Bogleheads® on Investing co-host Jon Luskin interviews Peter Lazarov, author of The Perfect Portfolio, about building an investment portfolio you can stick with for decades. They discuss how investment strategies should evolve as life circumstances change, why investors shouldn’t count on a future inheritance, and how to assess risk tolerance by examining past behavior rather than relying solely on questionnaires. The conversation also explores index versus factor investing, the relationship between interest rates and bond fund returns, and the trade-offs between individual bonds and bond funds. Finally, Peter explains why he invests his own money in a single, globally diversified all-in-one fund, reinforcing the importance of simplicity and staying the course.
• • •
Jon Luskin, CFP®, a long-time Boglehead and financial planner, hosts this episode of the podcast. The Bogleheads® are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads® have held national conferences in major cities across the country. In addition, local Chapters and foreign Chapters meet regularly, and new Chapters form periodically. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
Listen On
Show Notes
Ben Carlson on Inflation, Investing, and Why Less Is More: Bogleheads® on Investing Episode 97
The “Easy” Button for Investing
Save Taxes with All-In-One ETFs with BlackRock’s Jay Jacobs: Bogleheads® on Investing Episode 93
Transcript
Introduction
00:00:00 Jon Luskin
Jon Luskin, your host here for the 98th Bogleheads On Investing podcast. We’re going to try something new for this episode and jump right into the interview. Stick around to the end for important announcements and my final thoughts.
Peter Lazaroff, Chief Investment Officer over at an investment shop that oversees billions in assets, why write a book about the perfect portfolio?
The Perfect Portfolio
00:00:21 Peter Lazaroff
Well, Jon, you know, it’s one thing to manage, I guess, over $10 billion for clients at this point across the country. It’s another when you’re trying to educate the masses. I host a podcast called The Long-Term Investor. You can go to longterminvestor.com to learn more about that.
But one of the things I’ve learned over the years is that there is so much information that if you need a resource to try to have, like, instill all of the best advice from the investing classics and incorporate stuff like behavioral finance, incorporate things that didn’t exist when investment classics were written, it’s hard to just give somebody one book.
I feel like all the time people are like, “Peter, what is a book I should read that would, you know, get me a little more educated, better understand your philosophy?” And I feel like I have to give them six or seven different books.
Here, I could try to do something that’s approachable, that uses more modern examples, and, you know, is not 400 pages long and just kind of hits those high points and maybe makes you think about things that differently or learn something new, even if you’ve been a student of the market for a long time.
00:01:29 Jon Luskin
Well, speaking of favorite books, I’m biased. Jack Bogle’s Little Book of Common Sense Investing is one of my favorites that I recommend to a lot of folks who are first starting to learn about investing.
I’ll link to that in the show notes for folks to check out.
Let’s jump to an audience question.
This one is from Xexanoth from Bogleheads Reddit. They ask, “What’s the goal of the perfect portfolio? Is it the highest expected return, or is it something that you feel confident that you can stick with for the long term?”
00:01:59 Peter Lazaroff
Wow, that is actually an incredible question. For me, the perfect portfolio, first of all, there’s not like a one-size-fits-all universally perfect portfolio. I make it very clear right out the gate that I think that there is a perfect portfolio for all of you out there. You just have to find it and understand some things, some basic foundational ideas in order to find that portfolio.
And to me, it’s not necessarily about return maximization and is certainly more on the spectrum of “What is the portfolio and strategy I can stick with for decades on end?” Because most of investment success is about minimizing mistakes and just making sure you don’t interrupt compound interest in an unnecessary fashion. So for me, it’s definitely that, what can you stick with for multiple decades?
00:02:47 Jon Luskin
In the book, you have a great little analogy about cereal. Tell us about that and how it relates to investing.
00:02:54 Peter Lazaroff
Well, sort of, you know, I just mentioned how the perfect portfolio is more about the one you can stick with for multiple decades, but that doesn’t mean you can’t make changes. Like, it has to be a little bit adaptable. And in the opening chapter, I talk a strangely large amount about food, but I note how for much of my life I would eat, I mean, four, maybe five bowls of sugary cereal right before bed, whether it’s Froot Loops, Cinnamon Toast Crunch, Corn Pops, like whatever. I’m all in on it. And as I’ve aged, so I turned 42 this year, you know, I can’t really do that anymore. And I mean, I still love cereal, but that’s not good for my body. And certainly that much of it right before bed, that’s not a thing that is necessary and/or good for me. Whereas, you know, in my teenage years and my twenties, actually I had a hard time gaining weight. And so anything I could consume that I enjoyed eating, I should eat. You know, things change over time.
So with your portfolio, what you need in your twenties or your fifties or your seventies is obviously going to change. So the perfect portfolio is not just a static portfolio. If anything, it’s this philosophy and strategy and process for making decisions so that you can adapt as life changes with you. So I think one of the biggest things that is different in people’s lives, like we could try to corner certain decades of life, but I don’t know how you feel about this, Jon, but to me, the playbook, as if there’s this official playbook, maybe we could write a book called The Playbook to Accumulation, is largely agreed upon. It’s, hey, max out your tax-deferred accounts, keep your investment costs low, like save, you know, spend less than you earn, save money, you know, effectively. It’s all pretty basic. It’s not that complicated.
Decumulation, on the other hand, I don’t feel like there is a one-size-fits-all because everybody’s objectives are so different. And that’s the thing with investing. I think a lot of investing, both the classics and the current books, address investing for the accumulator. Whereas I think holistically, one, the accumulators are all going to have different goals, like whether you are a few years away from retirement or having just entered retirement or just getting started in your career, you’re going to have different goals and objectives. And so I think, you know, the cereal thing is a good example of, hey, the way that I eat has changed. Now, I used to, you know, everybody who’s listening to this podcast has had to deal with the terrible effects of aging and how you have to eat less and less and less over the years. But it’s not just quantity, it’s types of foods.
You know, it’s the types of things that maybe will make your stomach upset that didn’t used to. I think you could make an easy, almost cliché analogy to investing of the things that make your stomach upset as you get older versus when you’re younger as an investor. So to me, I think it kind of, this perfect portfolio, especially with the food stuff, for whatever reason as I was writing, maybe I was just hungry the whole time, but it just occurred to me that like everybody’s perfect meal is different. And Jon, if you and I go to the restaurant, or any restaurant, not the restaurant, but you, we could order any number of things, the likelihood of us ordering the exact same thing is pretty low. And even if we do, we might like modify the side or like have it cooked a little differently.
But even if somehow we have truly the exact same order, you and I are going to have physiologically different responses to that order. We’re going to react to it. We’re going to enjoy it different amounts. And so, look, I think I really just wanted to talk about cereal in my book. I’ve written about it in more casual blog posts before. I’m a huge cereal aficionado, but, you know, hopefully it does tie nicely to the adaptability and changes that we go throughout life in.
00:06:34 Jon Luskin
Yeah, I thought that was a pretty neat analogy, how it just spoke to the fact that what you could do when you’re young, you can no longer necessarily do when you’re at more advanced stages. And the same applies to your portfolio. The portfolio that got you to retirement isn’t necessarily the same portfolio that will get you through retirement.
So let’s talk a little bit more about some of those changes that you may be making to your portfolio over time. This is actually a question we got from the Bogleheads community for our last interview, for our last guest. Didn’t have time to get to it, but it’s a really interesting topic. And you touch on it in the book. You have a pending inheritance. How should one invest in light of that?
Planning for an Inheritance
00:07:13 Peter Lazaroff
Such a good question. And there’s going to be always this caveat that it depends on your situation. However, here’s what I will tell you is when we’re working with clients at PlanCorp, at least, if someone thinks they’re having an inheritance and we are building a financial plan, we don’t account for it. And I believe in that approach. I don’t think you should really count on an inheritance until it’s like in an irrevocable trust and it is yours, because a lot can change.
Let’s say mom and dad have told you that you’re going to inherit money, but either mom or dad passes away and then the other one remarries, and then a totally different set of circumstances comes in. Or maybe there’s a lot of health complications at the end of life. There basically are always health complications at the end of life. And so I think when you’re investing, I don’t think investing as if you’re getting an inheritance to sort of bail you out is the right approach.
Maybe if your investment plan and overall financial plan is in really solid shape and you decide that you want to take a bigger vacation or maybe you don’t travel as much with your spouse and your children or whomever as much as you’d like, and you’ve done a really good job and you can like, maybe you can’t take your inheritance to the bank, but you can count on something being there. Well, maybe we should live a little this year. And so I think it doesn’t have to be a permanent lifestyle choice, but I don’t think you have to fully ignore it. I just, I always feel really uncomfortable to bake it into a financial plan.
Now, one last thing that I would consider is, you know, and this is where the caveat depends on how old you are. So if you’re in your twenties or thirties, I think you need to invest as if it doesn’t exist. If you’re in your fifties or sixties, what you have saved for retirement, you know, most of the compounding is going to happen based on what you’ve already saved. And so like, maybe the calculus and the psychology around it changes a little where you get more flexible, not just in how much you save year to year, but in what your asset allocation would be.
I think the older you get, personally, you start to realize like some of this money isn’t really for me, it’s for my heirs. And so how am I going to align my asset allocation with the risk tolerances and the time horizon of those who are actually going to spend it? And so like, if the inheritance would equal, would double the size of your net worth, that’s going to be a lot different than if the inheritance represents 5 to 10% of your net worth.
Also, is the inheritance in an inherited IRA where you’re going to take taxes, or is it going to be in a taxable account? And, or, you know, there’s just so many caveats. And I realize I started the answer that way, but I think, you know, as a framework, the later you are in life and the more established your financial plan is, I think the more flexibility you can use, less so in how you invest and more so in how you’re living your life year to year.
00:10:02 Jon Luskin
Yeah, I certainly want to echo your point about not counting on an inheritance, planning in the absence of it.
All right, let’s talk about risk tolerance. You have a great line in the book. Past behavior tells you more than risk questionnaires. Tell us, as investors, how should we be assessing our risk tolerance?
Risk Tolerance
00:10:21 Peter Lazaroff
Boy, I love this question. So I think of it in two categories. There’s ability, to me at least, there’s ability and willingness. And ability is very objective and you can calculate it. And you typically, like once you have a financial plan, you’ve arrived at it. And so ability has things like time horizon, human capital, flexibility of goals, you know, because with ability, basically like imagine you’re young and you have a long future of earnings ahead. Well, your time horizon’s long and you can keep saving if the market turns down on you. Whereas if you’re a year away from retirement and, you know, a bear market kind of introduces that sequence of returns risk, like your ability goes down. The flexibility of goals, like your retirement date or how much you want to spend, those can really impact your ability as well. So that’s like very, something that you can calculate effectively.
Willingness, however, is very subjective. And I would argue that people are not the best interpreters of their own willingness to take risks. And, you know, the thing about risk tolerance questionnaires is that typically people’s responses change based on what’s going on in the market. And there’s pretty decent studies like documenting this happening. The other thing with like risk tolerance questionnaires is they really have to be worded very well in order to make sure that they’re measuring what is actually trying to be measured. Most risk tolerance questionnaires that I see, I’m like, ah, that has nothing to do with how somebody’s going to behave.
And so to me, I think if you look at what you did during the Great Financial Crisis, if you look at what you did during COVID or during 2022, those behaviors are going to signal a lot better to me what your willingness to tolerate risk is. So were you buying more stocks as they were falling, or were you selling and going to cash? Were you making moves or did you stick to your plan? Like even if you weren’t buying stocks, like with new money, were you like rebalancing? Were you staying the course with your plan? Were you watching the financial media? Were you just freaking out or were you like, oh yeah, I kind of remember that. Like, oh, I’m glad that like that’s over now. Those are very different experiences.
One thing that I’ve noticed though, when we talk about market losses, so like just throwing some generalities out there, like the market falls 10% on average about every 12 months. It falls 20% on average every three and a half years or so. And then it falls 30% or more about once a decade. And these are S&P 500 statistics. I think you can get people comfortable with that and they can even live through some of them.
But what I’ve gained a greater appreciation over the past two decades working with people is that it’s not necessarily the percentage decline or even the dollar value loss. It’s the narrative tied to it. You could have ice water running through your veins through all these other drops, but whatever makes this drop feel different, you know, the terrible words, this time is different. We know that you’re never supposed to say that, but the media makes it feel that way. And so like for the financial crisis, which I referenced, well, that narrative was the whole system is coming down. That’s what, that was the narrative. In COVID, it was, we are all going to die. You know, these are scary things where those might trigger you. In 2022, it was interest rates are rising. That doesn’t seem as scary, but look, that was a much more orderly decline. I’ve just come to appreciate that the narrative is sort of what scares people.
00:13:52 Jon Luskin
And the S&P 500, that’s just a representation of large US stocks. It’s a common benchmark for the stock market.
I want to talk more about ability and willingness. Now we work with different client demographics. I work with do-it-yourselfers, you work with delegators.
And one thing that I see a lot with do-it-yourselfers is that they’re singly focused on their willingness to take risk, but oftentimes ignoring both their ability and their need.
I’ll be working with folks and they have likely more money than they can spend. Their retirement is fully funded and then they just still want to invest aggressively.
I’m curious, what do you see in the delegators that you work with? Is there a disconnect between their ability and their willingness and the need to take risk?
00:14:39 Peter Lazaroff
Well, I think one thing that the people I work with and you work with, Jon, that they share in common is that they’re good savers and, you know, they have built substantial wealth, whether they’re delegating or do it themselves or like kind of sitting somewhere between the two on the spectrum of that. And when you have been such a good saver, what I actually tend to see most is that you don’t want to spend. Like all the things that made you a great saver and investor make you a terrible spender, make it really hard to enjoy life.
And there is a couple of like schools of thought, like when you have much more wealth than you could possibly need, on one hand, your ability is super high. You could go 100% stocks, really have nothing to try to offset the volatility, because in reality, even if the market were to fall 60%, you’d be fine. You can live the life that you want to live.
There’s another like school of thought where it’s like, well, hey, you have everything you need. Why don’t we sort of lock this in and be more conservative? I think I was hearing you say this being true of you yourself as well, but correct me if I’m wrong, but like I see people resist doing that because they’re like, well, look, no, investing in stocks for the long run is the smarter choice. Like over a 20 or 30 year period, you’re almost knowingly locking in a lower return by owning bonds.
I’m actually working on a podcast episode right now that’s just asking the question like, are bonds really less risky than stocks? And I think it’s all about your definition of risk. Like day to day, bonds are less volatile than stocks. So if volatility is your measure of risk, then yeah, like day to day volatility.
But if I were to look at 30 year real returns or actually, so there’s some data in the book that comes from Jeremy Siegel and Jeremy Schwartz. It was in stocks for the long run in 2022. They were so kind to update the data for me through 2025, but it goes back to 1800. And you look at like the real return on stocks, so the return after inflation, and it’s about 7%.
And they also look at it through different economic regimes because I kind of referenced this earlier. I always hear like this time is different and the world is changing, but in reality, the world has always been changing. And then you compare that to bonds and depending on like what the duration of the bonds you’re looking at are, maybe the real returns are anywhere from like 1 to 3%. Let’s be friendly and call it 3%.
So you’re like knowingly accepting four percentage points less of long-term growth when you allocate to bonds. And what that does over the long term is it, is it riskier towards like meeting whatever goals you have for you and your heirs? I don’t know. I’m still kind of like workshopping it.
00:17:10 Jon Luskin
You touched on the issue of bonds being riskier than stocks. This is actually something we discussed with Ben Felix in a previous podcast episode. I’ll link to that in the show notes for folks to check out.
All right, let’s jump to a question from the community. Again, from Bogleheads Reddit, who did the best job submitting questions for this episode.
This one is from username Linett-Chukwuemeka61, and they ask about designing the perfect portfolio. Do you lean towards something like a Bogleheads Three-Fund model or something else?
Three-Fund vs Factor Investing
00:17:38 Peter Lazaroff
Well, there is a whole chapter in the book explaining on how I have my portfolio set up. And I do discuss it actually within the context of my balance sheet. I have a hard time thinking about the portfolio and the choices I’ve made with mine and explaining them to others without them understanding what else is going on in my balance sheet. One of the approaches though, like the Three-Fund portfolio, let’s just get out in front of this. I don’t, I don’t really have any issue with that. I think an index portfolio versus like a factor portfolio is something I explore. And I don’t point to one being better than the other. I do think though, that it is important to understand like what an index portfolio is.
And so the book is sorted into three sections. It’s like some foundational theory. It goes through history, it goes through behavioral finance, it goes through like actual asset pricing portfolio management theory. Then the second section is kind of evaluating these different strategies on the stock side, on the bond side, like do alternatives make sense? And then the third section is all about implementation. And the reason I mention all that is when I talk about indexing, it’s a rules-based system. I am a huge fan of rules-based systems, something that doesn’t try to predict the future, something that can keep costs low. Indexing was the original like investable form of that.
And the analogy I use is like, think about Jon, like fastballs and velocity. Like when we think about, ask people like, what makes a great fastball? They’re going to say velocity, they’re going to say speed. But before the radar gun, nobody actually knew how hard anybody was throwing. Like the scouts would kind of like sit behind the batter’s cage and squint and like if the glove popped loud or if the batter swung really hard and like missed and made a lot of effort, like, but the pitchers just buzzing balls by like, oh yeah, that guy’s throwing fast. But then we introduced the radar gun and suddenly we knew whether people were throwing 89 or 94 or 100. And so like all of baseball reorganized itself around this one number, like velocity. And if you were a pitcher and you had it, you were a prospect. And if you did not have velocity, you were not.
Now today, you fast forward today, there’s actually like newer systems and it’s stuff like this called like PITCHf/x and Statcast, and they’re looking at vertical access, spin rate, movement, wrist angle, grip, all these like little nuances that actually explain more about what makes a fastball effective than just velocity. Now what does this have to do with investing? Indexing is the radar gun and velocity of rules-based investing. You know, market beta is sort of like the original thing of what explains stock performance and indexing gives you exposure to that. Factor investing, what it does is it just takes more things that explain return and uses rules to adjust market cap accordingly. Now, does that make it better? No, it does not. Factor investing explains market returns more, but it comes with more risk. And so there’s like no guarantee that any one strategy is going to work.
But I am very clear, like the listener’s like, well, how does, like how does he design it? When I think about stock strategies, I don’t like traditional active management in the stock arena. Like I think the evidence is overwhelming that stock picking or trying to time the market is not an effective strategy. The evidence is also overwhelming that high costs are typically going to lead to bad performance. Now it’s really like, I mean, I think the nuance of the data is it’s like, hey, the 10% most expensive funds underperform the 10% cheapest funds. I was going to try to avoid using the word decile, but like basically like being cheaper doesn’t mean you’re better, but at the extremes, like the evidence is very, very strong. Sometimes you pay more for something like a factor fund and it can add value.
And I’m just going to say this as an example, but I don’t want my compliance getting upset with me, but you can like look out at an index fund like VTI and another ETF from Dimensional DFUS, which is like a broad market fund, but it is not an index fund. It’s just using more of these factors that explain return. You know, most people think of DFA and Dimensional as like a value shop and a size shop and that sort of thing. DFUS is a broad market fund. It’s not intended to be like severe overweights towards any of these factors. It’s just saying, hey, like if we’re going to build the broad market using rules that explain the overall market, this is what would happen.
The thing about indexing that I do like is that once you do anything other than indexing, you’re introducing uncertainty, you’re introducing cost, you’re introducing complexity, and not everybody should be doing those things. The average, like we all know, and Bogle did a great job at doing this is saying like, hey, the average market participant owns the market. And so he or she who owns it cheapest will have the most return at the end of the day. Could not agree more. However, that’s the average market participant. So if you’re watching and listening to us, ask yourself, well, how am I different than average? Do I have more wealth or income than the average American? And I’m just going to sit with Americans because we’re talking about American markets, but you could think globally, although it’s going to really skew the data, but like, am I healthier? Do I have more money? Do I have different goals? And so like, how am I different than average? So the index question can be the right answer for most people, but that’s what the perfect portfolio is all about. It doesn’t necessarily mean it’s the right answer for everybody.
00:23:19 Jon Luskin
All right, you mentioned some tickers, so I’ll just throw out there: Not investment advice, speak with your financial professional before making any decisions. And then we talk more about factor investing on two previous Bogleheads on Investing podcast episodes we did recently, Ben Carlson and Ben Felix. I’ll link to those in the show notes for folks to check out who want to learn more about that subject. And if you like what you see in those episodes, be sure to subscribe. Also like and leave a comment. Who has a better beard? Me or Peter? We want to know. Put it down below.
Okay, let’s talk about a topic that confuses a lot of investors, at least that’s what they’ve shared with me, bonds. In the book you write, as long as your time horizon is longer than the duration of your bond fund, higher interest rates can actually improve your long-term returns. So tell us about that and break down some of those terms in there for us.
Bond Funds vs Individual Bonds
00:24:11 Peter Lazaroff
Yeah, you know what’s crazy, Jon, is I had an email list that, like I have an email that goes out every two weeks to like all my followers, but I had a special email list that was just for people who wanted updates about the book. And one of the chapters that changed the most as a result of people like following along and giving feedback as I was writing it was the bond chapter. And I know there’s a lot of misconceptions out there, but a few things that seem to come up repeatedly. A lot of people’s bond questions are actually cash questions. And then the other one is the question you just asked, which is about duration and like rising rates and how that impacts like bond funds versus individual bonds.
But you called out perhaps the most important like line within the bond chapter, which is, as long as your holding period is greater than the duration of your bond portfolio, rising rates are actually good for you. You will have higher returns over that duration than you would if interest rates fall. So let’s kind of unpack some things from the very simplest beginning. So when interest rates rise, bond prices fall. We’re not going to go into all the specifics why, but it’s just like, that’s the thing that I think confuses a lot of people. Like when interest rates fall, bond prices rally. What happened in 2022, interest rates were, let’s just say, effectively zero. So as they were rising, there wasn’t really any income to offset those price losses. And so we had the worst bond market in U.S. history.
And duration, duration really just measures the sensitivity of a bond’s price or a bond fund’s price, which is just a portfolio of individual bonds. The duration measures the sensitivity to interest rates. So like really back of the envelope math would say, if your bond portfolio has a duration of five, then a one percentage point increase in interest rates would result in a five percent price decline in your bond portfolio. But here’s the thing about duration, and some people are like kind of aware of that, but the thing about duration that people really don’t understand is that duration is equal to the number of years it takes to break even from any changes in interest rates, whether they’re falling or rising.
And so to go back to the statement that you highlighted, as long as your holding period is longer than the duration of your fund or, you know, your portfolio of bonds, you’re going to come out ahead. And think about the statement I said just before, because duration is how long it takes for your portfolio to break even from any changes in interest rates. So if yields are higher by the time you reach duration, well, then your return’s going to be higher than if yields are lower. I feel like this is a difficult concept to put out there verbally, but there is a graphic that I remember developing in 2022, and I did it for the book as well. It’s figure 7.3. I’m looking at it over on the screen right now. So go to chapter seven, go to figure 7.3, and you’ll see a hypothetical where interest rates increase by 1%, decrease by 1%, or stay unchanged.
And if the duration, and you can pick whatever duration and yield to maturity, starting yield to maturity that you want for the portfolio, but once you get past the duration in terms of your time horizon, the portfolio where rates were rising did better, which is really important for today. Like today, yields are finally back to pre-financial crisis levels. In 2022, they were rising, coming off a base of zero. And so it was a really painful bond market. This year, because yields started at something other than zero, the price declines are being partially offset by the income. So I think people are like stomaching it a little bit better. Also, you know, back in 2022, cash yields were higher than bond yields. So that created a whole nother set of behavioral issues.
But when I think about bond confusions, I think most people don’t want to own bond funds because they don’t like that the price fluctuates. And more specifically, they don’t like it when the price goes down. Because who likes it when prices go down? Nobody likes that. Now, there are some nuances, and I can picture all the Reddit and Twitter people kind of being like, yeah, but how do you recover the price if the duration is constant of a bond fund? One of the things with a bond ladder is like, imagine we build a bond ladder, a five-year bond ladder, with bonds maturing once a year. Every single day, the duration of that individual bond portfolio shrinks by a day.
Whereas with a bond fund, every single day, the manager is reinvesting cash and keeping the duration steady. Now you reset the duration of your bond ladder once a year. So you are also doing the same thing. You’re just doing it with less bonds, less diversification, and more cash drag. And so as you can tell, I’m starting to come out hot on bond funds versus individual bonds. Like I’m a very big proponent of bond funds. The math is overwhelmingly better to own bond funds. If you like the certainty of getting back your principal at maturity, that is a choice you can make. Again, this is all about the perfect portfolio for you. You are knowingly accepting a lower return, and that can just be thought of as the cost of that certainty.
Like you like that certainty, it comes with a cost. And in a rising rate environment, even though price declines that you don’t see in an individual bond, you sort of, like if you went out there to market it, it would be lower than what you see on your statement. You’ll see price declines in a bond fund. However, you are going to come out ahead in that bond fund over the long term.
00:29:52 Jon Luskin
And duration is just a pretty easy metric you can look up. You can find it on any listing of a mutual fund or an ETF. And our YouTube viewers already know they saw a screenshot of the chart Peter was referring to on screen. So if you’re listening to this on audio, you might want to check out the YouTube version.
And then lastly, for more on individual bonds versus bond funds, check out our interview with Ben Carlson. Again, that’s linked in the show notes. I put out a tweet recently saying how I personally use a single all-in-one fund for my investments. And then you responded saying you do the same. Tell us about how you use one single fund to invest.
Single Fund Investing
00:30:36 Peter Lazaroff
Important caveat. I have no taxable dollars invested, which I think is a really important qualification for what I’m about to say, but I have a single 100% globally diversified, 100% stock globally diversified fund that takes a factor approach. It’s offered through Dimensional Fund Advisors. Neither you nor I are trying to give investment advice or, you know, like this is all just education. So I feel like I can say that and we’re all safe. But for me, the question I feel like a lot of people ask is, if you’re managing all your clients’ money with all these different funds, like why is one fund good enough for you?
Well, for starters, this fund is more expensive. So I’ve made a choice to outsource my investment management, and I can build the same portfolio using its component pieces more cheaply. The other thing is that with multiple pieces, there can be some asset location aspects. There can be some tax loss harvesting. But Jon, earlier I was talking about the difference between long-term returns in stocks and bonds and how when you add bonds, you are knowingly accepting a lower return, which is a risk in and of itself.
I also think that I’ve been doing this for 20 years. Granted, I made the choice 13 years ago to go all into one fund. I was rolling in the 401(k) from my old employer to my new employer. And I didn’t make the choice like on day one. I spent a couple months of time thinking about it. And honestly, the thing I disliked most about the fund was that it was so much more expensive than what I was doing. Now the cost of that fund have come down over time. But to me, I have so many things going on and I’m responsible for so many clients. I don’t have time to worry about my own portfolio. And I need to make sure that it’s being rebalanced just relentlessly and without emotion.
And I think in general, I also in my personal portfolio prior to making this choice and having taxable assets too, like I made the same mistakes everybody else does. Like yes, I largely did a lot of things right, but yeah, like I, maybe it wasn’t market timing in the most traditional sense, but like I maybe rebalanced a little bit differently or tax loss harvested a little bit differently or, you know, made choices in a way that once you put human judgment into the equation, you’re going to eventually make a mistake. And so for me, this was the right option.
One fund can be difficult for people who suddenly just want the S&P 500. So I did this 13-ish years ago. The S&P 500 has trounced a globally diversified fund, whether it’s index or factor approach, but I know the benefits of it and I know I’m not going to deviate. So I think a one-fund approach can be really hard for somebody if they’re not a student of the market, if they don’t have very tightly held beliefs on their investment philosophy. It’s just not for everybody.
And then the last piece is I think as I have a taxable account, I suspect that I will utilize SMAs to some extent. And I might also utilize more of an index approach. Like this is a pretty heavy factor approach of what I have going on in my tax deferred accounts. But, you know, I think at some point I aspire to have taxable savings and maybe we’ll grow to two funds or a fund in an SMA or something like that.
00:33:47 Jon Luskin
We had a previous guest on our show, Ben Felix, also personally uses an all-in-one fund, that’s already linked to for folks to check out. And then I’ll also link to my presentation at the Bogleheads Conference on this exact topic. And then also our interview with the BlackRock rep, where he also talked about the all-in-one funds that that company offers.
Peter, thanks so much for joining us on the Bogleheads on Investing podcast. Learn more about Peter. Check out the longterminvestor.com.
00:34:14 Peter Lazaroff
Thanks for having me, Jon.
Jon’s Thoughts
00:34:16 Jon Luskin
That wraps up our interview with Peter. Please allow me to share with you a couple final thoughts. Factor investing. Man, it sure sounds sexy. More risk for more return. Maybe even some complexity in there across the various factors a particular fund may have access to. And while it’s all well and good for some, I think about in the almost 500 households that I’ve worked with, some folks are certainly going to opt for that factor approach. And then I’ve also worked with folks who’ve abandoned that factor approach, having not really stuck with it for a long time, regretting the decision to take a factor-based approach to investing.
Of course, it’s difficult to know what sort of investment strategy you’ll want in the future, but certainly detouring from the conventional low-cost, broadly diversified index fund portfolio might increase the odds that you’re not going to stick with that in the future. Factor heads might get triggered at what I’m going to say next. I think one problem with the approach is that it’s this allure of higher risk for higher return. Higher than what? Well, the index. So you’re always going to be benchmarking your factor fund performance to that low-cost, broadly diversified fund. And when it underperforms, that’s when you may struggle with maintaining that approach.
I think for that reason, my take that I’ve expressed before is that if you are going to go down this factor approach, I think you should be very excited about the likelihood that you are going to underperform. Consider going into it thinking, “Hey, this thing is going to do worse than my index fund, and I am pumped about that.” If you can’t say that, I’m not sure factor investing is right for you. Because when that factor fund will eventually underperform over any particular time period, that’s when you’re going to be tempted to jump ship. And that’ll also possibly be the worst time to do just that. As with index fund investing, with factor investing, you need to stick with it for it to work.
I was really excited to learn that Peter uses one single fund to invest. That adds one more point to the tally of some really smart guys that use an all-in-one fund for their personal portfolio. As with Ben Felix, Peter knows his stuff. And given all his intelligence, he again has the wisdom to choose a single fund. Now, Peter, like Ben, these are DIYers, even though they serve delegators. They’re managing their own portfolio, much like much of the audience does too. So if these really smart do-it-yourselfers are taking a very simple approach to investing, consider if additional complexity makes sense if you too are managing your investments yourself.
Thanks for joining us for the Bogleheads on Investing podcast. For more free financial education, be sure to check out videos from the 2025 Bogleheads Conference, all available on YouTube for free. You’ll also find countless shorts from both the conference and this podcast there too. And if you still want more, go to boglecenter.net, where you’ll find a treasure trove of personal finance resources designed specifically for do-it-yourself investors, also free.
This podcast is free because it’s made by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit dedicated to building a world of well-informed, capable, and empowered investors. Show your support by going to boglecenter.net/donate to make a tax-deductible donation. You can also show your support by liking, commenting, subscribing, and sharing this episode with others. Of course, a big thank you to the folks who make this show possible: Michael for help with transcriptions, and Ross, our video editor.
Lastly, this podcast is for informational and entertainment purposes only. It should not be construed as investment, tax, or legal advice.
