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Bogleheads® Live: Episode 1

Post on: April 23, 2022 by Rick Ferri

In this episode, Rick Ferri, CFA introduces the Bogleheads®, discusses the importance of spreading the word of low-cost investing, how to get involved with the Bogleheads®, fields audience questions on investing, and more.

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Transcript

Bogleheads Live Episode 01: Introducing the Bogleheads®

Jon: Hello, I'm Jon Luskin, your host for Bogleheads® Live where Bogleheads® get their questions answered by subject matter experts, live! Thanks for checking out the first episode. To listen to future episodes of Bogleheads® Live as they happen, with a chance to ask your questions to the show's guests, check out the Bogleheads® on Twitter to learn about upcoming dates, times, guests, and topics for future episodes. On Twitter it's @Bogleheads.

Before we get started nerding out on investing, a disclaimer. This is for informational and entertainment purposes only, and should not be relied upon as a basis for investment tax or other financial planning decisions. The John C Bogle Center for Financial Literacy is a 501(c)3 nonprofit organization. At Boglecenter.net, your tax-deductible contributions are greatly appreciated. And with that, please enjoy the first episode of Bogleheads® Live.

Hello, everyone. Thank you for joining us today for our inaugural episode of the Bogleheads® Twitter Space on investing. My name is Jon Luskin and I'm the host of today's space. My co-host this week is Rick Ferri who for Bogleheads® needs, no introduction. Rick publishes and speaks on investing and is the host of the Bogleheads® on Investing podcast.

For today's Twitter space, we'll be introducing the Bogleheads®, listing the resources available to self-proclaimed Bogleheads®. And after that, we'll open it up to Q and A. But first let's start with what is a Boglehead®: the Bogleheads®investment philosophy page. On the Bogleheads® Wiki says the Bogleheads follow a small number of simple investment principles that have been shown over time to produce risk-adjusted returns far greater than those achieved by the average investor.

It goes on, “these principles are easy to understand and implement and they work. In fact, the basis of all those principles is the idea that successful investing is not complicated and can be accomplished by anyone with a small amount of effort.”

  Let's talk about who the Bogleheads® are, it's a community, inspired by: the late John C Bogle who passed in 2019. He was the founder and former chief executive of the Vanguard Group and is credited with creating the first index fund. “Jack,” as we know him, preached investment over-speculation, long-term patience over short-term action and reducing broker fees as much as possible.

To give you guys a little bit of history: the Bogleheads® community started in 1998, when Taylor Larimore, a WW2 veteran who fought at the infamous Battle of the Bulge and a follower of Jack Bogle started a forum on Morningstar.com called the Vanguard Diehards. The purpose was to discuss Vanguard mutual funds, index funds, low-cost investing and other sound investment principles.

In February of 2007, the forum then moved to its own commercial-free forum on Bogleheads.org. And since then, the growth of the Bogleheads® community has been phenomenal and in many different directions. Everyone is a volunteer who contributes their time and energy at no charge. The John C Bogle Center for Financial Literacy site - at Bogelcenter.net - a 501(c)3 nonprofit organization, owns and controls the Bogleheads®  trademark, and your tax deductible contributions are greatly appreciated at Boglecenter.net.

All the entities that use the Bogleheads® trademark do so at no cost and expect to follow the mission of this nonprofit organization: to expand John C Bogle’s legacy for promoting the principles of successful investing and financial wellbeing, through education and community.

So what are these resources? There are many as mentioned, we have the:

 Since 2007. We've had the national conference in cities around the world. We're currently set to meet once again in Philadelphia this year after a three-year hiatus. The hub of all this information is at Bogelcenter.net, is undergoing major upgrade to help you find everything. You'll be able to link to everything for Boglecenter.org once completed. That is just a little bit about those resources available to Bogleheads®

Rick, let me turn it over to you. What do Bogleheads® believe?

Rick: Well I believe first of all, that the national conference is going to be near Chicago this year and not Philadelphia. Sorry about that typo that I sent you earlier. The conference will be a suburb of south of O'Hara. A three-day conference from October 12th through the 14th, and we're going to have a whole lot of great speakers there. Hopefully some of you can make it as well, and we'll be doing it over a three-day period. And it's always a good time. Always good to meet a lot of people, there'll be about 500 people attending this conference. 

So that's one thing coming up, which is exciting. But as Jon said, thank you Jon, for hosting this Bogleheads® Twitter spaces. Going forward, he'll have different guests on. This week I'm the guest. I'll probably be the guest several times, but we really made a lot of progress with the Bogleheads® and have really come a long way with expanding this trademark, which is again owned by the John C Bogle Center for Financial Literacy and a special thanks go out to all the people who are running the Facebook page, the Reddit, the Wiki, the Bogleheads® forum. Jon, to you for doing this Twitter spaces and YouTube channels.

 I mean, we're just going in many, many different directions to try to bring the message out to people about quality investing via, what Jack Bogle believes in, that's the idea. So what is it exactly that Bogleheads®  believe in? I just want to run through this fairly quickly and then we'll get to questions from the audience and have a good discussion. So the way I look at it, is that there are three parts to it. The first part is a philosophy. The second part is a strategy. And the third part is discipline. 

The way I think about it and trying to formulate this into three easy ways of talking about investing. Let's talk about the philosophy of the Bogleheads®. This is the big overarching things that all of us who are Bogleheads® believe in and follow. So it's universal among the entire group, if you will. And that is: 

  • To develop a workable plan
  • To invest early and often
  • To bear risk, but not too much or too little 
  • To not try to time markets 
  • To use low cost index funds when available, but not always. There are a lot of strategies that we use that are not index strategies, but in general use index funds when possible. 
  • Keep costs low, always
  • Diversify your portfolio, not trying to time sectors or industries or countries. 
  • Minimize taxes
  • Keep it simple, and 
  • Stay the course. 

And this is a general philosophy that all Bogleheads®, if I was at a conference and I said, how many of you out there believe in this ideals, everybody in the audience would raise their hand. But then I go to the next phase, the next part, and the next part is strategy.

Now what is strategy? Strategy is how you take these principles, this philosophy and apply it to your portfolio or if you're an advisor, how you it to your clients' needs. So strategy is personal. My portfolio and what I own is going to be different than what you own or what anybody who's listening on this call owns. All of our portfolios are going to have perhaps different investments in them. Somebody may decide they want to do a CD ladder. Somebody may decide that they want to use the Fidelity zero index funds. Somebody may decide they're going to use Vanguard ETFs. Somebody who has a 403(b) may not have much choice of what they're going to use because the options are not very good, but they're going to pick something in there that does make sense. And it might be one index fund. 

So when you're developing strategy and the asset allocation between these various asset classes, what I found and all the other advisors who are on this discussion today I'm sure have found, is that there are no two people who are the same. Everyone is different. Everyone's strategy is going to be slightly different. The funds they use, even the asset allocation and passing assets on, and how much you put into a Roth, what you put into a Roth, what you put into a taxable and all of these things are very individual to you. 

So that's strategy. Everybody follows the same philosophy. The ones that I've just laid out that are on the Bogleheads® Wiki, but the strategy is different. Now sometimes on the Bogleheads® forum people start arguing about strategy. Should you have 11.35% in emerging market funds? Or should it be 9.21%? It doesn't matter. That stuff is irrelevant, but for some people it might be 11.35%. And for other people, it might be 9.21%. They're both right because for their individual strategy, what they're trying to accomplish, it makes sense. So here's where the philosophy and the strategy are different.

A lot of times we have arguments over strategy and what's right for one person may not be right for another, but it's the second part, if you will, of what we talk about as Bogleheads®, that's trying to help people to develop their strategy with their unique situation. And finally, the last one is discipline as Jack Bogle used to say, "stay the course." Once you have this philosophy in mind and you've adopted it, you've embraced it. You've come into the church, so to speak. And you've developed the strategy that you need to reach your financial objectives, which funds, what asset allocation, how are you going to tax manage your portfolio? How are you going to distribute assets in retirement? 

 The strategy that you develop. You have to have the discipline to implement it. Number one, implement it. And secondly, stay the course. To get it fully implemented and stay the course. So the Bogleheads®, this is what we try to teach. We try to teach the overall philosophy. Please adopt the philosophy. Don't go out there and think you're going to be able to pick stocks and outperform the market, or try to do market timing or any of these other things. Just accept the returns of the markets as they are and create a strategy for your needs, to get you to where you need to go. Implement that strategy fully and maintain it. This is the idea of the Bogleheads®

 And that's really what we, we spend all of our time talking about. All of the podcasts that I do kind of get to that. The forum gets to this point. All of the other things that I've talked about and we've talked about. The YouTube channel and all of that really gets down to these three things. You can bucket them into, is this a discussion of philosophy? Is this a discussion of strategy or is this a discussion of discipline? So that's what we believe. And with that, I'm going to turn it back over to you, Jon.

 Jon: Awesome. Rick, thank you so much. That was fantastic. Let's talk a little bit more about those resources. There are many ways folks can get involved in the Bogleheads® community. I listed them earlier. Let me share one of my personal favorites and that is the local chapter meetups here in San Diego. We have a great group. Now naturally for the last couple years, these in-person meetups have been virtual. Maybe if we're lucky and COVID does finally fully sunset, we'll be able to have some in-person meetings once they get outdoors. But just be able to meet up with fellow Bogleheads® who understand the importance of low-cost investing, finding my own investing tribe, has been really rewarding. 

 The local group here in San Diego has even been gracious enough to let me present to them a couple times on some research I've done on investing. But again, it's just so nice to be able to meet in-person with your tribe, that low-cost investing tribe. Having that community is so invaluable, especially when you can be going through market volatility or any sort of difficult financial planning circumstances, it's great to have that community. 

Rick, what are your personal favorites? And so far as the various resources that are available to Bogleheads® community members, and you certainly are allowed to say the podcast, as that is what you are the host of.

Rick: So I'm really becoming interested in trying to figure out Reddit. I think that's kind of my goal at this point. It's an interesting community and the way it works, by the way with the Bogleheads®, is that we don't, we meaning, I do the Bogleheads® podcast and I have a guest here every month and now we're doing Bogleheads® Spaces and I do participate some on the forum. These are not run by a top-down group. The people who are running the Reddit page, they're Bogleheads® who decided that they wanted to run a Reddit page and we give them permission to use the trademark, usable as a trademark to run the Reddit, but they're going to go off their own direction. 

Same thing with all of the local chapters and the virtual chapters and the Facebook page.

Everyone is going in their own direction, but they're all adhering to the philosophy that we talked about earlier. And the mission of the Bogle Center. We're not giving them a set of instructions and saying, go do this. But what's amazing is that when you watch this happen, look at the Reddit page and you start reading, everyone has the philosophy. You could see it. Everyone believes in these principles and they're helping other people. 

So for me personally, I mean, I've been going to the conferences for 20 years and I've been doing the podcast for three years. I like Twitter and I think a lot of you who are here know that I like to get on Twitter. That's kind of a lot of fun for me. It's sort of become my platform personally. When I have something to say, the first place that I go is Twitter, but I'm interested also in Reddit because that's a great community to reach out to maybe some younger folks, if you will. So this is something that interest me as well. I haven't figured it out yet, quite frankly.

Jon: Sure. Thanks for sharing that. Certainly with respect to, "Hey, I'm curious about investing or gosh, maybe I've been a die-hard low-cost indexer for some time." The forum can be a great place for folks to get started. They can post questions anonymously or just lurk and read what's out there. And so far is folks finding the best way to get involved with the Bogleheads® community for them. What do you think is a great starting place for them to check out?

Rick: Well, the forum is the place where most people start, but honestly, again I think Reddit, the forum, there's a Facebook page out there, Bogleheads® Facebook page as well. Not as active, but we're working on that. There is another John C Bogle Facebook page out there, which is very active and it's very good by the way. I post on there as well. Again, the people who are running these various Bogleheads® sites are on their own and some are more active than others. 

 We try to encourage them to be active, but other things pop up as well. But I think just going to the Bogleheads.org, the forum and start reading there. And by the way, the biggest resource probably at this point for the Bogleheads® is the Bogleheads® Wiki. The Bogleheads® Wiki is just a phenomenal resource. It's almost eye-watering what you can find on there. It's amazing, thousands upon thousands and thousands of pages of great information. 

Just about anything about investing that you might want to find. You've got to go to the Bogleheads® Wiki page. It'll be there somewhere. It's just an incredible resource. They've been working on this, I want to say for 15 years, and it's just eye-watering how much information is there.

Jon: Absolutely. I'd certainly second that some of the Bogleheads® Wiki pages are just fantastic resources. There's even a spot where you can get instructions on putting together your own investment policy statement, which is a great way to manage your investments if you're choosing to manage them yourself as many Bogleheads®. As a more higher level or sophisticated or level two, and getting involved with the Bogleheads®, that annual conference is absolutely phenomenal. 

Having had the opportunity to attend in 2017, I got to see such Bogleheads® luminaries in person speak such as Christine Bens and Mike Piper and of course, Rick Ferri. It’s just an absolutely fantastic experience. So folks can consider that in getting involved with the Bogleheads® community as well. Gosh, I was even fortunate enough to meet Jack Bogle in person, shake his hand and thank him for all the amazing work that he's done for investors around the world back in 2017. 

Rick, what else should folks keep in mind in getting involved with the Bogleheads® community?

Rick: Of course my big thing is pass it on. I mean, once you get involved and a lot of people on this. I've looked and see who's listening in. There are a lot of people here who are carrying the flame for Jack Bogle, not only just me and there are lots of people that are listening in tonight that are carrying the flame. In other words just get it and pass it on. I say that a person has to be touched a hundred times with this before they start to get it. In other words, people tell me, "I try to tell my brother and my sister or I try to tell my friends, or I try to tell my cousin" or whatever about this and "they just don't listen or they don't get it."

And I say to them, "I know they don't get it. I didn't get it either. Imean, it took me many years before I started to pay attention." I'd been in the investment industry for probably seven years before I started to pay attention to what Jack Bogle was saying and what this whole thing was about. And of course I was in it every single day. And I still had this idea, this vision, that I was going to find a solution to outperforming the markets and I was going to find the managers who were going to beat the markets. And I didn't need to use index funds. I mean, why just get an average return when I can get an above-average return? All you have to do is read these books or follow this particular program or whatever. And “I can beat the market.” I mean, that's what people say. The people who are selling that stuff say that. 

 

So it's hard to get them to look at this. Start to get them to look the other direction at this. It takes about 100 times hearing it, honestly, where you just don't pay attention to it the first 80 times that you hear about this and the next 20, you start to kind of pay attention. And then finally about the hundredth time you've heard about it. You begin to actually get it. It begins to sink in. So the people who I talk with who say, "Hey, you know, I try to tell my friends about this, but they just don't get it." And we talk about it, but they just don't get it. I say, don't stop. Don't stop! Because every time you bring it up, it's another touch. And then you bring it up again, it's another touch and so forth. 

And it takes sometimes years. Of course, some people will never get it, but the fact is, they will get it eventually if they get touched enough time with this. So just keep saying it, just keep mentioning it, just keep talking about it. Just keep giving away those books, keep sending those links to various websites. Just look at the progress that has been made. I mean, 25 years ago when I converted to this philosophy, I mean, there was very few people doing it. There was something like 1 or 2% of all of the money on the stock market at that time was being indexed. 1 or 2%. Now it's much, much greater than that.  In fact, when it comes to mutual funds, more than about half of all the mutual funds now are in index funds. But back then, very few people were putting money in index funds. Look where it is now. I mean, this has really made tremendous progress out there. Incredible progress, to save people thousands and thousands of dollars during their lifetime towards retirement is a huge thing. 

I was on a conference call yesterday for socially responsible investing, not really my thing, but I did bring up in the conference call that I think I'm doing socially responsible investing. Only I'm doing it in a different way. I'm saving people a lot of money. I think that's socially responsible. So I think that we, the community have a responsibility. Everyone has a responsibility. Once you get it, once you see it, once you've adopted the philosophy, once you've implemented your strategy, once you're staying the course and you get it, the next thing is join the choir.

You're in the church, you get it, you feel good about it, you see it, join the choir and help other people. So that's what I'd like to see happen. That's what I'm doing and have been doing for a while. I'm more and more so now, seems like most of my day now, probably 90% of my day is doing these things rather than working. That's me. Do you want to go to the audience, Jon, to see if people want to participate with this?

 Jon: Yeah, absolutely. I mean, just add a couple more points. First I absolutely love that. Spread the word of low-cost index investing. For you that can be different depending upon what approach you want to take. I know for me here locally, just because I love the local meetup so much. I invite friends and family, other folks interested in personal finance to the local meetup to learn more about the Boglehead® approach. Absolutely, we are going to help save folks a fortune in investing expenses over their lifetime. I love that. 

Before we jump to the Q and A, I just want to let folks know that we'll be having our next Bogleheads® Twitter space on Thursday, the 24th. And that's going to be at 2:00 PM Pacific, 5:00 PM Eastern, and we'll be discussing asset allocation. What's appropriate and how to make one for yourself. Let's open up the Q and A now for folks who want to speak. It looks like we've got Cody Garrett requested. So I'm going to put Cody live now. And if you'd like to speak as well, just go ahead and make a request or raise her hand using the little raise your hand emoji. Cody, take it away.

Cody: Awesome. Appreciate it. Thanks so much for making this Twitter space excited to hear. It's funny. My question was actually going to be related to what's next time, I guess, which is the ultimate debate about how much do you tilt in your equity toward international, developed, emerging, whatever? And in terms of Bogleheads®, how much do you tilt toward total international versus total US? And what is kind of the background in that decision in terms of Bogleheads®? 

Rick: Thanks for asking. Okay. So the world has changed and back 30 years ago, when you looked at the top stocks on the US stock exchange, there were General Electric, General Motors, DAO Chemical, maybe IBM and a couple of other names from various industry groups that were not technology. Maybe it was Johnson and Johnson. The diversification that you got in industry groups from being on the US market was pretty broad back then. 

The US market was not 25% technology and/or communications, which we know that Google and Facebook are communications stocks, they're not even part of the technology index, not even part of the technology side. Amazon is not considered a technology stock. But if you look at these companies, these top 8 companies, they are all different than the companies that used to be the top companies on the stock exchange 30 years ago. Where have all the industrial companies gone? Where have all the material companies gone? Where have the mining companies gone? Where have the energy companies gone?

They're not there anymore. Airline companies and travel companies. You add all these things up together, it doesn't make very much of the US stock market. So here's my view of international. In order to get a diversified industry portfolio, you need to have about 35% of your equity portfolio in international stocks because it gives you industry diversification that you're not getting anymore just by being in the US market alone.

 Now, nothing is wrong with technology, nothing is wrong with healthcare and nothing is wrong with communication stocks. But we live in a global economy. We still use all that other stuff. We still buy all that other stuff. It's all very important to us. We just don't make all that other stuff anymore. Now we're trying to do more insourcing. Bring things back here, but the Exodus out of the manufacturing base and the United States to overseas changed the structure of the US market. 

Now, some could argue well for the better, but it also goes to create a more volatility if you only have US stocks, because we have these big swings in technology. And I can remember three large swings in technology that they're just getting bigger. In my lifetime, it happened three times. It happened after the 1960s, the big technology stocks were Tetron and Xerox and believe it or not these were the big technology companies. IBM. And they were great during the 1960s and 1970s. 

In fact, Jack Bogle thought they were wonderful. It cost Jack Bogle his job when he decided that the Wellington's Prime Fund. The Wellington Fund at the time was not invested in those things. They were losing market share. So Jack Bogle went out and he teamed up with the three managers out of Boston and brought them in and put them on the board and actually gave them managerial control. These were the Go-Go managers, technology managers. 

It was great for a few years. The performance of Wellington picked up, but then they got absolutely crushed when the cycle went the other way and technology fell off a cliff. It cost Jack Bogle his job, which we're all grateful for because he ended up starting Vanguard after that. That was the first phase. Then there was another phase, the .com bubble in the late 1990s. Again, it was even bigger though. I mean, technology now had become even a bigger part of the stock market and the downturn that occurred after that hurt more people. 

 This time around it's even larger. So technology is getting more and more and more, greater and greater and greater portion of our stock market, but it's not getting greater and greater portion of our economy or the global economy. And so in order to get diversified, you just need to be international. I tell people if you want to get more diversification in your portfolio in industry groups have about 35% in international. Plus you get some currency diversification as well. So that's my answer. 

And technically if you're doing some sort of an efficient frontier and we all know that efficient frontiers are very time-sensitive, time based. So if you're looking at efficient frontier for one decade or another decade, where you're measuring US versus international, it's all over the place. But if you're going to do it over the very long term, like a 35, 40, 50 year period of time, it's about 30% to 35%. Has been and I don't know what it's going to be in the future, but it has been about the efficient, it puts you on the efficient frontier, if you will. It'd be about 35% international. So that's my answer, Cody, I know different people have different views, but this is the way I approach it. 

Cody: Appreciate that and Jon.

Jon: Yeah, to Rick's point, you have to have international diversification. A lot of huge tech makes up the US stock market today. The thing that I think about a lot when working with folks is that, you're going to have folks from Amazon, Microsoft, Google, Apple. They're going to get all sorts of employer equity compensation, and they're going to have just a large part of their portfolio already in big America tech. So for them having a big chunk of US stocks in a low-cost diversified index funds such as VTI, means they've got all the more risk. And usually that risk can be compounded by the fact again, that they're going to be working with that employer and then also maybe they'll have a non-qualified deferred comp plan as well. That in worst case scenario, it means there's going to be multiple dominoes that are going to be falling if you're going to see the US market underperformed, because it's so overweight in tech. So looking at the global cap waiting can be a pretty great way to approach this question. 

How is money invested around the globe right now? How do investors distribute their dollars across publicly traded companies? And right now it's roughly 60% in US. Roughly 40% international. So in that we use market cap index funds for our US market exposure. I can make a similar argument, do the same when it comes to the US international split. For do it yourself investors, this can be a pretty easy using a tax advantage account. You can get a global fund. All equities in a single fund giving global diversification. 

Now, as Rick often likes to point out, that's not ideal for taxable accounts, where you're going to use a foreign tax credit, but that can be a pretty simple way with respect to, Hey, how do I approach the US international split? Well, don't overthink it, use the wisdom of the crowd. How's money invested around the globe and just a cap-weighted global fund can be a way to do that.

Rick: So Cody, what do you think? 

Cody: So I've always tilted kind of that two-thirds to 75% US equity. Of course, no advice on this space, but I've always tilted US, but I do believe in diversification without just looking at the past 10, 20 years of what International as done most. Most clients who kind of fight having international developed markets, they use that side of saying, oh, well we're a global economy. And so much of the S&P 500 is like, so much of the US growth is international. We have a global market in the US now. I still tilt that way, but it's interesting to hear how tilted. 

So some people say, I want to do, 90% US or some people flip the other way and they say, it's been,  "buy low" they'll say that they want to go actually tilt more toward international than US. So, yeah I actually, personally, and in terms of most conversations I have, I tilt about two-thirds US in the equity space.

Rick: Yeah. That's great, two-thirds, one-third. I use that all the time. I mean, you still get a home country bias, but two-thirds and one-third works. Yeah, I agree.

Jon: Yeah, absolutely. At that point, you're pretty close to the global cap weighting at that point, single digit percent off. So not too far from how investors are putting their money over the globe.

Cody: Appreciate that. I definitely don't want to hog the space, I guess, while other people want to come up and speak. I was wondering about, there's this funny thing that people are saying now, which is this fear of, if too many people are invested in the index, the whole thing falls apart. What are your takes on that?

Rick: Yeah, interesting. I just posted something yesterday about that. Let's just talk about mutual funds. So the amount of the us stock market that is invested in mutual funds is about 30% and that would include exchange traded funds. So the US market, capitalization, 40 trillion or whatever it is, 35 trillion today, maybe. 30% of that, 10 trillion roughly invested in mutual funds, maybe 11 trillion. What percentage of that is in index funds in ETFs versus actively managed. And by the way, indexing is very kind of nebulous. Some things that are actively managed are actually calling themselves an index. So let's just forget that for now. 

But I mean, we just got to realize that indexing isn't what it used to be either. So everything's an index now, if you can call it that. They try to market things as active management, as indexing. But where was it 10 years ago? Well, 10 years ago, this actually 28% of the market that was in mutual funds, 28% of mutual funds and 28% now, 20% of that 10 years ago was actively managed. And 8% was an index. Now it's split. 14% is inactively managed and 14% is index. So index have gain an extra 6% in active management, has lost a 6%. 

I always think though that active manage is more like this. I own the stock today. I don't like it anymore. You buy it from me. I'm an active manager, you're an active manager, a zero sum game, Sharpe’s math, where you are buying it from me, I'm buying it from you. And it goes back and forth and back and forth and back and forth among the active managers. And somebody ends up winning and somebody ends up losing, but net of fees, most people lose.

So to me, there's really been no change in the amount of money being made in mutual funds and ETFs. It hasn't really influenced prices at all. And then secondly, it's way overblown this idea. And I think my tweet was "never in my lifetime, am I ever going to see or ever going to worry about indexing somehow influencing market prices." It's just not, there's so much money on the active side. And even the companies themselves for buying stock or issuing stock for doing their own compensation programs or stock dividends or stock buying, buying back stock, buyback dividends, if you will. 

I mean, there's so much of that going on, that's price setting, but then there's one other thing too. I had Gerry O'Reilly, who was the manager of the Vanguard total market index fund and ETF, he's the manager, 1.3 trillion dollar fund. And I asked him this question. At what point does indexing take over? And he's been running that desk for 30 years or something. He has seen no difference during his lifetime that indexing has caused on price discovery of any stocks. And he says to me, of all of the stocks that trade the total amount of volume that trades on the US stock exchanges everyday, less than 5% of that volume that trades is indexing, because indexers buy and hold. They generally buy it. They put it away and they hold. 

It's not the indexers who are causing changes in stock prices. It's the act of management. And you could see this when you look at Facebook going down 25% a day after Google went up 8%. So they're the two largest stocks on the exchange. And one goes up 8% and the very next day Facebook goes down. And then you've got things like Amazon saying a 20 for 1 stock split and the stock goes up 6% for no reason at all. I mean the value of the company didn't go up 6%.

I mean, these are things that in indicate to me that indexing isn't doing anything, changing price discovery. Standard and Poor does reports showing that the dispersion of returns among their indices hasn't changed in 30 years, even though a lot more money has gone into index. Well, if the dispersion of returns among S&P 500 stocks have not changed in 30 years, why would we think that somehow someway indexing is causing distortions in the market. What's causing all of the noise is the active managers who are losing market share. That's what's causing the noise. They're coming up with all kinds of things.

“Indexing is toxic. Indexing is worse than Marxism” and all of these nonsense things that we hear and none of it is true. And you hear about it though. I mean, clients listen to this. You can say anything you want and you can tell a big lie. It takes one minute to tell a big lie and it takes 15 minutes to explain why that lie is a lie. But unfortunately we're in the position of having to speak the truth over and over again, because these lies are constantly being told. And that's what we have to do. I mean, that's our job to keep telling the truth over and over and over again, because lies are constantly being spread. That's my view on it.

Cody: Rick I really appreciate that. There's that take that just because we talk about it all the time, doesn't mean it's taking over the world. We think about it constantly, but that doesn't mean the majority of the rest of the US for example have even heard the word index fund before.

Rick: That's correct. And you've got to just keep saying the same things over and over again, and coming up with unique ways of saying them and unique distribution channels, in which to save them in because people learn differently. So that's why it's important to do it on Twitter. It's important to do it on Reddit. It's important to do it on Facebook. It's important to do it in a forum. It's important to do it in Twitter spaces. It's important to do it wherever the distribution channel is. When these new distribution channels are created, we have to be there and we have to be putting this information out and over and over and over again.

Jonathan Clements had this interesting comment a few years ago when I was speaking with him, he said, "nothing has changed in the investment industry in 25 years. We just have to come up with new ways of saying it." That's all.

Jon: Absolutely Jason Zweig, says it well. He's a fantastic financial journalist over the Wall Street Journal. He says something similarly, “his job is just to say the same thing over and over again, but know how to say it differently." Let's move on to “Straightforward Financial Advice.” You had a question for us. Why don't you go ahead and take it away.

Ross: Hi everyone. You can just call me Ross. Thanks for doing this. You all. So Bogleheads®, I would imagine that any Bogleheads® portfolio has a substantial allocation to bonds. And it seems that over on the forum, for a year, two years, maybe even three years now, there's just widespread bond panic. And I imagine Jon, Cody, Rick and other advisors, questions about bonds or on everyone's heads. And it seems like everyone feels like they can time the bond market. And I'd love to hear Rick and Jon talk about good old 60/40, or other substantial allocation to bond portfolios. And just if there's anything that can be said to sort of calm the waters among the Bogleheads® who feel like market timers now.

Rick: Well, that's, that's a great question, Ross. Thank you for bringing that up. A couple of things though. I mean, the idea that all portfolios or most Bogleheads® portfolios have bonds, again that's a very individual thing where a lot of my clients that I work with don't have any bonds. A lot of them will even say to me, "I don't understand bonds." And then I have clients who have a lot of bonds. They don't like stocks. So again, it becomes very individual on that. It's a strategy question, as opposed to a philosophy question, whether they have bonds or not.

First and foremost, bonds are not stocks. They will help you not do dumb things with your portfolio. So even though now is probably the worst time on a real return basis to invest in bonds because the real return on bonds absolutely is the worst it's been, it must be 40 years, terrible. It still is a place to put money that isn't in stock, so that if people do have more than they should have in stock, they go beyond their tolerance for risk. They overleverage their portfolio in risk. However, you would like to say it, then that is worse than being more in bonds. 

Now even though bonds are bad, what's worse is somebody getting too much into stocks and capitulating when the market crashes. That's worse, that's non-recoverable. And so first what we have to do is figure out where do these people, each one of these people we talk with, where do they sit? So how much risk can they really take? Not how much they say they can take. There's a big difference between that. When you're talking to a doctor and you go "how are you feeling today?" "Oh, I feel great." And as soon as you walk out of the doctor's office and you get in your car, it's like, "oh my, my back hurts. I got a stomach ache." My point is that we are the doctors and people like to tell us, "yeah, I can handle stocks, no problem." Or you've got to take everything with a grain of salt when the clients are talking with us about how much risk they can actually handle. 

I mean, I don't care what kind of questionnaire you can ask them it doesn't really make any difference. People are brave in a bull market. They're going to say they could take more risk in a bull market than they could maybe really take. And we just got to be very careful of that. And so the money that doesn't go into stocks, once we figure it out, where really should the client be on their stock and bond allocation, then we have to figure out, this is what they can really handle in stocks. And then we have to figure out, well, what is it they really need in stocks and what do they want in stocks? 

And that can be a generational thing to too, meaning it's not just you, it's, it's the next generation. It's like who are you saving money for? Is it for you or do you have more money than you need, so you're saving it for the next generation. Well then you should have more stock. My bottom line is that bonds are not stocks. Bonds are where the money goes, that shouldn't be in stocks, maybe for a number of reasons. But the primary reason it shouldn't be stocks is because having more stock would hurt you more than having more bonds, even though bonds are bad. 

So I know it's sort of a backdoor way of answering the question, but we just say bonds are for income. Bonds are to stop you from doing something that's going to hurt you worse, which is having too much stock. I guess that's the way I would put it.

Jon: Yeah, absolutely. I think a lot about “this time it's different.” There is one article that Rick wrote years ago. I think I want to say 2012 about going short in bonds because of fear of rising interest rates, right. Rick wrote that article years ago and we're still having the same concerns about interest rates are going to rise. I'm going to lose value. There's no real return in bonds, et cetera. When it comes to the Boglehead® approach, it's going to be, we're going to stick with it. Is it different this time? Who knows, but that's not necessarily going to warrant us, making some radical change to our investment portfolio. And then to get a little geeky on the bond front, I'd say be critical about those bonds that you're investing in. Making sure you're opting for those higher-quality bonds is going to make sure those bonds do a better job as that portfolio diversify or those lower-quality bonds. They're not going to be great in so far as their role in risk management. 

We have got a new request for a speaker. Let's have this be our last one before we wrap up our call, rather our Twitter Space for the day. To remind folks, next Thursday, 2:00 PM Pacific time we'll be having our next Twitter Space, dealing with Asset Allocation, how to make an appropriate one. But now let me unmute Danny here so we can answer Danny's question.

Danny: Hi guys. Quick question on bonds. Where's the most efficient place to put them in my investing plan, I guess? Hold the bulk, if you're holding 20% or 30% inside your 401k, or is it okay to spread it between 401k and brokerage and Roth. Thank you.

Rick: That's a great question Danny and the answer is, “it depends,” like most, without knowing your situation, it's hard to say of this 20% or 30% that's in fixed income. How much should be in tax-deferred, how much should be in taxable or even I do have clients and I've told them to put bonds in their Roth only because they need that money to live on and they will be withdrawing it in a relatively short period of time.

And it's a unique situation, but there is some times when having bonds in a Roth account makes sense if you need to draw the money out for the purpose of keeping your taxes very low before you're 65 and go on Medicare. And so you can draw money out of your Roth to live on, and then you get the government to pay your healthcare for you. But that's a really unique situation. 

In general, 10,000 foot level. There needs to be most of your fixed income in your tax-deferred account. So the 401K is generally, again, 10,000 foot level, where you're going to first look to put bonds. Now I will say that with a caveat. You do need to have an emergency fund in your taxable portfolio. So you do need cash and you do need some sort of a cushion between your daily operating cash and your taxable portfolio and your stock and your taxable portfolio. So that cushion could be in fixed income, but that's usually a dollar amount as opposed to a percentage. So if you're going to have 20% or 30% of your portfolio in bonds, a certain dollar amount of that fixed income would probably be in your taxable account as a cushion between your working capital day to day and your stock.

So once you take that out, put that into the equation, then you might end up with like 25% and it might end up being 5% of the bond or fixed income portfolio or whatever it is. Of the 30%, say 5% is over in your taxable portfolio, whatever it is, as far as the dollar amount. And then the rest of it is generally going to go into your tax-deferred account. Now, why is it going to go in the tax-deferred account? Well, number one, fixed income is inherently tax and efficient. You have to pay ordinary income tax on most of your fixed income, unless you're going to go into municipal bonds. And that's a different story. We could talk about that in your taxable account for that extra money. 

Generally bonds are tax-inefficient because it's ordinary income tax at the highest tax rate. But secondly, eventually you're going to be taking money out of that 401k. And eventually at age 72, you're going to have to start doing required minimum distributions. And depending on how you set things up earlier or how much money you put away in your 401k or 403B or IRA or Simple or SEP IRA or whatever you've been using, you could accumulate a lot of money in there. And if you don't take some out doing, maybe some Roth conversions after you retire, by the time you hit age 72, it could be quite a bit of money in there. And then you start taking RMDs out of that, starting at age 72 and low and behold, you realize, holy moly, my tax rate just went way up and my tax rate is now higher than it was when I put the money in because I'm doing RMDs.

And that certainly starts to happen later on down the road in your seventies and eighties, as your distribution go higher and higher and higher because you're getting older and older and therefore the life expectancy tables and whatnot changing, you have to take out more and more money. So what happens is, you want to have the slower growth asset if you're going to have stocks and bonds. And we know that bonds are the slower growth asset there. You want to have the slower growth asset in the account that you haven't paid taxes in yet, which would be the 401k and the IRA and the SEP Plan, 403B, 457 Plan, things like that, in general, 10,000 foot level.

Danny: Thank you, Rick. That does answer. So I had everything in the tax-deferred, but I might put a little bit in the taxable early and I'm trying to FIRE in the next 15. Thank you.

Rick: Good luck.

Danny: Appreciate it.

Jon: Danny, one other thing to bear in mind is that with respect to your investment options that are available in your 401k, you want to consider cost with respect to any sort of tax-efficient fund placement strategy, asset tax location strategy. If you can access any asset class you want - stocks versus bonds - in your 401k, then you can go ahead and pursue a tax-efficient fund placement approach. But we certainly wouldn't want to use a higher-cost fund in particular account just to get the tax benefits. Also, make sure you get the stock bond mix right first. That's going to be your priority. Consider that tax-efficient fund placement, that asset tax location, as some icing on the cake, if you will. 

Folks, we are coming up at the end of our window for our call today. So let me remind everyone once again, that our next Bogleheads® Twitter Space is going to be on Thursday, the 24th, 2:00 PM, Pacific, 5:00 PM Eastern, and we'll be dealing with Asset Allocation, how to make one during that next conversation. We've got a few minutes left. So I see Cody with his hand up. So Cody go ahead and take it away.

Cody:  Yeah. I love that conversation about bonds. Just quickly I'll say that, really bonds can provide one or many of the following things, which is stability, income or diversification. So before you own bonds, you have to know why am I buying them to begin with? And I think really Danny, that my perspective about really like where to hold your bonds is you have to ask yourself, when do I need this money? So I think you have to prioritize maintaining your desired lifestyle first and then taxes are secondary to that. I know that taxes are kind of a fear-driven conversation, especially right now. 

But once you figure out, when do I need this money that will help you determine where it should be. So if you're taking money out of your taxable brokerage account, you can withdraw money, the trades, the capital gains and losses are taxable in the year. But any withdrawals from the account have the no tax consequence. So it might make sense to have bonds that are providing stability within your taxable brokerage account, and just ultimately prioritizing cash flow flexibility. And when you actually need the money and then the tax characteristic kind of secondary to that decision.

Jon: Wonderful. Cody, thank you. 

Danny: Thank you, Cody.

Rick: This idea of putting bonds in a Roth, because I did bring it up. So there's a situation, very unique, where there was a couple who were retiring, they're both 60 years old. They were both retiring. They had fair amount of money in their Roth account. They had accumulated it, but they didn't have healthcare insurance. And they didn't have any children. So when they died, whatever money was left was going to go to nieces and nephews. So they're looking at this and I'm saying, okay, you've got money in your taxable account. You've got quite a bit of money in your Roth account. And you have money over here in your pre-tax account. You could live off your retirement, your taxable account and that's fine, but they didn't have a whole lot of money in their taxable account. 

So they would've had to withdraw some money out of their pre-tax retirement account, which generally might have been the thing to do, except that they didn't have healthcare. So I said, well, if you take money out of the Roth. Roth money, when you distribute Roth money, it doesn't count against your modified adjusted gross income to get ACA tax credits. Every other money does. I mean if you took some money out of your retirement account, it would count against you. The dividends and interest income from taxable account counts against you. If you take capital gains that counts against you, for hitting the poverty levels for getting money from ACA tax credit. 

So I said, "let's structure it this way." Let's do this kind of a bond portfolio in a portion of your Roth. You draw that money down. In addition to some of your dividends and interest from your taxable portfolio, without selling anything, this keeps your income very low. And now you qualify for the maximum amount of affordable care act tax credits. So that was my recommendation. I just wanted to bring that up because it is a unique case. There is once in a while, where you might have bonds in a Roth account.

Jon: Wonderful. Rick, thank you so much for sharing that. Alright, folks, that is going to be it for our inaugural Bogleheads®, Twitter Space. Remember to check out the other numerous Bogleheads®, resources, Bogleheads.org forum, Bogleheads® Wiki, Bogleheads® Reddit, Bogleheads® Facebook, Bogleheads®  Twitter of course, Bogleheads® YouTube channel, Bogleheads® local chapter. That's one of my personal favorites, the virtual chapters, international chapters of conferences and of course the books. 

We look forward to seeing you for next week's Bogleheads® Twitter space. Again, that's going to be on Thursday, the 24th. That is going to be 2:00 PM Pacific, 5 PM Eastern. We look forward to seeing you all there. Thanks again for everybody, for joining our conversation day. And I look forward to seeing you all next week.


Jon Luskin, co-host

Rick Ferri, co-host

The John C. Bogle Center for Financial Literacy is sponsoring Bogleheads® Live, a Twitter Spaces meeting project. The first meeting, “Introducing the Bogleheads” was held on March 16, 2022 and was co-hosted by Jon Luskin and Rick Ferri. The meeting attracted 199 participants.  The transcript is provided, courtesy of Jon Luskin.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


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