May 20, 2021

Bogleheads® Chapter Series – Allan Roth

Allan Roth presents a Q&A session for those in the "Starting out" life stage.

Hosted by the San Antonio Bogleheads chapter. Recorded on May 20, 2021.

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Bogleheads® Chapter Series – Allan Roth


Presentation host: Welcome to the Bogleheads Chapter Series. This episode was jointly hosted by the San Antonio Bogleheads and the Starting Out Life Stages Chapter and recorded May 20, 2021. It features Allan Roth, who's also a board member of The Bogle Center for Financial Literacy. Bogleheads are investors who follow John Bogle's investing philosophy for attaining financial independence This recording is for informational purposes only and should not be construed as investment advice and we are now recording.

Thank you Allan for joining us. A  quick introduction of Alan Roth. He is the board member and treasurer of The Bogle Center for Financial Literacy. He's the founder of Wealth Logic. He's a certified financial accountant, a certified financial planner, and has his master's in business administration. He was a corporate finance director for multi-billion dollar companies and author of the book How  a Second Grader Beats Wall Street. He's a big advocate for keeping it simple, and my favorite, he has the professional goal to never be confused with Jim Cramer. I always chuckled at that one. So yeah thanks. Thanks for joining us 

Allan Roth: My pleasure and thank you guys. You're the ones that do so much work to help so many people across the world and thank you. 

Presentation host: Thank you. So the first question is in regards to the Bogle Center. So what are the goals of the Bogle Center for Financial Literacy and what can we expect to see going forward from that organization.

Allan Roth: Well the pandemic obviously changed things a whole lot with conferences and the like, but we've been spending a lot of time on mission, vision, values, goals etc. And what we want to do is first of all, more support to the chapters. And I think Gail is doing an amazing job, spending an amazing amount of time on this. 

The conference, we want to get back into having in-person conferences again. It's not going to happen this year but it will happen next year and we are going to do more virtual conferences, the Speaker Series etc. We would-- it's kind of a lofty goal --we want to develop some tools to help people in different modes of decision relating to the life cycle, spending, saving etc. And then finally, just so we can get the word out. More media exposure. So those are kind of the high level, lofty goals that we would like to do more of .

Presentation host: Great. All right, Bart has the next questions. Thank you again Alan for joining us tonight. 

Bart: John Bogle principles brought us together this evening, so we appreciate that. So our question is what do you consider the basic principles of Boglehead investing?

Allan Roth: Well first of all, I mean John Bogle changed my life. I didn't realize how common this was but I sent him a letter once saying I'd love to meet you, and a week later got a letter back: I'm coming to Colorado in a few weeks. Let's get together. So he has just been an amazing man and mentor. Meeting him was kind of like meeting my favorite rock star, president etc. But if I had to say what he taught me about investing, and these are my words--you know, investing in eight words--minimizing expenses and emotions, maximizing diversification, and discipline. It's that simple. When people violate that they usually do so with their own peril.

So it really is that simple and it was very easy by the way, when my son was eight because money didn't mean anything to him. You know the older we get the more money means to us and the harder it is to behave,right. But Jack Bogle I consider him a multi-billion dollar man, and how much he saved people, not just at Vanguard but that other firms that had to copy Vanguard to stay competitive.

Bart: Okay, thank you. In some of your writing we've noticed that you've been highly critical with investment advertisers. Can you tell us a little bit about that, how your critical stance on investment advertising, in general?

Allan Roth: Well you know we were kind of joking before this started. I was going to sell an annuity at the end where we will give out the chicken dinners and the like. But the more one spends on advertising, the higher the fees they have to charge. And if you think about it, advertising is all about emotions, it is all about wanting to get a better value than just the market etc. So for the most part advertising--you know even I'm very critical of the CFP board and I am a CFP [Certified Financial Planner]--the amount of advertising they're doing versus the opposite strategy of Jack Bogle. Jack Bogle wanted to do the right thing, and people would come. A lot of other firms and the CFP board, in my opinion, are doing the advertising and saying, hey once we get more people or more money then we'll lower fees and do things differently. 

And then that's kind of like the 12b-1 fee model that failed miserably. So I mean investing should be boring, it really should, and that would make a really lousy ad.

Bart: Thank you, great. And Royce has our next questions.

Royce: Hi Allan. So my first question is a multi-part one. So before we officially started the meeting Miriam had mentioned your books, how you describe the second grader portfolio. Can you describe what that portfolio is and how someone goes about getting a proper stock bond allocation? And then also, is that different in different life stages? Or for example, you mentioned your son’s-- that's an authentication you know-- and has that changed since you wrote the book?

Allan Roth: Sure. Well I mean the basic--you know Taylor, great minds think alike.--so the basic second grader portfolio is Taylor's Three Fund Portfolio. It  is a total US and a total international stock index fund. With just those two, you own over 10,000 companies across the planet. And then a total bond index fund where you own all investment grade taxable fixed rate bonds. So it is pretty much that simple. When my son was eight we had him at 90 percent stocks. He's gotten a little bit more conservative now he's 23, living out on his own in Madison, Wisconsin. And he's starting to think about maybe someday buying a house and such ,so he wants to take a little risk off the table. 

I'm not a believer in setting asset allocation. There's a couple of 100 minus your age, I don't believe in that. There's a risk profile questionnaire and Jason's wife is one of the three people I blame the most for getting me into writing. He and I have a disagreement. He says those risk profile questionnaires are worthless and I say, Jason you're wrong, they're not that good they're actually dangerous if you think about it. 

And you know March 19th of last year when stocks hit an all-time high, we thought we could take a lot of risk. And suddenly 33 days later when the market fell 35%, our risk tolerance was very different. But the biggest factor is our need to take risk. As Bill Bernstein puts it so eloquently, “when you've won the game quit playing”’.

So you could be very young and not have to take much risk. You could be very old and need to take some risk. So there's not a cookie cutter formula.

And I used to say if you can't be right at least be consistent. But now I think consistency is even more important. you know changing that asset allocation, moving in and out. I've seen people time the market poorly far more often, probably 99 to 1 timing things poorly, because our emotions fail us when it comes to investing. 

So I don't have a cookie cutter sort of answer. It's not 100 minus your age; it's not take this risk profile questionnaire. And again, somebody young that might want to be saving up for a house they want to buy in a couple of years but they want to have some safer money. So it's not that simple, setting the asset allocation, but consistency, consistency, consistency.

Royce: Thanks. And you know in today's market, obviously, the markets change a little bit, and today we have low interest rates. And so more people are thinking, oh let me add more, go higher on my equities. And so what are your thoughts about bonds in a portfolio at the present time? 

Allan Roth: I totally disagree. My wife calls me the most argumentative person on the planet, and I prove her right daily. So I was once young. So when I graduated college I was 22 years old, and I could get, I think it was 12% on a CD. Now I tell that to clients and people, and they smile. And I say, those actually weren't such good days. Because, if you think about it, you invest a hundred thousand you got twelve thousand interest. A third of it went to taxes, so you're left with about eight thousand and inflation was thirteen, fourteen percent, so you lost a lot more of your spending power than you're losing today. So I change absolutely nothing when it comes to fixed income. The purpose of fixed income, in my opinion, has never been income. It's been the shock absorber, the stable portion of one's portfolio.

And I'm very much a believer, whether it's one of the alternative second grader strategies we were to use CDs, and I especially like CDs that have easy early withdrawal penalties because if rates do rise you don't suffer the loss that a bond fund would have. But always, always, always keep credit quality high when it comes to fixed income. Don't get greedy. don't try to--you know, even a corporate bond fund, in my opinion, if you look at what happened in March of last year. Liquidity dried up, and yes the government stepped in and started buying both the corporate bonds and muni bonds, which shocked me by the way. But there's no guarantee that they're going to do it next time--so trying to earn an extra you know 0.35 percent and risking that money in my opinion is not worth it.

Royce: Great. Thanks Allan. The next couple of questions will be coming from Donna.

Donna: Hello Allan, thank you for being here tonight. I have a question about asset allocation. Do you think that cryptocurrency can play a role in a diversified portfolio, and if so how? I actually just wrote about it for AARP yesterday and people are kind of shocked. Rick Ferri’s made fun of me in the bogleheads meeting  that I own bitcoin.

Yes in 2017, I  wrote about it and I knew nothing about bitcoin then. And I wanted to make sure that what I was writing was accurate. How do you go out and buy it? So I bought a lousy hundred dollars worth of bitcoin, which even with the pullback is still about a 10 times,  a thousand percent return. So I actually walked away with a little bit more respect for bitcoin than I thought when I wrote that 2017 article. 

Because number one it really does disintermediate a banking system. I mean people can transact with bitcoin avoiding the bank. When I buy something on Amazon, which you know is one of the two largest retailers in the country, I get two percent cash back. So you know that Amazon is paying more than two percent. So to disintermediate, that I think is a wonderful thing.

And finally, I love the fact that there's only a finite amount of bitcoin out there, that's not true for all cryptocurrencies. Now I certainly wouldn't tell anyone to even dream about putting more than two percent of their net worth in any cryptocurrency, and I think the odds are in five or ten years it's going to be worth a lot less than it is today. But I could be totally wrong, and I am quite worried by the way, with all the amount of money that we're printing, the fiscal and monetary policy but that doesn't necessarily--Japan's been doing that for three decades and fighting deflation. I also wouldn't extrapolate one country's experience to what's going to happen here so I am quite worried and crypto is kind of the digital version of gold. Well it's been quite volatile lately. 

Allan Roth: Oh yes, [Laughter] yeah, it makes gold or a precious metals and mining fund  is pretty volatile, but that even looks boring compared to crypto and bitcoin. You know one tweet from Elon Musk and things change, right. 

Donna: One more. Is there a difference between the S&P 500 index fund and the Total Stock Market Index Fund and do you prefer one over the other? 

Allan Roth: Yeah there is a difference, and I actually wrote a piece many years ago, the case against the S&P 500 index fund and Kevin Laughlin, who was Jack Bogle's, I  like to call him chief operating officer, rather than assistant, and by the way could he pick some great COs, I knew Kevin Laughlin very well and Mike Nolan very well, and they're just amazing people. But what I was writing. The case against the S&P 500 index fund is that it doesn't own the other several thousand companies, the few thousand companies that only make up 20%, but owning everything is better. And what I wrote was not only do you have more diversification, but whenever a company is admitted into the S&P 500, the stock typically goes up in after hours trading because people know that all the S&P 500 index funds have to buy it.

And then I think this was fairly amazing. If you look at what did better last year, a small cap index fund, a mid cap index fund, an S&P 500 index fund, which is large cap, or a total stock index fund, one would think that one of the first three had to do better than the total. But actually the total beat all three by almost a couple of percentage points.

Anyone know why one company, Tesla, wasn't in a small cap, in a mid cap, and it didn't get admitted to the S&P 500 until December 21st, almost the end of the year? Owning everything is better, and of course who brought us the total stock index fund, Jack Bogle. And of course, in the note that he wrote me, said of course you're right, but the overall performance is pretty similar. and it's true it is pretty similar.

So I'm not one of those that believe in putting everything in small cap, putting everything in value or small cap value, but I don't want to ignore it either. So the S&P 500 is going to miss out on small and mid cap.

Lucas: Thank you, great thanks Allan. A couple other questions that we received from the Bogleheads. What is a safe spot for people to put large amounts of cash that they do not want to take investing risks with?

Allan Roth: I don't have a good answer. There's this general belief that cash is a riskless asset. But if you think about it, you know cash is going to be eaten up by inflation year, after year, after year, especially if you're young and have many, many years. There's this old saying that I don't know if it's true and I’m not going to find out ,but they say if you drop a frog into a pot of boiling water it jumps right out, but if you put it in nice cool room temperature water and slowly heat it up it burns, today it boils to death. Like I said ,I don't know if it's true, and no, I have not done that,

But when stocks plunge, oh that cash feels warm and cozy. But you know Lucas, just think if you leave it in cash earning 0.01 percent in the Vanguard Treasury Money Market Fund,  just think what that purchasing power is going to buy in 30 or 40 years, right.

The one exception might be if you're a federal employee and have access to the Thrift Savings Plan, and in particular the G fund, which gives you a bond return without any risk of principal .You know, that's a wonderful thing. I've joked on Federal News Radio will somebody hire me, pay me one dollar, and give me enough time to move my IRA money into the Thrift Savings Plan. Then you can fire me. It's that good.

Lucas: Great. Let’s see, the next question. For the typical accumulator, say someone aged 20 to 45, with all, or mostly all of their assets in tax advantaged accounts what do you think will work best the second grader portfolio or low-cost target date fund from Vanguard?

Allan Roth: Well if all of the assets are in tax deferred I think something like a low-cost Vanguard target date retirement fund is fine. In fact the target date funds used to have just the three funds in there. Now they've added international bonds and a couple offer TIPs and the like. But I think it's just fine for somebody to have a low-cost target date retirement fund if they have all their assets and their tax deferred. I'm a believer in locating the assets so, for example, if you look just at my IRA and 401-k account you say, “Wow! not my traditional, not Roth.” You'd say. “Roth is a weenie. He doesn't believe in stocks, He's all in fixed income.” If you look just at my taxable accounts, you'd say, “Wow, Roth is a big risk taker, he's very heavily in stocks.”

So what I'm trying to do is locate the assets with more tax efficiency, which isn't important if you have everything in a traditional tax-deferred IRA or 401-k. However if you have a Roth IRA that's a different matter. You'd rather put the stocks in the Roth portion of that tax advantaged account as long as it's low cost. 

It's fine, and you know the target date funds harness what I think is the most powerful force in the universe, inertia. Because in my book I said that Albert Einstein called the power of compounding the most powerful force in the universe. And Jason's wife told me that there's no way to know for sure, but that probably isn't true.

Royce: So given the variables ,such as generous employer contributions or the ability of the employee to maximize contributions, that may influence the decision-making process. How should an individual decide between traditional and Roth 401k contribution options?

 Allan Roth: (Jokingly) Yeah, well I invented the Roth you know. I think you know it. The reason to have a Roth, a traditional, and taxable money, in my opinion is diversification from what congress may ultimately do with tax laws. So I'm a believer in all three. Now with that said, somebody who's starting out in a lower tax bracket, there I tend to recommend the Roth. Now any employer contribution is going to go into a traditional, but if your tax rate is low I'd consider--- you know as as my son is starting to invest in a Roth--because later on his income will probably go up, I think tax rates will go up.

And I'm using logic, and we're talking politics, and I don't know why I keep making that mistake, since logic and politics have little in common. So I'm a believer overall in having different tax wrappers, and that includes the Roth, the traditional, and the taxable. Now the Roth is my smallest tax wrapper because it's the newest.. Did that answer your question?

Royce: Yes. So my second question is with the many financial tools we have out there on the web and elsewhere, what tools do you typically recommend that accumulators use to determine how much to save and when they're able to retire? 

Allan Roth: Yeah, you know I've used a zillion different tools and Monte Carlo simulations. I even wrote one for Jack Bogle obviously many, many years ago. I think most of the online tools and such, especially the ones coming from the financial institutions, are in la la land. That they make certain assumptions on returns and you know the Monte Carlo model itself can be brilliant but you put garbage assumptions in, and guess what, you get garbage assumptions out so I think a much simpler and better way to do it is think of wealth in terms of years instead of dollars. So, in other words, if you need fifty thousand dollars a year to live on and you have two hundred thousand dollars you have four years worth of living expenses, for four years worth of financial freedom, and that I think is a better framework. 

Maybe you can assume that it might grow after taxes and inflation depending upon the allocation, at one or two percent a year but in my opinion that's a much better way of framing it and thinking about the things and boy can those fees and taxes take from those returns but again I think of wealth in terms of number of years of financial freedom rather than dollars. So somebody with a million dollars that needs fifty thousand dollars a year to live on has 20 years of financial freedom. Somebody with 10 million dollars that has five million dollars that they need to be happy they're pretty poor.

And you can get rich quick by really living frugally. Because by changing that denominator and try to figure out what makes you happy and what doesn't. And with all the mistakes I've made in my life I should be brilliant. I still remember as a kid thinking that if I went to the movie that would be over in two hours. But if I bought something with it, like a model airplane, I’d have it forever and ever. And boy did I have it wrong. Jonathan Clements taught me that it's experiences that bring happiness, not stuff.

Bart: Most of us Bogleheads have done a pretty good job of saving, but as we get closer to retirement, what types of spending and withdrawal strategies should we be taking a look at?

Allan Roth: Yeah I've always said that investing is simple. I never said taxes were. So there is no cookie cutter. You always spend down the taxable money first, tax deferred, in general the Roth is the last money you'd want to spend. That's your most valuable money under current tax law. Of course but there are many times, by the way, that especially if you have delayed Social Security, you haven't hit the RMD [Required Minimum Distributions], you might want to take money out of the tax deferred account and use up that 12% marginal tax rate. Or take some of it and convert it to a Roth .And then finally you might not want to do any of those because you might be at the zero percent federal long-term capital gains rate.

So you might want to harvest, as Mike Piper eloquently puts it, tax gain harvesting. You can--by the way you don't have to wait 31 days, you could sell VTI or VTSAX and then buy it back immediately-- and recognize that gain at a zero percent federal tax rate. And for those of you in Texas I say, with envy in my eyes, you have a zero percent state tax rate. Donna, is that why you moved?

Donna: Yes it was part of the reason, yes.

Allan Roth Okay. There are various strategies on the withdrawal. I would never let that, I shouldn't say never, but generally speaking you don't want to let that 12% marginal tax rate, federal tax rate go to waste. I think the odds are, I reserve the right to be wrong yet again ,that tax rates aren't going to go any lower than that.

Bart: And speaking of Social Security and stuff that's usually pretty complicated, how do you feel about the rule of thumb about postponing Social Security until you're 70 years old?

Allan Roth: Certainly number one, the best resource by far is Mike Piper's I mean I hate Mike because he's a lot smarter than me and is a whole lot nicer than me. He gives it away, but it is absolutely brilliant. I mean I can't describe some of the things in that model. LIke an insurance company, every other calculator assumes that I'm 63 years old, I'm going to die in exactly 23 years, whatever. But he's using actuarial tables and probabilities. 

So the answer to your question is the only reason, well obviously if you don't have the money and you're going to live under a bridge, yes I  would take the money at 62 in that case, but  if we're talking about a couple, the person with the highest benefit should almost always wait till age 70. The only exception would be if both parties in the couple were in horrible health and had a very, very short life expectancy. But even if one was in horrible health and the other was healthy you would wait till age 70. 

And it goes against our emotions because our emotions tell us I've been paying this FICA tax for decades, I want to get my money now. So the emotions say to take it immediately. And when it comes to investing, in finance, our emotions typically fail us. If something feels good it's usually bad. If something feels bad it's usually good. So yes, I totally agree, wait till age 70 for the higher benefit of the couple, or if you're a single person in good health wait till age 70.

Obviously if you have other assets elsewhere, I tell people to go ahead. You know, Bart, let's say you had a two thousand dollar a month benefit but if you waited five more years it would grow significantly. I'd say go ahead and spend that two thousand dollars today, because what you're really doing is buying an inflation protected deferred annuity. You used to be able to buy those on the open market. You can't anymore, but when I priced it, it was like buying it at about a 45% discount over what you could buy from an insurance company. Guess what? That insurance company is not backed by the US government.

Donna: Well adding to the Social Security question and Mike Piper's calculator in particular.  He uses the present value calculation and I was just wondering if you had a recommendation for what interest rate should be used when we're doing the present value calculations for social security or for annuities to evaluate them.

Allan Roth: Yeah. Well what Mike uses is a real discount rate, and that is absolutely the thing to do. When I do a private pension analysis for somebody, then I use a nominal rate and that rate can vary. If the pension is from the federal government I use a lower discount rate than if it's a private company, especially if the pension is above the Pension Benefit Guaranty Corp. limit,  or isn't backed by the Pension Benefit Guaranty Corp. So I use rates, a very,very long term bond interest rate in doing the discounting and then I actually, for conservatism, raise it just a little bit because unlike a bond you can't trade it. Once you've made that decision to take the pension you can't diversify it and you can't then change your mind.

Donna: New topic. Given the change of administration in the White House has that changed any of your thoughts on long-term financial planning, perhaps policy in particular?

Allan Roth: Yeah, first of all in investing not a bit. I've written pieces about people that lost money, a lot of money, making a costly bet against Obama. People that lost a lot of money making a costly bet against Trump. So when it comes to investing you have to know something the market doesn't already know.  When it comes to policy you know all we're hearing about changing the estate exemption, changes in the long-term capital gains rate, step-up basis. And most of these are for the very, very wealthy, the upper one percent. 

But I've seen more people make mistakes trying to predict what politicians are going to do. Creating irrevocable trusts so the kids lose out on the step-up basis etc. Thinking that the exemption was going to be a million dollars and  they've created an expensive infrastructure that they didn't need.

I've spoken to Mike Piper a lot about this. Trying to make changes based upon what we think is going to happen is a hard thing to do. The only thing that I was sure of, I forgot what year it was,that  the estate tax exemption became unlimited. I was absolutely sure congress was not going to let that happen,but yet they did. So trying to predict politicians is a very difficult thing to do.

Sure, and neither party wants to work together these days. I wish they could do something to solve our health care, where we spend more than twice per capita of any other country on health care with the shortest life expectancy of any developed country.

Donna: Great, thank you Alan. So that concludes the questions from the San Antonio Bogleheads Chapter. Next up we'll have a few questions from the Starting Out Life Stage, and those will be asked by Miriam. So thank you, Alan.

Miriam: These are for people who are kids, young people who are starting out in their investing career, or investors of any age who are late starters and realize they have to get going. My first question is when young people get their first job they often receive a big glossy 401k pamphlet. It has dozens of mutual funds. It has columns with 30-day returns, five-year returns, ten-year returns, percent. What should they do with all that information? How can they assess that information when all they really want to do is select something and move on with their life. And their HR department, the human resources department, cannot help them. They don't really know anything about the funds or a portfolio

Allan Roth: Good question. There's a whole lot of research that shows that when a company has dozens of funds in their 401-k,that a large portion of the participants are going to throw up their hands and just say, I'll put it in cash, which is that frog boiling. So they are getting better. There's a lot of default options now where if you don't pick anything it will automatically go to a life cycle fund, a target date retirement fund, based on your age. Which I think is a wonderful thing as long as it's a low cost sort of plan.

I think it was about seven, eight years ago that a Supreme Court ruling showed that fiduciaries, the trustees of corporate 401-k plans, had a fiduciary duty to offer low-cost good investments. So the 401-ks have gotten so much better over the period of time, offering low-cost sorts of things. So I would tell people just starting out to probably look for a low-cost target date retirement fund. If they have that pick, ignore the rest of the stuff. Make sure that the expense ratio is low. 

Miriam: Thank you. My next question is what is your advice for young investors who are so tempted to make more money and jump into Gamestop and Robinhood adventures.

Allan Roth: I would tell them to try to get their excitement from someplace else other than investing. And it's hard because you hear stories about how much your friend made in bitcoin. How much your other friend made and in Gamestop and the like. And some of those may be true. Most of them probably aren't, or they're not talking about where they lost money etc. 

But yeah, I would tell them to try to avoid that. Get their excitement elsewhere. Like I said, excitement has its place, but not in investing. Investing needs to be boring.

Miriam: Thank you, 

Allan Roth: And you know this is coming from a guy who I knew. I was going to get rich quick when I was 22 years old and put money in gold, which over what, 30 some odd years, has barely kept up with inflation. So I doubled my six thousand dollars. Had I heard of Jack Bogle and his S&P 500 index fund, instead of making six thousand, any guess how much money I would have made? Over a million? Very close to a million, about seven hundred thousand.

Like I said, I ought to be brilliant with as many mistakes as I've made. So yeah  there's always going to be a bitcoin, a Gamestop, a gold. And I would try to avoid those things. Except for maybe a fun little gambling portfolio. That's fine, to carve out a little bit of money to have fun with.

Miriam: Regarding the issue of paying off student loans versus using the money to invest in your retirement accounts. What are the factors you believe are important to consider? And what is your opinion about this, how would you make that decision? How would you advise young people to make that decision?

Allan Roth:  Well I guess the first thing I would say is never ever, ever miss out on an employer match. That's free money. So do I like paying off debt, absolutely. But never miss out on that free money.  The one exception might be if you don't plan to stay at the job long enough for the employer match to become vested. So that's free money never miss out on that.

Depending upon your tax situation, that debt may or may not be tax deductible. But I consider all debt the universe of a bond, because a bond you're lending. A Vanguard Total Bond Fund, you're lending money to  the US government, you're lending money to corporations etc. They're paying you principal and interest. Debt, whether it's the mortgage, car student loan is just the opposite. So to the extent that you can earn greater than a bond return by paying down debt you should go ahead and do that.

So depending on how expensive the debt is, whether or not they're getting a tax deduction and whether or not they've contributed enough to their 401k to get the employer match.

Miriam: My next question. Is there any real value, or should a young investor seriously consider tilting their portfolio to value funds and in particular small cap value since they do have a longer investing lifetime ahead of them? 

Allan Roth: In my opinion, no. You know some people experimented with drugs when they were younger. I experimented with DFA, and I think DFA is an amazingly good fund family, Dimensional Fund Advisors. But one reason I think they are so good, Fama and French, who really popularized the small cap value tilted portfolio and Dimensional Fund Advisors, never said it was a free lunch. They said it was compensation for taking on more risk. And I also found that the DFA funds were far less tax efficient.

So on one hand I don't believe in ignoring small cap. I don't believe in ignoring value. But I also don't believe in overweighting it. And if you think of the second grade math, or as Jack Bogle would say, the humble rules of arithmetic, I think that was his phrase, you know if one part of the market does better, another part of the market has to underperform. And lately it has been in a small cap value, until just recently and we don't know how far that's going to continue.

But the fees are forever, and I'm seeing more and more tilted portfolios mixed with alternative asset classes and the like that  are worse than, in my opinion, a lower cost Dodge and Cox, or even American Funds, you know,active.

So I believe that, for instance, if somebody picked a 60 /40 DFA  portfolio with a small cap value tilt, that might be equivalent to a 65/35 market cap weighted Vanguard type of portfolio and you'd have lower costs and more tax efficiency. It's a viable active strategy and if you do it you've got to stick with it, in my opinion. Moving back and forth, there's a recipe to do worse than both. 

Well when young people look at those graphs and they see that, when I look at those graphs and I see small cap value just down at the bottom of the graph for a long period of time, for years at a time, you wonder, well when is it going to make me money. You know you  want to earn some, have a return, and if it's not going to do it. And then 10 years later you get out of it. Yeah, well I mean there's going to be reversion to the mean. It's not always going to underperform, it's not always going to outperform.

And you know all I could say is-- it was about seven years ago-- every conference I was at seemed like every 30, 60 seconds I was hearing factor tilting, smart beta, small cap value etc. And I think that was a warning sign. And by the way I told you I'm not nearly as nice as Mike Piper. If I knew how to beat the market the last thing I would do is tell you guys, or write about it. I would be rich.

Because even if that small cap value tilt, and I think there is some logic to it, but the more that it's known the less likely it is to work going forward. So I'm not going to small cap value tilt, I'm not going to go with what's her name, Kathy Wood, didn't do the large cap growth bet either. So I'm going to get hit by people on both sides about how stupid I am. Great, I embrace dumb beta.

Miriam: Thanks for those responses. At this time I will be stopping the recording so thank you.


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{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}