Podcast: Financial Advice from Allan Roth – You Get What You DON’T Pay For

Episode 7 of the NewRetirement podcast is an interview with Allan Roth — a highly in demand, by-the-hour financial advisor with over 25 years of experience in the field. He also runs Wealth Logic. Allan and Steve discuss how (and why) most people can do much better financially by keeping investments simple and managing expenses.

Allan Roth & MaxWho is the acclaimed? Max Tailwagger (Allan’s dachshund) or your financial advisor?

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Full Transcript of Steve Chen’s Interview with Allan Roth

Steve: Welcome to the seventh podcast for New Retirement. Today, we’re going to be talking with Allan Roth from Colorado Springs, Colorado about why and how he believes most investors can do much better by keeping it simple and managing expenses, which aligns with the two main themes of our podcast, making the most of your money and time. Our goal is to help people who are planning for retirement or financial independence with financial insights, stories and ideas for making the most of their lives. Allan runs Wealth Logic, which is an hourly only financial planning firm and you can read more about him at daretobedull.com. He’s been working in the investment world where he’s got over 25 years of corporate finance experience and he’s served as the corporate finance officer of two multi-billion dollar companies and consulted with many others while he worked at McKinsey & Co. He’s also been quoted in many publications including the Wall Street Journal, Money Magazine, The New York Times and Dow Jones MarketWatch. He’s also appeared on a number of radio and TV shows. Welcome, Allan. I’m glad you could join us.

Allan: Thank you, Steve. It’s a pleasure to be here.

Steve: I’m just going to jump in with a quick softball question. I was reading about you and I saw that you had your dachshund win a plaque for being one of America’s top financial planners. Can you give us the backstory on that?

Allan: Sure. If you come into my office, you’ll see a nice looking plaque from the Consumers’ Research Council of America as one of America’s top financial planners made out to my dog, Max Tailwagger. It’s kind of funny, but also a bit sad. I wrote about it. Forbes There are so many fake awards out there that all you have to do is write a check or in this case, give a credit card number and it’s to build credibility and such so people think that wow, I’m dealing with one of the top people when you really have to do is write a check out. Now to be fair, Max also got an award from one of America’s top financial advisors from doctors, from Medical Economics Magazine, only my editor didn’t pay the money for him to actually get the listing, which really hurt his self-worth.

Steve: Nice. That’s awesome. I’m glad he’s such an accomplished dachshund. I’d love to hear a little bit more about your trajectory and how you decided to get into financial planning after your long corporate career in corporate finance.

Allan: Sure. I wish I could say there was a master plan, but a lot of it is just luck. I did my undergrad in accounting and did two years of public accounting. It seemed like 20, but it was only two, and I realized I was the worst CPA in America. Then I went to grad school at Kellogg at Northwestern to get my MBA to learn how to be a great investor, and along came Burton Malkiel’s Random Walk Down Wall Street that said you can’t do it. I figured I’d better figure something else out so I did consulting with McKinsey & Company and 20 years of corporate finance. I had good times. I worked for some really good companies and really good people, but it wasn’t my natural habitat. I am not the most politically astute person in the world. After my son was born when I was 40 years old, I hit my mid-life crisis and got off the bandwagon and decided I wanted to do something different and financial planning was it.

Steve: Nice. Yeah, I know you’ve got some pretty strong beliefs about the right way to do planning and I’d love to hear from you what those core beliefs are, about how you approach investing and wealth management.

Allan: First of all, we give up most of our real return in the way of fees and what matters is our real return. If we are in 10% and there’s 12% inflation, we’ve lost spending power. You interviewed one of my favorite people, William Bernstein a bit ago and he mentioned 2% to 3% might be the average real growth of a portfolio. If you’re giving away 1% to 2% in fees, you’re giving away most of your return. You really get what you don’t pay for. In actuality, whenever I do benchmarking, probably 90% of the time I find that a portfolio has underperformed the low-cost index funds by more than cost would have predicted.

We have mental models that we follow without realizing, you get what you pay for, follow your instincts, buy good companies, big, nice, safe blue chips like Eastman Kodak and General Motors or more recently GE. A lot of these mental models that work so well in life fail us miserably when it comes to investing. Keep it simple, stupid, something that cuts beyond investing. Whenever I make things complex, I usually live to regret it. It’s hard to keep things simple. Then finally, there’s some low hanging fruit that people can pick such as leaving hundreds of thousands of dollars in a bank earning 0.01% where your money doubles in 6,400 and some odd years. Those are certain beliefs. Investing itself is simple. Taxes maybe aren’t, but investing is.

Steve: As an advisor, where do you think you add the most value for people?

Allan: Several things. One, I tell them that I don’t know the future. In fact, I charge people $450 an hour to tell them I don’t know the future and it’s not a very good feeling, but it’s incredibly valuable. What I do is I help somebody design a portfolio that meets their willingness and need to take risks. It’s not going to beat the market. It’s going to earn the market return minus some very small amounts of fees, try to set it up in a very tax efficient way. By the way, the new portfolio is the easy part. The complexities of getting out of the old portfolio, what taxes are due, AMT, fees, etc., that’s the hard part. Helping them understand where they are in terms of reaching financial independence, a.k.a. retirement, safe spend rates, looking at do they have the proper amount of insurance and typically when the clients come to me, they have too much insurance. They’re insuring for something that they can afford to lose and they ought to self-insure. Then finally, even though I’m not an attorney, making sure that they have their estate plans in order.

Steve: I know for a lot of our users, tax efficiency, especially around drawing down their assets is really top of mind and I think the math around drawdown, it is so much more complex ’cause you’ve got all these moving parts. You’ve got all these existing assets and you’ve got various sources of income like Social Security and different things you could tap into and you have to be really thoughtful about how do you take these things down and how you position your assets. Could you elaborate a little more? I know you’re very focused on keeping things simple. Could you elaborate a little bit more about how you think about that? I know also in earlier discussion, you mentioned that related to that you have some thoughts about how to smart beta, factor investing hasn’t really worked very well over the last several years.

Allan: Yeah. The latter question, maybe three, four, five years ago, I couldn’t be at a conference and go more than 5 minutes without hearing the term smart beta, smart beta or factor tilted rather than owning the entire market by market cap where Apple, let’s say, would be the largest, Google, Exxon, etc., those would be the largest holdings, factor tilting towards small cap, towards value, towards momentum. I think there are now hundreds of different factors that have been discovered, and lo and behold, whenever money pours into any one part of the market, there is a high probability that underperformance is going to happen because it drives the value up, which makes future returns more difficult.

Steve: Back to your model and your hourly approach to this, I know that you’re obviously an opinionated person and I was reading about some of the stuff that’s been written about you or some of the interviews that you’ve done, and I know that you’re not always the most popular or at least you don’t always have the most popular opinions out there. I know at one point you butted heads with an SEC enforcement director who I think now has gone on to work at a big wealth management company. Can you share a couple stories about what you’ve run into and why you butt heads in some cases with some existing traditional players in the market?

Allan: I’m not a fan of our regulators in general. I’ve written pieces. Is the SEC chair too cozy with Wall Street? I’ve written a piece for The Wall Street Journal when the CFP Board found that a planner with fiduciary duty who double dipped in selling an annuity, 5.29%, the facts were so ugly that both the insurance company and the broker dealer paid the client back plus 6% interest for many years, but yet the CFP found no conflict with the fiduciary standard. I don’t think our regulators are doing right.
An example that you’ve mentioned on the former chief enforcement officer of the SEC who was at the time general counsel for Bank of America, which owned Merrill Lynch, had done some really ugly things to a client of mine. The point is it’s a revolving door. If you want to be a leader at a regulator and then have the future after working for the regulator, you can’t be too mean to Wall Street. You’re going to need a job from them. I wish our regulators would change a bit. I think there’s got to be some sort of reward for causing change rather than how long you’re at the regulator.

Steve: Right. Yeah, unfortunately I think that’s how it works right now across the board with this revolving door between the private sector and the regulators. But yeah, it’s something to definitely try to shine a light on and I think on our side, we definitely are focused on trying to remain independent and be an independent voice out there and I think that’s important for every service provider out there and player in the industry.

Allan: Totally agree. By the way, the best protection is not the regulator. It is making sure that you understand the advice you’re getting and that it’s simple because the more complex the product, the worse it typically is. As I say if you don’t understand your investment strategy or even if you can’t explain your investment strategy to an 8-year-old, you’re probably doing something very wrong.

Steve: Yeah, I think that’s a great point. We definitely believe it starts with education and people have to understand their own finances, be able to make informed choices. Just as a quick aside, you and I met at the Next Generation Personal Finance Conference a couple of weeks ago here in San Francisco, which is about trying to bring personal finance education into middle schools and high schools as a standard approach across the country.

Allan: Yeah, what an incredible organization that is Tim Ranzetta doing good for a lot of people on something that is sorely needed, teaching finance to young people.

Steve: Yeah, it’s amazing that it’s not required education for everyone considering the level of student debt that people are taking on, the credit card balances that people are carrying around. It’s not like a standard thing. It’s not. When I was in high school, I think they taught home economics and did part of that was like showing us how to balance a checkbook, but that was basically it and it doesn’t seem like it’s gotten a whole lot better in the ensuing 20 plus years. Anyway, hopefully it gets better.

Yeah, just real quick, one thing that jumped out at me was there’s roughly $8 trillion in IRAs so that’s $8,000 billion and let’s just say the fees are roughly 100 basic points across advice and fund fees and stuff like that. That’s $80 billion in fees. That’s just a tremendous amount of money. It really is amazing how much money is going into fees every year. I was wondering if you had a take, I’d love to get your perspective on where are those fees going and how you think that might change going forward.

Allan: I think fees have come down and a lot of it was our Supreme Court actually had a unanimous decision that trustees of corporate 401K plans had a fiduciary duty, whatever that term fiduciary means, and lo and behold a lot of companies have been leaving the more expensive insurance providers and going to the Vanguards, Fidelitys, TD Ameritrades. Fees have gone down tremendously, but I would characterize it that fees are now less bad than they used to be. There’s still plenty of room to go.

Steve: Yeah. Back to your practice, I think it’s pretty interesting that you only do it on an hourly basis. Pretty much most advisors historically have been taking a AUM, asset under management percent of assets kind of model. Now you’re seeing different kinds. There’s hourly. Sometimes, there’s flat fee or you’re seeing I think some compression in the percent of assets that people are charging, but I’d just love to hear your take on the hourly only, why you chose that model.

Allan: I look at every profession on earth is fee for service. Even the oldest profession on earth is fee for service. I certainly agree with you that commission-based product sales is bad, but I’m not sure that it’s any worse than capturing assets so that one can continue to charge an ongoing stream on it. I didn’t earn the money that my clients have. I don’t feel I have a right to continue to charge them from their money. If they ask me today what the market is going to do tomorrow or the rest of this year, I’m going to answer, “I don’t know” or give them probabilities. Three years from now, we give them the exact same answer. Again, once a plan is designed, the hard work is getting them out of where they are into the new plan. It’s pretty simple to give rules going forward so they don’t even have to keep paying me on an hourly basis. My goal is to do a one-time plan and get fired or like any doctor, lawyer or accountant, if something changes in the client’s life, they can come back to me.

Steve: Right. You feel like your model’s most closely aligned with what the consumer and their needs and how you create value, which is I agree, there’s a ton of value in planning and historically, that’s been like a loss leader. The advisor does it for nothing essentially and then charges, makes their money back over the life of the relationship, which in many cases is decades long, whether getting a strip of earnings essentially or a strip of the returns that the portfolio produces.

Allan: Yeah. It’s a model and by the way, I will freely admit if paying my son’s college tuition were dependent upon me charging you 1.5% or selling you an annuity, I would probably do it and think I was a force for good. After 20, 25 years of corporate finance and living fairly frugally, I had the freedom to charge any model that I wanted to.

Steve: Right. Yeah, I think that in general, advisors add a lot of value and for many folks, they add a ton of value. I think the world’s going to go to a place where there’s just going to be a lot more transparency and I think informed choice by consumers where they’ll be able to see hourly or if it’s transaction based or if it’s a percent of assets, but you’ll see probably more compression around that idea of percent of assets, but we’ll see how it unfolds.

Allan: Yeah, I hope you’re right. I still think transparency is incredibly lacking in my industry.

Steve: Yeah. We shall see. I think that we definitely see more and more companies out here that are … Silicon Valley in general through fintech is going after financial services and I think that you’ll start to see that pressure come to bear. Just like Amazon is, for better or for worse, trying to deliver a very different experience around retail and in some cases, causing casualties in the traditional retail.

Allan: Yeah. You’re absolutely right. By the way, my biggest surprise in my years of financial planning is a pleasant surprise. I’ve been indexing for a long, long time, 30 plus years, still a lot … I wasn’t one of the first adopters when Jack Bogle came out with the S&P 500 Index Fund, but I never would’ve dreamed indexing would’ve become as popular as it is and I think that’s a wonderful thing.

Steve: Yeah. Yeah, I think the idea of kind of low-cost, passive investing, just trying to capture the return, that idea is spreading like wildfire and what’s happened with Vanguard and their intake of assets, $1 billion a day is reflecting that. All right, we’d love to talk a little bit more about what does a typical client engagement look like for you? Is there a process that they go through and just to hear it from you?

Allan: Yeah. The process is relatively simple. First of all, they have to fill out a profile from the website and send it in because I can’t really tell whether I can help them or not, and my practice isn’t soliciting clients. I’ve been fortunate for a long time to have a wait-list of clients. They submit the profile. There’s no confidential information as far as anything that could be stolen for identity theft. I don’t need account numbers. I don’t need Social Security numbers, but I need to see where they are, what their goals are and then, I have a 20-minute phone conversation with them where I can go through and see whether or not there might be a fit for a client. My hourly fee is fairly high so unfortunately, I can’t help clients with less than a million or two in general.

Then once we go through that and they are a potential fit, then I’ll give them a range of roughly of how many hours and it’s typically between 12 and 20, but it can be as low as 8 and higher than 80 on very complex large accounts. Then they think about it. They can’t accept that day. I read and went to a class once about how obtaining a new client, don’t give them time to think, make them sign the document day one. I’ve decided that I want to do the opposite of that model, give them some time to think about it. It’s an incredibly important decision. Then if they accept going forward, I prepare the agreement. Again, it’s strictly hourly. Schedule a start date. Give them a not so fun data request and then, we build the plan, implement the plan and give them rules going forward, and they fire me.

Steve: Nice. How quickly do you usually get through that engagement? Is it within three months or something?

Allan: Yeah. My wait-list can be anywhere between a month to three months. Once it gets longer than three months, I typically put on my website, “Don’t submit a plan until I get caught up.” But once I start the engagement, it’s typically about a two-week process.

Steve: Nice. Then once it’s implemented, it’s mostly on autopilot or they’re monitoring or do you monitor it at all?

Allan: Yeah. They monitor it. They can come back to me. Again, I would argue, my average client probably knows more about investing than the vast majority of investment advisors.

Steve: In some ways, it sounds like you provide this objective set of eyes like a coach looking at their situation, try and identify big opportunities, and helping them to get set up properly and then once they’re set up, they’re off and going on their own.

Allan: Exactly. My wife calls me the most argumentative person on the planet and I prove her right daily so I push back on where they are in their portfolios and what needs changing, etc., but they have to come to me understanding that they want the diversification, that they want low fees and tax efficiency and the like. When I started my practice, clients would come to me saying they’re beating the market and I would say, “Let me see.” I do some benchmarking and then I would show them. Today, I’m getting worried enough that so many people are in indexing. When people come to me saying they’re beating the market, I say, “Good for them. Keep doing it. Keep markets efficient.”

Steve: Yeah. Exactly. We got some questions from people on our Facebook group and would love to get your take on what you think a safe drawdown rate is?

Allan: Yeah. I’m a whole lot more conservative than those people. I do the same Monte Carlo simulations that others do, but I wrote a piece back in 2010 after reading so many pieces that Monte Carlo simulation had failed in 2008 and 2009 because it was such a long tail unusual event, the financial crisis, and it was barely a 2 standard deviation, which should happen once out of very 20 years. It wasn’t that rare. It was the assumptions that go into the Monte Carlo simulation that were garbage. Garbage in, garbage out.

I think a safe spin rate of let’s say a 50-50 portfolio and only for 25 years is about 3.5%. That means $35,000 for a $1 million portfolio increasing with inflation and that gives you a 90% chance of success. If you want to change that to 35 years, my modeling shows it drops to just under 70% success. If clients tell me I’m being too conservative, I tell them I would rather them come back to me in 10 years saying, “I have too much money. What do I do? Than I’m out of money. What do I do? One’s an easier problem to solve.

Steve: Right. For people that are just retiring, say that there’s somebody 60 years old, would you have them be in a higher percentage of equities and then dial that down over time or just start them at 50-50?

Allan: Absolutely not. The 50-50 was an example. That doesn’t mean everyone in retirement should be 50-50, but yeah, I read the work by Kitces and Wade Pfau who I think are wonderful people, but I completely disagree with starting conservative and getting more aggressive later on for a couple of different reasons. One, mathematically, it was correct, but it assumes you die at a certain year. In other words, if you’re doing a 30-year plan and you’ve lived to age 29 of those years, don’t count on dying the next year and two, behaviorally, it’s so hard to get people to rebalance, to stick to an asset allocation, getting them to increase their equity. It isn’t going to happen.

Steve: Any thoughts on sequence of return risk and how to manage that?

Allan: Yeah. I’ve read lots of articles on managing it and they all basically rely on the fact that you’re going to cut spending when stocks go down and then never recover. There is no way to really manage sequence of return risk other than continuing to rebalance and you can cut your spending temporarily until things recover, but your biggest risk, there’s no doubt about it, your biggest risk is in the first few years after retirement.

Steve: Given that one way to hedge your income need is to use annuities, but I know there’s definitely lots of bad kinds of annuities out there, but do you ever consider using annuities out there like fixed immediate annuities or longevity insurance?

Allan: Yeah. First of all, you can’t buy an annuity anymore outside of Social Security that’s inflation adjusted going forward. The fact that buying a fixed annuity eliminates longevity risk is baloney. What you’re really doing on buying a fixed annuity is buying a bond, corporate bond. It’s not even backed by the US government with the duration for the rest of your life at a time when nominal rates are near an all time low. Yes, the annuity that I use all the time is telling people, and it is probably at least 98% of people that come to me, is to delay Social Security. What I say is go ahead and spend that money that you would’ve been able to spend at age 62, 66, etc. What you’re really doing is taking that money and buying an inflation adjusted annuity backed by the US government that you’ll then turn on at age 70 typically.

The vast majority of the cases, as long as one person in the couple is in good health, delaying Social Security is the right way to go and then also, if you can afford to delay Social Security, it means you’re probably in a higher economic situation than most people and the data is compelling that wealthier people live a lot longer so what that means is if you can delay Social Security, you’re probably going to live longer than average and should delay it.

Steve: Right. Yeah. I know we wrote an article about how, at least for married couples, the single best thing they can usually do is have the highest income earner defer until 70.

Allan: Yeah, there were some great strategies like double dipping. A while ago you could actually, if you took Social Security, pay it back and then reset it a month later, but those rules went away.

Steve: Yeah. It’s great to get your take on essentially, the inflation risk that people face because many people don’t think about it like, “Oh, 30 years out, what is the purchasing power going to be of my savings and how do I make sure that it stays with or how do I hedge against that inflation risk?”

Allan: If you have 2% inflation versus 6% inflation over 30 years, that has a dramatic of what that annuity is actually going to buy.

Steve: Yeah, that’s a great point. Do any of your customers ever consider home equity? Do they ever downsize or anything like that or do they usually not include that?

Allan: My average client, I’m not particularly proud of that, is fairly wealthy that they don’t have to downside. Whether or not they should downsize, if you think of what money is, and you interviewed I think the world’s expert on money and happiness, Jonathan Clements, is money is out there to fund your life to do whatever gives your life meaning, etc. Should you downsize and move to a less expensive part of the country, will you be happy, Is very important in that. I do consider, the one asset that I consider in addition to the portfolio on a save-spend rate is the house because it’s the one thing people can typically enjoy and in the long run goes up, maybe not up as much as stocks after you take into account all the maintenance, insurance, etc., but later on in life, you can either downsize or rent or take out a reverse mortgage and tap some of the equity.

Steve: Yeah, yeah. I think that’s right. One thing that a lot of our users ask about is like what are things I need to watch out for? One of the things I saw you write about that was like an issue even for you is the high cost of health insurance. Could you talk about that a little bit?

Allan: Yeah. This was venting. My past life, I was director of financial planning for Kaiser Permanente and then a division of Anthem so healthcare is near and dear to me, but we spent … This was more of a venting exercise when I wrote about it, but we spent twice the amount of any other country per capita on healthcare and we live in a global economy where we have to compete with other countries and such. I would’ve guessed and I’m totally wrong that healthcare would’ve collapsed before we hit the amount that we are spending now and again, I was wrong. We’ve got to figure out some way to change this. The implication to financial planning is when somebody tells me that they’re going to spend more in the first several years of retirement than the last several years ’cause they won’t be traveling and the like, I point out that that might be true, but Medicare is in more shape than Social Security and there’s always the possibility that it becomes means tested going forward. Healthcare is a big problem in this country and, unfortunately, our politicians don’t seem to want to solve it.

Steve: Yeah, I think I read that we were on track to where healthcare was going to become 40% of our GDP, of our national … Sorry, at least our spending and I think that is obviously unsustainable. We’ll see. What did they say? Something that can’t exist won’t or can’t persist won’t and hopefully, that gets solved. I want to move on to your book here that you wrote for your son, How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn. Could you give us a quick recap of what you cover there and anything that we haven’t covered so far?

Allan: Yeah. As I was raising my son, I was realizing just general life lessons I was teaching him like don’t put all your eggs in one basket, Don’t lend stuff to someone who’s not going to return it, was what people were violating all the time when it came to investing. When my son was 8, he had an incredible advantage over adults because number one, money didn’t mean anything to him so he didn’t practice the ritual of buying after stocks went up and panicking and selling after they plunged. He wasn’t watching Cramer. He had huge advantages over other people. It was just the simplicity of investing and how building a portfolio with three or five funds, a Total US, a Total International and a Total Bond could beat the vast majority of all other portfolios because it had a huge lead in the way of lower fees. It was book about simplicity.

Now my son’s a sophomore in college. Money’s starting to mean more to him so he’s losing some of his advantages. The older we get, by the way, the less we have in the way of human capital and the more we have in the way of investment capital. When that investment capital plunges when stocks plunge, the pain is a whole lot more and it’s a lot harder to run a portfolio.

Steve: I think that’s pretty interesting that you looked at it through the eyes of your young son. I think it’s a great way to imagine the world. I look forward to reading it. It’s interesting you cover some of the same things we talked about with Bill Bernstein, which is you know what, investing can be really simple. You can have a very simple three- or four-part portfolio, save, invest. Ignore the noise and the media out there and when you’re younger, just work, save, invest, ignore it. When you get older and you have to start relying more on your savings, you do have to be more thoughtful and manage risk more actively … Maybe not more actively, but position yourself better, but that works. That’s the thing that’s proven to work.

Allan: Yeah, Dow Jones actually made up eight lazy portfolios with Paul Farrell and the Second Grader is one of the lazy portfolios along with Bill Bernstein’s and the Second Grader portfolio is the simplest of them all and also in first place.

Steve: Nice. Actually, you know what, on that note, I think we should talk quickly about The Stock Market Game because I know that was a topic that came up during the Next Generation Personal Finance Conference and I know you have strong views about it and would love to get your quick take on it.

Allan: Yeah. The Stock Market Game is a game and sponsored by the financial services industry where over a period of a few weeks, you pick stocks and whoever does the best, gets a nice trip to Washington and awards and all of that stuff. Unfortunately, all that does is teach speculation since there’s upside for winning and no downside for losing. Obviously, the way to go is to buy the fewest amounts of most volatile stocks you possibly can so that teaches speculation and the two outcomes are both going to be bad. Either the student does really well and thinks of themselves as brilliant or does very poorly and says, “Investing is really hard. I don’t want to invest or better yet, I should pay a broker to do the investing for me.” Both of those outcomes are wrong and bad, and my son has had to play that game in elementary school and high school and now in college.

Steve: Nice. Davorin’s over here, our sound engineer bouncing around, he’s in high school, a senior. He’s played this game.

Davorin: I’ve played it this year. It was horrible because I saw the second effect among all of my peers, which is everyone got very scared because everyone invested in the things that they know — like big companies such as AT&T. I don’t know if you know about this, but AT&T dropped right about when we started playing and everyone invested in that and everyone got very scared because logically, when the stock market goes down, you want to try to sell when that’s really not what you’re supposed to do, of course, yes, but this game taught them that that’s what you’re supposed to do because that’s the only thing they know how to do. So it’s reinforcing the bad habits and it’s not helping.

Steve: I think you’re raising an interesting point. You only have a very limited amount of time to win this game so you take on risky bets. If they go bad, you want to get rid of them as soon as possible because you want to try and preserve … No. Not incur too many loses. You’re right. It’s interesting you’re raising another point that it’s bad on another level.

Allan: Yeah. If you built a portfolio of three index funds, you have a zero percent chance of winning.

Steve: That’s right.

Davorin: Yeah. You can’t-

Allan: That is the better investing strategy, the long-term investing strategy.

Steve: Right. On one end, I think it’s good ’cause obviously, a lot of kids are engaged in it and seeing the mechanics, but many of the lessons that it’s teaching ’cause of how the game is run are the wrong kinds of lessons unfortunately.

Allan: I think the bad way outweighs the good. There is some good in it, but the bad is far larger in my opinion.

Steve: Right. I know you have your ideas about how to fix it, but we’ll preserve that discussion for another podcast maybe.

Allan: Okay.

Steve: Unless you want to dive into it? If you want to discuss it, I’m happy to have that discussion now. I don’t want to …

Allan: Just real briefly, it would be wonderful if there were a way to compress time whereas each day would be a year and then, use a Monte Carlo simulation to show what happens over time and can you beat the market versus the index fund, etc., and then have consequences. Those who do good or great get pizza, sit in the front of the class. Those that do poorly are in the back of the class, don’t get any food, which is the consequences for being a bad investor.

Steve: Yeah, I think the idea of compressing time is a really good one because then, you’re able to represent more of a full life cycle. The artificial or the short period of time if the kids play the game for it does cause a big part of the bad behavior or reinforces those bad lessons.

Davorin: But there is an issue in that. Then you lose the abstraction of them being real companies with real life effects that affect the company, right? Because then you’re playing with just random stuff with the Monte Carlo method. Then I think the students would just lose interest because everything’s meaningless ’cause it’s not real companies. It’s not real people affecting the stock market. It’s randomness.

Allan: Yeah. I think it would be less real. That doesn’t mean you can’t take a company and run it through a Monte Carlo simulation and say, “Hey, AT&T didn’t do so well as new technologies came out there.” Who would’ve dreamed Eastman Kodak and … There was an old saying, you guys may be too young, but “So goes GM, goes America.” Thank gosh that wasn’t true ’cause the new GM, by the way, the original shareholders got wiped out. But I agree. It would not be as real.

Steve: It’s something to work on. I’m sure we can cover some ideas to make that better. I’d like to move on a little bit to get your take on behavioral finance ’cause I know you’re one of the experts in the field and on your site, you list off a number of them. I’d like to just get your take on what you see the behavioral finance effects are on people investing and how it changes their behavior.

Allan: Sure. When I got my MBA in 1982, I was trained in traditional economics, supply curve, demand curve, price, quantity, and all that assumed that we were logical, rational beings working to maximize our utility, not impacted by the herd, no fear and greed. To this day, that’s hindsight bias, I don’t know how I could’ve fallen for that hook, line and sinker. We are emotional beings. We are not mathematical beings. We make mistakes all the time. There’s a reason why probably physicians make the worst investors and men are worst investors than women because of our overconfidence. Optimism, we only see ads for winning funds, not losing funds. They only advertise their winners, etc. Have you ever seen a new fund being launched that didn’t work on a back tested basis? In the world of big data, it’s pretty easy to do some data mining and find patterns out of randomness and give explanations for why they work going forward. Do you want to hear some more of these?

Steve: No, this is good. Do you see these kinds of issues with the clients you serve all the time?
Allan: I not only see them with clients, I see them with myself. I have to ignore all of those instincts. It’s not such an easy thing to do. I have not outgrown these instincts and I will also tell you that I’ve worked with some of the leaders in the world of behavioral finance and understanding them in theory and practicing them are two different things.

Steve: Yeah. I think this is an example of where it’s great to have like an external third-party that helps you manage your money because, Morgan Housel raised this point, it’s just the fact that it’s not you, it’s somebody else taking a look at your situation and isn’t so tied up in how you earned it and the outcome of growing it or having it go down.

Allan: I can’t predict markets, but it’s actually fairly easy to predict human behavior and that is that we are, as Daniel Ariely would put it in this book, Predictably Irrational, markets go up, we typically get greedy and buy. Then they plunge, we don’t say we’re panicked and selling. We say, “We’re going to get more defensive until things stabilize,” but that’s panicking and selling. Going against the herd is a very, very difficult thing to do, especially when money starts meaning more to you, but is very valuable.

Steve: Yeah, totally. Would love to get any kind of top investing thoughts or quotes that come to mind. I know you’ve got some on your site, but rules of thumb that you have.

Allan: In terms of best advice or …

Steve: Yeah. Just in terms of best-

Allan: The two people that really changed my life on investing was Burton Malkiel’s Random Walk Down Wall Street, taught me back then the futility of trying to beat market and then Jack Bogle, the founder of Vanguard got me into indexing a long, long time ago. Unfortunately, I wasn’t smart enough to start my indexing with Vanguard, but that’s another story. There are lots of just wonderful writers out there. Jonathan Clements, the HumbleDollar, who you’ve interviewed and William Bernstein, I can’t get enough of his stuff. Jason Zweig at The Wall Street Journal, he and Jonathan I blame most for getting me into writing. The Oblivious Investor by Mike Piper is wonderful. Vanguard has a new podcast, The Planner and the Geek, Joel Dickson and Maria Bruno, wonderful people. Yeah, I wish I had more time to listen to podcasts and read, but unfortunately, I don’t as much as I should.

Steve: Yeah, I think that’s the one challenge when you’re delivering the service directly yourself, which is obviously highly impactful, the scarce resource is your time and that’s the main reason your rate is so high, but it’s good. You’re providing a lot of value for folks. I know I saw on your site this quote, “You get what you don’t pay for,” by John Bogle, which I thought was a great saying and also you have Warren Buffett, “Investors should remember that excitement and expenses are their enemies,” which I think is something to remember, especially with the Bitcoin stuff that’s been happening and also, with the volatility that we’ve been seeing recently out there.

Allan: Although, I might argue the volatility we’re seeing more recently is more normal. It was last year, the complete lack of volatility, I think that was so abnormal. Maybe we’re anchored to what happened last year. Suddenly this year, we view as volatile. Gee, the market, doesn’t it always go up? It’s gone up for nine years in a row. Why wouldn’t it go up this year?

Steve: That’s right. Whenever I start hearing that, I used to hear that about California real estate, .com bubble stocks. It’s like, “Yeah, it only goes up.” As soon as you start hearing that, Bitcoin, it’s like time to make sure you’re not invested in those assets or decrease your exposure in those assets. We’re almost done here. I would love to find out who does your PR? Because you’re in all these magazines and you’re in all of these sites. Just do you have an agent or something?

Allan: No, that’s my advantage. I have no PR agent. I think I have a different viewpoint and quite frankly, the hourly model allows me to have a different viewpoint. Therefore, those different viewpoints allow me to get published and probably to get paid right.

Steve: Nice. That’s awesome. I think this was great. We’ve covered a lot of stuff. Do you have any questions for me or anything else you want to cover on your side?

Allan: I don’t feel very good that I’m only helping the wealthier get richer. How did you decide to … You’re helping people of all different backgrounds, all different economic groups. How did you get into doing … I envy you. I wish I were you.

Steve: We’ll see. We’ll see if it works out. Yeah. This company started because my mom came to my brother and I, and she needed some help, financial help and guidance around her own retirement. We looked around to try and get her some help from advisors, but couldn’t really find anyone that was a good fit for her and looked at it holistically. We ended up doing it ourselves with spreadsheets. Then we realized after helping her that and looking at the demographics of 75 million baby boomers that there’s a lot of people that need help.

Previously, I’ve always worked in software and technology and I’ve also worked in financial services. I did a company before I was about to transition to higher education, making the process of researching, inquiring and getting into college easier. I did that during the first .com bubble, although we were around before that, although we got swept up a little bit, but … I had that experience and then decided that, you know what, this is a similar thing. There’s a lot of people that are going to transition to retirement. It’s really complicated. It’s not all put together in a nice way, and people need help making good decisions, and they need to have groups that they can trust, and also just be educated so that they can make informed decisions on their own, and manage their resources as efficiently as they can.

We thought that there was an opportunity and we’re approaching it in a way, in a software kind of digital first way so we can help as many people as possible, and we also want to have very transparent pricing that is free software. We’ll have a paid version of the software that’s rolling out very soon. We’re looking at packaging up hourly advice with it, either ourselves or potentially with partners or advisors like yourself. Just full disclosure, Allan and I have no relationship, financial relationship or anything here. But just giving that access to a range of services and try to do it in a very scalable way.

Allan: I think that’s terrific. You’re helping a lot of people to have more freedom, be able to retire earlier and do whatever gives their life meaning. That’s a wonderful thing.

Steve: Hopefully, it works out. We’ll see, but appreciate having you on the show and what’s been amazing with this podcast thing is that some of these episodes, you’re getting 10,000 plus downloads and so hey, at $250 an hour, if 10,000 people listen in, you’re providing $4.5 million of value out there so that’s good.

Allan: You mean I don’t get paid for this? That was a joke. We have no financial relationship.

Steve: No, but hopefully, we’re helping the world out there. Allan, thanks for being on our show. Davorin Robison, thanks for being our sound engineer. Anyone listening, thanks for listening. Hopefully, you found this useful. Our goal at New Retirement is to help anyone plan and manage their retirement so that they can make the most of their money and time. We offer a powerful retirement planning tool and educational content that you can access at newretirement.com. We’ve been recognized as best of the web by groups like the American Association of Individual Investors.

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Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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