The Fastest Market Selloff Since 2020: Rick Ferri on Tactics to Survive and Thrive

[00:00:00] Be like Warren Buffett and you just make believe the stock market closes for 10 years and look forward. This just happens to be the crisis of the day and we have these every three years or so for whatever reason. We always do what is probably the most uncomfortable thing. It might be really comfortable to say I'm just going to sell everything and wait it out, but the real uncomfortable thing to do is to say,

[00:00:27] well, how far down have stocks gone? I have an allocation between stocks and bonds of 70, 30, 60, 40, 50, 50, whatever it is. Am I within that 5% window where I should sell bonds, which by the way are rallying very strongly here, and buy stocks? Hi, Rick. Thank you very much for joining us on Excess Returns. Well, thank you for having me back.

[00:00:53] The conversations with you tend to be some of the more popular ones on our channel. Okay. I think that a lot of the investors that watch us, sort of your discipline, low cost, evidence-based approach is something that resonates, I think, with a lot of our audience. And we always appreciate the insights and the practical wisdom that you kind of bring to these conversations. So with that, thank you very much. Well, thank you.

[00:01:18] If people want to learn more about Rick and some of the ideas that we're going to talk about today, you can head over to RickFerry.com. He's also on Ex. You can follow him there. And for those that find value, you know, in these conversations, please subscribe to the channel. We appreciate the support because your support helps bring and help us get great guests like Rick on the pod. So it's so great. Matt, I'm going to kick it over to you to kind of start us off here, if you don't mind.

[00:01:47] And then I'll follow you up with some stuff afterwards. Absolutely. I mean, so we're recording this on April 3rd, 2025, which I think makes this the third April Fool's Day in a row this week. Yeah. Uncertainty is like the, I don't know, the buzzword or something here between politics and everything else. I know talking to regular investors all day, every day that it's really hard. You want to make changes. You want to feel like you're doing something in an environment like this when there's chaos going around.

[00:02:16] I'm hearing more and more people just in the ether saying like, oh, you just go to cash. You wait it out. We know, we know it's not that easy. What's some pieces of advice you might give Rick in an environment like this when you feel like you should do something and maybe even something rash? Well, I mean, I mean, you know, what's going on now is not that much different. This just happens to be the crisis of the day. And we have these every three years or so for whatever reason.

[00:02:43] And the stocks adjust to expectations of perhaps lower growth, lower GDP, fear, anxiety, whatever. And again, if you're a 10 year investor and you're looking through this rather than at it, I think that's a good idea. I love that framing of look through, not at anything else on just like the reminders.

[00:03:11] What other things can we say to just say expand the aperture, take that step back, suck on a Werther's and drink a cherry Coke. Why don't you like what else can we say to regular people struggling with this? Well, you always do what is probably the most uncomfortable thing. It might be really comfortable to say, I'm just going to sell everything and wait it out. But the real uncomfortable thing to do is to say, well, how far down have stocks gone?

[00:03:38] I have an allocation between stocks and bonds of 70, 30, 60, 40, 50, 50, whatever it is. Am I within that 5% window where I should sell bonds, which by the way are rallying very strongly here and buy stocks? And if you are, you have to do the uncomfortable thing, which is to buy stock. Is that the right thing to do? Well, over the next week or two or month or even the next year, I don't know.

[00:04:06] But over the next 10 years, I'd say probably is the right thing to do. One thing I love about you talking about this stuff is the encouragement to do the uncomfortable thing nestled in with the encouragement to do the simple thing. I want to talk about the benefits of simplicity, but I want to talk about it through, seems like the other thing that's happening in the world right now is the complicated strategies. People want to make this so much harder.

[00:04:34] So what do you think about the benefits of simplicity on a pure philosophical level first? Well, I don't think people, investors want to make this complicated. I think the industry wants to make it complicated. And at a deeper level, if you look at all the flows that are going to just simple total market index funds, the industry has a problem. The industry needs complexity.

[00:05:04] Complexity is job security in the investment industry. That's why you have right now. Seventeen hundred or so ETFs come out in the last few years. And many of them are, you know, triple leverage single stock ETFs. I mean, you know.

[00:05:22] They the industry is trying to figure out a way of surviving in a low cost, low fee environment where the money is moving away from active strategies, away from active management and moving into these simple strategies. And so the complexity. I don't think is on the side of the investor. The investors want to keep things simple. It's the industry that wants to make it complex because after all, why would you need them if all you did was buy a few good low cost index funds?

[00:05:53] One of my other favorite ways this is manifesting is we've been told the 6040 is dead for probably 50 years. Yeah. And inside of that, the little reminder that you just said bonds are rallying like the 6040 is not sucking right now. No. So you're kind of doing what diversification is supposed to do. When we look at the core foresight that you run, when we look at some of the other ways to think about like simple approaches with or without alternatives, with or without something else.

[00:06:24] What do you have to say about just smarter, I'm going to call it smarter alternatives to just the plain old 6040, if any at all? Well, I mean, 6040 is sort of the middle of the road of asset allocations. But whether one person should be 6040 or not, I mean, that is completely different than, you know, what the median or middle of the road is. I might be 6040. You might be 8020.

[00:06:54] Somebody else might be 2080. And it all based upon their own circumstances, their own ability to handle risk, risk tolerance and need to take risk or maybe generational items as well because they have more money than they need. So they're going to invest at a higher equity allocation. I mean, so many, many, many factors go into an individual decision whether to have 6040, 5050, 8020, 2080, whatever.

[00:07:23] Just kind of lands 6040, the middle of the road. Peter Bernstein called it the, I mean, maybe I can remember the phrase, the center of gravity for investors is a 6040 portfolio because it does over the long term not do badly. There are times when there are bonds are correlated with stocks and that has hurt you and that sometimes that helps you. And there are times they're non-correlated like today and that's helping you.

[00:07:50] So I think we get a little bit confused with, you know, everybody should be 6040. Well, no, nobody ever said that, that I can recall. Before we get off the volatility of today and what investors might be thinking, do you have any hacks or tricks, I guess, that you've used over time to sort of help people? I like, I love the idea of, you know, seeing through it.

[00:08:18] Like you said before, I'm thinking about like a 10 year time horizon, but I'm thinking things like, like simple things like, you know, when things are dicey in the market, maybe people aren't looking at their accounts as much or showing like rolling returns of stocks over periods of time. Or, you know, just what do you have any sort of things that you've done with investors that have helped in this regard? There's going to be volatility in the markets.

[00:08:44] And if you have an asset allocation to risky assets and risk, less risky assets, so call it stocks, bonds, and then no risk assets, call it cash. And you've thought about this and you've thought about it in times, not when stocks are booming, but maybe times like this. And you come up with your asset allocation that makes sense for you in the very long term.

[00:09:12] Then you're, you're not going to be comfortable with, you know, market downturns of 10%, 20%, but you're also not going to make rash changes. So the right asset allocation for someone is the asset allocation that they're going to stick with through good times and bad times. They're not going to increase their allocation when stocks are trending up and they're not going to decrease their asset allocation to stocks.

[00:09:39] When stocks are trending down, they're going to be, you know, oh, I wish I had more stocks when stocks were going up, but they're not going to do anything about it. Oh, I wish I had less stocks when stocks were going down, but they're not going to do anything about it. So that's the right asset allocation for each of us. So if you can find that happy medium where you, I'm not saying don't be concerned. I'm not saying don't look at your account.

[00:10:03] Just find that happy medium where you're just not going to take action and that's the right asset allocation for you. Another thing that comes into the different for every person in the way it's experienced, but we talk about it on the headline level is inflation. I'm curious what you're thinking about inflation, how it relates to portfolio construction and then how it relates to individuals. Because kind of like asset allocation, my inflation is different from your inflation. That's true. How should we think about that?

[00:10:33] Well, that's a good point. I mean, years ago, I did a study with an intern that I had working for me and we looked at personal inflation rates and we tried to parse it by age. You know, what's the inflation rate by age? And it was really kind of an interesting study. We did this probably 25 years ago. And yeah, the inflation rate for people who are retired is a little bit different than the inflation rate for students, for example. You know, and so first of all, everybody does have a personal inflation rate. So that's a really good observation.

[00:11:01] And I think that, you know, we have to think about it in those terms. If you're trying to buy a house, you have a heck of a lot more inflation than if you have owned a home for 10 years and your mortgage payment is exactly the same as it's been for 10 years. So, yeah, I don't try to forecast what the inflation rate is going to be. I do look at the Fed's break-even point between nominal treasuries and TIPS.

[00:11:29] They have a five-year break point that they compute every day and a 10-year break point, which is nothing more than taking the yield, the interest income or the yield, I should say, from income, from the nominal 10-year, regular old 10-year treasury and subtracting it from TIPS. And the difference supposedly is what the market is thinking the inflation rate will be 10 years from now or five years from now. So there's two of those numbers out there.

[00:11:58] And ironically, that does not move very much. It doesn't move very much. So whenever I get a little concerned about inflation, I always go to those charts and I look at them and go, well, you know, I mean, I might be concerned about higher inflation in the future, but the markets don't really seem to be too concerned. It might have ticked up by 0.1% over the last couple of months, but it hasn't been a big move. Rick, what are your thoughts on international diversification in someone's overall asset allocation?

[00:12:26] I know it probably depends on age and all that, but just generally, do you subscribe to allocating to international equities? Or do you kind of think that, you know, if you're buying a basket of, you know, large cap U.S. stocks that because they have international exposure that you kind of get it inherently in that? Well, as I look around my office, I see that half the stuff in it, well, probably 80% of the stuff in there has been imported. Probably this microphone that I'm talking into, these, you know, headsets.

[00:12:56] Yeah, it's all imported. We buy a whole lot of stuff from overseas. I know that we've just slapped some tariffs on everybody, but the point is we buy a lot of stuff from overseas. And overseas corporations are profitable. There's no reason why they wouldn't give you the same return as U.S. stocks. So what are the three benefits then of long-term? Again, we're looking through this whole idea that the U.S. has done better than international over the last 10 or 15 years.

[00:13:25] We're looking through that and we're saying, well, let's look at the long-term data. Okay, what do you get from diversifying, say, two-thirds in U.S. stocks and one-third in international, which is the middle-of-the-road allocation that I usually recommend? Well, you get, number one, a lot more stocks. If you look at something like the Vanguard Total International Fund, it's got 6,500 names in it. If you look at the U.S. Stock Market Index Fund, maybe it's 3,500.

[00:13:52] So you're getting a whole lot more exposure to a whole lot more companies. So in my view, more diversification is good. Secondly, you get a little bit different industry exposure. If you look at the underlying industries that create the foreign markets, non-U.S. markets, a whole lot less in tech and a whole lot more in materials, manufacturing, financials.

[00:14:17] And so you do diversify your industries away from Magnificent Seven, if you will, by just being an international. It gives you diversification. And it gives you actually a value tilt if you're a factor investor that way. And the last thing is currency diversification. If you notice today, the U.S. dollar got kind of clobbered. And so international stocks today, in this bad day in the market, are down only 1%. And the U.S. stock market is down, well, I don't know, 3% or 3.5%.

[00:14:44] So some of that is currency diversification. So you get good, in my view, long-term diversification from having international stocks. About one-third of your equity in your stock portfolio is a good mix, I believe. We're not hearing as much of this lately.

[00:15:05] But I think sort of last year and maybe coming into this year, you know, the risks of sort of a concentration in something like the S&P 500. Yep. What, how do you, do you think that's a legitimate concern? I mean, how do you approach that? I don't. I mean, literally don't. I mean, it's happened before. I mean, back in the day, I think the entire market was railroad stocks and maybe some banks.

[00:15:33] So we have had concentrated markets before. And all the data you see of the, you know, the return of stocks for the last hundred years, basically since 1926, have gone through many of those periods. So it doesn't, it's not something that I really spent a lot of time thinking about. And if I do think about it, I go back to the previous question, which is, well, that's where my international stock allocation comes in. Because they are not in the constant, you know, Magnificent Seven.

[00:16:03] You had mentioned, I just want to make one sort of side joke here. Thank God we all bought our podcast equipment before the tariffs. Our mics and our computers. I don't know. I mean, I really don't know. Look, look at what's happening. I mean, we can get into a little bit about economics, but, you know, it's supply and demand, right? So the idea is you slap tariffs on things that are being imported and the price goes up. But what happens if the demand falls?

[00:16:30] So maybe, I mean, I don't want to talk politics here, but this is the first year of Trump's administration. They can afford to have a recession. They can afford to have demand fall. And, you know, economics 101. If prices go up and demand falls, what happens to prices? They come back down.

[00:16:56] So maybe the cure or the remedy here, and I'm not saying they actually are orchestrating this, but I'm not trying to be cynical. But maybe going into a recession will not cause inflation to be not the fear that a lot of people think it's going to be. Because the demand side of the equation will fall.

[00:17:21] Do you think this, what you said, you know, about the recession in the first year of the Trump administration, and is that mostly because, you know, sort of the voting and you don't want to be going into an election or midterms with a weak economy? Right. Because obviously that affects the political outcome. Exactly. Sure. Absolutely. I mean, look, Trump is not going to get reelected. Forget about what, you know, you might hear from the people out there in the social media. I mean, he's going to be done in three and a half years.

[00:17:52] But you have to make big, big changes as a president in your first year. You have to. Because especially if you're not running for reelection and we have a president who will not be running for reelection. So you got to make the big changes now. Take it on the chin from everybody hating you. The economy may be going down. Maybe some of that will go away by the midterm. Maybe you can save the House, save the Senate.

[00:18:21] But after the midterm election, it's all going to be about who's going to be president in 2028. And so this is the time to do it. I mean, if you think that tariffs are the way to equalize trade and raise revenue so that you can keep your income tax and corporate tax low, not tax, social security benefits, all of these things, you're going to get it all from tariffs. I mean, you have to do it this year, if that's what you believe. This is the year to do it.

[00:18:51] I'm really curious to see like when and if these tariffs start showing up in goods and how sort of that just manifests itself in the real economy. Like when do you actually, I mean, your point about supply and demand is a good one. But I'm curious as to how quickly you start seeing this stuff on the prices of things. Oh, I really don't know that, honestly.

[00:19:18] Now, these companies are going to absorb some of these tariffs at first, the ones who are importing to us. They have to. I mean, they can't just raise the prices of their goods by 10 percent or 25 percent or whatever the tariff is that's being slapped on a particular product in a particular country. You just can't because you're going to kill your sales in the U.S. So you've got to absorb it for a while until you negotiate something with the sitting administration to have it more equitable to you.

[00:19:47] Or you do what a lot of companies are doing and you do what President Trump has said he wanted to do, which is to insource, build factories in the U.S., make it here so you don't have any tariffs. And we're seeing a lot of that. I mean, you know, I mean, Biden started this whole thing with the CHIPS Act and it was a good act. And I thought it was a good piece of legislation. And we and I think Trump is continuing that he's doing it in a different way. But I think it's the same effect.

[00:20:16] What are your views on direct indexing? Is that something you think some investors should look at or no? Well, absolutely. Some investors should look at it. But most investors who it's sold to should not. It is being oversold. It's not that it's a bad product. It's just that it's being oversold to a lot of people who really don't need it. So let me describe the person who could use direct indexing. So here it is beginning of April.

[00:20:46] And you just sold your business in January of this year. Sold your business or you sold stock. Big position of Apple or whatever you had. And you have a big, big capital gain. You know, several hundred thousand dollars perhaps. And you have cash because you just sold your company or you sold that big position in stock. And you're thinking, how do I invest this money to mitigate my taxes this year?

[00:21:15] Because you have to pay capital gains in 2025. If you did direct indexing, which is simply going to one of the many vendors out there to do this, and they bought 500 stocks in your portfolio and sold the ones that went down. There happened to be a lot going down now. But I mean, sold the ones that went down and were able to generate for you.

[00:21:40] Let's say you gave them two million dollars and they were able to generate a couple of hundred thousand dollars in losses. By the end of the year, that's going to save you a lot of money in taxes. So it makes sense to maybe look at the direct indexes. The following year, you don't have a business to sell. You've already sold off your position in your large stock. You don't need hundreds of thousands of dollars of losses. In fact, you may never use them throughout the rest of your life. Now you have to do something with this portfolio.

[00:22:09] And there are now solutions of what you can do with that portfolio. The direct indexing companies don't like the solutions, but they are now available through companies like Alpha Architect, where you could turn in this portfolio and just get one basically U.S. stock ETF back from it at the cost basis of the entire portfolio. So you don't have to deal with hundreds and hundreds and hundreds of stocks. So that's the ideal scenario of why you would use it. The problem is 90% of the people direct indexing is sold to don't need hundreds of thousands of dollars of losses.

[00:22:39] They don't have any gains. I've seen clients come to me and they're in their 70s and they've been sold direct indexing portfolios. And, you know, they've got a few million dollars in their direct index and it's hundreds upon hundreds and hundreds of stocks. And I said, well, why? I mean, why are you doing this? They said, well, they said it would be good for taxes. And I said, oh, you have property you're going to sell? No. You have a position in some large company that is going to be liquidated at some point? No.

[00:23:08] Well, what do you need hundreds of thousands of dollars of tax losses for? I don't. It seems saying it's oversold. And I think it's a good product for a few people, but I do think it's oversold. I love that you're framing it this way because I think as a project tool, not an evergreen product, you have to be able to talk about it that way. And it's a very narrow set of the people situation where people should have it for the long term and where they get recurring benefits from it.

[00:23:37] From others, it might just be it's a one-off project. It's here's where you want it to take place in your portfolio for a period of time. And you have a solution to get in and a solution to get out of it as a product, which is the right way to look at it. And I think the advisors should be looking at this. I don't know about the advisors who are doing their job or their fiduciaries should be considering this.

[00:24:04] I see a lot of abuse on direct indexing and SMAs coming directly from the custodians. I won't name any names, Fidelity, but places like Big Custodians, Fidelity. Let me read you this. You tweeted this. I'm going to read it to you. It's a little bit lengthy, but I want just to read it and then I want you to comment on it.

[00:24:26] So-called investment experts once told us to use index funds for large cap stocks and select active funds for small cap stocks because small cap markets were inefficient and active managers can easily outperform. They also told us to use actively managed international funds because foreign markets are also inefficient. Fast forward 20 years and we find that 80% of active small cap funds underperformed their benchmark. I'm inserting that.

[00:24:51] And 79% of all large cap foreign funds underperformed. Recently, the experts have been telling us to use actively managed bond funds rather than index funds, claiming bond indices are inefficiently constructed and active managers can easily outperform. Perform them. I have three words of advice. Don't believe them. Yes. Why do you think active management, given these statistics, but yet active management continues to grow?

[00:25:20] I mean, what is behind this? Marketing. It's better to have good marketing than good management. I don't know if you ever heard that phrase before, but it came from an active manager. Um, so here's a little background on me before I give you the overview.

[00:25:41] Uh, probably more than 30 years ago, I developed a methodology for comparing active managers to various benchmarks. And there really wasn't a lot of data out there on this. I mean, Mobius was doing it and a couple of other companies. Um, you might be old names here, frontier analytics. And these were some old companies, uh, but, but they were expensive software. So I developed my own. Um, and I took the indices and I looked at the active managers.

[00:26:08] Um, and this is how I became a bogel head, if you will. The phrase didn't exist back then, but I realized that, gee, if you just bought the index funds, you'd actually be a lot better off. However, there were trends.

[00:26:20] There were, there was momentum where there was segments of the active management industry, but call it U S stocks, international stocks, small cap, where the active funds for a while did outperform on average, uh, their benchmark.

[00:26:42] And so when that happened for, let's say five years or so, uh, the pitch was, uh, core and explore core and satellite, which is, oh, you want to do, you know, core U S equity. Cause that's an efficient market just by the S and P 500. But for your small cap, oh, you want to use active managers because active managers, uh, can take advantage of any efficiencies and outperform.

[00:27:08] And I knew that wasn't true because these things kind of went in phases, if you will. And it was just a phase that we were going through. And the same thing occurred with international as well. Oh, you know, you know, you don't want to do, uh, international index funds. The indices are not really well constructed. You just want to use active management because they can find inefficiencies and invest in the right markets and yada, yada, yada. And they're going to outperform.

[00:27:31] I mean, this was the, if you didn't know the data and had studied the data, you just kind of went along with the flow of what the people, the marketers, the experts, or whoever you want to call, you know, the, the, the, the, the fund providers or whatever we're saying. That's what you would believe. But I knew it wasn't true. Now at the time, by the way, index bond funds were crushing the total of the, the bond, the active bond managers during that period of time.

[00:28:00] Crushing them. No one said that you should be doing active bond management at the time. Okay. Well, here we are 2025. We look back and we see, oh yeah, maybe you should have just done an index fund in your small cap. Oh, maybe you should have just done an index fund in your international. Oh, but look at bonds. You know, you should do active management and bonds because they outperform by a little bit, not by a lot, just by a little bit. And so you should go out and buy active. And I'm saying is, again, look through all of that.

[00:28:29] Look beyond the last five years or so. Look, look, we've had active managers who have taken big positions in credit risk and the total bond market index fund is, doesn't have a lot of credit risk in it. It's just mostly treasuries and government agencies. And there's maybe 25% in corporate. So there's some credit risk there, but there's not a lot of credit risk. But the active funds have taken a lot more credit risk. So yes, they've been rewarded for that. Was that an active decision on their part of it?

[00:28:56] They're just trying to make up the fact that they charge fees and so they have to get a higher rate of return. Well, I don't know the answer to that. But the fact is, whatever the circumstances were which caused them to not outperform, because the data shows that about half have outperformed and half have underperformed. But by the way, they didn't outperform by much. You know, we're talking about maybe a half a percent. And the underperformers was maybe a half a percent. It wasn't a lot. It was very peaky, if you will. But it was about 50-50. But, you know, you see a lot now out there.

[00:29:26] Oh, you should do active bond management because there's a lot of opportunities out there. And you should do active bond. So that's kind of the... I mean, it's an old story. It's just an old story. It's just, you know, new characters, old story. And that's what I was trying to say with that post. Inside of the new character's old story, and I want to stick in bonds for just one more second here. What about stuff like private credit that's high yield on steroids? It's levered up debt.

[00:29:54] It's levered up credit at the end of the day. It's an active decision maybe to allocate towards that. But how do you think about stuff like private credit? I don't. Look, I avoid recommending anything that has the word private. in front of it. It tends to have problems eventually, liquidity problems. You have, look, it's great while it lasts.

[00:30:23] But then when there's a liquidity crunch, everybody's running for the door. Who prices this private credit? And it tends to get mispriced in many ways. I'd rather just stick with the public market where I know what the price is. You know, you could talk about private equity also in ETFs, and maybe you will in mutual funds, but it's a little bit of the same way.

[00:30:53] It's active managers trying to survive in a very difficult industry is what it is. Do I need it? No. I don't need that. Do my clients need it? Now, they don't need these things. But the fund company needs it. The industry needs this because you can charge something for it. If you have exclusivity, if you have illiquidity, you can charge more.

[00:31:21] And so I understand that. And that's why a lot of these things exist. Whether they're going to outperform anything, it remains to be seen. One thing that keeps coming up lately, and it feels like, and this goes back to the 60s, 40s, long and imminent death. This argument that we're kind of in the 70s again, or that we're like in a different era or a different regime of markets.

[00:31:48] What would you say for people who say this current regime is clearly different and rhymes with some other historical regime? How do you answer questions about that stuff? I was in college during the 70s, during business school. So I remember those days. This is not the 70s. This is not. We had a lot of difficulties in the 70s. I mean, we're just coming off the Vietnam War. We came off the gold standard. We had the oil embargo. We had stagflation.

[00:32:18] I mean, an employment rate of 15%. I mean, when I graduated from college in 1980, you couldn't get a job at a shoe store. I mean, it was terrible. Terrible economy. But I don't see that here at all. I know there's really no comparison between today and the 1970s. Now, is there a regime change going on? It might be moderate.

[00:32:46] I mean, some people make a big deal out of it. Oh, you know, terrorists, this and that. Okay. I don't see it being like the 1970s, at least not yet. But no, I can't make that comparison yet. You ever have a job at a shoe store? I did. I had a job at a shoe store. Two shoe stores. Two shoe stores? I did back in my high school and college days. I worked at a shoe store. This is good. This is good to know. We're clocking you on this stuff, too.

[00:33:16] I want to share. We're going to put a tweet up on this one. And it was an argument we hear a lot, probably because it's just it feels so simple. And it's this idea that you should have your age in bonds. And you've had a lot to say about this rule and what the pros and cons of this rule are. You want to comment a little bit on the age in bonds and who's it for and who's it's not for? All right.

[00:33:41] So we financial advisors who are doing a lot of writing, books, articles, podcasts, we are talking to the masses out there. I mean, we're not talking to one particular group. We're not talking to people who have $3 or $4 million saved for retirement. We're talking to the masses.

[00:34:08] And the masses have maybe the people who might listen to this podcast, let's say, might be a little bit more sophisticated than the median, say, new retiree. But, you know, they might have three or four hundred thousand dollars to their name and they're going to collect Social Security and maybe their house is paid off. I mean, that's sort of the middle of the road.

[00:34:32] You have to if you're going to do rules of thumb like age in bonds, you have to think in terms of who they are. And for somebody who's got five hundred thousand dollars of investment portfolio and is getting Social Security and the house is paid off. I mean, you know, age in bonds isn't a bad place to begin for your asset allocation of that five hundred thousand.

[00:34:57] However, you've got four or five million dollars and you're only spending one hundred and fifty thousand or one hundred and forty thousand a year. So you're spending less than three percent of your portfolio and most of your net worth is going to go to your heirs or maybe to charity. It has absolutely zero use to you. None. Literally. Literally.

[00:35:21] And so what happens out there, I talk with clients and many of them who have 25 million, 30 million, then they start talking about age and bonds. And I have to say, well, wait a minute. And I have to explain this to them. I say, realize that these rules of thumb are not really designed for people who have got twenty five million dollars. OK, we need to talk about you, your circumstances, how much you want to leave your children, your grandchildren, your heirs, your charities, whatever, because that's what's going to happen.

[00:35:46] And so if you put yourself in their shoes, let's say your children or your grandchildren who are going to inherit this money, what asset allocation would you say they should have? Because really all you are is the stewards of their money right now. And they go, oh, well, they should probably have 70 or 80 percent stock. Well, there you go. Right. That's probably what you should have, too. Maybe a little bit extra on the side to take that around the world cruise.

[00:36:11] But generally, you have to think beyond you into the next generation and maybe even a generation after that when you're setting this asset allocation and you're answering your own question, particularly if they've already been if they've been 80 percent stock. You know, that's that's how I answer that question.

[00:36:29] For clients who are hiring people to get advice on stuff like this, and as they're looking at those suggestions from their advisor and they're thinking through this and we'll probably share one of the tweets you had put up about the Ameriprise advisor with the signing fee and the AUM fee stacked on top of each other. As clients look at the advice they're getting, they listen to the rules of thumb or the very specific bespoke, you know, this is the exact size and pair of shoes you need for your job in the shoe store.

[00:36:59] What are some questions that clients should be asking of their advisors around how this stuff is priced and how this stuff is thought through? What are smart questions you want people to ask you? Let me I think I can answer that by saying, you know, if you if you are a new person to me, well, how would I begin the conversation? And what what do I go through? And if you give me a few minutes, I can do it very quickly. OK, Matt. Great. Thank you for contacting me. Great. Appreciate it.

[00:37:28] Tell me a little bit about yourself. Tell me about you, your family, your career. And even want to know about your parents, if they're still living and your siblings. So tell me about tell me about yourself. I'm not saying you will, but that's how we begin. Right. That's how we begin. Why? That gives you a really good.

[00:37:52] Picture of who this person is, if they're married with children, how old are their children, if they have parents, do the parents need some of their money or maybe the parents are giving them money? I mean, you just you start with that. Start with it. Plus, it's an easy opener for somebody who you don't know. Tell me about your kids. I mean, what else? What else could you say to somebody if you want to get them talking? Right. How are they doing in school? Are they in college? What are they studying? Things like that.

[00:38:21] I mean, so this is like how you break the ice and also how you learn. And then you go into career. OK, so, you know, tell me about your career. They probably already showed me how much they made. How long do you want to work there? Do you have a 401k? Are you getting a match? Spouse, same thing. You know, you get into this aspect of it and then you get into the aspect of, well, how long do you want to work? You know, what do you think you might want to retire?

[00:38:49] OK, and then we talk about things like whether you have disability insurance and life insurance to sort of ensure that. And then we talk about a little bit on state planning. So we look at, OK, how are all these accounts that you currently have wrapped up as far as are they in trust? Are they, you know, TOD and all of that? And finally, after all of that, well, let's look at what you have. Let's look at what you have. How much do you have you accumulated? How much are you accumulating every year? Where is it going?

[00:39:19] And then finally, the very last thing we talk about is how have you been investing this money? Where is it? And then we can have a conversation about whether the portfolio is actually appropriate for all this other stuff that we talked about beforehand. That's the way to do it. That's the way I do it. What do you think about that for people?

[00:39:42] And this might be for people who come to you, too, where you look at that and they've actually done the process and the logic and everything right. You're doing a great job. Absolutely. You don't need anything. They don't need me. But they do need me because what they need a lot of people. So you're breaking it down between different types of people who come to me. There are people who come to me who are like that. They watched all the videos. They've read all the books. They've really done a lot of work.

[00:40:10] But what they're looking for is validation. That's all. They need a professional, an expert, if you will. I don't call myself an expert. I never would. Henry Ford said if anybody calls himself an expert, you should run the other direction as fast as you can. And I believe that. But they want validation. And I can give it to them if they're doing everything right. I say, yeah, you're doing everything great. And maybe tweak this, tweak that. Maybe you don't have, I don't think, enough international. But it's very, very minor stuff. That's one type of client.

[00:40:38] The other type of client is the one who just stepped into the church, so to speak. They've been entrusting all of their money to a person who calls themselves a financial advisor, but in fact is a product salesperson. And they have a mess of a portfolio. And it's in all this stuff, active management, spinning off a whole bunch of capital gains at the end of the year that they don't need to be paying. I mean, it's a mess. And they need restructuring.

[00:41:07] And they know they need restructuring. So they come to me and they say, okay, I'm now in the church. Help me move closer to the altar. Help me restructure my portfolio. And then we work on that. So there's kind of two different people. Rick, when we had you on last time, you shared with us your evolution as an investor.

[00:41:29] And there was stages that you had to go through to get to where you are today and embracing this concept of simplicity and low-cost indexing. So, and I apologize. I don't remember all the stages, but I remember that really resonated with me and I think our audience. And I want to kind of revisit that if you don't mind. So the four stages of the education of an index investor is what I call this.

[00:41:58] But it's really the education of an investor who decides they're going to embrace a philosophy of low-fee simplicity, low-cost, simple investing. The first stage is darkness. And we've all been, okay? This is where, when I first started investing, when I was in the Marine Corps as a young lieutenant, I didn't know what to do. I called up a broker, happened to be my brother-in-law. He worked for one of the big brokerage firms. And it's like, hey, I've got $3,000. What should I do?

[00:42:26] And he pitched me the mutual fund of the month or of the week, whatever. And, you know, I did it because he told me to do it. And he's an expert. I mean, this is his job. And so I believed everything. And a lot of people are in darkness. Probably a lot of people who are not listening to this podcast are in darkness. And a lot of people stay in darkness their whole lives.

[00:42:50] But you get out of darkness and you go to enlightenment when you begin to listen to podcasts like this. And you begin to do some reading. And you begin to wonder whether or not how you've been doing it in the past because of recommendations by friends, family, brokers, whatever, is really in your best interest. And how are you really doing? And you discover that or you begin to believe that you're not doing that well.

[00:43:20] And that if all you did was had a few index funds in your portfolio and that's all, that you would have done much better. And then you begin to understand why. The fees, active managers, underperforming general, and so forth. And all of a sudden you have what's called enlightenment. Enlightenment. You become enlightened. Ah, index funds. And it took a long time, by the way, but only now over the last, say, 20 years or so has really been people been moving that direction. But for years, I mean, index funds existed, but it was just very, very few people doing it.

[00:43:49] So you become enlightened. But then what happens when you become enlightened? Well, you sometimes go out and listen to too many podcasts. You read too many books. And you start thinking about, oh, you know, if I had small cap value in my portfolio, I could actually outperform the market. If I have, you know, private equity, you know, maybe I could outperform them.

[00:44:13] You start slicing and dicing your portfolio like Humpty Dumpty being pushed off a wall. Right. And then put back together again with all these pieces. It's still Humpty Dumpty. It's still the market. But the bottom line is that you overcomplicate your portfolio. And so you go to an advisor and you say, hey, I really believe in index. And they go, oh, that's great. Let's do core and explore, core and satellite.

[00:44:40] And the next thing you know, you've got 25 different funds in your portfolio. It's way too much, overly complicated, way too tax inefficient. Well, maybe you do it yourself by just keep adding little pieces. Why don't we split value and growth? And then when value goes down, I could sell that and do a tax-loss harvest and buy a different value fund. And then if growth goes down, I could sell that. I'm really, really, really making a mess out of this whole thing. And the more stuff you add to the portfolio, the messier it becomes.

[00:45:08] And you get to the point where you become paralysis by analysis. And, you know, this is crazy. What am I doing? If all I did was own a few low-cost, total market U.S., total international, a couple of bond funds, maybe some real estate, all I did was kept it very simple. It would be a lot simpler. It would be a lot less expensive. And probably I'd actually do better. And my taxes would be less.

[00:45:37] Now you have reached simplicity. So you go from darkness to enlightenment to overdoing it with complexity. And now you're finally at nirvana of investing, which is simplicity. So that's how it goes. I love that.

[00:45:57] And I think that is a great sort of segue into just, you know, could you just walk us through, and you kind of hit on these, but just how you construct the core four portfolio and what specific assets. Yeah. I mean, the core four is a little spinoff of the three-fund portfolio. So let's talk about that first.

[00:46:19] Three-fund portfolio is really just Tobin's rule or whatever it was. So simply you have risky assets and then you have less risky assets, and then you have to decide where you should be between the two. So it starts with that. Two funds, right? The risky assets are stocks where you're expecting to get a higher rate of return and then fixed income where your returns are expected to be lower. So you have to decide where you fit there. So that's like the two-fund portfolio.

[00:46:48] Just a world equity fund and a bond fund or laddered CDs or laddered chips or whatever. Bonds are, again, the rates of return between different strategies are very minor. Okay. Then the stock side is like, well, we do want to have international diversification. So let's have U.S. stocks and international stocks. And there's tax benefits to having it split up in your taxable account. So you have, okay, two-thirds U.S., one-third international.

[00:47:15] You may have a global portfolio in your Roth or a global portfolio in your retirement account. Fine. But in your taxable account, you're going to want to split it between U.S. and international to get the foreign tax credit. Okay. But there's a third growth asset class, and that's real estate. And most people own real estate. They own a home. A lot of people own rental homes. Some people own partnerships.

[00:47:44] And so this real estate is a different asset class than common stocks generally. Treated differently, different taxes. It really is a different asset class. So I like to divide that out and say, okay, well, let's have the core four. You have a bond allocation to something. You have a U.S. stock allocation using a U.S. total stock market index fund. You have an international allocation using an international index fund.

[00:48:10] And you have a real estate component, which some people could say, well, I own several homes. Or maybe you have a real estate investment trust. A small allocation to that as part of the stock allocation because it is at times non-correlated. It is a different asset class in my opinion. And so that's the core four. And it's pretty much done. Not a whole lot more to it. That was my thinking. I mean, I'm not trying to be complicated. I will make one more thing to tell you. Okay, I have one more thing about core four.

[00:48:39] The other thing about core four is it is closer to the economy by allocating that way than it is the stock market. So we look at the stock market side. And you say, okay, well, real estate is a huge part of the economy. But real estate developers are generally capitalizing themselves, not in the stock market. They borrow money. So a lot of it's in the banking side, private debt side. That's how real estate is done.

[00:49:06] Or maybe it's owned by large pension funds, insurance companies or whatnot, own a lot of commercial real estate. So it's not really out there in the public markets. So if you wanted your stock portfolio to look more like the economy than the stock market, you would have to actually add a little bit more real estate to it. So there was another factor there. And what is your view on just rebalancing in general?

[00:49:32] Like are there tardy weights that you bring back to over time or do you just let the assets fluctuate? And if it's... Go ahead. Good question. It depends. If you're in the accumulation phase, then you're putting money into your portfolio every year. You can use that new cash flow coming in to rebalance if it's going into a taxable account.

[00:49:55] If you've got retirement money, you could change your allocation of your retirement fund to rebalance to get it back to 70, 30 or whatever your allocation is. So usually that's how you would do it during the accumulation phase.

[00:50:07] In the distribution phase, when you're taking money out, if you have fixed income in your retirement account, because it's more tax efficient to have it there and more tax efficient to have stocks in your taxable account, what you find is over time, as you're taking money out doing RMDs or doing Roth conversions, which is now moving money to a Roth, which would want to have an equity. All of a sudden, your asset allocation to equity starts creeping up. What do you do? Well, you can do one of two things.

[00:50:35] You could sell stock in your taxable account or not. You could do what Michael Kitsis and Wade Fow called a reverse glide path. You might start at an asset allocation of, say, 60, 40. And since you're never going to use all this money, you have more than what you're going to need, then you could just let the equity portion grow.

[00:50:59] You could have the dividends come in in your taxable account and reinvest it in municipal bonds to give you an allocation away or treasury bonds away from equity. But you're just not going to worry too much about the fact that your equity creep is occurring over time. And the work that they did shows that's actually a better liability match with life, if you will, later on down the road as your medical expenses may increase. Having more equity is actually a benefit for you.

[00:51:28] So I believe in the liability matching, you know, reverse glide path approach. If you can't rebalance, I realize if you can rebalance, then maybe you want to. But if you can't because you're running into tax problems, don't pay taxes to rebalance. Don't pay taxes to rebalance. Okay. Just in most cases, you can just let it ride. Just let it go. My opinion. Again, everything I say is my opinion.

[00:51:55] And it's not the way that you should do it, but, you know, everybody has to do it differently. But it's just an idea that we bring up with. I bring up with a lot of clients. Don't worry. We'll disclaimer that. But really, Rick, this has been great. We appreciate your time and you coming on and speaking with us and educating our audience.

[00:52:17] We do have sort of a new closing question, which is, what is the one thing that you believe about investing that you think the majority of your peers would disagree with you on? The fees? I think advisor fees are... Advisor fees should be advisor fee for advice. And asset management fees should be fees for asset management. I believe there should be a separation of the two.

[00:52:43] So if you're an advisor and you do both, you provide advice and you provide asset management, I believe they both should be separate line items on a report, you know, fee report. And it shouldn't all be lumped together in one wrap fee of call at 1% because I think that ends up overcharging the client for the advice side. So decide what you're going to charge the client for asset management. And it should be reasonable. I mean, Vanguard charges 30 basis points. I think that's a fair fee.

[00:53:11] And then you're going to charge them maybe also fee for advice, which may be a flat annual fee. So I think they should be separated because there are two separate businesses that you're providing, two separate services you're providing. And I think I disagree with a lot of my peers on that point. It's probably the biggest point I disagree with on. Thank you, Rick. Really appreciate your time. Well, thank you. Thanks for having me on again. Thanks so much for tuning into this episode. If you found this discussion interesting and valuable,

[00:53:41] please subscribe on YouTube or your favorite podcast platform or leave a review or a comment. We appreciate it. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the participants or their clients.