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0:04

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0:17

I'm in

0:20

Minneapolis. I can't say

0:22

quite why just yet. It's I'm

0:25

working for Barron's. It's for reporting

0:27

for the future story.

0:29

And we're gonna answer a few listener

0:32

questions. And

0:35

then I'm gonna go across this

0:37

highway here over to the Mall of America where

0:39

I've never been. Look, I don't wanna

0:42

bum people out, but it's Valentine's Day.

0:44

You know, my wife dropped me off at the airport.

0:46

I'm here by myself. I was gonna go across to

0:48

the ball and have some dinner,

0:50

maybe find a steak, maybe have a beer, and then

0:52

I was gonna go see a movie. And

0:54

I just heard an interview with Brendan Fraser

0:57

who's in this movie called The Whail, which is

0:59

like, I think it's is

1:01

it depressing? Seems like it might be depressing.

1:03

And that I'm thinking after

1:05

that steak and that beer watching that movie,

1:07

I'm definitely crying during the

1:10

movie and I thought, what

1:12

kind of a ways does that dispute validates

1:14

this? That's not -- Where do you wanna

1:15

be? -- you gotta watch the latest puts

1:17

and boots. I

1:19

got good news though. The whale is not playing.

1:21

I mean, I'll I'll see it eventually. The whale is not

1:24

playing. It's a pretty thin

1:26

film slate out there right about now.

1:28

They're actually playing Titanic

1:31

and sleepless in Seattle. I know what

1:33

you're thinking. There have been sequels. No. There haven't

1:35

been. They're playing the original

1:37

ones. That's how thin the film slate is

1:39

right now. So among the new movies,

1:42

I saw magic mike's

1:44

last dance, which I

1:47

don't know, isn't that about men, teenagers.

1:49

Yeah. Like Chippendale's kind of situation. Right?

1:51

You know what? don't wanna come in late

1:53

on the story. I didn't see the original ones.

1:55

I bet you it's great, but should just go to

1:58

the amusement park. I think there's roller coaster

2:00

in that mall. Definitely not going

2:02

on a roller coaster. This is why you

2:04

need a video arcade. I mean, they don't have

2:06

them anymore. I could really go for

2:08

a couple of runs at Barron's right

2:10

now.

2:11

I I wish I knew what that was. We'll

2:13

talk about it later. Is that Arcade? Alright.

2:15

It's it's It was the first one to ever go

2:17

to two quarters. It was shocking at the time.

2:19

Couldn't believe the outrageous demand

2:22

for fifty cents for a video

2:23

game. And you died after like thirty seconds. It

2:25

was a money pit.

2:29

Let's get to some questions. You know, who do

2:31

we have? Who's up first? Well, first,

2:33

I have Warren Duffy who's asking about

2:36

differences between the Russell

2:38

two thousand and S and P six hundred,

2:40

which are two small cap indexes

2:43

that we talked about a few weeks

2:44

back. My name is Warren Duffy,

2:46

and I'm a big fan of your podcast. Listen

2:49

to it every Saturday morning. When

2:51

I'm walking my dog Winnie. Anyway,

2:54

the question I had was for

2:57

this last podcast, you're talking

2:59

about small cap differences between

3:02

the Russell two thousand and the S and P six

3:04

hundred. And I understand

3:06

the rule or filter that the S

3:08

and P six hundred has around profitability.

3:12

If you're in the index, and

3:14

you have a bad year and you're unprofitable,

3:17

do they take you out? And if

3:19

so, Is there any problem

3:21

with that? I'm just thinking, like, they're

3:24

selling low, they're pushing you out probably

3:26

when your stock price is low. And

3:28

then they'll bring you back in when you're profitable

3:31

on my hunch's, your stock price is probably

3:33

gonna be high. And if this

3:35

is supposed to be passive, Is

3:37

that really passive or is that

3:40

kind of active?

3:43

Thank you and shout out to Winnie.

3:46

Your question is about indexes, the

3:48

S and P six hundred. We had mentioned

3:50

that difference between the performance on that

3:52

and the Russell two thousand. And we attributed

3:55

that to the fact that S and

3:57

P uses an an earnings screen. They

3:59

use a profitability screen. So you

4:01

tend to get, I guess, you know, higher quality

4:04

companies in that in that index. I

4:06

wanna read you what S and P says

4:08

about deletions. They say that

4:10

they'll delete companies that substantially

4:13

violate one or more of the eligibility criteria

4:16

at the index committee's discretion.

4:19

So I don't think it's automatic that they just

4:21

take a company off because a company has a loss.

4:24

And In fact, if I run a screen

4:26

for S and P six hundred companies and

4:28

I look at last year's profits and see how

4:30

many of those companies, had negative

4:32

profits in their most recent fiscal

4:34

year, I get a hundred seven companies

4:37

out of six hundred. And there's

4:39

no way they're turning over more than a hundred

4:41

companies a year in that index. So, you know,

4:44

based on the past few announcements,

4:46

it looks like maybe

4:49

several a month tops. So

4:51

the answer to your question is, I

4:53

don't think a company drops out

4:55

just because they have negative

4:57

profits. There is some discretion there.

5:00

But your broader question is,

5:02

is this index effectively, actively

5:05

managed? If they're, you know,

5:07

only taking companies that are profitable.

5:12

And the answer is Yeah. Kinda.

5:15

I mean, every index, we

5:17

call it passive investing, but

5:19

even passive investing is a little

5:21

bit active in the sense that you have to

5:23

make a decision. If you say I want

5:26

to invest in the universe of stocks, well,

5:28

how do you define the universe of stocks?

5:30

Right? If you say, I want the S and P five

5:32

hundred. What you're saying is, I want

5:34

US companies and I want the

5:36

largest five hundred by stock

5:39

market value. And so

5:41

one criticism of the SP5

5:43

hundred is people say, well, if

5:45

it tends to overweight the companies

5:47

that have gone up the most, and

5:50

so it tends to be kind of growth tilted.

5:52

But then the other side of that is,

5:54

you know, it it's true that it does that,

5:56

but it's also true that returns

5:58

over time tend to be driven by just

6:00

a handful of tremendous winners,

6:03

and you really wanna have exposure to those winners.

6:05

So even passive investing is making

6:07

some kind of an active decision if

6:09

you wanna call it that. I don't think it's necessarily

6:11

a bad thing. By the way, S and

6:13

P recently updated the

6:16

market cap guidelines on

6:18

their index funds So

6:21

you have the the new range now for companies.

6:23

If you're buying into the small cap index,

6:25

a small cap now as of January

6:28

fourth is defined as accompanied

6:30

between eight fifty million

6:32

dollars and three point seven billion

6:34

dollars. So you're saying you won't invest in companies

6:37

in that range. And it adjusts those

6:39

ranges every so often because the value of

6:41

companies changes over time.

6:43

And that's it. Anything else I should add here,

6:45

Jackson? No. But on

6:47

the topic of indexes, Paul Pope

6:50

has a question about

6:52

bond indexes.

6:54

Versus buying individual bonds

6:56

themselves? This just took a

6:58

crazy turn.

7:00

That might that's probably overselling it. Right?

7:03

Just wait until you're on that roller coaster today.

7:05

Alright. Let's hear

7:06

it. Hi, Jack. This is Paul Pope. I

7:08

live in New York, but I'm currently calling from Tennessee.

7:11

I have a question about bond ETFs.

7:14

I understand the general advice that

7:16

it's better to buy bonds directly rather

7:18

than investing in bond funds. I

7:20

know that was certainly true over

7:22

the last decade as people were looking ahead

7:24

towards the possibility of rising interest

7:26

rates. However, my understanding

7:28

is that most of the damage now has been done

7:31

with those interest rates. I'm

7:33

looking at bond mutual funds

7:35

and bond ETFs I'm wondering

7:38

is it possible that bond ETFs could

7:40

actually outperform the mutual

7:42

funds considering the fact that there is so much

7:44

investor attention now on bonds

7:46

perhaps the market value of

7:48

those ETFs could actually be

7:51

above the NAV? Do you think that that's

7:53

a good idea that bond ETFs could actually

7:55

outperform both bond mutual funds

7:57

and bonds

7:58

themselves. Thank you.

8:02

Thank you, Paul. So there there's a couple of things

8:04

that you're asking about here.

8:06

One of them is about ETFs

8:09

and could the value of the bonds go

8:12

above the net asset value

8:14

of the ETF? That's a mechanism

8:16

that's more common in closed end funds

8:18

where you close the portfolio, it trades like

8:20

a stock, and it can trade it at a discount

8:23

or premium to the net asset value. You.

8:25

ETFs can vary

8:28

from the value of the underlying securities, but

8:30

they tend to do so minimally because

8:32

there's this ongoing mechanism

8:34

where you can create new shares

8:36

and swap them back and forth for the underlying

8:39

assets, and it tends to hold that share price

8:41

pretty close to the value of the assets in the fund.

8:44

The other matter that you asked about or or that

8:46

you mentioned in passing was this idea

8:48

of it being better to buy individual bonds

8:51

than bond funds. And

8:53

I think it depends what kind of investor you are.

8:55

First of all, you have to have kind of a lot of

8:58

money to put together a diversified

9:00

portfolio of individual bonds.

9:02

I don't know what the exact dollar figure is,

9:04

but I'd say it might be in the millions.

9:07

If you wanted to put together a portfolio of

9:09

treasuries and corporate bonds and

9:12

all different types of maturities and all different

9:14

types of credit quality and so forth. If

9:19

you just wanna buy, you know, one or

9:21

two very safe bonds, treasury

9:23

bonds, let's say, and you know exactly what you want,

9:25

fine. And if you can keep fees very

9:27

low, fine. But for most people,

9:29

they'll get more diversification and

9:32

lower fees from a fund. And

9:35

I get the idea that with an individual bond,

9:37

you can make the decision to hold it until

9:39

maturity and get your money back. So

9:41

if interest rates rise, the

9:44

trading value of that bond might fall for

9:46

people who are gonna sell it before maturity,

9:48

but you can ignore that dip in the trading

9:50

value and you can hold it to maturity and get money

9:52

back, assuming it's a very safe bond. That's

9:55

true. But what you don't

9:58

get is the ability to reinvest

10:00

money between now and the maturity

10:03

date at these higher interest rates.

10:05

It's a rise in interest rates that's gonna push

10:07

the value of that bond down And if

10:09

that happens in a mutual fund, that

10:11

fund manager has bonds that are continually

10:14

coming due and cash that needs to

10:16

be reinvested. And he or she can

10:18

take that money and put it to work at those

10:20

higher interest rates. So

10:23

those are kind of offsetting factors. Even

10:25

if we expect rates to rise, I'm not

10:27

sure that the investor who's buying a

10:30

diversified bond mutual fund

10:32

with low fees is getting

10:34

a worse deal than the investor who's putting

10:36

money into individual

10:37

bonds. I think either type of investor

10:40

is fine as long as they're keeping fees low and getting

10:42

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11:44

Jackson, how am I doing so far? Is this

11:47

I mean, is the enthusiasm coming through?

11:49

Can you hear from the

11:51

tone of my voice that I'm in a hotel

11:54

room with my phone and a little plug in

11:56

microphone propped up on a pillow, staring

11:59

that you sound like you're on sports center.

12:02

Oh, I do. I do

12:03

sound. You're wearing like a beige

12:05

blazer and Oh, chunky

12:08

tie. Yeah.

12:10

That's that's what I meant to say. Yeah.

12:13

What's in the mini bar? Over here. Should

12:15

I check the mini bar for twelve dollar milk duds,

12:17

or do you wanna go on to the or or third

12:19

and final question? Say first

12:21

milk duds, then question

12:23

I'll investigate while I'm listening.

12:25

Let's go ahead and and play it. Who do we have?

12:27

We have Chuck Warner from Pasadena. Hey,

12:30

Jack and Jackson. It truck corner from

12:32

Pasadena, California. I love the

12:34

podcast. I think a good topic

12:37

would be investment portfolio management

12:39

alternatives. Including using

12:42

AAA paid investment adviser,

12:45

using a robo adviser, self

12:48

managing a portfolio, I'm

12:51

currently self managing my portfolio. I'm

12:53

talking to somebody from my brokerage firm

12:55

who would like to manage it for me.

12:59

I'm reluctant to switch. My

13:01

wife is favorable and I need some

13:03

help. Thanks, guys.

13:08

Thank you, Chuck. I agreed that is

13:10

a good topic. It's a tough

13:13

one to answer because it gets into matters

13:15

of, you know, personal taste. It's

13:17

not just math. It's like saying, which is better?

13:19

A thirty five thousand dollar family car or

13:21

a sixty thousand dollar luxury car. Well,

13:23

you you know, different people like

13:26

different things and have different means.

13:28

But let's just define some

13:30

of the things we're talking about and and give

13:32

some guidelines in terms of cost.

13:35

First of all, Managing your own portfolio,

13:38

that's pretty clear. It costs you next to

13:40

nothing. Stock commission, you know, commissions to

13:42

buy, things like ETFs are incredibly low.

13:45

A robo adviser. So

13:47

that's a piece of software

13:50

offered by a financial firm that tells

13:52

you over time what your asset allocation should

13:54

be. And it manages your money for you

13:56

and it changes as you grow older and

13:59

it puts your money in different things. Ultimately,

14:01

those decisions are made by financial

14:03

advisers at the firm who

14:05

programmed the software or informed the software

14:08

about how to make these decisions. It's

14:13

kind of way to get investment advice

14:16

automated for cheap. Barron's

14:18

does a yearly ranking of robo

14:20

advisers I'm reading from a story

14:22

last August that says, robo

14:24

fees vary, but clients are typically

14:27

charged about a quarter of a percent.

14:29

On their invested assets. Traditional adviser

14:31

fees are close to one percent of assets. Okay.

14:34

I think that's fair. You know, for somebody, you

14:36

you can buy a cheap index fund

14:39

and you can pay a tenth of a

14:41

point on fees and you can do it yourself and figure

14:43

out which ones you should buy. And by

14:45

the way, it's not super complicated.

14:48

If you're listening to this podcast, if you're

14:50

somebody who, you know, reads Barron's,

14:52

surely you already have the wherewithal

14:55

to do it. Anybody else can bring

14:57

themselves up to speed. Pretty quickly,

14:59

if they're motivated, you can read some books

15:01

and find different ways to form yourself. But

15:03

I think for someone out there who says, look, I

15:05

don't know how to do this or I don't have the confidence.

15:08

But I don't I also maybe I don't have

15:10

a lot of money start or I don't wanna get killed

15:12

on fees. I think Robo Advisor is

15:14

a is a, you know, fair way to go.

15:17

Quarter of a point, I can live with that. So

15:19

I'm looking at this ranking from the

15:21

saga story in Barron's and some

15:23

of the names that are mentioned near the top

15:26

are Sophie and Wealthfront and

15:28

Fidelity and SIG

15:29

FIG. Those are some examples of

15:32

Robo Advisor products. Now,

15:37

The Human Advisor,

15:40

the Non Robo Advisor. Barron's

15:43

also publishes reviews of advisors.

15:46

And they can get paid a number of different ways.

15:48

Some of them get commissions

15:50

on the products they sell, I don't love that

15:52

model. Some of them get fees

15:55

on managing portfolios. And I'm gonna read

15:58

from a story here from the Barron's

16:00

Advisor folks last year, last

16:02

May. It says one common

16:04

model is a fee that's equal to a percentage

16:06

of the total assets the adviser is managing

16:08

for you. The fee is usually point

16:11

two percent to two percent

16:13

with the percentage decreasing on assets

16:16

above certain thresholds. For example, say

16:19

a wealthy client has twelve million

16:21

dollars under an advisor's care.

16:23

There may be a one and a half percent

16:25

charge on the first three million dollars

16:28

in assets, one percent on

16:30

the next three million dollars and

16:32

zero point three five percent on

16:34

the last six million dollars. Now one

16:36

way to look at that is you say,

16:38

hey, I'm rich enough to really get a discount

16:40

on those fees because they're dropping down to, you

16:42

know, just over a third of on that last

16:44

six million. Another way to look at that is

16:47

you're you're paying over ninety thousand

16:50

dollars a year for an

16:52

adviser, which has a lot of money. Right?

16:54

If you're if you're looking for a job in retirement,

16:56

you're thinking about work in retirement, or

16:58

here's a job. You can make ninety thousand

17:00

dollars or save that much by not

17:02

paying that much in fees for a financial adviser

17:05

by learning how to do it yourself. But It's

17:07

not for everyone. Some people like to

17:09

have, like, the added confidence that

17:11

comes with a professional. And there are,

17:14

of course, many advisers out there who are

17:16

well worth their So that's

17:18

the difference in the cost. Which one

17:20

is best for you? I know which one's best for

17:22

me. I like to keep it cheapety, cheap,

17:24

ety, cheap. Low fee index

17:27

funds and do it myself, but

17:29

not everyone shares my tastes and not

17:31

everyone has the same

17:32

interests. That gives you a sense of how much

17:35

you'll pay for the different routes you can go.

17:39

Okay. I think that takes care of is here

17:41

I'm gonna head over to the Mall of America.

17:43

It's my first visit. Do

17:46

you want tell folks the story about

17:48

how when your parents took you to

17:50

the Barron's mall as a kid and you thought

17:52

it was an actual mall and you were wondering where

17:54

the Antianese

17:56

pretzel I was

17:57

looking for the the cinnabon in the

18:00

Washington Monument. I think

18:02

that tells us everything we need to do. Thank

18:04

you Warren and Winnie and Paul

18:07

and Chuck and thank all of you for listening.

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