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The Long View
Cullen Roche: What Is Your Perfect Portfolio?
00:59:08
The financial strategist and author discusses key principles for assembling a successful portfolio, concentration risk in the US market today, and why he’s an evangelist for ‘defined-duration’ investing.
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- [00:00]
Pomona Investment Fund Announcer
In private equity secondaries, relationships aren't just an edge, they're everything. Trust and reputation open doors long after deals close. For 10 years, the Pomona Investment Fund has brought institutional private equity exposure to individual investors, delivering opportunities others can't. Think private equity is just for large institutions, think again. All investments carry risk, including possible loss of principal. For details on the Pomona Investment Fund and its risks, Visit Pomona Investment Fund.com investors.
- [00:30]
Podcast Disclosure Announcer
Please stay tuned for important disclosure information at the conclusion of this episode.
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Christine Benz
Hi and welcome to the Lawnview. I'm Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar.
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Ben Johnson
And I'm Ben Johnson, head of Client Solutions for Morningstar.
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Christine Benz
Today on the podcast, we welcome back Cullen Roesch. He has a new book out called you'd Perfect Portfolio the Ultimate Guide to Using the World's Most Powerful Investment Strategies. Cullen is also the founder and Chief Investment officer of the Discipline Funds and he heads up ORCAM Group, a registered investment advisory firm he established in 2012. Cullen started his career as an advisor at Merrill lynch and worked at an event driven hedge fund before starting his RAA firm. He received his bachelor's degree in finance from Georgetown University's McDonough School of Business. Colin, welcome back to the Longview.
- [01:24]
Cullen Roesch
Hey Christine. Hey Ben. It's awesome to be back.
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Christine Benz
Well, it's great to have you here. And you were just here back in the spring when the tariffs were the really big news. But we wanted to revisit that topic before we spend some time talking about your book. So at the time we talked to you, which I think was back in April, you said that these tariff related price increases had the potential to push the US Economy into recession. Can you maybe do a little bit of a temperature check on where we are now in terms of the tariffs and also potential economic effects for the US Economy?
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Cullen Roesch
Yeah, well, I think things have simmered a lot. I mean, I think I mentioned back then that the likelihood that the worst case scenario was going to unfold was very, very low in large part because the whole thing was very untenable. And I mean, in the midst of the worst moments of April, we had essentially an embargo with China and they were talking about upwards of two and a half trillion dollars of tariffs in total because they were talking about ways to replace the income tax and are huge, huge line items. I mean, the personal income tax alone is two and a half trillion dollars. So even replacing a large component of that would have been a just a humongous tax increase on corporate America. So there was A lot of angst and concern about all that just because of the, the big talk. And the reality is that the vast majority of the tariffs were never enacted and despite the persistent narrative and the media attention it gets, they really have not been that big. So I mean I a real time tariff tracker on my website and it's amounted to so far we're what, seven, eight months in since April and we're looking at like 200 billion so far. So that's not nothing, but it's not a gigantic tax increase either. I mean we were already doing $80 billion a year. So you're talking about, you know, at a 12 month run rate, maybe $300 billion. So you know, $220 billion of tax increases inside of an ENT, $5.5 trillion of income a year in total taxes. It's not nothing, but it's not the huge time bomb that we were all worried about back in April.
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Ben Johnson
Colin, I'm curious as we sit here today, it's the middle of November 2025 and many prognosticators are rolling out the Alphabet again when they think about what the future shape of the economy might take. Is it going to be an L of U, a V or one of the more popular letters right now is K? A K shaped economy ultimately where those who are well off continue to do quite well and spend their way through, whereas the other leg of the K, lower income, middle income individuals are going to struggle. I'm wondering are you seeing a K taking shape and if so, what might the implications be for the US economy and by extension financial markets?
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Cullen Roesch
Oh, I don't know. These simplifications with letters are always kind of funny. My daughter's learning the letter S in Spanish class right now, so the economy to me always looks like a sideways S. That's probably a better comparison. But no, I think that there is validity to the idea that there's a K in a sort of secular sense I think is actually the more worrisome thing. I don't worry too much about what the economy does in the short run. I mean in the long run people wake up, they go to work, they're productive. We're all trying to be a little bit better, I think, or at least most of us are in the in the short run which results in long term gains in the long run. And so that's the short story of the economy in the long run is that there are gains because we're all trying to be productive in the long run. And so the short term ends up kind of coming out in the wash and. But I think the thing that's interesting about the K narrative is that there is a K in a sort of secular sense. And I think it's, it's at risk of being exacerbated too with the way that AI is developing in the way that technology just in general. I think that the development of technology has exacerbated inequality in a lot of different ways where the, the wealth in the U. S economy has concentrated to fewer and fewer people because the gains are accruing to fewer and fewer entities and fewer and fewer parts of the economy in general. And so in a sort of secular sense, there is a K. And I think it's, you know, I don't want to be dramatic about the impact of AI but the worrisome thing about AI is that nobody really knows how it's going to play out. And there is this scenari scenario where it has a hugely damaging impact on, you know, very sort of basic jobs across the economy and results in a huge concentration of wealth in what is sort of an exacerbation of what we're seeing in sort of like the Magnificent seven and whatnot, where more and more of this wealth accrues to smaller and smaller parts of the economy and you get sort of a secular K, which is a. It's a more of a social problem than anything else because it's causes. I think a lot of the angst that we've been seeing where people feel, a lot of people feel left behind in this economy and that is a function of this sort of K function that's occurring in more of a secular sort of sense.
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Christine Benz
So sticking with AI, I wanted to discuss the market implications, the implications for investors. A topic we've been chatting about with our guests has been the concentration at the top of the US Market today. How concerned are you about that and how do you think investors, if you are concerned about the potential overvaluation in those types of companies, how should investors approach it? How should that guide what they do with their portfolios?
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Cullen Roesch
Well, it's a weird one because it's not a problem in the sense that, I mean, there's always been some level of concentration, this level of concentration maybe appears a little unusual. You know, in the aggregate, the gains are the gains. And so even though the gains are concentrated, if you own, if you're an indexer, as I'm sure many, maybe the majority of listeners to this podcast are, you know, and I'm a big advocate of indexing as well, that's kind of the point of indexing, in fact, is that you, you don't have to pick the winners and the losers. You don't have to own. You know, there was a famous study that came out a few years ago that said that 4% of all corporations generated the vast majority of all the gains over the last 150 years in the global stock market. And part of the point of inde is that you don't have to know what are the 4% that are going to be the outsized winners. You just have to own, you know, as John Bogle would say, just own the haystack. You don't have to find the needles. And so, you know, that's a good thing in that sense, is that you can kind of own the haystack and not have to worry about these needles. I like to think of this more from a, I mean, at a financial planning perspective. I think that the, the risk of concentration is the potential that there is greater sequence of returns risk that you have this sort of concentration and you have especially this sort of sectoral concentration. You have an environment that this probably isn't like the NASDAQ bubble, but if it's even a fraction of the NASDAQ bubble and you have that sort of sequence of returns risk due to the concentration and the really high expectations that are concentrated in a particular sector, well, you could go through a big, big downturn that creates a lot of angst in the short term. And you know, the interesting thing about the NASDAQ bust is that if you bought the exact top and wrote it all the way to today, you've generated something like 8% per year, which is phenomenal. So in the long run, the NASDAQ bubble wasn't wrong. In the short run, obviously, you had to wait 10 to 15 years to even break even. So you went through this really sort of traumatic sequence of returns that caused a lot of problems, especially for financial planning needs. And so, so from that perspective, I think it's reasonable to look at certainly the US Market relative to foreign markets and even other pockets of the US Market and say, from a planning perspective, I think it is reasonable to look at that and say there is the potential that there is a much higher risk of a negative sequence of returns if you have a lot of concentration. And so for me, I just tell people, if you're concentrated in AI positions or the NASDAQ 100 or something like that, or even the US domestic market, you maybe have to prepare to be a little bit more patient with that position than you otherwise would be.
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Ben Johnson
Colin, I want to pull on that a bit. In light of this concentration in light of current valuations across key sectors of the market, folks are asking do I ignore maybe the late John Vogel's advice, which he often said don't do something, just sit there and if they're tempted to do something, what are the levers that they might pull? You mentioned foreign markets might look from a valuation perspective relatively more appealing. Certainly there's a push into all form of private assets and I think the other key vector you mentioned too is a sort of different form of diversification which is almost temporal, if that makes sense. So the sequencing looks like it might go askance. Is there anything that folks can do to address that potential risk?
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Cullen Roesch
Yeah, I mean I'm sort of on a mission to I guess preach the, the benefits of, of like what Christine would call a bucketing strategy or you know, I call it, my strategy is defined duration investing, whatever it might be. But it's a time aware portfolio allocation where we often talk about the benefits of diversification across assets. But what's lesser talked about is the benefits of diversifying across time horizons. And so I'm, I'm not a huge advocate of trying to div. Diversify your stock market risk away with the stock market itself. So I mean I generally believe that if, for instance in this environment, if you own the, the global stock market and the US market goes down, let's just be dramatic and say it goes down by 50%. Well, I think foreign stocks are going to go down a heck of a lot too. And I think value stocks probably will no matter what it is. I think you're going to be, you're going to experience a relatively traumatic downt if you have an extreme downturn. And so I think that the way to diversify away from that in a really effective way is you do have to own alternative types of assets or something other than the stock market itself. And so you know, you can obviously diversify away single entity risk inside of the stock market itself, but once you're diversified enough across something like an index fund, I don't think that owning, tilting to value or foreign or whatever, it might insulate you from the really extreme volatility utility of the NASDAQ 100 or something. But it's, it's still going to be relatively volatile in a, in a sort of traumatic way I think. And so I think that you have to look into, you know, whether it's bonds or alternatives. I'm not a huge advocate of alternatives I'm certainly not a big advocate of like private equity. I do think there's a, there's a time and a place for a certain client that I think fits. But I think for the majority of people, when you're diversified across especially bonds and bonds in this environment I think are especially attractive and you know, that can range from, you know, even T bills, even T bills are generating a real return. I mean I would argue that in an environment where T bills are generating a one to one and a half percent real return, I'd say that in terms of portfolio insurance, it's really hard to beat that because they give you absolute understanding of what your future income is going to be, your portfolio stability. I mean they're the ultimate sleep well and night sort of instrument. So I would say that the no brainer way to diversify away this sort of a concentration risk is to own something that is going to help you sleep at night. Because that's really what it comes down to is that value stocks are not going to help you sleep at night in a really deep bare market, whereas something like T bills will. And of course they're not going to generate the same returns as value stocks or the NASDAQ 100 in the long run, but they'll keep you insulated from overreacting in the short term. And so, and that's very specifically a, a temporal decision because the, the reason T bills are so stable across their specific time horizons is because they're specifically short term instruments, whereas the stock market, I mean I like to think of the stock market as a, at a minimum of 15 plus year type of instrument that if you hold that thing, yeah, you're going to get 6, 7% real returns maybe in the long run, maybe a little bit lower than that, but you'll do really well in the long run. But you've got to be with the stock market because the stock market is this inherently long term sort of instrument. So it's a, you have a duration mismatch if you think that the stock market is going to insulate you in the short run. And that exacerbates the risk of a behavioral problem when you're in the throes of a really scary bear market.
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Christine Benz
So we want to pick up on several of those threads, the T bill and chill strategy which you discuss in your book, as well as a little more on the defined duration type investing. But we did want to switch over and discuss your. Which is called you'd perfect portfolio. I was telling Ben before we got started I really enjoyed the book. I loved the format. It made it so easy to follow where things were going and just told in a really helpful, useful way. So congratulations on the book. We want to discuss a central thrust of the book, which is the portfolio that works for one person may not work for another. Can you talk about why that's such a key concept and. And also talk about how it relates to behavioral finance?
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Cullen Roesch
Yeah. So I think that one of the interesting things about being a market practitioner is that a lot of us are selling a strategy, and a lot of us are viewed also as sort of like gurus or experts or whatever. And I think that people who do something else for a living oftentimes look at these people and they say, yeah, I'm going to follow this person or I'm going to buy this person's strategy. And I think that it's important to realize that. That every person is unique, and every portfolio needs some unique customization and that buying what somebody else is selling it may fit you. It may be really bad for you, too. And so, you know, the, the analogy I use throughout the book is that finding your perfect portfolio is a lot like finding your spouse and that everyone's unique and you have to find someone that works for you. You're not just gonna. You can't just read a, you know, magazine and say, hey, I'm gonna. I'm gonna chase down Heidi. It comes to, you know, my wishes because it. You don't know. That's the thing. I think you have to. You have to test the waters and find someone that works for you and make sure you're compatible. And portfolio construction is very much the same in the sense that you have to find a portfolio that you're comfortable with that meets your needs because your life is different than everybody else's and your financial plan is going to be different than everyone else's. And so for me, I'm writing this almost from my own experience where I've spent a lot of my life, professional career, flipping from strategy to strategy to strategy, trying to find the one that worked for me the best. And I ultimately arrived at the conclusion that everyone's different. Everybody needs a little bit of a different portfolio. You may find a structure that works generally well, but everybody needs some customization. And so that's kind of the main thrust, is that everyone needs to find their own perfect portfolio and not just buy the portfolio that someone else is selling.
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Ben Johnson
Colin, you mentioned in the book and channel Bill Bernstein specifically on this topic, saying the suboptimal portfolio however you want to define suboptimal. But the suboptimal portfolio that you can actually stick with is going to be better than any theoretically optimal portfolio that you wind up ditching at the worst possible moment. I'm wondering if there's any central characteristics of such portfolios that you find or you've experienced on your own that are characteristics that are evidence of, hey, this is a portfolio I'm going to be able to stick with. Or is it too difficult to make those generalizations because to your point, each portfolio is different in the title of your book is doing a lot of heavy lifting.
- [18:43]
Cullen Roesch
Yeah, I do think that one of the things I really try to emphasize in the book is having a plan and having a process, because I think that a lot of people can get into this process of portfolio construction with just big dreams of making a lot of money. And of course, everybody wants to generate the highest return with the lowest amount of risk in the long run. And that's not necessarily a bad goal. But I think that when you start from a financial plan, you create a very specific structure that helps you then outline what am I doing with my portfolio and how is the assets that I'm actually utilizing inside of that portfolio helping me personally in the long run. And that's a, at its heart, that's a financial planning process. You know, when you start thinking about, well, how am I going to pay for my daughter's tuition next year, how am I going to pay for a bathroom remodel, how am I going to pay for the college tuition in 10 or 15 years, and then how am I going to fund retirement? You can start to create this really structured process where your portfolio is built across a comprehensive nature of how your total financial assets are really helping you meet certain needs across time rather than when you, I think, start from the function of I just want to make as much money as I possibly can. Well, well, that's not, I don't think, terribly difficult actually in terms of portfolio construction. It probably just is generally something like buy stocks, be really aggressive, and you know, step on the gas as hard as you can. And the problem with that is that process does not align necessarily with a financial planning process because it especially it doesn't match or correspond with shorter term financial planning needs because the stock market is, is like I mentioned earlier, it's this instrument that it will do very well in the long run and it can drive you crazy in the short term and cause all sorts of behavioral biases that can be really problematic. And so when you Start from the planning process of all of this. I think that that's, that's the thing. And I think one of the lessons from starting from a planning process is that financial planning as it pertains to portfolio construction is inherently imperfect. From the optimization perspect of portfolio construction, it is never going to generate the optimal return because when you own for instance, two years worth of emergency funds in a money market fund or T bills, well, by definition you're leaving money on the table there. You're not generating the optimal type of return. You're just generating what, you know, what we would call basically the risk free return, basically. And so you're not taking risk. And by not taking risk though, you're aligning an asset with a specific part of your financial plan where you're sort of, you're succumbing to the reality that, hey, I'm not trying to generate the optimal return here, I'm trying to generate the appropriate return here.
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Christine Benz
So the book begins with 10 key principles. And the idea is that you can land on a portfolio that makes sense for you, but these principles should underpin whatever anyone does if they want to have good results. What are a few of the most important of those principles in your mind? Mind?
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Cullen Roesch
Well, I certainly think that the principle of diversification is, I would say the, the most important one in the context of especially my work, because I think of diversification very specifically as not just asset class diversification, but temporal diversification as well. And I think that that's especially useful for people to understand because I, I write one of the essential principles is that asset allocation is a temporal conundrum. That what the stock market does, when the stock market goes down a lot is it exposes your degree of asset liability mismatch. And what I mean by that is that when the stock market goes down, I think a lot of us think of that as just the stock market is scaring us. And I don't necessarily, I think the stock market is scaring us. But I think that the reason it's scaring you is because what it's exposing in your financial life is that you don't have enough security inside of your financial plan and your, your asset allocation. And what people do when they succumb to selling into a bear market is what they're really doing is they're buying cash. And they're buying cash because they know that cash is the thing that gives them short term certainty. And so what they've done basically if, if you do get scared inside of big bear markets, I think what's really happening is that you have actually the same exact problem that like Silicon Valley bank had back when they failed a couple of years ago, that they had this huge asset liability mismatch. They basically owned too many long duration instruments relative to what their funding needs were. And retail investors go through the exact same thing when they're exposed to a big bear market that scares them out of the stock market. What's really happening is they're realizing that hey, I had my risk profile wrong this whole time. And that's a function of basically not owning enough stocks, not owning enough bonds, or not owning enough sort of uncorrelated assets that offset what the stock market is doing. And so to me those are, there were 10 of them, but those are the two big ones that diversification is the only free lunch. And corresponding with that is that asset allocation is a temporal conundrum where you benefit not only from being diversified, but you benefit from being diversified across assets with different time horizons.
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Ben Johnson
One of the other principles you touch on in the book, Colin, is the principle of risk, which I feel like in our industry, just as pushed across to investors is so often pushed across as math. And you actually quoted Ken French saying risk is the uncertainty of lifetime consumption. I think that's a really interesting and useful framing. I would love to hear why you latched onto that and how ultimately that is applied in investors portfolios.
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Cullen Roesch
Yeah, well, it's interesting coming from the. I see myself more as, I guess, portfolio manager than anything else, but I traverse the world of financial advisory also because I have clients who are real people. And it's interesting, I've always almost viewed these two worlds as almost having like a conflict of interest in the sense that the portfolio management side is always trying to optimize everything for the most, most, you know, the, the most amount of return for the least amount of risk and risk. You know, we call it standard deviation or volatility. We can call it lots of different things in mathematical form, I guess, but for your average person the risk is, it's, am I going to have enough money to do the things that I need to do that I want to do across life? It's, you know, when I talk to real people it's can I remodel my bathroom next year? Do I have enough money to retire comfortably and not have to change my living standards if the stock market goes down a lot? And that's how real people think. Real people think in terms of time horizons. They think about the way that their money is going to Help them fund their life across very specific lifetime events. They don't think in terms of style boxes and factors. And that's the language that Wall street speaks. We speak about growth and value and, you know, factors and momentum and alpha and beta. And this is a language that, sure, maybe retail investors understand it to some degree, but they don't really care about that. They want to know, am I going to have enough money at certain times in my life? And so I think that when you work from all of this, from this sort of planning based perspective, risk becomes a very different thing. Because risk is not optimization of the portfolio. Risk is making sure that people are comfortable and have the appropriate portfolio that corresponds with their financial plan. And that's the thrust of what I think Ken French was really getting at, was that risk is something very personal in the sense that it is this thing that creates uncertainty if you don't have the right portfolio to match with your financial needs across time.
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Christine Benz
Yeah, I loved that quote as well. You have a whole discussion with Bill Bernstein in the book. And I think Bill calls risk bad losses and bad times, which is kind of the same idea. Yeah, yeah. So the format of the book is that you take these portfolios one by one and you look at their pros and cons. I think the first one in the book is a Warren Buffett type portfolio. And my first question is it sounds like you tried to elicit some response from Buffett. You were writing him letters when you were a young buffetologist. Did you ever get any, any response to those?
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Cullen Roesch
I did. He would write me. Well, he wouldn't write me, his secretary. His secretary would send me letters on old like six by four sheets from a typewriter. I have them all in a, in a filing cabinet. He invited me to the Berkshire shareholder event one year and I couldn't go because I had a family event or something. It's one of my biggest regrets of my life. But no adorable letters though. Really cool sort of memorabilia for me because I was, I kind of started my career as a really a Buffett disciple. I was, you know, I, I guess I, I cut my teeth in the NASDAQ bust thinking that when I was buying sort of broken, a lot of these broken technology companies, I was thinking that I was, was sort of emulating a Buffett style strategy because I, I think I misunderstood it. But one of the things that I thought was interesting about studying Buffett's structure was that the really, really brilliant thing about Buffett was that he obviously is a great, a great picker. Of stocks and just understands corporations. But he also really was incredibly disciplined about the concept I talked about earlier that he thought of stocks as these very long term instruments. And he, he was incredibly patient. His superpower was that he was, he had the ability to look at these as businesses, not, not ways to get rich quick, but ways to get rich slow, basically. And, but also the other big lesson from studying Buffett I think, was that Buffett had this incredibly innovative structure in the way that he built Berkshire Hathaway. Not only in the way that he really ultimately built it around insurance companies and what you know, we call insurance float, these sort of like interest free loans that he would get from the premiums that insurance payers would, would pay into Berkshire over time that he would then, you know, outlay as investments across time, but also just the general structure. I mean, he was an innovator in the hedge fund industry. The way he did it, I mean, almost before anybody did, the way that he was building these limited partnerships that were, they had an unusual fee structure where he was charging relatively high fees, but they were, were, they were relatively fair fees in the sense that he only made money when, when Berkshire made money. And so the Buffett partnership was really an interesting structure in and of itself. And then you know, when he buys Berkshire Hathaway, which interestingly was almost like a, a gigantic mistake, he called it picking up cigarette butts on the street and he ended up having to smoke the, the cigarette for, you know, the rest of his life basically. But he built this really incredible structure. And I think that a lot of the lesson there is that again it's, it's more so about process and having a vision that is structured across time that really made it all work. And the incredible thing with him is that he stuck with it through 70 years of this process. And that's his superpower, I think, is that patience. So many of us are especially these days, we're impatient about everything. And the stock market is something that especially benefits people who are incredibly patient with it across time.
- [31:05]
Pomona Investment Fund Announcer
In private equity secondaries, relationships aren't just an edge, they're everything. Trust and reputation open doors long after deals close. For 10 years, the Pomona Investment Fund has brought institutional private equity exposure to individual investors, delivering opportunities others can't think. Private equity is just for large institutions, think again. All investments carry risk, including possible loss of principal. For details on the Pomona Investment Fund and its risks, visit pomonainvestmentfund.com investors so.
- [31:36]
Christine Benz
In that discussion of a Warren Buffett style portfolio, you make the point that picking individual stocks, picking individual companies is not going to be a great use of time for most individual investors, maybe you think, for most financial advisors as well. Can you discuss that thesis why you think most investors should not go down that path?
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Cullen Roesch
Path? Well, the, the big one is that the data pretty convincingly shows that even the pros are bad at it in the long run. I mean, something like 95% of all active portfolios were under will underperform an index fund over 20 plus year periods, which is just a, you know, indexes are I guess a little bit unfair to compare everyone to because indexes don't live real life in any meaningful way. But still it's, I think the lesson from this is that picking stocks is just, it's an incredibly difficult endeavor. And, and I actually career picking stocks and running some a strategy that was sort of antithetical to everything I preach now because I was essentially, I mean the first five years of my career I was basically picking stocks overnight and, and kind of naively benefiting from what we now know of as the overnight effect, which I didn't even know was a thing at the time, but I thought I was a genius at the time, but it turns out that I was just benefiting from this weird phenomena. But it's interesting though that you know, even looking back then, I mean, I would just spend an incredible amount of time doing this and, and I realized I, I kind of, you know, the financial crisis kind of lopped me over the head because of the strategy I was using. It. It stopped working basically for 12 months. And, and I realized that a strategy that doesn't work for 12 months is a bad strategy. And, and also this is just a bad way to be a productive member of society was sort of, the, the bigger thing for me was that I'm sort of sitting around. You know, one of the, the things I talk about in the book in the essential principles is that you're a saver, not an investor. And meaning in economics that it means to spend for future production and when we allocate stocks, we're just allocating our savings. And that's, that's very different than someone who goes out and builds companies and creates real value. And so to some degree I think I felt maybe a little bit like a leech in the sense that I kind of knew that I was just riding the coattails of other people's investments, of the investments that these corporations were making. And you know, I also probably to a large degree realized that the success I had Picking stocks during the period where I was successful doing it was probably unsustainable and largely luck. So I very intentionally pivoted into building a business that is much more retail service oriented where I was then really helping people start to build financial plans and start to, I think, give them some of my knowledge and help them sort of understand, you know, hey, this is a smart way for you to navigate the financial world using my expertise and for me personally that just has been a lot more valuable because there's nothing for me professionally, there's nothing better than talking to real people and working with, you know, real households and helping them navigate what is a mess of conflicting narratives and, you know, difficult concepts to understand.
- [34:56]
Ben Johnson
Colin, one extreme portfolio that you look at is a portfolio that I think many have been mulling and maybe it says a lot about just this moment that we're at markets in recent lived history in markets which is the all stock portfolio. And you could argue if you've got sufficient time horizon, sufficient patience, and now that it's easier and less, less costly than ever to own just the entire haystack, that this might make sense. But you argue going all in on equities doesn't. So why don't you think that makes sense? What's your take on the all stock portfolio?
- [35:35]
Cullen Roesch
Well, the biggie is that everyone can't own the all stock portfolio. So from a sort of aggregate perspective, we all can't own nothing but equities. But also, I think it would be inappropriate. I mean, everybody, everybody needs a certain amount of cash just to function on a daily basis, to be able to pay the monthly bills, the mortgages, the rents. But also, you know, like I alluded to earlier, this whole process is very temporal by necessity in the sense that that's just how we live out life is across different time horizons. And so the stock market has this very long term time horizon in my methodology. And, and I think that when you buy nothing but equities, if you're in a 100 stock portfolio, I think you're inevitably going to run into, at some point in your life, you will run into the reality of that asset liability mismatch. And you know, it's different across different time periods obviously where, I mean, when you're very young and you're, you know, you're working, you have an income. I write in the book that I like to think of your income basically as like a fixed income position that, that when you have an income coming in every, every, you know, two weeks or whatever it is, you have an implicit sort of bond allocation in your life where you've got an asset that's generating a fixed income. And you may not think of it this way, but your, your income is essentially generating a bond like allocation in your portfolio. And that gives you a lot of bandwidth to take more risk. And this is especially true when you're young and you've got that long time horizon. You don't have a lot of short term liabilities necessarily, so you can take a lot more risk. But the point where this especially I think lops people over the head is when they get to retirement, when they get to retirement age, that bond allocation disappears. And this is a really difficult transition for a lot of people because of that, because they're, they now are coming to the realization that, okay, I'm going to have to start living off this portfolio and I've got the potential for much greater sequence of returns risk across the next 20, 30 years of my life here. And if that portfolio is 100% equities, well, you're going to run into a behavioral problem at some point because the stock market is going to get volatile at some point. It's very, very likely to go down 20, 30% with regularity, perhaps even 40 or 50%. And when you're in the throes of that, especially if you have an especially unfortunate sequence of returns risk where you're, you know, it occurs right near your retirement age, well, you're going to be forced back into work or you're going to be forced into a position where you're going to feel like you need to own something that is safer. And so I don't necessarily think that 100% stocks is bad for certain people, especially certain times in life and especially even certain components of a portfolio. Like I would argue that your retirement accounts in general, maybe even well into retirement, you know, can afford to be much more aggressive than your taxable accounts, for instance. But I think in general being 100% equities and getting really, really aggressive, especially deep into big bull markets, it is a recipe for behavioral biases that are going to lop you over the head at some point.
- [38:52]
Christine Benz
Wanted to stick with income because it does seem that many older adults especially are very attached to generating especially dividend income from stocks in their portfolio and they will not be convinced that they should take a total return mindset. They really like harves those dividends and maybe seeing the underlying portfolio grow a bit. Do you agree that dividend focused strategies really seem to work behaviorally? And if so, maybe you can talk about why you think that is. It sounds like wanting to replace income from your job is a big motivation, but maybe delve into that.
- [39:29]
Cullen Roesch
Yeah, it's interesting. That's one of the themes that I focus on in the book is that sometimes you just have to do what you're comfortable with and things that you, you like. And you know, that for some people it may mean, you know, having a 95% indexing strategy with 5%, you know, gambling on the side, that for some people it scratches a niche that makes them comfortable. And I'm, you know, I generally would tell people, you know, don't do that. You're just, you know, you're pissing away 5% of your portfolio basically. But dividend investing is kind of the same thing where I think a lot of people, they get an enormous amount of comfort from seeing the income come in. And it's, there's a certain amount of truth to that, I think in the sense that you're generating a component of your return through income that you see it's a more tangible type of return. And you know, the math doesn't necessarily show that it's better. In fact, you know, in a taxable account, it's very likely that a, a dividend paying account is going to end up being worse after taxes because you're, you're incurring these taxable events by, you know, basically forced dividend payments from the corporation. And so it's suboptimal probably from a taxable after tax perspective. I think that from a behavioral perspective there is benefit to it in that sense that you're not relying on principal appreciation as much inside of a dividend paying account. And so, you know, I would, I would say from a strict sort of academic sense, a lot of us would say, you know, kind of more aligning with like what Meb Faber would call the shareholder yield allocation. You're, you're better off generating returns through principal appreciation in the long run because then you can kind of, you can kind of implement what Ken Fisher would call a homegrown dividend type of strategy where you're, you're selling off a piece of the portfolio and you're creating sort of your own homegrown dividends in doing so across time. But in general, I do think there's a lot of benefit to building the portfolio that you're comfortable with. And if you're comfortable with dividends, you like seeing the income and that helps you stay the course. As John Bogle would say, that's really hard to beat.
- [41:40]
Ben Johnson
Colin, one of the areas you touched on tangentially earlier that is very much in vogue right now is everything to do with private markets. I'm wondering what you see there, why you think that their popularity is surging and whether or not they have any place in individual investors portfolios.
- [42:03]
Cullen Roesch
I don't know. I kind of of, I honestly, I struggle to assess the value of this. I think there's a, there's certainly certain types of investors that can benefit from this much more. So I mean I work with some ultra high net worth people that they have so much of their asset allocation inside of the public equity markets that sometimes will look at private placements and whatnot and say, you know what, this is interesting. It's a diversifier that's going to be somewhat non correlated to your, you know, your public equity allocation. I would argue though for the vast majority of people that the public equity market is going to be a totally sufficient form of asset allocation where sure. Could you benefit from owning all these alternatives? Maybe. And in certain environments it's certainly going to look smarter than in other environments. But I think on average, I still think that the, the simple, simple is better than the complex in terms of portfolio construction where it's very hard to beat a diversified stock bond asset allocation. And it's interesting looking at the evolution of these different portfolios across time. I talk about where the 6040 came from, the 6040 came out of the Great Depression in essence, and the fact that nobody was Talking about a 100% equity allocation coming out of the Great Depression because people realized during the Depression that owning such an aggressive portfolio can really cause an enormous amount of harm. And so the 6040 interestingly kind of grew out of that. The first balanced portfolios really grew out of the Great Depression where they performed much better, especially in a relative sense compared to much more aggressive portfolios. And then the next iteration of portfolio development there was sort of the. It actually goes all the way back to John Mater Kane, who, you know, Maynard Keynes was the first one who he actually took the King's College endowment out of mostly bonds and real estate and he was initially pushing for public equities in the UK market. And he was a fantastic portfolio manager. A lot of people don't know he was probably a much better portfolio manager than economist. And then you get the evolution of this into 60:40 across time after the Great Depression where the public equity markets had become very popular and people kind of evolved more into something much more holistic, much more diversified. And then David Swenson comes along with the Yale Endowment Portfolio and he adds a different slice where he was basically a big advocate of this illiquidity premium where kind of like Keynes, he pushes for equities, but he pushes for private equities and especially things like venture capital and owning these things that were essentially even you could think of them in the context of the way I talk about defined duration as even longer duration instruments in the sense that a lot of these things had long lockups, that they require an outlay of capital that takes 5, 10, 15 years for the, the actual production to come to fruition and generate an roi, a return on investment that is sufficient to justify the, the investment in the first place. And so it's interesting to think of the evolution of all of this. And I, I think the one thing that we're not seeing, especially in the public markets yet is, is really a fair democratization of these instruments where the fees in general are still really high. They're not performing that differently than a lot of the publicly similar instruments. And so I don't know. I do think you can get, you can get overly cute with all of this and you can start to build a portfolio where like I mentioned in the the Endowment Portfolio chapter, I explicitly write this portfolio is complex and it's probably way too complex. The pie char on it has like 25 different instruments and it looks very fancy, but in reality, is that thing going to outperform a 6040 in the long run? I bet it doesn't by much. So I think you can get too cute. And I would say that for the vast majority of people owning stocks and bonds and maybe a sliver of other things is probably going to be more than sufficient to meet your financial planning needs.
- [46:17]
Christine Benz
The last portfolio type that I'm hoping you can touch on is a Boglehead style three fund portfolio which is like total US Market, total non US Market, Total Bond Market index. Can you talk about what you see as kind of the key pros and cons of just going for those three funds, allocating them in kind of a reasonable way and calling it a day?
- [46:38]
Cullen Roesch
Yeah. God, it was super fun to talk to Taylor. Yes, Taylor Larimart is the creator. And one of the fun things about that is that Taylor, he, he had, he wasn't a, you know, a financial expert or anything. He just was a guy that, I think he had some bad experiences with financial advisors. He became great friends with John Bogle and he just sort of arrived at the ultimate in simplicity. And you know, I think I know Christine, you've written that it's simplicity and elegance, you know, and it's like maximal just asset allocation. And so it's a portfolio that it looks very simple, but it's actually doing a lot. I mean it's, and this is again, one of the, the main thrusts of indexing is that you, you own a lot of underlying entities even in a three fund portfolio. And I think that the value of that is that you've created something very simple, but you've created something that's also, it owns a lot of the market and it owns, I would say, more than enough of the market to probably meet most of your needs across, across time. I think the one sort of critique you could probably make about something like a three fund portfolio is that it maybe doesn't align perfectly with like a financial plan. It may be, it may be a little bit overly simple for some people. I certainly think it's appropriate for a lot of people. But I think that if you're someone who is, you know, you, Christine, you wrote that great article recently about optimizers versus satisficers. And, and I think that if you are the, you know, someone who's more of a satisficer, the three fund portfolio is fantastic for you. Whereas if you're someone who's more of an optimizer and you like to get very granular, I mean, like, I'm probably a little bit in the middle. I like to think I probably lean a little more towards optimizer. But I mean, I build out like very structured T bill ladders and tips ladders. And so for me personally, that gives me a lot of certainty. It helps me stay the course because I can look at things and I'll get as nerdy as, you know, like we're going to Europe next summer. I'll buy a six month T bill knowing that, hey, that six month T bill, it is there for the vacation. And I know that when I pay my, you know, the vacation bill for that, I'm using that money. And it, it does two things for me. It not only gives me the behavioral, you know, comfort of, of knowing the money is there, but it also, it sets a goal for me in my financial plan where I'm looking at that thing across the time horizon and I'm sorry, saying I'm actually going to go on that vacation because I look at it in my portfolio and I see that T bill and I know that that's the T bill that, that pays for the European vacation next year. And so, you know, that's, that's getting really granular in a way where the three fund portfolio wouldn't necessarily align well with. But yeah, I think as certainly as a core component, a three fund portfolio is something that is useful for probably everybody.
- [49:31]
Ben Johnson
So, Colin, during the course of your experience, during the course of the book, you fall into and out of love with a number of different approaches to portfolio construction before ultimately arriving at a concept that you've defined as effectively defined duration investing, which really anchors on some of the things we've talked about today regarding temporal diversification. Why do you think, think that this concept is so underplayed in investing circles? It just seems, especially when you landed on specific examples like a European vacation that you have to plan for, it just seems so pragmatic, so obvious. Why does it not get as much airtime as it maybe deserves?
- [50:19]
Cullen Roesch
It's a funny question. I don't fully know the answer. If I had to guess, I would say that I think there is that sort of conflict that exists between, I mean, financial planning and portfolio management are two very different worlds. I think if you ever walked into a financial planner's office, you know, you outlined a set of goals, I don't think any good CFP would say beating the market is one of our top goals. And yet that's the goal of most of portfolio management is to optimize the returns relative to the amount of risk we're taking. And, and that's a very different process than a financial planning process. And there's a, there's an overlap in the two, certainly to some degree. But I think that the two worlds, to some degree, they talk different languages. And it's interesting for me because I think that the unifying language is time. It's. Time is the one thing that we all understand. It's the language that, you know, I don't care what your skin color is or your sex or what country you come from, you understand time and you especially understand the way that money interplays with time and, and your financial needs across different time horizons. And so to me, you know, my whole, really since the financial crisis, the financial crisis really woke me up to this realization because I started to work with a lot of banks back then doing consulting work. And I realized, especially working with banks that they have this very specific temporal mismatch in their assets and their liabilities because they borrow short and they lend long and they have to be very careful about how they manage their balance sheets. But then I also realized, realized around the same time, and especially, you know, in later years, especially during COVID when I went through my own sort of wake up call when I had kids, right before COVID that I have this same problem, the same temporal problem where I need to be very mindful of the way my assets are allocated across these very specific time horizons. And the, the thing that makes all of this difficult is it's the stock market, the stock market and, and especially these longer sort of duration instruments. I mean we, we quantify the duration of the BO precisely and it's relatively easy to match assets to liabilities in the bond market. And that's traditionally how liability driven investing has always been done. It's been done almost exclusively in the fixed income markets. And what I've tried to do is sort of take this to the next level where I'm trying to apply time horizons now to the stock market. And there's obviously some guesswork that goes into all of this, but I'm really trying to quantify what is the sequence of returns risk that exists inside of different instruments and essentially especially multi asset instruments and things like that. What is the sequence of return risk right now inside of a 6040 portfolio versus a 100% stock portfolio versus an aggregate bond index versus a T bill portfolio. And you can start to map this stuff out and apply reasonable time horizons to all of this, where you can then start to apply what we call asset liability matching processes to, to anyone's portfolio. And to me, it's interesting that the world of asset liability matching seems to exist almost exclusively inside of institutions. And I would argue that it's much more applicable at a personal level that your average retail investor would benefit far more from understanding the time horizons of different instruments and the way they interplay with their expenses and liabilities across the time in a much more granular way than even the way we apply it at an institutional level. So to some degree, I guess that's what I'm wrangling with is I'm trying to build this methodology that can take sort of a, you know, an ALM approach, an asset liability matching approach and give it to retail investors in a way where you can sit down with somebody and say, okay, we're remodeling a bathroom next year, we're going to do a 3 month T bill for that. We're going on the European vacation in nine months, we're buying a T bill for that. Your kids are going to college in five years, we're buying five year bonds for that. And you can start to structure all this stuff and even including the stock Market inside of all of this, in a sense where, you know, applying the math I said earlier, where the stock market is sort of a 15 plus year instrument, I try to quantify it much more rigorously. But even applying that, you can start to map out, okay, we're, we're now alighting your stock allocation to 15 plus year sorts of expenditures and needs in a way where, where hopefully when you construct the portfolio correctly using this sort of a methodology, you give people a lot of certainty, especially about their short term needs. And when you do that, you alleviate a lot of the concerns about the long term stuff where. The vast majority of my clients at this point, they have such a good understanding of the, the time horizons of the way their assets align with liabilities and expenses in their portfolio that they largely don't care what the stock market does. Because the stock market is structured as this very specifically long term instrument inside of their portfolios and that it communicates something to them that is very important because it gives them clarity about the way their assets are actually serving a purpose inside of their portfolio rather than, I mean the way I used to do this was probably something that was roughly, hey, here's a subjective risk profile based on how scarce you get about the stock market when it goes down. And okay, that corresponds roughly to a 6040 portfolio. I ran some retirement simulations on this and the probability of you running out of money in the long run is 10%. And that is a sufficient outcome for us to plan for retirement. Whether or not you're going to be able to go on your European vacation next year or whatnot is totally up in the air. But here's a big blob of assets for you that I think in the long run will service you pretty, pretty well. And that's, that's probably a fine process. I mean I did it for years, but to me it, applying these time horizons is just much more rigorous. And it, it's been fun seeing clients actually, you know, like the other day I had a, a couple on the, the phone doing a video call and all the wife wanted was a bathroom remodel. She just so, and they were wrestling about this because he, he was convinced that, you know, can we afford it? And it's funny because they hilariously could ease very easily afford it. And when I showed them the math and the scratch, especially the temporal asset allocations, I mean, she just lit up when I said, sue, you get your bathroom. And communicating that through time though is very important in terms of helping them understand. Okay, yeah, we can do the bathroom remodel and not have to worry about whether or not this is going to be damaging to our ability to navigate our future living standards.
- [57:06]
Christine Benz
Well, Cullen, this has been such an informative conversation. As always, congratulations on the book and thank you so much for taking time out of your busy schedule to be with us.
- [57:16]
Cullen Roesch
Yeah, thank you both. It was great talking to you.
- [57:18]
Ben Johnson
Thanks Cullen.
- [57:25]
Christine Benz
Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts. You can follow me on social media hristinebenz on X or @christinebenz on LinkedIn.
- [57:43]
Ben Johnson
And @BenJohnson, CFA on LinkedIn or @mstar.
- [57:48]
Christine Benz
BenJohnson on X. George Cassidy is our engineer for the podcast and Carrie Gretschick produces the Show Notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongvieworningstar.com until next time. Thanks for joining us.
- [58:11]
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