The Pilot Money Guys
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In this podcast we discuss market bubbles (are we in a bubble?), the benefits of diversification (no, it doesn’t suck), index mutual funds, and Exchange Traded Funds (ETFs). We discuss some causes of investment bubbles and whether we are currently in a bubble or not.  What happens when the bubble bursts and how it could affect us as investors? Learn why being an envious investor is one of the worst investment mistakes (FOMO) and why it causes us to continuously buy high and sell low, thus underperforming the actual investment we’re invested in! We discuss how diversification can help combat both bubbles and investor envy as well as help us win in the long run.  But be warned, it is the least “sexy” of all investment strategies.  You can’t brag to your friends at the bar about how diversified you are! We finish up discussing the potential ‘gotchas’ of index investing and warn investors to use caution with new, complex, and unnecessarily expensive index funds.


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Bubbles, Investment Envy and Why Diversification Sucks

Voice Actor: [00:00:00] ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams and goals. This podcast is brought to you by leading edge financial planning. Without further ado here is your host Robert Eklund.

[00:00:32] Rob: [00:00:32] Hey folks, welcome to the pilot money guys.

[00:00:34] Podcast  where we aim to bring you some lighthearted, financial fun. I’m Rob Becklin. Current airline transport pilot investment advisor representative with me today. We’ve got the former airline transport, pilot and certified financial planner, Charlie Mattingly. And of course, of course our producer and wonder boy.

[00:00:51]Ben Dickinson planner, but it’s more of a silent type

[00:00:56] Charlie: [00:00:56] silent, but

[00:00:57] Rob: [00:00:57] deadly, I was hoping you going to be in the silent role today. That’s, that’s the way I like to

[00:01:04] Charlie: [00:01:04] speak when you’re spoken to

[00:01:10] and you know, what a good first officer or a wingman says. Right. See if you see how well we’ve trained, you. Yeah, you said, uh, don’t say I forgot. We’re

[00:01:21] Ben: [00:01:21] recording. We’re recording. I better

[00:01:24] Charlie: [00:01:24] keep it clean. Keep it clean.

[00:01:26] Ben: [00:01:26] Nice landing. That’s that’s

[00:01:27] Charlie: [00:01:27] the only one I’ll say no. You’re right, right. You’re right. Yeah.

[00:01:32] Nice landing. Or in the case of the wingman, you know, wingman, uh, lead you’re on fire. That’s those are the things that, right.

[00:01:39] Ben: [00:01:39] I heard the different one, but yeah,

[00:01:41] Charlie: [00:01:41] that’s a clean, that’s a clean version of my mom listens to this podcast, so let’s go. Good.

[00:01:47] Rob: [00:01:47] Good. At least we got one listener. We’ve got at least one.

[00:01:51] Charlie: [00:01:51] Yeah, that’s right. Mom hit like, and subscribe. If you don’t mind, please.

[00:01:57] Rob: [00:01:57] Well today we’re covering the topics of day bubbles and indexes, which almost sounds appealing. And Ben starts getting excited when we start talking bubbles and indexes. Yeah, that’s a good teaser. That’s what we’re going to be talking about. But first we’re going to jump into some aviation news. So, uh, the first thing that I saw, obviously we’re recording this in early March.

[00:02:20] So what had just happened the last couple of weeks was United’s a triple seven going on to Hawaii. Uh, had an engine that basically blew up on him or at least shelled itself, and they had to return to the airport. So really interesting. Uh, they came back to the airport. I’m a heavy guy. So this one is, it was very interesting.

[00:02:42] And former KC 10 DC tank guy. So I was wondering, you know, how heavy they were. Uh, there was all kinds of photos on YouTube and Facebook and videos would show that the, the, the engine callin was gone. It was completely blown away. Obviously parts were falling off people’s neighborhoods and Broomfield, uh, up in Denver there.

[00:03:03] And it was just a pretty interesting to see hats off after those pilots. I mean, we’re, you know, we’re going to talk about a little bit, but, uh, uh, I hate Monday morning quarterbacks. And those guys did a great job. They got them on the ground there, safe and sound. I mean, that’s what pilots get paid. Pretty good money to do so.

[00:03:19] Yeah.

[00:03:20] Charlie: [00:03:20] And Rob the cowling, just for those who maybe are non-pilot. So pilots listening as that big round piece, they saw in the news, big round metal. Those are all my technical words that I’d know that was laying in someone’s yard, which. I don’t think anybody was hurt. Thank God. Right? I mean, that’s a huge thing and correct me if I’m wrong.

[00:03:40] Here’s some more trivia. Somebody said that cowling itself on the triple seven engine was bigger than the fuselage on the seven three seven.

[00:03:48] Rob: [00:03:48] I’ve heard that I’ve heard that that’s huge.

[00:03:50] Charlie: [00:03:50] That’s huge. It’s massive. Yeah. Yeah. So

[00:03:54] Ben: [00:03:54] it’s all a picture in that guy’s yard and it was just like the size of his Toyota Tacoma in his driveway.

[00:03:58] I’m like,

[00:03:59] Charlie: [00:03:59] Lord. Yeah.

[00:04:01] Rob: [00:04:01] That’s not good. They’re so, so thankful and lucky. No one got hurt.

[00:04:05] Charlie: [00:04:05] That’s incredible.

[00:04:06] Rob: [00:04:06] One of the things I was thinking about was one of the, one of the videos had the engine, you know, obviously the cow’s gone. And there’s still fire, you know, going out like the engine is still burn it.

[00:04:16] And it made me think, did they not shut down the engine? You know, what’s going on there. If they’re heavy, there’s a reason they might not shut down that engine, you know, go into Hawaii. They’re gonna have a lot of gas it’s COVID times. So they might not have had a lot of people, but if you’re heavy, loaded the gills, uh, I don’t know, I’m not a triple seven guy, but you know, just thinking about it.

[00:04:34] If you lose an engine you’re in Denver, high altitude. Uh, you know, one of the things you talk about, at least in the DC 10 world was you might keep that engine running if it’s putting out any kind of thrust at all. didn’t, I wasn’t sure they did that, but it could have been just residual fuel flow because the calendar’s gone.

[00:04:51] If they fire the retardant bottles that goes into the Cali. And would suppress the fire. But since the calendars, God, even if they did that, it wouldn’t have necessarily happened. So they might, they might’ve shut it down. I didn’t understand

[00:05:01] Charlie: [00:05:01] all the stuff you said there, Rob, your technical, your technical knowledge is exceedingly impressive.

[00:05:06] Yeah. Oh my God. Maybe we can have a wife’s listening. Thank you. We have a triple seven guy call in. Got her girl call in right now. Is that possible? Yeah,

[00:05:16] Ben: [00:05:16] let me get, let me check. You can do that

[00:05:18] Charlie: [00:05:18] on a podcast, but, um, but no, I, I don’t know. I was surprised at that too, Rob. I was like, why is there, why does it look like it’s still running in fact, If it’s not, even if they shut it down, it’s not seized.

[00:05:28] It could still be, it will still be spinning if it’s not seized, but there were, like you said some flames coming out, but who knows when that video was taken? Maybe it was right at the beginning. Maybe they’re in the process. It takes a while to run those checklists sometimes. And, but hats off to the crew, like you said, Rob, because, I came from the single engine world and I’ll tell you what never did flying a single engine.

[00:05:51] Seven 37 profile in the SIM. Luckily I never real appointing. Yeah, but never was that easy? Never was that easy. I mean, it’s very challenging, especially when you’ve got a huge thrust in it’s differential, a symmetric or whatever, all we say, all those, those things that I’ve already forgotten, but man, it’s challenging.

[00:06:10] In fact, Rob, I’m going to make a confession to you right now on my very first SIM at Southwest airlines. I crashed the SIM on a single engine ticket. That was my, that was my, what we call it. LOE. That was my, that was the one I crashed.

[00:06:27] Rob: [00:06:27] That’s why you

[00:06:28] Charlie: [00:06:28] practice and maybe that’s why I retired and I’m doing something different.

[00:06:31] Maybe I’m glad to retire.

[00:06:34] Rob: [00:06:34] So

[00:06:34] Charlie: [00:06:34] there was that beat sweat that went down in my face and the captain looked over and he’s like, dude, don’t worry about it. You get another chance. You’ll be fine. I was like, there’s this? Why is there a sweat rolling down my face? It’s

[00:06:44] Rob: [00:06:44] cold. That was during your initial

[00:06:47] Charlie: [00:06:47] new hire scary.

[00:06:50] And the SIM the screen goes, red screen goes red. You probably didn’t know that

[00:06:56] Rob: [00:06:56] you’re non pilot. Non-sales they’re a airline guys. Yeah. That is. Your check, ride out, maybe one of the biggest check rides you’re taking.

[00:07:09] Charlie: [00:07:09] It’s definitely one of the more nervous ones for sure.

[00:07:11] Rob: [00:07:11] Yeah, absolutely. I know guys that get

[00:07:14] Charlie: [00:07:14] super nervous during that funny story.

[00:07:16] I won’t, uh, deliberate too long, but, uh, this is seven years later and because every time I did the SIM like that, I would tell the, the Gower girls line with, Hey, look, I’m not good at the single engine stuff. It’s, I’m working my butt off when we lose an engine. And usually it’s right on. Take off. So I would always tell the person I was fine with.

[00:07:35] Hey, Hey, feel free to help me with whatever you can do. Step on the rudder for me, what the heck. But anyway, so I told that to one guy and this is a seven or eight year fo at this point, the dude’s like, Hey, you’ll be fine. This is my technique,  well, we get in the SIM on our LOE and he crashes on takeoff.

[00:07:55] So that made it even worse. Cause I was like, Oh no, this guy’s crashed and I’ve got to go next. So anyway, yeah, it’s challenging. The point of all that is hats off to the crew. Yeah, they did an awesome job. It’s it can be challenging. And clearly no one, I think no one was hurt if I’m not mistaken. So how,

[00:08:14] Ben: [00:08:14] how does that affect the drag?

[00:08:16] I mean, that’s gotta just put a huge amount of drag on that, that side. They’re adjusting for that. Yeah. It’s

[00:08:23] Rob: [00:08:23] um, been, I was a former C1, 30 guy, so props are a lot more problematic. Than jet engines. So if you have a prop, you know, one of the things you got to do immediately is what they call feather, the prop, which is turning it sideways to the wind.

[00:08:39] And since, since it’s a jet engine, not as critical, but it’s still, you lose all that thrust and you’re right. There is definitely drag out there. So you got to get what, you know, you’ve got to get that rudder, they balance out the plane. For sure.

[00:08:50] Charlie: [00:08:50] So, yeah, absolutely.

[00:08:52] Rob: [00:08:52] You know, and it was something that I also thought about was that’s an E that was an E stops flight going to a Y.

[00:08:58] So that engine, obviously there were some things, no problems with that. Um, previously I think is what I had heard. We’ll wait for the report to come out, but you know, that that engine was checked a little bit more critically than other engines or at least a little more dynamically. And that one. You know, one maintenance, uh, personnel would check the oil and I think another one would check the other engine also.

[00:09:22] Not, not much, but at least some more consideration on those over-water flights like that. So it’d be interesting to see what comes out of this for

[00:09:30] Charlie: [00:09:30] sure. Yeah, absolutely. Just,  glad that, uh, You know, again,  the engine casing, I guess, did his job because those fan blades stayed inside. They were contained.

[00:09:39] And when they come outside of that casing, that’s when it can strike the airplane and cause more damage. So that that’s is all right, Charlie. I’m not

[00:09:46] Rob: [00:09:46] sure that happened. I

[00:09:46] Charlie: [00:09:46] think even while I’m saying it, Oh, you say, Oh, it did

[00:09:49] Rob: [00:09:49] come out. Yeah. I think, I think it may have. Yeah, that’s the, that’s one of those things.

[00:09:53] Where did the, you know, are we, are they doing everything they need to do? And obviously look at that and make it safer. Which is what we’re we’re good at. So, yeah. That’s cool stuff. And the other thing, what else you got? You got any other airline

[00:10:06] Charlie: [00:10:06] news, Charlie? Hey man. I thought a couple of things were interesting.

[00:10:09] I’ll go through the headlines here, you know,  United buying 24 more max seven 37. So that’s good. Positive. Any positive dudes from the airlines, you know, it was just amazing. And like we talked about last time, about this time last year, we thought we were going to lose an airline or two. You know, and, and, uh, and we haven’t yet.

[00:10:30] Hopefully we won’t. So that’s good news. In fact, adding to that, Delta’s recalling, recalling all of their pilots, I think, or it says, at least it says more pilots. I quite frankly, I didn’t, I thought they avoided furlough, so I could’ve been mistaken on that , but the good news is they’re coming right back.

[00:10:45] They did.

[00:10:46] Rob: [00:10:46] They had to let something go for a little bit.

[00:10:49] Charlie: [00:10:49] That’s good news or coming back. The last thing that I think is fascinating. And I need to learn more about this because it’s just a, the headline and the quick article at this point. But net jets just ordered 20 of Ariens, never heard of very on before supersonic jets.

[00:11:08] Their goal everyone’s goal is to be able to connect it. Uh, any point. In the, in the world within three hours, any two points, I guess. Right. Are you going to start

[00:11:17] Rob: [00:11:17] flooding? I’m

[00:11:18] Charlie: [00:11:18] jumping back in, man. I I’m jumping back in and, uh, except for, I know flying supersonic is actually kind of boring, so there’s really not, there’s really nothing to it.

[00:11:29] I would say that it sounds cool, but it really, really matters. It’s not that

[00:11:35] Rob: [00:11:35] cool, but anyway, that’s awesome. Uh, something else, last thing, uh, for aviation news or at least that I was thinking here is. Southwest is now going to be flying to Bozeman Montana. They’ve opened up a couple more routes. Awesome. I think a couple of destinations in Florida as well.

[00:11:52] Destined

[00:11:53] Charlie: [00:11:53] the Destin area. Amanda Knoxville on to Knoxville, Southwest, Southwest, killing me.

[00:12:00] All

[00:12:00] Rob: [00:12:00] right. All right. Moving along. We’ve got the financial topics of bubbles.

[00:12:06] Charlie: [00:12:06] Charlie. Yeah. Yeah. So bubbles is the topic.  And maybe that’s just, uh, an attention getter. Cause I don’t want to talk about bubbles that much, Rob.

[00:12:13] I hope you’re not disappointed in me.

[00:12:16] Rob: [00:12:16] We’re talking financial bubbles, financial bubbles. Thank you. Thank you. Not other bubbles

[00:12:21] Charlie: [00:12:21] then was blowing bubbles for some reason. I was excited

[00:12:24] Ben: [00:12:24] actually about this topic and now I’m a little disappointed.

[00:12:27] Charlie: [00:12:27] So let me explain, let me explain this. Bubbles. We only know bubbles after the fact a bubble could be bursting right now.

[00:12:35] Okay. , so,  let’s keep that in mind, you know, w what the heck is a bubble? Well, basically prices get inflated, and then they crash,  , so did we have a bubble or not? Well, I don’t know yet again, we could be in the middle of one, things have changed significant  as far as different asset classes, as far as performance since last summer.

[00:12:55] Let me explain that a little bit more large growth, large us growth to be specific. Did phenomenal last year. I mean, phenomenal. There was some mutual funds  one in one of our profit sharing accounts. The 50 plus percent. So that’s phenomenal. Then you look on the other end of that spectrum and you go, we’re in a recession, we’re in a pandemic.

[00:13:17] People are losing jobs. Uh, we’re we’re pumping money into the economy. It just doesn’t seem real. It seems artificial. It seems artificially ,  bid up.  So  the short story there is that. Potentially that is a bubble, maybe a micro bubble. We can call it potentially, you know, has it burst We don’t know. Maybe the performance in those specific asset classes are lower than they were before. So maybe it’s bursting as, as we speak. Is it going to affect all of us? Probably not. You know, will we even see it? Probably not. So we’re not looking at a bubble, like the tech bubble in the late nineties, we’re looking at some kind of micro situation where I’m probably not going to be.

[00:13:56] A whole lot affected. There are bubbles.

[00:14:00] Rob: [00:14:00] Bubbles are interesting to me because when I think about bubbles, we’re, we’re talking about, you know, you think of way historical type stuff with railroads and you know, obviously real lips to lips, a favorite topic of

[00:14:15] Charlie: [00:14:15] mine. That was the first bubble by the way, financial history feels for the first moment.

[00:14:21] It’s

[00:14:21] Rob: [00:14:21] true. So. You know, people talk about the housing bubble, some, you know, a lot of different back and forth on that. Some people say, well, was that a bubble in 2008? Because housing prices are back up. Is it a bubble? If it burst and now it’s back up higher than

[00:14:37] Charlie: [00:14:37] it was? Exactly. I think it’s, I think it’s a distraction.

[00:14:40] I’ll be honest with you. It’s it’s a distraction. A red herring, as I say, the really important thing here and let me transition to something called envy, right? Because last year we all had envy for those that invested only in Tesla, Bitcoin, uh, arc ETF.   They did awesome for that year.

[00:15:00] Now let

[00:15:01] me

[00:15:01] Rob: [00:15:01] use that in a sentence. So, Charlie, yeah. Ben is envious of Rob. That’s

[00:15:08] Charlie: [00:15:08] okay. Just to a practical application, but, but Warren buffet said it best. Are you ready? Warren buffet said it best as an investor. You get something out of all the deadly sins, except for envy being envy of someone else is pretty stupid.

[00:15:23] If you’re going to pick a sin, go with something like lust or gluttony, that way at least you’ll have something to remember the weekend for. So that’s our favorite Warren buffet and silly. But true. There’s so much truth in his little statements. And here’s what I’m talking about. Did I miss out? We get this question a lot and Rob, I told you I was gonna talk a lot today, man.

[00:15:43] I’m have six cups of coffee. I’m on fire. I’m

[00:15:47] Rob: [00:15:47] like drop your, your, your button, your coffee. You got the

[00:15:50] Charlie: [00:15:50] shakes right now. So that tells me I’ve had the right amount of coffee. But you know, the real question is, did I miss out as an investor? Should I have done differently? Um, I’m going to tell you that. I think the answer is no.

[00:16:03] And here’s why being a diversified investor. Uh, there will be times in fact, probably every single year where you will lose out to something. However, the reason we diversify is that over time, you’ve got different asset classes in there that do perform differently under different economic environments.

[00:16:23] Right? So over time, your dollar amount. Should be higher if you stay diversified, if you stay to disciplined and let me talk about the antithesis of diversification, that is the investor that says, Oh, Teslas up, I’m buying it. AHRQ ETF is up. I’m buying it. Well, guess what you just did. You just bought high, you know, there’s a great asset class called small cap value.

[00:16:49] That is just one. I’m not saying put all your money there. Just one have some of it. It was down and it was getting the, you know, what, beat out of it. Maybe we should be buying that that’s called buying low, right?

[00:17:01] Rob: [00:17:01] Rob? Absolutely. Yeah. I love what you’re talking about here at Charlie. One of the things that I keep thinking about,  folks or some kind of entity is beating the market, watch out for the fees that if you’re paying a hedge fund or, or a broker or whatever.

[00:17:19] Charlie: [00:17:19] Yeah. Yep. And the risk, I mean, am I taking the risk that’s appropriate? In other words,  one of our retired pilots called newly retired said, Hey man, I think I should probably be in Bitcoin.

[00:17:30] You know, it’s really doing all on yourself.

[00:17:32] Rob: [00:17:32] Again, Charlie,

[00:17:34] Charlie: [00:17:34] I’m talking to myself and I, and I said, well, let’s talk about that. You know, it’s, it’s very tempting. Gosh, Bitcoin has really been on a run lately and although it’s crashed before, et cetera, et cetera. So I’m like, well, how would your life change if you were in Bitcoin right now?

[00:17:47] And, and are you going to put everything you own? Are you gonna put a hundred percent of your money in Bitcoin? Heck no. Right. That’s too much risk, right? Yeah. So how much are we going to put in there? Well, let’s put in a little slice. Well, is it going to change? What if it doubles triples? Is it going to change anything in your life right now?

[00:18:02] No. If it does double, triple, you know, is it really going to change your retirement of talking to this guy? No, it’s not going to change anything. What if, what if you lose all of it? Is that going to change anything? Yeah, that’s kind of, that’s really going to hurt. So, you know, that’s kind of an example of the risk reward, trade off in your personal life, but.

[00:18:20] But, you know,

[00:18:21] Rob: [00:18:21] that Bitcoin, that Bitcoin discussion is something that I’ve gotten a call to about that as well. And it’s the way I kind of think about it. This is totally going off the rails here, but, uh, I kind of think about that the same way I do with speculating on art or cars or any, you know, , something like that.

[00:18:42] If you’re really into it and you really want to do that stuff, maybe it’s, there’s a place for it in your portfolio, but just a slice of it. Like you were talking about Charlie. Yeah,

[00:18:50] Charlie: [00:18:50] absolutely. And understanding, and I’m not beating up Bitcoin there’s there’s like you said, there’s a place for it. But understanding that there’s a difference between speculating.

[00:18:59] And investing, you know, we’re, we don’t know anything about,  what Bitcoin’s going to do. It’s a very emotional driven, just like any other commodity at this point, so that there’s speculation there and that’s okay. Just understand the difference. But you know, back to diversification a little bit, just to get us back on the rails.

[00:19:17] I know we get excited and all that. Nice, nice of

[00:19:20] Rob: [00:19:20] course. Direction

[00:19:21] Charlie: [00:19:21] of course, direction, but. Diversification when you’re really diversified in a year. Like last year, I’ll be honest with you. I’m going to be vulnerable here, Robin and Ben, you kind of feel like a loser, like, Oh, I’m such a loser. I’m diversified and everybody else is everybody else is at the bar and they’re talking about their Tesla.

[00:19:37] I’m like, Oh, I’m diversified. That’s pretty cool. No, not, but anyway. Let’s look at 2000 to 2020 2002. Bear with me for a second. This is from BlackRock really interesting. And I’m going to compare a diversified portfolio . Rob, do I have time to do this? Okay, great. Great. Um, 2000 to 2002 diversification, one big time, you know, against the S and P 500.

[00:20:04] In fact, I’ll just go and, tell you the end of the story. From 2000 to 2010 S and P did not make money. If you invest it in the S and P 500, $2,000, and you didn’t make money, which is hard to imagine because the most recent 10 year period, we just went through, there’s nothing that beat the S and P 500.

[00:20:21] So

[00:20:21] Rob: [00:20:21] anyway, excluding excluding dollar cost averaging probably, but yes, I’m with

[00:20:27] Ben: [00:20:27] excluding Bitcoin. Yeah.

[00:20:28] Charlie: [00:20:28] Yeah, probably my theory is falling apart already. You guys have feet holding my theory. So from 2000, 2002 certification one, you know, that was a recession. It was long, and it was fairly painful. The beginning of our Rob is beating of our investing lives.

[00:20:44] Um, but,  2003 to 2007,  diversification lost , 2008 diversification, one. Obviously 2009 to 2000, 19, 10 years. You, you were a loser in diversification. Okay. Say with me Q1 2020 diversification wins Q2,  the rest of the year or the rest of 2020 last year. Again, diversification, you’re a loser. So here’s how you felt during that time period.

[00:21:17] If you’re a diversified investor, I lost money 2000, 2002. You know, you did a little bit better than the S and P, but not much. You still lost. I didn’t make as much, you know, the next few years I lost money. In 2008, you did lose money or not. You had a temporary price decline. Sorry. I didn’t make as much as the S and P the next 10 years.

[00:21:35] This is how you feel the whole time, but guess what, at the end of that period, and this is from black rock, we can share this in our show notes. If we have those at the end of that 10 year period, the growth of your a hundred thousand dollars in the S and P 500 was $368,000. And some change in the growth of a diversified portfolio was $375,000 and some change.

[00:21:57] So it’s just really fascinating to me. And again, that’s a 20 year period. And people will say, I don’t have 20 years, you know, I’m retiring next year, but, but you know, we’re still have to think in a diversified way in a long-term fashion as well. But go ahead, Ben, you got something

[00:22:12] Ben: [00:22:12] I was just looking at, BlackRock’s a return map as well.

[00:22:16] And I thought this was kind of interesting. Um, speaking of that and why diversification is so important, but, um, you know, if you break up your portfolio into different percentages of different asset classes, you know, last year in 2020, Uh, let’s say you, you had a, you know, a certain percentage in commodities while they were down 9.3%.

[00:22:35] And so that your percentage of your portfolio, the amount of commodities and that percentage, uh, of that asset class it has, has dropped. So what you do is you and that same year in 2020 U S equities Rose up. So what do you do to rebalance and to, to keep that diversified and also capture some of those gains, will you sell some of those us equities that have done.

[00:22:57] Well, and you, you buy some of the commodities  to rebalance, and that’s where that diversity really is, is able to provide you. You do actually capture returns. You do actually make money. You do  buy low, sell high. And. That’s how you capture those returns, but, but if you were just in commodities, for instance, will 20, 20 you’re down 9.3% year to date 2021, you’re up 13.5%.

[00:23:19] So it’s just so you just never know, and you have to be diversified too, to be able to capture those gains and yeah.

[00:23:25] Charlie: [00:23:25] Rob,

[00:23:27] Rob: [00:23:27] uh, I don’t, I don’t have a whole lot, um, one of the things that kinda getting us almost back on the other set of rails, when we were talking about bubbles, Is, uh, you know, some things that Eugene Fama had brought up during the course of his research.

[00:23:44] And actually he was just interviewed by Howard gold on, uh, one of his, platforms and gold asked him, did you also say you don’t believe in bubbles? And he said, well, I believe in them, if you can tell me when they’re going to burst, but in my world, the definition of a bubble is something that has a predictable end.

[00:24:03] It’s if it’s just something you use to describe an up and down. Well, that has no context for me. Those things happen in random series. So things are going to go up. They’re going to go down that may not barely, I mean, it’s a bubble, or even if it is a bubble, do you really care? Because if you’re diversified, like you’re talking about Charlie and Ben, that’s a way to really game the system you become.

[00:24:24] It’s almost like you become, you’re playing with house money at that point. Yeah. That might be a stretch, but that’s the way I think of it. You’re diversified these bubbles. They’re going to go up and down. Do you really care? Um, the housing bubble, again, we talked about it’s back up. So was that a bubble?

[00:24:40] It depends on your definition and economists would argue that until they’re blue in the face. Probably.

[00:24:46] Charlie: [00:24:46] Yeah. You know, I want to stress one thing on this topic and we’ve been bouncing around a little bit. Cause I want to get back to the question that we get a lot in it. Hey, did, did we miss out again? I didn’t get an arc all of last year.

[00:25:00] And did I miss out, is my retirement going to be hurt? I’m trying to save for retirement and now my neighbor’s got more money than me. There’s the envy part. Right. And we all have it, whether we admit it or not, but really the problem is not missing out on a high flying stock mutual fund or asset class.

[00:25:16] The problem is buying into that strictly because it’s doing well. That’s a problem.  The other problem is not buying into great asset classes like emerging markets and small and international, because they’re doing poorly. That’s the other mistake, you know, because we’ve missed out then on the ability to buy those low.

[00:25:37] So, so there’s, there’s some behavioral components in here, right? That NV causes bad, bad investor behavior, just like Warren buffet talked about.

[00:25:47] Rob: [00:25:47] So Charlie, along those lines, I think. It’s so important for diversification  you know, people will go back to what buffet and Bogle. I think of both said at one point or another is, Hey, I’m just investing in the U S however, that was maybe a different time.

[00:26:01] And thoughts have evolved. What I would throw at you is, you know, do you drive a German car? Yeah. Have you ever, if you’ve been lucky enough to go to Japan and you’ve sat on their toilets, their toilets are way better. Yeah. Nice.

[00:26:15] Charlie: [00:26:15] If you get nothing else out of this podcast, Japanese toilet,

[00:26:20] Rob: [00:26:20] it’s awesome.

[00:26:22] There’s all of this ingenuity and all of this great stuff going along around the world. Do you, you know, if you only invest in us stuff, you’re going to miss out on some of that. So there’s this there’s a good place probably for international. Stocks or, um, funds in your portfolio and diversify that as well.

[00:26:40] Obviously we don’t know which, which country is going to do the best and that’s always fluctuating up and down. So, uh, definitely us is a big part of your portfolio, but you want some exposure to those other over the other places that are coming up with great products and are emerging with great products.

[00:26:57] Charlie: [00:26:57] Yeah.  These high flying against stock funds, mutual funds, whatever it stocks,  If you look at like a five-year look back performance of those particular funds and you go, man, I could have had that or look what those investors had. Well, the real fact is that the investors in those funds didn’t actually get those returns a lot of the times because there.

[00:27:18] They’re jumping in high, jumping out low, in fact, Morningstar tracks this and they call it,  mind the gap or behavioral investment gap.  . And they look at the investment returns of these great funds. And then they look at the people that invested in them and they didn’t get those returns because their behavior either envy prevented them from doing so.

[00:27:38] They didn’t have the discipline to stay with it. When they’re, when their neighbors were, were, you know, enjoying a higher return and some other. Some other investment. They simply jumped ship from one to the other, constantly back and forth, like a dog chasing their tail. And in an unfortunately that is not the recipe for success.

[00:27:57] Rob: [00:27:57] Yeah. I think.   Some of the investors have a stoic philosophy and start not being envious. Obviously that’s easier said than done, but, uh, one of the quotes that I always think of when I think about envy is.

[00:28:09] As iron is eaten by rusts or the envious consumed by MB. So if you can stop thinking about what your neighbor’s doing, obviously you’re going to be happier in the long run too. He who envies others does not obtain a peace of mind and is less happy. So I think all of that is so key. When you talk about FOMO, right?

[00:28:29] Fear of missing out everyone’s jumping on the Apple bandwagon, the Amazon bandwagon, you know? Who knows this, this, the four most dangerous words in investing this time. It’s different. So,

[00:28:39] Ben: [00:28:39] yeah, to have FOMO right now with social media and, and, uh, the news, I mean, what gets the headlines, I mean, is what you’re going to see.

[00:28:48] And you’re, you’re seeing right now, just this craze of people, uh, you know, I earned this much in GameStop or Bitcoin or, or just in, in whatever in Tesla and Amazon. I mean, you hear it all the time and, and it’s really hard to resist that. Um, But they don’t really talk much about diversified portfolios, uh, crushing it over the long run.

[00:29:06] So

[00:29:09] Rob: [00:29:09] how does it make the news channel diversification? Whoa, what else you got? We got anything else on bubbles

[00:29:18] Charlie: [00:29:18] there? I think I’m coming down off my coffee. Hi. So, um, so I think I’m about spent and, uh, it’s just fascinating though. I mean, and this is a fun conversation, so hopefully it’s been useful in

[00:29:30] Rob: [00:29:30] some way.

[00:29:31] Absolutely. Well, let’s jump into indexing and index index funds. I’ll cover this a little bit and you guys jump in wherever you want to here. Uh, the big topic or the big push here is all index funds are not created equally. So you gotta be careful when you’re, when you say indexing, obviously indexing has taken over, it’s taken over the world.

[00:29:52] Um, but we gotta be careful when we, when we talk indexes because. There’s a lot of gotchas out there that can even happen because it’s become so popular. Obviously there’s lots of people out there that have noticed that, and they’ve started to come up with indexes a they index when, you know, when their dog is going to want run around the house.

[00:30:09] So you’ve got to, I’m very careful about just because it’s an index fund. Doesn’t mean it’s something you necessarily want to invest in. So first off, what is an index fund? An index fund is just either a mutual fund or, or an exchange traded fund and ETF that holds a stock or a bond. And does this designed to mirror some type of composition and a performance of the financial market index?

[00:30:30] The best known one is the standard and Poor’s S and P 500, right? Um, index funds. Generally we have lower expenses and fees than actively managed funds. So that’s why a lot of people get into it. But then it’s not always the case. That’s why we gotta be careful. Uh, one of the things we look at here, uh, around, around the office or the offices we have at leading edge is we always are looking at expense ratios and it’s something you need to do if you’re going to be investing in anything, either have your financial advisor, make sure they’re reading the prospectuses or you are to make sure you know, what those funds are doing.

[00:31:06] So. Another thing about index is they have they follow more passive investment strategy. So everyone’s talking about passive investment past investment. They don’t try to beat the market rather. They try to be the market. That’s what indexing is. So it can be a terrific, um, way to industrial money and it can be definitely diversify your portfolio and do all these great things.

[00:31:29] But you gotta be okay.   With, , trying to beat the market for the most part. And, and you gotta be okay with that. Um, most index funds, they’re not going to beat their market because of obvious reasons. They’re just trying to match the market or that index funds.

[00:31:44] So index, uh, uh, portfolio and they’re just going to trade in and out to match whatever that index is, is tracking. If you’re one of these people, you need to be aware that all index funds are created equal Schwab, Vanguard, fidelity BlackRock’s I-Shares, uh, state street, spider indexes. They’re all.

[00:32:02] Well-known but you gotta be careful because, uh, before investing in any fund, you’ve got to do that research and see what’s going on. One of the interesting things I saw when I was a research in this a little bit more big names, BlackRock, JP Morgan, Invesco, Guggenheim partners, and Wells Fargo. All of them have an S and P 500 fund should be pretty low expense ratio.

[00:32:24] All of those folks have at least this is his back. As far as the 2018, uh, they all had funds that charge more than 1% expense ratio. Just to track the S and P 500 that’s compared to Charles Schwab, you know, and others, others have, I think Fidelity’s even got one that doesn’t charge anything for, uh, tracking the S and P 500, but swabs is a 0.03%.

[00:32:50] So 1%, obviously a hundred compared to three, you do the math on that one. That’s pretty easy to do. Uh, one of the worst funds, it’s an index fund and you say, Hey, I’m going into index funds and you see right X, S and P 500 C class. Index fund has an expense ratio of 2.3, 3%. That’s a ton of money just to track the S and P 500.

[00:33:13] So just because you’re getting into an index fund doesn’t mean, I mean, you’re necessarily where you need to be. You got to look at those expense ratios that make sure your financial advisors looking at those now pay more than you need to. What do you guys got on that? Anything, anything to add?

[00:33:26] Charlie: [00:33:26] Yeah, I’ll tell you what we like.

[00:33:28] We like indexes. I mean, they’re, they’re very tax efficient. They’re very low cost, you know, in your riot, Rob, you, you just got to kind of watch out. Um, there are some apps there that are, uh, man, they’ve got every kind of index inverse, triple inverse, you know, this and that. So, you know, we’re pretty conservative when we were using these index funds and it’s a very,  contentious,  argument or debate, if you will, inside the nerd industry, , financial services world in that, you know, as an active, as a passive.

[00:33:58] And, and you talked about it, Rob, I mean, indexing is, is called passive. And so you’re active people and we’re going to talk about how you’re passive. You don’t do anything. There’s no way to protect downside risk. That’s my favorite. Right? Well, you know, You’re right. And they say that because of the index follows that it just tracks that index, whether it goes up or down, but that’s why you diversify, you know, back to our, you know, I’m hung up on that today, Rob, as you can tell.

[00:34:23] No, no, you’re right. That’s a weird argument to me. I’m like, well, what are you talking about? Like one person owns one index, you know, of course, you’re going to add some in there. You’re gonna diversify. That’s what provides downside protection.  You gotta be careful.  Passive to me is a little bit of a misnomer because, um, You know, people take that as like, you’re just doing nothing.

[00:34:42] So, you know, people need to rebalance. People need to think about,  , are they taking the right risk?  When to make trades and when not to, you know, those are some things where,  , passive, I think, people equate that to  sitting on your hands being lazy.

[00:34:56] Rob: [00:34:56] What else you guys got? Man. I think

[00:34:58] Charlie: [00:34:58] we can have another podcast on active and passive. That’s a big one, man. I I’m not even gonna comment on that because it w we could go down another rabbit hole. It’s a good topic though.

[00:35:08] Rob: [00:35:08] That’s a good one. It really is. That’s perfect. Good stuff. Well, I’ll leave you guys with a quote from Eugene Fama. , I’d compare stock pickers to Austria astrologers, but I don’t want to bad mouth astrologers, so

[00:35:21]That’s it. We’ve arrived at our final destination. Thank you for joining us here at the power and money guys podcast. If you have any questions, shoot me an Of course, if you like to hit the subscribe button. And, uh, so we can reach more people there and we’ll leave you with, as Emerson said, the world makes way for those who   know where they are going.

[00:35:41] So plan

[00:35:42] Charlie: [00:35:42] accordingly we’re out.  .

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 04/21/2021 and are subject to change at any time due to the changes in market or economic conditions.

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