PODCAST EPISODE 240: The Best Tech Fund You Never Knew You Owned





      • 00:00 – Episode Begins, Corey Welcomes Listeners
      • 04:05 – Intro topic: S&P 500 Beliefs
      • 05:00 – M.A.G.A. stocks and their index effect
      • 08:10 – Rebalancing in volatile markets
      • 09:25 – Analyzing the “drift”
      • 10:30 – Re-constitution cost
      • 12:30 – Drift conclusions
      • 14;55 – How to benefit from understanding drift
      • 17:05 – Sound Financial Group opportunity
      • 18:30 – Advising notes
      • 19:30 – Tracking market trends
      • 21:00 – portfolio comparisons to the market indices
      • 22:00 – external returns of having an advisor/coach
      • 24:30 – sharing this podcast can help others financially
      • 26:15 – Show conclusions
      • 27:48 – Episode end, thank you for listening



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Full Episode Transcription



Hello and welcome to your business your wealth. I am Corey Shepherd, president of sound financial group and one half of the hosting capacity of this show. Paul and I are taking a break this week. So we’re giving you a throwback article, sorry, throwback episode inspired by this article. Stocks and bonds are falling in lockstep at Pace unseen in decades. Now, this is very recent article from The Wall Street Journal. And one of the things we wanted to point out is this information here on the index performance in 2022. You notice Dow Jones Industrial Average, down 8.8, year to date, s&p 500, down 11.3, NASDAQ down 20. Now, you notice that the s&p and the Nasdaq while they’re down different amounts, they kind of look like they’re headed in parallel lines, very similar direction. So this is where our throwback episode about two years ago, we recorded this episode called the s&p 500, the best performing tech fund, you’d never knew you own. And that’s because over that last 10 year period from when we recorded that episode, five stocks, Facebook, Amazon, Microsoft, Google, Apple, were 12% of the entire Rate of Return of the s&p 520 22%.


There were 22% of the weighting.


Of they were 12% of the rate of return that had


Oh, I’m sorry, I stepped on it.


That’s okay. Well, all we have to do is do a cut to just the


screen, if you want to bring it yeah, if you want to bring back the bring it back to when you cut off of the graph, if you if you’re cool with that, but I would say 22% of the waiting 12% The rate of return, but I say 22% of the holdings of the s&p 500 is a little stronger. Yeah,


you’re doing an awesome job. So you want so I’m just going to come back to me only, or


you’re just on my graph. And then I’m going to just as you say, which leads us to so then they’ll have a place to cut it in.


Gotcha. Okay. Which leads us to this graph comparing index performance in in 2022. The Dow Jones the s&p 500.


Sorry, Cory, I was gonna say, what you do is say, which leads us to this throwback up. So as you’re exiting this graph, not as you’re going into it, sorry.


Okay. Perfect, perfect. Perfect. Yeah. Which leads us to our throwback episode, which we recorded a couple years ago, called the best performing tech fund, you never knew you own it. And it’s about the s&p 500. Because at that time, we noticed that five stocks out of 501% of all the companies, Microsoft, Amazon, Facebook, Google and Apple, some of whose whose names have officially changed, but you know who they are. That was five companies out of 500 were 22% of the entire holdings, because its cap weighted is weighted by the size of the companies, it’s not distributed evenly, and a full 12% of the entire rate of return from the last 10 years at that point. So now we’re seeing that move in the other direction. And it’s really evident how not diverse and tech heavy, the s&p 500 is. So enjoy this this throwback episode, which is surprisingly relevant for today, even though we recorded it two years ago, and we’ll see you back fresh next week.


Well, today, today, we’re talking about something you’ve been kind of passionate about. This has been an issue near and dear to your heart. The idea that the Standard Poor’s 500 is not quite what people might believe that it is. And you went to a conference earlier this year where this was kind of a topic and you brought back this article.


Yeah. So, you know, first and foremost, the media latches on to the s&p 500 as the standard for the market as a whole. And when we talk about broad swings of the markets up or the markets down, what they’re really talking about, in most cases, is an index like the s&p or the or the Dow, but most often the s&p 500. And people will think, Oh, well, 500 big companies in the United States. That’s a pretty wide berth, but it really is a lot narrower than people think and even more so over the last 10 years. So, Paul, this article that we found is talking about the Magga stocks. Now this is not, this is not putting on any bright red hats. We’re talking about Microsoft, Amazon, Google and Apple. And, Paul, if you want to scroll down, I’ll let since you’re moving the article, I’ll let you. Yeah, perfect thing to talk about yet.


So so we can see here is you have in this article, you’ve got Apple, Microsoft alphabet, now Google and or Google Now alphabet and Amazon. And you can see, the total contribution to return is 12.38% of the return of the Standard and Poor’s 500. Over the last 10 years. Now, we have a little bit you can, maybe you’re a fan of the current president and your mega mega mega, or maybe your Mega F, and you just don’t like you give it an F. But if that’s the case, we just had Facebook. And so Facebook is a another contribution return of point nine 3%. So over this window of time, and keep in mind, for a portion of the last 10 years, these companies were not so big, that they dominated the Standard and Poor’s 500. These companies are actually more likely to drive the return in the future, because they’re much more heavily weighted today than they were even over the last 10 years. And that’s super important to think about, because every time we see the s&p 500 on TV, they point to it as the market is up or the market is down my own personal opinion. But watch for it, you will see how often they point to whatever index has the greatest amount of volatility to keep you through the next commercial break. Now, of course, you did some other checking on current weighting, right?


Well, just if we just do the math in our in our heads, five stocks out of 500 is 1% of all the stocks in that index, nevermind the weightings. And the point is, is that nothing should be too greatly weighted over anything else. If we’re thinking we have 500 stocks, and we’re widely diversified. So we would hope that it’s a fairly even mix of all those but 1%, five out of 501% of the stocks are responsible for 12 and a half percent of the return over the last 10 years. That’s just wild that’s wildly concentrated. And that’s why we call in our episode, the best tech fund that you never knew you own. Because s&p 500 has largely been a tech fund for the last 10 years. Well, in


the end to go further, that also means 1% of the stocks make up about 19% of the allocation, or said differently. The other 495 positions in the s&p 500 are 89% of the portfolio. So it’s like you most of your money is not in the other 495 stocks. Right, it’s not spread out evenly among them, or even close, they all have a weighting. And it does not re balance. So one thing we talk about volatile times in the market is that the market goes up and down. And not every market moves simultaneously. Small cap moves differently than large cap international stocks move differently than domestic stocks. And as a result, we’re going to periodically rebalance the portfolio and you get the benefit of one selling after it’s gained traction in your portfolio and being sold and buying something that hasn’t done as well, which brings them both back up and rebalance as well. The s&p 500 Each time they reconstitute it says here is the new index, this is the way we’re going to do it. And there is a little bit of lead time to the traders in the marketplace that can get ahead of that small impact on the s&p 500 much larger impact on some other indexes. Now, Cory, I just want to kind of jump to when people think about Standard Poor’s 500. They’ve got a pretty good idea of it, they know that it reconstitutes meaning they come out and say here’s what’s in the s&p 500. Here’s what’s coming out. But what a lot of people don’t realize and you’ve probably heard this before of like, you know, management, creep or scope creep in your career. But there’s also a type of creep that occurs with index funds that we refer to as drift. And I’ve got a little visual, I want to share with all of you on this. And it’s it’s really kind of astounding how much things change inside of a span of even six months inside of India. index portfolio. So here’s just a visual look, and thank you to dimensional funds for putting this together. Here is your current index list whatever basket of securities that they say, here’s what’s going to be in the index. But just six months later, a bunch of stocks no longer qualify for whatever criteria the index has. And then when they reconstitute, they must sell all those positions and repurchase the ones below. Now, we talked a little bit in past episodes about reconstitution cost. The problem being that these securities in the box must be purchased, and the ones outside of the box must be sold after the drift has occurred.


And I love comparing it to something like the you know, right before the 2008 mortgage crisis, when everybody wanted to buy a house, like what happens when everyone wants to buy the same things all at the same time. Yep. And people get it real quick and mean is like, Oh, you’re paying more than you would have otherwise. So that reconstitution cost is a major inefficiency and drag on on these published indexes, because everybody’s buying and selling the same list of stocks in that really short, compressed amount of time.


Another kind of easy example that we can all notice is imagine if you said, hey, I want to get a and by the way, for those of you that are huge car fans, if I say anything wrong about a Corvette, my apologies in advance. But I want a Z 71 Corvette, I want it with the track package, it needs to be read, and a convertible, and I need it to be a 2017. That’s your criteria. Oh, by the way, I need it tomorrow. You don’t get much price flexibility in what you’re going to pay for that car. But if instead you said I’ve got some time, I’m going to make my selection appropriately. All I might care about is it needs to be two seater, and need to be a sports car with over 300 horsepower. And I need to have the ability to either have it come with the track package that I want or be able to install it after I get the car. That’s an example of you being able to pay fair market price for that vehicle that you couldn’t do if you’d like I gotta buy it tomorrow. And that’s what indexes have to do when they reconstitute, we’ll go into that deeper in another episode we’ve done in the past a little bit. But this is the part that affects the drift. This is an example of the reconstitution impact on something like the Russell 2000 index, largely small cap US stocks. And so here’s the small cap companies that are in the bottom 10% of market capitalization. So that would be like a great example of a small cap index. And what you can see is that when they reconstitute, they’re at nearly 100%, small cap. But then what happens some of the small cap companies, they get bigger, they no longer qualify as small cap companies, does the index immediately just know, next year, the index readjusts they get back up to 100%, small cap.


And what amazes me as I see this is I quit count, roughly seven out of 10 years, it’s a pretty steep drop, like immediately, yes, things are change. It’s not like a slow level, it just, bam, early in the year, you’re already way out of out of whack.


Yeah. So a great example would be we think we have 10% of our portfolio, or 15% of our portfolio in small cap. And because we own the index, it’s drifting from the minute we grab it, because nobody is going in and looking at a consistent, we’re not a fan of active management. But we are a fan of making sure that the asset classes we think we own are also the asset classes that we actually own. And you can see that happen year after year where starts out at 100%, it drops to 90, goes back up to 100%. It goes back down to 85. And this happens year after year after year we own any particular index is it just has drift. And we probably don’t know it. We may or may not even find out about when it reconstitutes but our entire portfolio is drifting throughout the year for all indexes. Not bad. I would much rather have people index investing than chasing around active manager, right, no question. But these are some of the things that nobody talks about out the financial press. Unless they have some amazing article that super click Beatty, that they can say the reason this one went down was because of the way they drifted.


Paul, let’s give folks some idea of what they can do with this new knowledge and how they can actually benefit from what we’ve unveiled and integrate this into their strategy and their balance sheet.


Well, one of the first things I would encourage everyone listening to do is when you see people talk about the verb market, on TV, just be centered on the fact that what they’re showing you is a part of the market. Now, whether they’re using the Dow Jones Industrial Average, the NASDAQ, some European index, the Nikkei, or the Standard and Poor’s 500. Any of them, it is a segment of an academically allocated globally diversified portfolio. Not the entire thing. So what the market does in one particular index is not indicative indicative of what your portfolio is doing.


But it’s addictive, to watch those stories and watch it move up and down. But I love that reminder that there’s I mean, there’s many markets, and there’s the overall marketplace as a whole. But your portfolio is always some subset of that will always be different to some degree than whatever they’re showing on that news channel. Because they don’t know what your exact portfolio is.


More importantly, I would even throw out you as a listener, if you’re not a client of ours, it might be the same. Well, that’s so but if you have an academically allocated globally diversified portfolio, your portfolio is not the same as any particular index that they’re touting on the news to keep us through the next commercial break. So what you can do is a, what was we’re doing something right now, you know, we’re still in the midst of COVID-19. As we record this, this won’t release for a few weeks, but I think we’re gonna keep doing this for a few months. Not only here at sound financial group, do we have a CEO that hasn’t gotten a haircut, and therefore, I’m not trimming my beard, because otherwise, the hair is gonna look extra long. If I shorten the beard?


Well, you got a president that hasn’t gotten a haircut, either. My wife said, hey, I can cut your hair. I said, Great if I can cut yours, and that ended the conversation really?


Well, so in this case, the other thing that we’re doing in the midst of COVID-19, because we’ve actually brought on some new staff, we have some additional resource is if you’re just worried about your portfolio, you’re worried about whether or not it can rebound with the rest of the market, then we’re actually waiving our usual $500 upfront portfolio review fee. Now, this is not our full scale coaching, this is not our wealth design build process. This is meant specifically for people who are worried about what’s going out on the market would like to be able to find out if they’re properly allocated in their 401 k to be able to do that, reach out to us at info at SFG wa.com. And we will walk you through sending us the statements and being able to give you what we refer to as Gao


Jordans, putting the link in our show notes. So they can just schedule a 15 minute call to get that process started and talk about better Any questions before they get a longer meeting.


That’s perfect. And and I think what we want that to do is just to reassure people, we don’t have a truckload of hand sanitizer or a bunch of masks that we can send out. So we’re just helping where we can, along with bring you quality content like this podcast, every week to two weeks depending on when we get a chance to drop a new recording out that having been said, what a lot of people sit with is so we that portfolio review free, and we’ll even send you the allocation model. So you can implement wherever your investments are now, whether it’s 401, K and IRA, etc. But what many people listening may think of as a cash, but it’s going to cost me something to have an advisor. And especially if you do much reading on the topic, it’s like well, the advisory fees and mutual fund fees totally erode your return. And I think it can, especially if that advisor isn’t value added. But let me share something that Corey was kind enough to build as one of the things we do is we just are somewhat relentless and making sure that we’re constantly checking ourselves that our strategies work. And one thing we’ve worked to do is have our portfolios have the tilt is for those of you that have watched the illusions of investing series, the tilts towards small cap value and more profitable companies. And then we figured, well, we just want to get that extra little bit of return that comes from the tilting the portfolio that way to be able to alleviate the cost of having had an advisor. And so this is us going back to 2002 Corey


Yeah. 2002 and this is this is me putting on my Paul Adams hat. This is much more common of a thing for you to go tinker with and say cool, right? Look what I discovered. So I was very proud to to have a moment with the so we we have the s&p 500 in here. then you can see that that kind of darker blueish line to compare that wild ride that it’s been on with some of these other portfolios, DFA sound financial group at 20 sound financial group 6040, just in case, that’s the risk level that you’re more inclined to be invested in, and the Vanguard 8020 target portfolio as a comparison. So that’s a, you know, Vanguard is the industry, you know, stallion of low cost, low fees. And so we use that as a standard for someone doing as really as well as they could do on their own without an advisor, because that’s how Vanguard is set up. And one of the things, Paul, I’m glad that you asked me to add the s&p 500 to this, because you just see, at the end, the wild take off that it that it went on, it was lagging a couple of these portfolios, especially the ad 20s, for a lot of years of this timeline, and then just in the last few is where it took off. And it’s just it’s astounding to see


well, and here’s the main point that I wanted to make and bring this up, is that if you had an 8020, no cost, no advisor, or if you had sound financial group, exact same 80% equities, 20% fixed income. But instead of all indexing the way Vanguard does that, instead, it’s being done with an academically allocated globally diversified portfolio, both of them being regularly rebalanced. And what you find is, it’s basically the same return, it’s basically the same return over 20 years. Now, what you can do with this, and I can’t encourage anyone listening enough, if you’re not currently working with an advisor with sound financial group, you can reach out to us, or you just need to find an advisor who’s going to act like a coach, rather than a financial product salesperson. And I say that with all the empathy in the world, because that’s where Cory and I both started in our careers was on that path of financial product sales. So I don’t I don’t mean to admonish anybody. But think about this timeline. We just were able to go through that over 20 years, one of the lowest cost portfolios that you could have possibly been in that you would have held strategy like perfectly, like you never had to be tucked off a cliff, you basically put your money in and you kept adding money, and you never looked at it, you never freaked out, you never had the Maalox moment. And you held strategy all the way for 18 years. And if you did that, you would have been in basically the same spot as somebody who had about $3 million invested, we took our full freight on fees. And your portfolio would have been slightly above where the no load portfolio would have been. But what else might have happened? And this is the beauty of having a coach, do you think a coach might have helped you enter into maybe your first real estate investment, and really understand how to go about doing that instead of you know, just kind of hoping praying and going to escrow. Second thing is what about something as simple as the backdoor Roth, or the ability to be strategic in different income years and converting your traditional 401 K Roth 401 K, are saving


money on payroll taxes when an owner and their spouse are both on the company payroll, which is a really common area that we We help business owners that the rates of return of those things are not what are showing up on this page. But they’re things that you can control 100%, unlike the market, which we can’t tell you what that’s going to do in any given year.


Exactly. Right. So the idea being is that there are these external returns to working with a coach, there’s the ability for a coach to maybe have you position your money into a better place for your emergency fund. And we go down the list all the way to we had a client that’s coming on board with us now. And they’re in the midst of a refi. And I said, Well, what caused you to have to do the refi. Like when listen to your podcast, I’m going to read your books. Like we realize that we’ve ignored some of the stuff and they’re starting to get into some of the strategies before ever engaging us. And that’s what we hope for all of you. Each time we do these recordings. I want you to know that Corey and I have a whole conversation about what this is going to mean or how valuable it will be to you. And then we back to how do we best communicate that. So something you can do that will help all the people who have not yet had a chance to hear about our show is give us a review. All you got to do is go to iTunes, Stitcher wherever you download your podcasts and simply do a review when you get something useful from this podcast. It’s super easy. Just hit the share button on your podcast app. and posted to your social media, give people one or two sentences of what you took away. And the reason that is key is we literally have clients today who have gone through this incredibly volatile market cycle. But they were able to do it with confidence, because they knew they had a strategy that they had thought through the coach and implement it. And when you do that review, when you share it on social media, you have the opportunity to make a tremendous difference for somebody that you may never meet. And we’ve got countless examples this this think about a gentleman that started working with us two and a half years ago. And it was a year before that, that he had seen a post of one of our early podcast episodes, saved it, waited a year, and then reached out to us. Now I would highly encourage all of you to not wait a year. But what I do want to encourage all of you to do is to take the time, if it’s not us, it should be somebody else that you fully disclose you open your financial kimono to and you get some real advice and coaching about how best to move with your money, you work too hard in your career, just let it languish on a balance sheet where it’s not being paid attention to, you can reach out to us and we’ll have that initial conversation with you in the show notes is the link where you can go right to and schedule with Cory and be able to really have that initial conversation to see if there’s a fit. And if nothing else, in this time, just think accurately. Just make sure that what you’re doing or the emotions you feel or their concern about the virus, concerned about the economy. Don’t let it run away with you. We hear about this being unprecedented times. But the unprecedented things that happen in unprecedented times are not one sided. There are incredible good that come out of things, no matter how hard they are. And there are things that are unprecedented levels of good, that can come from these things that we don’t fully understand. I want to encourage all of you to focus on that. Corey, anything else that you want to make sure that we send everybody off with today,


just that reminder that we want to support you and sharing with other folks. So whether it’s a review on iTunes, or a share to your social media, you take a screenshot of either one of those with a few words that you’ve you’ve written and send it to us at info at SFG wa.com. And we’d love to send you a copy of my book a copy of Paul’s book or clockwork by Michael McCalla wits. So that’ll just be our little thank you for any kind of honest review or our share to get this out there.


Right on. Thank you, Cory, and thank you to all of you. And we hope that this has been a contribution to you, being able to design and build a good life



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