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

hello hi we're going to get started today good afternoon everyone thanks for coming this is an authors at Google event and today we have Daniel Solen here with us Daniel Solen is a leading Securities um arbitration lawyer and a senior vice president of index funds advisor and inde independent financial advisor organization Daniel has prepared on the O'Reilly show CBS News the early show msnbc's weekend Economic Review CNN's money and Bloomberg television he is also a contributor to the Huffington Post a political online news website and blog and is a frequent speaker of on investment related topics if anyone's interested in his most recent Huffington Post I have a few copies which I will leave um by the exits and you can grab one on the way out uh Danel s is the author of does your broker owe you money he is here today to discuss his most recent book A New York Times bestseller a Wall Street Journal bestseller and a business week bestseller the smartest investment book you'll ever read please join me in welcoming Daniel Solen thank you very much uh Kelly can everybody hear me even in the back so the mic is working fine um I have to tell you I speak before a lot of groups and speaking before Google is a somewhat intimidating experience and I'll tell you why uh when when I learned that I was going to give a little talk here I kind of checked it out with my family and like most people my age my children are much more techsavvy than I am so I I have to give you a little insight into my family I have two children Andrew and Sabrina I'm married my wife is here um Andrew is an audio engineer with an Ecommerce firm their entire business depends upon people making Google searches their organic ranking if you go down his company is out of business basically um so I my history with Andrew was that like most parents I really wanted to give him the benefit of a lot of different experiences so when he was in 11th grade I thought what a great idea I'll send him to the Harvard summer school I sent him to the Harvard summer school thinking well he's going to learn a lot he'll be around a lot of other smart kids and to make a long story kind of short when he came back what he had mastered was the discovery of pot and following the Grateful Dead as a consequence he had one of the largest uh tie dye shirt wardrobes in history which was his exclusive uh wardrobe for several years uh as he's evolved however he's he's a musician he was a lead guitarist in a in a hard rock band and so when I called him and I said hey Andrew good news I'm going to be talking in front of Google employees and I think you'll pick up very quickly on a common theme here he's a man of very few words so his first reaction was very cool and then there was a long pregnant pause and he said those dudes are really smart and I think it was said like you could be in trouble here but I so I didn't pursue that and then I I called my daughter and my daughter is very much like me she's a journalist trained as a journalist she was co-founder of Cosmo girl a former editor and she of 17 magazine she's also very techsavvy she works for a division of the Time Warner company developing web content probably a job that didn't even exist 5 years ago she left me she questions everything and I call her headline woman because she's great at coming up with little catchphrases that kind of capture the moment much better than I am in a lot of my journalistic style I really learned from my daughter who was very into communicating with people in a way that they could can understand that was kind of why I wrote the smartest investment book you'll ever read so I want to read you the voicemail that that she left me I'll read it for btim Dad think about it it would be easier for a liberal agnostic to be appointed to the Supreme Court by the Bush Administration than it is to get a job at Google you you wrote a book entitled the smartest investment book you'll ever read They're going to have you for lunch finally I bounced it off my wife Patricia and if I can just take a moment she's in the back of the room a great source of support and I just want to introduce everybody to [Music] her and I said Patricia I'm going to be talking in front of this group of Google employees and I'm going to be talking about the smartest investment book you'll ever read and I'm going to be telling them exactly how to invest so when they walk out of that room they're going to know exactly what to do and she said this is great great they're really smart they're your demographic they're going to get it so I have one one vote saying I think I can get this message across in a way that everybody's going to understand and appreciate two are very very concerned about my ability to do so so while I hope I can convey information that's useful to you I really need a lot of feedback from you either just raise your hands whatever you want ask me questions or tell me afterwards if you come up to me about whether this message resonates with you because I like to think that really smart people are unemotional look at data make rational decisions based on the data that they look at so I want to lower expectations initially and then I'm going to raise the bar so to lower expectations let me tell you why I named this book the smartest investment book you'll ever read which sounds like an incredibly arrogant and presumptuous title I didn't name it the smartest investment book ever written I named it the smartest investment book you'll ever read because it was clear to me that there was an absence in the marketplace for investment books that normal people could read understand and Implement all of the books that I had read I had a lot of trouble getting through them and when I was done I felt more confused than before I started I didn't know how to invest is there a way to invest so the title is intended to be this is the smartest investment book not ever written but that you'll ever read you'll completely understand and you'll Implement there's a little exception for this crowd because I think you guys could probably read and understand any investment book so let me tell you what I think are the best investment books ever written because I think that's useful information personally I think a random walked down Wall Street by Burton malel is really the best investment book ever written I'm also a big fan of Bill Bernstein's books the four pillars of investing the intelligent asset allocator uh these are wonderful books almost anything written by John Bogle the founder of Vanguard particularly Bogle on mutual funds he has a new book out that's kind of similar to my book but doesn't ever really get to the bottom line which is what exactly I'm normal person I'm working hard I have a 401k I have some Investments what exactly am I supposed to do so that was lowering the bar I don't want you to think I I really believe I wrote the smartest investment book you'll ever read or or that's ever been written but I do want you to believe that I think I wrote a book that you can Implement and that will really create value for you over the long term so now let me raise the bar here's my goal in the few in a few moment moments and I really don't have a prepared speech or even a particularly long one so I really want you to be as interactive as you want you can interrupt me at any time let me tell you exactly how you should invest I'm going to drop to the bottom line and then I'm going to tell you why all the data indicates that this is what you should do and what I'm going to say is considered controversial but really it's not controversial based on any data it's it's controversial because there's an entire industry called the Securities industry that makes a great deal of money trying to convince you that they have an expertise that they don't have so before I justify My Views let me just tell you this is exactly how you should invest I can do this in five minutes you will have no doubt about what you should do first thing if you are using a traditional broker or a traditional investment advisor defined as somebody who says I can pick stocks that will outperform other stocks I can put you in mutual funds that have good managers that will outperform other mutual funds I have a feeling for where the market is going it's going up or going down you can rely on me I look at the ticker all day you can't possibly do that this is 95% of all Brokers and investment advisers if you want to be what I call in my book a smart investor what you have to do is stop dealing with those people absolutely critical that you stop dealing with those people and stop relying on any advice that they are giving you that is premised on their ability to do any of those things there is no academic peer review financial data indicating that anyone has that that ability with persistency they have it over the short term but we know that over the short term you can get lucky so we'll get to that in a moment so okay first thing you're going to you're not going to deal with any broker or any adviser who says I can beat the markets I have these great insights second thing determine your asset allocation this will take 10 minutes of your time asset allocation is defined as what percent of your assets and combine your 401 K assets with your non 401K assets okay because you're one person that money is the same it doesn't have different goals you deter asset allocation means what percent of my assets that I have to invest get invested in stocks and what percent get invested in bonds asset allocation determines 94% of the variability of returns in your portfolio 94% all you hear about is stock picking and Market timing this is relatively insignificant what stocks you buy relatively insignificant whether you get in the Market at this time or that time that's not where your focus should be if Brokers knew what they were talking about paid any attention to the literature what they would be calling every day instead of saying to their clients buy this stock sell this stock this is where I think the Market's going they'd be saying I want to talk about your asset allocation it's most important thing you can determine what's my asset allocation okay how do you do that you can go to smartest investment book.com there's a free questionnaire it will take you 10 or 15 minutes to fill out it will tell you what your asset allocation should be uh there are many asset allocation questionnaires on the web the worst of them is better than what most people do most people are 100% invested in equities let's assume you're the laziest person in the world you say look I hear what you're saying about asset alloc I refuse to take any questionnaire all the data shows that if you allocated 60% to stocks and 40% to bonds then you would do better than 95% of all investors in the market I'm not recommending that I think that people should be serious about getting control of their assets getting control of their finances you all work really hard and I'll talk in a minute about what's going to happen to you if you don't do this so first you determine your asset allocation okay second now you know let's say your asset allocation is 60% stocks 40% bonds how do you determine what should be in the 60% stocks which should be in the 40% bonds all you need to do is buy three mutual funds you don't need a broker you don't need any advisor you call up any of the major fund families like Vanguard T price Fidelity I lay out out in appendix B of my book exactly what funds you're going to buy here's the theory you're going to buy what I call capitalism Inc we even have a little certificate for this capitalism Inc is all stocks in the global stock market they had in 2006 a total market value of 29 trillion sales of 23 trillion net profits of 1.8 trillion 60 million employees 16,000 chief executive officers 442 General Industries and they operate in 192 countries since nobody can tell you what sector is going to outperform any other sector uh what what asset class going to outperform any other asset class for the 60% of your portfolio in my hypothetical that's going to go into stocks you're going to take 70% of the 60% which is is 42% right and you're going to invest in the broadest index fund that covers the US domestic Market my personal favorite is the Vanguard Total markets fund I have no affiliation with Vanguard I don't benefit at all from making any of these recommendations but that mimics What's called the Wilshire 5000 the US economy is roughly 50% of the world's G&P so you need to own a meaningful portion of your port folio is going to be in a broadly Diversified portfolio of US based companies the other 30% which is 18% of your total Equity portfolio we want you to have a globally Diversified portfolio nobody understands the global economy more than people who work at Google I looked at those searches coming from all over the world it doesn't make sense for you just to confine your Equity purchases to us-based companies so we want to give you exposure to the international markets how do you get that exposure I met somebody in your in your parking lot who's from India said I'm investing in the Indian economy I think that market is great and I didn't have a chance to explain this but will when I go out is that's what you don't want to do the Indian economy may be a great economy this year but you want to follow the same strategy that doing for the domestic stock market you want to you don't want to pick the country that's going to outperform other countries you want to own all of those countries so you're going to invest in another index fund and my favorite here is the Vanguard international Index Fund because it's a great cross-section of international Equity Funds so with those two mutual funds you now have a globally Diversified portfolio of equities the bond portion of your portfolio is very simple to to implement because we're going to give you a an Bond index fund that basically gives you broad exposure to all the first class investment grade bonds that are based domestically and here you can do something like the Vanguard Total Bond index portfolio now if you just did that and I want input from you on why so many people don't if you just did that based on 80 years of recorded data you would be in the top 5% of all professionally managed money the top 5% why do you want to be in the top 4% if it means that you're going to take significantly more risk so all you that's it that's the entire story of what appropriate investing is so when I wrote my book the first review came out it was a huge review in the Sunday New York Times and the newspapers and the Securities industry do not like this message with some rare exceptions like Jonathan Clemens of the Wall Street Journal is certainly an exception but they don't like this message because how can you sell newspapers or magazines every month saying buy three index funds I mean check your asset allocation buy three index funds so newspapers the whole financial media has a vested interest in convincing you that and it's easy to convince people if I just study more there are more bu a hedge fund um which I'll have more to say about buy alternative buy gold buy REITs uh here's a hot fund manager this creates a lot of excitement so if you watch like CNBC you'll see that the reporters are breathless on the floor of the stock exchange well what's happening today Fred today investors are nervous they're nervous about this that other thing when we see a pullback in the market that's at noon and then at then at 4:00 when the market shoots up Fred I thought investors were nervous well they they now learn that tomorrow there's going to be another announcement and then now they're not nervous anymore so there so what happens to people like you you're buffeted by all of this information and you believe because you're trained to believe we're all trained to believe this if we just work harder we can do better but what you really have to understand is let's look at the data that supports what I'm saying market returns obviously I can say to you if you do what I'm telling you to do I can guarantee you that net of costs which are very low you will capture the market returns for your particular portfolio because you're investing in those markets I can guarantee that I mean you can't miss you're buying funds that are geared towards particular benchmarks they're going to give you the returns of those benchmarks and I've told you how that plays out over any 10-year period over the last 80 years okay so now what happens let's look at first what really smart people do what I mean because I think that's useful I mean none of us is that smart right why don't we look look at how do the smartest people in this country invest first of all who are they how do they invest 4 trillion of pension and Trust money is invested exactly the way I'm telling you to invest it's indexed $4 trillion these people can hire any broker or investment adviser they want they don't do it why because they understand the data that over the long term they're going to significantly underperform the markets who believes what I believe and why isn't it publicized every Nobel Prize winner in economics hundreds and hundreds of academic studies that have peerreview academic studies that have appeared in financial journals um Warren Buffett who's off I get this question all the time hey Dan I heard that speak what about Warren Buffett so when I started I was more defensive than I am now and I would say if when your broker calls you you ask your broker what his name is and if he doesn't come back and say my name is Warren Buffett what do you care what Warren Buffett is doing that's not the advice you're getting War Warren Buffett believes that most investors should invest in index funds what Warren Buffett does is by control of companies hold on to them for long periods of time putting in good management and Warren Buffett functions as a brilliant investment manager he is not buying and selling stocks trying to out guess the market Peter Lynch the famous guy from Fidelity believes the same thing so there is overwhelming evidence that people believe what I believe but less than 10% of all individual investors do this why because hundreds of millions of dollars is spent on Advertising but The Brokerage industry that says um our analysts you know can figure out what stocks you should buy but we had the analyst fraud Scandal and that seemed to indicate first that the analyst were selling out the retail clients to support the investment banking clients but second there's a lot of data that shows that if you do the opposite of what the analysts recommend you would actually end up better and my next blog on The Huffington Post is going to be I've got a hot tip for you buy crappy stocks because what you always hear about is my broker can find Quality Companies but all the data indicates that over the long term poorly managed companies with poor earnings outperform Quality Companies in terms of returns so virtually everything that you've learned about investing is geared to separate you from your money and the people who end up with your money are Brokers and financial advisers who never lose because their goal is to get you to trade and to invest in expensive mutual funds that will underperform index funds we took a look and there's a study in my book over over a 10-year period we looked at I think 1,00 funds that were supposed to equal or exceed The Benchmark of the S&P 500 over a 10-year period 3% equal or exceed roughly 97% fell short obviously you would have been off much better off just buying the S&P 500 Index Fund delbar which is a very well-respected Boston based research firm with no acts to grind they studied investment returns of all investors over a 10year period I think that period it was like 1994 to 2004 I may be off a little bit but I'm not off by much during that period the S&P 500 returned 13.2% how did investors do listening to the advice of Brokers and advisers under 3% why because they're chasing returns they're not sticking with a fund after a couple of years the broker saying look this fund outperform that fund and so they're running from One Fund one expensive fund to another expensive fund the difference in expenses between say the Vanguard Total markets fund and a comparable actively managed fund Vanguard Total markets fund last time I looked had an expense ratio of 10 basis points 1/10th of 1% the average competing fund is 150 basis points and what do you get you get a fund that's likely to underperform the Vanguard fund over a long period of time so what about all that data all that morning star data all those Stars the fstar fund or all or what you hear about funds that cons you know outperform for 5 Years it'll say you read every every Sunday in the New York Times say this fund is outperformed it's benchmarked for the Last 5 Years now I tread in this area lightly because I know what math gurus you all are and I'm really math phobic but here's the only example I can give you coin flipping we can all agree is something that is random people are not better coin flippers than other people so we know that coin flipping is random if I flip a coin a thousand times s it is likely that I'm going to get roughly 500 heads and 500 Tails but what happens if I flip a coin 10 times it is actually more likely than not that I'm going to get a streak of heads or tails I'm not going to get a perfect distribution over that short period of time of heads and tails I might have five heads in a row does that mean that I'm a great coin flipper no it means that luck probability played a role if if an investment manager shows five years of great returns does it mean he's a better investment manager not based on all the available academic data what all the available academic data tells us is it means he was lucky for a 5ye period he may even be lucky for a 10-year period nobody has ever demonstrated persistency in fact fact what all the data shows is that mutual fund managers who do well over a 5-year period tend to end up in the lowest quartile over the next 5year period you actually would be better off buying poorly performing mutual funds so in a nutshell that's my message so let me now just well I'll give you one more example by the way I kind of like this example I don't I want to talk about Jim Kramer and Allen Greenspan because they're two really favorite subjects of mine alen Greenspan I mean call me crazy I could not understand a word that the guy said I absolutely I did not understand why when people talk about financial subjects generally they speak in this peculiar elliptical way that nobody what what is are you saying you have confidence or you don't have confidence in the economy I could never understand this he was a master at Double speak so he would give a talk the markets of course would be hanging on his every word and depending on who you are you could interpret what he said positively negatively or that it was just gibberish which was my own interpretation so alen Greenspan I presumably he's was the head of the Federal Reserve board who knows more about the markets than Allen Greenspan presumably no one so in 1996 he gives a speech and wherever he speaks I mean he could he could speak before like a dog kennel there' be reporters would be reported everywhere gives a speech in Washington before a Press Club here's what he says I believe there is a irrational exuberance in the market translated into normal language I think stocks are too high and I think people are getting carried away a huge sell-off ensues that day okay so what happens over the next 3 years greatest bull market we've ever seen in equities that's what happened over the next 3 years so people who listen I mean Alan greensman smart guy people who listen to him he knows more than anybody he couldn't call the direction of the markets what are the chance of your broker being able to call the direction of the markets so last week I go on Fox and Friends why do they have me on because the markets are volatile markets lost 250 points one day 125 the next day and the morning talk shows are filled with Talking Heads like me and I get questions like this Dan what's happening in in the markets what should investors do they're nervous they're they don't know what to do they need guidance what do you think like I know and I said okay well let me break some news the markets are not volatile markets are very predictable over the long term how do I know this I look at history over the long term the global markets always go up take a look at 2001 right September with greatest tragedy I think this country's ever suffered Dow Jones goes down to 9,000 what happens between 200 2001 and today an unmitigated disaster of economic foreign and political news that I cannot even remember in recent history we're in a a war that could not be going worse our deficits are at alltime record highs oil has tripled in price is headed towards $100 a barrel it's currently pushing 80 the housing market is in the pits nobody knows when it's going to recover what happened to the Dow Jones Industrial Average it brushed 14,000 so all we know is we have a very resilient economy the markets will always go up so you always want to participate in the markets but you can't can't start picking which part of the markets you want to participate in that's why you need a globally Diversified portfolio Okay let's talk about Jim Kramer I I think I've never met Jim Kramer I I think I am going to meet him soon but I here's my take because I'm asked a lot about well what about Jim Kramer the good news about Jim Kramer I think is he's gotten a lot of people talking about the markets and finance particularly Young people and I think that's a good thing because when I was a young person nobody ever talked to me about investing I wish somebody had come up when I was your age and said this is the way to invest I mean this would have been a wonderful thing for me because my portfolio would have been entirely different so to the extent Jim Kramer has stimulated discussion I think it's a good thing here's the bad news does it really take this kind of hyperkinetic personality sticking knives in ducks blowing whistles and yelling booya is that related in some way to intelligent investing and as he marches around screaming and yelling and blowing whistles and buzzers and whatever does this actually communicate to people an intelligent message about how to invest so I went and looked at the data how does Jim Kramer do with his stock picks how hard can it be he's on television he recommends stuff he has opinions on every stock 47% less than a coin toss based on all the available data I've looked at Jim Kramer is Right 47% of the time okay what does this tell us I mean he's a very smart guy by the way how did he make his money hedge funds if you want to make a lot of money apparently the way to do it is form a hedge fund get a lot of assets under management and given the fee structure of hedge funds 2% whether you win or lose up to 50% of the profits you only need a couple of good years so let me end with a little discussion of hedge funds because hedge funds really make my point so here's what's happened in the last couple of weeks Harvard University these are certainly smart people they have a guy who runs their endowment billions of dollars he says to his boss I want to leave and form a hedge fund they say great idea here's $350 million of our money that will help you get started a complete unmitigated disaster I don't know if that fund is out of business but the losses have been absolutely horrific is your broker smarter than the guys at Harvard who run tens of billions of dollars Bear Sterns one of America's leading financial institutions do you find it somewhat odd that there's all this talk about the subprime market is this a mystery that people are Lo owning money out to people who are not creditworthy and extracting High interest rates that doesn't seem that obscure to me Bear Sterns amongst the smartest people on Wall Street has two hedge funds and suddenly we wake up one day and what do we find both are bankrupt because they overcommitted in this area is your broker smarter than these people at be Sterns and if not do you think your broker at Goldman sack or Merill or Solomon Smith Barney do you think they're smarter than their counterparts at the other firms there's no expertise here all of this is an in my opinion all of this is an elaborate Rose we have an entire industry predicated on selling an expertise that does not exist and you are probably the smartest people I will ever address and if past is prologue you will fall prey as victims to the very same people in I'm kind of a reformed lawyer in my last year of practice I represented two billionaires and a dirt farmer from rural Georgia I'll tell you what they had in common they all fell prey to very sophisticated brokers who were telling them they could do something that they could not do so my message to you is don't do it don't use them there's a simpler easier way and if you follow that way the kind of business success that you're having will be followed by investment ex investment success and that's your responsibility as siblings as Fathers as mothers as people who want to take charge of your own financial future you have an obligation to invest intelligently so be a smart investor do what all the smart people do don't fall prey to any of these other people and I'm happy to take all of your any questions that you may [Music] [Applause] have so two detailed uh clarifications why is your uh Bond recommendation us only rather than internationally Diversified and why do you recommend having no real estate at all in that mix okay well first let me take the second question first which is why do I recommend having no real estate I absolutely do not recommend having no real estate the Vanguard Total markets fund benchmarks the Wilshire 5000 the Wilshire 5000 includes every segment of domestic stocks that includes REITs other real estate holdings it includes Commodities it includes every segment my entire point is you want to own everything and as to your second question we we recommend and all the lit by the way very little of this is original thinking I mean I was as surprised as anybody when my book did so well I didn't have a single creative thought in that book I mean I'm I'm very candid about saying that all I did was take existing research and distill it in a way that normal people could understand and because of the currency problems with foreign bonds that's why we recommend that people who are Americans hold domestic bonds because we have no way to deal with the foreign currency problems yes sir so I have several questions yes if I may sure so just to chain on Alex's question uh when you say when you recommend uh American uh stocks and and 30% in international exposure yes so what would a you know like fund manager in Europe do I mean Europe is is an economy today you like of the size of the United States so would they be right in doing uh 70% of European stocks and 30% of sort of American question let's can we stop with that cuz I can only remember one question at a time okay I wrote a Canadian edition of my book um called um you know smartest best book you'll ever read Canadian Edition cleverly cleverly entitled right so we we had to then confront this issue what could what should Canadians do and it turns out that Canada is approximately 2% of the world's GNP and we had P the phds I work with we had them run all their calculations they said well then Canadian should be exposed 10% to the Canadian economy the balance to the world's economy I'm not actually sure what that algorithm was that got from 2% to 10% the problem with people who live outside United States and people frankly live in the United States we're comfortable with what we know so Canadians tend to invest 90% in Canadian companies because they see them as they drive down so that's the answer is you would take the GMP of the country where you live and you would extrapolate from that and that would be your exposure to those markets so you didn't also comment at all you know like to the when when you say you like domestic stocks yeah I mean those companies in in in a lot of examples they actually invest outside correct so are you I mean is this calculated into the international exposure and then you know just to finish because I want to give my colleagues as well time so what about uh ETFs I mean uh and for example simple strategies as uh diversifying your ETFs you know like with an asset allocation that matches yours but then maybe you know like from time to time when you see this Market exuberance uh doing you know like a simple right call on uh on the ETF you know like a shortterm right call to sort of go and maximize a little bit the return I mean that's very okay let me let me take first question first it is a rare American company that doesn't have some International exposure so we kind of factor that in and say well if you don't want to use an En advisor the best we can do is give you the Wilshire 5,000 and the 30% is supposed to take into consideration that we understand that some of these domestic companies also have international exposure okay now if you use if you use a passive investment advisor there is a a company called dimensional funds advisors in Santa Monica California where a lot of the smart money invests I have an obvious conflict in self-interest so I don't like to talk about a lot but that is a company that slices the market differently still passive but it has different levels of funds in particularly the riskier asset classes in Europe uh Emerging Markets small value and you can newon support folio in a different way to take into consideration what you're talking about unfortunately the big fund families have not gone that route so this is the best we can do but for most people this is perfectly adequate ETFs yeah really ETF is a two-part question if you live in this country you have access to wonderful lowcost index funds there is no reason to use ETFs if you're a resident of this country why because of a number of technical problems first you have to open up a brokerage account second you charge commissions third there's a bid ask spread that has is kind of a builtin cost that is difficult to quantify particularly for the Emerging Markets small value um ETFs um fourth there have been some tracking problems noted in the literature they don't seem to track the benchmarks as well as the lowcost index funds in Canada interestingly in Canada they don't have lowcost index funds index funds there cost a lot so we had to recommend when we did the Canadian book we recommended people Implement that using ETFs where you get into trouble is the second part of your question the second part of your question is well because if I have ETFs what I can do is when the markets get hot I can do this and they can cool off and I can do all efforts to time the market are a zero sum game nobody can time the markets consistently that assumes there's a skill called Market timing there was a study done of Market timing newsletters over a 10-year period these are people that you pay a subscription so they can tell you when to get in the market when to get out of the market 98% of them went out of business Market timing is not a skill that we have you always want to be in the market you always want to be in the market when people say to me should is look the markets are up they Vol should I be in the market I said look if you're worried about shortterm volatility you deal with that with your asset allocation then you have more Bonds in your in in your portfolio if you understand as this probably the only group I ever talked to understands the concept of standard deviation which measures volatility of a portfolio Okay okay if you understand standard deviation here's a little fact toy that's very useful if you know that you can hold for a 7year period or more the difference between the riskiest portfolio all equities and the most conservative portfolio all bonds starts to go like this so for young people as I look around I'm seeing a lot of 20s and 30s you want to your PO asset allocation should be mostly in equities but should have some Bond depending obviously on your individual situation special health concerns divorce other things but we know that equities outperform bonds over the long term so if you have a globally Diversified portfolio and you know you're going to hold you want to have you want to load up as much on Equity index funds as possible yes sir most of the index funds or indexing strategies are based on you know they're Market weighted indexes and lately in the last one or two years there's been a lot of talk about fundamentally weighted indexes where people talk about the same thing that you're talking about but not using the conventional uh you know indexing so what do you what do you think about those you're talking about Jeremy seagull's work primarily from the University of Pennsylvania okay first of all uh this issue of indexes is like that's a very important question because if you're benchmarking an index you want to be pretty sure that that index is an accurate index dimensional funds advisors does not use the traditional indexes that Vanguard uses they use what are called the crisp indexes which are developed by the University of Chicago School of Economics they're much more sophisticated indexes for most people however I believe that the standard indexes are perfectly adequate as for the Jeremy seagull fundamental indexing all I can say is we don't have enough long-term data it it may turn out that he's right but so far there has not been wide Acceptance in the academic Community there is a tendency by the way for people to make investing very complicated and and that's what I found when I did a review of the literature if I can make it really complicated that must mean that I'm really smart only I can understand this now I'll give you all kinds of charts and graphs smart investing is really simple buy three mutual funds rebalance every 6 months to be sure that your asset allocation is not out of sync don't do anything else don't look at the markets don't read The Wall Street Journal don't watch the BC except for entertainment go on with your lives none of that stuff is going to help you make money what I'm telling you will help you make money yes um back there hi Dan thanks for coming sure um so a lot of my friends used to work in the uh you know Finance industry back in New York but um and we read you know I read the book Monkey Business that's when I started to catch on to a lot of what you're talking about right so I have two questions the first one is if everyone caught on to this and started moving towards overall total index funds right wouldn't that be a huge hit to the whole you know financial industry and let's stop with that yeah that's a really good question by the way that's a question I actually get a lot the best answer to that question if you were to go to uh DFA us.com to the FAQ page they give a really intelligent answer to that question but let me give you my distillation of that first don't worry about it it's never going to happen most people are going to be there's a greed Factor there's a whole thing called behavioral Finance why do we behave the way we behave is it cognitive dissonance why do we ignore data why do we run around calling our broker with cell phones what do we do Fred what why do we do all those things so people are not going to give that up they're addicted to the chase they love the hunt particularly sorry to say men women are documented as better investors because they're more risk adverse so it's not going to happen second and I can't go too deep on this CU I don't really understand it my basic understanding is if the whole world indexed that would actually create inefficiencies in the market that then could be exploited so as we look at the current data more than 50% of corporate and Trust money index less than 10% indexed we have a long way to go so what was your second question question here yes sir thanks for coming uh one question is uh you've you said that you've been capturing data for 80 years you've looked at 80 years so that like you know that times you right after 1929 market crash uh so wouldn't that cue a lot of your data does uh but the what you can do is if you were to go to ifa.com you could look at any asset allocation of any portfolio and you could look at returns to go one year 3 year 5 year 10 year I think uh 25 year 35 year 50 year and 80 year I never quote 80-year data because you're right that captures the Depression years and that was before we enacted regulations that regulated the markets the Securities Act of 1934 Securities Exchange act so you should look at always at the longest term data you can look at and to me that's 50-year data but I have one caveat we live in a crazy world as you know even long-term data is not necessarily predictive of the future that's why I find it kind of personally offensive I mean truthfully I do this work because I really like to save people from becoming victims of an industry that I believe is just an Insidious Force I have seen the ravages of what happens to people when they lose their money I saw what happened in the tech wreck I saw people who were retired who are now greeters at Walmart I had clients who committed suicide who had got divorces I've seen all that happen so every time I address a book every time my publisher gives me sales numbers on my book I really say to myself this is great if they do this they'll never be a victim of anybody so yeah you can look at long-term data but just keep and way in the back of your mind when a dirty radioactive Bond Go bomb goes off in any major city in this country all the markets all over the world are going to be shaken it's the best data we have but it's not necessarily predictable okay and the next question is uh if the fact that like a lot of the companies today are taking themselves private yes and if you want to invest in capitalism Inc by using index then you're you're not touching for example the management consulting firms you're not touching law firms and all this stuff and and this trend seems to be picking up so so what about alternative Investments is your question right right okay so if you look at the data on alternative Investments private equity and hedge funds here's what you find I mean this data is published you find that on average those Investments underperform the basic indexes on average like you look at the data for 8,000 hedge funds how' they do over the last say 5 to 10 years A lot of them you you can't get good long-term data because the average life of a hedge fund is three and a half years but when you look at it the average hedge fund underperformed the S&P 500 Index so I'm not tempted to do that the way the academics say you should to deal with precisely your issue is you tilt your portfolio towards the riskier asset classes Emerging Markets small value small cap and when you Nuance your portfolio in that way which we try to do with Vanguard but that index funds advisor really does much better because it has access to dimensional funds advisors which permits you to Nuance the portfolio you can now take advantage you can leverage your returns you can actually lower your risk and increase your returns so I don't I'm not saying that there are no good private Equity Investments out there there may be wonderful ones I'm not saying there are no good hedge funds out there there may be great ones I'm saying I can't evaluate that data so I can't recommend them yes sir so I mean it seems like when you're choosing countries to investing like you know for the US you're saying allocate a certain amount to the US aren't you essentially you're picking there as well um assuming you can pick one country that'll be better there why don't you just tell people to diversify completely globally I do that is my message divers by completely globally by by capitalism Inc 192 countries we don't pick countries we don't know which country is going to outperform any other country we just say if you're an American you take a look at the GMP here 50% we put you 70% into American based companies 30% into all other International companies look at the what Vanguard international index funds invests in it's a broad range of international companies so we don't pick we don't pick countries for precisely that reason I mean we could get lucky look I could come here if you want to really make a lot of money in life you come here and you stand up like Jim K you say look I think uh China is the place to invest well I have roughly a 50% chance of being right or I say by the way let me I don't want to get too close I think you should buy Google I think all your assets should be in Google but you know it's very interesting at the end of 19 at end of 2006 mle fool I mean a lot of people read that rely on it mle fool came out with six pred I five of them were positive like buy this stock buy this stock one was negative that was Google okay sorry they're completely wrong they're also wrong on three of their positive ones you don't want to own any individual stocks owning indiv individual stocks means that you are taking a lot of uncompensated risk One stock is far more volatile than owning a number of stocks that's why if you want to invest intelligently you want to own index funds the entire market now look if you have I don't want take everybody's fun away Burton malel said giving this message is lot like telling people there is no Santa Claus okay I understand that so if you want to believe in I mean I don't I don't mean to trivialize this people want to have fun with their money and they have a small percent of their money that's play money like why is it any different than going to Vegas really I mean I don't say to people don't go to Vegas I just say if you go to Vegas let's not kid yourself over the long period of time you're going to lose right but you can invest intelligently with in private Equity you might pick the right hedge fund you might pick the right country so I don't want to take all your fun away I'm just saying with your real money what you want to do is invest the way I'm telling you to invest because that's what the data tells us yes what are you are you only invested in index funds yourself yes good question I am I mean how could I stand up and say to tens of thousands of people I just want make not only am I but my children are all my friends and family is I mean I just say look I'm not I'm not incentivized to do to do this I don't make money by placing money in any Index Fund I mean if I saw data that said Nigerian oil Futures were the way to invest I I'd write a book saying well invest in Nigerian oil Futures like we don't get kickbacks from Vanguard or t roll price or Fidelity or dimensional fund advisors for that matter I just look at the when I wrote this book I just looked at all the data read all the books I said what am I missing here why isn't this message getting it is so clear yes sir um when you you talked about rebalancing your Port portfolio and one one issue with rebalancing let's say you have the right stock um stock Bond uh ratio but within the stocks they keep moving around and now to rebalance you have to actually sell you know sell the highs and and buy the lows but but when you do the selling you you take a big tax hit it's an it's always an issue that's why we say don't rebalance unless your portfolio is aut to whack by more than 5% unless your allocations aut to whack by more than 5% because you have to consider that that you might be taking a tax hit and and in all likelihood you are if it's a profit right but part of not Market timing means you are going to be buying when other people are selling you're going to be selling when other people are buying because you want to preserve the Integrity of your asset allocation and and B Bernstein said uh William Bernstein he said that uh you could make an argument for if as long as your stock Bond ratio is kind of in in line that you should never rebalance um I'm not famili I mean he did blurb my book I regard him as one of the great financial gurus of of our of our time I would say I don't understand that particular comment I mean yes if your asset allocation is is intact I wouldn't rebalance it's only when it gets out of whack that I would rebalance if your appropriate asset allocation for you is 6040 and it's now 5545 then I would rebalance How about if it's 6040 but within the 60 it's a little bit out of whack would you still take that no I wouldn't if the basic asset allocation is intact stocks versus bonds I would leave it I don't play Within within the mix no problem what about sector based allocations sector based allocation means that I'm guessing about sectors I don't have that ability rebalancing I mean in at fixed time periods but you like more sectors not but the index funds I'm recommending are all sectors so it it's not a factor they're all sectors International versus domestic let's say you had you know 30% International 30% domestic and then 40 % Bond and now you still had I would look at that b yes I would want to be sure that good point I'd want to be sure that my International versus domestic remained roughly intact that's right let me just get somebody who hasn't asked a question I just want to go over here um two uh one comment um with your International I think it also appear on retirement some countries have limitations on how much you can actually do externally like in the case of Canada yeah um but what my question is um shortterm so if you're planning to buy a large purchase you're saving you don't want to have too much Market exposure you don't know when you're actually going to be right one of the questions on any asset allocation questionnaire is something like this when do you think you'll need 20% or more of the assets that you've invested and if that answer comes out less in less than two years the way your assets allocation's going to come out is like you should be then in 80% bonds because you cannot deal with short-term Market volatility what we don't want is the market goes down 200 points you have to sell because you're going to buy a house we don't want this that's why it's so important to take an asset allocation question here by the way let me say one word on 401K plans which I forgot I'll tell you what I think is the best 401k plan in the country it's unbelievable to me that this is true the government which in my view can do very little right has a great 401k plan tp.com thrift Thrift Savings plan.com what is it it has roughly $155 billion it is the 401K plan for all the military and all government employees it has five pre-allocated portfolios that go from very conservative to all equities all indexed you just pick one of those portfolios depending upon what your particular asset allocation is that's a very intelligent 401k plan when you're doing your own 401k plan I haven't looked deeply into years when you're doing it try to get it as close to my plan as possible you have a Vanguard 401k plan so you may well have all of the Vanguard funds that I'm talking about that's problem there's very few them very few Vanguard funds okay that's a problem I mean I get this all the question I get all the time like I have an asked Dan thing on my web page like what do I do with I got 10,000 choices in my 401k what do I do I mean I ask myself so why why is that well unfortunately fund companies make much more money putting actively managed funds in their 401ks than index funds that's why shouldn't be so now we have my next book is going to be called the smartest 401K book you'll ever read and I'm actually doing a conversion chart if you have these funds this is as close to these as possible so that's best I can do I don't want to keep anybody too long so you have to tell me when we should cut off questions but yes sir um are you worried at all about the US dollar I mean sure the Dows at 14,000 but denominated in Euros it's pretty flat over the last several years and given the really large dollar positions of China and the AR countries um in our national debt are you wored at all of a dollar a further dollar collapse I mean we've already lost a ton of value against the town right the Euro and some other currencies well thanks for asking that question and making it appear that my judgment on that would actually be worth something because unfortunately it is not I mean I yes I'm worried about I I worry all day every day about everything but I don't have the ability to figure out stuff like that that's why I say you want to own the world's global economy if you say to me what's the loot where's that question really going where it's going is should I be buying gold for example because should I be hedging the risk of the American dollar answer nobody knows that's that's the truthful answer but if you ask that question to most people they will have a very strong opinion yes I've looked at this I've looked at this historically those opinions tend to be very unreliable unfortunately so is there any correlation between population growth and grow of the market population growth [Music] andet I mean I'm not familiar if there is I don't know about it but again to the extent that the underlying assumption is well here's a good idea why don't I find a country that's growing and I'll tilt my investments towards that country because I'm going to get a better return on my investment generally not a good idea I avoid Europe for example Europe I know or Japan no no data that I'm familiar with would support that as an investment theory yes sir sorry yeah so if you had $10,000 and you can invest in GOOG stock at Che price or index funds in Google stock at what at a discount 20% and the 10,000 was 100% of your assets that's right it's an absolute no-brainer question if you asked any financial planner what you should do under those circumstances they would say you should have a broadly Diversified portfolio of uh of index stocks no question um can we just take one more question if people have it because we are press for time yes sir how do we think the invested Google stock options stock in system because many of us are heavily invested in to the extent that you have a large committed position in any one stock great company like Google not so great company what this means to me is that the standard deviation of your portfolio is very high now I need to know what should it be and I would structure the balance of your portfolio to lower your overall standard deviation so if somebody came to me and said look I'm terribly committed I've got all this Google stock I'd say okay well I'm going to put the rest of your portfolio then in bonds and then that's what I would do because I want your standard deviation to always be under this is way I explain standard deviation is very quickly it's a very it's a complicated calculation you guys can understand I really don't Excel has a way to you know to to calculate it uh you really do need an advanced degree to calculate you know really calculate standard Aviation but here's what I say to everybody if your standard deviation is greater than the standard deviation of the S&P 500 you're in too risky a portfolio for most people in this room your standard deviation should be around 10 I mean that's what it should be so somebody comes to me with that issue I want to get their standard deviation around 10 I would do whatever it took to do to do that all right great thank you everyone for coming thank you thank you very much

Channel: Talks at Google

Views: 40,383

Keywords: talks at google, ted talks, inspirational talks, educational talks, The Smartest Investment Book You'll Ever Read, Daniel Solin, stock market, investments, economy talks, smart investing

Id: Y0LSG2omvEg

Length: 63min 27sec (3807 seconds)

Published: Fri Aug 10 2007