Duncan Hill (2:05)

Yeah, so. So I mean, not bad.

Ben Carlson (2:08)

Netflix was doing good, but okay. Robinhood Coinbase And Block.

Duncan Hill (2:11)

Yeah. These are other ones that you looked at Blackstone. Those are surprising to me because I felt like those would be down more.

Ben Carlson (2:19)

I mean, let's be honest. I would love to give myself a pat of the back, too. All these stocks are up on all the credit card companies. I think that was probably, like, right at the bottom, so better be lucky than good.

Duncan Hill (2:30)

I mean. Hey, I'm just saying.

Ben Carlson (2:31)

Okay.

Duncan Hill (2:32)

Yeah, it doesn't look bad. I mean, the only one that was, like, really down out of all those was. Wait, which one was it? Meta, right? No, Netflix. Netflix. Okay. Yeah, but it was up.

Ben Carlson (2:44)

All right.

Duncan Hill (2:45)

Not bad. Not bad. I'm just saying.

Ben Carlson (2:46)

I was just telling myself no more stock picking, but I guess maybe I'm back.

Duncan Hill (2:49)

Yeah. Just saying, if you want to watch that hedge fund might be a good time.

Ben Carlson (2:53)

All right. Water cooler chat is very excited. Let's go. Love me some massive compound. All right, let's do it. We got a lot of good questions.

Duncan Hill (2:57)

Yep. Up first today, we got. If one wants to be geographically diversified but avoid the higher risk of volatility or volatility of emerging markets, would investing in a developed markets index provide sufficient diversification? Similarly, for the domestic portion, would investing solely in an S P500 fund, rather than including small and mid caps, provide sufficient diversification?

Ben Carlson (3:22)

All right, good question. I got some charts, so let's throw it up here. This is the Vanguard Total Stock Market Index Fund Ticker vt. This is like the total world, right? So developed markets make up roughly 92% of the total. Emerging markets are a little less than 8%. That's the slice you're giving up. Okay, seven and a half percent or so. It's emerging markets. Let's do the next one. This is The Vanguard Total U.S. stock Market Index Fund. All right, Mega cap large cap is roughly 73% of the total. Mid cap is a little less than 20. Small is about 6 micro cap, 2% small. So we're talking 28% and change in the small mid micro. Okay, chart off, please. So right now, the US makes up 61% of the total. All right, I did math in school, so I know how this works. So small mid micro makes up 28% of that. If I go 28% times 6,61. So that means 17% of the world total is small mid micro. Okay, so add it all up. Emerging markets, 7.5% small mid micro. In the US 17%. We're talking roughly one quarter of the value of the world stock market index. So the question is, are you comfortable Enough. Investing in the top 75% of names of developed and international or developed in US that's the question. Or do you desire more diversification? Is there really a good answer? Like, does 75% of the way get you there? You're probably going to be okay if you have an S&P 500 index fund and an IFA index fund. Right. You're probably. Or, you know, develops ex us. Yeah, you're probably going to be okay if you wanted some more diversification. Sometimes small and mid do better than large, sometimes emerging does better than foreign developed. It really depends. But 80, 20 rule, you're pretty close to that.

Duncan Hill (5:16)

Home country bias is something I always find interesting. We've talked about it a lot on the show in the past, but. But yeah, when we have people that reach out and we talk to them about their situation and they're based in Australia or in Europe or wherever, there's always a lot of home country bias.

Ben Carlson (5:30)

Yes, it's bad here, but we also make up 60 plus percent of the total.

Duncan Hill (5:35)

Right.

Ben Carlson (5:35)

And so it's kind of, it's a little easier to get away with it here. If you're in one of these countries that is a much smaller percentage of the total, then it's a bigger risk. You're taking a way more concentrated risk. And a lot of these stock markets globally are way more concentrated. Like South Korea has been going nuts lately because two stocks make up like half of their stock market. So you're right. But that, that's a question you have to ask and there's not a good answer. But it's like, am I okay giving up on these slices of the pie? Because there are times when they do much better than the other slices.

Duncan Hill (6:04)

And now smaller, even riskier markets. That's frontier markets. Is that right? I've heard that term thrown around.

Ben Carlson (6:11)

You can call that. Yeah. So that'd be like Africa, for instance. That's a frontier market. Yes. Some places in like Central America, possibly. Yeah. A little more off the beaten path. Not as much liquidity. Someone in the chat said, Michael says, Ben, if you only invest in the stocks that go up, doesn't matter what ratio you use. That's fair. If you know exactly what's going to happen, diversification is not needed. If you don't know what's going to happen, then diversification come in handy.

Duncan Hill (6:32)

Yeah, I just prefer to know what's going to happen myself. Call me.

Ben Carlson (6:36)

Next question. Good question.

Duncan Hill (6:38)

Up next, we got one about the Cape ratio, which is also known as the Shiller pen Right, Yep. Okay. Is Cape ratio still a relevant valuation metric? Short.

Ben Carlson (6:48)

This one actually came from the YouTube comments, so not bad. I see. I'm looking in the comments and I'm pulling questions. Let's throw up the Cape ratio. Daniel, chart on, please. This is the Cape ratio straight from Robert Shiller's website. You can see it's. It's been going up, up and up and 36.5 times. And chart off, please. The way that this, this works is you take the prior 10 years earnings on an inflation adjusted basis and you average them. And the idea is, because you're averaging those earnings and comparing the price of today to that, it gives you a better sense of like the trend. Okay, here's the problem. Put the chart up one more time for me. At the lows in 2013, it got to 13.3 times at the bottom in early 2009 after the great financial crisis. And it did not stay there for long. You can see it took off like a rocket ship. Chart off again, again. Now 36.5 times. Like it's just going up, up and up. The very long term average. And Shiller brings us back to 1871, which is kind of a long time ago. Okay, the retirement plan for people. In 1870, you died. You worked on the farm and you died. That's how you, that's how you plan for retirement back then. Yeah, but the very long term average is 17.7 times. It used to be like 15, but it's been going up. The problem is, is. Is 17.7 times a good long term average? Does that, is 1870 still relevant to today? Probably not. So the past 30 years, the average is 28.7 times. The past 20 years is 27.5 times. In the past 10 years, the average is 32 times. That's a number that we've seen like twice in history until this point. Now we were averaging that over the past 10 years. Duncan, in the past 30 years, how many months do you think the stock market has been below the long term average of 17.7 in the past 30 years? That's a long time. So 17.7 is the average. How often have we been below that on a monthly basis?

Duncan Hill (8:39)

Five years.

Ben Carlson (8:41)

So 10 months. So that's less than 3% of the time we've been below the long term average.

Duncan Hill (8:47)

Wow.

Ben Carlson (8:48)

If you were using valuation as an indicator to tell you if the market is over or undervalued, it probably didn't help much. The question is like, which one of these averages makes the most sense?

Duncan Hill (8:55)

So wait. Yeah, if you were waiting on this to get in the market, you'd just be sitting and waiting.

Ben Carlson (9:00)

You'd still be waiting. So corporations of today are nothing like they were in the past, in the past 1870s and early 20th century. It's like iron smelting firms and railroads. Right. Today there's way higher margins. We talk about that a lot here. Not as capital intensive. The other thing is like that inflation adjusted earnings of the past 10 years. Especially in an environment like today where there's a huge innovation boom. Do you think that the earnings of companies today looks anything like it did 10 years ago or even 7 years ago and maybe 5 years? Like things are changing so rapidly today. There's no way you can even make that comparison. So listen, since 1990, the CAPE ratio has been above average 95% of the time. It's up 10.8% per year in that time frame. Okay, you use this and you said, oh, the market's always overvalued. It didn't matter. It's up 11% per year almost. I'd say that valuations probably only matter at the extremes and maybe those extremes are changing. Okay, I'm not saying they don't matter at all. But you can't use these things as like a line in the sand. So Robert Shiller himself said this in an interview. He said this back in 2015. So credit to him. He, he hasn't been like a staunch. Like this is written in stone. He said, I've been very wary about advising people to pull out of the market. Even though my Cape ratio is at one of the highest levels ever in history. Something funny is going on. History is always coming up with new puzzles. I like the way he put that. Another interview, he said, 2012, things can go for 200 years and then change. I even worry about the 10 year PE. Even that relationship could break down. Guess what? It broke down. Companies change so fast. And I think my way of thinking about valuations and fundamental investors are going to put me in the penalty box for this. I think people pay way too much attention to valuations. At the stock market level. Stocks are fairly valued. Stocks are obviously overvalued. People have been saying this for 15 years that the stock market is overvalued. It didn't matter. I think there's plenty of other factors that matter more than valuations today. Demographics, allocation, decisions by investors, flows, risk, appetite for investors. I think the prevalence of tax deferred retirement accounts has totally changed valuations. The trillions of dollars controlled by Financial advisors now, you know, I think the past 17 years is a great example of how hard it is to predict what's going to happen in the market. So, sure, use valuations, set expectations, do not use them to time the market. And the stock market most of the time doesn't care about your historical averages. If you can do a simple calculation and use that to like think you can beat the market. It's not that easy. I remember majority of the time seeing

Duncan Hill (11:20)

people on TV talk about how Nvidia was just, you know, so ridiculously priced. And I'm talking like years, like five, five to 10 years ago, people saying that about Nvidia. And yeah, yeah, we all know what happened.

Ben Carlson (11:32)

Again, higher valuations means there's a lower margin of safety. I'm totally on board with that. But if you're using these, these numbers as a line in the sand that like, all right, we're in, we're out, I don't think that's a good way smart way to invest. And I think you're probably going to get your face ripped off most of the time.

Duncan Hill (11:47)

Yeah. There is something nice about buying a stock though, and seeing a nice PE ratio just in general.

Ben Carlson (11:53)

Yeah. Because you know you're going underperform. I bought this for six times earnings. Why? The company is a piece of crap. Awesome. All right, next question. It just makes it easier, you know, ahead of time I'm probably going to underperform.

Duncan Hill (12:05)

It's good for tax loss harvesting.

Ben Carlson (12:07)

There you go.

Duncan Hill (12:09)

Okay, up next, I've become increasingly fascinated by what might be called the self constructed psychological prison many of us inhabit around personal finance. I find myself poring over spreadsheets and projections that exceed any reasonable threshold of necessity. And yet anxiety persists. It's a subject that defies honest conversation among peers. And I'm aware it occupies a rather specific category of concern. The Quint, quintessential champagne problem. For context, we're planning roughly eight more years of work, approaching a net worth of approximately $5 million and living well within our means. I'm a discipline saver and investor by nature. What eludes me is not the math, it's the mental architecture around it. I'd welcome your recommendations for resources frameworks or practitioners who specialize in the intersection of behavioral finance and wealth psychology. Specifically for those whose anxiety is disproportionate to their actual circumstances. This is a very self aware question. I like this.

Ben Carlson (13:07)

I think this is one of the better, most well written questions we've ever received. The way that he lays it Out. I think it's very nicely done.

Duncan Hill (13:15)

Odds that there was some AI assistance. What do you think?

Ben Carlson (13:18)

Well, I don't know. That's a good question. That's possible. But I love how he frames this problem as something that's impossible to have a conversation with your peers. Because it's totally true. It's like, give me the world's smallest violin. Oh, no. You have $5 million and you're worried about money. You're anxious. I don't care. Boo hoo. I have other problems to worry about.

Duncan Hill (13:35)

But where are the friends you reach out to with this question?

Ben Carlson (13:38)

Exactly. That's what we're here for, right? No one else wants to hear this. I know there's people who are watching or listening whose eyes are rolling in the back of their head right now, like, come on, seriously. But we've been, you know, Duncan, we've been getting this question for years. I see it all the time with clients, readers, podcast listeners. This is a real mental hurdle for some people, whether you think that's a big problem or not. I've talked about the reasons why. Some of it's just like genetics and experience and family and some of it is like personal experiences. Right. We've had clients who used to work at Lehman Brothers or Bear Stearns and stuff, and their way that they view risk has totally changed.

Duncan Hill (14:13)

Chris is referencing in the chat. $5 million is a nightmare, Greg.

Ben Carlson (14:17)

Yes. According to Succession, 5 million is the worst. I think most of it for most people is that good habits are hard to break. You created these great habits for saving and being frugal and building capital and letting it compound and then turning around and you're just always anxious. So I have a lot about thoughts about this stuff. I think Sam might need some tough love here. So first of all, certainty and comfort is a feeling, not a number. So you could get to 7 million, you're still going to be anxious. 10 million, you still might be anxious. Even at 15, you might still be anxious about money. And that's probably never going to go away. So I think the problem is you can't have the same scarcity mindset at $5 million as you had at 50,000. Right. And I think the planning and the optimization of the spreadsheets are just this coping mechanism for your financial anxiety. So, like, what do you do? Stop looking at your spreadsheet so much? I look at mine once every six months. I have a big master spreadsheet. I don't look at it on a weekly basis or monthly basis. Even quarterly is Too much. Probably look at it once a year, once every six months. I like. Why would I look at it all the time if I have a general sense of what's going on based on my savings in my portfolio? I'm sure you know what's happening. Stop looking at it. I don't know if you have a financial advisor. They didn't mention this, but I think that's one way to just outsource your anxiety. Let them do all the worrying for you. That's what their job is. Okay. That's kind of like if you really want to outsource to someone else. The big question you probably haven't thought deeply enough about, like, what is the money for? And don't say freedom. Financial freedom is a cop out. What will you do with that freedom? Don't say travel. Everyone says they'd like to travel more. You don't need financial freedom to travel. I think don't feel anxious is also not. That's an impossible goal. There's always gonna be something to be anxious about.

Duncan Hill (15:56)

Well, because we hear often from people, the more money you have, the more anxious you are about drawdowns in the market. Right. Because the number's bigger.

Ben Carlson (16:03)

Yeah, it's a higher math.

Duncan Hill (16:05)

It's a bigger amount of money you're losing.

Ben Carlson (16:06)

And so, yeah, it's. It sounds like a really. It sounds like a. Yes, a champagne problem. As, as they said. But it's true. Like a. Even a smaller percentage decline is a bigger money dollar sign decline. Right. So the, the point is you can't solve an emotional problem with numbers. Here's how you, like, get to like. What does your perfect Thursday look like? What makes you happy? How can you use your money to make others happy? Also, the other part about the dollar that you mentioned, like, what's your floor? What dollar value would your portfolio have to get to where you'd be super worried and ready to like, tap out? I also think spreadsheet people love creating savings plans and debt repayment plans and retirement calculators. They never create a spending plan. What are your guilt free spending zones? Right. Seek them out. Fly first class. Buy all the appetizers at a nice restaurant. Pick up a bar tab for your work colleagues. Buy those nice shoes. There has to be something that makes you happy, and it doesn't always have to be an experience like the books say material possessions are fine if it brings you joy in life. As far as resources go, there aren't that many books or resources that help you out with financial anxiety and being too conservative. With your money. If anything, there are lots of books out there that shame you for spending money and make you feel like you should be hoarding it all. That's what most personal finance books do. So to give you credit here, most of the advice you receive has told you that what you have is good. You should be anxious about your money. You should hoard it, don't spend it, don't go into debt. The best one on learning, and I've talked about this before, is like About Letting Go and Living Little is Die With Zero by Bill Perkins. I don't agree with everything in the book, but as far as developing the right mindset for money, it's probably the best one I've read. Although I'm not sure reading a book is going to get you there. I don't think you can change 30 years of habits by reading one book. I don't think that's possible for a lot of people. Ramit from I Will Teach youh to Be Rich has a great podcast called Bunny for Couples. I looked through throw up the chapters here. This is how, this is how helpful I am. I'm recommending another podcast. On a podcast. Can you believe this? He's talked to many people who have the same we're worth fight. Subscribe and rate our podcast too. We're worth $5.5 million, but I feel like it doesn't belong to me. We achieved flyer with 4.3 million. Why can't we enjoy it? We have 6.3 million. Why can't we take a vacation? And Ramit goes like, he doesn't hold back. He goes hard. He's like a financial therapist. So I think it could be good to hear someone give advice to people in similar situations. So I think that can be helpful. I think you can try to do this on your own, but you probably need a third party. This is why alcoholics go to Alcohol Anonymous, right? You need a community or group of people. Give us a call. We have a whole bull. I have a whole bullpen of financial advisors who have these conversations every day with clients. They're like financial therapists or call another advisor. I think at least having conversations with people who do this for a living, especially since you don't feel comfortable having it with peers who. Or family members in your life. You have to have that conversation with someone and like get it out. That's. That's my advice. Talk to someone else who's a. An objective third party because you're probably not going to get good advice from your family and friends. Anyway, they're either going to be jealous or they're going to give you bad advice.

Duncan Hill (19:03)

Right? Yeah.

Ben Carlson (19:07)

The Nick Murray quote that I love is that if you're still worried about money, you aren't wealthy.

Duncan Hill (19:14)

But is that really true? Because, I mean, to your point, there are plenty of people that have tens of millions or maybe even $50 million, and they still worry about money.

Ben Carlson (19:24)

It's a mindset, Duncan. That's what I'm saying. I'm saying they don't lead a rich life if they're constantly still worried about money. There's these stories of these billionaires who live in Florida for 181 days of the year so they can get the tax break, and then they wait on the, the, on the tarmac for an extra four hours before flying back to New York. Guess what? Those people aren't wealthy. In my book, if they're having to do that to save money on taxes, you're not wealthy. So I, I think that it really. Being rich in a lot of ways is a mindset.

Duncan Hill (19:53)

I think that that's people that just enjoy the game. They probably still like, do couponing, you know, could be.

Ben Carlson (19:59)

And I think if you have that much money, then it's. It's pointless. Yeah. Someone in the chat said golf is happiness. Spend to the moon on it. That's great. Pick your thing. Me, I hate golf. Hate it. My dad always tried to get me to play. I, I don't have the patience for it.

Duncan Hill (20:13)

I, I love golf, but the, the thing I don't like about it is being rushed. I don't like when you have people behind you trying to rush you. That makes it not.

Ben Carlson (20:20)

See, I, I didn't have enough. I'm very patient when it comes to investing and saving. I'm not patient enough for golf. It happens.

Duncan Hill (20:27)

Travis said he'd buy more surfboards. Of course.

Ben Carlson (20:29)

Yes. But again, I love. To your point, this is a very self aware person.

Duncan Hill (20:34)

Yeah.

Ben Carlson (20:35)

And they're not asking for people to feel sorry for them. They're just saying, this is something I'm dealing with. Like, what do I do? And again, I think you need to talk to someone else. I don't think you're going to figure this out on your own.

Duncan Hill (20:43)

Yeah.

Ben Carlson (20:45)

All right. Another question.

Duncan Hill (20:46)

Okay. And that one was from Sam, by the way. Up next, we have an anonymous question. For obvious reasons, I feel like the 1% fee I'm being charged in my actively managed brokerage account is a waste of money. With approximately $1.2 million in there, I'm basically paying them $1,000 a month to manage this. And there's not a lot of managing going on. I understand that it was set up using a computer program based on my risk tolerance timeline, etc. But since it was set up five years ago, there's been very little change. What are your thoughts on this? If it's bothering me, should I just tell my broker I don't want that account actively managed anymore? Is there something I'm not thinking of? I need you to kind of explain this to me. I don't quite even understand what they're talking about. An actively managed brokerage account,

Ben Carlson (21:30)

I gotta be honest, for the 1% fee. I've never heard of many of these, but this doesn't sound great, obviously. So this is some sort of actively managed, like separately managed account, I'm sure. And I don't know if they're using ETFs or picking individual stocks or what it is, but I would love to know, like, why you wanted to have them actively manage this portfolio in the first place. Right. I want to know how you define success for an investment manager and how long you think it takes, because five years is a pretty long time to do this. Like that should be enough to know. And I think you probably have to figure out like, did they set expectations up front with what this would be for you? Did you set expectations for them? Do they communicate with you what's going on with the portfolio? Do you know the types of environments this is going to work or not work? It does sound like this is kind of a haphazard way of running money and it doesn't make a ton of sense. Obviously this is not a financial advisor, this is an investment manager. And there's a difference. Yeah, paying that 1% fee, if they're really not doing anything for you or they're not telling you they're doing anything. They could just be long term buy and hold investors. But I would ask again, is it worth the fee? Are you expecting them to outperform a certain benchmark? I would need a lot more information here to understand this. It doesn't sound great at the surface.

Duncan Hill (22:47)

Yeah, it sounds like a fairly automated thing, at least in their eyes. Based on what they're saying, they don't give a sense that much managing is going on. So I guess it's a programmatic, which

Ben Carlson (22:57)

is interesting because it sounds to me like a robo advisor. But robo advisors do not charge.

Duncan Hill (23:02)

Robinhood has a managed thing now that you can do. But I don't think, I don't know what the fee is.

Ben Carlson (23:07)

I would say if this is the kind of thing you're looking for, you could get it for a much lower fee elsewhere, probably. Especially if you're, if you're only getting investment management, you're not getting financial planning, you're not getting insurance and taxes and all this other stuff that you can get from an advisor, then yeah, I need a lot more proof that this is something that's worth paying for, especially if you're not happy with the performance when.

Duncan Hill (23:27)

Especially because there's so many products now in ETF wrappers that are essentially active. And a lot of times, some, some of those fees, the expense ratios are actually close to a percent I've seen. But, but a lot of them are much lower or a quarter of a percent or.

Ben Carlson (23:40)

Yeah, I'm guessing it sounds like this person has a decent amount of money. They probably went to this brokerage and the brokerage said, ah, sales pitch time. And they gave a good sales pitch and maybe they didn't come through with what they, they said. I would need, I would need some assurances that there's a good reason for me to do this. I would need to have a re. Another sales pitch to talk, talk it through. Otherwise, like you said, there's plenty of better options out there, I think, than, than this today.

Duncan Hill (24:03)

Yeah. And to be clear, it doesn't sound like they're getting regular, you know, financial planning or anything like that. It's literally just managing, actively managing a brokerage account for them. Right? That's what it sounds like from what they say.

Ben Carlson (24:17)

Yeah. Show me your value. Yeah, there's, there's people in firms that can provide value at that fee level, but they better, they better show it, otherwise it's not worth it.

Duncan Hill (24:27)

Maybe it's as simple as that. Yeah, just reach out and say like, hey, you know, I'm just, I'm looking at my finances and I'm just curious to know like, what I'm getting for that 1% fee. And maybe they'll break it down and maybe you'll be impressed or maybe they will panic and you'll pull your money out, probably.

Ben Carlson (24:44)

Or they'll blame the Fed. You know, why we underperformed. It was the Fed.

Duncan Hill (24:46)

There you go.

Ben Carlson (24:47)

That's easy. All right, another question.

Duncan Hill (24:49)

All right, last but not least, we got one from Mike. What do you think of. I have no idea what they're talking about here, so you're going to have to explain. What do you think of build better Bond Ladders with iShares for building bond ladders. Instead of using a bond fund or ETF such as bnd, how exactly do they work when they mature and send the money back to you? If I buy $1,000 of the ETF, do I get the thousand dollars back in the year the ETF matures? Since you can buy or sell at any time, it doesn't seem that the value would stay stable like it would if I bought a bond directly.

Ben Carlson (25:24)

All right, before we get to this one, Michael in the chat says, I have an advisor in case I die. My wife has enough to do if that happens. That is actually one of the reasons that a lot of people come to an advisor when they're older. A lot of times it's one person in the family or the couple that is managing the money and they want to make sure that there's a fallback plan. We have one guy who came to us right when we started the firm. He said, I want to keep managing the money myself. He had like $10 million. He said, but I have a letter that tells my wife what to do and she's going to contact you if I pass away or get by a bus.

Duncan Hill (25:53)

Yeah.

Ben Carlson (25:54)

Peace of mind.

Duncan Hill (25:55)

In my will, I have. I have that. You'll manage my money if I die.

Ben Carlson (25:59)

So do I get some of your hats too?

Duncan Hill (26:01)

Yeah, yeah. You can have your pick.

Ben Carlson (26:03)

I don't want your oatly shares. Give them, give them to charity. It's a tax write off. All right, back to the bond ladder question. Good question. Do you have you. Are you familiar with these target maturity funds at all bonds? Because I think I'm going to lay out the case. I think these are for you.

Duncan Hill (26:19)

Bond. Bond ladders. I've heard of it, but yeah, I don't. I don't really understand.

Ben Carlson (26:22)

Okay, so there are a lot of these target maturity bond funds. Now they mentioned the iShares one. I'm pretty sure State street has one. I think Invesco has this Vanguard might be getting this game as well. It's cool. These funds exist because buying your own individual bonds can be tricky. We've had this conversation before. Individual bonds versus bond funds. The reason these bonds exist is twofold. One, you have a specific goal where you need the money, a specific time. I know in three years I'm going to have a down payment or a wedding or pay for my child's education for college. So I'm going to pick a 20, 29 target maturity bond fund. And I put money in now and I get income on the way. And then in three years, it's going to mature and I'm going to get back at par or close to par, depending on how things move. Two, you want to create a bond ladder. You might buy seven different bond ETFs with a maturity date from now until 2033. Okay. Each one will roll over each year, and then when those bonds mature, you either use the proceeds for spending purposes or you reinvest in a new bond. So that's a bond ladder. Right. You're laddering at different maturities. And at different maturities, you're going to get different interest rate levels. Right. And they're going to mature at different times. And the whole point of a bond ladder is you're trying to get rid of that interest rate risk because you're spreading it out over different maturities. And when it matures, maybe the rates are higher and you put in at a high rate. Yeah, that's good. Or the rates are lower and it's a lower yield. Well, the bond I still hold have higher yield. So that's so.

Duncan Hill (27:43)

So very ETFs that do this for you instead of you building your own ladder.

Ben Carlson (27:47)

Correct.

Duncan Hill (27:47)

Okay.

Ben Carlson (27:48)

So there's a main difference between the type of bond funds is duration risk. So BND that, that this person mentions is a total bond market fund. It's a perpetual fund that it never matures. So it has this wide range around the average. So it has an average maturity and an average duration that it's targeting based on the index. Right. But sometimes there will be bonds maturing, sometimes they'll be selling bonds to buy new bonds, but they're kind of going for a target. And that target maturity and duration, it changes a little, but it's always pretty constant.

Duncan Hill (28:15)

But so by definition, any bond ETF like that is laddering. They're constantly buying more.

Ben Carlson (28:20)

That turn point, it's not meant to have. It's not meant to ever mature in total, though.

Duncan Hill (28:27)

Yeah. Okay.

Ben Carlson (28:28)

It's trying to keep a constant maturity in duration so that price can drop and stay down for a long time occasionally, which happened in 2022 when interest rates rose. The reason you hold a bond ladder is because you don't want to have that. So because they have an expiration date, you're the one managing it now. So you're right. A bond fund is just a fund of individual bonds. It's pretty similar, but you're not. You're targeting a different perpetual average duration, whereas with a bond ladder, that might change. Okay. So it's a little more predictable for a bond ladder. And Obviously the amount you get back depends on what happened to the underlying bonds. Some might have been purchased at a discount, some might have defaulted if it's a corporate bond fund. But it should give you roughly back around par, plus or minus something depending on what happened between then and how far out you went. So the longer term you go out in terms of duration, the more volatility you'll have. But as maturity approaches, that volatility is more muted because you're going to get par back soon. So there's not as much volatility. So again, steady stream of income once a year. Again there's reinvestment risk. If rates are higher or lower, interest rate still does exist. In some ways it just changes shape a little. It's like reinvestment interest rate risk. There is a little more management involved and maintenance involved in a bond ladder. It's obviously not a lot, but it's something you have to pay attention to on maturity time, right? Am I going to spend this money or I'm going to reinvest it? Another bond that's seven or 10 years out or however long you want to make it for. There also could be some cash drag in these as the bonds mature within the fund. They could just hold cash towards the end. So you get a little cash drag and maybe the performance isn't as good. Listen, if you need money at a specific time where you just like the comfort of knowing when your bond matures, I think a bond ladder actually does make sense. More general fixed income exposure like BND, it can lose money in like a 2022 situation where interest rates rise. But on the flip side, when rates fall, you get more bang for your buck than in a bond ladder. Right? You're going to get much better performance in a recession in BND than you would in some of these, these individual bond funds will change. I think they asking the question like does it just stay stable the whole time? No, it's, it's going to be priced. Those individual bonds will change as rates change, as inflation changes, as it gets closer to maturity, the prices can and will change. But I think Duncan, as a hater, a professed hater of bonds, I think these, these target maturity funds make more sense to you because you can say listen, I just want a three year bond and it's not going to fluctuate very much and it's going to give me whatever the yield is when I buy it and then in three years I'm going to reinvest it into stocks or something else or I'm going to put it back into another three year bond, whatever the term is. I think for you who doesn't like to see a ton of volatility in bonds, it actually makes a little more sense.

Duncan Hill (31:05)

Yeah, sorry, but bonds are dead to me. They're dead to me forever. At least for now.

Ben Carlson (31:11)

What if Oatley does some corporate bonds? I think you could buy into the fixed income portion and that way once the equity goes to zero, at least when it goes the company was bankrupt, you get paid back as a fixed income investor.

Duncan Hill (31:21)

You know, you joke a lot, but Oatley's looking better than a lot of my stocks right now, so.

Ben Carlson (31:28)

All right. And I should come clean. I drink oat milk. It's a thing I do now.

Duncan Hill (31:33)

I mean, yeah, I haven't met many people who are like, oh, I hate oat milk. It's not like it's an offensive tasting thing or anything. No. Yeah, I'm proud of you.

Ben Carlson (31:44)

All right.

Duncan Hill (31:45)

And then in the chat, Giancarlo says, why do bond ETFs generally act differently than MMF money market fund? I guess, aren't they both investing in bonds?

Ben Carlson (31:56)

Money market fund is way shorter duration. So that's why, like it's similar to T bills. T bills don't have basically any volatility because the duration, you know, the maturity date is going to be shorter. So that's, that's the thing. The shorter the maturity, the less volatility, longer the maturity, higher the volatility. And so duration for a fund like BND or AG is something in like the 5 to 8 year range usually. So that's just a little more duration if you're in tlt, which the reason you hate bonds is because you were investing in TLT, which is a 30 year duration.

Duncan Hill (32:25)

I lost money several bonds, bond ETFs. But hey, you know what? What did work out for me though were the I bonds. Is that what they were? The inflation?

Ben Carlson (32:34)

Yep.

Duncan Hill (32:34)

I actually bought like direct with the government on that beautiful website. That worked out.

Ben Carlson (32:39)

Yeah, I could never get my login ID to work, so. Oh, well, all right.

Duncan Hill (32:44)

I think someone would have helped you.

Ben Carlson (32:45)

We covered the gamut on today's show. Behavioral psychology, bonds, stock valuations. Keep those questions coming. Every week we get, Sean gives me an update of the doc and every week it's full of really good questions, which is great. Ask the compound. Showmail.com we love your questions. Thanks to everyone in the live chat, as always on YouTube and on Twitter. What are we going to subscribe? Rate, review rate and review it on shop.com for compound merch needs share with your friends.

Duncan Hill (33:11)

Yeah.

Ben Carlson (33:12)

Thanks everyone.

Duncan Hill (33:12)

See everyone.

Ben Carlson (33:15)

Thanks for listening to Ask the Compound.

Duncan Hill (33:17)

All opinions expressed by Ben Carlson, Duncan Hill, and any of their guests are solely their own opinions and do not

Ben Carlson (33:23)

reflect the opinion of Ritholtz Wealth Management.

Duncan Hill (33:25)

This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Ben Carlson (33:31)

Clients of Ritholtz Wealth Management may maintain

Duncan Hill (33:33)

positions in the securities discussed in this podcast.