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Speaker 1: I'm Barry Redults, and I'm excited to tell you about

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Speaker 1: my new podcast, At the Money. Each week, I'm going

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Speaker 1: to spend about ten minutes or so diving deep into

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Speaker 1: a specific topic that affects you and your money, acquiring it,

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Speaker 1: spending it, and most of all, investing it. Strap in

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Speaker 1: for At the Money starting right now, Listen. Investing is

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Speaker 1: a complicated problem. What if I told you a beautiful

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Speaker 1: solution has been found? Investing is not easy. How do

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Speaker 1: you pick the correct asset class? Which sectors do you buy?

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Speaker 1: How do you know which are the right stocks or

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Speaker 1: bonds to own? Do you use leverage? Do you hedge?

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Speaker 1: Do you time? What about private equity, hedge funds, venture capital?

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Speaker 1: It's really complicated, or is it? I'm Barry Redults, and

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Speaker 1: on today's edition of At the Money, we're going to

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Speaker 1: discuss investing as a problem that's been solved. To help

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Speaker 1: us unpack all of this and what it means for

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Speaker 1: your portfolio, let's bring in Dave Knadig. He is financial

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Speaker 1: futurist at VETIFI and a well known ETF industry pioneer.

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Speaker 1: So I love this quote of yours. Investing is a

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Speaker 1: problem that's been solved. Explain.

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Speaker 2: Well, what I mean by that quote, Barry, is that

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Speaker 2: I think a lot of people spend a lot of

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Speaker 2: time and energy and frankly emotion caught up in the

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Speaker 2: idea that they have to figure out investing. Right. They

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Speaker 2: have ten thousand dollars, they have one hundred thousand dollars,

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Speaker 2: they want to grow that for some purpose, five to

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Speaker 2: ten hundred years out, whatever it is, and they feel

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Speaker 2: like their job is to solve this puzzle and get

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Speaker 2: all those pieces just right, and if they get it right,

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Speaker 2: they win, and if they get it wrong, they're destitute.

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Speaker 2: And I think that's the wrong approach. The core of

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Speaker 2: investing is, in fact a solve problem mathematically. If you've

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Speaker 2: got a set of assets you can invest in. For

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Speaker 2: almost sixty eighty years, we've understood the fundamental, fundamental math

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Speaker 2: of how you put that portfolio together to get a

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Speaker 2: certain pattern of returns for a certain level of risk.

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Speaker 2: There's nothing really all that interesting or complicated about that.

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Speaker 2: You can do all the math on your phone. There's

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Speaker 2: one hundred different apps you could download that will make

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Speaker 2: a model portfolio for you. That's not the part people

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Speaker 2: should be focusing on. I contrast that to advice. The

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Speaker 2: knowing what to do, when to do it, how to

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Speaker 2: do it. That's the really hard problem. That's where people

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Speaker 2: should be putting their energy.

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Speaker 1: So let's break this up into a couple of different pieces.

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Speaker 1: If I say to the average layperson, investing is a

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Speaker 1: problem that's been solved, they're going to say, great, what's

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Speaker 1: the solution.

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Speaker 2: Well, the problem with your question is that an advisor

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Speaker 2: then would turn around and say, great, how much money

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Speaker 2: do you have to invest? When do you need it back?

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Speaker 2: What's your tolerance for risk? There's another fifty questions you

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Speaker 2: have to ask before you get to the investment part.

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Speaker 2: Once you've gotten to the end of that chain of questions,

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Speaker 2: you know, oh this, I have one hundred thousand dollars.

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Speaker 2: I need this in fifteen years because that's when my

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Speaker 2: kids are going to go to college. I understand my

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Speaker 2: tax situation, and oh I can put some of that

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Speaker 2: in a five twenty nine or I can't. Once you

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Speaker 2: answer all of those questions, then constructing that portfolio, what

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Speaker 2: do I own to get a pattern of returns that

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Speaker 2: delivers me the maximum chance of being able to put

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Speaker 2: my kids through college in fifteen years. Honestly, you can

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Speaker 2: do that in a target date fund, and that's most

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Speaker 2: of the math baked in for you. Anything you do

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Speaker 2: other than that is trying to get a different pattern

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Speaker 2: of returns that is inherently going to have more risk

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Speaker 2: associated so.

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Speaker 1: With target date fund. For listeners who may not be

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Speaker 1: familiar with this, these typically are the default settings for

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Speaker 1: for a one k's. They're managed by big fund managers Fidelity, Vanguard,

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Speaker 1: et cetera. And they start out with a certain percentage

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Speaker 1: of equities and a certain percentage of bonds depending on

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Speaker 1: how far out eighty, twenty, seventy thirty, whatever, and as

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Speaker 1: time goes by, they gradually lower the risk by raising

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Speaker 1: the percentage of bonds and lowering the percentage of equity.

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Speaker 2: Fair enough statement, absolutely, and it's very easy to criticize

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Speaker 2: those things. They're very naive, right, I buy a twenty

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Speaker 2: thirty fund, Okay, Well, how much is precisely in cash?

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Speaker 2: How much is precisely in international equities. There is a

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Speaker 2: decent amount of variation between the Vanguard and Blackrock, and

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Speaker 2: everybody's got a version of these things, so there are

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Speaker 2: differences between them, but the point is they're all trying

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Speaker 2: to do the same thing and they're all basing on

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Speaker 2: the same fundamental understanding of how asset classes interact with

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Speaker 2: each other, So that part of the problem is not

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Speaker 2: actually the difficult one. Making the decision to do that

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Speaker 2: and then sticking with it is the difficult part.

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Speaker 1: Let's stick with the portfolio part, because when I hear

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Speaker 1: you say investing is a problem that's solved, and knowing

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Speaker 1: your background working in the ETF industry and what you've

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Speaker 1: done for so many decades, I think of a low cost,

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Speaker 1: diversified por folio of ETFs consisting of broad indices, rebalance

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Speaker 1: once a year. You're done.

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Speaker 2: Am I making it too simple? I think it's actually

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Speaker 2: that simple. I think that the value of going further

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Speaker 2: than that is fine tuning it to your individual needs.

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Speaker 2: Is rebalancing that once a year. The best answer is

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Speaker 2: rebalancing it once a quarter. The right answer, there's a

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Speaker 2: different answer for different people. Is the honest answer there.

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Speaker 2: But the math about how you do it very straightforward

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Speaker 2: for most people. As you said, a diversified portfolio of

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Speaker 2: low cost indexed ETFs is going to get you ninety

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Speaker 2: percent of the way there. That last ten percent, you know,

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Speaker 2: do you get an active manager to run your bond fund.

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Speaker 2: Do you put a little bit of money in commodities

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Speaker 2: or crypto or real estate or something that's a little spicy.

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Speaker 2: Those things are really all about getting that last ten percent,

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Speaker 2: those last three miles of the marathon and having some

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Speaker 2: energy there. That's what that's all about. But the base

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Speaker 2: of it that the eighty nine twenty percent of your

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Speaker 2: returns is just about getting your money in the market

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Speaker 2: and not making any dumb mistakes. Big low cost ETFs

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Speaker 2: are really good at keeping you from making dumb mistakes.

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Speaker 1: So I'm glad you brought it up that way because

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Speaker 1: Charlie Ellis wrote a wonderful book years ago, Winning the

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Speaker 1: Losers Game, where he makes the analogy to tennis. And

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Speaker 1: when you look at professional tennis players, they win by

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Speaker 1: scoring points. Sounds obvious right now. You compare the professionals

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Speaker 1: to the amateurs, and they don't win by scoring points.

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Speaker 1: They lose by all these unforced errors. And what you're

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Speaker 1: describing is don't worry about the points, just avoid the

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Speaker 1: big mistakes. You're ahead of most.

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Speaker 2: People, absolutely, and it has nothing to do with how

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Speaker 2: smart you are. I think this is the other thing

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Speaker 2: people sometimes get upset about is when you say something

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Speaker 2: like this. They're like, well, but I'm smarter than that.

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Speaker 2: I can figure out something better than just buying a

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Speaker 2: target date fund. It has nothing to do with being smart.

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Speaker 2: It has to do with whether or not you're actually

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Speaker 2: going to be doing this every single day. So it's

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Speaker 2: those unforced errors. It's the panicking because the market went down,

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Speaker 2: so you sell out of everything. It's the thinking the

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Speaker 2: markets are a little bit too pricey, so you stay

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Speaker 2: out for six months and you miss a rally. Those

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Speaker 2: unforced errors really suck most of the returns out of

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Speaker 2: individual investor portfolios. And even at the institutional level, even

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Speaker 2: the folks that get paid to play the game, their

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Speaker 2: hit rates on these things are like measured in the

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Speaker 2: fifty one to forty nine percent rate. Nobody hits home

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Speaker 2: runs over and over again. Really good institutional active managers

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Speaker 2: hit singles more reliably than they should, and that's considered magic.

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Speaker 2: So the idea that an individual investor is going to

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Speaker 2: somehow do better than that is ridiculous.

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Speaker 1: And I'm always fascinated by the concept of intelligence because

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Speaker 1: my experience almost thirty years in the markets. Intelligence is

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Speaker 1: table stakes. Just to sit down at the table, Hey,

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Speaker 1: everybody doing this is really smart, and some people are

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Speaker 1: really really smart. But if it was just intellectual horsepower

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Speaker 1: that mattered and nothing else did well, then long term

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Speaker 1: capital management wouldn't have blown up as spectacularly as it did,

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Speaker 1: nor any of the past dozen funds that blew up.

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Speaker 1: These are filled with MIT and Harvard whiz kids who

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Speaker 1: are brilliant. Right, But it's not just about intelligence.

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Speaker 2: Well, it's not because there's so much luck involved, right,

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Speaker 2: And I think people in the business are very reluctant

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Speaker 2: to point out how uncertain finance is. I'm not saying

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Speaker 2: that it's luck. Whether Tesla stock goes up or down.

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Speaker 2: There's always a reason, right, And gosh, the financial media

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Speaker 2: is really good at telling you the reason whatever happened

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Speaker 2: in the market happened. They'll tell you why, even if

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Speaker 2: they're just making it up.

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Speaker 1: Well, that's the narrative fallacy large right, Hey here, let

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Speaker 1: me explain to you what just happens that I was

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Speaker 1: unable to warn you about an advance because I had

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Speaker 1: no idea.

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Speaker 2: Right, So something as simple as market timing, like, oh gosh,

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Speaker 2: the market seems expensive, maybe I should take them off

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Speaker 2: the table. A very common sort of retail investor reaction

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Speaker 2: to seeing a lot of headlines. Whether you get that right,

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Speaker 2: and the math proves this over and over again, is

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Speaker 2: blind luck whether or not you actually time the market

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Speaker 2: correctly as a coin flip, and generally you're going to

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Speaker 2: get it wrong because you're gonna be on the wrong

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Speaker 2: side of sentiment. So that uncertainty is the reason why

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Speaker 2: intelligence only gets you so far, because the way you

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Speaker 2: mitigate uncertainty is not by being smarter. It's by being

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Speaker 2: unemotional and managing risk really well. And for most investors,

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Speaker 2: the way you do that is you give the money

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Speaker 2: to a giant index fund and don't think about it

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Speaker 2: for as long as you can.

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Speaker 1: That's really fascinating. You know, when you speak to certain

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Speaker 1: people like Annie Duke, who wrote the book Thinking and Bets,

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Speaker 1: one of the things that poker players, where there's an

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Speaker 1: unbelievable amount of luck involved. One of the thing that

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Speaker 1: Anie Duke talks about all the time is avoiding resulting,

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Speaker 1: meaning looking at the outcome, looking at the results and

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Speaker 1: try and extrapo light backwards. What you need to do

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Speaker 1: is focus on the process. And sometimes really good hitter

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Speaker 1: is going to strike out, and sometimes wood gets hit

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Speaker 1: on the ball and you get a double triple home run.

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Speaker 1: But a good swing with a well thought out strategy

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Speaker 1: at the plate doesn't guarantee anything, and people seem to

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Speaker 1: lose track of that.

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Speaker 2: Yeah, And one of my favorite books, I think she

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Speaker 2: has a whole thing in there about learning to deal

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Speaker 2: with bad beats? Right, how do you deal emotionally with

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Speaker 2: you again and again doing the right thing, having the

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Speaker 2: right hand, and somebody who's just an idiot just hits

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Speaker 2: it out of the park and you lose, and then

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Speaker 2: you lose again. And that is a very common story

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Speaker 2: in investing. And I think that people, particularly folks who

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Speaker 2: who think about investing, who are attracted to individual investing,

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Speaker 2: they think about stocks and performance and fundamentals. I think

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Speaker 2: those types of folks are the ones that are most

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Speaker 2: in danger of making bad mistakes because you can be

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Speaker 2: wrong on fundamentals for a very long time. Even if

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Speaker 2: you were right on the underlying truth right, the market

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Speaker 2: cannot reward you for a very long time. Brilliant stock

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Speaker 2: can go from a pe of twenty to a pe

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Speaker 2: of eight for reasons you don't understand.

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Speaker 1: Right. There's an old expression, never confuse a bull market

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Speaker 1: with brains. The flips out of that is a rampaging

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Speaker 1: bull market covers up a lot of errors. I love

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Speaker 1: the way the book thinking in Bett starts. I don't

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Speaker 1: remember which team it was and whether it was a

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Speaker 1: super Bowl or I think it was a conference game

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Speaker 1: where the coach goes on goesford on fourth and one

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Speaker 1: stopped at the goal line. The other team gets the

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Speaker 1: ball and scores, and the coaches excortiated, why don't you

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Speaker 1: go for a field goal? But she defends that decision

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Speaker 1: as statistically speaking, this is your best outcome. Hey, you're

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Speaker 1: down by seven. If you're not going to get the

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Speaker 1: ball in now, what makes you think you get a

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Speaker 1: field goal and then march all the way down the

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Speaker 1: field and score again. It was the right process, and

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Speaker 1: unfortunately it's not guaranteed you had a bad outcome. You

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Speaker 1: have to work past that and stick with the process.

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Speaker 2: And you have no alternative as an investor, right, I mean,

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Speaker 2: the insurance industry would try to sell you a lot

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Speaker 2: of products that guarantee you things, but there are no

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Speaker 2: free lunches, and you certainly cannot guarantee market returns. If

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Speaker 2: you're going to be an investor and you're going to

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Speaker 2: do something other than just clip coupons on your thirty

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Speaker 2: year treasuries for the rest of your life. You have

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Speaker 2: to be willing to accept some level of uncertainty.

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Speaker 1: And that's just the way it is. And investing is

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Speaker 1: a probabilistic exercise using imperfect information to make decisions about

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Speaker 1: an unknowable future. That sounds to me like the definition

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Speaker 1: of uncertainty exactly.

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Speaker 2: And when I say it's a solve problem, I mean

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Speaker 2: the overlaps with quantum physics are endless. Right, we are

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Speaker 2: working living in a probabilistic world. Investors have to get

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Speaker 2: comfortable with that. That's why it's a solved problem. We

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Speaker 2: understand the parameters, we understand how historically things have reacted

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Speaker 2: alongside of each other, but that doesn't mean that's how

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Speaker 2: they're going to react tomorrow.

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Speaker 1: So let's sum this up. Investing is complicated, especially if

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Speaker 1: we make it complicated. But if we want to take

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Speaker 1: a simple solution, it's not that difficult. Own a globally

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Speaker 1: diversified set of low cost index ETFs, rebalance those ETFs

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Speaker 1: once a year, have a good night. That's all that's necessary. Sure,

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Speaker 1: we can make it more complicated, We can think about

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Speaker 1: lots of other aspects to this, but that solution will

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Speaker 1: work for the vast majority of investors, and as Dave suggested,

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Speaker 1: that solution isn't even the most important aspect of your investing.

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Speaker 1: It's why are you investing, What are your goals, what

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Speaker 1: are your risk talents? And how does this portfolio fit

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Speaker 1: into what you hope to accomplish. That's the variables that

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Speaker 1: are complicated, But investing itself, it's a problem that's been solved.

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Speaker 1: You can listen to At the Money every week, find

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Speaker 1: it in our Master's in Business feed at Apple Podcasts.

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Speaker 1: Each week we'll be here to discuss the issues that

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Speaker 1: matter most to you as an investor. I'm Barry Rittolts.

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Speaker 1: You've been listening to Add the Money on Bloomberg Radio.