be careful about people often especially Bogleheads focus on expense ratios I think the right way to focus on it is the expense ratio relative to the amount of exposure to these factors you're getting so for arguments sake just to make it simple if you thought all of the factors would get you 2% a year and you're getting 10% exposure to it well you're getting 20 basis points and if you're paying 8 for it and their implementation cost you're probably not getting very much of any benefit and the end if you paid 20 for 30% you're way ahead I call what you just talked about the cost per unit of risk right you could pay a lot of money for a small cap value fund that's basically has mostly beta and doesn't have much small cap and not much value exactly you have to look at that I'll give one very brief example we used to use DFA we switched in 2011 to Bridgeway because it was much smaller and deeper value it was 8 basis points more but the market cap was half the size of DFA and the price the book and earnings and cash flow were much lower we estimated if the factors delivered what we expected it would outperform by about 60 basis points we were willing to pay 8 to get 60 I have a couple of people who asked about risk parity so I'll let you go ahead and explain quickly what risk parity is and you can give your opinion so here's the basic concept of risk parity or why people should at least be thinking about it so a typical 60-40 portfolio when I ask people if you have a million dollars 600,000 in stocks and 400,000 in bonds how much of your risk not money but risk is in stocks they'll say 60% but that's not true because stocks are so much more riskier than say a 5 year treasury they're about 4 times as volatile so about 85% of your risk in that portfolio is in your equities if you believe that as you and I think can agree they're pretty highly efficient then you should also believe it has to follow that all risky assets have very similar risk adjusted returns so small caps are riskier than large caps so they should have higher expected returns it doesn't make them a better investment it means they're riskier and once you adjust for the risk their risk adjusted return should be similar risk adjusted returns are not just the sharp ratio you have to think about liquidity and trading costs etc but that's the idea so risk parity the idea is to diversify of course as many unique sources of risk as you can identify that provide premiums that have evidence using my terms from my factor book that they're persistent all over over very long periods of time they're pervasive all over the globe they're robust to various definitions so you don't have likely data mining so for value, PE, cash flow EBITDA all work momentum you can have different formation and holding periods they work has to survive transactions costs meaning it's implementable you don't want a 5% premium of micro caps and of course 6% to capture it and lastly it has to have intuitive reasons for you to believe it will likely persist the idea of risk parity then is to put equal amounts of money in every one of the assets that you could identify so you end up having an equal amount of risk so that's the concept directionally that makes perfect sense and logic I would say however I don't have the same degree of confidence in all of these factors or asset classes so I want to put more of my weight in my portfolio on things I have the most confidence in those are things that are risk based solutions things like small and value where momentum is purely behavioral so I don't want to ignore it because it has a lot of evidence that meet that criteria so I just try to eliminate negative momentum as an example and then I invest in other assets like reinsurance quality profitability etc putting more weight on the ones I have the most confidence in and less weight in the others so each person should decide how much confidence they have in each one and then diversify logically bottom line is risk parity is a good general idea but I think it's not the right answer you should not be looking to have exactly the same amount of risk in each of your assets you should put more weight on the ones you personally have the most confidence in that will deliver above market returns or have unique risks that are rewarding Talking about risk one of the Bogleheads asks isn't a simple portfolio of few index funds still the best way for the general public to grab their fair share of market return without breaking the bank on expenses and if not what can the general public do to try to take advantage of some of your ideas First of all I think you and I can agree that a simple two fund portfolio of a total US and a total international to the global market cap today is actually roughly 50-50 you want to tilt a little bit or as Cliff Asnes would say sin a little bit so you want to have a little more US or a little more international that's fine and that's a very low cost tax efficient way to do it the problem is you have all of your risk then in market beta where correlations go very high especially in crises but even not in crises you can go through very long periods we happen to be one now for the last 10 years US small value is performed relatively poorly from 66 to 82 on the other hand a total US market fund would have underperformed totally riskless one month treasury bills for 17 years and underperformed small value by over a thousand percent to me the right answer is you want to be low cost tax efficient to yourself the chance to stay disciplined and the right portfolio is the one that you are most likely to stay disciplined so no matter what you invested whether it's total stock market funds there are three periods where US total market is underperformed totally riskless T-bills for at least 13 years that's cumulative 45 of the last 90 years in the other 45 years it dramatically outperformed we don't know which period you are going to get maybe the next 15 years when you retire tomorrow is one of those where US market beta does poorly so to me if you are able to deal with this tracking variance issue that once you diversify you know you are not going to look like the market and you have to live with that if you can't do that well then you shouldn't tilt into smaller value or own reinsurance or anything else because every risk asset guaranteed will go through long periods of underperformance there is no such asset that doesn't and that has to be the case or there would be no risk for the long term investor on the other hand if you do diversify and diversification is difficult because you are always going to own some things that are doing poorly which is why so few people are good at it then you increase your odds of getting a return that's expected you are narrowing the dispersion of your outcomes because you won't own all of the best and you won't own all of the worst if you will and that actually goes a long way to giving you a better chance of getting the mean return expected out of a potential dispersion when you run money call analysis diversify across asset classes or factors, unique sources of risk will come up with much higher odds of success but it doesn't do you any good if you can't stay disciplined so don't do it if you are not going to be able to stay the course and that means rebalancing along the way I call it a lifelong investment strategy because you really need to be in the thing lifelong to believe in it so strongly that you are willing to stick with it for the rest of your life if you don't, odds are the time you jump out is going to be the worst time and then looking back what you should have never done it to begin with I completely agree let's get on to something that I think is really important right now it's called recency bias and somebody asks do you think that investors are suffering from recency bias in the stock market going up over the last 10 years well we know recency bias is prevalent through all investors not just individuals we spend more of our time managing people than we do managing money whatever is done well recently they want to buy I remember well today everyone why we own international emerging markets or small value if you just go back to 2007 at the end of that year period that prior 5 years the S&P had a great period it was up 82% EFI was up 162 called a double and the DFA emerging market fund was up 565% and money was flowing in like crazy as I'm sure you remember into emerging markets I do it was all the rage yep and then of course the reverse happens and then floods out so the problem is people only buy after the good returns and they panic and sell so they hurt themselves the best thing as you said and I completely agree you got to have this kind of lifelong approach and you got to stick with it now people are fleeing emerging markets they're fleeing small value and by the way I'll point out one of the techniques I use when I talk to people I point out value went through exactly the same period even much worse performance just not as long in the late 90s and Buffett in many cases was being ridiculed in the media as the time has passed him by in the new dot com era you got to own Intel and all of these kinds of companies but it's the same thing that happened in parts of the 80s digital equipment and those stocks were there and we're seeing now the same thing Buffett didn't give up on value in the 90s and then next eight years with the biggest value premium ever by far and right now value relative to growth valuations are pretty much almost exactly where they were in 99 now I'm not making any prediction I have my crystal ball is cloudy but valuations look really stretched and value looks really cheap and I ask people what do you know that Warren Buffett doesn't know he's not giving up on cheap value stocks why should you it doesn't matter some people you can't protect from themselves Larry question from a Boglehead having to do with the 4% rule and I'm referring to the idea that it's safe to withdraw 4% of your portfolio is there now a 3% rule instead of the 4% rule here's the way I would answer that first of all I don't believe people should use that is anything more than a guideline number one but the 4% rule was based on the historical evidence when valuations of course were much lower and expected returns much higher and bond yields were much higher which meant yields were much higher today if you ran Amani Carlos simulation using the same type of life expectancy and withdrawal rates but now just projecting returns based on today's valuations you get a number closer to about 3.3% to be safe I think withdrawal rates like 4% or 3% or whatever you're going to use are fine when you're you know in your 40s and you're still working and you're looking toward retiring in your 60s or mid 60s and when you're projecting out how much rate of return you might get on your portfolio and how much money you need to accumulate to get to a certain point and then from there if you took 4% or 3% how much would that give you I think that's where the 3 or 4% with safe withdrawal rate works but in retirement when you're actually getting ready to retire the withdrawal rate is the amount of cash flow that the portfolio creates to me so we're looking at dividends and interest income and what amount of dividend and interest income and what amount of social security are you getting and how much cash flow are you getting in this is your sustainable amount this is the sustainable amount that you can get out of the portfolio if you go more than that then you start cutting into principal then it becomes not as sustainable so I think that this 3 or 4% withdrawal rate is good for planning purposes long term long range planning purposes but you actually get into retirement as you said it's sort of year by year and your budgeting and what are you going to do and I know you use Monte Carlo simulation I don't particularly use that but I think we all get to the same spot when you're actually in it and you're actually taking money out of the portfolio you've got cash flow coming in and then you've got things that are occurring on a year over year basis that might need to be looked at as they occur I'll just add quickly Rick one I certainly agree with the first half completely what you're saying 3 or 4% reasonable for long term planning in retirement the only thing I would add to what you said is not drawing any principal I think becomes way too conservative because we know we are not going to live forever so you can certainly dip into some amount of principal unless you have that I'm going to want a bequeathed desire there so we don't want people not to be able to enjoy their life and spend money so you want to at least consider you can dip into that portfolio a little bit every year and just depending upon how far you're along certainly at age 90 someone maybe got a 10 more year horizon of most they should be able to take out a lot more than 4% of their portfolio right? absolutely just like exactly what the required minimum distributions are on a retirement account for sure now if you could only spend it at age 90 that would be better right? alright somebody is asking what about if you're in a situation where you have nobody who can take care of your affairs in retirement you're unable to handle your own affairs you're unable to manage your own portfolio at some point what do you suggest for a person or a couple who is in that situation where there's nobody who can actually come in and help them and take over for them what suggestions do you have for those folks? yeah well first I'm going to broaden the question because I think it's going to be helpful for every bogal head just in my own particular case we're all living longer the risk of dementia go up is the most likely to prey on the elderly and they know women are more susceptible so they're targeted I have a whole chapter on the book there but one of the things that I did personally in creating my estate documents my wife has a right which I have a reciprocal right if she believes I'm in cognitive decline and are unable to make sound financial decisions she can request that I have or require that I have a cognitive test and if I can't pass it then I am to be removed from power of attorney over bank accounts financial matters brokerage statements everything to protect myself and the family and of course I have the right to the same thing and that's right in my estate documents and obviously if you're alone you want to have that situation or some trusted family member or friend or whoever it might be and I would prefer it not be some corporation like a bank trust that creates all kinds of problems with family members having difficulty accessing funds at times but if you don't have that then some trusted trusted advisor could play that role we do that for a select few of our clients but you need absolutely to have somebody who you trust the most trusted person in your life I'll just add one other comment sadly the person most likely to rip off the elderly is some family member who might be in trouble either drug abuse their business went south they got a divorce and got in trouble and often will sadly rip off the parents I've seen people who were financially in trouble just ruin their parents fortune by taking over and by convincing the parents to give them control over the assets and very soon thereafter there were no assets left I've seen that happen it's really unfortunate because these are unpleasant things to think about and contemplate and therefore people delay and don't do it so I'm going to urge all the Bogleheads who don't have a disability policy don't have an umbrella policy and don't have this request for have an exam where you could pass a cognitive test if you don't have those in your documents go out and get them tomorrow here's a couple of questions about different asset classes you could just answer these very quickly because they have here there and everywhere so one of them is what role does cash play in an investor portfolio almost none because today you can stick with short term bonds just as highly liquid so other than money in a checking account you typically don't need much cash because as long as in a short term bond fund your volatility is going to be one or two percent depending upon how short it is so you want to keep maybe a couple of months expenses in cash and beyond that there's no need to have a lot of cash around that's one of the most common mistakes I see is people sit with lots of cash and what about peer to peer lending something new that I haven't heard you talk a lot about but I know it's in your portfolios right so this is a natural the banks have been disintermediated by fintech providers partly Dodd Frank opened the doors for them the banks were short of capital and today you can get a replacement for a 22% credit card if you're a good credit 13 to 14% kind of range and your credit isn't quite as good the rates go up from there after expenses we think a well run fund should be able to generate 4 to 5% again above T-bills and you're getting compensated for credit risk so last question Larry what is the most recent version of the most up to date version of the Larry portfolio so the Larry portfolio phrase was coined by the New York Times and it only referred to basically the equity portion of the portfolio so it was US small value international small value emerging market value so it's all in the highest expected return assets now you could use that Larry portfolio in one of two ways I have investors who are young willing to live with the tracking variance and they're 100% equities and 100% the Larry portfolio trying to earn that extra premium on the other hand you have people like me who have won the game already and I'm trying to protect my wealth I'm trying to create more that risk parity portfolio I don't want a lot of market beta exposure but I'm trying to keep my expected returns up by the equities I'm holding have higher expected returns that allows me to own less market beta and then more safe bonds so my portfolio was roughly at the time was 30% public equities 70% safe bonds it's a little more diversified today adding things like reinsurance and alternative lending I also happen to own something called the variance risk premium fund or all asset variance risk premium it's also one of the most studied research well documented premiums and all of finance which is the variance risk premium so you're selling volatility insurance I think that again has a 4-5% above T-bill expected return and I also own AQR's alternative style premium fund which is a long short portfolio of four different factors across four different asset classes so moving more towards risk parity but each one of them is a few percent of my portfolio because I want most of my portfolio in that safe for bonds well Larry it's been a very great having you on here and as always every time we talk we are 99% correlated and only 1% uncorrelated yeah and people love to focus on the 1% that creates the tension right well thank you so much for being a guest on the Bogleheads on investing show great to have you and hopefully we'll have your back again soon yeah my pleasure and you can let the Bogleheads know if you didn't get to any of the questions they can always shoot me an email at elswedrow.bamadvisorwithn0.com I'm always happy to answer questions alright thank you Larry take care this concludes the 12th episode of Bogleheads on investing I'm your host Rick Ferry join us each month to hear a new special guest in the meantime visit Bogleheads.org participate in the forum and help others find the forum thanks for listening