Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: Welco nutrileons, I'm Joel Weber.
Speaker 3: And I'm Eric Balchunis.
Speaker 2: Excited to have a newcomer on the podcast today who's
Speaker 2: kind of a big deal. Yeah.
Speaker 3: I mean I've known him for a while. I remember
Speaker 3: my first book, The Institutional ETF Toolbox, I interviewed him.
Speaker 3: He was one of like thirty people I interviewed. He
Speaker 3: was really good. He came from the institutional world, so
Speaker 3: he really knew that world and this sort of called
Speaker 3: them unnatural barriers for ETFs in that world. Then he
Speaker 3: joined Redholtz and he's been blogging there and he has
Speaker 3: a podcast called Animal Spirits. Ben Carlson, I know him
Speaker 3: as a Wealth of common Sense. That's kind of his
Speaker 3: name of his brand, and he writes books and is
Speaker 3: always he's just really has great data, great takes. Classic
Speaker 3: sort of big long advisor as I call them, meaning
Speaker 3: that unlike the big short people who are like out
Speaker 3: there looking for tops and trying to be cool, like
Speaker 3: Christian Bale, these guys do the opposite. They're like, don't
Speaker 3: worry about it, so they invested, go along, and their
Speaker 3: their clients get rich.
Speaker 2: Okay, So Ben Carlson, who's the director of institutional asset
Speaker 2: Management at rich Holds Level Management, this time on Trillions
Speaker 2: riskin Reward. Ben, Welcome to Trillions.
Speaker 4: Hey guys, glad to be here. Eric.
Speaker 5: It's funny you and I talked a number of years
Speaker 5: ago and you said, Hey, I'm writing this book and
Speaker 5: I want I might want to call it the Big
Speaker 5: Long as opposed to the Big Short. And I liked
Speaker 5: that idea, and actually I was going to ask you first,
Speaker 5: but I talked to my publisher and I said, what
Speaker 5: if we call this the Big Long? And they said
Speaker 5: it's a little too cute. It's a great name, but
Speaker 5: it's a little too cute. So we said a lot
Speaker 5: of risk reward instead.
Speaker 2: Riskin Reward though kind of an obvious title. What took
Speaker 2: so long for somebody else to claim this title?
Speaker 4: I know, right, Yeah, that's my whole thing.
Speaker 5: It's just it's attached at the hip, like you don't
Speaker 5: get one without the other, and that's kind of the
Speaker 5: point of it.
Speaker 2: What made you decide this was the moment to do
Speaker 2: this book?
Speaker 5: I mean, I think this is kind of what I've
Speaker 5: been thinking about and writing about in my blog for
Speaker 5: the past whatever twelve years I've been doing. It is
Speaker 5: just I've been writing about the idea of long term investing,
Speaker 5: and I constantly get pushback from people. There are certain
Speaker 5: people who just can't wrap their head around this idea.
Speaker 5: And I get because some people just don't have the
Speaker 5: personality for it. And I think a lot of investing
Speaker 5: is like your own emotional makeup and personality, and some
Speaker 5: people just can't wrap their head around it. So like, hey,
Speaker 5: but what about what happened in Japan and what about
Speaker 5: the nineteen seventies inflation and what about this crash? And
Speaker 5: what about this bad period? And people are constantly giving
Speaker 5: me the like the exceptions to the rules and sod.
Speaker 4: Yeah.
Speaker 5: So I said, fine, I will do this myself. I'll
Speaker 5: play Devil's advocate. I'll show all the bad stuff that
Speaker 5: can and will happen, and then I'm still going to
Speaker 5: show you why it still makes sense to have a
Speaker 5: long term mindset.
Speaker 3: By the way, the book that we were in Arizona
Speaker 3: at the pre future Proof conference called Wealth Stack that
Speaker 3: they have and this book idea big long I was
Speaker 3: going to try to follow these four people or five advisors,
Speaker 3: just like Michael Lewis did with the big Short and
Speaker 3: just different kind of younger, up and coming advisors who
Speaker 3: were the complete opposite of these big short people. They
Speaker 3: saw something no one else saw, which is just don't
Speaker 3: do anything. I mean, you could say a lot of
Speaker 3: Vanguardians feel that way, but I just thought it was
Speaker 3: cool idea. That book turned into the Bogl effect. Sometimes
Speaker 3: I'll have an idea and it'll morph into something else.
Speaker 3: But I do have a chapter where I reference Big
Speaker 3: Long advisors in the Bogle effect. But I think Big
Speaker 3: Long would have been fine. But risk and reward is good.
Speaker 3: It's very clear what it is, and I think you
Speaker 3: do a good job one of the things. So let
Speaker 3: me just jump into a couple of things that I
Speaker 3: was interested in when I read the book. What would
Speaker 3: happen if you only purchase stocks at the absolute peak
Speaker 3: of the market, which is a whole other thing because
Speaker 3: people are like, oh my god, it's so overvaluated. That
Speaker 3: is a way to keep people from actually hitting the
Speaker 3: buy button. It's like, oh, I'm gonna wait, I'm gonna wait,
Speaker 3: I'm gonna wait. Well, what if you just bought at
Speaker 3: the worst possible times? You study this, the result be.
Speaker 5: Yeah, It's funny because I started my blog in twenty thirteen,
Speaker 5: and that's right when we finally hit new all time
Speaker 5: highs again after the Great Financial Crisis. And at the time,
Speaker 5: everyone goes, oh, no, we hit an all time high again.
Speaker 5: Remember what happened the last time we hit all time highs?
Speaker 5: The market crash, And people, even back then, this is
Speaker 5: twelve thirteen years ago, are like, there's no way this
Speaker 5: is going to last. It's it's going to fall off
Speaker 5: a cliff. And I said, okay, fine, let's pretend that
Speaker 5: does happen. You put your money into work right now,
Speaker 5: the market falls off a cliff, what happens? And so
Speaker 5: I looked at this, this theoretical guy, Bob, and he
Speaker 5: only bought over like his forty year period of investing.
Speaker 5: He bought at before the nineteen seventy three crash, he
Speaker 5: bought before the nineteen eighty seven crash.
Speaker 4: He bo Yeah, he Bob.
Speaker 5: He bought before the dot com crash, and he bought
Speaker 5: before the Great financial crash. And I said, but what
Speaker 5: if he just kept his money in He built up cash,
Speaker 5: he put it to work at these like four worst
Speaker 5: possible times ever, and he kept his money invested in
Speaker 5: the market. He didn't touch it after that, and the
Speaker 5: results were actually pretty good. Nick Madjuli, our numbers guy
Speaker 5: ran the IRR for me, and I think it was
Speaker 5: it was still like eight percent per year or something.
Speaker 5: Was crazy because he said, I cash the whole time.
Speaker 5: And I said, like, even though he was the worst
Speaker 5: investor ever, the world's worst market timer, he became a
Speaker 5: millionaire and that to this day. I wrote that in
Speaker 5: twenty fourteen. It's my most popular blog post of all time.
Speaker 5: People still read it every year, but I also get
Speaker 5: a ton of pushback on it, and so that was
Speaker 5: again the idea I wanted to update that study. I
Speaker 5: wanted to write about that for the book in just
Speaker 5: why I think time horizon is by far the most
Speaker 5: important thing for investors to define when they invest in anything, and.
Speaker 2: Tell us more about what that time horizon looks like.
Speaker 2: When you updated it Bob's time horizon.
Speaker 5: Yeah, it looked even better. But the funny thing is
Speaker 5: I also did some other variations of this, and I said, well,
Speaker 5: what if you just bought at like the lows, you
Speaker 5: built up your cash and at the lows of the
Speaker 5: crash you bought, you still did better just dollar cost
Speaker 5: averaging in so obviously dollar cost averaging works better than
Speaker 5: buying at peaks, of course, but if you just built
Speaker 5: up your cash for years and years and years and
Speaker 5: just put it to work at the bottom of the
Speaker 5: Great Financial Crisis or the bottom of the dot com boom,
Speaker 5: you know, after a burst, you would have still done
Speaker 5: better just dollar cost averaging. And that's the point is like,
Speaker 5: no one has the bad no one has bad enough
Speaker 5: luck to only invest in the peak, but no one
Speaker 5: is good enough to invest at the bottom of these
Speaker 5: things and time it perfectly. And if you just take
Speaker 5: that element out of it, the idea that like you're
Speaker 5: gonna wait for the dust to settle, or you're gonna
Speaker 5: time it perfectly. That's the idea that if you just
Speaker 5: like put in money on a regular basis, which is
Speaker 5: how most people invest anyway, you're gonna do fine.
Speaker 3: Yeah, there's a great stat and hear about the sixty
Speaker 3: forty portfolio, right, which a lot of ETF investors use. Historically,
Speaker 3: if you held a sixty forty portfolio for one month,
Speaker 3: there's a sixty four chance, sixty four percent chance that
Speaker 3: you would have had a positive return. But if you
Speaker 3: held it for ten years you were up one hundred
Speaker 3: percent of the time, and then he has these charts
Speaker 3: twenty years one hundred percent, five years ninety five percent.
Speaker 3: I mean, the odds are just so good. Do you
Speaker 3: find that people that are your clients and out there investors?
Speaker 3: Obviously with these kind of returns it's easier. But are
Speaker 3: they generally just constantly nervous or are they getting good
Speaker 3: at just like not even paying attention to their own
Speaker 3: doubts or the sort of doomers out there.
Speaker 5: I mean, there's definitely still people who are nervous all
Speaker 5: the time, but I think that investors have absolutely become
Speaker 5: better at this stuff. I think the last twenty years
Speaker 5: people have had it beaten into their heads. And Eric
Speaker 5: he wrote about the bugle head stuff, right. I think
Speaker 5: people have learned for years and years people said, listen,
Speaker 5: don't run out of the store when the stock market
Speaker 5: goes on sale, right, And we've seen that with the flows.
Speaker 2: Right.
Speaker 5: Anytime there's been a bear market this decade, the flows
Speaker 5: increase and people invest, and we get that from clients too.
Speaker 5: But I think on the whole, retail and DIY investors
Speaker 5: are so much better behaved than they were in the past.
Speaker 3: Yeah, and I want to just jump in here one
Speaker 3: thing in the Bogle effect that I pointed out, and
Speaker 3: I want to get your take on it. I know
Speaker 3: your advisors, and I give advisors a lot of credit.
Speaker 3: It is a very useful job, in my opinion, because
Speaker 3: people out there like this is like when I go
Speaker 3: to the Pep Boys, I don't know crap about the car,
Speaker 3: and I don't want to know any thing about it,
Speaker 3: and I want to trust somebody who like tells me,
Speaker 3: do I really need new break pads?
Speaker 2: You know?
Speaker 3: And an advisor does that with your portfolio, so there's
Speaker 3: always going to be a need for that. However, I
Speaker 3: do think the advisor's job was made a lot easier
Speaker 3: that Vanguard got an index fund down to about three
Speaker 3: basis points, because you can marry that thing and even
Speaker 3: with the markets it going down, at least you're in
Speaker 3: the what you feel is the best deal possible, like
Speaker 3: you're off the market. Back in the eighties and nineties,
Speaker 3: people would date I think five star managers, and I
Speaker 3: think just creating a marriable product I think is half
Speaker 3: the battle.
Speaker 5: Thoughts, Yes, it's way easier to rebalance into the pain
Speaker 5: when you know what you're investing in, Like you know
Speaker 5: that the whole stock market is not going to go
Speaker 5: to zero. It's you know, the thing I like to
Speaker 5: say about index funds is that, like, you never have
Speaker 5: an index fund that that decides to take a step
Speaker 5: back because it wants to spend more time with its family.
Speaker 5: That happens to heads for the managers all the time. Right,
Speaker 5: your index fund is not going to go through a divorce.
Speaker 5: And so I think that idea and that's why it
Speaker 5: instant sho't have such a hard time you talk about
Speaker 5: my nonprofit world, Eric, Whenever there would be an actively
Speaker 5: managed fund, it could be a hedge fund, could be
Speaker 5: an actively managed stock picker. Whenever they would get hit
Speaker 5: a rough patch, it was always really especially if they're discretionary.
Speaker 5: How do we know whether we should lean into the
Speaker 5: pain or whether we should give up on them. It's
Speaker 5: way easier to lean into the pain for a rules
Speaker 5: based strategy like an index fund or some sort of
Speaker 5: ETF like that, because you know it's going to come
Speaker 5: back eventually.
Speaker 4: These things are cyclical.
Speaker 2: You know, a lot of what you laid out here
Speaker 2: is about how behavior is the more important part than
Speaker 2: being brilliant and obviously that comes through in a lot
Speaker 2: of your writing too. So when you've thought about this
Speaker 2: and brought it to the book, what is the great
Speaker 2: psychological mistake that investors keep repeating?
Speaker 5: I think that there isn't one for every person. I
Speaker 5: think everyone has their own blind spots, and it's about understanding,
Speaker 5: like what's the lesser version of you? Because everyone has
Speaker 5: the regrets, right. The Bezos talks about regret minimization, like
Speaker 5: what are you going to regret more being too con
Speaker 5: servative in your portfolio and missing out on gains or
Speaker 5: being way too aggressive and taking part in losses. And
Speaker 5: there is no right answer if I think it's about
Speaker 5: knowing yourself in like your own emotional makeup.
Speaker 4: And I used to be this.
Speaker 5: Diehard person who thought everyone should be a Jack Boga
Speaker 5: decightful put all your money into index funds and just
Speaker 5: lose the password, right. But some people really just don't
Speaker 5: have the ability to do that. And I think it's
Speaker 5: fine as long as you can admit that. Some people say, listen,
Speaker 5: I know I'm young and I should have all my
Speaker 5: money in stocks, but I just can't do that because
Speaker 5: it won't allow me to sleep at night. So I
Speaker 5: keep twenty percent of my portfolio and T bills or something.
Speaker 5: And I think that's perfectly fine as long as you
Speaker 5: understand the trade offs that you're taking.
Speaker 3: Let's talk about that a little bit, because as the
Speaker 3: market keeps going up and up, and it is obviously
Speaker 3: historically stretched valuation wise, and I think what I find
Speaker 3: useful is and I want to get your take on
Speaker 3: diversification instead of like calling a top or shorting the market,
Speaker 3: which I feel like is what some people out there
Speaker 3: are either advising or doing themselves. It must suck to
Speaker 3: root against you as stocks like because they always prove
Speaker 3: you wrong. And why do you want to root against
Speaker 3: like companies doing well? And it just seems like a
Speaker 3: really rough way to live. These big short people want
Speaker 3: to bees whereas okay, you're nervous about it, why don't
Speaker 3: you just put more money in T bills or a
Speaker 3: goal or real estate, Like, just take the new money
Speaker 3: and put it into something that's not the stocks. That way,
Speaker 3: you can still root for your stocks, but you're adding
Speaker 3: to things that help you sleep at night. With that said,
Speaker 3: how do you know consider that and what else can
Speaker 3: you diversify into besides sponds?
Speaker 5: Yeah, I'm a big preacher of the fact that there
Speaker 5: is no free lunch in investing. But diversification's pretty darn close,
Speaker 5: right in terms of a risk management tool. And so
Speaker 5: I think that you diversify not only by asset class.
Speaker 5: So that's stocks, bonds, cash for some people, that's now alternatives,
Speaker 5: and there's a lot of different things that that could be.
Speaker 5: But then within those those buckets, I think you have
Speaker 5: to diversify by you know, geography and market cap and
Speaker 5: then strategy in a lot of cases. And I think
Speaker 5: what a lot of people learned. Bonds are the most
Speaker 5: boring part of the market obviously, but in twenty twenty two,
Speaker 5: when inflation went sky high and interest rates went from
Speaker 5: zero to five percent what felt like overnight, and people
Speaker 5: in there BN d ETF go, wait a minute, my
Speaker 5: bonds just fell twenty percent.
Speaker 4: What the heck? This is supposed to be the safe
Speaker 4: part of my portfolio.
Speaker 5: So now I think people have learned, oh, maybe I
Speaker 5: need to be diversified in my bonds too. So I
Speaker 5: need to have some T bills to account for the
Speaker 5: fact that rates might rise, and I need to account
Speaker 5: for that I might need tips to account for inflation,
Speaker 5: and so I think thinking through these things. It's not
Speaker 5: just like a one decision thing anymore. You might have
Speaker 5: to have further diversification. The hard part is you're always
Speaker 5: apologizing about something in your portfolio, and you have to
Speaker 5: be That's the other trade off is you have to
Speaker 5: be like, Okay, I know that these two pieces are
Speaker 5: going to fall and do poorly and they're not going
Speaker 5: to keep up when the rest of my portfolio is
Speaker 5: doing good.
Speaker 4: But you have to have it in the back of
Speaker 4: your mind.
Speaker 5: That each part of your portfolio has a specific job
Speaker 5: for a certain environment.
Speaker 3: Now, what about buffer ETFs. I thought what you just
Speaker 3: mentioned in twenty twenty two, when stocks and bonds both
Speaker 3: went down and the sixty to forty went down, I
Speaker 3: think especially boomers older investors freaked out that had never
Speaker 3: seen that before. Buffer ETFs are now close to one
Speaker 3: hundred billion dollars in assets. They came out of nowhere.
Speaker 3: These are ETFs that basically use options to sort of
Speaker 3: like lock in a type of downside. The cost is
Speaker 3: you give up some upside, so it's options to use
Speaker 3: a more sculpted outcome. They're very popular. I get it.
Speaker 3: To me, it's like taking a xanax kind.
Speaker 2: Of you know, fluff your pillow, help you sleep at night.
Speaker 3: Yeah, I mean, or pop a pill. I equate them
Speaker 3: to XANX because they do curing anxiety, but you give
Speaker 3: up a lot. And the alternative guys they're always like, oh,
Speaker 3: these buffers are bs.
Speaker 2: You got it.
Speaker 3: You should come to alternatives. But the alternatives are so
Speaker 3: expensive and are they even hedged. It's tough to evaluate.
Speaker 3: I'll turn to funds in general. What's your take on that?
Speaker 3: If somebody were looking for something other than the sixty
Speaker 3: forty because of what happened in twenty twenty two.
Speaker 5: We had Bruce Bond on our podcast right when the
Speaker 5: buffery TEFs came out and they were the first ones
Speaker 5: to do it right, and Michael and I my coast
Speaker 5: looked at each other afterwards and said, these things are
Speaker 5: going to be massive. Just the ideal a loone because
Speaker 5: it's a behavioral thing, and you're right. The quantitative guys
Speaker 5: hate these things because they go, why don't you just
Speaker 5: put your money in a seventy thirty portfolio? You probably
Speaker 5: get the same thing, right, but it's the behavioral piece
Speaker 5: where you can have some sort of certainty in terms of,
Speaker 5: like I'm going to have bookended.
Speaker 4: Right.
Speaker 5: Sure my upside is capped, but so is my downside.
Speaker 5: And I know what range I'm generally going to be in,
Speaker 5: and I think one of the areas, especially when rates
Speaker 5: were so low for so long, people wanted to find
Speaker 5: a middle ground, like I know I have stocks here
Speaker 5: and I have bonds or cash here. That's like my barbell,
Speaker 5: Like what do I have in the middle? And the
Speaker 5: middle thing is the hardest for people to find. Advisors
Speaker 5: have been looking at forever, and I think people are
Speaker 5: looking at as that middle ground in terms of yes,
Speaker 5: I'm giving something up, but especially for like retirees who
Speaker 5: are just so worried about listen, They've got they have
Speaker 5: more money in their portfolios than they ever thought possible
Speaker 5: because this bowl market has been raging so long. So
Speaker 5: it's kind of like how do I protect some of
Speaker 5: those gains and how how do I avoid huge losses
Speaker 5: while also maybe giving myself a chance to earn a
Speaker 5: little more than I can get in casher bonds.
Speaker 2: Ben, I want to bring it back to risk and reward.
Speaker 2: You have a lot of charts and infographics, highly visual
Speaker 2: that we might not be able to show on the podcast,
Speaker 2: but walk us through one of your favorites.
Speaker 4: Yeah, I think I counted.
Speaker 5: I think I did fifty two charts and tables for
Speaker 5: the book, so I'm very data heavy. I like the stories,
Speaker 5: but I like the numbers too. Okay, here's one of
Speaker 5: my favorite ones. If you look at the S and P.
Speaker 5: Five hundred and this book covers like the last hundred
Speaker 5: years or so of markets and all the bad stuff
Speaker 5: that can happen. The worst starting point in US stock
Speaker 5: market history was September nineteen twenty nine, right the stock
Speaker 5: market fell eighty six percent over the next three years
Speaker 5: in the Great Depression. If you would have invested in
Speaker 5: September nineteen twenty nine, in held your stocks, reinvested the
Speaker 5: dividends for thirty years, you would have had a total
Speaker 5: return of eight hundred and fifty percent seven point eight
Speaker 5: percent annual return. And that's the worst thirty year return
Speaker 5: you could have gotten in the S and P f
Speaker 5: F pick any month over the past one hundred years.
Speaker 5: The worst return over thirty years you've got was roughly
Speaker 5: eight percent per year. It's just mind boggling. And the
Speaker 5: funny thing is that the best return you got would
Speaker 5: have been starting in nineteen thirty two at the bottom,
Speaker 5: which is like fifteen percent per year. So that's like
Speaker 5: the time rising thing that Oh my gosh, that's inclusive
Speaker 5: of an eighty six percent crash and you still earned
Speaker 5: eight hundred and fifty percent.
Speaker 4: That's the worst thirty year return in this period.
Speaker 3: Let me ask about that, because you're kind of talking
Speaker 3: about the US stock market, which I think is the
Speaker 3: eighth wonder of the world. That's another book idea I had.
Speaker 3: I wanted to write about the Nasdaq one hundred, that frickin'
Speaker 3: index is. I mean, it's like, how on earth is
Speaker 3: it so good? But then I wanted to dive in
Speaker 3: why the US is so different. I think our stock
Speaker 3: market is special because you have now show Japan, which
Speaker 3: I get on Twitter a lot too. It's like you
Speaker 3: put something that's like, now do Japan, Well, Japan had
Speaker 3: like a long dead period, but other countries have too,
Speaker 3: and now International had a good year, but now the
Speaker 3: flows are coming right back to the US because the
Speaker 3: US is now roaring again. Just seems like International has
Speaker 3: these like mean reversion headfakes the last six months or
Speaker 3: a year, but for the most part, the US is
Speaker 3: just on another level. There's more trillion dollar companies here.
Speaker 3: Obviously there's more billion dollar companies. The environment here is
Speaker 3: very much about taking risk. The people here are from
Speaker 3: a lot of different backgrounds. People come here for this
Speaker 3: capitalist economy. I mean, is America just special and we
Speaker 3: should just acknowledge that and keep that as the majority
Speaker 3: of the portfolio or could the things you described in
Speaker 3: the book happen in another country for the next fifty years.
Speaker 5: Yeah, I do think there is something to like our
Speaker 5: appetite for risk in the dynamism we have here. It's
Speaker 5: funny because I write of the book, Japan was arguably
Speaker 5: the biggest financial asset bubble of all time, and they
Speaker 5: don't That's like the only one they've ever had in
Speaker 5: the nineteen eighties. Like we have a bubble once every
Speaker 5: seven years here. It seems like, you know, we just
Speaker 5: we can't help ourselves. It's like in our DNA, for
Speaker 5: some reason, we take risk and that risk gets amplified.
Speaker 5: But yeah, I think that Japan situation is a really
Speaker 5: good precursor for the US. It's funny because some people say, like,
Speaker 5: why would I have my money in anything else besides
Speaker 5: the S and P or the NADZEK one hundred like
Speaker 5: these are obviously the biggest best companies in the world,
Speaker 5: and other people say, oh my gosh, the concentration is
Speaker 5: too much. I needed diversify, and I think Japan is
Speaker 5: a great illustration of and this is way to the extremes,
Speaker 5: but Japan was forty five percent of the US stock
Speaker 5: market in nineteen eighty nine. It was bigger than the
Speaker 5: United States. And even if you take the whole world,
Speaker 5: so you invested in the entire world, since then, you
Speaker 5: were up like nine percent per year. And that's that's
Speaker 5: from Japan going from forty five percent of the index
Speaker 5: to five percent. So what happened? The other countries brought
Speaker 5: it up right? They The US of course was part
Speaker 5: of it. All these other countries did really well. I
Speaker 5: think a good baseline for most investors. Because people ask
Speaker 5: me this all the time, do we need international Bogo says,
Speaker 5: you know, forty percent of revenues and s top five
Speaker 5: hundred companies come from overseas. Kind I've heard a lot
Speaker 5: of these stats. The US currently makes up like sixty
Speaker 5: to sixty five percent of the global market cap. I
Speaker 5: think that's a pretty good baseline if you wanted to
Speaker 5: start and you say, Okay, if I'm super worried about
Speaker 5: concentration in the US, maybe I do a little more international.
Speaker 5: If I'm really a big US person, maybe I do
Speaker 5: less international. I think that's a good starting point, is
Speaker 5: like the global market cap. But I do think that,
Speaker 5: you know, people around the world wake up just like
Speaker 5: us and want to get better their station in life,
Speaker 5: and I do. My contention is AI is going to
Speaker 5: be the thing that really flattens information. You're already seeing Eric,
Speaker 5: you're following this like South Korea, the ETF is going nuts.
Speaker 5: A lot of these companies in China are neck and
Speaker 5: neck with us on AI. I do think AI is
Speaker 5: the thing that that could potentially just you know, make
Speaker 5: it easier for people anywhere around the globe to start
Speaker 5: a business, to have an idea. And I don't think
Speaker 5: that it's going to be just like contained within our
Speaker 5: borders anymore. That's kind of my contention. And again it's
Speaker 5: like a risk if you would have done that for
Speaker 5: the past fifteen years invested internationally.
Speaker 4: You're going, why would I do that? So that's another
Speaker 4: trade off. Thing.
Speaker 3: I love that you brought up hot sauce. You don't
Speaker 3: call it hot sauce. But you talk about the fun accounts,
Speaker 3: carve out five to ten percent of your portfolio as
Speaker 3: a behavioral release, valve and go nuts. We have noticed
Speaker 3: that the flow show this, and I would say, like
Speaker 3: a good chunk of new ETFs are hot sauce. They're
Speaker 3: aimed at this real small part of the portfolio. So
Speaker 3: it seems like people are like, Okay, I'm gonna get
Speaker 3: married to cheap beata, whether it's bonds and stocks. I'm
Speaker 3: paying five BIPs, but I got it's going to be
Speaker 3: really boring to watch this grow for forty years. It's
Speaker 3: like watching a tree grow in your backyard. I want
Speaker 3: to have a little fun and take part in some
Speaker 3: speculative investments while I wait. And you've got a lot
Speaker 3: of people serving this up. I would say concentrated stock pickers,
Speaker 3: thematic ETFs, leverage funds, crypto, there's a majority of things
Speaker 3: prediction markets could be in this. You say it's actually
Speaker 3: potentially a behavioral hacket, actually could help behavioral wise as
Speaker 3: an advisor, how have you seen people do that? Like
Speaker 3: are they able to do the five temper sent and
Speaker 3: quarantine it to that or does it drive them crazy?
Speaker 3: Like how does that hot sauce part of the account
Speaker 3: help or hurt people as you see it.
Speaker 5: Yes, I think people like to have some limitations, and
Speaker 5: so I think having a ceiling on it and not
Speaker 5: just saying like it's a wild West, go nuts with
Speaker 5: whatever you like if you as long as you have
Speaker 5: that limitation and you box it in. I think for
Speaker 5: a lot of people it scratches an itch and it
Speaker 5: allows them to leave the rest of the portfolio alone.
Speaker 5: And for some like we have some clients who for
Speaker 5: them it's not a stock picking portfolio, but it's hey, listen,
Speaker 5: I do private investments among friends and stuff. Help me, Like,
Speaker 5: I want to say no to more people, but I can't.
Speaker 5: So he said, okay, put.
Speaker 4: A dollar amount on it. Every year.
Speaker 5: Here's the dollar amount you can say yes to these
Speaker 5: private startup investments. And then when the bucket is filled,
Speaker 5: then you're done. And they're like, great, that's the perfect
Speaker 5: way to do it, because I can finally say no
Speaker 5: to these people and say, hey, listen, this is the
Speaker 5: allocation I have to these investments.
Speaker 4: Once it's gone, it's gone. And I think that's the.
Speaker 5: Same thing with these And the funny thing is is
Speaker 5: that if you have five to ten percent of your portfolio,
Speaker 5: and like your robin Hood account, you're trading and you're
Speaker 5: buying zero day options and leverage funds, You're probably gonna
Speaker 5: like ninety percent of your attention is going to be
Speaker 5: on that five or ten percent, Like you're going to
Speaker 5: be checking it constantly, And I think it's a good
Speaker 5: It's a good reminder like if you had all of
Speaker 5: your portfolio doing this speculative stuff, you'd be a wreck
Speaker 5: all the time, right, because you're constantly checking it and
Speaker 5: looking at it and thinking, you know, like double you know,
Speaker 5: second guessing yourself. And that's why I think like sizing
Speaker 5: it correctly is the right move.
Speaker 2: Barry Holds calls that a cowboy account. What's your favorite
Speaker 2: way to label that? Behavioral hack?
Speaker 4: Oh? That's good.
Speaker 5: Yeah, I call it the fun account, which barriers is
Speaker 5: probably better better than mine.
Speaker 2: Okay, So everything that you've laid out here, if I
Speaker 2: was looking back on my investing journey, this would have
Speaker 2: been great to have heard when I was starting out, Right,
Speaker 2: what's the takeaway that you want to give to those
Speaker 2: people who are just beginning there investing journey?
Speaker 5: Yeah, I think that risk means different things to different people.
Speaker 4: At different stages of life.
Speaker 5: So your your risk as a retiree with a mature
Speaker 5: portfolio for like bear markets and crashes, is far different
Speaker 5: than someone who's young, when human capital is their biggest asset, right,
Speaker 5: And the biggest asset for people who are retired is
Speaker 5: their financial assets. It's a house in their portfolio. For
Speaker 5: young people, it's human capital, and so a bear market
Speaker 5: is an opportunity for young people, whereas it's a big
Speaker 5: risk for people who are older. And I think that's
Speaker 5: the idea, is trying to reframe what risk means to
Speaker 5: you at different stages of your investing life cycle.
Speaker 2: Okay, Ben, this may be the first package trade. What
Speaker 2: came first, the book or the ETF?
Speaker 5: I tell you what this is like the busiest six
Speaker 5: months of my life because I was getting a book
Speaker 5: to the finish line and an ETF for the finish line,
Speaker 5: and they came out.
Speaker 4: Within two days of each others.
Speaker 5: So my book was released on May twelfth and ETF
Speaker 5: came out two days later on May fourteenth.
Speaker 4: I did not plan at.
Speaker 2: It just sort of worked out might be the future here.
Speaker 3: And this CTF is called the Goaltender, which GTND is
Speaker 3: the ticker now I immediately thought of like minute bowl,
Speaker 3: blocking a shot when it was on its downward arc,
Speaker 3: and that's called goaltending. But this is about a soccer goalie,
Speaker 3: is that right?
Speaker 4: Yeah, that's the metaphor I think is okay, yeah, Josh
Speaker 4: Optimus when I came up with it.
Speaker 5: And it's funny because it pirs nicely with the book
Speaker 5: because my whole idea about behavior is that some people
Speaker 5: need a release valve.
Speaker 4: Okay.
Speaker 5: And so for our wealth management practice, you know, ten
Speaker 5: or eleven years, I guess, we started a separately managed
Speaker 5: account tactical strategy in twenty fourteen, and the idea was like,
Speaker 5: if we're going to put client, there's clients who just
Speaker 5: can't sleep at night because they worry about what's going
Speaker 5: to happen if there's a forty or fifth percent crash.
Speaker 5: And I lived through that in the Great Financial Crisis,
Speaker 5: and I lived through that in the dot com bubble,
Speaker 5: and yes, I survived those and I held through but man,
Speaker 5: it was terrible. I need something that will see me
Speaker 5: through this. And for most people, the you know, the
Speaker 5: answer will be, well, put your money into bonds or cash,
Speaker 5: and some people say, but I don't want bonds and
Speaker 5: because that's lower perspective returns, So what else do you
Speaker 5: got it for me? And so we just decided to
Speaker 5: create a tactical strategy. And coming out of the Great
Speaker 5: Franship Crisis, all these tactical strategies were downside risk, right,
Speaker 5: we're going to hedge downside volatility. But then none of
Speaker 5: them allowed you to invest in the upside too, And
Speaker 5: so we said, if we're going to do a tactical strategy,
Speaker 5: we wanted to be able to protect the severe crashes,
Speaker 5: you know, these thirty forty fifty percent, you know, just
Speaker 5: death spirals, but.
Speaker 4: We want to take part in the bull market too.
Speaker 4: So how do we do that.
Speaker 5: We look at all these different things, earnings and macroeconomic variables,
Speaker 5: We look at every single variable we could find. But
Speaker 5: if we're protecting against a short intermediate term, what does
Speaker 5: all that lead up to? It's just price, right, And
Speaker 5: so that's it. That's where trend filing came from. And
Speaker 5: so we've been doing this strategy for clients for years
Speaker 5: and we put ten or twenty percent of their portfolio
Speaker 5: in a trend following strategy, completely rules based. You know,
Speaker 5: we're following like moving averages and then if Volatiley picks
Speaker 5: up and a stock market breaks through those moving averages,
Speaker 5: we go more defensive. And what we found is that
Speaker 5: it's a great way for a lot of clients to
Speaker 5: again leave the rest of their portfolio alone, because they
Speaker 5: know this piece is going to be, you know, their
Speaker 5: potential savior.
Speaker 3: It's like a chameleon. It's going to move into whatever. Yeah, okay, interesting,
Speaker 3: And that glt n D is the ticker, no gt
Speaker 3: and gt n D and so what.
Speaker 2: Are the holdings been? Yeah, how do you manage to
Speaker 2: do all that?
Speaker 5: Yeah, so we've been we've been doing this for years.
Speaker 5: We just it's it's all US large cap stocks. If
Speaker 5: it's risk on, and we have a number of different signals,
Speaker 5: we look at it. And the reason that we decided
Speaker 5: to go from a separate managed to count to ETF
Speaker 5: is because we would have clients come to us and
Speaker 5: this is in taxable money and they would say, Okay,
Speaker 5: I was just in a bowl market for three years.
Speaker 5: You gave me great gains in this. Now we get
Speaker 5: a signal to sell and you're going to hit me
Speaker 5: with a tax bill. No, just keep it long only.
Speaker 5: And so we said, well, geez, this it defeats the
Speaker 5: purpose of this, and how do you get around that
Speaker 5: in ETF? Right, because you can do the trades in
Speaker 5: ETF by going from risk on to risk off. Because
Speaker 5: a lot of these trend folling strategies, because the market
Speaker 5: moves so fast these days, you could get a down
Speaker 5: ten percent month and guess what, You hit your triggers
Speaker 5: and you sell, but then the market goes back up
Speaker 5: the next ten percent and you get right back in.
Speaker 5: So a lot of people are going, wait, you're going
Speaker 5: to sell lock in taxes and then buy right back
Speaker 5: in because you get these whipsaws. And that's like the
Speaker 5: downside of trend filing. That's like the insurance premium you
Speaker 5: pay that sometimes you get a whipsaw. You know, the
Speaker 5: stock market doesn't always fall thirty percent just because of
Speaker 5: fall ten percent. So the ETF structure is perfect for
Speaker 5: something like this. So we said, we kept having to
Speaker 5: put all of our client assets into tax deferred retirement accounts,
Speaker 5: but people with just tax bill accounts were kind of like, hey,
Speaker 5: we're not even going to give you this because it's
Speaker 5: not tax efficient. The ETF structure completely fixes that problem.
Speaker 3: It's very interesting. This is so far in the future, Like,
Speaker 3: this is futuristic stuff. You're for an advisor.
Speaker 2: Packaging a book and an ETF.
Speaker 3: Yeah, I mean just just the fact that they're on
Speaker 3: this behavioral stuff writing books about it. Ben, I've traveled
Speaker 3: a lot throughout the world over the last two years
Speaker 3: for especially our e you have some depth event has grown,
Speaker 3: and I go to these different countries and there aren't
Speaker 3: people like you there. They're really not. They're harder to
Speaker 3: find here in America. Seventy five percent of all the
Speaker 3: assets in the advisory world are fee based. That means
Speaker 3: you get a percent of the client assets. Well, of
Speaker 3: course you're gonna try to pick cheap, good stuff because
Speaker 3: it's coming out of your money. Most people get paid
Speaker 3: by the mutual funds. Still, that number will be one
Speaker 3: percent some places or two And I'm like, you guys
Speaker 3: need more rid Holtz type people. If because ETF growth
Speaker 3: is going to be intercorrelated with the growth of fee
Speaker 3: based advisors, do you guys plan to expand overseas? Why
Speaker 3: do you think that's so difficult for such an obvious
Speaker 3: idea not to take realt quicker internationally.
Speaker 4: It's funny.
Speaker 5: I've done a few speeches overseas, Like I've been to
Speaker 5: Italy a few times. They brought me to Canada some
Speaker 5: of these places and they tell me, like, listen, we're
Speaker 5: probably like seven to ten years behind the US in
Speaker 5: terms of advisors, like we're trying to catch up, and
Speaker 5: so they bring me over there to kind of educate
Speaker 5: them and the stuff that we've learned. One of the
Speaker 5: reasons we haven't gone over ses yet, especially, it's because
Speaker 5: so much of the stuff we do is financial planning wise,
Speaker 5: like the tax laws are all different, and so we
Speaker 5: would really need some boots on the ground to better
Speaker 5: understand that. But they the good news is a lot
Speaker 5: of these places are they see what's happened here and
Speaker 5: they're trying to make it.
Speaker 4: But it's funny. Like I went to Italy.
Speaker 5: My first speech I did there was in like twenty fifteen,
Speaker 5: and they were like, listen, for years, all the wealth
Speaker 5: in this country has been in government bonds and real estate.
Speaker 5: We're trying to explain the stock market to these people, right,
Speaker 5: So I give them the Bob Strategy about the world's
Speaker 5: worst market timer. So they're they're I think they are
Speaker 5: finally getting around to like okay, index funds and follow
Speaker 5: the market and beta like they're getting there, But you're right,
Speaker 5: they're they're far behind. And I think hopefully the information
Speaker 5: age is bringing them into this faster, but you're right,
Speaker 5: the rest of the world is kind of far behind
Speaker 5: us in the RA space.
Speaker 2: Why are so many advisors getting into the ETF business
Speaker 2: and is there more to come?
Speaker 5: Yeah, So we worked with ETF Architect, which is Wes
Speaker 5: Gray's firm that did this, and they do it for
Speaker 5: a lot of advisors and we ask them about this
Speaker 5: and a lot of it is like separate manage accounts
Speaker 5: and just the tax efficiency of the ETF structure allowing
Speaker 5: those trades within the ETF to not give someone a
Speaker 5: tax bill.
Speaker 4: It's funny.
Speaker 5: I think we've shifted in this in the industry. People
Speaker 5: wanting alpha from their investments, right, like we're going to
Speaker 5: outperform the market. And I think the indexing wave kind
Speaker 5: of people kind of finally figured it out like, Okay,
Speaker 5: meeting the market is really hard, We're just going to
Speaker 5: stop trying. But now the new thing is tax alpha, right,
Speaker 5: and people are way aware that it's not my gross
Speaker 5: returns that matter, it's my net of everything, net of expenses,
Speaker 5: net of taxes, and people are coming to us and saying, like,
Speaker 5: how can you give us some more tax efficient framework?
Speaker 5: Because we're sitting in all these gains. We want to
Speaker 5: defer as long as we can, and this structure is
Speaker 5: perfect for that. So there's tons of advisors who're going
Speaker 5: through this process. Then you have things like the three
Speaker 5: fifty one exchange. I mean, we're getting into the nitty
Speaker 5: gritty here, but you know, you can defer taxes longer
Speaker 5: you can defer the taxes, the greater your wealth can grow.
Speaker 4: People love that kind of stuff.
Speaker 5: That's what clients are looking for in terms of solutions
Speaker 5: these days.
Speaker 2: Final question for you, Ben, what is your favorite ETF
Speaker 2: ticker other than your own?
Speaker 5: Oh man, that's a great question because people sit on
Speaker 5: these things right. It's like a it's a game and
Speaker 5: you hear a new one and you go, oh, that's
Speaker 5: a great ticker. Where did you Where did you find that?
Speaker 5: I always thought the cow ticker was pretty good. What
Speaker 5: What are some of your guys's favorites.
Speaker 3: I mean, moo gets brought up a lot that's similar
Speaker 3: to cow. People love animals. Yeah, hack is one of
Speaker 3: my favorites.
Speaker 2: I like verbs Eric's thesis if it's both noun and verb, yeah,
Speaker 2: it's a yeah.
Speaker 3: If it's a noun and a verb and a word,
Speaker 3: ye's it's.
Speaker 2: A sweet spot. Yeah.
Speaker 4: Oh yeah, all.
Speaker 2: Right, Ben Carlson, congrats on two launches, Risk and Roar
Speaker 2: the Book and Goaltender the ETF. Thanks for joining us
Speaker 2: on Trades. Thanks guy, Thanks for listening to Trades. Until
Speaker 2: next time. You can find us on the Bloomberg Terminal,
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Speaker 2: and Kishov Pundia. Bye