WEBVTT - Cullen Roche on the Art of Building a Perfect Portfolio 0:00:02.720 --> 0:00:16.560 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.200 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:21.280 --> 0:00:23.520 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:24.000 --> 0:00:27.240 Tracy, I know, like everyone is like really into what's 0:00:27.280 --> 0:00:29.840 the hot stock these days? In video? How do I 0:00:29.840 --> 0:00:32.320 play the AI boom? It's interesting you can make a 0:00:32.360 --> 0:00:34.800 lot of money and get the right stocks. I love 0:00:34.840 --> 0:00:38.400 the general topic though, just like optimal portfolio construction. It 0:00:38.400 --> 0:00:41.720 seems like a fascinating puzzle to me, how to fit 0:00:41.880 --> 0:00:45.960 different types of assets together in one coherent thing. 0:00:46.159 --> 0:00:49.800 It almost felt to me like a study in behavioral science, 0:00:50.080 --> 0:00:52.839 almost because I think everyone always says, you know, just 0:00:52.920 --> 0:00:55.840 invest in an index fund and maybe sixty forty, although 0:00:55.880 --> 0:00:57.960 as we saw in twenty twenty two, that has its 0:00:58.000 --> 0:01:00.840 own problems and we can talk about that. But I 0:01:00.880 --> 0:01:03.720 think this is like the one area in people's lives 0:01:03.720 --> 0:01:07.800 where they actually crave complexity, right, Like it doesn't sound 0:01:07.920 --> 0:01:10.200 right to be like I just put your money in 0:01:10.200 --> 0:01:11.800 an index fund and forget about it. 0:01:11.880 --> 0:01:14.120 I know, it's like the simple It is like the 0:01:14.160 --> 0:01:17.760 simplest investing strategy is the hardest. Yeah, for people. It's 0:01:17.800 --> 0:01:20.640 really hard, though, Like when you see people making life 0:01:20.720 --> 0:01:22.920 changing the amount of money because like, oh, I was 0:01:23.000 --> 0:01:26.319 in you know, sand disc right, and suddenly everyone wants 0:01:26.400 --> 0:01:29.160 memory because of AI and they're up five hundred percent 0:01:29.200 --> 0:01:31.200 in the year. Is like damn, you know, like I'm 0:01:31.240 --> 0:01:33.479 really happy with my twelve percent year that I've been 0:01:33.520 --> 0:01:35.000 making Flood. 0:01:35.000 --> 0:01:35.480 I've really know. 0:01:35.640 --> 0:01:36.520 It's really hard. 0:01:36.680 --> 0:01:39.920 I was one hundred percent invested in a leverage doge eta. 0:01:40.280 --> 0:01:42.240 Yeah, right, Like if you did that and then you 0:01:42.360 --> 0:01:44.640 retired the next day, I'd be like really annoyed. I'd 0:01:44.640 --> 0:01:47.200 be like really upset. But it is a fun puzzle. 0:01:47.319 --> 0:01:50.200 You mentioned twenty twenty two, and we saw what we've 0:01:50.240 --> 0:01:53.680 seen really since COVID. What we've really seen since the 0:01:53.720 --> 0:01:56.480 worst inflation in forty years is that some of these 0:01:56.760 --> 0:01:59.720 portfolio constructions that work very well for a very long time, 0:02:00.200 --> 0:02:03.720 particularly anything that sort of resembles that sixty forty thing, 0:02:04.320 --> 0:02:07.880 which just worked so beautifully in the twenty tens, but 0:02:07.920 --> 0:02:12.160 even before it hasn't worked as well. I think you're 0:02:12.160 --> 0:02:15.080 still doing fairly well. But yeah, so it gets you 0:02:15.160 --> 0:02:17.119 the question is like, well, I remember we asked Bill 0:02:17.120 --> 0:02:20.160 Growth why I even own bonds at a time he 0:02:20.280 --> 0:02:22.400 was like, well don't Yeah, don't. He's like, I'm in 0:02:22.520 --> 0:02:24.760 I'm in pipelines, and that's where that's why I'm getting 0:02:24.760 --> 0:02:29.040 my or I'm in whatever MLPs or whatever, that's where 0:02:29.040 --> 0:02:31.560 I'm getting my yield. But yeah, I think there's some 0:02:31.600 --> 0:02:35.639 real question about like why own treasures, why own whatever, etcetera. 0:02:35.800 --> 0:02:38.440 Well, the other thing is timing. This is the thing 0:02:38.520 --> 0:02:41.720 that everyone has to consider. Right, So in twenty twenty two, 0:02:41.840 --> 0:02:44.720 if you were about to take out a big chunk 0:02:44.760 --> 0:02:46.840 of your portfolio to buy a house, or if you 0:02:46.880 --> 0:02:50.280 were a retiree and you needed to make some chunky payment, 0:02:50.760 --> 0:02:53.560 you were really really unlucky. In twenty twenty two if 0:02:53.600 --> 0:02:56.760 you were if you would take everyone's advice and invested 0:02:56.800 --> 0:02:59.280 in a sixty forty portfolio. So this is the other thing, 0:02:59.320 --> 0:03:02.359 Like you can try to smooth out returns, but your 0:03:02.400 --> 0:03:05.520 own spending is going to go up and down quite 0:03:05.560 --> 0:03:05.799 a bit. 0:03:06.200 --> 0:03:09.480 There's one other issue that I think a lot about 0:03:09.560 --> 0:03:12.480 with the very standard and it sort of relates exactly 0:03:12.520 --> 0:03:15.560 to this, with this sort of standard advice. So in 0:03:15.680 --> 0:03:18.240 theory is like we're not supposed to time the market. 0:03:18.800 --> 0:03:22.400 Buy the highs, you buy the lows, et cetera. Twenty 0:03:22.480 --> 0:03:25.040 twenty was a great time to buy. Merge twenty twenty 0:03:25.120 --> 0:03:27.040 would have been a fantastic time to buy. The problem 0:03:27.080 --> 0:03:30.400 is layoff surge, and there's this sort of phenomenon where 0:03:30.760 --> 0:03:32.919 often the best times to invest in the market or 0:03:32.919 --> 0:03:34.639 when you don't have a job and you don't really 0:03:34.680 --> 0:03:38.200 need money, and actually, yeah, they always say don't sell, 0:03:38.280 --> 0:03:40.839 don't panic sell at the bottom. There's a good chance 0:03:40.960 --> 0:03:42.840 that's when you might need to sell. That's maybe when 0:03:42.880 --> 0:03:45.320 you lose your job or something. The ability to sort 0:03:45.360 --> 0:03:49.920 of mechanically actually follow the rules setting aside behavioral stuff, 0:03:50.160 --> 0:03:52.200 just the ability to like have the income or have 0:03:52.240 --> 0:03:55.160 the ability to like hold through draw downs, buy the dips, 0:03:55.160 --> 0:03:59.040 et cetera, may not even be possible. Absolutely well, anyway, 0:03:59.040 --> 0:04:01.600 I'm excited to say, we really do have the perfect guest, 0:04:01.640 --> 0:04:05.080 someone we've had on the podcast before, also someone we've 0:04:05.120 --> 0:04:07.200 just known for a very long time. One of the 0:04:07.200 --> 0:04:10.400 most interesting thinkers in the realms of investing, in portfolio 0:04:10.440 --> 0:04:14.760 managing and so forth. A voice of sanity, i would say, 0:04:15.360 --> 0:04:17.520 which is very rare these days. We're gonna be speaking 0:04:17.560 --> 0:04:19.960 with Colin roch As, the founder of Discipline Funds, and 0:04:20.040 --> 0:04:21.919 he is the author of a brand new book called 0:04:22.040 --> 0:04:26.360 Your Perfect Portfolio about exactly this topic. Colin, thank you 0:04:26.480 --> 0:04:28.400 so much for coming back on the podcast. 0:04:28.440 --> 0:04:29.720 It's nice to see, nice to be here. 0:04:30.839 --> 0:04:31.839 Why did you write this book. 0:04:32.920 --> 0:04:33.840 Well, this is. 0:04:33.760 --> 0:04:37.200 A problem that I've always run into throughout running my business, 0:04:37.279 --> 0:04:42.240 is that I think as the portfolio manager and financial advisor, 0:04:42.720 --> 0:04:45.400 I've run into this issue where I'm trying to construct 0:04:45.480 --> 0:04:49.760 a model portfolio that is ideal for my business so 0:04:49.800 --> 0:04:52.400 that I can easily implement something and then kind of 0:04:52.400 --> 0:04:55.000 just plug and play it into client portfolios. And what 0:04:55.040 --> 0:04:57.880 I've realized over the course of managing money for you know, 0:04:57.960 --> 0:05:01.240 hourver long it's been now multiple decades, is that everyone's 0:05:01.240 --> 0:05:04.520 different and everyone needs their own level of customization, and 0:05:04.600 --> 0:05:07.160 so it's very hard to just take a model portfolio 0:05:07.200 --> 0:05:09.760 and then plug and play. And the kind of funny 0:05:09.800 --> 0:05:12.880 thing with the financial services industry is it's largely built 0:05:12.920 --> 0:05:17.400 around these ideas that you take a product and then 0:05:17.440 --> 0:05:20.400 you sell it to the client. And oftentimes what I 0:05:20.400 --> 0:05:22.440 find is that when you're trying to sell the product 0:05:22.480 --> 0:05:24.640 to the client, it just doesn't mesh with their needs. 0:05:24.680 --> 0:05:28.360 And so everyone needs to find their own perfect portfolio. 0:05:28.480 --> 0:05:31.479 So the book isn't titled The Perfect Portfolio, and the 0:05:31.480 --> 0:05:33.960 purpose of the book really is to what I do 0:05:34.080 --> 0:05:37.320 is I go through a number of famous portfolios, and 0:05:37.360 --> 0:05:39.080 some of them are very boring and some of them 0:05:39.120 --> 0:05:42.360 are more sophisticated. But the overarching ethos of the book 0:05:42.440 --> 0:05:45.240 is that you have to understand all these different approaches 0:05:45.600 --> 0:05:47.800 and then you can plug and play the way that 0:05:47.880 --> 0:05:50.320 you want to build your own perfect portfolio so that 0:05:50.360 --> 0:05:51.000 it works for you. 0:05:51.640 --> 0:05:54.560 One thing I'm curious about because I've never had a 0:05:54.560 --> 0:05:58.239 professional financial advisor or anything, but how do you actually 0:05:58.320 --> 0:06:01.400 evaluate your client's needs? It's like, what do those questions 0:06:01.400 --> 0:06:04.000 look like? I imagine you know, there's probably a lot of 0:06:04.040 --> 0:06:07.359 finances involved, but are there questions like how do you 0:06:07.440 --> 0:06:11.120 feel about losing forty percent of your portfolio in a 0:06:11.160 --> 0:06:11.800 single year? 0:06:12.000 --> 0:06:12.120 On? 0:06:12.480 --> 0:06:15.839 That's actually that's my my very favorite question, the question 0:06:15.920 --> 0:06:19.799 I hate the most because for I don't know, twenty years, 0:06:19.839 --> 0:06:23.160 I used to print out these phony risk profile questionnaires 0:06:23.160 --> 0:06:25.000 and I would send them to people and one of 0:06:25.000 --> 0:06:27.600 the questions as always, you know, how do you respond 0:06:27.680 --> 0:06:30.320 to a market that falls thirty or forty percent? And 0:06:30.880 --> 0:06:35.120 literally ninety eight percent of people will answer that question 0:06:35.200 --> 0:06:37.440 the exact same way because they know the right answer. 0:06:37.440 --> 0:06:40.800 They'll say, oh, I stay the course, I will buy 0:06:40.839 --> 0:06:41.839 the dip or whatever. 0:06:42.160 --> 0:06:45.560 And then COVID happens, and fifty percent of my clients 0:06:45.560 --> 0:06:48.320 are calling me like, this has never happened before. 0:06:48.480 --> 0:06:50.480 What the hell do we do now? This is terrifying. 0:06:50.520 --> 0:06:53.000 We need to sell everything, right, And I'm there even 0:06:53.040 --> 0:06:55.040 I'm looking at that and I'm kind of like, you know, 0:06:55.120 --> 0:06:57.120 cause in the throes of it, Yeah, that's the hard 0:06:57.120 --> 0:06:59.760 part about investing into a bear market, especially when it's 0:06:59.760 --> 0:07:00.720 actual going on. 0:07:01.240 --> 0:07:04.400 It all feels right, just justified totally, and you're looking 0:07:04.440 --> 0:07:04.960 at it. 0:07:05.000 --> 0:07:06.520 One of my favorite charts in the book is a 0:07:06.640 --> 0:07:09.240 chart of the Great Depression downturn, and it shows this 0:07:09.360 --> 0:07:13.000 like horrific eighty percent downturn where the market just went 0:07:13.080 --> 0:07:17.080 down like every month for basically three or four years, 0:07:17.400 --> 0:07:19.280 and it goes down a full eighty percent. And when 0:07:19.280 --> 0:07:21.600 you're in the throes of that sort of thirty or 0:07:21.640 --> 0:07:24.960 forty percent downturn that we saw, say during the GFC 0:07:25.160 --> 0:07:29.680 or during COVID, you're thinking to yourself, well, wait a minute, 0:07:29.960 --> 0:07:33.000 I know that the market has gone down sixty seventy 0:07:33.040 --> 0:07:35.440 eighty percent in the past, so if we're at forty 0:07:35.560 --> 0:07:38.080 that means we probably have another you know, forty percent 0:07:38.120 --> 0:07:41.280 haircutter coming down the line. And so that's the psychology 0:07:41.320 --> 0:07:43.560 of it when people are actually in the middle of it, 0:07:43.880 --> 0:07:47.239 and I remember it vividly during COVID, because even people 0:07:47.320 --> 0:07:50.120 like Buffett and Bill Gates, like some of the most 0:07:50.160 --> 0:07:53.040 practical thinkers in the world, they're sitting around there saying, 0:07:53.280 --> 0:07:56.120 this has never happened before, We've never seen this, No 0:07:56.160 --> 0:07:58.800 one living has seen what is going on right now, 0:07:58.840 --> 0:08:01.560 and so it all feels rational. And then, you know, 0:08:01.600 --> 0:08:05.480 so from a risk profiling perspective, it's really difficult because 0:08:06.160 --> 0:08:09.600 that sort of subjective nature of it all is really 0:08:09.640 --> 0:08:12.200 sort of irrelevant because when you're actually in it, it 0:08:12.240 --> 0:08:14.000 all will feel totally rational. 0:08:14.240 --> 0:08:14.360 Now. 0:08:14.360 --> 0:08:17.760 I remember thinking that even like obviously April of last year, 0:08:17.880 --> 0:08:23.240 during the brief but very sharp sell off after liberation. Yeah, 0:08:23.440 --> 0:08:27.240 and it's like, well, Trunk just changed the rules of capitalism. 0:08:27.280 --> 0:08:29.480 This is gonna be different. This is really different. Or 0:08:29.760 --> 0:08:32.800 going back to COVID, like we all say we're gonna 0:08:33.040 --> 0:08:37.400 just hold through the downturn, but in that moment we're like, oh, no, 0:08:37.520 --> 0:08:39.400 this isn't really this is well, this is not like 0:08:39.480 --> 0:08:40.880 the other cell. This is different. 0:08:40.920 --> 0:08:41.840 This is not like dot. 0:08:41.720 --> 0:08:44.199 Com or there was just an overvaluation. This is not 0:08:44.240 --> 0:08:47.160 like nineteen ninety one when we had a fed engineered recession. 0:08:47.360 --> 0:08:50.080 This is something different. The old rules about buying and 0:08:50.120 --> 0:08:51.560 holding must not apply this. 0:08:51.720 --> 0:08:53.559 Yeah, it's funny, you know, I see a lot of 0:08:53.600 --> 0:08:55.679 people get mocked. A lot of the analysts back then, 0:08:55.720 --> 0:08:57.560 where you know, they were changing their estimates and they 0:08:57.640 --> 0:08:59.800 kind of, you know, after the tariffs more or less 0:08:59.800 --> 0:09:03.719 got scrapped, they then you know, up their estimates for 0:09:03.760 --> 0:09:06.520 the year end targets, and in retrospect that looks kind 0:09:06.520 --> 0:09:09.280 of stupid, but in the throes of it, if you remember, 0:09:09.440 --> 0:09:11.640 like they were saying they were going to replace the 0:09:11.640 --> 0:09:14.840 income tax. Yeah, like I'm writing, you know, they're doing 0:09:14.920 --> 0:09:16.520 the math on that, and I'm like, wait a minute, 0:09:16.559 --> 0:09:20.720 that's a two point five trillion dollar corporate or tax increase. 0:09:20.880 --> 0:09:23.120 Like that's a. 0:09:22.480 --> 0:09:26.480 Gigantic number of incredibly frightening number if it's true. And 0:09:26.520 --> 0:09:28.880 then you know, of course the CEOs of Home Depot 0:09:28.920 --> 0:09:30.679 and Target and all them walk into the White. 0:09:30.480 --> 0:09:32.000 House and are like, do not do this. 0:09:32.559 --> 0:09:35.040 And so they're still doing the tariffs, and they're still impactful, 0:09:35.040 --> 0:09:37.240 and they're still a corporate tax and whatnot, but they're 0:09:37.240 --> 0:09:39.720 not nearly the size that you know they were going 0:09:39.800 --> 0:09:41.480 to be, you know that they were claiming to be. 0:09:41.600 --> 0:09:45.640 And so that frightening moment where you know, they announced that, 0:09:45.880 --> 0:09:48.640 you know, got quickly scrapped when they were kind of 0:09:48.640 --> 0:09:49.600 reversed course on it. 0:09:49.880 --> 0:09:52.079 I feel like we should note here that we're recording 0:09:52.080 --> 0:09:55.320 on January eighth, and we are expecting the Supreme Court 0:09:55.320 --> 0:09:58.360 to make a decision of the tariffs, so the entire 0:09:58.480 --> 0:10:02.120 game could change again. Now you mentioned the Great Depression, 0:10:02.200 --> 0:10:04.120 and one thing I thought was really interesting in the 0:10:04.160 --> 0:10:06.960 book is you talk about how no one really quite 0:10:07.040 --> 0:10:10.280 knows the origins of the sixty forty portfolio, even though 0:10:10.280 --> 0:10:13.960 it's become fairly standard in finance, but you trace it 0:10:14.000 --> 0:10:16.679 back to the Great Depression. So tell us how you 0:10:16.720 --> 0:10:17.120 did that. 0:10:17.840 --> 0:10:20.480 Yeah, well, I don't know if I did do it correctly, 0:10:20.559 --> 0:10:23.240 but it was kind of a guess. But I found 0:10:23.280 --> 0:10:26.840 that so fascinating that sixty forty is arguably the most 0:10:26.840 --> 0:10:30.000 famous portfolio of all the portfolios, and we all probably 0:10:30.040 --> 0:10:32.800 own something that kind of looks like sixty forty at 0:10:32.840 --> 0:10:35.560 some point in our lives and It was actually Corey Hofstein, 0:10:35.880 --> 0:10:39.720 who manages the return Stacking ETFs, that he asked on 0:10:39.760 --> 0:10:42.840 Twitter one day, where did this thing come from? And 0:10:42.960 --> 0:10:45.560 there were hundreds of responses, and none of them. 0:10:45.440 --> 0:10:46.199 Seemed to write. 0:10:46.400 --> 0:10:48.360 And so I just had so happened to be writing 0:10:48.400 --> 0:10:49.880 the book at this time, and I'm writing the chapter 0:10:49.920 --> 0:10:52.200 on sixty forty, and I started digging into it and 0:10:52.240 --> 0:10:54.560 I found the story about this guy named Walter Morgan 0:10:54.559 --> 0:10:58.480 who's running a fund called the Wellington Fund. And Wellington Fund, obviously, 0:10:58.679 --> 0:11:02.079 you know, famous because it turned into a Vanguard fund later, 0:11:02.280 --> 0:11:05.000 is run by John Bogel, who some people may have 0:11:05.040 --> 0:11:08.280 heard of. And he's doing this though in a very 0:11:08.360 --> 0:11:11.840 unusual way back in the depression, where during the Depression, 0:11:12.120 --> 0:11:14.520 equity investing was kind of the dominant. 0:11:14.040 --> 0:11:16.280 Way to actually allocate assets. 0:11:15.880 --> 0:11:19.240 And Morgan had been burned before that, so he goes 0:11:19.240 --> 0:11:22.079 into the Great Depression. He launches the Wellington Fund right 0:11:22.120 --> 0:11:25.200 before the depression, but he does something really unusual. He 0:11:25.240 --> 0:11:28.160 adds a huge chunk of bonds to the portfolio. And 0:11:28.200 --> 0:11:30.679 the thing gets crushed in the depression, but it gets 0:11:30.679 --> 0:11:33.840 crushed way less than everything else got crushed. And so 0:11:34.040 --> 0:11:36.640 then all of these research analysts are starting to look 0:11:36.679 --> 0:11:38.839 at you know, kind of you know, picking through the 0:11:38.920 --> 0:11:41.319 dust of the Great Depression and the returns there, and 0:11:41.360 --> 0:11:44.080 they're noticing that, hey, this fund did really well in 0:11:44.120 --> 0:11:48.240 a relative sense. So Morgan's fund kind of takes off 0:11:48.280 --> 0:11:50.679 because of this because the relative performance was so good. 0:11:51.040 --> 0:11:54.960 And then the story is interesting because then Walter Morgan 0:11:55.040 --> 0:11:58.560 hires Don Bogel. Bogel runs the Wellington Fund through the 0:11:58.600 --> 0:12:02.240 fund goes through the World War Two and the boom 0:12:02.280 --> 0:12:04.959 of the nineteen sixties and then the scary inflation of 0:12:05.000 --> 0:12:07.840 the nineteen seventies. Bogel actually does something really weird. He 0:12:07.880 --> 0:12:10.439 turns the fund closer into like an eighty twenty fund 0:12:10.679 --> 0:12:13.560 kind of chasing performance and which was sort of like 0:12:13.600 --> 0:12:16.959 antithetical to everything that Bogel ultimately is kind of known for. 0:12:17.320 --> 0:12:20.320 And then we all know the story from there. The 0:12:20.440 --> 0:12:23.560 sixty to forty from nineteen eighty to present day has 0:12:23.600 --> 0:12:25.240 been you know, kind of like one of the best 0:12:25.240 --> 0:12:28.080 performing portfolios ever. So it's you know, through all of 0:12:28.120 --> 0:12:32.960 these trials and tribulations, though this portfolio has done incredibly well, 0:12:33.040 --> 0:12:37.040 and I traced its origin mostly back to the Great 0:12:37.080 --> 0:12:39.199 Depression in the way that Wellington Fund. 0:12:39.000 --> 0:12:41.960 Was sort of built as the first real balanced Indeth fund. 0:12:57.840 --> 0:12:59.520 It's actually a zoom out or back up a little 0:12:59.520 --> 0:13:02.600 bit and talked theory because you said that many of 0:13:02.679 --> 0:13:06.240 us or most of us will have some portfolio that 0:13:06.440 --> 0:13:08.600 is sixty forty ish, but that there's gonna be various 0:13:08.640 --> 0:13:11.959 modifications and people are gonna want a slug of real 0:13:12.040 --> 0:13:14.280 estate or commodities whatever. But what are you talking about, 0:13:14.280 --> 0:13:18.199 maybe from the academic perspective, like what is the sixty 0:13:18.559 --> 0:13:22.280 forty portfolio really is? And like what is it theoretically 0:13:22.480 --> 0:13:25.760 achieve that is given it this sort of it's Lindy, 0:13:25.920 --> 0:13:29.320 this sort of enduring effect that it accomplishes goal. Talk 0:13:29.360 --> 0:13:31.920 to us about like why from the perspective of a planner, 0:13:32.040 --> 0:13:35.839 maybe it's not perfect for everyone, but it has certain qualities. 0:13:36.360 --> 0:13:38.440 This is a good portfolio to me. 0:13:38.559 --> 0:13:41.040 The sixty forty is like the good enough portfolio. 0:13:41.080 --> 0:13:42.600 So it just to be just to define it, So 0:13:42.679 --> 0:13:46.760 a sixty forty portfolio means basically sixty percent equities and 0:13:46.800 --> 0:13:50.000 forty percent treasuries exactly, Okay, but talk about why it's 0:13:50.000 --> 0:13:51.959 good enough? What are the properties of it? 0:13:52.080 --> 0:13:56.280 So it's the portfolio of that by owning sixty percent stocks, 0:13:56.400 --> 0:13:59.439 you will you'll do well enough, you'll capture enough of 0:13:59.480 --> 0:14:03.480 an equity market bull market, and also conversely, during a 0:14:03.520 --> 0:14:06.080 bear market, because of the forty percent bond slice, you 0:14:06.120 --> 0:14:09.560 typically will buffer the equity volatility in the portfolio just 0:14:09.720 --> 0:14:12.560 enough that you won't capture all of the downside. And 0:14:12.600 --> 0:14:15.400 so it's it is balanced in this way that it 0:14:15.480 --> 0:14:18.400 doesn't capture all of the upside or all of the downside, 0:14:18.440 --> 0:14:19.280 and kind of can help. 0:14:19.160 --> 0:14:20.000 You stay the course. 0:14:20.480 --> 0:14:23.800 I talked specifically in one chapter about something called the 0:14:23.840 --> 0:14:28.760 global financial asset portfolio, and I really like understanding this portfolio, 0:14:28.840 --> 0:14:33.040 especially from like a theoretical perspective, because the most interesting 0:14:33.080 --> 0:14:35.320 thing about it actually is that nobody owns this portfolio 0:14:35.680 --> 0:14:39.160 because it's mostly uninvestable or you can't fully invest it, 0:14:39.200 --> 0:14:41.360 and it's actually, you know, I talked to a lot 0:14:41.360 --> 0:14:43.920 of famous researchers about this topic when I was researching 0:14:43.920 --> 0:14:47.240 the book, and they all kind of concluded that the 0:14:47.320 --> 0:14:51.280 screwiest part about actually quantifying that portfolio is that it's 0:14:51.320 --> 0:14:54.320 actually really controversial how to quantify it because all of 0:14:54.360 --> 0:14:58.320 the assets in that portfolio are not investible. So for instance, 0:14:58.360 --> 0:15:02.560 like China A shares are not necessarily investible for foreign investors, 0:15:02.560 --> 0:15:05.360 and there's lots of assets that are held by you know, 0:15:05.400 --> 0:15:08.120 the Swiss National Bank owns a lot of assets that 0:15:08.160 --> 0:15:09.680 make the assets then uninvestable. 0:15:09.800 --> 0:15:11.600 And so you know, the FED has been buying a 0:15:11.640 --> 0:15:12.520 lot of treasury bonds. 0:15:12.520 --> 0:15:14.840 So technically you could say, you know, what happens to 0:15:14.880 --> 0:15:17.920 the market cap of outstanding bonds when the FED is 0:15:17.960 --> 0:15:19.640 the owner of a lot of these bonds, And you 0:15:19.680 --> 0:15:22.800 can start getting into these sort of very academic theoretical 0:15:22.800 --> 0:15:27.000 debates about well, what is the market portfolio and what's 0:15:27.040 --> 0:15:31.000 actually investable versus uninvestable. And it's especially interesting from like 0:15:31.040 --> 0:15:32.520 a theoretical. 0:15:32.080 --> 0:15:36.160 And in theory that portfolio includes like gas stations in Burma. 0:15:36.280 --> 0:15:38.480 Right, yeah, well, god, if you go into all of 0:15:38.520 --> 0:15:40.840 the assets, you know, I did financial assets only, so 0:15:41.120 --> 0:15:43.600 I kind of excluded all the non financial. 0:15:43.120 --> 0:15:43.920 Assets so things. 0:15:44.000 --> 0:15:46.480 Cause then the whole portfolio kind of turns into a 0:15:46.480 --> 0:15:49.760 real estate portfolio. It's basically everybody's houses is everything that 0:15:49.800 --> 0:15:53.360 we own. But from a financial asset perspective, it was 0:15:53.400 --> 0:15:56.080 really interesting because especially when you look at things like 0:15:56.360 --> 0:15:59.080 the full cap versus the free float, which is basically 0:15:59.160 --> 0:16:03.040 the actual assets, you can invest in versus the portfolio 0:16:03.160 --> 0:16:07.080 that is actually the issuance of outstanding financial assets. These 0:16:07.120 --> 0:16:11.280 portfolios are really different. And like, for instance, in today's environment, 0:16:11.440 --> 0:16:16.040 the outstanding market cap of stocks versus bonds is roughly 0:16:16.120 --> 0:16:19.080 sixty five thirty five. And when you look at the sorry, 0:16:19.080 --> 0:16:21.800 the equity market, when you look at the US versus four, 0:16:21.840 --> 0:16:24.080 and it's sixty five versus thirty five. But when you 0:16:24.120 --> 0:16:27.560 look at the actual issuance, the full cap, it's almost 0:16:27.640 --> 0:16:30.760 the opposite. And so the US is way smaller from 0:16:30.760 --> 0:16:35.440 a full issuance perspective, but from an actual investible perspective, 0:16:35.640 --> 0:16:38.000 the US is you know what we call like this 0:16:38.120 --> 0:16:41.840 extraordinary market, this unusual, huge part of the full market cap, 0:16:41.880 --> 0:16:45.960 and which is weird to think of because when Vanguard 0:16:46.000 --> 0:16:48.800 and some of these big index funds create these products, 0:16:48.920 --> 0:16:52.120 they have to issue what is investable. They can't just 0:16:52.160 --> 0:16:54.960 say theoretically, like I sometimes will tell my clients, well, hey, 0:16:54.960 --> 0:16:57.440 if you want to actually own the true market cap 0:16:57.480 --> 0:17:00.760 portfolio or the market issuance portfolio, you should actually be 0:17:00.840 --> 0:17:03.520 closer to like forty percent US. You should be underweight 0:17:03.600 --> 0:17:06.520 the US market versus four and in this environment, because 0:17:06.560 --> 0:17:10.320 that actually is representative of the full issues, whereas if 0:17:10.359 --> 0:17:12.480 you're Vanguard and you're running this index and you have 0:17:12.560 --> 0:17:15.320 to buy what has actually been issued, it's almost the 0:17:15.359 --> 0:17:18.199 exact opposite and you real way overweight US. So you 0:17:18.240 --> 0:17:21.400 get into these interesting sort of like theoretical debates about 0:17:21.400 --> 0:17:22.240 how to even do this. 0:17:22.320 --> 0:17:24.879 In the first place, I want to talk more about 0:17:24.920 --> 0:17:27.639 illiquid assets like real estate, because for most people this 0:17:27.800 --> 0:17:31.480 is their biggest investment, right their actual house. But before 0:17:31.520 --> 0:17:34.200 I do, you just reminded me gold. So in the 0:17:34.240 --> 0:17:36.280 book you talk about gold as like one of the 0:17:36.359 --> 0:17:39.639 true uncorrelated assets, but of course over the course of 0:17:39.680 --> 0:17:43.120 last year, it looks like a momentum stock, right, how 0:17:43.119 --> 0:17:45.600 are you judging gold at this moment in time. 0:17:46.440 --> 0:17:51.720 You know, gold and commodities are really hard to compartmentalize 0:17:51.720 --> 0:17:54.359 in the portfolio construction process because I typically think of 0:17:54.359 --> 0:17:59.199 commodities in general as they're just they roughly track inflation 0:17:59.440 --> 0:18:02.240 because they are just cost inputs, and you know corporate 0:18:02.480 --> 0:18:06.240 you know costs, and so they should roughly reflect something 0:18:06.280 --> 0:18:09.000 close historically to the rate of inflation, which is pretty 0:18:09.040 --> 0:18:10.280 close to what the data shows. 0:18:10.640 --> 0:18:13.200 Gold is a really screwy. 0:18:12.800 --> 0:18:15.960 One because gold has this whole other element to it 0:18:16.000 --> 0:18:19.040 where there's huge swaths of the population that view gold 0:18:19.040 --> 0:18:21.840 as money, even though you know, in a modern monetary system, 0:18:21.880 --> 0:18:24.639 you could argue that gold is actually a pretty terrible 0:18:24.640 --> 0:18:27.480 form of money just because it's impractical to use for 0:18:27.520 --> 0:18:30.000 the most part, it's got this store of value in 0:18:30.040 --> 0:18:32.080 this sort of I refer to it as a faith 0:18:32.119 --> 0:18:34.760 put inside of it where it's price almost gets like 0:18:34.800 --> 0:18:39.360 a premium because it's not just an input and cost inputs. 0:18:39.480 --> 0:18:42.000 It is something that people believe in, that people hold 0:18:42.000 --> 0:18:44.720 and people have demand for because it's got this other 0:18:44.840 --> 0:18:48.679 strange use, and so it's weird in the context of 0:18:49.000 --> 0:18:50.080 today's environment. 0:18:50.160 --> 0:18:51.120 Another concept I. 0:18:51.080 --> 0:18:53.679 Talk about is I talk a lot about time and 0:18:53.760 --> 0:18:56.480 the book about how important it is to think about 0:18:56.520 --> 0:19:00.359 portfolios and asset performance across time horizons. And you know, 0:19:00.400 --> 0:19:03.160 I do a lot of asset liability matching, and that 0:19:03.240 --> 0:19:07.439 basically entails working with somebody where I'm quantifying liabilities and 0:19:07.480 --> 0:19:10.520 expenses over time horizons and I'm matching assets and not 0:19:10.600 --> 0:19:12.679 just a similar way to like maybe a big pension 0:19:12.720 --> 0:19:16.280 fund would or banks might operate. And that's all about 0:19:16.359 --> 0:19:19.200 understanding time and an asset liability mismatch. 0:19:19.240 --> 0:19:21.520 And if you get that wrong, you end up like 0:19:21.600 --> 0:19:22.600 Silicon Valley. 0:19:22.320 --> 0:19:24.560 Bank, and which you talk about in the book. 0:19:24.640 --> 0:19:24.840 Yeah. 0:19:24.880 --> 0:19:27.560 And the interesting thing about even like a retail investor, 0:19:28.080 --> 0:19:29.920 you know, and it took me for, you know, two 0:19:29.920 --> 0:19:32.320 decades working in the business to realize this that the 0:19:32.400 --> 0:19:35.080 better way to go through a risk profiling process is 0:19:35.119 --> 0:19:38.280 not to ask people phony questions about this subjective nature 0:19:38.280 --> 0:19:39.960