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In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 20: A Higher Intelligence.
LEARNING: Choose passive investing over active investing.
“Passive investing involves systematic, transparent, and replicable strategies without individual stock selection or market timing. It’s the more ethical way to go.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 20: A Higher Intelligence.
Chapter 20: A Higher IntelligenceIn this chapter, Larry discusses prudent investing.
The Uniform Prudent Investor ActThe Uniform Prudent Investor Act, a cornerstone of prudent investment management, offers two key benefits.
Firstly, it underscores the importance of broad diversification in risk management, empowering trustees and investors to make informed decisions.
Secondly, it promotes cost control as a vital aspect of prudent investing, providing a clear roadmap for those who may lack the necessary knowledge, skill, time, or interest to manage a portfolio effectively.
Ethical malfeasance and misfeasance in investingIn this chapter, Larry sheds light on Michael G. Sher’s insights. Sher extensively discusses ethical malfeasance and misfeasance. He says ethical malfeasance occurs when an investment manager does something deliberately or conceals it (e.g., the manager knows that he’s too drunk to drive but drives anyway).
For example, consider the manager who invests intentionally at a higher level of risk than the client chose without informing them and then generates a subsequently higher return. The manager attributes the alpha or the excess return to his superior skill instead of the reality that he was taking more risk, so it was just more exposure to beta, not alpha.
On the other hand, ethical misfeasance occurs when an investment manager does something by accident (e.g., the manager really believes that he’s sober enough to drive). Thus, the manager doesn’t know what he’s doing and shouldn’t be managing money.
Avoid active investingLarry highly discourages active investing because the evidence shows that active managers who tend to outperform on average outperform by a little bit, and the ones that underperform tend to underperform by a lot.
Either they don’t have the skill, and they have higher expenses, and the ones who have enough skills to beat the market, most of that skill is offset by their higher costs. So it’s still really tough to generate alpha.
Passive investing is the ethical way to goAccording to Sher, managing money in an efficient market without investing passively is investment malfeasance. He also notes that not knowing that such a market is efficient is investment misfeasance because you should know it. It’s in the law books. Sher concludes that passive investing is a systematic, transparent, and replicable strategy that is more ethical.
Further readingLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 19: Is Gold a Safe Haven Asset?
LEARNING: Do not allocate more than 5% of gold to your portfolio.
“I don’t have a problem with people allocating a very small amount of gold to their portfolio, but they should only do it if they’re prepared to earn lousy returns most of the time.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 19: Is Gold a Safe Haven Asset?
Chapter 19: Is Gold a Safe Haven Asset?In this chapter, Larry explains why you should not buy gold because you think it’s a good inflation hedge. While he is fine with people allocating a minimal amount of gold to their portfolio, Larry cautions that they should only do it if they’re prepared to earn lousy returns most of the time.
Gold as an investment assetGold has long been used as a store of value, a unit of exchange, and as jewelry. More recently, many investors have come to believe that gold should be considered an investment asset, playing a potential role in the asset allocation decision by providing a hedge against currency risk, a hedge against inflation, and a haven of safety during severe economic recessions. Larry reviews various research findings to determine if the evidence supports those beliefs.
The evidenceIn their June 2012 study, “The Golden Dilemma,” Claude Erb and Campbell Harvey found that in terms of being a currency hedge, changes in the real price of gold were largely independent of the change in currency values—gold is not a good hedge against currency risk.
This means that the value of gold does not necessarily increase or decrease in response to changes in currency values, making it a less effective hedge than commonly believed.
Erb and Harvey also found gold isn’t quite the safe haven many investors think it is, as 17% of monthly stock returns fell into the category where gold dropped while stocks posted negative returns. If gold acted as a true safe haven, we would expect very few, if any, such observations. Still, 83% of the time, on the right side isn’t a bad record.
Gold is not an inflation hedge, no matter the trading horizonThe following example provides the answer regarding gold’s value as an inflation hedge. On January 21, 1980, the price of gold reached a then-record high of US$850. On March 19, 2002, gold traded at US$293, well below its price two decades earlier. The inflation rate for the period from 1980 through 2001 was 3.9%.
Thus, gold’s loss in real purchasing power, which refers to the amount of goods or services that can be purchased with a unit of gold, was about 85%. This means that the value of gold, in terms of what it can buy, decreased significantly over this period. Gold cannot be considered an inflation hedge over most investors’ horizons when it lost 85% in real terms over 22 years.
Gold is not as attractive an asset as many may thinkInvestors are often attracted to gold because they believe it provides hedging benefits—hedging inflation, hedging currency risk, and acting as a haven of safety in bad times. The evidence demonstrates that investors should be wary.
While gold might protect against inflation in the long run, 10 or 20 years is not the long run; you need a longer investment horizon to make actual returns. And there is no evidence that gold acts as a hedge against currency risk.
As to being a safe haven, gold is a volatile investment capable and likely to overshoot or undershoot any notion of fair value. Evidence of gold’s short-term volatility is that over the 17 years (2006-2022), the annual standard deviation of the iShares Gold Trust ETF (IAU), at 17.2%, was higher than the 15.6% annual standard deviation of Vanguard’s 500 Index Investor Fund (VFINX).
In addition, gold experienced a maximum drawdown of almost 43%—safe havens don’t experience losses of that magnitude.
Don’t allocate more than 5% gold in your portfolioWith this evidence in mind, Larry advises investors never to own more than 5% of gold in their portfolio. Further, investors should remember that gold only acts as a safe haven on occasion, but there are also many times when it doesn’t. Historically, the probability is close to a 50/50 coin toss, slightly favoring gold.
Alternative assets to own instead of goldLarry says investors are better off owning real assets than gold because they have expected actual returns. So, for example, real estate prices over the long term go up because part of the cost is land and buildings, making real estate an excellent long-term hedge.
Another asset Larry suggests instead of gold is infrastructure ETFs that, for example, own toll roads and water facilities. Such assets raise their prices with the inflation rate and can act as a hedge.
Further readingLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 18: Black Swans and Fat Tails.
LEARNING: Never treat the unlikely as impossible. Diversify your portfolio to withstand black swans.
“If you build a portfolio that can withstand the black swans and is highly diversified, then psychological or economic events won’t force you to sell.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 18: Black Swans and Fat Tails.
Chapter 18: Black Swans and Fat TailsIn this chapter, Larry explains the importance of never treating the unlikely as impossible and ensuring your plan includes the near certainty that black swan events will appear. Thus, your plan should consider their risks and how to address them.
Understanding the risk of fat tailsIn terms of investing, Larry says, fat tails are distributions in which very low and high values are more frequent than a normal distribution predicts. In a normal distribution, the tails to the extreme left and extreme right of the mean become smaller, ultimately reaching zero occurrences.
However, the historical evidence on stock returns is that they demonstrate occurrences of low and high values that are far greater than theoretically expected by a normal distribution. Thus, understanding the risk of fat tails is essential to developing an appropriate asset allocation and investment plan. Unfortunately, Larry notes, many investors fail to account for the risks of fat tails.
History of the black swansWith the publication of Nassim Nicholas Taleb’s 2001 book Fooled by Randomness, the term black swan became part of the investment vernacular—virtually synonymous with the term fat tail. In his second book, The Black Swan, published in 2007, Taleb called a black swan an event with three attributes:
Taleb went on further to show that stock returns have big fat tails. Their distribution of returns is not normally distributed, and fat tails mean that what people think are unlikely events are much more likely to occur than people believe will.
To illustrate this, Larry uses an example: if you take stock returns, and in the last 100 years, you cut out one best month per year, which is 1% of the distribution, the assumption is that you wouldn’t lose all that much of the returns. But the fact is, you lose most of the returns. So that’s the good fat tails. Similarly, if you avoid the worst months, your returns become spectacular.
Do not try to time the marketHowever, Larry cautions investors that trying to time the market because of unpredictable events is the wrong strategy. The fact that you have fat tails in the data doesn’t mean you should try to time the market or engage in an active management strategy because evidence shows that it doesn’t work.
What it means, very simply put, is that your investment strategy, investment policy, and asset allocation decisions must take into account that these fat tails exist; they’re unpredictable, and therefore, don’t take more risks than you can stomach. Further, Larry adds, you must be prepared to rebalance the portfolio to take advantage of those drops and buy more when things are down.
Active management will not protect you from fat tailsThe existence of fat tails doesn’t change the prudent strategy of being a passive buy, hold, and rebalance investor. Active managers have demonstrated no ability to protect investors from fat tails.
However, the existence of fat tails is significant because of their effect on portfolios. The risks of black swans and the damage they can do to portfolios, especially for those in the withdrawal phase, must be considered when designing your asset allocation. With that in mind, Larry offers the following advice:
Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 17: There is Only One Way to See Things Rightly.
LEARNING: Consider the overall impact of investments rather than focusing on individual metrics.
"There is only one right way to build a portfolio—by recognizing that the risk and return of any asset class by itself should be irrelevant."Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 17: There is Only One Way to See Things Rightly.
Chapter 17: There is Only One Way to See Things RightlyIn this chapter, Larry enlightens us on the benefits of considering the overall impact of investments rather than focusing on individual metrics. This holistic approach empowers investors and advisors to make more informed decisions.
Don’t view an asset class’s returns and risk in isolationA common mistake that investors and even professional advisors often make is viewing an asset class’s returns and risk in isolation. Larry emphasizes this point by giving the example of Vanguard’s popular index funds, the largest index funds in their respective categories, to make us all more cautious and aware of the potential pitfalls of this approach.
From 1998 through 2022, the Vanguard 500 Index Fund (VFINX) returned 7.53% per annum, outperforming Vanguard’s Emerging Markets Index Fund (VEIEX), which returned 6.14% per annum. VFINX also experienced lower volatility of 15.7% versus 22.6% for VEIEX. The result was that VFINX produced a much higher Sharpe ratio (risk-adjusted return measure) of 0.43 versus 0.30 for VEIEX.
Why more volatile emerging markets have a higher returnAccording to Larry, despite including an allocation to the lower returning and more volatile VEIEX, a portfolio of 90% VFINX/10% VEIEX, rebalanced annually, would have outperformed, returning 7.59%. And it did so while also producing the same Sharpe ratio of 0.43. Perhaps surprisingly, a 20% allocation to VEIEX would have done even better, returning 7.61% with a 0.43 Sharpe ratio.
Even a 30% allocation to VEIEX would have returned 7.59%, higher than the 7.53% return of VFINX (though the Sharpe ratio would have fallen slightly to 0.42 from 0.43). The portfolios that included an allocation to the lower-returning and more volatile emerging markets benefited from the imperfect correlation of returns (0.77) between the S&P 500 Index and the MSCI Emerging Markets Index.
The right way to build a portfolioLarry says there is only one right way to build a portfolio—by recognizing that the risk and return of any asset class by itself should be irrelevant. The only thing that should matter is considering how adding an asset class impacts the risk and return of the entire portfolio.
Further, Larry stresses the importance of global diversification, a strategy that can reassure and instill confidence in investors and advisors. He points out that if markets are efficient, all risky assets should have very similar risk-adjusted returns. This argument for broad global diversification, avoiding the home country bias, is a logical starting point for you to consider in your investment strategies.
Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
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Quick takeIn this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 16: All Crystal Balls are Cloudy.
LEARNING: Estimated return is not always inevitable.
“If returns are negative early on, don’t withdraw large amounts because when the market eventually recovers, you won’t have that money to earn your returns.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 16: All Crystal Balls are Cloudy.
Chapter 16: All crystal balls are cloudyIn this chapter, Larry illustrates why past returns are not crystal balls that predict future returns.
According to Larry, the problem with all forecasts that deal with estimations of probabilities is that people tend to think of them in a deterministic way. He says that as an investor, you should think about returns with the idea that distribution and estimate are only the middle points.
Your plan has to be prepared for either the good tail to show up, which is easy to deal with and usually will allow you to take chips off the table and reduce your risk because you’ll be well ahead of your goal. But if the bad tail shows up, you may have to either work longer, plan on saving more, or rebalance, which means buying stocks at a tough time.
The threat of sequence riskTo demonstrate the danger of sequence risk, Larry asks us to imagine it’s 1973, and stocks have returned 8% in real terms and 10% in nominal returns. We’ve had similar results over the next 50 years. Say an investor in that time frame decides to withdraw 7% yearly from their portfolio in real terms because they know with their clear crystal ball that they will get 8% for the next 50 years.
This means if they take out, say, $100,000 in the first year, and inflation is 3%, to keep their actual spending the same, they have to take out $103,000. According to Larry, this investor will be bankrupt within 10 years due to the sequence of returns, which is the order in which the returns occur, not the returns themselves.
As you can see in the table below, despite providing an 8.7% per annum real return over the 27 years, because the S&P 500 Index declined by more than 37% from January 1973 through December 1974, withdrawing an inflation-adjusted 7% per annum in the portfolio caused it to be depleted by the end of 1982—in just 10 years! (Note that from January 1973 through October 1974, when the bear market ended, the S&P 500 lost 48%.)
Sacrificing expected returnsLarry says this example shows the danger of sequence risk and illustrates that the order of returns matters significantly in the decumulation phase because systematic withdrawals work like a dollar-cost averaging program in reverse—market declines are accentuated. This can cause principal loss, which the portfolio may never recover from.
In this case, the combination of the bear market and relatively high inflation caused the portfolio to shrink by almost 56% in the first two years. For the portfolio to be restored to its original $1 million level, the S&P 500 Index would have had to return 127% in 1975. And because of the inflation experienced, the amount to be withdrawn would have needed to increase from $70,000 to over $90,000. In such cases, the odds of outliving one’s assets significantly increase if you don’t adjust the plan (such as increasing savings, delaying retirement, or reducing the spending goal).
The order of returns mattersAccording to Larry, our investor made the mistake of treating the single-point estimate as if it were an inevitable outcome and not a single potential outcome within a broad spectrum of potential outcomes.
Another mistake our investor made was failing to consider that his investment experience might be different from the return over the entire period because of the impact of his withdrawals. In other words, the order of returns matters, not just the returns over the entire period.
Estimated return is not inevitableLarry insists that since we live in a world with cloudy crystal balls, and all we can do is estimate returns, it is best to avoid treating a portfolio’s estimated return as inevitable. Consider the possible dispersion of likely returns and calculate the odds of successfully achieving the financial goal.
The goal is generally, though not always, defined as achieving and maintaining an acceptable lifestyle—not running out of money while still alive. In other words, the goal is not to retire with as much wealth as possible but to ensure you do not retire poor and risk running out of assets while still alive.
Using a Monte Carlo simulator to forecast the potential dispersion of returnsLarry says that forecasting the potential dispersion of returns is best accomplished through a Monte Carlo simulator—a computer simulation that uses random processes to model the impact of risk and uncertainty in financial and investment forecasting.
This tool allows one to see the probabilities of different possible outcomes of an investment strategy. The computer program will produce numerous random iterations (usually at least 1,000 and often many thousands), letting one see the odds of meeting a goal. Since thousands of iterations are run, one must think about probabilities instead of just one outcome.
Projecting the likelihood of successDivide the Monte Carlo simulation based on your investment life into an accumulation phase when you’re working and making contributions and a distribution phase that begins when you retire and lasts as long as you live. The inputs into the Monte Carlo simulation are:
The output is summarized by assigning probabilities to the various investment outcomes.
The ultimate goal is to ensure you are comfortable with the projected likelihood of success—the odds you can withdraw sufficient funds from the portfolio each year and still achieve your financial goal.
Nobody can predict the future when people are involvedIn conclusion, Larry reminds investors that crystal balls will always be cloudy when forecasting the future, be it the weather or stock market returns. He quotes Alan Greenspan’s advice: “Learn everything you can, collect all the data, crunch all the numbers before making a prediction or a financial forecast. Even then, accept and understand that nobody can predict the future when people are involved.”
However, Larry adds that the inability to forecast the future accurately does not render forecasting useless. It just means we must accept this shortcoming and take it into account. Another essential investment advice is to never make the mistake of treating even the highly likely as if it were inevitable.
Further readingLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
[spp-transcript]
Connect with Larry Swedroe
BIO: Damon Pistulka, co-founder of Exit Your Way, is known for his hands-on, practical approach to helping business owners maximize value and achieve successful exits.
STORY: Damon explains his journey into understanding technology and its role in business growth.
LEARNING: Stay informed and adapt to changing industry trends. Adapt to changing customer expectations and preferences.
“The simple things we can do with technology today make the customer experience so much better.”Damon Pistulka
Guest profile
Damon Pistulka, co-founder of Exit Your Way, is known for his hands-on, practical approach to helping business owners maximize value and achieve successful exits. With over 20 years of experience, Damon is dedicated to transforming businesses, enhancing profitability, and helping founders create lasting legacies.
Technology is your business allyIn today’s episode, Damon, who previously appeared on the podcast on episode Ep649: Be Careful of Concentration Risk, discusses the value of technology in running a business. He emphasizes the importance of robotic process automation, CRMs, and AI in modern business operations to accelerate value. In his opinion, technology allows businesses to do simple things that improve customer experience.
Damon highlights a couple of threats businesses face today that could be dealt with by adopting technology.
Damon explains his approach to helping clients develop business growth strategies. He emphasizes the importance of starting with small, manageable changes and gradually scaling up.
Damon cautions entrepreneurs from trying to do it all. Instead, he advises starting with simple, practical changes, often referred to as ‘low-hanging fruits’—these are the tasks or opportunities that are the easiest to achieve and provide the quickest benefits. Gradually, as these are implemented, more complex systems can be adopted.
Seek out experts who can help you advanceFurther, Damon advises seeking out experts who can help you advance in the particular area you’re focusing on. Then, work your way up as you get your company, your people, and your supplier base comfortable with these changes.
Get educated before adopting new technologyDamon also underscores the importance of getting educated before adopting new technology. He advises becoming familiar and comfortable enough with it to try it, enabling you to identify potential areas where the technology could help your business.
This approach instills a sense of preparedness and confidence. Then, he suggests hiring an expert to help you implement your new technologies and strategies.
Move fastAnother way to deal with the business threats is to move fast. Damon says that speed sells, and businesses must adopt a speed and innovation culture. This culture is about encouraging and rewarding quick decision-making, rapid implementation of ideas, and a constant drive for improvement. Technology will help you do things in half the time and stay efficient and competitive in your operations, which is a key aspect of this culture.
Just get startedFinally, according to Damon, just get started. Business owners wake up knowing what they have to do every day. By cutting the distractions and focusing on your core strengths and capabilities, you can stay reassured and focused. As Damon says, there’s a lot of time in your day if you throw out the junk.
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Connect with Damon PistulkaIn this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 15: Individual Stocks Are Riskier Than Investors Believe.
LEARNING: Don’t invest in individual stocks. Instead, diversify your portfolio to reduce your risk.
“Diversification has been said to be the only free lunch in investing. Unfortunately, most investors fail to use the full buffet available.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 15: Individual Stocks Are Riskier Than Investors Believe.
Chapter 15: Individual Stocks Are Riskier Than Investors BelieveIn this chapter, Larry reveals the stark reality of investing in individual stocks, highlighting the significant risks involved. His aim is to help investors understand the potential pitfalls of this high-stakes game and why they should avoid it.
Given the apparent benefits of diversification, it’s baffling why investors don’t hold highly diversified portfolios. According to Larry, one reason is that most investors likely don’t understand how risky individual stocks are compared to owning a broad selection of hundreds or thousands of stocks.
Evidence that individual stocks are very riskyLarry notes that the stock market has returned roughly 10% per year over the last 100 years, and the standard deviation on an annual basis of a portfolio of a broad market of stocks has been about 20%. He observes that most people don’t understand that the average individual stock has a standard deviation of more than twice that.
In another study from 1983 to 2006 that covered the top 3,000 stocks, the stock market returned almost 13% per annum, but the median return was just 5.1%, nearly 8% below the market’s return. The mean annualized return was -1.1%. This means that if you randomly pick one stock, the odds would say you’re more likely to get -1.1%. However, if you own hundreds or thousands of stocks, the odds are in your favor, and you’ll get very close to that mean return.
Larry shares another stark example of the riskiness of individual stocks. Despite the 1990s being one of the greatest bull markets of all time, with the Russell 3000 providing an annualized return of 17.7% and a cumulative return of almost 410%, 22% of the 2,397 U.S. stocks in existence throughout the decade had negative absolute returns. This means they underperformed by at least 410%. Over the decade, inflation was a cumulative 33.5%, meaning they lost at least 33.5% in real terms.
In another study by Hendrik Bessembinder of all common stocks listed on the NYSE, Amex, and NASDAQ exchanges from 1926 through 2015 and included. He found:
Bessembinder concluded that his results help to understand why active strategies, which tend to be poorly diversified, most often lead to underperformance. At the same time, he wrote that the results potentially justify a focus on less-diversified portfolios by investors who particularly value the possibility of “lottery-like” outcomes despite the knowledge that the poorly diversified portfolio will most likely underperform.
A diversified portfolio is the way to goThe results from the studies Larry has highlighted underscore the critical role of portfolio diversification. Diversification, often referred to as the only free lunch in investing, provides a sense of security and peace of mind. Unfortunately, many investors fail to fully utilize this powerful tool. They mistakenly believe that by limiting the number of stocks they hold, they can better manage their risks. In reality, a well-diversified portfolio is the key to long-term financial success.
Most professionals with PhDs in finance spend 100% of their time engaged in stock picking and have access to the world’s best databases and teams of professionals helping them. These individuals are unlikely to outperform. So why would an average investor think they have enough advantage over them? Larry’s stern advice to investors is not to play the game. His professional guidance is a beacon of reassurance in the complex world of investing, steering investors away from risky individual stocks and towards the safety of a diversified portfolio.
Investors make mistakes when they take idiosyncratic (unique), diversifiable, uncompensated risks. They do so because they are overconfident in their skills, overestimate the worth of their information, confuse the familiar with the safe, have the illusion of being in control, don’t understand how many individual stocks are needed to reduce diversifiable risks effectively, and don’t understand the difference between compensated and uncompensated risks (some risks are uncompensated because they are diversifiable).
Another likely explanation is that investors prefer skewness. They are willing to accept the high likelihood of underperformance in return for the small likelihood of owning the next Google. In other words, they like to buy lottery tickets. Larry says that if you have made any of these mistakes, you should do what all smart people do: Once they have learned that a behavior is a mistake, they correct it. So, steer away from risky individual stocks and go for the safety of a diversified portfolio.
Further readingLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
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Connect with Larry Swedroe
BIO: Ava Benesocky is an author, public speaker, educator, CEO, and Co-Founder of CPI Capital, a uniquely innovative real estate private equity firm that helps investors invest in multifamily assets.
STORY: Ava became passionate about real estate when she was young. At 15, she convinced her parents to invest $13,000 in a course by Scott McGillivray on renovating and selling homes. Ava never did anything with the course, which made it the worst investment ever.
LEARNING: If you invest in anything, ensure you’re ready to be committed, take action, and focus completely on it. Beware of shiny object syndrome.
“If you’re ever going to invest in something, you have to take action, or else it’s a total waste of time and money. And what’s the point?”Ava Benesocky
Guest profile
Ava Benesocky is an author, public speaker, educator, CEO, and Co-Founder of CPI Capital, a uniquely innovative real estate private equity firm that helps investors invest in multifamily assets.
She is the Host of Real Estate Investing Demystified with August Biniaz, who was Ep 784.
Ava has been featured in publications such as Forbes, Yahoo Finance, and numerous PodCasts and YouTube shows. Ava helps busy professionals earn passive income through Multifamily Real Estate investments.
Worst investment everAva became passionate about real estate when she was young. At 15, she convinced her parents to invest $13,000 in a course by Scott McGillivray on renovating and selling homes. Ava never did anything with the course, which made it the worst investment ever.
She tried to get it started, but there were so many moving components, and the process was so convoluted that she got scared. It all fell through the cracks. Ava never ended up taking action on it.
Lessons learnedRefrain from being impulsive when buying courses. Take your time and ask yourself if you have time for it. Can you block it off on your calendar? If not, do not get it.
Ava’s recommendationsAva recommends listening to her podcast Real Estate Investing Demystified, where she shares her personal experiences, interviews industry experts, and provides advice on real estate investing and other investment opportunities.
No.1 goal for the next 12 monthsAva’s number one goal for the next 12 months is to continue building a couple of departments in the company and closing on a couple more assets. On a personal level, she will continue taking care of her mind, body, and family.
Parting words“Thank you so much for letting me be on your podcast, and good luck to everybody out there in whatever venture they decide to take.”Ava Benesocky
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Connect with Ava BenesockyIn this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 14: Stocks Are Risky No Matter How Long the Horizon.
LEARNING: Stocks are risky no matter the length of your investment horizon
“Investors should never take more risk than is appropriate to their personal situation.”Larry Swedroe
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.
Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 14: Stocks Are Risky No Matter How Long the Horizon.
Chapter 14: Stocks Are Risky No Matter How Long the HorizonIn this chapter, Larry illustrates why stocks are risky no matter how long the investment horizon is.
According to Larry, the claim that stocks are not risky if one’s horizon is long is based on just one set of data (the U.S.) for one period (albeit a long one). It could be that the results were due to a ‘lucky draw.’ In other words, if stocks are only risky when one’s horizon is short, we should see evidence of this in other markets. Unfortunately, investors in many different markets did not receive the kind of returns U.S. investors did.
Historical examples of stock market risksLarry presents evidence from several markets, reinforcing the historical data that stocks are also risky over the long term.
First, Larry looks at U.S. equity returns 20 years back from 1949. The S&P 500 Index had returned 3.1 percent per year, underperforming long-term government bonds by 0.8 percent per year—so much for the argument that stocks always beat bonds if the horizon is 20 years or more.
In 1900, the Egyptian stock market was the fifth largest in the world, attracting significant capital inflows from global investors. However, those investors are still waiting for the return ON their capital, let alone the return OF their capital.
In the 1880s, two promising countries in the Western Hemisphere received capital inflows from Europe for development purposes: the U.S. and Argentina. One group of long-term investors was well rewarded, while the other was not.
Finally, in December 1989, the Nikkei index reached an intraday all-time high of 38,957. From 1990 through 2022, Japanese large-cap stocks (MSCI/Nomura) returned just 0.2 percent a year—a total return of just 6 percent. Considering cumulative inflation over the period was about 15 percent, Japanese large-cap stocks lost about 9 percent in real terms over the 33 years.
Taking the risk of equity ownershipLarry notes that the most crucial lesson investors need to learn from this evidence is that while it is true that the longer your investment horizon, the greater your ability to take the risk of investing in stocks (because you have a greater ability to wait out a bear market without having to sell to raise capital), stocks are risky no matter the length of your investment horizon.
In fact, that is precisely why U.S. stocks have generally (but not always) provided such great returns over the long term. Investors know that stocks are always risky, and thus, they price stocks in a manner that provides them with an expected (but not guaranteed) risk premium.
In other words, stocks must be priced low enough to attract investors with a risk premium large enough to compensate them for taking the risk of equity ownership. Because the majority of investors are risk-averse, the equity risk premium has historically been large.
Things that never happened before do happenLarry warns that investors should never take more risk than is appropriate to their personal situation. It is also important to remember these words of caution from Nassim Nicholas Taleb: “History teaches us that things that never happened before do happen.” With that in mind, you will be well served if you never treat the highly unlikely (a very long or permanent bear market) as impossible.
In addition, investors should diversify their portfolios against risks that can show up and not have all of their assets in any one country or asset class. This is because any of them can have very long periods of poor performance. He insists that having long periods of poor performance is not a reason to avoid an asset class. It’s a reason why investors should diversify.
Further readingLarry Swedroe was head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.
Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.
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Connect with Larry Swedroe
BIO: Pritesh Ruparel is the CEO of ALT21, a leading tech company in hedging and currency solutions.
STORY: Pritesh found a good trade and invested 100% in it. His manager later advised him to liquidate that position because it was too concentrated. A day after Pritesh liquidated, a natural disaster occurred, and the spread went from $10 to $250 in an hour.
LEARNING: Put yourself in a position to get lucky. Never decide against your gut. Stay grounded between the highs and the lows.
“The worst thing you can do is to trade on something or to make a decision that you don’t 100% agree with.”Pritesh Ruparel
Guest profile
Pritesh Ruparel is the CEO of ALT21, a leading tech company in hedging and currency solutions. With two decades of expertise in financial derivatives and structured finance, he leverages technology to make financial products accessible and affordable, aiming to save small and medium-sized enterprises (SMEs) millions annually on international transactions.
Worst investment everPritesh’s first trading role was as a market maker in commodity relatives. One summer, he put a ton of analysis into a particular commodity spread trade. Pritesh thought the risk-to-reward looked good, but the trade was not doing anything. Nobody was marking the trade. Pritesh thought this was insane, so he went all in. He had the biggest position possible in that trade and it was 100% of his portfolio.
A manager advised Pritesh to liquidate the position because it was too concentrated. A day after Pritesh liquidated, a natural disaster occurred. The position benefited from this disaster and went from $10 to $250 in an hour. Unfortunately, Pritesh could have earned so much if only he had not liquidated.
Lessons learnedStay grounded between the highs and the lows. Ultimately, you’ll be fine if you make decisions that align with what you believe in. This can give you a sense of confidence and conviction in your decisions.
Pritesh’s recommendationsPritesh recommends building systems, processes, or resources that suit your risk appetite, emotional intelligence, and patience. This can enhance your decision-making and risk management, as it aligns with your personal attributes.
No.1 goal for the next 12 monthsPritesh’s number one goal for the next 12 months is to have repeatable, scalable processes for his go-to-market and use that to make an impact globally.
Parting words“Remember, it’s a marathon, not a sprint.”Pritesh Ruparel
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