22 January 2020

On today’s show, Robert Leonard talks with investing expert Rick Ferri. Rick is a Charted Financial Analyst (CFA), the Founder of Ferri Investment Solutions, an author, and Podcast Host of Bogleheads on Investing. He is passionate about maximizing investment returns by eliminating unnecessary fees and increasing simplicity.



  • What Bogleheads are and what Boglehead investing is.
  • Why you need to diversify your investments.
  • How you should get started investing today.
  • Why you need to eliminate unnecessary investment fees in your portfolio.
  • And much, much more!


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Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors may occur.

Robert Leonard  00:02

On today’s show, I talk with investing expert Rick Ferri. Rick is a Charted Financial Analyst (CFA), the Founder of Ferri Investment Solutions, an author, and Podcast Host of Bogleheads on Investing. He is passionate about maximizing investment returns by eliminating unnecessary fees and increasing simplicity.

Intro  00:22

You’re listening to Millennial Investing by The Investor’s Podcast Network, where your host Robert Leonard interviews successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

Robert Leonard  00:45

Hey, everyone, welcome to the show. I’m your host, Robert Leonard. And with me today I have Rick Ferri. Welcome to the show, Rick.

Rick Ferri  00:52

Thank you for having me. I appreciate it.

Robert Leonard  00:55

For those listening who may not know who you are, or who John Bogle was or what a Boglehead is, can you please talk to us about John and Bogleheads?

Rick Ferri  01:04

Sure, so John Bogle is the founder of the Vanguard Group of Mutual Funds, and their specialty at Vanguard is index funds and low cost investing. But primarily, John Bogle created the very first index mutual fund back in 1976, which was almost a flop and almost didn’t make it back then. But it created now a huge industry where almost all of the fund flows and mutual funds and exchange traded funds are going into index funds.

So, it started out very slowly but now it is a major part of most people’s investment portfolios. So John Bogle is credited for that. He passed away earlier this year. I am part of an organization called the Bogleheads. I’m actually the President of the John C. Bogle Center for Financial Literacy. And we just continue to promote the idea that investing is not hard. Investing is easy, if you do it in a very low cost and simple way and not have a lot of complexity, not have a lot of taxes, and not have a lot of fees. And that’s what the Bogleheads are all about.

Robert Leonard  02:23

How did you get involved with this Bogleheads strategy? What really drew you to index funds over other strategies that you know are often quoted as more exciting?

Rick Ferri  02:32

Well, I have a background on analysis. I went into the investment industry after I left the Marine Corps. I was a fighter pilot in the Marine Corps back in the early 1980s. And later on, I went into the reserves and finished my 20 years. However, in the late 1980s, I went to Wall Street and the people on Wall Street were managing investment portfolios and with the analyst on Wall Street had a designation called a Chart of Financial Analysts charter. So I thought I’d better get one of those.

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So I worked on that for three years and received my CFA charter. And I was studying the performance of active managers versus indexes. Basically, all the different mutual funds out there that are trying to beat the market are trying to beat a particular market. And what I studied during the 1990s and did a lot of analysis on was the rather poor track record of all of those fund managers who are trying to outperform and came to the epiphany in 1996 that why bother trying to outperform the market when the market just does well all on its own, and all you need as an investor is to get the return of the market instead of trying to beat the market. And you will be much farther ahead than most people who out are there trying to outperform it. And when I had that epiphany, for the last 20 some odd years I’ve just been preaching and singing in the choir, so to speak.

Robert Leonard  04:09

That’s really interesting that you found that out after the CFA, and in working on Wall Street, because I mean, that’s essentially what Wall Street does, is they look to outperform the market. And basically, the CFA is a big designation to help those people on Wall Street do that. So it’s really interesting that that you realize this after having getting that designation.

Rick Ferri  04:27

Well, it’s exactly what you said, the CFA charter, it’s supposed to help people outperform. The fact is, it doesn’t, it doesn’t really matter if you have a CFA charter. It doesn’t really matter if you have a Masters of Science and Finance, which I also have. It doesn’t matter if you’re a PhD. The markets are difficult to outperform. And if you think that you’re going to develop some strategy to outperform the market, you are probably mistaken. Now, there is a small minority of people who have done it. Number one, they will not manage your money.

And number two, we can no way determine who those people are going to be in advance. So why do you need to do that? You don’t need to bother. If you just get the return of the market, you’re in the top 10 percentile of every investor out there. So if you just get the return of the market, you’re doing much better than most people, and you can achieve your financial objectives. And my goal was to work with my clients to achieve their financial objectives. I didn’t have this ulterior motive of becoming a famous money manager. I was only trying to get my clients their fair share of the market return.

Robert Leonard  05:45

Why do you think so many people have a hard time beating the market?

Rick Ferri  05:49

Because of fees, investment fees caused them to underperform. It’s really quite simple. The return to you is the return of the market less the fees that you’re paying. So the market is a zero sum game. If somebody outperforms, somebody else must underperform. If I am getting the return of the market because I’m using a market index fund, and so I’m getting the return of the market. There are people out there who are trying to beat the market. If somebody does outperform, it means somebody else must underperform. But both of those people are paying higher fees. They’re paying transaction costs, they’re paying bid ask spreads. They’re paying money management fees. And so net-net, the majority of people who are trying to outperform because of these, underperform. So if all you do is get the performance of the market because your fees are practically nothing. You’re outperforming most of those other people.

Robert Leonard  06:43

For somebody who is just getting started investing, why are the fees so much lower on an index fund?

Rick Ferri  06:49

I think the fees are lower on an index fund because that’s the way Vanguard first designed it. John Bogle, when he founded the Vanguard company, started it as a mutual benefit type of company, meaning the shareholders of the mutual fund own the company as opposed to the other way around. The other way around like if you take up Fidelity, it’s privately owned, you take MFS, it’s privately owned, you take any other mutual fund company, it’s privately owned or it’s owned by shareholders. So the shareholders are trying to get a rate of return on their investment in the fund company. So they charge fees to the fund shareholders. That’s how the shareholders of the fund, the owners of the fund company get paid.

Well, with Vanguard, it was different. We, the shareholders, the people who own mutual funds, actually own the company. So we wanted to get our return from the fund and therefore the whole idea of having low fees in the fund and keeping the overhead of the Vanguard Company itself low was to our benefit. So it was to our benefit, as the owners of the company and the investors in the funds, to keep the cost low as opposed to paying high fees for mutual funds that the shareholders who own the fund company received. It starts out as a conflict of interest right away if you start a fund company because you want to make money by owning a fund company, it’s a conflict of interest.

Because if you make money by owning the fund company, that means your shareholders who are in the fund are not going to make money, and just a conflict of interest. You’re taking their money and putting it into your pocket, promising them high returns and promising them they’re going to outperform the market when in fact, it doesn’t happen. So you know, once you have this epiphany, once you realize what is going on out there on Wall Street, and how it all works, you never go back. Once you go into the church, you never leave it. You just realize that this is in your best interest is to not pay fees to get the return of the market. And that is in your best interest, although it’s at the detriment of the people who own mutual fund companies. So it’s all about money.

Robert Leonard  08:55

And those active funds also have salaries of people and overhead to pay and of course, they have portfolio managers and analysts trying to pick the best stocks for them to invest in. So of course, that’s going to be expensive. Whereas with your low cost index funds, there’s no or very little overhead and salaries to pay. It’s really just tracking the market. So the administrative costs allow for much lower fees.

Rick Ferri  09:16

Exactly. That helps also as well, I mean, there’s no reason you need to go out and try to hire five dozen analysts to analyze every sector of the market, to try to pick the winning stocks in those sectors and pay those people hundreds of thousands of dollars a year each. That’s all overhead. And then, by the way, because fund companies have to market the idea that they’re going to outperform, it cost an awful lot of money for these fund companies who are trying to beat the market to go out there and sell you on the idea that they’re going to outperform.

So that money has to come from somewhere. Well, it comes from the current shareholders. So all these fees get added on and by the way, a lot of brokers get paid by selling these funds so they have to get paid and that leads to 12b-1 fees and leads to commissions. It’s all about making money from you, as opposed to you making money for yourself. So, in the end, when you figure all this out, you say, “I don’t want to pay any of those fees. Why do I want to pay for the fund company to go out and market to other people? Why do I want to pay for that?” You shouldn’t have to. If you go into an index funds, fees are extremely low. And you don’t pay a lot of those expenses.

Robert Leonard  10:24

Yeah, that marketing piece of it is really interesting. I had never actually thought of it that way. And you’re absolutely correct. I mean, they’re spending a lot of marketing dollars to tell people that they’re going to outperform, which essentially would draw in more funds for them and have more inflows. But like you said, that money has to come from somewhere and it’s coming from current shareholders. That’s really interesting. I had never thought of it that way.

Rick Ferri  10:44

Yeah, and by the way, they can’t tell people they’re going to outperform. They can suggest to you in many different ways that will make you believe they’re going to outperform, by showing you, say, past performance of a particular fund. They might have 50 or 60 funds, of which maybe 10 of them at the time are actually outperforming. So they’re going to show you the performance of those 10 funds maybe. And therefore, you’re going to believe that they are, actually all of their funds, outperform when in fact, they don’t. A vast majority of them do not. And the ones that currently are outperforming, there’s no persistence in the performance.

So they might stop outperforming tomorrow. And then a couple of other funds might start outperforming, but you can’t tell which is going to outperform, which isn’t.  In the aggregate, only over a five year period of time, only about 20% of the actively managed mutual funds outperform and they only outperform by a small amount on aggregate. The other 80% underperform and they underperform by two to three times the amount that 20% outperform. So you’re paying a lot of money for a low probability of picking a fund that’s going to outperform and even if you happen to pick right, you happen to get a fund that did outperform, it’s not going to outperform by as much as it should outperform, to pay you for the risk that you just took.

It’s like five horses in a race. And you have to bet on the winning horse, you put $1 in, and you win, you think you should get $5 back, but you only get $2 back. But that’s because the track is taking the rest. And this goes on and on and on and on. Day after day after day, year after year after year and the mutual fund owners, the people who own mutual funds get rich while you struggle trying to figure out what the next winning fund is going to be, which you can never do.

So, you know, it’s a philosophy. It’s a philosophy that goes against everything that you see on TV, you read in the magazines, you get on the internet that these people you know Jim Cramer, you know? All yeah, it’s easy to do. But it’s all marketing. It’s all marketing to try to get you to invest, but when you really look under the hood, I mean, it’s not a 450 horsepower engine under there. You know, it’s a little. That’s a couple of hamsters on a treadwheel. That’s all you get. So that’s the reality of the business.

And when you realize this, when you have this epiphany, when you have this aha moment, this light bulb moment, you never go back. You never go back the other way. You say, I’m not doing that anymore. I’m just doing these low cost index funds. That’s all I’m going to do the rest of my life. I’m going to buy a few of those good ones, total US stock market, total international stock market, a bond fund, and that’s it. I’m done. Good for me. Maybe you just buy one balanced index fund that has everything in it. You don’t need anything else. Your fees, just pennies is all it costs to do this. And that’s all you need to do.

Robert Leonard  13:45

How does somebody get over the psychological conflict they might have if they buy an index fund, and they’re getting the market returns, but they might hear their friends or family members bragging about how they’re getting, you know, these amazing returns on some of these individual stocks that they’re picking? How can somebody deal with that dynamic?

Rick Ferri  14:05

Well, you know, it’s not true, because people are only going to tell you they are winners. They may have this great stock that they’re making a lot of money on, but they have 10 other ones that they’re losing. They’re not going to tell you about the 10 losers, we’re going to tell you about the one winner. And it’s a random event, the spin of the wheel. You know, if you pick 10 stocks, one of them is going to go up. That’s the one you’re going to hear about. But in fact, when you actually look at their… if they actually gave you the data, they analyze their portfolio, which they’re not going to do. And you really get into the data audit, you find out they’re actually not doing well at all.

They’re underperforming. This happens. Look, there’s going to be lucky people. I’m not saying that, you know, you weren’t lucky 20 years ago, and you know, bought Google stock or whenever they became public. Yeah, sure if you held it that long. I mean, look at Amazon, if you would have bought Amazon back when it first became public, you of course you’d be you know, wealthy today, but who’s going to hold Amazon when when it’s going up and down 80% , up 100%, and then down 80%? I mean, so much volatility. People don’t hold these things. So when you look at the actual performance over the long term of the people who claim to be doing well, you will find out that they’re really not doing well. They’re not, but they’re not going to give you that information.

Robert Leonard  15:12

So for someone listening to the show right now who knows that they want to start investing, but they just really aren’t sure where to begin, where would you recommend that they start?

Rick Ferri  15:21

Well, a lot of people who are just starting investing are probably going to their employer and invest in the 401k plan that their employer offers and maybe the 403-b plan that they have. So that’s usually where people start investing. And within that 401k or the 403-b, they’re going to have this list of options that you have. And you have to look at those options. And you have to say what can I invest in and you’re looking for the lowest cost funds. So you want to look at what are the fees of these funds.

If you’re looking down the list, it’ll say here are your US stock index funds, carrier bond funds, here are your international funds. What you want to do is you want to go to the far right hand column, if it’s there, and you want to look down, you gotta set where are the ones that have .02 percent, the .03 percent fee. Those are the ones you want to circle. You don’t want to look at the ones that have .6% fee , 1.1% fee, .9% fee. Just get all those, just don’t even look at them. Look at the fees, look at the ones that have the extremely low fees, .01 percent expense ratio per year.

And those are the ones that are probably the index funds. And then you need to decide how much you want in the US stock index fund, how much you want in the international index fund, how much you want to the bond index fund. But again, look at the fees. These will tell you whether you’re getting an index fund or whether you’re getting some sort of a high cost active management that has a low probability of outperforming that index fund.

Robert Leonard  17:01

What if somebody is really interested in this stuff, though, and they want to be more hands on and they want to have an active role in their investment approach, and they want to buy individual companies. Is there a place in somebody’s portfolio for a small percentage of that, or should it just be strictly index funds?

Rick Ferri  17:17

Well, the very first book I wrote more than 20 years ago was called “Serious Money.” And “Serious Money,” the reason I called it “Serious Money,” because I said, the serious money that you have to invest needs to be in index funds. However, if you get to the back of the book, I also talked about bingo money, bingo money.

The reason I call it bingo money is because my grandmother, when she used to do the laundry for my grandfather, she used to take the nickels and dimes out of his pocket and put it into a little jar. And she used to call it that’s my bingo money. And she used to go to the bingo twice a week at the local church. Anyway, so that’s the bingo money. So I named the chapter after her. Basically, this is your bingo money, which means the money that you get that sort of is not your serious retirement money, you know, maybe a small account that has a couple of thousand dollars that you want to play around in fine, you want to buy a few stocks. I think it’s a good idea. You go out and you buy a few stocks.

Robert Leonard  18:14

And as long as the portfolio is allocated appropriately, and you do lose it, that’s a relatively cheap form of education, right? You could spend that money, a lot more money on a college education to learn something, but you’re going to learn it a lot better and a lot more cheaply if you do it that way. And you only allocate a small percentage of your portfolio.

Rick Ferri  18:34

The older you get, and the more experienced you have, the less and less likely you are to go out and try to pick stocks because you understand that you have no information. You need superior information about the company. Number one, you have to have superior information about the stocks you’re trying to pick and why would I have superior information about Amazon or Google? I mean, where am I going to get superior information from?

So you have to have superior information about the company either through analysis, or maybe somebody who does have superior information leaked it to you, which of course is illegal. So you have to have superior information.  But secondly, you have to know when to trade on that information. And there’s a book out by Jim Cramer called “Confessions of a Street Addict.” It was written 20 years ago, I think it was Jim Cramer’s first book.

And I when I used to teach college and I used to college finance, I used to quantitative analysis and a lot of other courses, I used to have students read that book, because in there, it talked not only about having superior information and how Jim Cramer used to try to get it as a hedge fund manager… Basically, he paid off Wall Street analysts by giving them a lot of trades. So they used to call him first. So we tried to get the edge on getting superior information about earnings forecast or change in the rating or something like that that the analyst was going to make publicly. And so he will be the first call to get that information.

But secondly, he talked about in that book that even though he had the superior information, he was unable to make any money on it, because he didn’t know how to trade on it, until he hired a trader who happened to be his first wife eventually, who knew how to trade on the stock. So Jim Cramer then would get the superior information the way that he would pay to get it. And then he would give the trades to who would be his future wife who he hired. She was a trader, and she knew how to trade the stock, and she would make the trades and then finally they started making money.

So you need superior information. And you need to be able to trade the stock superiorly. And if you don’t have those two things, you can’t outperform on a consistent basis. You can always get lucky. You can always get lucky. And I’m not saying you won’t get lucky, but you’ll become unlucky eventually. But if you want to actually make money, picking individual stocks, you need a whole lot more than just, you know, a subscription to a stock tracking or a stock charting website or some sort of a program that you use. That doesn’t do anything for you.

Robert Leonard  20:59

Previously, investing in index funds often had an advantage over individual stocks for newer investors because a lot of large brokers didn’t have any trading commissions on their funds. But now that most large brokerages have gone to zero trade commissions for individual stocks as well, how do you think this is going to impact index funds? Do you think more people are going to start trading individual stocks?

Rick Ferri  21:22

Now, I’m not gonna make any difference at all. But the fact that it’s free trading, it doesn’t make any difference. It’s irrelevant that they, you know, the fact that now, you could trade stocks for free at Schwab, *TD, Fidelity, Vanguard. I think it makes no difference. Ond3 you understand that you can’t outperform then what’s the point. And by the way, exchange traded funds now also trade for free. So now I can buy index funds at Schwab, Fidelity, and *TD using exchange traded funds and I don’t have to pay commission. So that’s good for me as an index fund investor. If I’m using Schwab, Fidelity, or *TD, I can buy exchange traded funds, *they are that track the indexes. And I don’t have to pay commission either. So I don’t see how the fact that you don’t have to pay commissions anymore is making any difference whatsoever.

Robert Leonard  22:09

Of course, it’s going to vary for almost every person’s individual situation, but as an investment advisor, and whether it be an IRA or 401k, when do you recommend someone invest in a Roth retirement account versus a traditional retirement account?

Rick Ferri  22:23

So there is no rule of thumb for this. There’s no one size fits all. But this, when you invest in a regular retirement account, like a 401k, or an IRA, you’re putting your money on pre-tax. So you don’t have to pay the taxes, the federal or state income tax on that money this year, and you’re limited to how much you can put in, but we’re not going to talk about the limit. So if you do it tax-deferred pre-tax, you don’t have to pay the taxes on it. So if you’re in a high tax bracket, now, you put the money in there, you don’t have to pay the taxes on the money that you put in later on down the road. When you retire after age 70 and a half, you have to start taking out the money required minimum distributions.

And at that point, you’re not working anymore, you may not be working anymore, so your tax rate is going to be lower. So the whole idea is this is a tax arbitrage. Why would I pay 35% tax on this money? Now when I’m retired at age 70 and a half, and I take it out, I only have to pay, say 12% on it or 22%. So I’m going to go ahead and do this tax arbitrage. But if you don’t, if you’re in a low tax bracket now anyway, and you think that when you’re retired, you’re actually going to be in a higher tax bracket because you’re, you’ve got Social Security coming in and you’re having to take these required minimum distributions, but today, you’re actually in a very low tax bracket.

Maybe you’re only in a 12% tax bracket, because your income is down there at $40,000 or so. Well, you may not want to defer taxes until you’re 70 and pay more in tax. You might actually want to put money into a Roth, which is after tax contributions, and then it can grow tax free for the rest of your life. And then when you take the money out later on, it’s not taxed either. And so that’s what you would rather do. So it all depends on what tax bracket you’re in now, and what tax bracket you’re going to think you’re going to be in when you retire, if you think you’re going to be in a higher tax bracket when you retired, put the money in a Roth. If you think you’re going to be in a lower tax bracket when you retire, put the money in a traditional IRA or a 401k traditional.

Robert Leonard  24:37

What have been some of your biggest mistakes in your investing career and how can a new investor avoid those same mistakes?

Rick Ferri  24:46

I cannot count the amount of mistakes that I’ve made. I mean, it has been just a school of hard knocks. Let’s see. I’m writing a book now called “A Few Good Funds.” And in the first two chapters, I talk about all my investment mistakes. I mean they run the gamut of buying artwork that was fake, to buying vacation condos as an investment, which was a bad mistake. I bought stocks based on recommendations in magazines. They all sounded so good.

And then of course, after I bought them, one of them, I bought three stocks. And at one time, one of them went to zero. The other one went down about 90%. And the other one I actually made a little money on because it was bought out. This happened back in the 1980s. And I bought stock options on hunches that turned out to be completely false. I mean, I’ve done everything that you could imagine that was absolutely wrong. Until I realized, I don’t know what I’m doing. I have no idea. I thought I knew what I was doing. I have an undergraduate degree in finance. And I have thought I was a smart guy, but I didn’t know anything.

I still don’t know anything. I mean, I know enough now to put money in index funds and just leave it there. I know that. I hope that the stock market continues to go up because the global economy continues to grow, which we all hope for that because if it doesn’t, we’re all in trouble. Not just our investments, but we are all in trouble as far as our jobs. So we hope that the economy continues to grow. And if it does, the stock market will grow accordingly. So I do know that. I do know what the tax code says about dividends from stocks are taxed at less than interest from bonds. So I know a few things to be able to put together a reasonable portfolio, but the older I get, the less I actually know.

Robert Leonard  26:33

How should somebody who hasn’t made all those mistakes yet avoid those?

Rick Ferri  26:37

It’s hard. I mean, you know, we like to believe we know a lot more than we do, right? Everybody does, like trying to ask people if they’re a good driver or not. Well, of course, there are great drivers, but everybody else is a terrible driver. It’s the same thing with investing at first. It’s like a lot of people think that they’re really good till they really learned that they’re average and then they learned that average is actually below average. Meaning that you *inaudible, an average investor does worse than the market. So if you want to do better than the average investor, then you just buy the market and you’ll outperform the average investor. Now you’re doing above average. I know it’s strange, but that’s how it ends up.

Robert Leonard  27:14

And there’s actually a quote I like and it it’s goes something like a smart man learns from his mistakes, but a wise man learns from others’ mistakes. And I really like that quote, because I think it illustrates your point exactly.

Rick Ferri  27:28

Don’t worry, you’ll make plenty of mistakes. Everybody does. You just can’t help it. Men, by the way, make more mistakes than women. I mean, it’s clear that we are not as good at listening to other people, taking advice from other wise people, and investing in index funds and holding them. Women are much better at doing this than men are. We’re men, you know, let’s go, you know, rule the world, and we pay for it. And we do and I’m not talking that… I’m saying this. I mean, it’s shown in the data that men, especially men with higher degrees of education, tend to do the worst.

Robert Leonard  28:02

You know, it’s interesting because the finance industry is predominantly male. And so it’s really interesting to see how this changes as more females come into the industry. Of those mistakes you mentioned, did they all happen before you started index investing? Or was this some of them still afterwards?

Rick Ferri  28:20

No, this is all before. This started when I was basically, in 1982, I believe it started when I first had money, because I want in the Marine Corps and I was able to save some money and I wanted to invest it. And so I called my brother-in-law who had just started working at a stock brokerage place, big firm, and I said, “Hey, I got this money, I want to invest it.” And he goes, “Okay, put it in this mutual fund.” So I said, “Okay.”

So I put it in that mutual fund, and within six months, that $2,000 that I invested was only worth about $1600. And part of that, by the way, was the commission I had to pay to get into the fund. So I extrapolated that and I said, “My God, if this thing continues, I’m going to be broke. I’m going to lose all of my money in a period of like two years. So just get me out, get me out of this thing. Get me out of it.”

Well, it happened to be like the growth fund of America, which was the American funds, which is not a bad, bad fund, not a bad actively managed fund. And the fees aren’t that bad. But I didn’t know. I just could see that this investment is just going to go to zero. And so I got out of it. And of course, that was the beginning of the next bull market that went from 1983 to basically 2000.

It was the beginning of it, basically the month that I sold, so and it got worse from there. And then I bought those three stocks because I figured, “Hey, I’m going to pick stocks now.” And then I did the condo thing, the timeshare which was a train wreck. But worst train wreck was doing the fake *Dali prints that I bought that I thought were going to make me a lot of money. I mean, it just goes on and on and on. It’s a good thing. I didn’t have a lot of money back then. And that’s a good thing, by the way.

When you’re young, you don’t have a lot of money. You think it’s devastating, you think it’s terrible, if you lost a few hundred dollars that you bought some stocks, and they went down. It does actually a good thing that you lost that money when you’re young because when you get older, and you have a few million dollars, I mean, you don’t want to be making those mistakes. So if you make the mistakes when you’re young, and you lose this money, and you get beat up, and you do all these stupid things when you really don’t have any money, and you get humbled, and get plummeted by the markets, and all of a sudden, you finally realize, “My gosh, what are these index fund things?”

Robert Leonard  30:37

Yeah, when you’re young, I mean, it’s a relatively inexpensive way to learn for the long term. So yeah, I completely agree. What is your favorite investing book of all time?

Rick Ferri  30:49

Well, the one that changed my life was called “Bogle on Mutual Funds.” Because during the 1990s, when I was going through this crisis of trying to figure out what is going on, I had my Charter Financial Analyst designation I was getting my Masters of Science and Finance, and I was trying to find winners and I was trying to find winning managers, and I was trying to find the formula, and I was just miserably failing. And I was failing my clients and I felt very depressed.

The book that saved it for me was John Bogle’s first book, “Bogle on Mutual Funds,” which he wrote in 1994. And I read it in 1996, after seeing him on stage at a CFA conference in Atlanta in April of ’96. And then I bought his book and I read it. And I remember when I read it, I read it on October 23, 1996. And I was reading it at about 7:30pm at night as I was sitting in a parking lot of a House of Horrors while I was waiting for my children to go through this House of Horrors right before Halloween.

So I was sitting in the parking lot and all these chainsaws were going off the back and people screaming this and that. I’m waiting for them. And I’m reading this book. And I’m screaming in the car, “My god, this is exactly what I see. This is exactly.” The way he was speaking to me through that book, that I was not alone, that what was actually I was seeing day to day in my job and what was I was experiencing on Wall Street, and all the stuff that I was seeing was real, and that it happens and that I was not alone. And that this is the answer. This is how you fix it. Just use index mutual funds. And as I was reading this, that’s when I had my epiphany and my aha moment. So to me, that’s the greatest book that I ever read.

Robert Leonard  32:39

For somebody listening to the show who might be thinking themselves but what about Warren Buffett or Ray Dalio or these guys have beaten the market for a substantial period of time, what do you have to say about that?

Rick Ferri  32:50

Yeah, well, I’m not Warren Buffett. Are you?

Robert Leonard  32:53

I definitely am not.

Rick Ferri  32:55

Okay, right. I think Ray’s great, he’s wonderful. Yes, but I’m not him. Okay? If you ask Warren Buffett what I should do with my money, he’ll tell you put it in an index fund. That’s what Warren Buffett tells people to do. I’m sure Ray will tell you the same thing. And so, you know, there are people that are going to outperform, there are literally hundreds of thousands of people out there that are trying to beat the market, just by randomness alone. There’s going to be a Warren Buffett, there’s going to be one. I don’t know who they are. If I did, I’d gladly give them my money.

But I don’t know. They all sound good. They all sound smart. They all have PhDs from all these different incredible universities, MIT and Princeton and University of Chicago. I mean, they’re all brilliant, brilliant people, it doesn’t matter. That doesn’t mean that they have any higher probability of outperforming than somebody else. And for me, I’m talking about me, Rick Ferri. I mean, also, if they are that good, why would they ever want to manage my money? If I’m in the top 10%, instead of the top 1%, that’s good enough for me. And I know, I can guarantee to be in that top 10% just by buying the index. And so that’s what I’m going to do. I’m going to take that guarantee.

Robert Leonard  34:11

And when you say buying the index, do you mean just buying an S&P 500 index? Or is it portfolio consisting of maybe the S&P, total US market, total world market, maybe a bond fund? What exactly do you mean when you say buy the market?

Rick Ferri  34:26

It depends on which market you want to invest in. So if you want to invest in the US stock market, you buy a total stock market index fund. If you want to invest in the large cap US stocks, you buy the S&P 500 index fund. If you want to buy international stocks, you buy the total international stock index fund. You want to buy emerging markets, you buy an emerging market index fund. If you want to buy bonds, you just want to buy investment grade bonds, a portfolio of investment grade bonds in the US. You can buy the total bond market index fund. If you want to buy a portfolio of corporate bonds, you buy a corporate bond market index fund.

So whatever sector of the market that you want to buy, you buy an index fund. Now, you’re going to have US stocks, maybe in your portfolio, you’re going to have international stocks in your portfolio, you might have some treasury bonds, maybe some treasury inflation protected securities in your portfolio, and you may decide to have some corporate bonds. All four of those segments of the market are all low cost index funds. That’s what you buy in each of those segments. It was written in 1994. But the data is just as accurate today, as it was 25 years ago, when it was written, it doesn’t change. The numbers don’t change.

Robert Leonard  35:42

If you could go back and give yourself one piece of advice when you were just starting to invest, what would you tell yourself?

Rick Ferri  35:48

I would say to myself buy Vanguard S&P 500 index fund and never sell it?

Robert Leonard  35:56

It’s simple, but it really is great, timeless advice.

Rick Ferri  36:01

That’s because when I was first starting to invest back in 1993, the only index fund available was the S&P 500 index fund. Now, they have a total stock market index fund, which is more than just the top largest 500 stocks. So now if I was to give somebody a piece of advice, what stock index funds should I buy? If I’m only going to buy one stock index fund you would buy in the US, it would be a total stock market index fund. If you want to buy one stock market index fund that you would buy internationally, it would be a total international index fund. If there was just one stock index fund variant that you bought. And you can only buy one, it would be a total world index fund, which covers both the US and the international market. So if you just bought that one, total world index fund, that’s all you need. That’s it. You don’t need anything else.

Robert Leonard  37:00

Do you recommend the total US market fund over an S&P 500 fund? And if so, why?

Rick Ferri  37:06

Well, because you get more diversification, you’ll get another 3000 stocks. The S&P 500 is basically 500 large companies. The total amount of stocks on the US market is like, around 3800 stocks. So not only you get the top 500, you get the other 3200 or so. So you get more diversification. But again, that’s the reason why.

Robert Leonard  37:29

Is there value to somebody who is looking at how their index fund is weighted?

Rick Ferri  37:36

Is there value to looking at it, you can look at a law you want, it’s not going to make any difference in how you perform as far as in the long term. So if you decided that you’re going to the market is what it’s the sum total of all of the thoughts and wishes and dreams of all the investors are in the market. So Amazon and Google and so forth, or you know, ExxonMobil, I mean, these are very, very, very large companies and the value of their stocks are very large, so they have a bigger component in the market. Okay, that’s where more money is in those stocks than in smaller companies. The S&P 500 has more money in those 500 stocks than like 85% of the market, is the S&P 500, even though it’s 500 stocks, and the rest of them are only make up another 15 or possibly 20%.

So that’s capitalization weighted index. That’s what the world believes that the value of all these companies are.  Now there are people out there who say, well, instead of doing 500 stocks based on the weight so I have a more Apple, more Amazon and so forth. Why don’t we do equal weighting across every stoc so I have an equal amount? So basically, with 500 stocks, I have .2% in 500 different stocks, I mean, is that a viable investment? Yeah, it’s viable. Sure. Is it going to outperform the S&P 500 over the long term?

You could make a case that it might do that, because there are more money pushed down to the smaller components of the S&P 500 that have more risk. And since more of the money has been pushed down from the bigger companies to the smaller companies that have more risk, than you would hope that because you’re taking more risk, you’d get a little bit better rate of return in the long run. So theoretically, yes, that’s true. However, you can’t buy an equal weighted S&P 500 fund as cheaply as you can buy a capitalization weighted S&P 500 funds.

So you’re always going to pay more money to do the equal weight .2% any stock. It’s always going to cost you more money, you may not always get a higher rate of return. So the first thing you need to do is get over the fee, the extra fee that you’re paying. Okay, and it doesn’t always do that. It hasn’t happened over the last several years where an equal weighted S&P 500 has outperformed capitalization weight. But it kind of goes one way and it goes the other and it goes this way. And it goes that.

I can just tell you, if you decided to do that, if you decided to do the equal weighting, instead of a capitalization weighting, you have to stick with that plan for the rest of your life. Not a few years, not just to give it a shot, see how it does next year, maybe how it does over the next two or three years. It is a lifelong decision because I guarantee you, if you decide you’re going to do the equal weighting S&P 500 and it underperforms, the S&P 500 capitalization weighted for a couple of years you underperform, you’re going to get out of it. And if you get out of it, you’ve just locked in your underperformance for the rest of your life. So if you’re going to do the equal weighting S&P 500, or the fundamentally waiting which is another different way of waiting… If you have to do these, you have to make a commitment doing that for the rest of your life because it might take that long before you actually get a benefit from doing it.

Robert Leonard  41:07

I personally just go with the capitalization weighted S&P 500.

Rick Ferri  41:11

I’m not that smart. So that’s what I do too. I just buy the market.

Robert Leonard  41:15

I think we provide a lot of value for the audience. We did a deep dive into index funds and I think you’re gonna find it really valuable. Where can the audience go to connect more with you?

Rick Ferri  41:25

My website is https://rickferri.com/ or RICKFERRI.com. That’s my website. You’ll see my books up there. I’m also the host of a podcast. I host the Bogleheads on Investing Podcast. Now you only do it once a month and I have a special guest every month that come on. My first guest happened to be John Bogle as a matter of fact, a couple of months before he passed. That was a really special program. So you can find me at the Bogleheads on Investing Podcast or at https://rickferri.com/.

Robert Leonard  41:57

We will be sure to put links to your podcast, your website, everything you have going on in the show notes so our audience can go to connect with you further. Rick, thanks again for your time. I really appreciate it.

Rick Ferri  42:08

Thank you. Thank you for having me on the show enjoyed it.

Robert Leonard  42:11

Thank you all for the support. I really appreciate it. I look forward to having you all back here for next week’s episode.

Outro  42:51

Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or broadcasting.


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