Episode 88: Listener Question Deep Dive - Simplified vs. Complex Investment Portfolios

In episode 88 of Accessible Finance for Retirement, hosts Eric and Rachael Johns tackle a listener's detailed question about simplifying versus complicating investment portfolios. They delve into the listener's meeting with a CFP and provide insights into Monte Carlo analysis, the probability of success in retirement planning, and the comparison between broad fund investments and more granular ETF allocations. The episode emphasizes the importance of understanding investment strategies, tax efficiency, and risk tolerance, all while maintaining clarity and intentionality in portfolio management. Join Eric and Rachael for an in-depth discussion on making informed investment decisions that align with your retirement goals.

🎙️ Have a financial scenario you’d like us to discuss (without giving personalized advice)? Send your questions to podcast@equilibriumfp.com—we’ll keep your information completely anonymous!

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Read the Transcript

Episode 88

Eric: [00:00:00] Welcome to episode 88 of Accessible Finance for Retirement. I'm Eric Johns. And 

Rachael: I'm Rachael Johns. 

Eric: Let's dive in. 

Rachael: All right, Eric, we are going to continue our segment on, uh, listener questions. Okay. This one is very specific. 

Eric: Great. 

Rachael: Okay, so everyone hunkered down. Bear with me on this one.

I met with a CFP fee only fiduciary retirement planning advisor. 

Eric: Lots of good words. I'm so happy right now. 

Rachael: You like all of them? 

Eric: Those are great words. Okay. 

Rachael: Um, he assured me that our retirement projections look very good. 

Eric: Okay. With 

Rachael: a 100% chance of success based on current assumption. 

Eric: I have a lot to say about that, but let's finish the question.

Rachael: Do you wanna weigh in now on 

Eric: I, 

Rachael: yeah. Do Well, ISS relevant? You 

Eric: think so? Yeah. Okay. All right. [00:01:00] When we talk about probability of success, yeah. What they're saying is usually that they've run Monte Carlo analysis, which takes like a thousand plus projections of a variety of market returns on an annual basis, or asset returns on an annual basis, right?

Mm-hmm. Well, market returns, but it's various markets. Sorry, that is probably not important to 98% of our listeners. 

Rachael: Nope. 

Eric: So they're gonna take this Monte Caral analysis and they're gonna find out what percentage of the time, right. Your probability of success. You finish your plan, which means you're you, you end your plan, you die.

Mm-hmm. You pass away with a dollar or more in the bank. 

Yes. And 

every time you have a dollar, they count that as a win. So we're taking your wins. Right. And dividing it by the total. And that's your probability of success. Mm-hmm. So he's saying 100 out of 100 times or 1000 out. 1000 or 10,000. Outta 10,000 times you have finished the plan with a dollar.

Yeah. What that means to us is that. You should probably increase your spending or set some very concrete goals because that's, that's high. That's really high. Right. So like, typically what we would do is we would target a range of about [00:02:00] 50 to 90% probability of success. Mm-hmm. And you might be saying yourself, wait a second, I don't wanna fail 50% of the time.

Yeah. Well, the idea is if you're working with a, without an advisor or a planner, you're not gonna fail because you're willing to make adjustments, right? You're gonna turn a dial, you're gonna pull a lever. When you see yourself hitting the wall, you're not just gonna allow yourself to hit the wall. It's 

Rachael: ongoing planning.

And so that number is. Static. Right? So if you're at a 55% chance, that's 55%. If you do. Nothing differently. Correct. To change nothing. But 

Eric: the idea is it, when you've run these scenarios with Monte Carlo analysis and plan in planning software over time, you'll notice that your clients will tend to have a ton of unspent dollars in the bank.

Mm-hmm. If you target. Probabilities that are incredibly high. Yeah. So as long as you, and they are willing, as long as you as a professional are comfortable with the idea that your client can make adjustments. Right. Because to be clear, there are some clients where you, you know, they're not gonna cut back on spending because every month you've told 'em to spend 12 K and they spent 20 k.

Yeah. You know what I mean? Like you, you understand you're not gonna tell that person, Hey, okay. Instead of [00:03:00] spending 20, let's ratchet down to 18. Yeah. Like there's no world where that's gonna happen. That's on you to figure it out as very individualized 

Rachael: For sure. Right. Um, and but my 

Eric: point here is simply if it's a hundred percent of success in our mind, that's already a, a topic for conversation.

Yes. Because it's very likely that that's too high. 

Rachael: Chances are you're foregoing many current opportunities in your lifetime. 

Eric: Correct. Exactly. 

Rachael: And the whole point is to be able to balance your goals. While you're alive with your goals, once you have gone. Right. 

Eric: And just to put a little bit of context around that.

'cause we might get you, you, you know, I might, I might hear that if, you know, I weren't in this business and think, hold on, hold on a second. I have kids I wanna reach more than a dollar I wanna leave. That's, I was gonna, I'm happy with having a large amount Yeah. At the end of planning. 'cause I wanna leave it to my kids.

Correct. Okay. Well, would it, we just wanna provide the optionality to clients or, or, or anybody that's interested in this, right? Mm-hmm. So listeners that. You might be able to achieve these, uh, you might be able to give your kids maybe 20 grand a year. Yeah. Maybe 30. Maybe 50. [00:04:00] Right. Maybe you can buy 'em a house, a car.

Like would you enjoy that? Would you enjoy the smile in their face when you give them like a, I'll say 

Rachael: the majority of our clients who have legacy goals tend to enjoy watching. Yeah. Their, you get to share these experie children and their family. Enjoy. 

Eric: Yeah. You get to share in the experience, right? You can go buy the the family trip to BA Colorado for example.

Also, I 

Rachael: think it also tends to be at times when families need the OR could benefit from the money the most, right? Chances are later on in their chances are later on in their professional life. They're in a better financial position than earlier on kids. That's a really good point. When kids are young, and that's 

Eric: a great point.

Yeah. When people are in their fifties and sixties, it's, and you know, you're gonna live long enough to see your kids in their fifties and sixties, nineties, right, right. Then they're gonna have less use for the dollars. Correct. Like 50, like, you know, think about your own life. Yeah. $50,000 means a whole lot more to a 20-year-old than it does to a 55-year-old, 

Rachael: especially a 20, 30-year-old new parent.

Mm-hmm. Right. You've got a grant, right? Yeah. Those [00:05:00] expenses add up so quickly. Right. 

Eric: You're, you're paying for tuition. So there are all kinds of options there that we would just wanna make you aware of. Yeah. Because a hundred percent is high, right? Mm-hmm. And if you're willing, if you're, if you're disciplined, and it sounds like they are already by the, by the tone of this question, but I'm excited.

Let's let, let's keep going. Sorry for the derail, 

Rachael: but I do think that's important. I think it's important just to know that like. If somebody came to us and, and we're like, look, your plan says a hundred percent. It does not mean you're set, you don't Right. Need help or guidance. It's at least worth having a thought partner kind of walk through, right.

What some other options are. Okay, so the CFP fee only fiduciary retirement planner advisor assured him the retirement looks great. 

Eric: Okay? 

Rachael: Um, he looked at their investments, which are currently invested in Vanguard t IRAs. 

Eric: Sure. 

Rachael: Uh, Roth IRA and brokerage accounts. 

Eric: Okay. 

Rachael: This man states that simplicity in investments is important to him.

Got it. Heard. Okay. Um, he says that they're [00:06:00] invested in four funds. The first fund is the Total US Stock Market Index Fund, VTI. 

Eric: We're Happy 

Rachael: Total International Stock Market Index Fund vx us. Mm-hmm. I was like, so many of these are awfully familiar. Yes, they are. Total US Bond Market Index Fund. BND? Yes ma'am.

And the Total International Bond Market Index Fund. BNDX. 

Eric: Mm-hmm. 

Rachael: Okay. So this is their current investment. 

Eric: Got it. 

Rachael: The CFP recommended a more complex allocation using the following ETFs, VOO, which is the Vanguard s and p. 

Eric: Okay. 

Rachael: VYM, which is the Vanguard High Dividend Yield, E-T-F-V-U-G, which is the Vanguard Growth.

Mm-hmm. Vtv Value. Yep. Value. VOM, which is Mid cap. Oh. Vanguard. Midcap. ETFM. 

Eric: Hep was vo. 

Rachael: Oh, maybe it's VOO. That's okay. No, VOO is S and [00:07:00] P? 

Eric: No, VOO is. S and PVO is mid, I believe. Oh, I don't know. He may have just accent. This might be a different, it might be another fund that I'm not familiar with, if that's okay.

Rachael: Um, VOE, which is the vanguard Midcap value. Oh, I don't know what that is. VBR, which is Vanguard Small cap value. 

Eric: Use that one 

Rachael: VEA, which is the international developed Develop. Yep. VWO, which is the emerging markets. Yep. And then additionally, he recommended for the fixed income only for TIRA, he recommended VTC, which is total Corporate Bonds.

Okay. BNDX, which is the international bonds. Yep. And then USHY, which is I shares broad USD, high yield corporate bond ETFs. Okay. Okay. 

Eric: This is interesting. I. We, I feel like we don't talk about investment allocation enough. We don't, and so I don't want to give listeners the impression that we shy away from it.

I love it. 

Yeah. 

Love it. I listen to Rational reminder. Yeah. Uh, again, shout out to that podcast. They're amazing. You guys should all listen to it as well. If you're into this, there's super granular, right? You have to really enjoy. Ben Felix's analysis of peer-reviewed journals and interviews of academics.

Sue Granular. Rachael's heard it a couple times. I make her listen to it. Our children 

Rachael: have also heard it a couple times. It's fantastic, 

Eric: but it's very, very in the weeds, right? Yes. 

Rachael: You have to be wanting to dive in. 

Eric: Yeah. I'm talking about risk premiums with implied volatility on covered calls. Versus 

Rachael: it's a lot, it's actual income.

Eric: So like there's a lot that goes into it. It's up. But I do think it's 

Rachael: worth having an episode for us that focuses on 

Eric: investments. Well, this could be it. All right, so let's get, let's dive in. Okay. So wait, the questions, so lemme say what his question, what concern is, 

Rachael: right? So the CCF P has, he stated what he had, the CFPs recommended, you know, more.

Um, and so the man says, I am trying hard to wrap my head around the more complicated diversified recommendations. He explained how adding more asset classes and separating the assets out of one holding like [00:09:00] VTI, 

Eric: mm-hmm 

Rachael: allows us to keep the expected return rate, but decrease the volatility. He also stated that it allows us to allocate certain asset classes to different accounts and weight them in a way that better aligns with our risk tolerance.

Additional benefits, he stated were tax efficiency by where? We're holding the growth slash income asset classes combined with the weightings to give a smoother ride. I'm still learning and would appreciate some input on the pros or cons of moving investments to this more complicated asset allocation or sticking with our current.

Eric: Funds. I really like this guy or gal. Yeah. Do you know if it's a guy or gal? It's a guy. It's a guy. I really like this guy. I'm a big fan. Okay. So I'll tell you why I'm a big fan. First. The four fund portfolio that he had, perfectly fine. Absolutely satisfactory. Could have written it, could write it up forever.

I was like 

Rachael: when I recognized the a hundred 

Eric: percent fine, the tickers. I know, absolutely fine. Um, yeah. Questions are around how much [00:10:00] more viable is this? CFPs, um, broaden diversification, more granular portfolio. I would say that it is objectively worse in a lot of ways. Right. So let's articulate this, the proposed.

Rachael: Portfolio you're saying? Yeah, it's 

Eric: nonsense. And so here's why like, yes. Tell me you're like, if you wanna split up VTI, okay. Into VOO, which is like it's mar and mega cap component and then maybe VO for its mid cap, which actually if you look at it, it's not really necessary. You can just, it, if you look at the VTI, it's mostly just VOO and vb, right?

If you VB is small cap, sorry. So it's mostly just large cap and small cap. 'cause the small cap has some mid and some micro. But the idea is that you could essentially break it down to just VOO and vb. Right. That would be the breakdown that he's talking about. Right? So we're taking these like aggregate funds and we're just kinda splitting 'em up into their component pieces.

Mm-hmm. That's not what the CFP did. Okay. That's not at all what he did actually. So he took VTI, all right. And then he broke it down into VOO, which is us, [00:11:00] the s and p 500, absolutely fine margin mega cap. We're happy with this, right? But then he has VYM, so now we're overweight dividends, right? Then VUG. Now we're overweight.

Growth. And now VTV. Now we're overweight value, so VUG and VTV. Are all and VYM. They're all large caps. So he's got the large cap that includes all of them, and then he is overweighting individual components. Yeah. But presumably at relatively equal distributions. Yeah. So there's not actually a clear and coherent plan here.

Does that make sense? We're not in a dividend strategy, we're not in a growth strategy. We're not in a value strategy. Yeah. And we're also in all, so like, you know what I mean? Like if I were gonna say like, we're gonna be overweight value. Yeah. Then I might buy VOO and VT V. Right. So now we have, we're owning everything and then a little bit more of the value stuff.

Yeah. We're adding that as icing on top. Okay. We're not doing that here. Hm. We're also gonna be overweight mid cap when you have any mid cap section. Because if you look at the VTI breakdown, they're mostly gonna be large and then only a small amount of mid and then small. Right. So if you buy vb or if you buy us small cap, yeah, you're [00:12:00] gonna gain some mid cap there accidentally.

Right? VB just holds mid cap. It says. Us Vanguard Small cap fund. I'm very aware of that. But if you go and look at the breakdown, the companies by market cap and how they're separated, you will have mid cap exposure there. Mm-hmm. Right. So I I, I'll get outta the weeds in a second, I promise. But this is important.

VBR, the small cap component, VBR is Vanguard small cap value. Yeah. Right. So that's gotta have a value til. He has a me. What was this? VOE was like emerging was mid value or something like that. 

Rachael: VBE you said? No, 

Eric: no, no. V-O-E-V-O is VE. Oh, VOE 

Rachael: was the vanguard mid cap value. Yeah. Okay. So 

Eric: he is like trying to overly value at various times, but there's also like a kind of a growth component, which you would think of as, yeah.

Not exactly in conflict, but they're different. And then he's got VEA and VWO, right? So that, yeah, he's got 

Rachael: developed markets. The emerging markets. Yeah, that's the split. 

Eric: So VA and VWO is actually a perfect component split of vx US, which was one of the large four funds that they had talked about initially.

Yes. So why would 

Rachael: you, so exactly, why would you go from, from, why would you ever 

Eric: go from the, that aggregate to the individual pieces, right? Yeah. And here's a good [00:13:00] que, like that's, that's a good question. You would do that if you're looking to do things like tax loss harvest. Does that make sense? So. Tax loss harvesting involves your position going down in value.

You sell out of that position and then buy into basically the same thing. Right. So A VOO goes down, I sell VOO, take the tax loss on my 10 40 on my tax return. Yeah. Right. And then I buy into SPY or any of the other s and p tickers. Yeah. Right. Like F-T-A-I-X or whatever. Like I'm gonna go buy into another fund that essentially owns the s and p 500.

Rachael: Is that not feasible with their current 

Eric: four? You could do it with VTI, right? Yeah. But then VTI like if I have to. Right. So if I have VOO and VB for VTI, right? Yeah. So my VTI is my, is my whole, and then I have the two parts. Yeah. Now I have essentially double the chances. 'cause then if small caps go down, I can do it with just the small caps.

Right. Even if the large caps have exploded without having to do 

the whole one. Yeah. So like in 

the, in early 2020s, you could do something like that. Like large caps were killing it. Small caps not quite so much. So if the market pulls [00:14:00] back, you're more likely to be able to sell the smalls and rebuy. So it, so here's why that's useless.

I 

Rachael: was, it sounds like you're advocating though, for like. An ingredient mix rather than like a final cook. I don't hate 

Eric: the ingredient mix. Yeah. I don't hate the ingredient mix, but I hate some of the choices of the ingredients. The idea is fine. The concept I'm okay with, right. Yeah. And it's not just, I'm not trying to nitpick here.

I'm not talking about like, I like Avanti as a small cat manager instead of Vanguard because they da da da. Like not into not, not into that right now. Right. Not getting that granular yet. 

Rachael: Although you would be happy to. Yes. Let's do it though. Let's dance. 

Eric: Um, but what I'm saying here is that we're nonsensically.

Investing because we're overweighting and then underweighting, like the same things. Right. 

Rachael: Okay. So like I imagine it for our listeners who are kind of with you, okay, correct me if I'm wrong here. Right? So like if you look at their four. Stock holdings. Yeah. Four months for one portfolio. Right. If you look at that as, you know, a completed meal, right?

Like let's say it's a loaded burger, it's got all of the [00:15:00] S Yes. Right? And then you're like, well, instead he's basically breaking down all of the ingredients, however. It's not breaking down into the same ingredients that he had, right? He might like, um, get extra lettuce or he's throwing some 

Eric: pineapples and es on there.

And we may not, we may or may not. That's kind of a 

Rachael: weird burger, 

Eric: right? But also it's like, it, it, the, the burger analogy in my mind kind of breaks down because you're going like really overweight on pickles and then really going overweight on the opposite of pickles. But I don't know what that is. 

Rachael: What then, what ends up happening, right, is that if you end up going overweight on all of the condiments.

Then the actual meat patty is like no longer. 

Eric: I mean sure, yes. When you're overweight on everything, you're actually overweight on nothing or like you're losing it. Right. But, but even more problematic is if we look at the bond side. Okay. So we had said mm-hmm. That our initial for fund was B and d. Yeah.

Which is like the total aggregate bond, US bond market. Yeah. And then B and DX, which is the total aggregate international bond market. Correct. Okay. That includes government bonds and corporate bonds at a ratio of, I believe it's about 70 30, like if we're talking B and D. Mm-hmm. I think it's 70%. Uh, [00:16:00] government and 30% corporate.

Okay. Let's just assume that that's true for now. He seems 

Rachael: to be pushing, 

Eric: so let's assume that's true for now. Now when our CFP man, 

Rachael: what your 

Eric: pen? I dropped a pen. Im sorry. I have another one though guys. I have, 

Rachael: I've never run out of 

Eric: pin guys. I'm not running outta pin. Okay, so sorry. 

Rachael: Back to the, so yes. Yeah, you're 

Eric: sidetracking me when I'm already in the weeds.

I'm amped up guys. I'm ready to go. This is fun. Okay, here's the deal, right? So we were in B and D and B and DX. Also, we should talk about investments more. 

Rachael: I mean, this 

Eric: is energizing. Huh? Guys? Oh my goodness. Are y'all feeling this energy? See, 

Rachael: he doesn't need coffee. Do a little will Ferrell? 

Eric: No, not at all.

Rachael: Okay, so yes, 

Eric: here's the deal. Yes, we were in B and D, right? And B and DX. Presumably at like equal weight, or doesn't even really matter point is B and D. If we're in it has exposure to US government bonds. Yeah. When c fp man broke us down, we no longer do, right? We're in US corporate international in high yield corporate.

Who do I not want that in the portfolio ever. And let's talk about why, why? Because bonds are a hedge against risk assets [00:17:00] or equities, right? What we mean is we want the bonds to serve as a store of value when the markets tank, unfortunately, high yield corporates have a much higher correlation with the stock market than, um, than government bonds do.

Right? So what I'm, what we're thinking here is that we wanna be. We wanna be safer so that we have something left to sell when the stocks tank, right? If the stocks tank, we don't want our bonds to also tank correlation means they're moving in the same direction. Not necessarily the same magnitude in the same direction, but if I'm going up, the other thing's going up, maybe not quite as high.

Right, but it's still moving in the same direction. And that's problematic from a, uh, modern portfolio theory standpoint, from a risk management standpoint, right? Yeah. We're not getting the optimal risk adjusted returns when we do things like this. High yield corporates. No, no, no reason to have this here.

Another point that's a little bit more nuanced, but I believe our audience could follow. Yeah. Because they probably, like listening to me talk about ridiculous stuff at this point, um, is if we're talking about doing this kind of a [00:18:00] rebalancing reallocation. For tax loss harvesting purposes, presumably.

Like we had, we, we've already established that we have the three tax buckets. You know, he has taxable. He said he has a TI, uh, aa, which is tax deferred. Yep. And he has a Roth. Okay. So he has the taxable tax, deferred tax free buckets. 

Rachael: He seems like even though he couches his stuff of like, I'm kind of new to this, he seems to be playing quite well.

I think he's, 

Eric: I was gonna say I, and I love the way you said that. I also agree that he's playing the game quite well. 

Rachael: I do have two questions when. 

Eric: My diatribe finishes. Go when you're ready. It's not No, no, no, no pausing. No pausing. I have questions. Okay. One pause, but only after this. Okay. Okay. So here's the idea.

If we are correctly allocated with VTI in our taxable account, yeah. It is almost guaranteed to be highly appreciated at this point. So doing this kind of a rebalance would. Would perpetuate would create the taxable event that you're hoping to avoid? To avoid? 

Rachael: Yeah. 

Eric: You would be, if you're selling BTI in a taxable account, if you're selling anything in a taxable account that you've been holding on for this long, except, I mean maybe not the bonds, if their bonds were in [00:19:00] taxable account, we can talk.

Yeah. But, um, and it might not be as nonsensical as, uh, but point is, even if it's not statistical to hold the bonds in the taxable account, maybe we just move B and d or B and DX to your tax deferred and then we buy your equity that we owned in, um. In your tax deferred in your taxable account, right?

Mm-hmm. So we can shift those positions without having to shift the actual securities and the tickers that we're using. 

Yeah. 

Right. But to, to talk about it as a risk tolerance thing, in my mind is, it is silly given that we're having things that are increasing our correlation with each other rather than decreasing correlation, which means they're moving in different directions.

I'll pause now. Sorry. 

Rachael: Well, that actually ties into the first question that I have. So the first question I have is, does this seem to you like. Somebody who essentially has bags behind the counter of just like prefilled grocery, like lots of ingredients and groceries. They put in bags that are already there and they're like, give me your burger.

I'll give you the bag of groceries without necessarily looking at what the. The [00:20:00] thing is that they're trading so that it's not necessarily like an ECU equitable trade. Like does it, like, are they, 

Eric: do they have like pre-built models? Yes. And they're just, they're just putting 'em in a model. Yes. Does 

Rachael: that feel like a pre-built, like, this is like a thing I recommend to my clients?

Eric: Probably. I don't necessarily know that that's inherently bad though. I, I think the answer to your question is yes. I don't, I wouldn't say that that's inherently bad. I would say that it's inherently bad if you've made a complex bag of groceries for no reason other than to. Create complexity and the illusion of outperformance.

Rachael: So that brings me to my second point. The second point here is, do you believe that if you are trading one item, right, or in this case four, 

Eric: right? 

Rachael: And getting a bag filled with 12, what do 

Eric: we have? Is it 12? 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 1, 12. Exactly. 12. Yes ma'am. 

Rachael: Yeah. So we're, we're multiplying what you have by three.

Three x. Yep. Despite the fact that this individual specifically said. That his goal here, he values simplicity here was simplicity. So, and he is 

Eric: doing 

Rachael: it well, to be clear, yes. He's got a 

Eric: globally [00:21:00] diversified vote cost portfolio here. I don't know what his allocations are. I don't know if that matches his risk, Thomas.

Sure. But that's what should matter. But I 

Rachael: think that, so, okay. The second question I have here then is, do you believe that for the general public, if they're giving you like a stack of four things and you're handing this. Then this bag of 12 and you're like, there, it's, you know, gonna be amazing. And it's kind of a semis smoke and mirror show.

Yeah. Do you feel that offers some type of like psychological comfort to the majority of clients that are like, Ooh, like this guy's doing something that's, he knows what he's 

Eric: Yeah. That's unfortunately, I think the answer almost certainly is yes. Right. I do too. I, I think that's, I think that's kind of sad because.

I think that's what, I think that's what advisors, not advisors, but advisors and or like planners. They're just people. I mean, this guy has a CFP. He studied for a hard test. Yeah. He passed it and he, and he's probably, he, I mean very well believe he may well believe himself to be doing the right thing. I would like to have a conversation with him.

But the idea here is that I think, [00:22:00] I think people that are in the planning industry and are in the investment management industry are trying to like. Show their value. That's 

Rachael: what I was gonna say. Yeah. And they're trying 

Eric: to convey to clients like, I know a lot. Yep. Like, put me in coach, like I, this is what should be done.

When it really, it's not wrong to lean into the, like, simplistic Yeah. Three or four funds. I'm not saying it needs to be three or four. Like again, I'm, we like Avantis for small cap, but I do international. I 

Rachael: think that if you're going that route, right, where you're leaning into the simplicity, you have to be, if you're a, a holistic, you have to be offering other value.

You have to be very good. Not at just. Offering the value, but being able to communicate what that is. Correct. Because like we've talked about, yeah. The majority of people believe that the highest upside to working with a planner is that you have, you're gonna inside information on these stocks, you know what to invest, you know what's going up.

And if you have someone telling you that I would run correct. But the. I think that it's very possible that this CFP is doing a lot of really [00:23:00] great things. Like we're thinking like Titanic, like iceberg style, where, yeah, there's a lot of stuff happening below the water that we don't see, but the thing that's most tangible for people, the thing that they access the most, the thing that we've seen mm-hmm.

Some of our clients. Like, oh yeah. Look at the most is they're constantly looking at their, it's balances in the stock market. They wanna see it go up. And so being able to say, you know, I have this expertise. There are these 12 things you currently afford, but these 12 are gonna allow you to have like Right.

Tax loss harvesting and things like that. And 

Eric: you'll use buzz words, right? Yeah. And like nobody really knows what you're saying. Well, the volatility and got the inverse variance. Yes. We're talking about lower correlation and that's gonna be like a, that's gonna create a lower beta of the overall portfolio.

We're gonna hedge some of those. Risk tax efficiency. Yeah, like there's all sort sorts of can, everybody can talk the talk, but it's just so, it 

Rachael: sounds really good. And I think that overall people like planners in general, I think feel like they can convey truthfully or not. Their value with investments.

Yeah. Better than in any of the other [00:24:00] areas. 

Eric: And, and look that it is not uncommon at all for us to hear in a prospect meeting. Okay? So your fee is 1%. Yeah. That means you're gonna beat the s and p by at least 1%, right? Mm-hmm. And we're like, guys, that's. Absolutely not how it works. First of all, just so compliance knows, we never say yes.

Like no, you're not allowed to promise returns. Right? Okay. We, we couldn't, even if we thought we could beat the s and p, we couldn't say it even if we thought we could, but the idea is that's not what we're talking about here. Like you can, and that's, and that's kinda the problem for advisors. They're trying to set up a portfolio that essentially may position itself, but before 

Rachael: you continue with the portfolio, I do think it's very important that we.

Go back to the 1% comment that Eric made and make very clear that we do though, in response, tell them that we can provide more value than the fees that we are charging, 

Eric: correct? Absolutely. It's 

Rachael: just not necessarily solely in the, it's in the whole picture. Right. 

Eric: Exactly. Retirement planning, tax planning, education, planning, a student loan, a pizza, 

Rachael: and each slice is like a different thing.

And if we're pinning all our hopes [00:25:00] and dreams on that one slice, pepperoni, like 

Eric: Absolutely. And look, we, there are many times where investments have been repositioned in ways that were provably better. Yeah. Right? Like they just For sure. Well empirically experienced higher returns than the client otherwise would've if they would've just scraped there.

Right. 

Rachael: Or lower fees. 

Eric: Correct. Yeah. Yeah. Right. Rights. Absolute. That happens a lot. There's 

Rachael: multiple ends of Yes. Or oftentimes it's both. Yeah. Um, 

Eric: getting clients out of American funds and prize. But it's not 

Rachael: telling you like buy GameStop now, right? Oh, no, absolutely not. Scuba. Absolutely not. Um, so yeah, I mean it's just, it's, it was such an interesting, very, this was fantastic, very complex question.

I think the man who wrote it was really measured in being able to communicate what was communicated to him. 

Eric: Yeah. 

Rachael: Um. And I just, I thought it was really interesting 'cause we don't really talk that much about investments specifically, or, I mean, we talk about investment philosophy, but we don't really get into some of the concrete investment 

Eric: mm-hmm.

Rachael: Things here, because like we've said, we are not. [00:26:00] Individual stock pickers. 

Eric: Right. 

Rachael: Um, but it is really important to understand like the pros and cons of 

Eric: Right. I just wanna make sure that I, that I was clear in what I said about this. It's not necessarily bad put a on it to break a hole down into its component parts in terms of like securities.

Right. In terms of like a fund. That's not bad. Can't, I think you even talked about some of the benefits. Think it's actually good. Yeah. Okay. But I don't, I think you better be sure that if your whole is ab, that you're not breaking it down into A DF, G. Does that make sense? Like that's not okay. It needs to still be AB Correct.

A plus B. I mean, 

Rachael: like you said, it's, it was literally adding like pineapple and jalapenos to. Yeah, we, we threw some stuff in here, American, that not 

Eric: only wasn't part of the thing, but is representative of an entirely different and incorrect strategy. Yeah. Yeah. Does that make sense? So like for fund in my mind was objectively better.

Yeah. Granted, I haven't seen his allocations, Steve. That's be 1%. 1%, 1%. 99 7. Yeah. And then we're just like, what are you doing man? We 

Rachael: don't have [00:27:00] the percentage allocations, but you would assume that if we're 

Eric: talking, generally speaking, some kind of 60 40 with, you know, of his 60% equities, we're talking like 60 40 US international.

Yeah. Or you know, 65, 35, whatever. If it's in the realm of reasonability, we're pretty happy with the four fund, especially compared to this. 

Rachael: And so like, okay. So would you say that if you're making moves in a portfolio, that it should be adding value? 

Eric: Yeah, a hundred percent. 

Rachael: Right. 

Eric: So. There should, it should just be deliberate.

It should be intentional, deliberate. Yes. And should have a very clear investment thesis behind it. We tell through that all the time. 'cause there are people that have, that are, that are attached to emotionally attached to specific Yes. Positions. Yes. That they hold or will hold or whatever. Right. But that 

Rachael: they've seen grow.

Yeah. Yes. 

Eric: So like, we're just like, look, let's con, let's construct some framework around why we like this. What has to be true for us to like this? Like maybe we like JP Morgan stock because Jamie Diamond is the CEO and we're big fans of Jamie Diamond. Right. I'm not saying any of this is true. I'm just giving you an example.

Yeah. 

Okay. Well. [00:28:00] What What tends to happen is if you don't have real clarity around why you're there, Jamie Diamond might retire. Yeah. Okay. And then you'll still hold your JP Morgan stock. Mm-hmm. And you'll just change your reason. Yeah. Right. You haven't written it down. You haven't, there's no accountability there.

So you're just like, well, you know, they do pay a good dividend. It feels good. It feels weird 

Rachael: letting go of it. 

Eric: Right. But I thought we were there because Jamie Diamond, not because of the dividend. 

Rachael: Right. 

Eric: I didn't think we were there for dividend growth. Are we there for dividend growth? Yes. Okay. Let's talk.

We there, because they're the biggest bank us by assets. Right. 

Rachael: Backwards or cyclical reasoning to avoid. Yeah. 

Eric: People back themselves into decisions that they've already made and they're kind of, you know, they're attached to it emotionally. Yeah. And so they'll stay there. So we just wanna get really clear about why we're making moves.

Yeah. What our investment philosophy is, and then what our thesis is for each position that we hold. 

Rachael: And so I, I think, you know, the best way to kind of wrap up and sum this up is essentially like. You know, the poster said that the CFP stated that this allows them to allocate certain asset classes to different accounts and weight them in a way that better aligns with their [00:29:00] risk tolerance and that the additional benefits are tax efficiency.

Those three things are all seem inherently wonderful things. They are not uniquely tied to the 12. Investment options that he had. Correct. Right. So, 

Eric: and I would argue they're not actually doable because his taxable account has been held for a long time probably. And it's gonna have a highly appreciated assets to sell it.

You're actually creating the capital gain that you're saying you're going to avoid with increased tax efficiency. Right. 

Rachael: So timing matters. 

Eric: Yeah, and also like, and also just the, the solutions are not unique. What I mean by that is, that's one of my favorite things to say, but it's silly. I know it's like JE debate stuff, but, um.

What I mean is you can do the tax efficiency part of that without his security selections that he's made. Right. 

Rachael: That's what I, does that make sense? That's what I'm, I don't think we can, we 

Eric: can put the, the fixed income. Yeah. The B and d and the B and DX, we can put that in the tax deferred TIAA without going to VTCB and DX and US Y Yeah.

It just, 

Rachael: it seems that he struggled to make that connection. We're just conflating the two and using buzz words, the three things that [00:30:00] he, exactly, the three purposes that he mentioned. He failed to explain how those 12 holdings, right. Accomplish those things. Um, so, 

Eric: but yeah, great question. Bottom line, really happy with that one.

That fun? We like his initial one. Okay. Beautiful. Really fun. Well, 

Rachael: that was a full episode right there. So our next episode, we'll have some more questions. 

Eric: Alrighty, 

Rachael: until next time. 

Eric: Thanks guys.