Mr. PIE is fairly certain most of the readers listen to the odd podcast or two. Perhaps while out on a walk or maybe you squeeze it in over the lunch-time slot to drown out the noise from the neighboring cubicles or open-plan offices. Mr. PIE uses his time commuting to listen to whatever he remembered to download the night before. Alternatively, Mr. PIE forgets all about downloading it so just streams it directly using the work iPhone and doesn’t give a sh** about the data usage.
This week Mr. PIE listened to the Masters in Business podcast hosted by Barry Ritholtz. He was interviewing none other than Bill McNabb, the CEO of Vanguard. You know, that company who appears to be the darling of the individual investor and helps you to build your wealth, dreams and generally anything else you may need to forge a darn happy life in early retirement or otherwise.
Since Mr. and Mrs. PIE have a large chunk of their change entrusted with the dudes who inhabit the campus at Valley Forge, PA, Mr. PIE felt this was a good opportunity to perform some diligence on the man at the helm of the good ship Vanguard. Mr. PIE was very curious to hear what was on the mind of the man who oversees nearly $4 trillion dollars in assets. Yes, that is with a “T”! Would it be a description of the 40,000 sq ft McMansion in the Teton valley? Or teething problems docking the super-yacht in the harbor at Monaco? Perhaps wondering when Mr. Ritholtz would shut up and he could get back on the private jet and fly to the Hamptons for an extended week-end? First world problems for sure. It can be tough being a CEO these days.
healthy skepticism cynicism of Mr. PIE was swept away rather quickly in what turned out to be a terrific 1-hour plus long interview with a very down-to-earth, pragmatic and humble man.
Rather than use your valuable time reading the whole transcript of the interview or eat into an hour of your precious work time (muffled sniggering….) by listening to it, Mr. PIE has summarized the discussion into a handy-dandy five soundbites taken directly from the CEO’s mouth. Mr. PIE has also tried to provide some context on application of these words of wisdom to your investing world and lifestyle overall. Let’s jump right in.
Costs are an important component of investing
When was the last time you looked at the fees associated with your investment portfolio? Why, thank you for asking Mr. PIE! If you have not taken a close look at fees, please read the following paragraph and then go investigate your portfolio immediately.
$10,000 tax-deferred dollars invested into your 401K on an annual basis, assuming 0.1% in fees (this is actually not too hard to do with an investment house like Vanguard) and 8% nominal returns, can grow to $1,200,000 in 30 years. If the corresponding fees are 1% (not uncommon with many brokerage houses), the portfolio grows to $1,000,000 – a shortfall of $200,000. Are you interested in fees now? You should be. That difference could deliver an extra 3-6 years of living expenses. Of course Mr. PIE gets the fact that you may not have much choice in your 401K but the same principles apply with a taxable account or a Roth IRA, where you are in full control of your choices. Fees matter BIG time to your FIRE plans.
Simple works better in most cases
Think of a long hike on a sunny day with family or a lazy afternoon at the local river swim-hole or a relaxing afternoon with some friends and a few cold brews to accompany some yummy grilled BBQ food from the grill.
Conversely, think of a Saturday afternoon trip to the packed shopping mall, visiting American Girl, Coach, Crate and Barrel and swinging by Starbucks on the way home for a triple venti soy almond milk latte and extra froth on top just for the hell of it.
One scenario is very simple with respect to use of time and money and the other not so much. And simple applies to investing also.
With investing, keep things very simple and stick to building your portfolio from low cost equity funds (US and a slice of international cheese depending on your palate), corporate bonds, perhaps throwing in some Treasury Inflation Protected Securities (TIPS) and a bit of real estate (either real bricks for rental income or a REIT or two) and of course some cash. For the average investor, there is no need to make it more complicated with the next hot biotech stock or exotic investments like commodities, gold or private equity. Of course every investor is different. If you are a gold-bug and a small allocation to this particular asset class allows you to sleep well, go for it. With Mr. PIE’s background in chemistry, he loved a quote from Early Retirement Now on a blog post rant he had on gold – “Gold molecules don’t reproduce last time I checked”. Gold is indeed chemically fairly inert. You don’t want your investment portfolio to follow suit, even in retirement.
To help you with simple, take a look at these 8 Simple Portfolios compiled by Mike Piper who blogs over at the Oblivious Investor. Pick one, any one. They are all fairly simple, even if you want to tweak the allocation percentages in any of them.
Average is not average
Taken directly from the 2016 Dalbar Quantitative Analysis of Investor Behavior report: In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%. Wow! The average investor is indeed not average! The figure below from the report gives you a nice visual of this “less than average” performance relative to the S&P 500 over time.
Source: “Quantitative Analysis of Investor Behavior, 2016,” DALBAR, Inc. www.dalbar.com
The reasons why leads to the next pearl of wisdom from Mr. McNabb….
Human behavior is always looking for the home run
Analysis of the under-performance highlighted in the figure above reveals that investor behavior is the number one cause of the problem. The notion of out-sized returns is super seductive and investors invariably chase yesterday’s winners. A study, again taken from the Dalbar 2016 report, showed that a fund that was in the top two quintiles had less than a 20% probability of maintaining its percentile ranking the following three years. You can get to “your enough” without chasing yesterday’s winners.
It gets to the question “How much is enough?”
Anyone pursuing financial independence, early retirement (FIRE) is very aware of the “one more year syndrome”. It will take one more year to hit the magic number and then happiness will suddenly materialize. Another year of salary/bonus will pad the portfolio to get into a safe zone with respect to safe withdrawal rate. That one more year may come, in part, from pressure to maintain a certain lifestyle. Yet if you are a believer in “Simple works better in most cases” (see above), you perhaps realize that your enough may already be staring you in the face. Your enough may actually be nothing more than your intimate relationship with self to understand and appreciate the simple things in life that make you happy and make you thrive. Your savings can help for sure. They can buy you time. And with enough time, truly great things await.
So there you have it. Five pearls of wisdom taken from the man at the helm of one of the most highly respected brokerage houses on the planet. In summary , being very cognizant of costs associated with your investments, simplifying your overall investment approach, the acknowledgement that human behavior is not average at all and understanding what makes you happy can go a long way to delivering an awful lot more than actually money can buy. Mr. PIE came away from listening to the podcast that adherence to these philosophies over time has made Vanguard great. Understanding them and trying to apply them in your daily life can make you great too.
Do any of these soundbites resonate with you? If you listened to the podcast already, did anything else Mr. McNabb said hit the spot with you? Let us know in the comments.