Host Jon Luskin, CFP® and the do-it-yourself investor community ask questions to financial experts – live.
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In the 18th episode of Bogleheads® Live, Jon talks with Barry Ritholtz. Barry is the co-founder, chairman, and Chief Investment Officer of Ritholtz Wealth Management LLC, one of the fastest-growing investment advisors in the U.S.
Barry’s career focus has been on how behavioral economics and data affect investors. Jon and Barry discuss the behavioral side of investing, the relationship between greed and FOMO, the Bogle effect and the future of indexing, economic reflexivity, how to safely scratch that itch to actively manage an investment portfolio, the fallacy of low risk – high yield, portfolio allocation for younger investors, direct indexing to reduce taxes, and the importance of luck in investing.
One of the first principles that John Bogle understood was how much of investing – what the Fed does, what Congress does, whether the market starts the first half of the year down 20% – is completely out of your control. What we can control is our behavior: whether we maintain control of our limbic system, or whether we react and respond to stimulus. The people that follow Bogle (usually) have their behavioral side under control. That has a much bigger impact on how well you do as an investor, more so than any specific investment approach.
Indexing was off to a slow start from the 1970s until it took off in ’08 or ’09, (probably due to all the financial scandals). This industry shift has been a long time coming. Despite the rapid growth in popularity of passive index investing, it still only accounts for a minority of total investments; the overwhelming majority of investments are still actively-managed. Many in the industry are scared or feel threatened by the change, and they’ve been lashing out with nonsense ideas about how it will destroy markets. The truth is it would take a huge jump in market share for passive index funds to start negatively impacting market efficiency, (probably more than 90%). It’s unlikely that passive index investing will ever account for such a large portion of the market. People are overly optimistic and human nature will always steer towards active management (i.e., trying to beat the market). It’s also worth considering that as passive index investing grows, competition among active managers will decrease, potentially making active management more profitable. While Barry doesn’t think index funds pose any threat to the future of our markets, it’s always possible that this constant fear-mongering will lead some rogue legislator to implement damaging restrictions or rules. The truth is that Vanguard and Blackrock have saved investors trillions. And despite their massive holdings, they aren’t systematically important because they don’t rely on leverage, derivatives, borrowed money, or low equity levels. They can survive the big economic downturns; leveraged investors may not.
It can be hard to dissuade people from active management and market bets when so many people have made tens of millions doing just that. But it’s important to remember they still represent only a handful of investors that are fantastically skilled; most are not. For those that struggle to withstand the draw of active investing, it can be safe to take 5% or some other small portion of your assets and play around with futures, crypto, stock picks, or whatever. As long as it doesn’t impact your core holdings, it can’t hurt you too much.
For the younger investors, those under 40, Barry believes there’s no good reason to hold anything but equities, preferably in a low-cost global fund. After age 40, or even after 50, you can start moving some money into venture capital or private equity, argues Barry (assuming you have access to the top quartile or decile of skilled money managers). That should be in small percentages around the edges; the core investments for the bulk of your life are going to be in long-term global index funds.
Barry talks about how important luck is to investment success. We hear the success stories of companies betting big and winning big, but not the countless instances of when that hail mary fails. Barry’s had his own share of luck with major market calls, including when he happened to call the bottom of the Dow on television in early ’09. (The Dow bottomed out the very next day.) Since then, he and his firm have had no shortage of clients coming to him. But Barry maintains a conservative, tactical portfolio, using a rules-based approach to investing. He seeks market returns, not stock picking or speculating. Barry shares that his firm is set apart by utilizing technology and software to help minimize the tax burden and impact of capital gains.
- Masters in Business; Apr 21, 2017; Interview With Andrew Lo: Masters in Business
- Bogleheads® Live #3: Rick Ferri, CFA on picking index funds
- Pioneering Portfolio Management by David F. Swensen
- Ritholtz Reads in Your Inbox
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