Retirement Mistakes

SPEAKER_04 0:08

Tom and Don are talking real money.

SPEAKER_01 0:12

It's all about money and leaf blowers. Hi, welcome to the Money, Leaf Blower, and Retirement Show, the Talking Real Money Ba-Ba Bum podcast. We're going to talk a little bit about retirement today, not really leaf blowers. It just happens that my yard crew is here at the very moment that we are recording this, and uh they were supposed to be here yesterday. Mm-hmm.

Retirement Tax Traps

SPEAKER_01 0:32

And before you, Tom, say something about why don't you mow your own yard? It's hot and humid here. So just be quiet. We're glad you're there. Welcome to the show. I'm Don. That's Tom who was going to give me a hard time, but it's now not, I think. Uh we are going to talk a little bit about retirement today. It's one of our favorite topics because we believe it's probably the thing you spend the most time working toward financially. It is the big thing in our lives. It's that goal we have. We want to enjoy the final period of our life without worrying about money. And yet a lot of us do worry about money, and a lot of us make big mistakes when it comes to planning for retirement. So today, on this episode, we want to talk about those retirement errors, uh, unforced and otherwise, that you make when it comes to planning for and living in retirement. Again, I'm Don. Tom's there. This is the Talking Real Money Podcast. And Tom, what are the big mistakes that we see, you see, and Bloomberg sees when it comes to retirement? Trevor Burrus, Jr.

SPEAKER_03 1:43

Yeah, these are around taxes. A lot of people are worried about. I mean, they did a poll and asked people what concerned you in retirement. 70% of them said taxation on retirement income, which is a good thing to pay attention to.

SPEAKER_01 1:58

Yeah, a good thing to pay attention to as one of many things, but it feels like, and it feels like it on our show that people totally obsess on taxes to the exclusion of any kind of sensibility when it comes to the bigger issue, which is how much money you're making and how do you make it last the rest of your life. We get focused, hyper-focused on taxation.

SPEAKER_03 2:20

Yeah, there's some areas though to think about and some things to be concerned with, and good tax planning really done properly, again, uh should provide flexibility, should provide reasonable taxes in retirement. People don't plan on it. I think oftentimes they say, Oh, I have a million dollars in my 401. No, you really have 800,000, right? Because you gotta have to pay if it's traditional, then the government's

Social Security Taxes

SPEAKER_03 2:46

gonna want their piece. So, but there's a few things that they brought up that I think are reasonable to consider and people overlook. Number one, and this is uh an assumption that is incorrect, assuming Social Security benefits aren't taxed, if you're gonna live in a household that makes more than forty-four thousand dollars, up to 85% of your Social Security benefits are taxable.

SPEAKER_01 3:09

I wonder where that belief comes from. What why would I mean it the Social Security has been taxable for a long time, above I think because people paid into it and they think, well, I already paid tax somehow, and why am I gonna pay it again?

SPEAKER_03 3:30

Which is not true, by the way. You didn't pay tax on the Trevor Burrus, you didn't pay tax.

SPEAKER_01 3:35

I'm gonna add a little uh aside to that. And it's the the belief this is another one of those big mistaken beliefs that you paid the money in and you're just getting your money back out. Trevor Burrus, Jr.

SPEAKER_03 3:48

Yeah, not not even close. So nice try.

SPEAKER_01 3:51

Yes.

SPEAKER_03 3:51

Remember, the employer pays the same amount that you paid in.

SPEAKER_01 3:55

And well, and the other thing is that Social Security was originally set up as a means by which the current taxpayers are footing the bill or a large part of the bill for previous retirees. Remember, the whole program started upside down because there were work the workers of that period in the 30s were paying for retirement benefits for people who never paid into the system because it didn't exist. Trevor Burrus, Jr.

SPEAKER_03 4:22

Yeah. It just started cold in the mid-30s. They make a good point here that if people are called here, they give an example, $800,000 in Social Security benefits, which is kind of on the high side, um, and taking another $200,000 from investment, so $280. 85% of their benefits, $68,000 are taxable at the 24% rate. Excuse me, that means you're paying about $16,000 in taxes on that money that's coming from Social Security. It's something to pay attention to in retirement that people do not consider. They they and uh and they should as part of the planning.

SPEAKER_01 4:56

Trevor Burrus, Jr. Before we move on, you you m you alluded to this. $80,000 in annual Social Security benefits. Pretty good benefit. That's got to be a couple. Yeah, that's got to be a really high-earning couple because the max benefit is about $5,000 a month.

SPEAKER_03 5:14

Yeah. So that that that's a pretty good benefit. But that's one thing to

Account Type Diversification

SPEAKER_03 5:19

consider. Here's another one that I think is far bigger, especially if you have young people in your life, kids, grandkids, et cetera. Having only one account type, I do many times see people that come in and only have a traditional 401k. So all the money that they're going to draw from in retirement is taxable, right? Mm-hmm. Completely taxable. Yeah. You have that wonderful partner in Washington that's going to want their part. Instead, it makes a lot more sense in the saving part to save, yes, sure, some pre-tax because or or traditional, where you're going to get a tax deduction right now because you're hopefully your tax rate's higher now than it will be in retirement. Then do something in Roth because that not only gets tax-free treatment, but then when you take it out, you're not going to pay any tax. Then I would still suggest having something in a brokerage type of environment because that gets taxed at long-term capital gains rates when you sell some of those investments.

SPEAKER_01 6:18

Again, that sounds lovely in a perfect world and a perfect situation, but let's look at that a little bit. A lot of people struggle just to max out their 401k at work. They struggle, and many struggle just to make the contribution that gets matched. And they're not going to have a lot of money. So it's not a universal thing. I want to make it clear that these are not universal. These are these actually, this advice is for higher-end savers and investors.

SPEAKER_03 6:48

You very kindly, every once in a while, go read the numbers of how much actually people have saved. The average and the median. It's you all, you our listeners, you're in the you're in the minority. Yes, unquestionably. But that's something, again, that I advise uh children of clients, probably grandchildren of clients here soon, have a little bit in each one. And for young people, really, uh at a lower earning situation, you should really be humping on the Roth thing. Really pounding that away because that's huge.

SPEAKER_01 7:20

401 if you have them, or Roth IRA. Yeah. When you're not in a high bracket, because later in your life you may be in a high bracket and you're not going to want the you're going to want the deduction from any more traditional accounts.

SPEAKER_03 7:32

Yep. And and if you may remember back in um back at Retire Meet, I think I looked at uh my daughter's Roth. I think by if everything goes as planned by age 25, she'll have fifty thousand dollars in that. If she did nothing else and it grew at, I think 7%, she'd have a million bucks at age 65. Not bad.

SPEAKER_01 7:52

Or the equivalent the equivalent of $25,000 as today's

Harvesting Tax Losses

SPEAKER_01 7:56

money.

SPEAKER_03 7:57

Thank you. You're very helpful today. All right. Here's another one that uh that should be considered, probably not very much this year, because we haven't had any real losses, and I'm talking about tax loss harvesting. When it can be done, right? When you have securities that go down in value and you can sell something and harvest that tax loss, that's a good thing to have to hold for gains later, right? That you can so you can take that and write that off against something that you've got to sell for a gain.

SPEAKER_01 8:27

Um it's not it's not as prevalent as it's been. Trevor Burrus, you you can tell this came from a publication like Bloomberg that is aimed strictly at the 5% of the population. It's a small number. Okay. I'll give you that. Again, you know, okay, maybe I can tax loss harvest. Oh, wait, all I have is a 401k at work. Trevor Burrus, Jr. No, not gonna happen. Can't be a qualified account. This has to be a broken. You have to have losses. That's right. Not lately. And um I looked and I could not find a single loss. Trevor Burrus, Jr.

SPEAKER_03 8:59

No. It's it's pretty hard to locate. Um, but that's one to to just be aware of. Again, if if you have uh somebody that's your advisor, they should be doing that for you. You shouldn't have to call them up and say, hey, by the way, we might want a tax loss harvester. But

Roth Conversion Timing

SPEAKER_03 9:13

that's one to consider. Here's another one that this is such an over oh everybody's gotta do a Roth conversion, right? No. Everyone doesn't have to do a Roth conversion. They talk about here delaying Roth conversions, which can be a mistake because then if you do them after you retire and you're taking retirement income and you're gotta consider your Medicare Part B, right? You face Irma, right, when your income is too high and then you pay an additional premium for Medicare.

SPEAKER_01 9:44

It's Irma, when when when you get that old, when she gets that old, she can be really cranky.

SPEAKER_03 9:49

Yeah.

SPEAKER_01 9:50

I don't want to face Irma.

SPEAKER_03 9:51

Exactly. So, but again, this is why Roth conversions, it feels like 10 years ago everybody told you you got to do a Roth conversion. You gotta convert, you gotta convert. Everybody got to convert. Maybe.

SPEAKER_01 10:03

Well, and maybe, but it's part, but here's what all of this really boils down to, and they don't make this point in the article. There reaches a point in life where either independently or with someone who is a real fiduciary advisor planner, you need, you need to start planning. You need because all of this, this sounds great generally, but it doesn't apply specifically. Everybody needs an individualized look. Either you do it yourself or hire somebody to do it, but one way or another, it's like going through life and saying, well, you know, I'm I I'll I'll start going to the doctor maybe when I'm 90. You know, no, you gotta make sure you're in decent shape or you're not gonna make 90. You gotta make sure your portfolio is in the right shape, that taxably it's in the right places, that you're not leaving something on the table, but you also need to stop obsessing over the minutiae and focus on that bigger picture, which is how do I make that money last the rest of my life? How do I get it to generate a livable income stream? And how do I minimize the taxes without becoming

Heirs and Tax Headaches

SPEAKER_01 11:16

obsessed with taxes?

SPEAKER_03 11:17

Yeah, I think that those are good points. And here's uh here's the final one that uh I completely disagree with. I can just put that out there right now. Leaving tax headaches for heirs. And what they're talking about here is if if you die and you leave a lot of money in your individual retirement account or your traditional 401k, that your heirs have to take the money out in ten years and pay tax on it. So what? I know, that's my take.

SPEAKER_01 11:45

Really? Just more money.

SPEAKER_03 11:47

They made it. Yep.

SPEAKER_01 11:48

And so you need to either convert. Okay, wait. Oh, you just got a million dollars and you have to give the government $25,000, $250,000 of it. Oh well. I only have three-quarters of a million left.

SPEAKER_03 12:03

That's a headache. You didn't have the money before. Um they're saying, for example, Roth accounts offer what they call a cleaner alternative. Well, of course they do. You still have to take the money out in ten years, we can pay no tax on it. Right.

SPEAKER_01 12:14

But the downside to Roth's is that you lose that deduction in the high earning years. And you may it may be the benefit may be negated by the fact you're in a lower bracket in retirement. That's why every single thing on this list. Everything? Everything on this list is an it depends.

SPEAKER_03 12:33

I'm gonna throw it up in the air then. You ready?

SPEAKER_01 12:35

It's not universal, it's an it depends.

SPEAKER_03 12:39

It's always it depends. Of course it is. Everything is your plan is about you. But these are some points well taken and worth considering. I'll put it that way.

SPEAKER_01 12:48

Worth considering in your own individual plan. Yes.

unknown 12:53

Okay.

SPEAKER_01 12:54

Individualize it. Nice qualifier there. And speaking of individuals, our individual listeners have an ongoing opportunity to query us. In other words, Tom, for you know, those of you who don't have a big vocabulary that ask us questions.

SPEAKER_03 13:13

Oh, I I can't spell it, but I can say it. So thank you. Appreciate it.

unknown 13:17

Trevor Burrus, Jr.

SPEAKER_01 13:17

You just go to talkingroomoney.com and you click on the uh ask a question button, and then you type the question in or you speak it in. If you speak it in, it goes on the Friday QA that I do. If you type it in, it becomes a question on one of our regular podcasts, or or sometimes you end up actually conversing with Tom or me,

403(b) and 457 Options

SPEAKER_01 13:41

Tom, this time.

SPEAKER_03 13:42

So let's go to the phones. Let's go to Royalton, Vermont. Don't get there often, love to, but uh Ray joins us on Talking Real Money. Hey, Ray. Hey Tom, thanks for calling. My pleasure. What's up? All right.

SPEAKER_02 13:56

So I work for a school system and we have a 403B. And I had gone to my employer to uh see about getting some other uh vendors available. And the way our system is set up is a single vendor. So no real option there. I was looking to add the state 403B, which had uh lower fees in general and lower cost. So instead I started uh putting uh my resources into the 457. And recently, and you mentioned on the show this is a outfit before 403b Wiser. Excuse me, 403B Wise. Yes. And 403B Wise has uh started a new branch program affiliate called 457B Wiser.

SPEAKER_03 14:52

Wow, I didn't know that. I'm gonna have to look into that.

SPEAKER_02 14:54

Yeah, again, uh what I wanted to talk about was you know, I had spent some time frustrated trying to make a change to the 403B when the 457 was available the whole time.

SPEAKER_03 15:08

Yeah, let's but let's just interrupt you there real quick because for people that don't know what we're the heck we're talking about, throwing around four 403Bs and 457s. What we're talking about here with Ray is a real problem, uh, especially it seems in the educational uh arena where the plan options are poor. They're high expense, they're not very diversified, they're just they're not good options for the users. They for whatever reason, the institutions decided to go that direction. So what Ray was talking about was trying to find better ways to save for his retirement, you know, using the 403B or the 457. So sorry for the interruption, but I thought I'd just sort of clear that up.

SPEAKER_02 15:47

Sure, sure. Uh and as an example, uh with the 403B plan we have currently, the uh the the the program fee. I'm not talking about a fund fee, not sure of the right term there. Yeah, but that's probably half a percent. Yeah, the fund fees range from half a percent up to at least one and a quarter, and some of those are A shares.

SPEAKER_03 16:18

Oh gosh sakes, that's right. An A share, of course, is a uh a commission on there. I got it. This sounds like something from the 1970s, you know, not the 2020s, but okay.

SPEAKER_02 16:30

Yeah. And so um I was able to, you know, think about it differently as opposed to changing the 403B just to start utilizing the 457 deferred comp. And you know, they're both different, and I have money in both types, and so I have some different options once I depart service or you know, retire.

SPEAKER_03 16:52

Sure. So you can still do the four the 457, you can do the the isn't it 24,500, right? Plus the 8,000 catch-up if you need it.

SPEAKER_02 17:04

Yeah, if someone can swing it and they could do both. So that allows for a boatload of money to Yeah, you could set aside a lot.

SPEAKER_03 17:13

So so you're but you're you're still contributing to the 403B and the 457? Is that what I'm hearing?

SPEAKER_02 17:20

I'm sending enough money to the 403B to cover the annual fees, basically.

SPEAKER_03 17:25

Okay, okay.

SPEAKER_02 17:26

And then sending the the bulk of my uh contributions to the 457.

SPEAKER_03 17:30

And how does the website 457 be wiser? What do they think of your plan or have they looked at it?

SPEAKER_02 17:36

Yep. Um I I don't know because that organization just announced that change last month. Okay, so I myself haven't even gone to look at it.

SPEAKER_03 17:45

This is a by the way, folks, for those of you not familiar, if you work in the arena where the 403B or 457, or now 457, but 403Bs, they they look at the plan, they rate it, they give it a grade. What what is the grade your their 403B gets, or do you know?

SPEAKER_02 18:01

I think it's a C.

SPEAKER_03 18:02

Okay. All right. So as a passing, but yeah.

SPEAKER_02 18:05

The state plan, which uh would be an A.

SPEAKER_03 18:08

Oh, so I can see why you want to have access to that. Yeah, it makes a sense.

SPEAKER_02 18:12

And in the state 457 is also an A. And ironically, Tom, they're all run by Empower.

SPEAKER_03 18:22

That is so strange that they got one that's so good and one that's so bad. That just uh try and figure all that out, makes no sense. And are you outside of that doing your own Roth IRA? Are you Roth eligible?

SPEAKER_02 18:34

Yeah, yep. Uh try to uh add um contributions to the Roth IRA, but those go in lumpy.

unknown 18:46

Right?

SPEAKER_02 18:46

Yeah, right. But the thing is, my paycheck goes in every week, right?

SPEAKER_03 18:51

But you might be able to access you might be able to access asset classes there that you can't get in the 457, for example. I'm looking at, you know, like small caps in emerging market or you know, places that that that generally, you know, employer plans don't offer anyway. And if they offer them, they're a high expense. So you might be able to go get a you know an Avantis fund or a DFA fund there. And emerging markets, wow, what a year! It's not and that's not the reason to buy them. Reason to buy them is you want to own them all the time. But um, Matt, sounds like you're making a lot of good decisions to me. Yep.

SPEAKER_02 19:24

Well, thanks for uh talking it out with me, Tom.

SPEAKER_03 19:27

No, you're doing you're doing great. You've been a loyal listener, which we really appreciate, and uh love to hear from you anytime. So keep it up. All right. Thanks. Thanks, Ray. You bet. Take care.

Fund Promotions Question

SPEAKER_01 19:38

We answer a lot of questions this way. Tom just reads them like this one.

SPEAKER_03 19:43

Well, and this is lengthy, so we're only going to do one written question for this program.

SPEAKER_01 19:47

Okay.

SPEAKER_03 19:48

It's a little good. It's from Montrose, Colorado. Do you know Montrose? I do, Western Slope. Yeah. Okay. All right. Okay. From Lisa, who says she's written this before. She said, uh hi, Don and Tom. About a month ago I wrote in asking about your recommendations for Avantus and dimensional funds versus traditional cap-weighted index funds. Which, by the way, you said somebody called and said that we must be getting something from them.

SPEAKER_01 20:11

Yeah. As a promotion.

SPEAKER_03 20:15

Nothing from them. Nothing. No. Never have. Never from any fun family for that matter. So we would have to do that.

SPEAKER_01 20:27

Uh back in 1994, 3, 94, the Don McDonald Show was in fact sponsored by Vanguard. They ran commercials and they paid me money to be on the show.

SPEAKER_03 20:42

So I know another promotion you should mention. What? I because I was there with you. I think it was Phoenix. Uh it was some Schwab thing, and they said, You want to go in and pick out some stuff, some schwab Oh yeah, yeah. Yeah, they took us golfing to Awatuke. That was it, yeah.

SPEAKER_01 20:59

The Awatukee Country Club, and they said, Go ahead and pick something out.

SPEAKER_03 21:02

So it was nice.

SPEAKER_01 21:03

Yeah, it was like a golf shirt or some such thing. Anyway.

SPEAKER_03 21:06

All right. So that's the same thing. So yeah, I was bribing.

SPEAKER_01 21:09

I was uh and they gave me a schwab tie. I didn't remember that part. Wow, that's cool. Yeah, it was a schwab tie. Okay. Um but okay, back to the question.

Factor Funds vs Indexes

SPEAKER_01 21:20

Buried somewhere else.

SPEAKER_03 21:22

The question she says centered on whether these newer factor funds are really passive investing or simply active management in disguise, along with concern about their higher fees compared to Vanguard index funds. Thank you for responding to my question on the podcast. I appreciate the discussion. Especially your point that Avantis and Dimensional Funds are essentially titled, tilted.

SPEAKER_01 21:45

Oh, tilt tilted. Tilted. Value, small, profitability, the the factors, the tilts.

SPEAKER_03 21:51

What I keep coming back to though is that my Vanguard portfolio is also tilted. I already own exposures. We'll get to this, such as emerging markets, small cap value. REIT index funds, and I'm getting those tilts through low-cost Vanguard index funds at a fraction of the expense ratio. For example, AVUV, which is a fund that we have recommended, that is U.S. small cap value operated by Avantis, has an expense ratio of about 25 basis points, or should we say it, 0.25?

SPEAKER_01 22:20

Or a quarter of 1%.

SPEAKER_03 22:22

Thank you. While the weighted average of my Roth IRA and traditional IRA combined is closer to seven basis points. That's 0.07. That difference may sound small, but over decades, compounding matters, costs are one of the things investors can actually control. Another issue for me is the outperformance argument for factor investing often relies on relatively limited periods of real-world data. We all know the standard disclaimer, past performance does not predict future results. If that's true, then I struggle with paying materially higher fees based on the expectation that these factor tilts will continue to outperform going forward. I also keep hearing Jack Bogle's voice in the back of my mind saying that cap-weighted total market indexing already gives investors ownership of the entire market at extremely low cost and with maximum simplicity. Once we begin tilting toward factors, sectors, or characteristics where making active decisions, even if they are systematic and academically informed. So I guess my question is if an investor can already use diversified tilt using inexpensive traditional index funds, why should they pay significantly higher fees for Avantus or DFA products? Appreciate the thoughtful conversation.

SPEAKER_01 23:36

So I've got some response, but you go ahead and I just did I I I did this on the QA too recently, because this just comes up. There's nothing wrong, nothing wrong with just being average and owning Vanguard. We're n we're not saying that. We say own Vanguard, it's fine. However, the FAMA French models and the other research done around factor tilts is not limited. It goes back as far as records of market performance go back. To the twenties, if the d uh for for for the the bulk of the U.S. market data. Their studies go back to the twenties, so we're talking a hundred years of data. So it's pretty robust.

SPEAKER_03 24:21

And what about to the point that Vanguard has tilts? I think they have a very few funds.

SPEAKER_01 24:25

No, they don't they're indexing. She's tilting herself. She's doing her own tilting. Which you can do is index tilt. You can do your own tilt. You can get value funds at Vanguard, you can get small cap funds at Vanguard. It's just a little more work. Plus, they don't have all you can't get all of the tilts that dimensional and Avantis use.

SPEAKER_03 24:44

The uh the momentum tilt, the the profitability tilt, uh real value, real small that are that they don't have we've we've talked about this, for example, VBR versus AVUV. AVUV is the same.

SPEAKER_01 24:59

Before you get to your numbers, which I'm so glad you got. I can tell you're expecting it. No, I am. Um before you get to those, though, the point the the other point I want to make, we're not talking about active management. You are not sitting around every day making a decision as to which stocks you should own and which stocks you should not own. That is how we define active money management, investment management. It's saying this area, this sector is going to be better, this stock's gonna be better, and then I'm gonna move out of this one and into that one and back and forth and all over the place. That's active and that's pricey. The the folks at American funds do it for 60, 70, 80, 90 basis points or almost 1% a year. So that that is a drag because there's no evidence of outperformance. That's really where the the the rubber meets the road in this argument. There's no evidence of outperformance. We got a hundred years of evidence of outperformance for small in value. Okay, pretty much. Pretty robust. And hold on to the real numbers. Hold on, I want to get to the real numbers in a minute. Okay. But I want to get these basic tenants out of the way. Before we get to the real numbers, if you ask Avantis or Dimensional, they will not tell you. They will tell you we do not pick stocks. We have rules and we stick by those rules. In the same way an index has rules and generally sticks by those rules. Uh they're they're not making decisions based on how they feel or what they believe. It's very, very different. Now, Tom has looked back not as not a hundred years back. Twenty years. Because we don't have real-world performance like the actual funds. But we have twenty years of real performance comparing dimensional funds, because they've been around for a long time, with the versus comparable vanguard funds.

SPEAKER_03 26:50

No, not comparable vanguard funds. The indexes.

SPEAKER_01 26:52

The indexes. Yeah.

SPEAKER_03 26:53

Which is which I think is a fair comparison. By the way, this is not something. This is not a reason to buy or solo security.

Real Returns Compared

unknown 27:02

Right?

SPEAKER_03 27:02

I mean, we're not this isn't. I'm not telling you go run by all these. I'm just telling you here's what the facts show. This is 20 years ending March 31st of this year. So this is pretty recent data. And Dimensional very kindly puts out their track record, they don't promote this, they don't send this to the public the way a lot of other fun fans. We don't, because I think it's it's misleading. I have no idea what things are going to look like starting tomorrow. But if, for example, you bought the U.S. small cap value portfolio from Dimensional, in those 20 years ending March 31st, you earned 7.9% a year. And the appropriate index, right, index earned 6.9%. Yeah, the index. So you made about 1% more per year, but here's the part that's important. You start with $100,000 20 years ago. Your performance was worth $71,000 more by being in the dimensional fund. Okay.

SPEAKER_01 28:01

Okay. So 7.9. 7.9 versus 6.98. Versus 6.98. So we're talking about nine-tenths of a percent. That's right. All right. So let's subtract the difference in fees, which is about two-tenths of a percent.

SPEAKER_03 28:21

I don't know that there's any fee at all because this is a very important thing.

SPEAKER_01 28:23

Well, no, but I'm saying using a Vanguard uh value index. Let's just use a Vanguard value index. So we're looking at a it's the difference is actually about 0.15 for the value index. So something like that. So let's say we're looking at so we we got nine-tenths of a percent, so we're now talking about three-quarters of one percent. Trevor Burrus, Jr.

SPEAKER_03 28:44

No, you're going the wrong way because this shows the dimensional fee but no fee for the index. It would be so you'd be adding that to the index.

SPEAKER_01 28:51

Well, it shows the dimensional fee but no fee for the index. So we'd add that back in. So it's literally a 1 percent difference. Trevor Burrus, Jr.: It is.

SPEAKER_03 28:57

Yeah. And again, people say that's not a big deal. Here in this case, it would be $71,000 more in your account when you start with $100,000 over those 20 years. That's significant.

SPEAKER_01 29:06

But you could here's another way of looking at it. Oh, and this is actually kind of cool. Let's assume that all of the funds in your advisor-managed account, you got an advisor managing your money who's helping you with all the other stuff an advisor helps with, not just building a portfolio, but the planning process, the income process, all of that. Basically, you could have an advisor managing your fund at 1% per year, and you're at a break-even.

SPEAKER_03 29:34

That's right. Doing all the work somebody else do all the work. And this is another thing that most people don't understand about advisors. They think it's just a portfolio design and rebalance. It's a whole lot more than way, way,

Small Cap Value Edge

SPEAKER_03 29:48

way more. But okay. So let's go, let's look at another one. U.S. targeted value. These are small, again, uh it's an ETF now, DFAT, 7.75% a year for the last 20 years. And the index, 6.98. And the difference, again, $60,000 in money in your pocket. But you get into some other places that that people, again, don't pay close attention to because they think I just own the total U.S. market. No, if you own international small cap value, for example, dimensionals fund there made 7.1% a year. The index 5.9.

SPEAKER_01 30:25

Ooh, now that's a big difference.

SPEAKER_03 30:27

Big difference. So there's a difference there of $57,000.

SPEAKER_01 30:33

Before you go to the next one, I want to add a little something to all this. This is over the last 20 years, correct? That's right. Through the end of March recently. Much of the last 20 years, this was a big deal was made of this over a year ago, two years ago. Much of that period was the worst market in history for U.S. value stocks. That's right. In history. And yet they still outperformed.

SPEAKER_03 30:57

They still did. Um and then another part of the market that again most people do not own. I think she said she does. Emerging markets. Emerging markets. But emerging markets small cap value, 7.2% a year versus the index 5.3. So you made $118,000 more on your hundred in that 20 years. Again, and I'm not sure.

SPEAKER_01 31:20

And this is all hypothetical.

SPEAKER_03 31:25

I'm just saying why I believe the expectation should be in the future it could make more money. Don't know. But uh we use these funds, but there again, we have no there's no interest in promoting their product. We get nothing from them. We've simply looked at everything available. We think this is a better approach than just being a pure indexer. I put it that way.

SPEAKER_01 31:47

And here's the interesting thing, and and I respect the legacy of Jack Bogle because I think he did a lot for investors with the whole no-load indexing concept. He really paved the way for the people at uh at Dimensional and Avantis and the like to do their uh to add something to his work. But you have to remember the people who came up with these small and value and profitability tilts didn't do so just arbitrarily. Many of these people have either won or been nominated for Nobel Prizes in economics. These are well-trained academics who have a pretty decent idea what they're talking about and have done some very robust research that you can go online and read. This stuff is publicly available. It's it's ponderous, but it's available. The math is will make your brain hurt uh if you're a non-math person like me. And let me just add this one last thing. There's a reason why these factors have worked. There's a very logical reason we don't even have to go into the numbers and do the math. Why? Why has a value tilt, why have value-oriented stocks tended to outperform growth-oriented stocks over long periods of time? One-word answer. They're higher risk. Risk. Two words. Small cap stocks. Why have they outperformed large cap stocks? Risk. Why excuse me. These are absolute why have profitable companies outperformed nonprofitable companies? Profits. Yeah. Yeah, I know. It's not this is not just, you know, somebody arbitrarily making this stuff up and saying, ooh, hey, I bet if we just make up some really cool stuff, we can get 20 basis points more. I can tell you, Avantis and and Dimensional, if they truly believed that van that low-cost indexing was better, they'd be doing it. They'd be low-cost indexers. They would be the leaders of the they and they'd be in hot competition with Vanguard to be the leaders of indexing, but they found some data, and they're not the only ones. There are factor tilts now at spiders, with spiders with you know at uh lot of ETFs are are adding factor tilts. A lot of them. It's just that dimensional and Avantis, we believe, have done it a little bit better so far. If somebody else does, we Avantis came up and we we we had to wait a little while to make sure they were doing what we thought they could do.

SPEAKER_03 34:31

You know, and it didn't finish. I mean, the last time I looked at AVUV versus Vanguard small cap value A VBR, I think it is. The difference in performance there, but that's why I didn't do it. It's only been like five or six years, but the difference there was like five percent a year.

SPEAKER_01 34:46

Well, yeah, they haven't been around though. See that's in the ETFs.

SPEAKER_03 34:50

That's why I wanted 20 years, because I think 20 years is a fair number to consider. And you can see there's some sizable differences here in those funds versus an index. Again, it doesn't make the index bad or wrong or anything else. It just makes this approach having has been a bit more. Yeah, well, okay.

SPEAKER_01 35:06

The difference the difference over five years between AVUV and VBR is over four percent. It's almost five.

SPEAKER_03 35:20

Okay. That was close. So there you go.

SPEAKER_01 35:22

Yeah. I mean, that's a huge difference. Now, of course, that's that's that's a short period of time. We're not gonna say you can expect that in the future because we don't believe you can expect that. But we do believe, looking at that 20-year number, that that's a more reasonable expectation. And heck, it may only be your long-term extra return might only be two-tenths of a percent, but it's still extra. We believe that it's worth the slightly higher cost in a portfolio that is designed for your risk profile. That's uh across the board.

SPEAKER_03 35:56

I'll make you a bet, too, by the way, that many people who are listening today don't know how much small they have in their portfolio, don't know how much value they have, don't know if they're really properly balanced between the U.S. and international,

Free Portfolio Review

SPEAKER_03 36:09

et cetera. Um, and that's one of the reasons that we give you the free portfolio review and discussion with an advisor. We've done this for coming up on 20 years. I think we did it at Merriman for a while. But anyway, the point is we do this. Did we? I don't think I don't remember doing it. I can't, but anyway, it's something that's a good idea. No, I don't think we did prior Vestry. So which is coming up on that 17 years or something.

SPEAKER_01 36:32

I think that was one of the things that we we decided was going to be a differentiator for Vestry is that we would truly give free advice and we weren't going to be sales pitchers, people.

SPEAKER_03 36:42

And my suggestion to those of you who may have concerns about your portfolio, get the free review because it costs nothing and there's no pressure to it. It's a pretty good deal. You could simply go do that to uh go to talkingrealmoney.com and click on Meet an advisor. Oh, I can't. You know, it's funny.

SPEAKER_01 36:59

For a one question, one written question show, this one went a while.

SPEAKER_03 37:02

Yeah, it did. So there you go.

SPEAKER_01 37:04

I knew it was gonna be lengthy. We better go. We gotta get out of here. Thanks for listening. Thanks for telling friends. Thanks for going to talkingrealmoney.com and just uh asking questions or you know, reading or whatever you do there. And please keep joining us every single weekday except holidays, as we are Talking Real Money.

SPEAKER_00 37:24

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