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Welcome to Money for the Rest of Us, this is a personal finance show on Money. How it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 554. It's titled There is no Perfect Portfolio, Just Good Enough. Have you noticed over the past few years, as you have interacted with personnel in the hospitality space, whether you're at a restaurant, maybe, maybe you're at a hotel, and you, you do something, you order and they say, perfect, everything is perfect. And I'm not the only one that noticed it. I actually looked to see if there had been some academic study about that, because I don't remember hearing perfect as much a decade ago. What's interesting, though, is perfect. The word, it comes from the Latin perfectus, which means to finish or bring to completion. And that use of perfect is what we see in grammar. In English, you have present perfect tense, past perfect, future perfect. Originally, the word perfect meant completed, not flawless. But if we look at a essay I found by Paula Morantz Cohen in the Wall street journal back in 2022. She's a professor of English at Drexel University in Philadelphia. The title of her piece was why Everything is Perfect. And she used a phrase, she called it macro prai. The speaker is just overdoing praise to people, including saying, hey, perfect example. She gives quote. Thank you, Stephen, for your excellent question about whether we should be putting our trash cans closer to the curb. I think you are 100% right in raising this point. She thinks that maybe this idea to over exaggerate praise and use terms like perfect is some individuals, younger generations, perhaps, that's what she's saying. They have felt continually judged. And so. So there's either you're wrong or it's perfect. No ambiguity in between. Now, she had a suggestion to saying perfect all the time, say good enough. So if you order at a restaurant, the server will say, good enough. I don't know if that's going to work or not. We had. We were at. We had brunch the other day with a friend. Our server was Claire. She didn't say perfect, but she was an actor by training, very skilled, and she could have been. In fact, I suggested that she try standup. She was that good. A friend asked her her name and she said, my name is Claire. And he said, oh, that's a great name. And she said, thank you, I got it for my birthday. And the way she delivered that line was perfect. But she didn't want to do standup because it requires failing and failing again. And she's learning to get comfortable with failing because when you fail, you're no longer perfect. And that's just the way it is now. I mention it because I got an email from a publicist at Harriman House and they're publishing a whole suite of personal finance and investment related books. One of them is by an acquaintance of mine, Peter Lazaroff, the Perfect Portfolio. It comes out in the fall. Another acquaintance of mine, Colin Roche, wrote a book published by Herriman House earlier this year or late last year called you'd Perfect Portfolio. Also this fall is a book by Jared Dillian titled the awesome Portfolio. If you look at some of the other lists and they sent me kind of a photo of all these books lined up and there is actually a sameness to it when you look at the covers, very similar genre. Another one is the retirement answer, the everything code and the idea, at least by the title and you read some of the marketing is there is a perfect answer. There is a recipe you can follow in your investing to build the perfect portfolio. But when you actually dig into the text and I did, I bought Colin's book and read it this weekend and I the the Lazaroff's book's not out yet. I requested the PDF that's not available, but I have a sense of what's in there. And they're both kind of along the lines of how they define a perfect portfolio. The perfect portfolio for you is not necessarily the perfect portfolio for somebody else. It's the Portfol you can stick with. And Roche gives the example of research on dieting. Many, many diets work, but what they found is the diets that work best are the ones that the individuals actually stick to. And portfolio management, Roche points out, is no different. He writes, you don't need to find the perfect portfolio for all people at all times. You need to find the portfolio that's perfect for you and then you need to remain loyal to it long enough for it to work for you. Lazaroff writes, if there's a perfect portfolio, it's the one you can stick with through thick and thin. So these are behavioral elements when it comes to the perfect portfolio. And even, even the portfolio itself, if you can stick to it, doesn't mean it's perfect might be complete for you at that stage of your life, but it can change. Before we continue, let me pause and share some words. One of this week's sponsors, Deleteme. Deleteme makes it easy, quick and safe to remove your personal data online. At a time when surveillance and data breaches are common to make everyone vulnerable, it's easier than ever to find personal information about people. Your address, phone number, family members, names. They're all hanging out on the Internet and there's actual consequences in the real world to make everyone vulnerable. And that's why I continue to use Delete Me because I'm someone with an active online presence. So privacy is really important to me. And so I value Delete Me is constantly monitoring the Internet, requesting that my personal information gets removed. They send me a quarterly report showing what they found and what has been removed. The New York Times wirecutter has named Deleteme their top pick for data removal services. So take control of your data and keep your private life private by signing up for Deleteme now at a special discount for listeners. Get 20% off your delete me plan when you go to JoinDeleteMe.com david20 and use code david20 at checkout. The only way to get 20% off is to go to JoinDeleteMe.com David20 and enter code David20 at checkout. That's JoinDeleteDemetics code. David20 recently attended a Zoom call. It was a mastermind that my friend Bill Yount of Catching up to FI put together and we've gone back and forth as he's talked about restructuring his portfolio and the topic of the discussion this was mainly individuals in the financial media, podcasters as well as financial advisors. And it was on portfolio construction Simplicity versus Complexity and we started out and there was a presentation on Target Date Funds. Target Date Portfolios. These came out in the early 1990s. And just as an aside, Colin Roche's book on the on youn Perfect Portfolio. He goes through 20 different portfolios, one of which is the Target Date portfolio. And he mentioned how these were developed by two financial advisors, Donald Luskin and Lawrence Tint in the early 1990s. They were were with Wells Fargo Investment Advisors and they found that a lot of investors just didn't pay attention to the portfolio. They might set it and forget it and never rebalanced and it would just keep getting a higher and higher equity exposure to where they might be taking too much risk right before retirement and be subject to sequence of return risk if the market fell off significantly. So they came up with these life path portfolios. Roche points out that the targeted portfolio is a behavioral portfolio. It's not designed to beat the market or to optimize excess return. It's designed to be simple and you can Forget it. Because the underlying advisor is adjusting the allocation over time as you get closer to that target retirement date. These have been incredibly popular. I pulled up some research by Vanguard, and within their group, 84% of participants are using target date funds, 96% of plans offer them, and 42% of assets are invested in target date funds. That's up from 26% back in 2015. And so they have grown immensely in popularity, which is why private capital firms have been lobbying, advocating to allow these target date funds to invest in private capital because there's a huge amount of assets there. And now it has been approved within target date funds. We'll see how that rolls out. We talked about that in a podcast last year. But I think target date funds are amazing. They're not perfect, maybe not even awesome, but they are amazing because of how simple they are. And I've recommended them to family members. They're especially good for others don't really care about investing. Back when I was an institutional investment advisor, we had some 401k clients and we would do education. I worked with a chemical company and I'd go a couple times a year and I would meet with their employees. Most didn't care about investing. They're coming off third shift, they're tired. And the reality is we didn't have target date funds in those portfolios. We created too complicated a portfolio structure in terms of our fund selection. They were good managers, but they should have been in target date funds. But at the time, this would have been late 90s. Most plans did not have target date funds. They had large cap, they had international, they had small cap and bonds. An individual had to choose the allocation, and it could be overwhelming, especially if you're just not interested in investing. But now we have target date funds. They're not flawless, they're not perfect. I, for example, Vanguard's target date fund, they've consistently had an allocation to international bonds at a time when bond yields for non US Bonds were very, very low. It didn't make really any sense to invest in a bond fund with a 1% yield to maturity. So we talked about on this mastermind, we talked about target date funds and then we compared them to what they labeled risk parity funds, which turned out we weren't really talking about risk parity funds. And Roche. In his book, your perfect Portfolio, he has a chapter on the risk parity portfolios, which were developed by Ray Dalio, who was founder of the hedge fund Bridgewater Associates. And the aim of a risk parity portfolio is you, you want each asset in the portfolio to have a similar risk profile in terms of its volatility. You're essentially equal weighting by risk. And so for something that has lower volatility like bonds, a risk parity portfolio will leverage up that bond portfolio. They'll use leverage, they'll borrow money and invest it in bonds. And so this can be a, a complicated portfolio. In fact, Dalio recommends that you have at least 15 different uncorrelated return drivers. Now I remember coming across the Bridgewater risk parity approach, probably early 2000s, mid-2000s, and I thought, huh, that's an interesting approach, maybe we should implement that. And then as you look into it, at least at the time, it was challenging because if you're going to leverage up portfolios or an asset class, you need to be able to get cheap leverage. Something that we didn't have access to as an institutional advisor, but a hedge fund like Bridgewater did. But now there are ETFs that do this approach, including one where Bridgewater is the sub advisor, the State Street Bridgewater All Weather etf, A L, L W. There's also the RPAR risk Parity etf. RPAR AQR has run a risk parity strategy since well, at least 15 years. It's an institutional mutual fund, Aqrix. If we look at how they've done past year been, been good, they've all returned sort of mid-20s, 6% up to 28% in a period where the US stock market or the global stock markets returned 33% and bonds have done 6%. But over the long term, if we look at the longest performers is we have RPAR risk parity ETF five year return, 2.6% annualized. That's clearly disappointing. The AQR fund has done 8.5% over five years. That's annualized 8.2% over 10 years and 6.7% over the past 15 years. So the reality is, I think when you look at the 15 year returns for this type of risk parity strategy, kind of 7, maybe 8% return. But there's some definite cons. This is a complicated strategy and Colin Roche points out that it could be subject to diversification. You just keep adding all these uncorrelated assets and, and it, there's always something underperforming and potentially brings the return down. It can have high turnover, you got the leverage cost, potentially higher fees. But it, it is a complicated portfolio and an ETF, a mutual fund framework kind of 7% annualized return. But the approach is similar risk. So take different asset classes and equalize their volatility so each contributes the same amount. Before we continue, let me pause and share some words from this week's sponsors. Earlier this year, my son Brett and I on two different occasions we went to Palm Springs and we had a vintage clothing pop up. We were retailers and we used Square to take credit card payments. We bought the Square device, it connected to our phone. It was incredibly simple to set up and use. Square is a business toolkit that helps you sell, manage and grow without the chaos. Whether you're just getting started or already running something great. Square gives you the tools to take payments, track sales, manage your team and keep everything organized all in one place. And now I can tell you their iPhone app was super simple and we had no issues at all taking credit cards. And I was worried that this is going to work. It worked great. I'm not super techy and everything worked wonderfully. So Square helps you run your business with confidence, clarity and less chaos. And now it's easier than ever to get started. And why wait? Right now you can get up to $200 off square hardw@square.com Go David. That's square sq u a r e.com Go David. Run your business smarter with Square. Get started today now in this mastermind. They called it risk parity. But it wasn't really a risk parity approach. It was more what I call a role based approach. Sometimes it's called a permanent portfolio. And this was developed about the same time by Harry Brown that Ray Dalio was coming up with risk parity. While risk parity tries to create balance in terms of risk, what Harry Brown wanted to do was to have different assets in the portfolio do well during different economic regimes, be an economic expansion during periods of recession, during inflation and deflation. And so it has, it's a role based approach. So you have stocks during times of expansion. You have cash that protects you during a recession. Gold protects you from inflation, although we've seen it not every year. And U.S. government bonds protect you in case of deflation. Now, there are many different ways to go about constructing a role based portfolio. Many different flavors. There's not a perfect one. We've run a role based model portfolio on money for the rest of us. Plus since the end of 2018, it's returned just about 10% annualized and our version uses global stocks, but it also has a small cap allocation and then it has long term treasuries. It has some floating rate treasuries and then it has gold. In our mastermind discussion, they were looking at different versions. The presenter of these, they had different flavors in terms of they had some with longer term bonds, some with shorter term bonds. But the troll based some of the criticisms of this approach and Colin Roche mentions some of them depending on how it's done. The simplest permanent portfolio only has 25% in stocks. Our version we have 40% stocks. But most of the time you're in an economic expansion about 82% of the time. And yet depending on the particular flavor of a role based approach, that's not how it's allocated. Recessions are not the norm. Same goes for deflation. You have these longer term bonds to protect against deflation, but you don't have that many deflationary periods. So potentially you've made this allocation, particularly in. One of the things I pointed out on the call was if one had allocated to long term bonds back in 2021 or so, five year return has been negative because we've had a period of rising interest rates. One of my concerns with sort of a strict role based approach like the permanent portfolio is that what happens if we get a period where the US especially if it's US centric one, given its fiscal situation, the national debt keeps growing and we get term premiums blow out and so now we're at 6%, 7% interest rate and longer term bonds fall 40, 50% at the same time the stock market is selling off. You just don't know. And that's part of the point when it comes to a perfect portfolio. Investment markets are unpredictable, complex adaptive systems. So this is sort of allocating it and assuming it's going to work out even though most of the portfolio isn't allocated to the economic regime that occurs most of the time. Another criticism that Roche points out is on the gold. The gold is something that people have confidence in to protect against inflation. I pointed out on a podcast recently, as well as a newsletter, that gold doesn't have intrinsic value. And I got an email from a listener that disagreed with that. He said gold is used in aerospace, electronics, dentistry, jewelry. It has many uses, thanks to its inherent properties. It's malleable, conducts electricity, doesn't rust or corrode, so he believes it's intrinsically valuable. Now, my use of intrinsic was a financial use and I should have clarified that. I think gold has a lot of uses, but its primary use is as an inflation hedge, a monetary debasement hedge. And as a result, because of its rarity and how desirable it is, it's not used for all those things because it's too expensive. There are other metals that are cheaper. So it's primarily used as an inflation hedge, a monetary debasement hedge. It's held by central banks because it has been used as a type of money for millennia. But Roche points out, well, maybe that won't continue. And yet 20% of the portfolio, 25% is potentially invested in that. Now some of those that use this role based approach, they'll put maybe a small allocation to Bitcoin within kind of that inflation sentiment. But make the same case with Bitcoin. When I say there's no intrinsic value, I'm saying that there's no cash flow, that you can do a discounted cash flow and see what the value of that discounted cash flow, that cash flow in today's dollar is relative to the price. Because the price of bitcoin, the price of gold, it's just dependent on sort of the consensus of buyers and sellers. And that's fine, but there's no guarantee going forward. And that's why around 10% of my net worth in gold, I would be uncomfortable with 20 or 25%. Now back on the awesome Portfolio. If you read the press release or the description of the awesome Portfolio book, really enticing. Here's how it reads. Have you ever wanted to protect your money against market volatility but still benefit from outsized returns? If volatility is the enemy, then the goal should be to construct a portfolio that gives you something close to the returns of the stock market but with a lot less instability. That is the awesome Portfolio and I wanted to know what it was. Now the book hasn't come out yet, but I checked and with this, a lot of these books, there's been podcasts, et cetera. And so I found Dillian's definition of what he has an awesome portfolio. And it's a role based portfolio approach. 20% stocks, 20% bonds, 20% cash, 20% gold, and 20% real estate can include your primary home or equity REITs. So it's a role based approach. Fundamentally, how I invest is role based. I've called it an asset garden. The idea is to have differing return drivers. They have different roles. It's a little more forward looking. I'm aware of conditions generating cash flow and but many would look at my portfolio and say that's just, that's too complicated, which is fine and there is some complications to it and I should probably simplify it because one of the things when we think about a good enough Portfolio is it can change over time. And that occurred in this mastermind discussion that was one of the topics. As you get older you might not want as much complexity or if you pass you want a simpler portfolio for your partner or spouse to take over. Much then of portfolio construction, it's behavioral and it's messy. There isn't a right answer because there's so many other factors. You can read a book and it can describe. Here's kind of a recipe but certainly your risk capacity, your risk tolerance, your time horizon, your tax situation, your family obligations, even your view of the world can impact your portfolio decision. This is something that I've come to realize. I spent 15 years as an institutional investment advisor. I've spent the last 12 years focusing on individual investors. Not as an advisor but as an educator. I've answered hundreds of portfolio related questions. We've built an entire software suite to help investors, individuals and advisors to answer analyzed underlying drivers of portfolios to terms of expect return. With AssetCamp we built other retirement calculators, asset categorization, spreadsheets, all of these tools and we give them to people and we let them use them and they'll come back with questions and we realize just how challenging this is. And because of the behavioral aspect sometimes it's just super easy to ignore. And that's why we decided or one reason we decided to launch these money for the rest of us. Live portfolio cohorts that we're going to have have over three weeks in May. And this isn't a course. We've I've done courses, I've done courses on closed end fund. I've done, I've lessons on asset allocation and this isn't personalized investment advice. I'm not going to sit and tell cohort members this is the recipe, this is what you should do in terms of own this. No, we're talking about process here. Collectively a group of 25 individuals coming together as we work through this decision making process and work through the complexity which holdings should go on which account, how can we simplify and it's going to be messy but if we can do it together and I'll answer any question I can and we can help each other but that willing to address the messiness to come up with not a perfect portfolio but a good enough portfolio and it will help individuals understand whether they're on track to have enough money for retirement and is it the right asset mix or a good enough asset mix for that stage of their life and are their return expectations reasonable and in line with their goal will we have tools to help identify personal risk capacity and tolerance. Figure out what the expected return in your portfolio is. And we'll do some simulation analysis using AI and working with it together. And that's the key, doing it together. Because people in agent AI, they don't need a library, they don't need a recipe. They need accountability to gather in a group. And that's not for everyone. But for those that are interested that this type of environment could be helpful. Community accountability tools, someone to answer your questions, help you make the decisions. That's why we're launching this. And you can join the waitlist@moneyfortherestofus.com cohort. If you're on that wait list, you get $200 off early. Registration begins April 20th. So that's our live portfolio cohort tonight. I think it's going to be helpful. I'm going to make it helpful. I'm going to do everything we can to make it helpful. But it's it. Portfolio construction is messy, but at the end of the day we want it to be perfect in terms of complete. So you feel confident with your decision. Recently I read an essay by Stephen Cain in the Financial Times. He's the director of the Institute of Technology and Humanity at the University of Cambridge. He went through three fallacies as it relates to AI or worries about AI. And I've been very frank, like we are all facing both the risk and the opportunity by AI Leperel and I were driving yesterday through the countryside of Ohio and I, I saw my first data center and they're, they're, they're humongous and Ohio is, has a lot of data centers and it's impacting the grid and so there's worries out there. But he points out three fallacies that made me really think and the first is the presentist fallacy. The presumption of what we call work today is the best benchmark for meaningful activity. And much of what we've done we call work. Working on spreadsheets, working on a computer. I took a walk this morning, seven o' clock, and people were already at their desk at this office. I was curious what they were doing, but they're looking at their screens. But work changes over time. My work as a podcaster didn't exist 20 years ago. Now it's threatened by AI and short form video. But we shouldn't be so honed in on this is work. And now it's going to be completely disrupted because his other work will evolve and come about and then a Corollary to this is what he describes as the winner takes all fallacy. The idea that humans need to be the best at an activity in order for it to be meaningful. And he gives the example of go, ancient Chinese game. Computers are better at it, yet people keep playing go. People still play chess. Humans don't have to be the best at something in order to get satisfaction from doing it. Cain gave the example. He runs marathons. He's not the best in the world, but he still does it and a lot of activities. It's not about being the best. And if AI, as we pointed out a couple weeks ago, AI is better at playing the piano than humans. But we go and we hear humans perform, not player pianos. And then the final fallacy is what he calls the survivalist fallacy, the idea that meaning requires a struggle to survive. And I've often pondered that as we've worked with or have acquaintances, friends that just. Just struggle and the struggles are real. But sometimes it seems that there are some individuals that thrive on struggling, that are waiting for the next challenge to show up, the next thing to go wrong, and they need that chaos to thrive. And that's just not necessarily the case. And case talks about this. And so the idea is that maybe AI will free more leisure time, more opportunity, different work environments, and that we don't have to be trying to survive. It'll actually give us opportunity. We don't know. AI is both a threat. It's an opportunity. There's a war in the Middle east right now. Oil prices have soared. We don't know how that's going to turn out. And so back on this idea of the perfect portfolio. There isn't one. It's good enough. We do our best as it relates to uncertainty. We're going to make mistakes. The idea is to keep them small. Perfect portfolio is the good enough one. The strategy that you can stick to and you can evolve over time as your needs and your desires change. That's episode 554. Thanks for listening. Everything I've shared with you in this episode has been for general education. I'm not considered your specific risk situation. I've not provided investment advice. This is simply general education on money investing in the economy. Have a great week. Sa.