How to Beat Wall Street (It's Easier Than You Think)

Summary

Money Guy Show: How to Beat Wall Street (It's Easier Than You Think) – Detailed Summary

Release Date: June 6, 2025
Hosts: Brian Preston and Bo Hanson

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I. Introduction: The Challenge of Beating Wall Street

In this insightful episode, hosts Brian Preston and Bo Hanson delve into the perennial question every investor grapples with: "How can we be successful investors and make our money work harder than we do?" They aim to demystify investment strategies, providing listeners with actionable insights to outperform the market.

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II. The Underperformance of the Average Investor

Guest Expert Brent sets the stage by highlighting a concerning trend:

"The typical investor is horrible at making and sticking to investment strategies." [00:38]

He references the 2023 DALBAR study, revealing that while the S&P 500 yielded an annualized return of 9.65% over 30 years, the average investor only achieved 6.8%.

Brian underscores the gravity of this disparity:

"That's a 30% reduction in your return. Over a 40-year investing trajectory, it could nearly cut the amount in half." [02:09]

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III. Causes of Underperformance: Lack of Education and Emotional Investing

The discussion pinpoints two primary reasons for this underperformance:

1. Lack of Financial Education
   Brent asserts:

   "We'll just say, I don't know any better. Lack of financial education." [02:50]

2. Emotional Decision-Making
   Emotional biases like fear and greed drive investors to make detrimental decisions, such as chasing popular stocks or panic selling during market downturns.

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IV. The Myth of Active Management: Fidelity’s Findings

Brian shares a surprising insight from Fidelity:

"It was not actively managed funds... They were abandoned accounts... doing nothing was better than folks who actively try to do a lot of stuff inside their investment." [04:20]

This revelation challenges the conventional belief that active management leads to superior returns.

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V. Professional Investors Also Struggle

The conversation shifts to professional money managers, revealing that:

• Morningstar reports only 42% of actively managed mutual funds outperform their passive counterparts.
• SPIVA indicates that 90% of actively managed U.S. funds underperformed the S&P 500 over the last 15 years.
• The New York Times cites fewer than 5% of active U.S. stock fund managers outbracket their benchmarks over the past two decades.

Brian summarizes:

"Even people who hold themselves out as being professionals, a very small fraction... are even able to do better than their passive benchmarks." [06:07]

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VI. Popular Investment Strategies Explored

The hosts examine three widely touted investment strategies:

a. VOO for Life

Brent describes this as a straightforward approach:

"If you're new to this whole concept... VOO for Life is just the popular one that you see out there." [07:07]

Brian explains:

"It's literally the 500 largest publicly traded companies in the United States... VOO for Life is all equities." [10:11]

b. The Three-Fund Portfolio

A balanced approach combining:

• 70% in VTI (Total Stock Market Index)
• 15% in VXUS (International Index)
• 15% in BND (Total Bond Market)

Bo emphasizes diversification:

"This could change for you based upon what you sure, but we chose 70, 15, 15." [11:42]

c. Dave Ramsey’s Four-Fund Portfolio

Dave Ramsey's method divides investments equally into:

• Growth and Income
• Aggressive Growth
• International

Bo critiques:

"It seems like it is an exercise in growth... aggressive growth does not necessarily mean more reward." [12:11]

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VII. Assessing Risk: Beyond Volatility

Understanding risk is crucial. The hosts differentiate between:

• Risk Tolerance: How much risk you can emotionally handle.
• Risk Capacity: How much risk your financial situation can sustain.

Bo illustrates with a 72-year-old example, emphasizing that high emotional resilience doesn't equate to actual financial capacity to endure market downturns.

They discuss key risk metrics:

1. Beta: Measures volatility relative to a benchmark (S&P 500).
2. Standard Deviation: Assesses the dispersion of returns around the mean.
3. Sharpe and Sortino Ratios: Evaluate return per unit of risk.

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VIII. Performance Comparison Over Time

Analyzing performance across different time frames, VOO for Life consistently outperforms:

"VOO for Life has dominated... over the last decade has been the top performer." [33:05]

However, Bo cautions against recency bias:

"Just because it was a top performer... does not necessarily mean that it's going to be the top performer moving forward." [35:31]

They reference the "Lost Decade" where the S&P 500 underperformed, questioning the resilience of a one-basket strategy during prolonged downturns.

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IX. The Importance of Personalization in Investing

The episode concludes with a strong emphasis on personalized investment strategies:

"Don't let somebody sell you something on social media. That's going to be the end all that's not an actual personalized decision." [40:34]

Brent advocates for:

• Index Target Retirement Funds: Dynamic portfolios that adjust allocations as you approach retirement.
• Diversification: Balancing various asset classes to mitigate risk.
• Continuous Assessment: Regularly reviewing and adjusting your portfolio based on changing life circumstances.

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X. Conclusion: Embrace Diversification and Long-Term Planning

Brian and Bo encourage listeners to focus on what they can control:

"Focus more on the things that you can control. Have how am I being tax efficient? How am I spreading out my assets to match my risk tolerance and risk capacity?" [40:00]

They advocate for simplicity and disciplined investing over chasing market trends, reinforcing that long-term success lies in strategic planning and emotional resilience.

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Key Takeaways:

• Diversification is essential to mitigate risk and enhance returns.
• Passive Investing (e.g., VOO for Life) often outperforms active strategies.
• Understanding Risk (both tolerance and capacity) is crucial for sustainable investing.
• Personalized Strategies tailored to individual financial situations yield the best outcomes.
• Long-Term Planning and maintaining discipline are vital to outperforming the market.

Listeners are encouraged to visit moneyguy.com for more resources and personalized financial advice.

Transcript

[Bryan Preston]

What is dadication?

[Bo Hanson]

The thing that drives me every day as a dad is Dariona. We call him Dae Date for short. Every day he's hungry for something, whether it's attention, affection, knowledge. And there's this huge responsibility in making sure that when he's no longer under my wing that he's a good person. I want him to be able to sit back one day and go, we worked together. We did a good job.

[Bryan Preston]

That's dadication. Find out [e-mail] brought to you by the U.S. department of Health and Human Services and the Ad Council.

[Guest Expert]

How to beat the Wall street pros. By the way, it's gonna be easier than you think.

[Bryan Preston]

Brent. I am so excited to talk about this because we all want to know, how can we be successful investors? How can we make our money work harder than we do? And in today's show, we're gonna kind of walk you through how you should think about that and how you should analyze that.

[Guest Expert]

But here's, here's, here's a grounding fact. The typical investor is horrible at making and sticking to investment strategies.

[Bryan Preston]

And this isn't based off, you hear us talk all the time about, you know, the average person couldn't come up with a thousand dollars without going into debt. It's not that we're talking about even folks who make the decision to invest make the decision to put their money to work. They just generally tend to be not very good at it. And don't take our word for there's actually a DALBAR study in 2023 that found that if you look at the 30 year annualized return of the S&P 500, it's a little over nine and a half percent, 9.65%. But the average investor over that 30 year time period, a good 30 years to be investing, only made about 6.8%.

[Guest Expert]

And look, we were very generous by using the Dowbar study. We could have done JP Morgan, we could have used Morningstar. There's actually a lot of funds, I mean, a lot of research out there that shows because this spread is only the, the Delta here is 30%, 30% reduction. But I think that's being generous because I've seen all the different ways that the typical investor blows up their investment portfolio. Just be careful and understand you might be your own worst enemy.

[Bryan Preston]

So then the question you ask, okay, well, how significant is this? Okay, 9.65 to 6.8 doesn't sound that significant, but again, that's a 30% reduction in your return. And if that takes place over a 40 year working timeline. Over a 40 year investing trajectory, it could nearly cut the amount in half. The person who just invested in the S and P would have made $3.3 million. But the average fund investor has less than half that amount at 1.4 million. So it can make a substantial and significant difference. So the ultimate question becomes why, Brian? Why is the average investor so bad at investing?

[Guest Expert]

Well, it comes down to there's, there's two big things and I'll be generous with the first one is we'll just say, I don't know any better. Lack of financial education.

[Bryan Preston]

That's what we're here for. That's why we do this show.

[Guest Expert]

And welcome to the Money Guy show. But the, the real, the, the thing that I think is driving a lot of this is all of the emotional decision making. Tell, tell me if this resembles things we've seen in our career is it's the unhealthy relationship investors have with fear and greed, meaning that markets are getting their teeth kicked in, people are looking for the exits. That's typically peak opportunity to get a great deal. Other side of it is when things are overvalued, people get greedy and they typically are trying to load it up. There's also chasing, talking about greed, chasing the hot dot, whatever is the most popular thing at the time Right now that's out there in social media, what's out there in the nightly news. People are going out there and doing frequent trading on it. It's not really driven by good fundamentals.

[Bryan Preston]

Or anything else to drive this point home that the average investor is very bad at it. Fidelity actually did a study trying to determine, okay, what are our top performing accounts and all the trillions of dollars that we house, which accounts are the top performing? And what you may be surprised to find is that it was not actively managed funds. It was not aggressive single stock investors that were picking the number one best high flash stock. Do you know what the number one top performing accounts Fidelity found was?

[Guest Expert]

Were abandoned accounts.

[Bryan Preston]

They were the accounts that people had completely forgotten about, accounts that people didn't even realize that they still had. And they even took it a step further and said that oftentimes some of their best performing accounts are estate settlement accounts where someone passes away and it might take 5, 10 years to find the beneficiaries or to settle the estate or work through the probate process. Those accounts, the accounts where nothing at all was happening, were often the top performing accounts. Doing nothing was better than folks who actively try to do A lot of stuff inside their investment.

[Guest Expert]

This is almost because we, instead of having a good plan that works, you know, before, during, and after, it seems like everybody's out there looking for their reaction. They can do. And they usually are working against themselves. This is to the point that if you think about great investors in American history, the late Charlie Munger, very popular. Him and Warren Buffett built something incredible with Berkshire Hathaway. He has a saying, Bo. He's turned a famous saying upside down. Can you expand on that?

[Bryan Preston]

Yeah. Oftentimes people say, hey, don't just stand there, do something. We've all heard that expression. Well, Charlie said, when it comes to investing, you want to do the exact opposite. He says, don't just do something, stand there. Don't do anything. Don't take action. Because oftentimes no action is better than taking action and making the wrong decision. We see emotional investors fall into that trap all the time.

[Guest Expert]

Okay, so we just detailed in great detail that the average investor is horrible at investing. But the good news is, is you can go hire somebody. I'm sure a professional money manager is going to be even better because they have all this education, so they've overcome that part of it. And they also, they charge you fees, so they must be getting something for this. So how about professional investors? How do they do?

[Bryan Preston]

Yeah, when we think about professional folks who do this for a living, would you believe that according to Morningstar, only 42% of actively managed mutual funds beat their passive counterparts? Just the index itself? Or what about this from Spiva? 90% of actively managed US funds, 9 out of 10, have outperformed compared to the S&P 500 over the last 15 years. I mean, have underperformed compared to the S&P 500 over the last 15 years. And if the New York Times. Fewer than 5% of active U.S. stock fund managers have beat their benchmarks over the last 20 years. So even people who hold themselves out as being professionals, a very small fraction, a small percentage of them are, are even able to do better than their passive benchmarks. So not even the professionals have figured this out. So what are we as investors supposed to do? How are we supposed to tackle this? How do we figure out how we should be investing our.

[Guest Expert]

Well, I think it's interesting because you can imagine if we just showed you the average investor is horrible at this. The average professional investor is horrible at this. You can see how quickly there's some strategies that have shown up on social media, and that's what we want to cover today. Three Popular investment strategies that people get into. And one of them, the probably the most popular that I've seen on my feeds is VU for Life.

[Bryan Preston]

That's it. Just buy it and hold it forever.

[Guest Expert]

If you just. If you're new to this whole concept and you're like, what is VU is the S&P 500. That's Vanguard's ETF. You could have said Fidelity's S&P 500 index fund. You could have said Charles schwab's S&P 500. But Vu for Life is just the popular one that you see out there, probably because it rhymes with foo. That's got to be. That's where all the assets come to foo. But, but, you know, so you see that this is basically just people saying, we'll buy this one holding, ride it all the way until we get to retirement. The other one is the three fund portfolio. Bo. This is, this is interesting because it's typically gonna have a lot of probably the S&P 500.

[Bryan Preston]

Sure.

[Guest Expert]

A large cap, a lot of large cap. It's gonna have some international, it might even have some bonds. We'll get into some of that. And then there's even Dave Ramsey. A lot of you guys have found us and we appreciate you because you consider us kind of graduate level once you've kind of gotten out of debt. So Dave Ramsey has done a lot of good in the world of getting people out of debt. That then it translates into a lot of people also following, what does he do on investments? We want to go a little deeper and see what does that look like so you can figure out, what do I need to be doing with my investment life.

[Bryan Preston]

So when we think about these three strategies, VOO for life, some sort of three fund portfolio, or maybe following Dave Ramsey suggested portfolio, the question becomes, well, how do we decide which ones are good? Or how do we decide which which ones we should use? Or what are the things we ought to know about each of these different investing strategies or investing portfolios? So we want to evaluate them. We're going to walk you through the metrics that we would use as we're thinking about how to think about portfolios and how to think about putting our dollars to work. And so the evaluation metrics we're going to use is we're going to look at, okay, how are these allocated? How do each of them spread the assets out across different asset class of different investments? How do each one of these portfolios attack risk? What would be the risk profile of these portfolios? And then also we're going to close out with performance. Okay, well, if we just take away everything, which one of these portfolios has performed best, which one has performed worst, and then how can I use that? What should I take away? What should I know about that? So we're just going to kind of walk you through how we would think about these. So before you buy into any one of these strategies, it makes sense to understand, okay, what am I actually buying? What's the allocation? How are these assets inside of these funds, inside these portfolios actually being invested well?

[Guest Expert]

Boo. Boo. Boo.

[Bryan Preston]

He's just coming.

[Guest Expert]

Boo with the boo. No, Bo, I just gave the insight that Vu for Life is basically just buying the S&P 500. But we have, our audience is 40% of you are coming to us brand new all the time. We're using a lot of terms here. Whether it's, it's the Voo for life, whether it's the S&P5, what is, when we say the S&P500, what even is that?

[Bryan Preston]

It's just, it's literally the 500 largest publicly traded companies in the United States. So we're, when you think about it's names you've heard of, it's the Home Depot, the Apples, the Alphabets, the Facebooks, it's those kinds of companies that comprise the S&P 500. And so what these ETFs like Voo do is they just try to mirror, they try to mimic it. It's a market capitalized weighted index. So the biggest companies have the highest percentage and then the next biggest, the next biggest all the way down to company number 500. That is what Voorhees Voo invests in.

[Guest Expert]

So primarily large US companies.

[Bryan Preston]

That's right.

[Guest Expert]

Maybe a little sliver of mid caps as they're transitioning in their journey of growth from mid. But primarily this is a large cap holding index.

[Bryan Preston]

All right. Now when we think about the three fund portfolio, it's a little bit different. Oftentimes this is a mix of US equities, international equities and then some sort of bond funds or some sort of fixed income. And people will allocate according to their unique circumstances. So some people might go with like a 70, 15, 15 or some people might go with a 95, 5. For our illustrative purposes, for like a balanced, well rounded portfolio, we're just going to assume for the three fund portfolio we're going to use three Vanguard ETFs, 70% in VTI, just the total stock market index, 15% in the international VX US and then 15% Vanguard's total bond BND. So again, three ETFs across three different broad asset classes.

[Guest Expert]

And by the way, this could change for you based upon what you sure, but we chose 70, 50, 15. The disclaimer I'll say on this is your choice might be a little bit different on how much is risk on versus risk off.

[Bryan Preston]

If you listen to Dave Rames, if you've listened to any of his investing advice, he comes up with this idea. He says your portfolio just should be split equally between four different categories. Growth and income growth, aggressive growth and international.

[Guest Expert]

I'm surprised on international they didn't put growth on it because it does feel like, and look, we all, everybody knows who's followed our channel. We're not Ramsey haters. We love Dave because like I said, he is the price step number one, if you're trying to get out of debt, if you've had ever a discipline issue, you have landed on the Ramsey reservation. I mean there is no doubt about it. But it does concern me. I remember this is, by the way, this isn't like something that came up last week. This has been decades in the making. And it's one of those things when I'm helping people manage money and I look at a portfolio, I pick on sometimes when I see a portfolio and I'm like, did you just choose anything and everything that had the word growth.

[Bryan Preston]

Grow, that's all you want to see.

[Guest Expert]

And I do feel like sometimes when I look at Dave's portfolio because and I don't know if they've considered updating it, but it does look like it is an exercise in growth. Growth in income. Well, growth and income is probably going to be a balance of large cap, both value and gross holdings. Growth just means it's probably going to be on the aggressive side of the large cap holdings. Aggressive growth is probably going to be small cap or something like that. Get you a little bit more growth by juicing the risk. And then international, just by its nature, international has a lot of growth components to it. So this thing seems like it is wild.

[Bryan Preston]

It's wild. And so what we said is, okay, he just, Dave does not necessarily give specific fund recommendations, but we happen to know of some funds that would fall into these categories as Dave would qualify them.

[Guest Expert]

Well, think about it. He has endorsed local providers. We've seen enough of those portfolios come across that we know kind of the fund companies that a lot of those elps are using. And then it's crazy if we don't mention we live in the backyard. So we know people who have actually Ramsey 401ks. So this, these choices of funds probably aren't too far from what you've seen. If you are in part of the Ramsey, you know, network or if you work with an endorsed local provider, you're probably seeing some of these funds.

[Bryan Preston]

So if you want to know what we're using for 25% growth in income, we're using the Columbia Large Cap Index neiax. For the growth portion, we're going to use the JP Morgan Mid Cap Growth Fund. For the aggressive growth, we're going to use the Franklin Small Cap Growth Fund fsgrx And for international, we're going to use the American funds, Euro Pacific Growth Fund. That's R e r e x 25% in each of these. So we think about Voo for Life and we think about the three fund portfolio, we think about Ramsey's four fund portfolio. How do they compare from an allocation standpoint? Well, you can see we kind of have these pie charts or if you're out there listening in podcast land, we're kind of showing how are these assets, how are these portfolios spread across risk on assets? Those are all the shades of blue and gold and then risk off or risk reduced, which would be fixed income. And what you can see is VOO for life is pretty much all equities. It's all S&P 500, as you'd expect. Dave Ramsey's portfolio also all equities. A very small sliver of fixed income in there with a three fund portfolio being the only one that really is allocated between risk off or risk reduced assets and risk on aggressive equity type assets.

[Guest Expert]

Yeah, I mean, this is one of those things where I think, I mean, a lot of these funds are doing a lot of the same work. I mean, the big spread I see, Voo as we've talked about, is just the largest US companies. I think that 3 fund is kind of that same thing, but just with some diversifiers in there. You think about you adding some bonds, adding a little bit international, and then Dave's is probably, I mean, I'll be curious to see how this plays out from a performance standpoint. But it's got a little bit of everything on the risk side of things, meaning risk on assets. Because the only sliver of potential fixed income is in that growth and income holding. And look, you could play around. I know we've done this analysis before. It probably is worth saying the disclaimer is that you could change some of this around. But I still think that if you're looking at aggressive growth, growth in income international and then which, oh, he just got growth. You know, these are probably pretty similar. But I will put the disclaimers that you could change funds around and maybe get a little bit different result. But I don't think it changes the.

[Bryan Preston]

Discussion at about allocation comparisons between these three. While it may look like Dave's has more colors there, we would argue based on risk off risk on metrics, the three fund portfolio probably gets the gold medal here. It's probably the one from an allocation for diversification standpoint is the most well diversified. Number two would be Dave's portfolio and then number three would be Voo S&P 500 index. So when I'm thinking about our power rankings, I'm going to say that gold medal fund, gold star goes to three fund portfolio when it comes to allocation. All right, so now let's shift. We've talked about how they're invested. Now let's talk about risk a little bit because this is one we have to factor in. We have to think about this because risk is a certainty when it comes to investing.

[Guest Expert]

You need to understand there is risk tolerance which is how you feel emotionally and handle that volatility. But Bo, I think one that really as we deal with more and more people as they approach retirement, the discussion that I get more fruit out of is also explaining this concept of risk capacity. What are we talking about when we mention that risk that's kind of unsung or untalked about with most people?

[Bryan Preston]

Yeah. Risk tolerance is how much risk you can handle. Risk capacity is how much risk you should handle or how much risk your portfolio can handle. Far too often people have a high risk tolerance. Oh, nothing shakes me. I'm not afraid. I'm a cowboy. But they might not have the timeline or they might have the resources that they have the capacity to take on that much risk. So when it comes to analyzing and assessing risk, you really have to measure both sides of that coin. What is my tolerance but also based on my unique circumstances, what's my risk of having.

[Guest Expert]

Let's put some details on this. If you had a 72 year old gentleman who comes into the office and he says I am a cowboy. I literally am wearing chaps and I can do this and I have cowboy boots. I have everything to show you that I just. You're not going to rock me with the market going up or down. But if I showed this individual mathematically that yes, you seem like emotionally you're going to be perfectly fine if your portfolio has variations in volatility of 30, 40%. But could you if it took years to recover, do you have the time, literally the clock, the minutes on the clock to let your money recover? And if you're living off these assets, the answer is likely no. And that's why we say be careful if you're only measuring risk tolerance, because there might be a math calculation going on that just because you can doesn't mean you should.

[Bryan Preston]

But another thing that you need to recognize when it comes to what you ought to know about risk is not just those two metrics. You also need to recognize that risk is a crucial part of any portfolio. If you want your portfolio to grow, if you want the dollars to increase in value, you have to take on some risk. And a common misconception is that maybe I can take on no risk and I won't have any risk at all. But even that's not true. Even if you were to put all of your dollars and all of your assets and very conservative, very safe, maybe even like government backed bonds and Treasuries, there is a risk that exists that you might not keep up with inflation, you might not keep up with the costs of the rising prices of goods. So risk is a crucial part of any portfolio that's going to grow. And if you misassess it or don't assess it, you might have difficulty reaching your long term goals.

[Guest Expert]

Yeah, you've heard me share the tell of two fathers and the fact that my father thought investing was CDs so he never really put his army of dollar bills to work. Meanwhile, my father in law was buying the Fidelity Magellan fund back when that thing was a rocket ship. You quickly get an understanding of that. Yes, taking risk of calculated risk can actually be a very good thing for your portfolio. But Bo, I have to pick on because I'll pick on you a little bit because we see this with your first investment was buying some of these high flyers like satellite radio companies and other things because it just seemed like it was the coolest. Ladies and Grace, if risk is good, more risk has to be better. But what's wrong with that?

[Bryan Preston]

No, that's not the case. Risk is a necessity for meaningful growth. But it's not a one to one relationship. Just because I take on more risk does not necessarily mean that I'm going to get more growth. I mean we see that some penny stocks for example, are more risky than the S&P 500. But just because you go put your money in a Bunch of penny stocks does not mean that you're going to outperform. More risk does not always equal more reward. More risk can equal more reward. So you understand it's not a given, it's not a one for one, and it's not a not a certain thing. That's why it's called risk.

[Guest Expert]

And that's why we like anybody who does a little bit of research on investing. You're looking for an efficient portfolio, meaning one that's that Goldilocks of maximizing the relationship between risk and reward to get you the best return without betting all of the farm that you get yourself in a pickle of a situation.

[Bryan Preston]

So then the question becomes, okay, well, how do we measure this when we think about portfolios? We think about a VOO portfolio versus a three fund portfolio versus Dave Ramsey's portfolio. How can we assess risk? Now, there are a number of different ways you can do this. We're going to share with you some metrics that we look at as an investment committee here at our firm. But you might look at other metrics or you might take other things into consideration. This is by no means an exhaustive list, but here are some things that we like to look at. The first, especially when it comes to a portfolio, is what is the beta of the portfolio? And beta simply measures how much volatility is present in an investment or in a portfolio relative to some stated benchmark, relative to some index. And so generally if beta is greater than one, you would say it is more volatile than that benchmark. If it's less than 1, you would say it's less volatile. And if it was a negative beta, it means it moves opposite in different directions than that benchmark. So how volatile is it relative to a stated benchmark or a stated indice that you're trying to track? That's the first metric.

[Guest Expert]

Okay. And then so that one is going to tell me how much risk, how much riskier an investment is over just its benchmark. I'm expecting if it is riskier, man, oh man, I better get a better rate of return or your hope for at least anyway, otherwise it's underperforming. But then talk to me about, because what I get nervous about with investing is, is that what if you, you mentioned penny stocks, it's funny you mentioned that is because what if you chose a penny stock that one year made 30%, but then next year lost 5%, the next year it maybe made 1%. If you, if you added all that together, you'd be like, oh my gosh this thing, it looks like it annualized like 8%, but in reality there the volatility of, you know, it made all of its money in one year. What type of stat can help us figure out what type of volatility I might be buying into?

[Bryan Preston]

What you're describing is standard deviation. Standard deviation now measures the dispersion of returns around an investment or portfolio's mean return. What it allows us to hone in on is how predictable are these returns. If the standard deviation is very, very wide, then we're going to have very low predictability of returns. If the standard deviation is very, very narrow, we're going to going to have a higher predictability of return. So when it comes to risk, we want to know not only how much volatility is present relative to some given benchmark, how much absolute volatility is present. So those are two volatility metrics that we look at now. The third one is interesting because we don't just want to think about risk. We have to also wrap in sort of this return component, right? We want to make sure that if we are taking more risk, we're getting a better rate of return. And so there are some ratios that we can look at. And in the investing world, there are two that are most often quoted. There's the Sharpe ratio and the Sortino ratio. I'm not gonna exactly, I can. If you really want to explain the formula, I'm not gonna, but I could because, you know, I studied that and I know, but here's what they really say. How much return am I getting per unit of risk I'm taking? So if I'm taking on a lot of risk, I want to get more return. That's what Sharpe ratio measures. The Sortino ratio measures the same thing, but it's how much return am I getting if I only consider the downside? If I only look at the standard deviation of downside returns, how much more return am I getting for that volatility? So this will tell you how efficient investment or portfolio is at returning return for risk that you're taking. I know that's super, super nerdy, but these are things that we look at when it comes to portfolio. So what we said is, okay, if we're going to look at these three different metrics, how would we look at them across the VOO portfolio, across the three fund portfolio, across Ramsey? So let's look at the first one, beta. Remember, this is volatility relative to benchmark. And we just, we picked the S&P 500 because that's what most people often measure. Hey, how much volatile. How volatile is this compared to the S and P?

[Guest Expert]

And you can see VOO for Life is basically one. I mean, it's 0.9986. That's probably just the cash. The difference between what they have to keep in cash to just manage these index funds. It's a rounding error. So VOO for Life is the index itself. So it's, as you can imagine from the definitions, Bosher, that's a one for one on the risk you're taking three fund, because it does have 15% going into bonds in the example we use. Plus it's got 15% going into a completely different asset class. But that's a little more aggressive. You can see that probably that's why it's a little greater than 85% is because if we had 15% going to bonds, you would think, well, this ought to be 85% of the volume. No, it's 86, because we had aggressive international holdings in there. But you can see that diversifier did impact the beta.

[Bryan Preston]

And then when you look at Dave Ramsey's portfolio, it's act as a beta greater that you would say that it experiences 105% of the volatility of the S&P 500, where the three fund portfolio experiences 86% of the volatility. So when we just think about beta and we think about relative volatility, I'm going to argue that the three fund portfolio kind of takes it on this one. But remember, that's only one volatility metric. Let's look at the second metric, standard deviation. Okay. How much dispersion exists around these, around the mean return for these individual investments? Remember, big standard deviation, low predictability, small standard deviation, high predictability. What you can see is, once again, Voo, 15.8% standard deviation around the mean return. So that means you could expect returns if the mean return for VOO over this time period was 15%. Over the given time period, returns range at least the bulk of returns range from 0% to 30%. Makes sense.

[Guest Expert]

Yeah, a lot of volatility. The higher the numbers are. And that's why it's. When you see the 3 fund, you see that diversifier actually helped because it's got a little bit more predictability than VOO or even the Ramsey and Ramsey. I mean, because I pick on the fact that it's just got growth in every one of these funds. You can see swinging for the fences. It's got a very high standard deviation.

[Bryan Preston]

All right, so when I Think about these again. I would say the three fund portfolio has a lower standard deviation, so it's going to have a higher predictability of returns. I'm going to say that three fund portfolio kind of wins out when it comes to standard deviation. But, but remember, that's only one part of the equation. We also want to factor in return. We want to think about that component as well. So when we look at our Sharpe and Sortino ratios, how much return are we getting for the risk that we're taking? And all you really need to know here is the higher the number, the better. The higher the number is, the more return I'm getting per unit of risk. So you can see when it comes to Sharpe ratio, VU has one of about 0.67. The three fund is about 0.54 and the Ramsey portfolio is about 0.36. So VU would obviously win in sharp. And then even when you think about the Sortino ratio, how much additional return do I get when I just consider the downside? Again, Voo is at 0.7, almost 0.763, fund at 0.61, and the Ramsey portfolio 0.44. So just from the ratio standpoint, it looks like VU would be the top performer and that kind of be expected because of what's happened in the S and P over the last.

[Guest Expert]

I would, I would see, I would caution people, remember past performances does not necessarily mean future performances. Then if you looked at, if we chose a different time period, I don't know that VU would have dominated as well as it has for the last 10 years. Specifically, it has been really good. If we'd have brought in, and I'll mention a term that we'll spend a little more time on the lost decade. That would be a completely different kind of analysis here. You have to look at the window of time that you're using. But it is once again, it's powerful to see that three fund portfolio, even though the lion's share of that whole holding is probably more similar to voo. That diversifier definitely kind of kept it where it was respectable. And then Ramsey's kind of surprised me because now this is once again given a little bit of a disclaimer. We chose the funds that we've heard through the grapevine and we've seen and prospects that come through. But it is one of those things where I was real disappointed with how low that number is when you risk adjusted, because it is, you would think, swinging for the fences, you'd be getting more when it actually just means more risk.

[Bryan Preston]

So when we think about these three different risk metrics, beta, standard deviation, the Sharp and Sortino ratios, I'm going to argue that 3Fund was the winner on beta, it was the winner on standard deviation, and then VU was the winner for Sharp and Sortino. I'm going to say that if I had to do power rankings here, I'm still going to give my three Fund the gold medal. But VU was right there. It was close. It's a silver medal. I mean they were kind of neck and neck photo finish and then Dave would be the bronze medal. When we're just thinking about risk metrics, but again, we're only talking about one facet. The other thing we have to think about, and this is what 95% of people actually look about, look at 95% of people actually care about when it comes to investing is performance.

[Guest Expert]

Yeah, this is where it matters.

[Bryan Preston]

How do these portfolios actually compare when we look at them now? You hear us talk about this all the time.

[Guest Expert]

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[Guest Expert]

I mean it is kind of a stomping in the fact that but it's not completely surprising. But you can see that that Voo for Life, which is the S&P 500, has dominated. Really. I mean you look at the one year, the three year, the five year, 10 years, not a period there that the S&P 500 didn't dominate. So that's one of those things that man from historically that if you've been in the S and P, you've been greatly rewarded. That's why also you see it in this three fund portfolio because it's not uncommon that the lion's share holding out of that 3 fund is probably going to be something like a total market index or AN S&P 500 where they're going to have a lot of overlap in those funds. And then you can see, because we've now added in diversifiers like Small Cap International and things that are separated from the S and P. You can see Dave's portfolios probably have the most variation when you look at the annual difference between 1 year, 3 year, 5 year and 10 year performance.

[Bryan Preston]

Now here's the temptation. I think folks are going to look at this, all right, top performer Vu for life. That's what I want that's me. Sign me up for that. But it's interesting because we know just because one asset class, and when we think about VU, we're really talking about US large cap s and P500 holdings. Just because it was a top performer over the last year, over the last five years, even over the last 10 years, does not necessarily mean that it's going to be the top performer moving forward. That's why we have to assess risk in conjunction with performance. Because if we think about the last 20 years, we've shown you guys this illustration before. This is just a calendar periodic table of returns. It shows the return of different asset classes in any given year. And what you can see is that some years the top performing asset class might be the bottom performing in the subsequent year. You can look at pick any color on. You can pick real estate, the red color. You can see that some years it's the best performer and some years it's the worst performer. You could do the same thing with emerging markets. Some year it's the best performer and some years it's the worst performer. So when we think about portfolio allocation, we're not suggesting that you have to pick which color is your color and which color you love. That's why we like diversified portfolios. And we can do probabilistic allocations where we decide where we assign a higher allocation to the holdings that we have a higher confidence level in and a lower allocation to the ones we have a lower confidence in. But again, I think the natural bent, the natural tendency for an investor might be, okay, I'm going to look at the one that's near the top the most. And I'm just going to go all in on that. And over the last decade, that would have been Vu. That would have been the S&P 500.

[Guest Expert]

Well, I think there's also. We have to be careful of the season or the recency bias that we're all living in is that I think about Dave's portfolio. Dave came up with this back in the 90s when his book first came out, mid-90s. And I look at even on this Callum periodic table, if you go look at 2005, 2006, 2007, Dave's portfolio would have crushed it because look at what the top performing asset classes were. It was emerging markets. So a lot of those international. And then it's the third one is developed excluding the US So you can see his portfolio would have absolutely crushed in those years because you don't see the S. I mean, The S&P 500 was much further down. But then you go look at this Callen periodic table and you look at how often the large cap holdings is in the upper third of performance and it's almost every year. I mean there is a, definitely a recent bias towards S&P 500 over performance and that's something we should be very aware of so that everybody who watches this show doesn't just say vu for life. I've always heard it. There's a reason it's on social media is because, Bo, there's a little thing that whispers in my ear because I've been managing money since the 90s and we just chose the S and P. You could have, we could have done the Q's. If you think about the technology sector and I think about all the clients or prospects that I dealt with in the 90s where I had 50 year olds who were choosing those info and tech funds and other things because they were like, man, the high flyers is you buy the technology stocks and you really go into that sector and then the lost period of time after the great.com bubble that kind of popped, you would have sat in the desert for years waiting for the train of opportunity to come back around. We've actually experienced that with the s and P500. You hear about it called the lost decade. Can you describe what we're talking about when we talk about the lost decade?

[Bryan Preston]

Yeah. If you look at the return of the S&P 500 from January of 2000.com bubble all the way to December of 2009, right there towards the end of the Great Recession, total return for the S and P over that time was about negative 9%. It was almost flat over that nine year period, almost 10 year period. And so if you were someone who would have been investing everything and would have had everything in the s and P500, I begin to ask the question, man, what if this lost decade was the decade that I started my retirement? Well, what if in the years that I needed to pull off my portfolio, I had a year like 2008 where intra year it was actually down 50% intra year, could I still stay the course? Could I still have the resolve to stay in that portfolio? If all of my eggs are in that basket, If I'm betting on this one asset class and this is a decade where that asset class is not exactly doing exciting things.

[Guest Expert]

Well, that's why I'm glad you brought up that, you know, a period where because to have a lost decade, you had to have an extended period of underperformance or something so steep that it skewed the data. And here's what I think is interesting. A lot of people, this is why risk capacity is a real thing. As I think about my brand new retiree who is, you know, because especially after you have like a year where the market does really well and makes double digits, everybody's like, I want more of that. Load me up. And I always have to remind them. I was like, let's talk about the math of this because remember risk tolerance, just because you think you can handle it, could you actually survive this when we're living off of these assets? Because there's this weird math dynamic that occurs with returns. If you lose 20% in your portfolio to make back your money, you have to have an offset gain of 25%.

[Bryan Preston]

It's not just 20 for 20.

[Guest Expert]

Yeah, it's not 20 for 20. You have to actually get a little bit more to make it back. That's a weird thing about mathematics. Same thing. Let's just go ahead and amplify this up to 50%. If you lose 50%, you don't make 50% to get back. You have to make 100% to get back. Same thing in this boys thing gets steeper. You lose 60%, you got to make 150%. You can see how vicious this cycle is and you can imagine what this does to you emotionally while you're trying to live off of this money. But then even you think about the time component. If we know that markets you count on a planning and you're hoping you make 8, 9% out of your investments and you know that it's going to you have to make 67 to 100% to make back what you lost. That might be seven to 10 years worth of good growth just to get you back to break even. You might not have the amount of time on the clock to make that work. So make sure you're not sleeping on this concept of risk capacity.

[Bryan Preston]

All right. So when we think about the performance of these three different funds, obviously VU has to take the gold star over the last decade has been the top performer. I would say 3 fund gets the silver medal and then Ramsey obviously the bronze. So when you see this, it's kind of mixed. And when you think about this, it's not like there is a clear winner of which portfolio is absolutely best and what portfolio makes the most sense. So how do you decide when it comes to how you invest your dollars? What do you need to think through?

[Guest Expert]

Well, I think this is comes back to in personal finance, your specific answer is going to be very personal. And that's why when we have prospects come in the door, this is the things we try to do. First of all, we want to have a meeting where we figure out, how do you process money? What's your money psychology. Then we want to do some exercises just like all the other financial institutions, where we actually test and get a kind of a snapshot of what your risk tolerance is. But then we're going to take that extra step, is we're going to say, hey, just because you can doesn't mean you should. We're actually going to start measuring your risk capacity. How does that intersect with your goals, your desires, your assets? It's you have. And then after we've gotten all that data gathering and we've brought in all that information, it's the culmination of then creating a plan that will be good during, you know, after. And it incorporates all your goals, all your. All your desires, and your timelines, your age. All of that is going to be accounted into our plan of how we manage your money. And I would encourage you to do the exact same thing with your finances. Don't let somebody sell you something on social media. That's going to be the end all that's not an actual personalized decision.

[Bryan Preston]

That. Exactly right. You can do this very thing for yourself. So when it comes to designing your portfolio, focus on the things that you control. We often say that your actions are way more important than your allocation. Don't spin all of your wheels trying to figure out, do I put 1% here, 1% there, 1% here. Focus more on the things that you can control. Have how am I being tax efficient? How am I spreading out my assets to match my risk tolerance and risk capacity? Not how am I out there trying to beat the market. When you're doing this, don't overthink it, don't overcomplicate it, don't make it harder than it has to be. And when you do that, it allows you to actually focus on the things that move the needle. Like, what is my savings rate, how am I putting money, my money to work? And the beautiful part is when you do this, when you keep it simple, it doesn't have to get complicated. It doesn't require a finance degree to be able to do this for most investors. Most investors can apply this methodology to their portfolio. What's beautiful, Brian, is the financial world has actually made this even easier than ever.

[Guest Expert]

So you may be asking, what did we choose out of the three of.

[Bryan Preston]

These, which one of the three was the best?

[Guest Expert]

Yeah. And I think a lot of if you saw two of the three things we looked at measuring is the three fund did pretty good. Now even the performance, yes, VOO for life dominated that. But if you think about the way the 3 fund was set up is that it's still getting a lot of that performance. But here's where we're going to flip the script on you guys. We didn't choose any one of these three specific holdings. We think that there's actually something you ought to consider that's more dynamic because you're going to change. Your financial life will change as you get older. Your risk profile changes, your desires, your goals, all these things. You need something that's not just static and sits there like a Voo for Life or like a 3 Fund. You need something that actually changes with you. And that's what we love, is for somebody starting out and you just don't know what to do with your money. What's wrong with considering an index Target retirement fund?

[Bryan Preston]

Yeah, I love index target time because they check all the boxes. It allows you to not worry about all the allocation because it's done for. You can focus on the actions you can take, which are how much can I save and what year do I want to retire. It forces you into the place where you're not overthinking, you overthinking and you get to focus on the things that actually matter, like your savings rate. You're not over complicating it, you are keeping it simple. So it literally goes down the list of all the things that we said that you as an investor can do. So for people that are just starting out in their financial journey, for people that are just beginning to build, for people that have it reached that level where it makes sense to have like a customized, custom curated portfolio. I think target retirement index funds are great because it takes a lot of the great things about the three fund portfolio and about vu and about other options out there and it kind of pushes them all together.

[Guest Expert]

Well, it's more dynamic because I mean it has what's called a glide path is meaning that when you're young and you have 40 years from retirement, this thing's to going to be pretty aggressive too. It's, it's going to load you up. But as you approach retirement or as your life changes over time, this will change and adjust dynamically just like you would probably want a good asset allocation to do. Now look, everything has limitations. What I like about index target retirement funds is that they've tried to take target retirement funds but make them that much better because it's using index funds which are super low cost, giving you all those benefits, tax efficient, so forth. But there is going to come a graduation point like most things where your life gets more complicated and it doesn't matter if we're talking about Voo for Life 3 funds or even index target retirement funds. I think that there will come a time where you'll need to have that sit down like we talked about the questions we ask our clients where we talk about risk profile, intersection, point of goals, risk capacity, not only just risk tolerance. Those things are important. And yes, you will outgrow and we will be there waiting for you. That's why we can load you up and give you all this free advice is because we know just naturally success is going to create the complexity that requires you to take the relationship to the next level. So I would challenge you and encourage you go to moneyguy.com resources take advantage of all of our free stuff. But if you resemble some of the complexity because you're trying to land the airplane, don't be shy. Come and talk to us about taking the relationship to the next level. I'm your host, Brian Preston. Mr. Bo Hanson Moneyguy Team out the.

[Bryan Preston]

Moneyguy show is hosted by Bryan Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment or legal advice. All investments involve a degree of risk, including the risk of loss.