The Smartest Investment Book You'll Ever Read | Daniel Solin | Talks at Google

Hello. Hi. We're going to get started today. Good afternoon everyone. Thanks for coming. This is an Authors at Google event and today we have Daniel Solon here with us. Daniel Solon is a leading securities arbitration lawyer and a senior Vice President of Index Funds Advisors, an independent financial advisors organization. Daniel has appeared on the O'Reilly Show, CBS News, the Early Show, MSNBC's Weekend Economic Review, CNN's Money, and Bloomberg Television. He is also a contributor to the Huffington Post, a political online news website and blog, and is a frequent speaker on investment related topics. If anyone's interested in his most recent Huffington Post, I have a few copies which I will leave by the exits and you can grab one on the way out. Daniel Solan is the author of does yous Broker Owe youe Money? He is here today to discuss his most recent book, a New York Times bestseller, a Wall Street Journal bestseller and a Business Week bestseller, the smartest investment book you'll ever read. Please join me in welcoming Daniel Sol.

Thank you very much, Kelly. Can everybody hear me even in the back? So the mic is working fine. I have to tell you, I speak before a lot of groups and speaking before Google is a somewhat intimidating experience and I'll tell you why. When I learned that I was going to give a little talk here, I kind of checked it out with my family. And like most people my age, my children are much more tech savvy than I. So I have to give you a little insight into my family. I have two children, Andrew and Sabrina. I'm married. My wife is here. Andrew is an audio engineer with an e commerce firm. Their entire business depends upon people making Google searches, their organic ranking. If you go down, his company is out of business basically. So my history with Andrew was that like most parents, I really wanted to give him the benefit of a lot of different experiences. So when he was in 11th grade, I thought, what a great idea, I'll send him to the Harvard Summer School. I sent him to the Harvard Summer School thinking, well, he's going to learn a lot. He'll be around a lot of other smart kids. And to make a long story kind of short, when he came back, what he had mastered was the discovery of pot and following the Grateful Dead. As a consequence, he had one of the largest tie dye shirt wardrobes in history, which was his exclusive wardrobe for several years. As he's evolved, however, he's a musician. He was a lead guitarist in a hard rock band. And so when I called him, I said, hey Andrew, good news. I'm going to be Talking in front of Google employees. And I think you'll pick up very quickly on a common theme here. He's a man of very few words. So his first reaction was very cool. And then there was a long pregnant pause and he said, those dudes are really smart. And I think it was said, like, you could be in trouble here. So I didn't pursue that. And then I called my daughter. And my daughter is very much like me. She's a journalist, trained as a journalist. She was co founder of Cosmo Girl, the former editor in chief of Seventeen magazine. She's also very tech savvy. She works for a division of the Time Warner company developing web content. Probably a job that didn't even exist five years ago. She left me. She questions everything. And I call her headline woman because she's great at coming up with little catchphrases that kind of capture the moment much better than I am in a lot of my journalist style. I really learned from my daughter, who's very into communicating with people in a way that they can understand. That was kind of why I wrote the smartest investment book you'll ever read. So I want to read you the voicemail that she left me. I'll read it verbatim. Dad, think about it. It would be easier for a liberal agnostic to be appointed to the Supreme Court by the Bush administration than it is to get a job at Google. You wrote a book entitled the smartest investment book you'll ever read. They're going to have you lunch. Finally, I bounced it off my wife Patricia, and if I can just take a moment, she's in the back of the room, a great source of support, and I just want to introduce everybody to her. And I said, patricia, I'm going to be talking in front of this group of Google employees, and I'm going to be talking about the smartest investment book you'll ever read. And I'm going to be telling them exactly how to invest. So when they walk out of that room, they're going to know exactly what to do. And she said, this is great. They're really smart. They're your demographic. They're going to get it. So I have one vote saying, I think I can get this message across in a way that everybody's going to understand and appreciate. Two are very, very concerned about my ability to do so. So while I hope I can convey information that's useful to you, I really need a lot of feedback from you. Either just raise your hands whenever you want, ask me questions, or tell Me afterwards, if you come up to me about whether this message resonates, because I like to think that really smart people are unemotional, look at data, make rational decisions based on the data that they look at. So I want to lower expectations initially, and then I'm going to raise the bar. So to lower expectations. Let me tell you why I named this book the smartest investment book you'll ever read, which sounds like an incredibly arrogant and presumptuous title. I didn't name it the smartest investment book ever written. I named it the smartest investment book you'll ever read because it was clear to me that there was an absence in the marketplace for investment books that normal people could read, understand and implement. All of the books that I had read, I had a lot of trouble getting through them. And when I was done, I felt more confused than before I started. I didn't know how to invest. Is there a way to invest? So the title is intended to be this is the smartest investment book not ever written, but that you'll ever read. You'll completely understand and you'll implement. There's a little exception for this crowd because I think you guys could probably read and understand any investment book. So let me tell you what I think are the best investment books ever written, because I think that's useful information. Personally, I think A Random Walk down Wall street by Burton Malkiel is really the best investment book ever written. I'm also a big fan of Bill Bernstein's books, the Four Pillars of Investing, the Intelligent Asset Allocator. These are wonderful books. Almost anything written by John Bogle, the founder of Vanguard, particularly Bogle on mutual funds. He has a new book out that's kind of similar to my book, but doesn't ever really get to the bottom line. Which is what exactly? I'm a normal person. I'm working hard. I have a 401k, I have some investments. What exactly am I supposed to do? So that was lowering the bar. I don't want you to think I really believe I wrote the smartest investment book you'll ever read or that's ever been written. But I do want you to believe that I think I wrote a book that you can implement and that will really create value for you over the long term. So now let me raise the bar. Here's my goal in the few moments. And I really don't have a prepared speech or even a particularly long one. So I really want you to be as interactive as you want. You can interrupt me at any Time. Let me tell you exactly how you should invest. I'm going to drop to the bottom line and then I'm going to tell you why. All the data indicates that this is what you should do. And what I'm going to say is considered controversial. But really it's not controversial based on any data. It's controversial because there's an entire industry called the securities industry that makes a great deal of money trying to convince you that they have an expertise that they don't have. So before I justify my views, let me just tell you this is exactly how you should invest. I can do this in five minutes. You will have no doubt about what you should do. First thing, if you are using a traditional broker or a traditional investment advisor, defined as somebody who says, I can pick stocks that will outperform other stocks. I can put you in mutual funds that have good managers that will outperform other mutual funds. I have a feeling for where the market is going, it's going up or going down. You can rely on me. I look at the ticker all day. You can't possibly do that. This is 95% of all brokers and investment advisors. If you want to be what I call in my book a smart investor, what you have to do is stop dealing with those people. Absolutely critical that you stop dealing with those people and stop relying on any advice that they are giving you that is premised on their ability to do any of those things. There is no academic peer review financial data indicating that anyone has that ability with persistency. They have it over the short term. But we know that over the short term you can get lucky. So we'll get to that in a moment. So, okay, first thing, you're not going to deal with any broker or any advisor who says I can beat the markets. I have these great insights. Second thing, determine your asset allocation. This will take 10 minutes of your time. Asset allocation is defined as what percent of your assets and combine your 401 assets with your non 401 assets. Because you're one person, that money is the same. It doesn't have different goals. Asset allocation means what percent of my assets that I have to invest get invested in stocks and what percent get invested in bonds. Asset allocation determines 94% of the variability of returns in your portfolio. 94%. All you hear about is stock picking and market timing. This is relatively insignificant. What stocks you buy relatively insignificant. Whether you get in the market at this time or that time, that's not where your focus should be. If brokers knew what they were talking about, paid any attention to the literature, what they would be calling every day instead of saying to their clients, buy this stock, sell this stock. This is where I think the market's going. They'd be saying, I want to talk about your asset allocation. Most important thing, you can determine what's my asset allocation? Okay. How do you do that? You can go to smartestinvestmentbook.com There's a free questionnaire. It will take you 10 or 15 minutes to fill out. It will tell you what your asset allocation should be. There are many asset allocation questionnaires on the web. The worst of them is better than what most people do. Most people are 100% invested in equities. Let's assume you're the laziest person in the world. You say, look, I hear what you're saying about asset allocation. I refuse to take any questionnaire. All the data shows that if you allocated 60% to stocks and 40% to bonds, then you would do better than 95% of all investors in the market. I'm not recommending that. I think that people should be serious about getting control of their assets, getting control of their finances. You all work really hard, and I'll talk in a minute about what's going to happen to you if you don't do this. So first you determine your asset allocation. Okay. Second, now you know. Let's say your Asset allocation is 60% stocks, 40% bonds. How do you determine what should be in the 60% stocks? What should be in the 40% bonds? All you need to do is buy three mutual funds. You don't need a broker. You don't need any advisor. You call up any of the major fund families like Vanguard, T. Rowe Price, Fidelity. I lay out in Appendix B of my book exactly what funds you're going to buy. Here's the theory. You're going to buy what I call Capitalism, Inc. We even have a little certificate for this. Capitalism Inc. Is all stocks in the global stock market. They had in 2006 a total market value of 29 trillion, sales of 23 trillion. Net profits of 1.8 trillion. 60 million employees, 16,000 chief executive officers, 442 general industries, and they operate in 192 countries. Since nobody can tell you what sector is going to outperform any other sector, what asset class is going to outperform any other asset class? For the 60% of your portfolio, in my hypothetical, that's going to go into stocks, you're going to take 70% of the 60%, which is 42%. Right. And you're going to invest in the broadest index fund that covers the US domestic market. My personal favorite is the Vanguard Total Markets Fund. I have no affiliation with Vanguard. I don't benefit at all from making any of these recommendations. But that mimics what's called the Wilshire 5000. The US economy is roughly 50% of the world's GNP. So you need to own a meaningful portion of your portfolio is going to be in a broadly diversified portfolio of US based companies. The other 30%, which is 18% of your total equity portfolio. We want you to have a globally diversified portfolio. Nobody understands the global economy more than people who work at Google. I looked at those searches coming from all over the world. It doesn't make sense for you just to confine your equity purchases to US based companies. So we want to give you exposure to the international markets. How do you get that exposure? I met somebody in your parking lot who's from India, said, I'm investing in the Indian economy. I think that market is great. And why I didn't have a chance to explain this, but will when I go out is that's what you don't want to do. The Indian economy may be a great economy this year, but you want to follow the same strategy that we're doing for the domestic stock market. You don't want to pick the country that's going to outperform other countries. You want to own all of those countries. So you're going to invest in another index fund. And my favorite here is the Vanguard International Index Fund because it's a great cross section of international equity funds. So with those two mutual funds, you now have a globally diversified portfolio of equities. The bond portion of your portfolio is very simple to implement because we're going to give you a bond index fund that basically gives you broad exposure to all the first class investment grade bonds that are based domestically. And here you can do something like the Vanguard Total Bond Index Portfolio. Now if you just did that, and I want input from you on why so many people don't, if you just did that based on 80 years of recorded data, you would be in the top 5% of all professionally managed money. Top 5%. Why do you want to be in the top 4% if it means that you're going to take significantly more risk? That's it. That's the entire story of what appropriate investing is. So when I wrote my book, the first review came out, it was a huge review in the Sunday New York Times and The newspapers and the securities industry do not like this message. With some rare exceptions, like Jonathan Clements of the Wall Street Journal is certainly an exception. But they don't like this message because how can you sell newspapers or magazines every month saying buy three index funds? I mean, check your asset allocation. Buy three index funds. So newspapers, the whole financial media has a vested interest in convincing you that. And it's easy to convince people. If I just study more, there are more. Buy a hedge fund, which I'll have more to say about. Buy alternate, buy gold, buy REITs. Here's a hot fund manager. This creates a lot of excitement. So if you watch like cnbc, you'll see that the reporters are breathless on the floor of the stock exchange. Well, what's happening today, Fred? Today investors are nervous. They're nervous about this, that or the other thing. When we see a pullback in the market, that's at noon and then at 4 o' clock when the market shoots up. Fred, I thought investors were nervous. Well, they now learn that tomorrow there's going to be another announcement and now they're not nervous anymore. So, so what happens to people like you? You're buffeted by all of this information. And you believe, because you're trained to believe. We're all trained to believe this. If we just work harder, we can do better. But what you really have to understand is let's look at the data that supports what I'm saying, market returns. Obviously I can say to you, if you do what I'm telling you to do, I can guarantee you that net of costs, which are very low, you will capture the market returns for your particular portfolio because you're investing in those markets. I can guarantee that. I mean, you can't miss. You're buying funds that are geared towards particular benchmarks. They're going to give you the returns of those benchmarks. And I've told you how that plays out over any 10 year period over the last 80 years. Okay, so now what happens? Let's look at first what really smart people do, because I think that's useful. I mean, none of us is that smart, right? Why don't we look at how do the smartest people in this country invest? First of all, who are they? How do they invest? $4 trillion of pension and trust money is invested exactly the way I'm telling you to Invest. It's indexed $4 trillion. These people can hire any broker or investment advisor they want. They don't do it. Why? Because they understand the data that over the long term they're going to significantly underperform the markets. Who believes what I believe and why isn't it publicized? Every Nobel Prize winner in economics, hundreds and hundreds of academic studies that have peer review academic studies that have appeared in financial journals. Warren Buffett, who's often. I get this question all the time. Hey Dan, I heard that speak. What about Warren Buffett? So when I started I was a little more defensive than I am now. And I would say if when your broker calls you, you ask your broker what his name is and if he doesn't come back and say my name is Warren Buffett. What do you care what Warren Buffett is doing? That's not the advice you're getting. Warren Buffett believes that most investors should invest in index funds. What Warren Buffett does is buy control of companies, hold onto them for long periods of time, put in good management. And Warren Buffett functions as a brilliant investment manager. He is not buying and selling stocks trying to outguess the market. Peter lynch, the famous guy from Fidelity, believes the same thing. So there is overwhelming evidence that people believe what I believe. But less than 10% of all individual investors do this. Why? Because hundreds of millions of dollars is spent on advertising by the brokerage industry that says our analysts can figure out what stocks you should buy. But we had the analysts fraud scandal and that seemed to indicate first that the analysts were selling out the retail clients to support the investment banking clients. But second, there's a lot of data that shows that if you do the opposite of what the analysts recommend, you would actually end up better. And my next blog on the Huffington Post is going to be I've got a hot tip for you. Buy crappy stocks. Because what you always hear about is my broker can find quality companies. But all the data indicates that over the long term, poorly managed companies with poor earnings outperform quality companies in terms of returns. So virtually everything that you've learned about investing is geared to separate you from your money. And the people who end up with your money are brokers and financial advisors who never lose because their goal is to get you to trade and to invest in expensive mutual funds that will underperform index funds. We took a look and there's a study in my book. Over a 10 year period we looked at I think 1100 funds that were supposed to equal or exceed the benchmark of the S&P 500 over a 10 year period. 3% equal or exceed roughly 97% fell short. Obviously you would have been much better off just buying the S&P 500. Index fund Dalbar, which is a very well respected Boston based research firm with no axe to grind. They studied investment returns of all investors over a 10 year period. I think that period, it was like 1994 to 2004. I may be off a little bit, but I'm not off by much. During that period the s and P500 returned 13.2%. How did investors do? Listening to the advice of brokers advisors under 3%. Why? Because they're chasing returns. They're not sticking with a fund after a couple of years, a broker saying look, this fund outperformed that fund. And so they're running from one fund, one expensive fund, to another expensive fund. The difference in expenses between say the Vanguard Total Markets fund and a comparable actively managed fund, Vanguard Total Markets Fund, last time I looked had an expense ratio of 10 basis points, 1/10 of 1%. The average competing fund is 150 basis points. And what do you get? You get a fund that's likely to underperform the Vanguard fund over a long period of time. So what about all that data, all that Morningstar data, all those stars, the five Star fund or all what you hear about funds that outperform for five years? It'll say you'll read every Sunday in the New York Times and say this fund has outperformed its benchmark for the last five years. Now I tread in this area lightly because I know what math gurus you all are and I'm really math phobic. But here's the only example I can give you. Coin flipping we can all agree is something that is random. People are not better coin flippers than other people. So we know that coin flipping is random. If I flip a coin a thousand times, it is likely that I'm going to get roughly 500 heads and 500 tails. But what happens if I flip a coin 10 times? It is actually more likely than not that I'm going to get a streak of heads or tails. I'm not going to get a perfect distribution over that short period of time of heads and tails. I might have five heads in a row. Does that mean that I'm a great coin flipper? No, it means that luck probability played a role. If an investment manager shows five years of great returns, does it mean he's a better investment manager? Not based on all the available academic data. What all the available academic data tells us is it means he was lucky for a five year period. He may even be lucky for a ten year period. Nobody has ever demonstrated persistency. In fact, what all the data shows is that mutual fund managers who do well over a five year period tend to end up in the lowest quartile over the next five year period. You actually would be better off buying poorly performing mutual funds. So in a nutshell, that's my message. So let me now just. Well, I'll give you one more example. By the way, I kind of like this example. I want to talk about Jim Cramer and Alan Greenspan because they're two really favorite subjects of mine. Alan Greenspan, I mean, call me crazy, I could not understand a word that the guy said. I did not understand why when people talk about financial subjects generally they speak in this peculiar elliptical way that nobody. What, what is. Are you saying you have confidence or you don't have confidence in the economy? I could never understand this. He was a master at doublespeak. So he would give a talk. The markets of course, would be hanging on his every word. And depending on who you are, you could interpret what he said positively negatively or that it was just gibberish, which was my own interpretation. So Alan Greenspan, presumably he was the head of the Federal Reserve Board. Who knows more about the markets than Alan Greenspan? Presumably no one. So in 1996 he gives a speech and wherever he speaks, I mean he could speak before like a dog kennel, there'd be reporters who would be reported everywhere. Gives a speech in Washington before a press club. Here's what he says. I believe there is a irrational exuberance in the market translated into normal language. I think stocks are too high and I think people are getting carried away. A huge sell off ensues that day. So what happens over the next three years? Greatest bull market we've ever seen in equities. And that's what happened over the next three years. So people who listen, I mean Alan Greenspan, smart guy, people who listen to him, he knows more than anybody he couldn't call the direction of the markets. What are the chance of your broker being able to call the direction of the markets? So last week I go on Fox and Friends. Why do they have me on? Because the markets are volatile. Markets lost 250 points one day, 125 the next day. And the morning talk shows are filled with talking heads like me. And I get questions like this, Dan, what's happening in the markets? What should investors do? They're nervous, they don't know what to do. They need guidance. What do you think? Like I know. And I said, okay, well let me break some news. The markets are not volatile Markets are very predictable over the long term. How do I know this? I look at history over the long term. The global markets always go up. Take a look at 2001, right? September with greatest tragedy I think this country's ever suffered. Dow Jones goes down to 9,000. What happens between 2001 and today? An unmitigated disaster of economic, foreign and political news that I cannot even remember in recent history. We're in a war that could not be going worse. Our deficits are at all time record highs. Oil has tripled in prices headed towards $100 a barrel. It's currently pushing 80. The housing market is in the pits. Nobody knows when it's going to recover. What happened to the Dow Jones Industrial average? It brushed 14,000. So all we know is we have a very resilient economy. The markets will always go up. So you always want to participate in the markets, but you can't start picking which part of the markets you want to participate in in. That's why you need a globally diversified portfolio. Okay, let's talk about Jim Cramer. I've never met Jim Cramer. I think I am going to meet him soon. But here's my take, because I'm asked a lot about, well, what about Jim Cramer? The good news about Jim Cramer, I think is he's gotten a lot of people talking about the markets and finance, particularly young people. And I think that's a good thing because when I was a young person, nobody ever talked to me about investing. I wish somebody had come up when I was your age and said, this is the way to invest. I mean, this would have been a wonderful thing for me because my portfolio would have been entirely different. So to the extent Jim Cramer has stimulated discussion, I think it's a good thing. Here's the bad news. Does it really take this kind of hyperkinetic personality, sticking knives in ducks, blowing whistles and yelling booyah. Is that related in some way to intelligent investing? And as he marches around screaming and yelling and blowing whistles and buzzers and whatever, does this actually communicate to people an intelligent message about how to invest? So I went and looked at the data. How does Jim Cramer do with his stock picks? How hard can it be? He's on television. He recommends stuff. He has opinions on every stock. 47% less than a coin toss. Based on all the available data I've looked at, Jim Cramer is right 47% of the time. What does this tell us? I mean, he's a very smart guy. By the way, how did he make his money? Hedge funds if you want to make a lot of money, apparently the way to do it is form a hedge fund. Get a lot of assets under management, and given the fee structure of hedge funds, 2%, whether you win or lose, up to 50% of the profits, you only need a couple of good years. So let me end with a little discussion of hedge funds because hedge funds really make my point. So here's what's happened in the last couple of weeks. Harvard University, these are certainly smart people. They have a guy who runs their endowment, billions of dollars. He says to his boss, I want to leave and form a hedge fund. They say, great idea, here's $350 million of our money that will help you get started. A complete unmitigated disaster. I don't know if that fund is out of business, but the losses have been absolutely horrific. Is your broker smarter than the guys at Harvard who run tens of billions of dollars? Bear Stearns, one of America's leading financial institutions. Do you find it somewhat odd that there's all this talk about the subprime market? Is this a mystery that people are loaning money out to people who are not credit worthy and extracting high interest rates? That doesn't seem that obscure to me. Bear Stearns, amongst the smartest people on Wall street has two hedge funds. And suddenly we wake up one day and what do we find? Both are bankrupt because they over committed in this area. Is your broker smarter than these people at Bear Stearns? And if not, do you think your broker at Goldman Sachs or Merrill or Solomon Smith Barney, do you think they're smarter than their counterparts at the other firms? There's no expertise in here. All of this is, in my opinion, all of this is an elaborate ruse. We have an entire industry predicated on selling an expertise that does not exist. And you are probably the smartest people I will ever address. And if past is prologue, you will fall prey as victims to the very same people. I'm kind of a reform lawyer. In my last year of practice I represented two billionaires and a dirt farmer from rural Georgia. I'll tell you what they had in common. They all fell prey to very sophisticated brokers who were telling them they could do something that they could not do. So my message to you is don't do it. Don't use them. There's a simpler, easier way. And if you follow that way, the kind of business success that you're having will be followed by investment success. And that's your responsibility as siblings, as fathers, as mothers, as people who want to Take charge of your own financial future. You have an obligation to invest intelligently. So be a smart investor. Do what all the smart people do. Don't fall prey to any of these other people. And I'm happy to take all of your. Any questions that you may have. So, two detailed clarifications. Why is your bond recommendation US Only rather than internationally diversified? And why do you recommend having no real estate at all in that mix? Okay. Well, first, let me take the second question first, which is, why do I recommend having no real estate? I absolutely do not recommend having no real estate. The Vanguard Total Markets Fund benchmarks, the Wilshire 5000. The Wilshire 5000 includes every segment of domestic stocks. That includes REITs, other real estate holdings. It includes commodities. It includes every segment. My entire point is you want to own everything. And as to your second question, we recommend. And all the literature, by the way, very little of this is original thinking. I mean, I was as surprised as anybody when my book did so well. I didn't have a single creative thought in that book. I mean, I'm very candid about saying that. All I did was take existing research and distill it in a way that normal people could understand. And because of the currency problems with foreign bonds, that's why we recommend that people who are Americans hold domestic bonds because we have no way to deal with the foreign currency problems. Yes, sir.

So I have several questions.

Yes.

If I may.

Sure.

So just to chain on Alex's question, when you say, when you recommend American stocks and then 30% in international exposure.

Yes.

So what would a fund manager in Europe do? I mean, Europe is an economy today of the size of the United States. So would they be right in doing 70% of European stocks and 30% of sort of Americanism.

Can we stop with that? Because I can only remember one question at a time. Okay. I wrote a Canadian edition of my book called smartest investment book you'll ever read. Canadian edition, cleverly, cleverly entitled. So we had to then confront this issue, what should Canadians do? And it turns out that Canada is approximately 2% of the world's GNP. And we had the PhDs I worked with, we had them run all their calculations. They said, well, then Canadians should be exposed 10% to the Canadian economy, the balance to the world's economy. I'm not actually sure what that algorithm was that got them from 2% to 10%. The problem with people who live outside the United States and people, frankly, live in the United States, we're comfortable with what we know. So Canadians tend to invest 90% in Canadian companies because they sell see them as they drive down. So the answer is you would take the GNP of the country where you live and you would extrapolate from that and that would be your exposure to those markets.

So you didn't also comment at all when you say domestic stocks. I mean those companies, in a lot of examples, they actually invest outside.

Correct.

So are you, I mean is this calculated into the international exposure? And then just to finish, because I want to give my colleagues as well time. So what about ETFs? I mean, and for example, simple strategies as diversifying your ETFs with an asset allocation that matches yours. But then maybe from time to time when you see this market exuberance, doing a simple right call on the etf, you know, like a short term right call to sort of go and maximize a little bit the return. I mean that's very.

Okay, let me, let me take the first question first. It is a rare American company that doesn't have some international exposure. So we kind of factor that in and say, well, if you don't want to use an advisor, the best we can do is give you the Wilshire 5000 and the 30% and is supposed to take into consideration that we understand that some of these domestic companies also have international exposure. Now if you use a passive investment advisor, there is a company called Dimensional Funds Advisors in Santa Monica, California where a lot of the smart money invests. I have an obvious conflict in self interest, so I don't like to talk about it a lot. But that is a company that slices the market differently. So still passive. But it has different levels of funds in particularly the riskier asset classes in Europe, emerging markets, small value. And you can nuance a portfolio in a different way to take into consideration what you're talking about. Unfortunately, the big fund families have not gone that route. So this is the best we can do. But for most people this is perfectly adequate ETFs. Really. ETF is a two part question. If you live in this country, you have access to wonderful low cost index funds. There is no reason to use ETFs if you're a resident of this country. Why? Because of a number of technical problems. First, you have to open up a brokerage account. Second, you're charged commissions. Third, there's a bid ask spread that is kind of a built in cost that is difficult to quantify, particularly for the emerging markets small value ETFs. Fourth, there have been some tracking problems noted in the literature. They don't seem to track the benchmarks as well as the low cost index funds in Canada. Interestingly, in Canada they don't have a low cost index fund funds. Index funds there cost a lot. So we had to recommend, when we did the Canadian book, we recommended people implement that using ETFs. Where you get into trouble is the second part of your question. The second part of your question is, well, because if I have ETFs, what I can do is when the markets get hot, I can do this and they can cool off and I can do. All efforts to time the market are a zero sum game. Nobody can time the markets consistently. That assumes there's a skill called market timing. There was a study done of market timing newsletters over a 10 year period. These are people that you pay a subscription so they can tell you when to get in the market, when to get out of the market. 98% of them went out of business. Market timing is not a skill that we have. You always want to be in the market. You always want to be in the market. When people say to me, look, the markets are up, they're volatile. Should I be in the market? I say, look, if you're worried about short term volatility, you deal with that with your asset allocation. Then you have more bonds in your portfolio. If you understand as this, probably the only group I ever talked to understands the concept of standard deviation which measures volatility of a portfolio. Okay. If you understand standard deviation, here's a little factoid that's very useful if you know that you can hold for a seven year period or more the difference between the riskiest portfolio, all equities in the most conservative portfolio, all bonds, starts to go like this. So for young people, as I look around, I'm seeing a lot of 20s and 30s. Your asset allocation should be mostly in equities, but should have some bonds depending obviously on your individual situation, special health concerns, divorce, other things. But we know that equities outperform bonds over the long term. So if you have a globally diversified portfolio and you know you're going to hold, you want to have, you want to load up as much on equity index funds as possible. Yes sir.

Most of the index funds or indexing strategies are based on, you know, their market weighted indexes. And lately in the last one or two years there's been a lot of talk about fundamentally weighted indexes where people talk about the same thing that you're talking about, but not using the conventional indexing. So what do you think about those?

You're talking about Jeremy Siegel's work primarily from the University of Pennsylvania. Okay, first of all, this issue of indexes is like that's a very important question. Because if you're benchmarking an index, you want to be pretty sure that that index is an accurate index. Dimensional Funds Advisors does not use the traditional indexes that Vanguard uses. They use what are called the CRSP indexes, which are developed by the University of Chicago School of. They're much more sophisticated indexes for most people. However, I believe that the standard indexes are perfectly adequate. As for the Jeremy Siegel fundamental indexing, all I can say is we don't have enough long term data. It may turn out that he's right, but so far there has not been wide acceptance in the academic community. There is a tendency, by the way, for people to make investing very complicated. And that's what I found when I did a review of the literature. If I can make it really complicated, that must mean that I'm really smart. Only I can understand this now. I'll give you all kinds of charts and graphs. Smart investing is really simple. Buy three mutual funds. Rebalance every six months to be sure that your asset allocation is not out of sync. Don't do anything else. Don't look at the markets. Don't read the Wall Street Journal. Don't watch CNBC except for entertainment. Go on with your lives. None of that stuff is going to help you make money. What I'm telling you will help you make money. Yes, back there. Hi, Dan. Thanks for coming. Sure. So a lot of my friends used to work in the finance industry back in New York and I read the book Monkey Business. That's when I started to catch on to a lot of what you're talking about. I have two questions. The first one is if everyone caught onto this and started moving towards overall total index funds, wouldn't that be a huge hit to the whole financial industry? Let's stop with that. That's a really good question, by the way. That's a question I actually get a lot the best answer to that question. If you were to go to DFAUS.com to the FAQ page, they give a really intelligent answer to that question. But let me give you my distillation of that first. Don't worry about it. It's never going to happen. Most people are going to be. There's a greed factor. There's a whole thing called behavioral finance. Why do we behave the way we behave? Is it cognitive dissonance? Why do we ignore data? Why do we run around calling our broker with cell phones. What do we do for Fred? Why do we do all those things? So people are not going to give that up. They're addicted to the chase, they love the hunt. Particularly, sorry to say, men, women are documented as better investors because they're more risk adverse. So it's not going to happen. Second, and I can't go too deep on this because I don't really understand it. My basic understanding is if the whole world indexed, that would actually create inefficiencies in the market that then could be exploited. So as we look at the current Data, more than 50% of corporate and trust money indexed, less than 10% indexed, we have a long way to go. So what was your second question? Question here? Yes, sir, thanks for coming. One question is, you've, you said that you've been capturing data for 80 years. You've had that 80 years. So that like, you know, that times you're right after 1929, market crash. So wouldn't that skew a lot of your data? It does. But what you can do is if you were to go to ifa.com, you could look at any asset allocation of any portfolio and you could look at returns that go 1 year, 3 year, 5 year, 10 year, I think 25 year, 35 year, 50 year and 80 year. I never quote 80 year data because you're right, that captures the depression years and that was before we enacted regulations that regulated the market. The securities act of 1934, the securities Exchange Act. So you should look always at the longest term data you can look at. And to me that's 50 year data. But I have one caveat. We live in a crazy world. As you know, even long term data is not necessarily predictive of the future. That's why I find it kind of personally offensive. I mean, truthfully, I do this work because I really like to save people from becoming victims of an industry that I believe is just an insidious force. I have seen the ravages of what happens to people when they lose their money. I saw what happened in the tech wreck. I saw people who were retired, who are now greeters at Walmart. I had clients who committed suicide, who had got divorces. I've seen all that happen. So every time I address a book, every time my publisher gives me sales numbers on my book, I really say to myself, this is great. If they do this, they'll never be a victim of anybody. So yeah, you can look at long term data, but just keep way in the Back of your mind, when a dirty radioactive bomb goes off in any major city in this country, all the markets all over the world are going to be shaken. It's the best data we have, but it's not necessarily predictive. And the next question, question is if the fact that like a lot of the companies today are taking themselves private. Yes. And if you want to invest in Capitalism Inc. By using index, then you're not touching, for example, the management consulting firms, you're not touching law firms and all this stuff. And this trend seems to be picking up. So what about alternative investments is your question. Right, right. Okay. So if you look at the data on alternative investments, private equity and hedge funds, here's what you find. I mean, this data is published. You find that on average, those investments underperform the basic indexes. On average. Like you look at the data for 8,000 hedge funds, how'd they do over the last, say five to 10 years? A lot of them you can't get good long term data because the average life of a hedge fund is three and a half years. But when you look at it, the average hedge fund underperformed the S&P 500 index. So I'm not tempted to do that. The way the academics say you should deal with. Precisely. Your issue is you tilt your portfolio towards the riskier asset classes, emerging markets, small value, small cap. And when you nuance your portfolio in that way, which we try to do with Vanguard, but that index funds advisors really does much better because it has access to dimensional funds advisors which permits you to nuance the portfolio, you can now take advantage. You can leverage your returns. You can actually lower your risk and increase your returns. So I don't, I'm not saying that there are no good private equity investments out there. There may be wonderful ones. I'm not saying there are no good hedge funds out there. There may be great ones. I'm saying I can't evaluate that data, so I can't recommend them. Yes, sir.

So I mean, it seems like when you're choosing countries to invest in, like you know, for the US you're saying allocate a certain amount to the US Aren't you? Essentially you're picking there as well. Assuming you could pick one country that.

Will be better than you.

Why don't you just tell people to diversify completely globally?

I do. That is my message. Diversify completely globally by Capitalism Inc. 192 countries. We don't pick countries. We don't know which country is going to outperform any other country. We just say, if you're an American, you take a look at the GNP here, 50%. We put you 70% into American based companies, 30% into all other international companies. Look at what Vanguard International Index Funds invests in. It's a broad range of international companies. So we don't pick countries for precisely that reason. I mean, we could get lucky. Look, I could come here. If you want to really make a lot of money in life, you come here and you stand up like Jim Cramer, you say, look, I think China is the place to invest. Well, I have roughly a 50% chance of being right. Or I say, by the way, I don't want to get too close. So I think you should buy Google. I think all your assets should be in Google. But you know, it's very interesting, at the end of 2006, Motley Fool, I mean, a lot of people read that. Rely on it. Motley fool came out with six predictions. Five of them were positive, like, buy this stock. Buy this stock. One was negative. That was Google. Okay, sorry. They're completely wrong. They're also wrong on three of their positive ones. You don't want to own any individual stocks. Owning individual stocks means that you are taking a lot of uncompensated risk. One stock is far more volatile than owning a number of stocks. That's why if you want to invest intelligently, you want to own index funds, the entire market. Now, look, if you have. I don't want to take everybody's fun away. Burton Malkiel said, giving this message is a lot like telling people there is no Santa Claus. Okay, I understand that. So if you want to believe it, I mean, I don't mean to trivialize this. People want to have fun with their money, and they have a small percent of their money. That's play money. Like, why is it any different than going to Vegas, really? I mean, I don't say to people, don't go to Vegas. I just say if you go to Vegas, let's not kid yourself, over the long period of time, you're going to lose. Right? But you can invest intelligently in private equity. You might pick the right hedge fund, you might pick the right country. So I don't want to take all your fun away. I'm just saying with your real money, what you want to do is invest the way I'm telling you to invest. Because that's what the data tells us. Yes.

Are you only invested in index funds yourself?

Yes. Good question. I am. I mean, how could I stand up and say to tens of thousands of people. Not only, not only am I, but my children are all my friends and family is. I mean, I just say, look, I'm not incentivized to do this. I don't make money by placing money in any index fund. I mean, if I saw data that said Nigerian oil futures were the way to invest, I'd write a book saying, well, invest in Nigerian oil futures. Like, we don't get kickbacks from Vanguard or T Rowe Price or Fidelity or Dimensional Fund Advisors for that matter. I just look at the. When I wrote this book, I just looked at all the data, read all the books. I said, what am I missing here? Why isn't this message getting credit? It is so clear. Yes, sir.

When you, you talked about rebalancing your portfolio.

Yes.

And one issue with rebalancing, let's say you have the right stock bond ratio, but within the stocks, they keep moving around. And now to rebalance, you have to actually sell. You know, sell the highs and buy the lows. But when you do the selling, you take a big tax hit.

It's always an issue. That's why we say, don't rebalance. Unless your portfolio is out of whack by more than 5%. Less your allocation is out of whack by more than 5%. Because you have to consider that you might be taking a tax hit. And in all likelihood, you are, if it's a profit. Right. But part of not market timing means you are going to be buying when other people are selling. You're going to be selling when other people are buying because you want to preserve the integrity of your asset allocation.

And Bernstein said, William Bernstein, he said that you could make an argument for if as long as your stock bond ratio is kind of in line, that you should never rebalance.

I'm not familiar. I mean, he did blurb my book. I regard him as one of the great financial gurus of our time. I would say I don't understand that particular comment. I mean, yes, if your asset allocation is intact, I wouldn't rebalance. It's only when it gets out of whack that I would rebalance. If your appropriate asset allocation view is 60, 40 and it's now 55, 45, then I would rebalance.

How about if it's 60, 40, but within the 60, it's a little bit out of whack? Would you still take that?

No, I wouldn't. If the basic asset allocation is intact, stocks versus bonds, I would leave it. I don't play within the mix.

What about Sector based allocations.

Sector based allocation means that I'm guessing about sectors. I don't have that ability rebalancing.

I mean in fixed time periods. But you like long sectors.

But the index funds I'm recommending are all sectors, so it's not a factor. They're all sectors.

International versus domestic.

Let's say.

You know, 30% international, 30% domestic and then 40% bond and now you still had.

I would look at that. Yes. I would want to be sure that. Good point. I'd want to be sure that my international versus domestic remained roughly intact. That's right. Let me just get somebody who hasn't asked a question. I just want to go over here. One comment.

If you're international, I think it also if you're on retirement, some countries have.

Limitations on how much you can actually do externally. Like in the case of Canada. Yeah, but my question is.

Short term.

So if you're planning to buy a large purchase you're saving, you don't want to have too much market exposure. Bonds. Right. One of the questions on any asset allocation questionnaire is something like this. When do you think you'll need 20% or more of the assets that you've invested? And if that answer comes out in less than two years, the way your asset allocation is going to come out is like you should be then in 80% bonds because you cannot deal with short term market volatility. What we don't want is the market goes down 200% points. You have to sell because you're going to buy a house. We don't want this. That's why it's so important to take an asset allocation questionnaire. By the way, let me say one word on 401k plans which I forgot. I'll tell you what I think is the best 401k plan in the country. It's unbelievable to me that this is true. The government, which in my view can do very little right. Has a great 401k plan. Tsp.com, thriftsavingsplan.com what is it? It has roughly $155 billion. It is the 401k plan for all the military and all government employees. It has five pre allocated portfolios that go from very conservative to all equities, all indexed. You just pick one of those portfolios depending upon what your particular asset allocation is. That's a very intelligent 401k plan. When you're doing your own 401 plan, I haven't looked deeply into yours. When you're doing it, try to get it as close to my plan as possible. You have a Vanguard 401k plan, so you may well have all of the Vanguard funds that I'm talking about. Very few Vanguard funds. Okay, that's a problem. I mean I get this all the question I get all the time. Like I have an Ask Dan thing on my webpage, like what do I do with I got 10,000 choices in my 401k, what do I do? I mean, I ask myself, so why, why is that? Well, unfortunately, fund companies make much more money putting actively managed funds in their 401ks than index funds. That's why shouldn't be. So now we have. My next book is going to be called the smartest 401k book you'll ever read. I'm actually doing a conversion chart. If you have these funds, this is as close to these possible. So that's the best I can do. I don't want to keep anybody too long. So you have to tell me when we should cut off questions. But yes, sir. Are you worried at all about the US dollar? I mean, sure, the Dow is at 14,000 but denominated in euros. It's pretty flat over the last several years. And given the really large dollar positions of China and the Arab countries in our national debt, are you worried at all of a dollar further dollar collapse? And we've already lost a ton of value against the pound, the euro and some other currencies. Well, thanks for asking that question and making it appear that my judgment on that would actually be worth something because unfortunately it is not. I mean, yes, I'm worried about, I worry all day, every day about everything, but I don't have the ability to figure out stuff like that. That's why I say you want to own the world's global economy. If you say to me, what's the where's that question really going? Where it's going is should I be buying gold, for example, because should I be hedging the risk of the American dollar Answer, Nobody knows. That's the truthful answer. But if you ask that question to most people, they will have a very strong opinion. Yes, I've looked at this. I've looked at this. Historically, those opinions tend to be very unreliable, unfortunately. So is there any conversation population growth and growth of the market population growth. And. I mean, I'm not familiar if there is, I don't know about it. But again, to the extent that the underlying assumption is, well, here's a good idea, why don't I Find a country that's growing and I'll tilt my investments towards that country because I'm going to get a better return on my investment. Generally not a good idea. No data that I'm familiar with would support that as investment theory. Yes, sir. You can invest in Google stock at stock price or index funds in Google stock at What? And the 10,000 was 100% of your assets. It's an absolute no brainer question. If you asked any financial planner what you should do under those circumstances, they would say you should have a broadly diversified portfolio of index stocks. No question.

Can we just take one more question if people have it because we are pressed for time?

Yes, sir. How do we think a good vested understanding options or restricted stock in your system? Because many of us are heavily invested in Google. To the extent that you have a large committed position in any one stock. Great company like Google, not so great company. What this means to me is that the standard deviation of your portfolio is very high. Now I need to know what should it be? And I would structure the balance of your portfolio to lower your overall standard deviation. So if somebody came to me and said, look, I'm terribly committed, I've got all this Google stock, I'd say, okay, well I'm going to put the rest of your portfolio then in bonds, then that's what I would do. Because I want your standard deviation always be under. This is why I explain standard deviations very quickly. It's a complicated calculation. You guys can understand. I really don't. Excel has a way to calculate it. You really do need an advanced degree to really calculate standard deviation. But here's what I say to everybody. If your standard deviation is greater than the standard deviation of the S&P 500, you're in too risky a portfolio. For most people in this room, your standard deviation should be around 10. I mean, that's what it should be. So somebody comes to me with that issue, I want to get their standard deviation around 10. I would do whatever it took to do that.

All right, great. Thank you everyone for coming.

Thank you. Thank you very much.