In this episode of Your Business, Your Wealth, Paul and Cory continue their discussion on illusions of investing in the marketplace. In part five of this series, Paul and Cory discuss what you can do now that you’re aware of these illusions of investing. They share and analyze the concept of Passive Structured Investing and explain how to build and maintain an investing portfolio. Paul expounds on the Modern Portfolio Theory, the Four Factor Model, and the importance of client education and coaching. Finally, Paul and Cory take the audience through Sound Financial Group’s Passive Structured Investing Model and provide different examples of how they allocate and diversify financial portfolios to navigate the market.


  • 01:34 – Cory recaps the topics of the last four episodes on illusions in the marketplace
  • 03:11 – Introducing today’s topic, Illusions of Investing Part 5: What Can You Do Now That You Are Aware?
  • 04:39 – Why markets work
  • 07:38 – Modern Portfolio Theory
  • 13:31 – Building a portfolio
  • 14:55 – The Four Factor Model
  • 17:37 – The golf analogy
  • 19:34 – Paul interrupts the podcast to provide the audience with a special offer
  • 20:36 – Factor One: The Market Factor
  • 22:02 – Factor Two: The Size Factor
  • 23:24 – Factor Three: The Value Factor
  • 24:58 – Factor Four: The Profitability Factor
  • 26:37 – The importance of coaching and education around your money
  • 31:26 – The value of having virtual financial consultants
  • 33:56 – Sound Financial Group’s Passive Structured Investing Model
  • 41:13 – Paul encourages listeners to take the time to explore the option of a second opinion on your investments
  • 43:27 – Paul encourages listeners to reach out and leave a review on the podcastsde



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Full Episode Transcription


Paul 0:00

We have to spend more time thinking about our money, being in conversations about our money, reading books that deal with money, because if we don’t, we’re going to be in a spot where we’ve looked forward in the future where we only invested 80 hours into it or less. And we’re going to anticipate that it should produce our long term financial income for many, many, many times the amount of hours that we put in.

Unknown Speaker 0:25

Welcome to your business your Well, we’re your host, Paul Adams and Corey Shepard teach founders and entrepreneurs how to build wealth beyond their business balance sheets.

Unknown Speaker 0:39

God type

Unknown Speaker 0:49

there is no time. Like

Unknown Speaker 0:55

this is how

Cory 0:59

hello and well Welcome to your business your wealth. I am Corey Shepherd, president of sound Financial Group and your co host on this show with me today as always is a man who is so good at getting a good deal that he even asked for a discount when he pays attention, Mr. Paul Adams, and it is called breaking this is people love it on SNL when you just can’t keep going through the through the big laugh. Everyone loves it. So we’re just gonna do it once. So we’ve been doing a series called illusions of investing. And if you’re just jumping in, then you don’t need to stop and go to the beginning right now finish this episode, that’s totally fine. But you do want to circle back around and catch the beginning after this because you’re getting there’s a lot of great material. There’s a lot of technical pieces and a lot of very key points we wanted to get across in a shorter amount of time. So the past several episodes, I’ve turned it over to Paul to just run through a series of conversations that were really summarizing a series of conversations he and I had when we first met, that really, that helped me see some things that I had left unhandled for my family and our financial future. And by proxy, was very likely not handling with my clients at the firm that I was a part of at the time. So it quickly became a moral imperative for me to not be doing, what I was doing and start doing what we’re doing now together. But to continue this series as we start to talk about what to do, now that you’ve been exposed to some of these illusions of investing. I’m going to stick around so Paul is gonna carry us through the beginning, but I’m going to be here to talk with Paul about some of the things that we do for our clients and how we start to answer and combat some of these illusions. So Paul, writes,

Paul 2:53

Corey, a great introduction. As always, I missed not being able to do that to you, but I am always excited about what you’re gonna say about me. And now I know how you felt for the last couple of years, every time I introduce you,

Cory 3:06

and I know how you felt. It’s a lot of fun. Exactly. Yeah. So trading off.

Paul 3:11

Now what we’re going to touch on is what do we do now we’ve been exposed to all these illusions. what it is we think is going on in the marketplace with our money the way we think financial institutions are marketing us. And now we have some awareness of the illusions. So what do you do now that you’re aware? Well, we’re going to share with you what we call our passive structured investing at sound finance group, it really is made up of several factors. One is that markets work, that the market is pricing things properly, and the market tells us things like communicates information with pricing, second is modern portfolio theory. Third is the four factor model. And fourth is the importance of coaching and education around our money. Something that’s all too often not talked about is the importance of having a coach having somebody who educates you and making each financial decision to help the entire financial picture actually be more efficient, not just quote, unquote, get good rate of return in an investment

Cory 4:15

rate rate, well give too much credit to the market for the rates, rates of return like and they don’t give enough credit to their own behavior for what that does to the rate of return. Now, usually behavior is not an additional factor. It’s a subtraction factor to random return, but it’s very real. So that one is huge and important and not just tacked on the end by any means.

Paul 4:38

Absolutely. So we’re going to talk about let’s that first part about markets working. So I’m going to just show kind of a series of picture for those of you watching online of Nobel laureates in academics. Now, the thing to notice is not that they’re all or most of them are bald, but the thing to notice is that every one of them has a deep academic background and several of them are Nobel laureates.

Cory 5:04

Although I don’t hate that gray hair lack of hair. It’s not It’s not the worst thing. But Nobel prizes are probably more important. Yes.

Paul 5:12

Well and and the idea being that markets do work. Simply said when somebody releases a new piece of information, the entire market now I’m going back like 13 years. I was at a business conference and something I love this was a non investment conference. It was just kind of this business philosopher teaching a bunch of us and he said, a new piece of information is released. And he looked at his watch for six seconds and looked up. He says the market has already repriced, based on that was 13 years ago. Now between flash traders, or the way that people are dealing with their, their investments, their trading on a trade, or they’re trading in huge block trades. There’s people laying fiber optic cable Between the major exchanges to get a little tiny bit of better execution. With all of that, we know that the market is communicating information to us constantly. And what we can’t do is get out ahead of it. All those academic studies we looked at earlier in the illusions showed us that even the best of the best that people making millions of dollars a year of personal income, have no proof that they can consistently or predictably outperform the market, the markets work. So the important thing is to be in the market.

Cory 6:34

And Paul, my favorite book that covers about every single thing that you just said, is flash boys by Michael Lewis, who many people know from The Big Short, which became a huge movie talking about the mortgage crisis. And he follows all those pieces like the company that spent millions maybe maybe billions, maybe Yeah, but billions with a be getting a straighter line for a fiber optic cord to just take, I don’t know, hundreds of a second off the travel time between Chicago and New York for their trading information to get that much faster was worth it to them. So as an individual investor, if we think we’re going to read something in a magazine, they just the time it took to print, whatever we’re going to read. That’s already in the market. But yeah, let me read it.

Paul 7:27

Yeah, even if it’s on their website, and you’re the first person to read it. By the time you could execute a transaction, the market has already adjusted because it was public to somebody else, before the magazine published it, so that we do participate in the market. How should we Well, we’re going to use modern portfolio theory. Now, for those of you that don’t know, modern portfolio theory came to Vogue back in the 1950s. And ultimately, won Dr. Harry Markowitz, a Nobel Prize in Economics. See prior to this, you didn’t have a wave To reduce your risk other than just owning more bonds, so you own your basket of stocks that were picked, and then you owned your bonds and it was the blend between those two are the only way to diminish risk. What Dr. Harry Markowitz did is he showed that different asset classes do not move in lockstep as a result of them moving up and down differently, we can actually reduce risk by combining them in a portfolio. Now winning the Nobel Prize in Economics is not as easy as you might think. Not that you were thinking it’s easy, but two things had to happen. One it needed to work. In reality in the marketplace, it started back in the 1950s. But then he had to also live long enough because they do not give the Nobel Prize post humorously. So he still had to be around for it and it needed to have worked. So developed the 1950s awarded in the 1990s. It’s a big deal it was awarded as a result of changing The way people invest. And that’s where we own this broad, highly diversified portfolio, helping reduce risk for those of you watching, we just have a simple graph of investment a and investment be moving up and down at different times giving you the less volatile center line, which is the combination of the performance of investment a and investment B. What also came out in modern portfolio theory is that there is a maximum amount of risk to take in a portfolio. It’s called the efficient frontier. the efficient frontier is this horizon on a graph that allows you to understand that, oh, if I’m going to take this much risk, then this should be my anticipated return. Now, for those of you watching online, I want to call your attention to something you’ll see the s&p 500 on this graph, boy Low the efficient frontier, meaning we’re taking more risk, more volatility, then we are getting in reward over time. What that means for us as an investor, if we’re not on the efficient frontier, we’re taking some amount of uncompensated risk.

Cory 10:19

It’s not what I like to think about it. Like it’s like, someone’s unhappy with how much they’re getting paid in their job. If anyone out there that’s listening has ever said, they’re not paying me enough for all the work. I’m doing all the responsibility that I have, like that’s what this efficient frontier is, are you getting paid enough for the kind of risk that you’re taking in your your portfolio, and under the line means you are under compensated?

Paul 10:46

That’s it. And so you’re taking additional volatility without getting the reward. Now, this, like we mentioned a few moments ago, developed in the 1950s tried and tested through the 1990s 1990 Nobel prizes. Economics awarded to Dr. Harry Markowitz. But study after study after study has been done sense, and one of the biggest studies was the determinants of portfolio performance. Well, here’s what they discovered 91.5% of a portfolio’s performance is dependent upon the allocation you choose and the discipline by which you rebalance. market timing was 1.8%. Other factors not yet able to be identified 2.1% and 4.6% was stock selection. Now, you should be asking this, Paul, in one of the prior illusions, you just finished saying that market timing and stock picking don’t work. Correct. These are determinants of portfolio performance, it does not mean those are positive contributions to performance, that when you engage your market timing and stock picking, we don’t have Any academic evidence that those are going to work out? Well, in the long run, they might work out? Well, for a person bragging at the cocktail party. You could be listening right now maybe you’re the person that’s worked out for and you’re bragging at the cocktail party dragging other people into a pit that you happen to have avoided, and it didn’t swallow you alive.

Cory 12:17

Too much. And of course. Now, I think, I think we can’t be strong, worded enough about this, because it’s where we differentiate ourselves and where we separate it from so much of what’s in the financial current. And, but the 1.8% on market timing. This is not universal. For every condition, every person, this is over a long period of time. And what I mean is, if say, in 2008, you took your, you know, money completely out of the market for the next 10 years. Well, now that’s responsible for detracting 100% of your rate of return. Yeah, so. So don’t be Don’t be lulled into like Oh, let me try Bunch of market timing. and at worst, it’s going to be about 2%. down like no, no, you can you can make these worse, if you want to

Paul 13:08

this Yeah, this has determined some portfolio performance over a large group of people. Don’t be part of the Don’t be part of the people that create the tails of the bell curve, right? It’s, in fact, I lived my whole life just hoping to not prove the exception to the rule. Because the exceptions to the rule do prove the rule. Let’s Let’s take one more look at what happens when you build a portfolio. So here’s Paul and Cory. So you’re saying we can we need to be compensated properly for our risk, etc? Well, we’re going to give you an easy example. Let’s say all we did was we own the standards and Poor’s 500 index, and we can look and see that the rate of return we’d expect from 1970 through the end of 2017 will be 10.5%. The standard deviation that’s those risk units, how much risk are we taking how volatile is the investment is 16.99. So we’ll just call that risk units going forward. If we add to the portfolio 25% in a European index. Now, our annual gross return drops, very, very little. So now we’re at 10.32, standard deviation of 16.79. And then if we also added an international small cap fund, we now end up at 10.88%. And 16.99 in risk, simply said that we can take the same amount of risk and produce additional return by properly choosing our asset allocation. More on that in a minute. Cory, I’m ready to go to the four factor model. You ready? Let’s do it. Yep. So, when investing, there’s only four areas that have been proven to consistently and predictably produce additional returns, and be worth the cost to execute. So there are strategies that can be used by an individual stock picker or in a fund. And they point to all these results of it being wonderful like trading on momentum. The trouble is, if trading on momentum is the only strategy, the costs of trading on momentum, the additional tax costs, the additional trading costs. All of that wipes out the actual additional return when studied, not when just told as a unique sort of story that loads an investor into investing.

Cory 15:48

And this was so huge for me when we first talked about this and we’re at some of the research conferences about this that they’ve studied factors that are real but not profit. In a practical setting, so real in an academic research sense, but not profitable. So momentum being one of them, meaning you can actually lose by winning, like you can implement some of these things, see some positive movement in your portfolio but not actually have been better off in fact, maybe worse.

Paul 16:20

So well so. So these four factors are a the market, a big shocker for everybody. The market stocks outperform bonds over time. Second is the size factor. small companies outperform large companies. Most people accept that no problem. Third is the value factor. Those companies that have a better price to book ratio meaning like they own stuff, or maybe for reasons outside of the company’s financials, etc. It’s stock prices lower compared to its book value. And last but not least, is more profitable companies. Over time tend to outperform less profitable companies shocker shocker out here. And the thing that should really shock you is not that profitable companies outperform less profitable companies. But the fact that that also as a part of Eugene, fama is price markets theory in 2013, won him the Nobel Prize in Economics, in part, because profitability is one of the things that can drive returns on for a portfolio without taking any more risk. We’ll come to that in a moment. But when we talk about taking that risk, we’ve given you a few different looks at it, but I just have you think of it this way. When you step up to a golf tee, if you’re golfing, and you hit it with a driver, you’re taking more risk than if you use your seven iron. But what you’re hoping to do is hit the ball further than you would have if hitting it with a seven iron. Now, for me, I take a lot of risk when I use a drive. It’s gonna go through somebody’s window. Go into a yard hit a tree and come back at me I could lose yardage, frankly, using a driver. But I use it when appropriate, because I want the additional return to the extra distance. But if you took the same Golf Club, and you just climbed to a high point on the golf course picture a nice green up on a rise during a lightning storm and then held the driver over your head. Did you take much more risk? Yes. Is there a positively correlated outcome that you’re going to like from taking all that extra risk? No. That’s what we see when many people just tie blindly more risk equals more return. No, it does not. Lots of risk is uncompensated risk. You hold that Golf Club over your head during a lightning storm, you’re not likely to be compensated vectors zero likelihood you’re going to be compensated for that risk. So we’re going to talk about each of these tilts each of these factors in how you get compensated for having a portfolio that takes advantage of these four factors. With that, Corey, what do you think about taking us to a quick commercial break right before we come back and hit those four factors?

Cory 19:16

I think that’s a, that’s a great idea. So we’ve we’ve covered everything from lightning to male pattern baldness. It’s really hard to tell where to go from here, but it is going to be highly valuable in the world of investing. So when we come back from a quick message from sound Financial Group.

Paul 19:36

Hey, everybody, I had to interrupt our show for just a moment to share with you something new. We’ve designed a new white paper that we think is going to add new value in the way that you think about money. It’s three the biggest mistakes we see people make and six ways to fix them. Now for some of you, you might not want the white paper you might be ready to have a conversation with us. And that is okay, you can email us at info at SF GWA calm. That’s info at SF GW a.com. Find us on the web at your business, your wealth calm. And anytime on any of our social media platforms send us a message and we can get you this white paper. But in the meanwhile, if you want to just skip over the white paper, have a philosophy conversation with us, we’re happy to do that with you. Just let us know, philosophy conversation, the subject line. And if you want this white paper, just put white paper in there, I will immediately get out to you this white paper on the three biggest mistakes that we see people make and the six things that you can do to fix them. And now, back to our show. Welcome back. So we’re gonna start covering each of these four factors. These are the factors that are proven over time to produce additional return compensating us for the extra volatility we’re taking on. So the first one, not a mystery to anybody. Is that the Standard and Poor’s 500 ever since 1926, has outperformed bonds. Now I’m going to call something to your attention though. The s&p 500 return since 1926 9.71, the standard deviation, easiest way to understand it is that most of the time, like 65% of the time, that slope that you’re hoping to get in this case 9.7 is in some years going to be higher, like, plus 19%. So it’d be like 28%. But it could also be the other way, negative 10. That would be a totally normal outcome. So it How much does it go above and below that 9% growth line over time. And 95% of the time, it should be within two standard deviations. Don’t let that worry you now, just think about it as here’s our risk units. So it’s a lot more volatility and risk than treasury bills. But the return is like 300%, higher almost meaning treasury bills over that period of time did 3.35 while s&p 500 did not point seven one. That’s the first factor. second factor is this small companies tend to outperform large companies. Now you can see that it’s 9.71% versus 11.86%. Now, the biggest misnomer people have is they look and go, Well, that’s a 2% difference. What’s the big deal? Well, the difference is not 2%. Core, you want to tell him how big the differences.

Cory 22:29

So it’s about, let me say 20%

Paul 22:34

Yeah, like that little more than 20% because if you think about it, if you had $1,000 growing, it’s either gonna grow by $97 or it’s gonna grow by $11 and 80 cents, or $118. They’re at $118 is 20% larger than the nine point Seven. See we don’t edit out our mistakes. We just let you guys hang with us while we do them. That’s right now is there more risk absolutely see that additional volatility, but we are getting a lot more return over time. Now these each of these factors do not manifest every single year. But they do manifest more than half of the time through the years enough that it gives us that extra little return. Next is value that value stocks those that have a better current price to their book value as a company. And this is another one 9.7% versus 12.4.

Unknown Speaker 23:41

Now, is there enough builders, yes, outside factors that

Cory 23:45

that haven’t, that don’t show up every single year? Anyone who’s been following the markets will know that value hasn’t been showing up lately.

Paul 23:55

Yep. Now here’s the funny thing. value has been Performing just below its long term average. But compared with growth, the last four years growth has been, for some reason, outperforming its long term average. There are some theories about that we’re not going to get into today. But what is likely to happen at some point in the future, there’s gonna be a reversion to the mean, meaning growth will have to level back out to be more like its long term average, while value is performing slightly below its long term average. So even though we haven’t seen those returns manifest on an annual basis for about the last four years, growth has been outperforming value that has happened ever since the 1920s, that each of these factors will have periods of time that they’re out of favor. But what we’ve watched happen just in the latter half of this year, is that the value premium is starting to come back and it’s coming back quickly. So we’ve got some white papers on that if you guys have questions, feel free to reach out we can go deeper down that particular rabbit hole last is The one that we laugh about we say tongue in cheek, but did win somebody’s Nobel Prize, which is profitability more profitable during

Cory 25:09

the tech bubble. This was a shocker to a lot of people for some reason, you know, if you remember pets calm, it was like, all you needed was a good idea and an even better domain name. And that was enough to be a good company to invest in. Yes. And they. So profitability does went out in the end, or

Paul 25:26

even just think about what people might say, well look at all the years that Amazon wasn’t profitable. And look, it’s a behemoth now. Yes. But what’s not told in that story, remember all the way back to survivorship bias? How many companies were trying to be Amazon, who ended up with a market capitalization of zero when it was all done or bought by some other company for pennies on the dollar. What we need to be able to do is just realize that we’re not investing for a big win today we’re trying to build a portfolio that will allow our wealth to grow on our balance sheet on it. consistent, ongoing and predictable basis over long horizons of time, so that we can reach definite financial independence with enough capital to fund our work optional lifestyle. So profitability is a fourth factor, the thing I’d call your attention to if you’re watching this right now, is it does it with less risk. So the more profitable companies outperform, by about 1%, but do so with less volatility than the regular large cap, growth stocks. Okay. That’s our four factors. So let’s get on to coaching and education. Now, we alluded this a little bit earlier there is the importance of being able to hold strategy. We’re not only talking about that, we’re talking about all the little things that a coach working with you and your money should be able to identify. Can you do a backdoor Roth IRA? Are you financing your mortgages as efficiently as you can Does your will and trust actually demonstrate the actions that you want to your money to be in after you’re no longer there to direct them personally, all of these little inefficiencies with our money, make an enormous difference coaching and education does too. Why is this important? Well, I’m gonna give you guys just a little bit of math if you’re listening. And then for if you’re watching, you’re going to see this graphic. But I want you to picture let’s say, every single year, you spent two hours planning from age 25 to 65, two hours every year planning out your retirement. Now, we already know that most people spend more time planning their family vacation, they do planning their money, and to date, I’ve yet to meet the person that spends two hours every single year since age 25. planning their money, but let’s say we did do that. That would be a total of 80 hours. The trouble is if you live from 65 to age 95, for you and your spouse, that means you’re going to be depending on this money for 262,800 hours. So just think about this for a moment. Does that seem like an appropriate amount of work in the product out? Of course not. We have to spend more time thinking about our money, being in conversations about our money, reading books that deal with money, because if we don’t, we’re going to be in a spot where we’ve looked forward in the future where we only invested 80 hours into it or less. And we’re going to anticipate that it should produce our long term financial income for many, many, many times the amount of hours that we put in. Here’s another way to look at it. This big graph, huge pie chart demonstrates your tax time in retirement. And for those of you watching online, there’s this little tiny sliver I think there

Cory 29:00

is a line there. There, I’m pretty sure

Paul 29:04

I built this graph and it and I should. And literally PowerPoint laughed at me, it’s like, you didn’t really mean to put point 07. But 80 hours is only point 07 percent of the total amount 262,000 hours that your money is going to have to be producing those outcomes for you in the future. Like that is a huge deal. That’s 30 years our money might have to support us, we will likely spend more time living off of our capital at work than we spent accumulating all of it earning for our entire career. This is why that that literally a little tiny the finish line, I could make it. It represented on a graph of how much time we’re likely to spend a retirement. You’ve got to make sure we have the coaching and education and now when we work with clients, and what we recommend all of our clients do is get as many of your advisors to be okay with working with you in a virtual environment as possible because you don’t know where your wealth is gonna take you. So what do we do for education? Well, we meet with our clients online, we take time where they in their spouse can be in an office somewhere and meet with us, they could be in two separate offices working with us, you could bring your CPA in to that meeting and meet with an advisor, you might have an opportunity to see us live in an event. Or you could be sitting in your pajamas somewhere meeting with us. That’s not a picture of Cory in his pajamas meeting with you. But it is a you

Cory 30:38

have a green screen. So I can’t guarantee it’s not a T shirt that’s got a picture of a dress shirt over it just saying. But you know, but I have one other thing to admit Paul, and we didn’t talk about this, but we’ve got lots of great clients and we’ve got some longtime clients that they’re a years where they don’t return my calls enough to have spent two hours That you’re on their money. And it’s not a problem. I mean, we might want to solve it but we love you. It’s you know, we know life gets crazy. But that’s why we’ve created this podcast and this show. Because you driving around, you might get a chance to, to listen to some of these things and add on to that, even if we can’t always be walking with you every single step of the way, although we’re going to keep trying.

Paul 31:25

Yeah, and we’ll set and for those of you that are, you know, kind of considering maybe you’re building up a career somewhere, and you’re kind of been thinking to yourself that once we get out, access all my stock options in a move to another part of the country, or you might be somebody who owns a business right now and you’re kind of planning your exit in five or 10 years. I want you to imagine how important making sure your advisors are virtual is. You have an exit. You now have more money on your balance sheet than you’ve ever had before. And you move to the proverbial Arizona Palm Springs, the Nevada side of Tahoe, wherever you’re going. And now you’re going to start up fresh. And you’re going to try to find some big box financial retail advisor in a town you’ve not been living in for the last 20 years, and hope that the first choice with more money you’ve ever had is going to be the right choice. just build and develop a strategy with an advisor that has the ability to meet you, wherever you are. We are one of those advisors and there’s some others out there. I would encourage you to make sure for that reason so that the coaching is accessible to you that you build a team that is virtual or has the ability to be so now why is that so important? On screen right now I’ve got up this beautiful gym. It’s just gorgeous, built in somebody’s basement in a slammin mansion, and they’ve got every piece of equipment you could imagine it is gorgeous. Or there’s Bob Harper with a medicine ball now What do you think is likely to push you to better outcomes with your fitness? Having a really cool room of a gym to be able to work with? Or minimal amounts of equipment? But a coach? Think of it like golfing? Is it the club’s the best possible clubs? Or is it working with a coach to make sure you’re swinging those clubs as efficiently and as effectively as possible? Well, we all know it’s going to come down to the coach. Now, I’m not saying that we’re amazing, we’re pretty dang good. But the importance is the ability to access the coaching to create the environment where you have a chance to reflect on the action you have taken and the outcomes you want to have with your money. So that you’re co designing with somebody else that future that you’re creating, not just having a bunch of equipment or room looks like you probably use it looks like you’re probably squared away, except you’re not getting the results. So let’s jump on to the academic approach when it comes to investing and then we’re gonna land this plane. So what do we pull together? Well, we know that free markets work. We know about the four factor model, we talked about modern portfolio theory. And we talked about client education and coaching. Where those four overlap picture those four is a Venn diagram where they overlap is where sound financial group’s passive, structured investing model comes in. So I’m gonna give you an example of what it would look like to just build a portfolio only with indexes, diminishing the risk, increasing the amount of return we might be able to get over time. This is going to seem a little heady, as we talk through this when you’re on podcast only. So you might want to go back and watch the end of this one on YouTube. But don’t give up on us yet because you’re still going to get some nuggets. So why do people typically end up with such low returns? We know that over time, individual investors tend to perform much lower than institutions and the reason is they break strategy That’s where they freak out at some point, you just need to sell it.

Cory 35:04

Or they go moving everything into cash in 2008. Yeah, missing the return and the recovery. Uh huh.

Paul 35:11

Yeah, moving into cash. And when most people moved to cash was at the bottom, most people did not move to cash in 2008, when it was still good, and even those people didn’t get back in time. Or they’ll chase returns, who’s that asset manager? What are they doing? Well, let’s go invest with them. Now. They’ll try to try on stock picking or they’ll just be timing the market as we talked about earlier. So let’s just start with a portfolio. Our first portfolio construction is 100% Standard and Poor’s 500. We talked about this earlier, through 2000. By the way, this is some people’s portfolio. This is what many people think is the market

Cory 35:45

like a diversified portfolio. Yeah.

Paul 35:48

Now, this standard and poor’s 500 is 500 stocks all based in the US mostly large cap growth stocks. Okay. Now, the annualized return of that portfolio in 1970 through 2000 And 17 is 10.53 with standard deviation, that’s the risk units of 16.99. So let’s start by adding this gonna sound kind of funny actually adding 40% bonds 40% bonds, like we had 100% stock based portfolio, we’re adding 40% bonds that’s kind of killer return. Nope. rebalanced annually. 9.24%.

Cory 36:32

So we went down and rate of return by 10% ish but hadn’t for like 40% less reduction.

Paul 36:40

Yes, reduction in the volatility reduction in the risk. So let’s try portfolio three. So you can see on the screen we’re just adding different chunks. Now we’re going to add a European index that’s largely large cap and a small cap European index. Now we have a total of 30% International Our rate of return goes up a little. And our risk barely increases. So now we’re at 9.81 in return, and 11.02 and risk, remember, we started at 10.5 and almost 17% in standard deviation at the beginning of this portfolio for, we just add us small cap value, and us large cap value. And what you see is, we end up at 10.68% in return with less risk of only 11.48. So, which is my

Cory 37:39

favorite favorite thing? Like, it’s so great, Paul, sorry, I was I if the interrupt you landed. So this is the efficient frontier that we were talking about earlier. If you hear that old axiom of more risk, more return. It’s not always true and the time it’s not true is when you’re not already. On the efficient frontier, if you’re below that efficient frontier, we can actually get more rate of return for less risk just by making the portfolio more efficient.

Paul 38:12

And this is that gap perfect. And this is only looking at the portfolio itself. So Jordan, we can scrap the screen and now just be on me and Cory. Here’s what I want you guys to be able to leave with is that those illusions are real. But what people think, when we’ve talked through all these illusions is they’ve seen the negative outcomes. They’ve seen stock picking not work. Then they they tried it with an asset manager, then they tried it with their own ETrade account, and it didn’t work either. They tried market timing, and it didn’t work. They tried each of these things, and none of them worked. And what do people often say? That stock market is rigged. I’m just not going into it.

Cory 38:56

Or even worse, someone’s been invested in just the s&p 500 this whole time, they have held strategy and they think it’s working.

Paul 39:06

Yes. And for you listening now, you might be one of those people who has had some of those wrong turns in the market. But it’s not been because it’s your fault. It’s not because the market doesn’t work. In fact, I think all told, the most accessible and dependable wealth building tool to all of Americans is an academically allocated globally diversified portfolio, not the stock market. That’s how you hear people say it. The greatest growth through wealth building tool while they have their sleeves rolled up hidden funny noise buttons on msnbc. Not that it’s not the stock market. It is the way we participate in it. And by being aware of all these illusions, then looking at an existing portfolio and comparing it to what it would look like it was academically allocated Globally diversified. We just gave you a bit of an example with indexes. But what we end up doing when we manage money is we use a set of tools that allow us to have our clients in over 13,000 different positions in 42 different countries who are transacting in 190 plus countries. It’s all meant to be enormously diversified for the sake of achieving market returns. We don’t use the tilting to quote unquote beat the market or crush the market. The tilting, tilting a little more toward the market tilting a little more toward value tilting a little more towards small cap and tilting a little more toward profitable companies is meant to give us an extra one to one and a half percent rate of return, allowing you to have an advisor with you through that journey and overcome that frictional loss that comes with getting advice and getting coaching. So our goal with our clients is just to achieve market returns. Now that takes away a whole bunch of sexy marketing slogans of all our asset managers have a really good story. And we went on this due diligence trip to the Ritz Carlton, whatever it was, we don’t do any of that. Because we know what works. Here’s the key. If you’re listening to this now, and you’ve not done so yet, I just want to encourage you take the time, like for lack of a better way of saying it Be brave enough to realize that either you have enough confidence in your current strategy that it can withstand a second opinion. Or confronted with the statement I just made, you realize maybe it can’t withstand a second opinion. You can start getting that second opinion by being in communication with us. We’ll share our philosophy with you well, well, if appropriate, we’ll do an analysis of your investments for you to give you a sense of how they are doing when compared to being academically allocated and globally diversified. It’s nothing major, it’s Nothing fancy. We don’t even sell our clients on this philosophy. Rather we tell the story. And then people say, Well, what about this? And we’re able to present the facts to them. Well, what if we did this other thing, and then we’re able to show the facts. And in that scientific type of environment, we give you the opportunity to learn to challenge some of this, and work it out for yourself so that you can own the way that you invest in the market. You can understand how it works, which then gives you the freedom to not have to worry, and the ability to continue to question it not as questioning somebody’s opinion. But question it like, Does it still work? And that’s what we’re constantly doing is questioning and Does it still work? Does it still serve our clients? What is happening now and what should we do next? Because one of the most important things that should happen is that your investment should be creating the future you want, not just a return in the current year. Cory, anything else you want to leave with folks? As a parting thought,

Cory 43:03

No, I don’t I don’t think so well, just what you said, Paul, that we don’t have the way we just have the best way we’ve found in our research and we’re always looking for, for more. And that’s what we think everybody should be be doing. That’s why we’ve done this series to help you start that journey for yourself.

Paul 43:26

Right on. And as always, we encourage you to reach out to us, give us a review here on the podcast. Just make sure it’s honest. Send us a screenshot of it will send you a copy of our latest book, we’ll send you a copy of Coreys cape not required, or I think we still have a few copies left on Michael mccalla Wits is clockwork want to encourage you? To make that review send us a screenshot to info at SF GWA calm

Unknown Speaker 43:53

and we hope that this episode has been a contribution to you being able to design and build a good life

Cory 44:10

This is how legends are made.

Transcribed by https://otter.ai

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“Legends Are Made” Copyright 2017. Music, arrangement and lyrics by Sam Tinnesz, Savage Youth Music Publishing SESAC and Matt Bronleewe, UNSECRET Songs SESAC


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