Speaker 1: Investing is a complicated problem. What if I told you
Speaker 1: a beautiful solution has been found? Investing is not easy.
Speaker 1: How do you pick the correct asset class? Which sectors
Speaker 1: do you buy? How do you know which are the
Speaker 1: right stocks or bonds to own? Do you use leverage?
Speaker 1: Do you hedge? Do you time? What about private equity,
Speaker 1: hedge funds, venture capital? It's really complicated, or is it?
Speaker 1: I'm Barry Redults and on today's edition of At the Money,
Speaker 1: we're going to discuss investing as a problem that's been solved.
Speaker 1: To help us unpack all of this and what it
Speaker 1: means for your portfolio, Let's bring in Dave Kndig. He
Speaker 1: is financial futurist at VETIFI and a well known ETF
Speaker 1: industry pioneer. So I love this quote of yours investing
Speaker 1: is a problem that's been solved.
Speaker 2: Explain well, what I mean by that quote, Barry, is
Speaker 2: that I think a lot of people spend a lot
Speaker 2: of time and energy and frankly emotion caught up in
Speaker 2: the idea that they have to figure out investing. Right.
Speaker 2: They have ten thousand dollars, they have one hundred thousand dollars.
Speaker 2: They want to grow that for some purpose five ten
Speaker 2: hundred years out, whatever it is, and they feel like
Speaker 2: their job is to solve this puzzle and get all
Speaker 2: those pieces just right, and if they get it right,
Speaker 2: they win, and if they get it wrong, they're destitute.
Speaker 2: And I think that's the wrong approach. The core of
Speaker 2: investing is in fact, a solve problem mathematically. If you've
Speaker 2: got a set of assets you can invest in. For
Speaker 2: almost sixty eighty years, we've understood the fund fundamental math
Speaker 2: of how you put that portfolio together to get a
Speaker 2: certain pattern of returns for a certain level of risk.
Speaker 2: There's nothing really all that interesting or complicated about that.
Speaker 2: You can do all the math on your phone. There's
Speaker 2: one hundred different apps you could download that will make
Speaker 2: a model portfolio for you. That's not the part people
Speaker 2: should be focusing on. I contrast that to advice. The
Speaker 2: knowing what to do, when to do it, how to
Speaker 2: do it. That's the really hard problem. That's where people
Speaker 2: should be putting their energy.
Speaker 1: So let's break this up into a couple of different pieces.
Speaker 1: If I say to the average lay person, investing is
Speaker 1: a problem that's been solved, they're going to say, great,
Speaker 1: what's the solution.
Speaker 2: Well, the problem with your question is that an advisor
Speaker 2: then would turn around and say, great, how much money
Speaker 2: do you have to invest? When do you need it back?
Speaker 2: What's your tolerance for risk? There's another fifty questions you
Speaker 2: have to ask before you get to the investment part.
Speaker 2: Once you've gotten to the end of that chain of questions,
Speaker 2: you know, oh, this, I have one hundred thousand dollars,
Speaker 2: I need this in fifteen years because that's when my
Speaker 2: kids are going to go to college. I understand my
Speaker 2: tax situation, and oh I can put some of that
Speaker 2: in a five twenty nine or I can't. Once you've
Speaker 2: answer all of those questions, then constructing that portfolio, what
Speaker 2: do I own to get a pattern of returns deliver
Speaker 2: me the maximum chance of being able to put my
Speaker 2: kids through college in fifteen years. Honestly, you can do
Speaker 2: that in a target date fund, and that's most of
Speaker 2: the math baked in for you. Anything you do other
Speaker 2: than that is trying to get a different pattern of
Speaker 2: returns that is inherently going to have more risk associated
Speaker 2: so with.
Speaker 1: Target date fund For listeners who may not be familiar
Speaker 1: with this, these typically are the default settings for a
Speaker 1: one k's. They're managed by big fund managers, Fidelity, Vanguard, etc.
Speaker 1: And they start out with a certain percentage of equities
Speaker 1: and a certain percentage of bonds depending on how far
Speaker 1: out eighty twenty, seventy thirty, whatever, And as time goes by,
Speaker 1: they gradually lower the risk by raising the percentage of
Speaker 1: bonds and lowering the percentage of equity.
Speaker 2: Fair enough to statement, absolutely, and it's very easy to
Speaker 2: criticize those things. They're very naive, right, I buy a
Speaker 2: twenty thirty fund, Okay, Well, how much is precisely in cash?
Speaker 2: How much is precisely in international equities. There is a
Speaker 2: decent amount of variation in between the Vanguard and black Rock,
Speaker 2: and everybody's got a version of these things, So there
Speaker 2: are differences between them. But the point is they're all
Speaker 2: trying to do the same thing, and they're all basing
Speaker 2: it on the same fundamental understanding of how asset classes
Speaker 2: interact with each other. So that part of the problem
Speaker 2: is not actually the difficult one. Making the decision to
Speaker 2: do that and then sticking with it is the difficult part.
Speaker 1: Let's stick with the portfolio part, because when I hear
Speaker 1: you say investing is a problem that's solved and knowing
Speaker 1: your background working in the ETF industry and what you've
Speaker 1: done for so many decades. I think of a low cost,
Speaker 1: diversified portfolio of ETFs consisting of broad indices, rebalance once
Speaker 1: a year. You're done. Am I making it to simple?
Speaker 2: I think it's actually that simple. I think that the
Speaker 2: value of going further than that is fine tuning it
Speaker 2: to your individual needs. Is rebalancing that once a year.
Speaker 2: The best answer is rebound it once a quarter of
Speaker 2: the right answer, there's a different answer for different people.
Speaker 2: Is the honest answer there. But the math about how
Speaker 2: you do it very straightforward. For most people, as you said,
Speaker 2: a diversified portfolio of low cost indexed ETFs is going
Speaker 2: to get you ninety percent of the way there. That
Speaker 2: last ten percent, you know, do you get an active
Speaker 2: manager to run to your bond fund. Do you put
Speaker 2: a little bit of money in commodities or crypto or
Speaker 2: real estate or something that's a little spicy. Those things
Speaker 2: are really all about getting that last ten percent, those
Speaker 2: last three miles of the marathon and having some energy there.
Speaker 2: That's what that's all about. But the base of it
Speaker 2: that the eighty ninety percent of your returns is just
Speaker 2: about getting your money in the market and not making
Speaker 2: any dumb mistakes. Big low cost ETFs are really good
Speaker 2: at keeping you from making dumb mistakes.
Speaker 1: So I'm glad you brought it up that way because
Speaker 1: Charlie Ellis wrote a wonderful book years ago, Winning the
Speaker 1: Losers Game, where he makes the analogy to tennis. And
Speaker 1: when you look at professional tennis players, they win by
Speaker 1: scoring points. Sounds obvious, right now. You compare the professionals
Speaker 1: to the amateurs, and they don't win by scoring points.
Speaker 1: They lose by all these unforced errors. And what you're
Speaker 1: describing is don't worry about the points, just avoid the
Speaker 1: big mistakes. You're ahead of.
Speaker 2: Most people, absolutely, and it has nothing to do with
Speaker 2: how smart you are. I think this is the other
Speaker 2: thing people sometimes get upset about is when you say
Speaker 2: something like this, they're like, well, but I'm smarter than that.
Speaker 2: I can figure out something better than just buying a
Speaker 2: target date fund. It has nothing to do with being smart.
Speaker 2: It has to do with whether or not you're actually
Speaker 2: going to be doing this every single day. So it's
Speaker 2: those unforced errors. It's the panicking because the market went down,
Speaker 2: so you sell out of everything, it's the thinking the
Speaker 2: markets are a little bit too pricey, so you stay
Speaker 2: out for six months and you miss a rally. Those
Speaker 2: unforced errors really suck most of the returns out of
Speaker 2: individual investor portfolios. And even at the institutional level, even
Speaker 2: the folks that get paid to play the game, their
Speaker 2: hit rates on these things are like measured in the
Speaker 2: fifty one to forty nine percent rate. Nobody hits home
Speaker 2: runs over and over again. Really good institutional active managers
Speaker 2: hit singles more reliably than they should, and that's considered magic.
Speaker 2: So the idea that an individual investor is going to
Speaker 2: somehow do better than that is ridiculous.
Speaker 1: And I'm always fascinated by the concept of intelligence because
Speaker 1: my experience almost thirty years in the markets, intelligence is
Speaker 1: table stakes. Just to sit down at the table. Hey,
Speaker 1: everybody doing this is really smart, and some people are
Speaker 1: really really smart. But if it was just intellectual horsepower
Speaker 1: that mattered and nothing else did well, then long term
Speaker 1: capital management wouldn't have blown up as spectacularly as it did,
Speaker 1: nor any of the past dozen funds that blew up.
Speaker 1: These are filled with MIT and Harvard whiz kids who
Speaker 1: are brilliant, right, But it's not just about intelligence.
Speaker 2: Well, it's not, because there's so much luck involved, right,
Speaker 2: And I think people in the business are very reluctant
Speaker 2: to point out how uncertain finance is. I'm not saying
Speaker 2: that it's luck. Whether Tesla stock goes up or down.
Speaker 2: There's always a reason, right, And gosh, the financial media
Speaker 2: is really good at telling you the reason whatever happened
Speaker 2: in the market happened. They'll tell you why, even if
Speaker 2: they're just making it up.
Speaker 1: Well, that's the narrative fallacy large right, Hey here, let
Speaker 1: me explain to you what just happens that I was
Speaker 1: unable to warn you about an advance because I had
Speaker 1: no idea.
Speaker 2: Right, So something as simple as market timing, like, oh gosh,
Speaker 2: the market seems expensive, maybe I should take them off
Speaker 2: the table. A very common sort of retail investor reaction
Speaker 2: to seeing a lot of headlines. Whether you get that right,
Speaker 2: and the math proves this over and over again, is
Speaker 2: blind luck whether or not you actually time the market
Speaker 2: correctly as a coin flip, and generally you're going to
Speaker 2: get it wrong because you're going to be on the
Speaker 2: wrong side of sentiment. So that uncertainty is the reason
Speaker 2: why intelligence only gets you so far, because the way
Speaker 2: you mitigate uncertainty is not by being smarter, it's by
Speaker 2: being unemotional and managing risk really well. And for most investors,
Speaker 2: the way you do that is you give the money
Speaker 2: to a giant index fund and don't think about it
Speaker 2: for as long as you can.
Speaker 1: That's really fascinating, you know, when you speak to certain
Speaker 1: people like Annie Duke, who wrote the book Thinking and Bets,
Speaker 1: one of the things that poker players where there's an
Speaker 1: unbelievable amount of luck involved. One o the thing that
Speaker 1: Annie Duke talks about all the time is avoiding resulting,
Speaker 1: meaning looking at the outcome, looking at the results and
Speaker 1: try and extrapolate backwards. What you need to do is
Speaker 1: focus on the process. And sometimes a really good hitter
Speaker 1: is going to strike out, and sometimes wood gets hit
Speaker 1: on the ball and you get a double triple home run.
Speaker 1: But a good swing with a well thought out strategy
Speaker 1: at the plate doesn't guarantee anything, and people seem to
Speaker 1: lose track of that.
Speaker 2: Yeah, and one of my favorite books, I think she
Speaker 2: has a whole thing in there about learning to deal
Speaker 2: with bad beats? Right, how do you deal emotionally with
Speaker 2: you know, again and again doing the right thing, having
Speaker 2: the right hand, and somebody who's just an idiot just
Speaker 2: hits it out of the park and you lose, and
Speaker 2: then you lose again. And that is a very common
Speaker 2: story in investing. And I think that people, particularly folks
Speaker 2: who who think about investing, who are attracted to individual investing,
Speaker 2: they think about stocks and performance and fundamentals. I think
Speaker 2: those types of folks are the ones that are most
Speaker 2: in danger of making bad mistakes because you can be
Speaker 2: wrong on fundamentals for a very long time. Even if
Speaker 2: you were right on the underlying truth right, the market
Speaker 2: cannot reward you for a very long time. Your brilliant
Speaker 2: stock can go from a PE of twenty to a
Speaker 2: pe of eight for reasons you don't understand right.
Speaker 1: There's an old expression, never confuse a bullmarket with brains.
Speaker 1: The flip side of that is a rampaging bull market
Speaker 1: covers up a lot of errors. I love the way
Speaker 1: the book thinking in bet starts. I don't remember which
Speaker 1: team it was and whether it was a Super Bowl
Speaker 1: or I think it was a conference game where the
Speaker 1: coach goes on goes for it on fourth and one
Speaker 1: stopped at the goal line. The other team gets the
Speaker 1: ball and scores, and the coaches excortiated, why don't you
Speaker 1: go for a field goal? But she defends that decision
Speaker 1: as statistically speaking, this is your best outcome. Hey, you're
Speaker 1: down by seven. If you're not going to get the
Speaker 1: ball in now, what makes you think you get a
Speaker 1: field goal and then march all the way down the
Speaker 1: field and score again. It was the right process, and
Speaker 1: unfortunately it's not guaranteed. You had a bad outcome. You
Speaker 1: have to work past that and stick with the good process.
Speaker 2: And you have no alternative as an investor, right, I mean,
Speaker 2: the insurance industry would try to sell you a lot
Speaker 2: of products that guarantee you things, but there aren't no
Speaker 2: free lunches, and you certainly cannot guarantee market returns. If
Speaker 2: you're going to be an investor and you're going to
Speaker 2: do something other than just clip coupon's on your thirty
Speaker 2: year treasuries for the rest of your life, you have
Speaker 2: to be willing to accept some level of uncertainty.
Speaker 1: And that's just the way it is. And investing is
Speaker 1: a probabilistic exercise, using imperfect information to make decisions about
Speaker 1: an unknowable future. That sounds to me like the definition
Speaker 1: of uncertainty exactly.
Speaker 2: And when I say it's a solve problem, I mean
Speaker 2: the overlaps with quantum physics are endless. Right, we are
Speaker 2: working living in a probabilistic world. Investors have to get
Speaker 2: comfortable with that. That's why it's a solved problem. We
Speaker 2: understand the parameters, we understand how historically things have reacted
Speaker 2: alongside of each other, but that doesn't mean that's how
Speaker 2: they're going to react tomorrow.
Speaker 1: So let's sum this up. Investing is complicated, especially if
Speaker 1: we make it complicated. But if we want to take
Speaker 1: a simple solution, it's not that difficult. Own a globally
Speaker 1: diversified set of low cost index ETFs, rebalance those ETFs
Speaker 1: once a year, have a good night. That's all that's necessary. Sure,
Speaker 1: we can make it more complicated, we can think about
Speaker 1: lots of other aspects to this, but that solution will
Speaker 1: work for the vast majority of investors. And as Dave suggested,
Speaker 1: that solution isn't even the most important aspect of your investing.
Speaker 1: It's why are you investing? What are your goals, what
Speaker 1: are your risk talentses? And how does this portfolio fit
Speaker 1: into what you hope to accomplish. That's the variables that
Speaker 1: are complicated, but investing itself, it's a problem that's been solved.
Speaker 1: You can listen to At the Money every week, finding
Speaker 1: in our Masters and Business feed at Apple podcasts. Each
Speaker 1: week we'll be here to discuss the issues that matter
Speaker 1: most to you as an investor. I'm Barry Ritolts. You've
Speaker 1: been listening to At the Money on Bloomberg Radio.