Answers to Five Important Investment Questions with Dan Goldie

Episode: 67
Originally Aired: April 25, 2014
Topic: Answers to Five Important Investment Questions with Dan Goldie

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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  1. Introduction of Financial Planner and Author Dan Goldie
  2. Emotional Decisions About Money Often Turn Out Wrong
  3. Fear of Making Mistakes Often Leads to Mistakes
  4. Invest When You Have Money, Take It Out When You Don’t
  5. Financial Advisor Should Be Independent and Answer to You
  6. How Much You Invest in Stocks Is a Critical Decision
  7. Fixed-Benefit Pension Allows Greater Investing Flexibility
  8. Diversification of Asset Allocation Pays Off Over Time
  9. Odds Are Against Individual Investors Out to ‘Beat the Market’
  10. ‘Timing’ Is a Forecast Method; ‘Rebalancing’ Looks at Past Goals
  11. Don’t Pessimistic About Investing in America

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Introduction of Financial Planner and Author Dan Goldie

Hana Haatainen-Caye: Hello, and welcome to The Lange Money Hour I’m your host, Hana Haatainen-Caye, and, of course, I’m here with Jim Lange, CPA/Attorney and best-selling author of the first and second edition of Retire Secure!, and now, his new book, The Roth Revolution: Pay Taxes Once and Never Again. Jim’s guest tonight is Dan Goldie. Dan is a New York Times best-selling author of The Investment Answer: Learn to Manage Your Money and Protect Your Financial Future. He has been recognized by Barron’s magazine as one of the top one-hundred independent financial advisors in the United States. He has also appeared on ABC News, Fox Business News, National Public Radio, Yahoo Finance and CBS MoneyWatch, and has been quoted extensively in top newspapers and journals.

Tonight, we are going to talk about the five questions every investor needs to answer, and, as Dan says, even if you stay the course and do nothing with your investment portfolio, you are inherently answering all of these five questions. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Dan. The number is (412) 333-9385. Also, I want to mention that this is a special airing of The Lange Money Hour. Tonight, we are airing from 6 to 7, but we’ll be returning to our regular time slot in January when you can listen to the program at its normal time every first and third Wednesday from 7 to 8 p.m. You can catch the show every Sunday morning, as well at 9 a.m. right here on KQV. Good evening, Jim.

Jim Lange: Thank you, and welcome to the show, Dan.

Dan Goldie:  Thank you to you both.  I’m glad to be here.

Jim Lange:  Dan, first, I loved your book, and by the way, if anybody didn’t catch it, the name of the book is The Investment Answer, by Daniel Goldie and Gordon Murray.  I found it straightforward, relatively short, very good information.  But Dan, you’re not the only author on the book.  There is another author, Gordon Murray, and I understand there’s a little story behind the book with you and Gordon Murray.  Could you start by telling our listeners why you wrote this and what your involvement with Gordon Murray is?

Dan Goldie:  Well, we wrote this really because Gordon, who unfortunately passed away this January of an inoperable brain tumor, wanted to write a book that would be very educational and informative to everyday investors, and he’d been wanting to do that for a long time, and when he was diagnosed with his brain tumor, he was given about a year to live, and in that last year — actually, it turned out to be two years — in that time, he devoted his entire life to giving back to others, and this book project that we did together was the last thing that he was able to do before he passed.  So, it’s really been a pleasure for me to have worked with him on that, and now I’m trying to carry on his wishes and keep the book alive and the information available to all investors who are interested.

Jim Lange:  Well, I think the book is both timely and classic, but you and Gordon came from different angles.  Could you give a very brief background for where you came from and where Gordon came from and apparently ended up at the same conclusion?

Dan Goldie:  Yes, that’s right.  Yes, Gordon spent 25 years working on Wall Street for three major Wall Street firms:  Goldman Sachs, Lehman Brothers and Credit Suisse, and retired from Wall Street in 2001, and he worked on the institutional side of the business, basically selling bonds to big pension funds, endowment funds and large institutional investors, and after leaving the pro tennis tour in 1991, I started working on the individual investor side of the business as an independent financial advisor.  So, he came from the big institutional world; I came from the individual investor world, and we sort of met together because we shared a common investment approach that we thought was right for most people.

Jim Lange:  Well, I think you really hit the ball with the racket, in your case!  And frankly, there’s a part of me that wants to talk about the tennis tour, but I think it’d probably be better if we got to some of the main points of the book, and one of them, and I think it’s a really good question, and it’s how you pretty much start the book, is should you be a do-it-yourself investor?  Now, I have a friend and he says, “Hey, I have a well-diversified portfolio with Vanguard.  I have really low fees.  Why should I pay an investor any money?”  And in Gordon’s case, here’s Gordon, this guy who’s been on Wall Street for 20 years, yet he was coming to you for financial advice and to invest his money.  What is the advice that you would give to both sophisticated and unsophisticated listeners about should you be a do-it-yourselfer?

2. Emotional Decisions About Money Often Turn Out Wrong

Dan Goldie:  Well, I think that there are very good vehicles out there for do-it-yourself investors, Vanguard perhaps being the top of the list of good vehicles available, but not the only available option.  But I think, for most people, really should realize that if you look at the data on individual investor’s success, it doesn’t look very attractive.  Most investors make a lot of mistakes, and one of the problems we have is we’re all human beings, and because of that, we make emotional decisions with our money, and oftentimes, those emotional decisions turn out to be against our best interests.  For example, in late ’08, early ’09, when markets were looking very, very terrible, and it looked like the world was going to end and the financial system might just completely lock up and freeze, there were not many people who were sticking around in the market to get a possible recovery, yet, eventually, that’s what happened is markets did come back in ’09 and have been on the recovery mode since then, and individual investors pulled lots of money out of equity mutual funds ever since ’08 and continuing through today.  And that’s just part of our emotional makeup.  We get scared when things go down and we get overly enthusiastic when things go up, and so we end up buying high and selling low too often.

Jim Lange:  Yeah, I thought it was particularly interesting that you make the point, and we’ve actually made this point several times.  This year, we’ve actually had behavioral financial experts on that, in effect, a Vanguard investor on their own does worse than Vanguard.  Could you explain that, please?

Dan Goldie:  Well, that’s because it’s the idea that you put money in and out of funds at the wrong time.  So, if you had just bought the fund at the very beginning and held it all the way through, you would get the return that the fund delivered, but most people don’t do that.  They come in and out of the fund usually at the wrong time.  They’ll go in at higher prices and go out at lower prices, and that’s why they end up getting lower returns.

Jim Lange:  Yeah, it’s interesting that my buddy, who says, “Oh, there’s no need to pay a financial guy.  I’ll just do it all myself.”  And then I said, “Oh, by the way, what happened when the technology stocks were really taking off?”  He said, “Oh, I put a lot of money in technology.”  I said, “Well, did you lose a lot of money?”  “Oh yeah, I lost a lot of money,” and I was thinking, well, maybe if he had been with somebody who was a little bit more sound, a little bit more objective, maybe he wouldn’t done that, because you talk about a couple things.  One, you talk about what you call the “herd mentality,” but I’ll tell you the thing that I thought was even more interesting.  You talk about the fear of regret.  Could you explain the fear of regret and how that influences what we do in our behavior with regards to investing?


3. Fear of Making Mistakes Often Leads to Mistakes

Dan Goldie:  Well, this is the fear of making a mistake and regretting it later, or taking a course of action and having it not work out for you, which could just be a random event, and you think that it was your fault for making the wrong choice.  It’s just inherent in all human beings that we have that, and so, it tends to make us either freeze and not make decisions at all or end up making the wrong decisions.

Jim Lange:  So, literally, it’s the fear of making a mistake that causes us, in effect, to do nothing or to do something, or to do something when we should do nothing, and to do nothing when we should do something?  Is there any kind of rule of thumb on that?  Because I actually thought that that was really somewhat profound, that the fear of doing something wrong makes us do something wrong.

Dan Goldie:  Yes.  I don’t really know how to explain it further.

Jim Lange:  OK, I think listeners have the idea, which is that you’re kind of so afraid of doing something wrong, in a way, you maybe become too conservative at a certain point.  So, for example, you think, “Oh my goodness, I can’t lose any more money.  I have to get out of the market.”  Like you said, at the bottom in 2008, and then after the market rebounds, you think, “Oh no, I missed that huge rebound.  I’d better get in in case I miss another great rise.”  And they end up missing both.  The other thing, one of my favorite quotes from that chapter is “Our view is that the right time to invest is when you have the money, and the right time to sell is when you need the money.”

Dan Goldie:  Right.

Jim Lange:  Could you explain that?  Because I think that that’s an interesting thing, because a lot of times, people say, “Hey, I just made 30 percent.  I want to sell half of it and then leave the other half here,” and you’re saying, “Hey, that’s not the way to determine when you should buy or sell.”


4. Invest When You Have Money, Take It Out When You Don’t

Dan Goldie:  Well, I think a lot of these decisions come down to the way our brains are hardwired, and a lot of this idea that the neuroeconomics approach to thinking about things shows us that we don’t really think logically about a lot of our money decisions.  So, like what you said, someone makes a profit on an investment and one idea is, “Well, I’ll take my initial investment off the table, and that way, I know I at least covered my investment, and then I’ll let the rest ride.”  There’s a lot of rules of thumb and things like that that people follow that don’t make, I don’t think, a lot of investment logic, but, to me, the bottom line is that you can capture market returns over a long period of time.  You’re going to be ahead of the game, and to do that, the best way would be to invest your money in the markets as soon as you have it, and leave it in there until you need it, and then take it out.  It’s as simple as that.  You invest when you have the money and you take the money out when you need to spend it and don’t monkey around with it in between.

Jim Lange:  Well, let me take it a step further, and to simplify, I want to take the tax issue off the table.  So, let’s say that you have investments in an IRA or a qualified plan, so buying and selling has no tax implications, and let’s, for discussion’s sake, let’s even really simplify it and say that there aren’t any buying or selling expenses, which I know isn’t true.  Does it make any difference what you paid for an investment to determine whether you should sell it or not?

Dan Goldie:  No, it shouldn’t.

Jim Lange:  All right.  By the way, I happen to agree with you, but not a lot of people do, and I think that that’s really a good point because in some of my reviews, one of the criticisms that I received was that I wasn’t advocating a sale on an investment that did well, and then later it did go down in value, and the criticism was, “Hey, it did really well.  You should’ve just taken your profits, or at least half the profits, and sell half, but you didn’t.”  And what you’re saying is, other than taxes, or maybe costs, it really doesn’t matter what you paid for it to determine when you should sell it.

Dan Goldie:  Well, I think the distinction is that we’re talking about broad market investments in our book, and we’re not talking about individual stocks or things like that, and with a broad market portfolio type of approach, you just should stay invested to cut your taxes and your costs and capture the market’s return over the long run.  Another way to think about it is, the market doesn’t care when you bought or what price you bought, and it doesn’t make any difference.  Markets are going to do what they’re going to do, independent of when you came in or what price you paid.  So it’s irrelevant.

Jim Lange:  Yeah, and another thing that you talk about, you give a couple guidelines about choosing an investment advisor, and you gave some things that were kind of standard, what their background is, what their credentials are, et cetera, but one of the things that I’m very big on talking about … in fact, we’ve actually had an expert who spent an entire hour on this whole issue, is talking about fiduciary duty.  And you said that your broker’s first duty is to his firm, not to you, even though you’re his customer.  Now, I think a lot of people assume that a stockbroker or a financial advisor or an insurance agent has their best interest in mind, but from what I can see that you’re writing is that a broker legally doesn’t have to have your interests in mind, that is, doesn’t have to have the customer’s best interests, but he actually has to have the firm that he’s worked for, he owes them a fiduciary duty.  Could you talk about the importance of the fiduciary duty and who your financial professional should be answering to?



5. Financial Advisor Should Be Independent and Answer to You

Dan Goldie:  Well, I think a broker, when they’re working in the capacity of a broker-dealer, as opposed to a registered investment advisor, when they’re working as a broker-dealer, then their job is to sell securities, and so they’re a representative of the firm and their only requirement to the client is that the securities be appropriate for the client.  They don’t have to put the client’s interests first in a pure fiduciary relationship.  And so, I believe that’s the legal definition of it is that the brokers are required to make sure that the investments are “suitable.”  But we just think that, to make things in the best interests of investors, investors should be looking for someone who’s truly independent and who is required, by law, to put their interests first, and that would be a registered investment advisor who’s a truly independent advisor and only gets compensation from their clients, not from other sources.

Jim Lange:  Well, I think that’s true.  I also think it is very good for clients to understand how their advisor is being compensated, and I hear people say, “Oh well, I’m getting this done for free.”  Well, nobody works for free, and I think it’s really good to hear exactly how people are compensated, and I happen to agree with you that the way to go is a fee-only registered investment advisor.  Now, that might sound self-serving because I am a fee-only registered investment advisor, and I’m also a CPA and an attorney, which, by the way, has the same fiduciary duty.  As both a CPA and an attorney, I am required to put the client’s best interests ahead of anybody that I might be working with or associated with.  It’s the client’s best interests that comes first.  I think sometimes attorneys overdo that and get themselves and their clients in trouble, but I think the important thing is is that you want to be working with somebody who has both a legal and a moral obligation to put your interests, that is, the client’s interests, ahead of their own and ahead of the company that they’re working for.

Dan Goldie:  Right, that’s true.  I agree.

Hana Haatainen-Caye:  OK, gentlemen, we’re going to take a quick break.  When we come back, we’ll continue talking about the five questions every investor needs to answer, and I want to remind our listeners out there that we are live tonight, so if you have any questions, you can give us a call at (412) 333-9385.  We’ll be right back with Dan Goldie, co-author of The Investment Answer: Learn to Manage Your Money and Protect Your Financial Future, with Jim Lange on The Lange Money Hour.




Hana Haatainen-Caye:  Welcome back to The Lange Money Hour.  This is Hana Haatainen-Caye, and I’m here with Jim Lange and Dan Goldie.

Jim Lange:  So, Dan, and by the way, if anybody’s keeping score, we’ve only really covered the first answer of investment answers should you do it yourself.  The next one that you talk about is asset allocation.  So, I guess what you’re going to do now is to tell our listeners the best way to get really high returns with very low risk.  Could you do that, Dan?  That’s what our listeners want: really high returns and really low risk.

6. How Much You Invest in Stocks Is a Critical Decision

Dan Goldie:  We would all like that.  Unfortunately, in the real world, I don’t think that you’re going to find that very often.  Securities are priced pretty efficiently, and so what comes with higher return, of course, is higher risk, and if you want lower risk, you’re going to have to accept lower expected returns.  But the asset allocation decision is how you divvy up your money across the major asset classes that we’re defining as stocks, bonds, and cash, and what we have found is that most investors over time will kind of collect investments and they won’t really know what their allocation is at any given time.  It’s just a function of things that they’ve collected over their lives, and that’s how their money is allocated.  And so we’re advocating that people pay attention to their allocation and actually have a plan ahead of time as to, well, what percentage of my money should I have in stocks versus fixed income, bonds and cash, as that really will determine the vast majority of their future rate of return and the risk level going forward.  So, that percentage of the money you put in stocks, that really is a very, very important decision.

Jim Lange:  Well, I think it’s key, and I think that what you pointed out, and I’ve phrased it a little bit differently.  The way I’ve typically phrased it is most people’s financial situation, and by the way, including legal accounting and tax, but just for our purposes, investments, is not the result of a well-thought-out investment strategy, but it is rather the result of a bunch of individual decisions made in isolation, all of which seemed to make sense at the time that they made them, but they’re not working together, and what you don’t have is a well-diversified portfolio with appropriate asset allocation.  So I think that’s an enormous problem, and I think it’s even more widespread when people have a variety of investment houses or investment vehicles.  So, for example, people might say, “Well, hey, I have some in Vanguard and I have some in Fidelity and I have some in T. Rowe Price,” and then if you actually kind of look under the hood, they might have large-cap mutual funds in all of them, so it turns out they’re not very well diversified at all.

Dan Goldie:  Well, that’s true.  In fact, a lot of times, what you’ll find with portfolios is when you have the money spread out across a bunch of different mutual funds managed by different entities, that there’s a lot of cross-holding.  So a lot of the same stocks will appear in different funds, and you’ll actually own the same stocks multiple times across your portfolio, or you’ll have the same asset classes in your portfolio in different funds, and it becomes very difficult, if not impossible, to know exactly how your money is allocated across all these different areas because you can’t really aggregate together and mathematically calculate your allocations when it’s divvied up so completely like that.

Jim Lange:  I think one of the problems, at least that I have experienced, is sometimes clients are so afraid that the advisor is going to overreach and try to manage all their assets that they don’t tell them about other assets that they have.  So you have independent money managers, you know, it’s kind of like going to one doctor for your right arm and one doctor for your left arm and the doctors don’t talk to each other, and they’re giving conflicting, or, worse yet, the same medicine so the client’s taking it twice, and I sometimes think that does happen in the investment world, and what I tell people is hey, if you don’t want to give the combination of our firm and one of the money managers that we work with all your money, that’s fine, but tell us where your other money is so somebody — and preferably us — can make sure that your overall portfolio is appropriately diversified and has proper asset allocation.

Dan Goldie:  Yes, I agree.  It’s important for the end investor to make sure that the advisor they’re working with knows about all of the assets just for exactly the reason you’re stating so that decisions can be made encompassing all of the information so a smart choice can be made.

Jim Lange:  And now, if you don’t mind, I’d like to talk about two points that are not in your book on asset allocation, and by the way, for our listeners, both Dan and I are registered investment advisors and we both actually do this.  I also do retirement and estate planning as an estate attorney and CPA doing tax returns and Roth IRA conversions, but both Dan and I are assets-under-management registered investment advisors.  So these are some real-life situations that we deal with.  One of the ones that I deal with is, I have a fair amount of older, relatively wealthy clients that have, let’s call it, a Depression-era mentality or whatever you might want to call it, so that they’re not great spenders relative to the amount of money that they have, and the way they are diversified might even be on a traditional scale and a comfort level appropriate for them, but the reality of it is is that based on how much money they have and how much money they’re spending, the reality is that much of that money is ultimately going to go to children, and I wonder if it is appropriate, and I sometimes bring this up, to have, in effect, two different portfolios, if you will.  Let’s just say, for discussion’s sake, you have a couple that has $2 million, and they figure that between their Social Security and their pension, even the most conservative withdrawal rate on $1 million is more than enough to meet their needs.  Does it make sense to invest that second million dollars, not as, say, people in their 70s or 80s that have a shorter investment horizon, but people, the ages of their children that might be in their 30s or 40s, or even grandchildren, who might be quite young.  Do you ever run into that issue or do you ever address that?

Dan Goldie:  I’ve run into that a few times.  I’ve never thought of splitting the money up like you’re describing, but I do have some clients that are very conservative with the amount of money they’re spending and I try to approach that by educating them and letting them know that they are being very conservative, and they’re doing it by choice and it makes them feel safe, and they feel good about it.  So, I don’t see it as being a problem.  I mean, they understand that they’re potentially leaving income on the table that they could be spending, and they understand that money will go to their heirs.  But I don’t particularly see that as a problem.  I think it’s just an individual choice.

Jim Lange:  Yeah, sure, and I guess what I try to do is I try to point out, hey, maybe with at least a portion of your money, you can be a little bit more as a long-term investor, which might be a little bit more in stocks as opposed to bonds.  The other issue that I sometimes run into is I have a lot of clients with some traditional pensions, whether they be midlevel managers, some people at Westinghouse, a lot of teachers, for example, have a traditional defined benefit pension, where they’re getting X dollars a month for the rest of their lives or X dollars a month for the rest of their lives and their spouse’s lives.  And let’s say that somebody’s getting a $50,000 or $60,000 pension, or even a smaller one, and by the way, to a lesser extent, I would say the same thing is true of Social Security.  Do you ever look at that money as kind of like a, in effect, bond equivalent, and you might have a different recommended asset allocation for somebody with a pension and Social Security versus somebody who has no pension and maybe a minimum Social Security?


7. Fixed-Benefit Pension Allows Greater Investing Flexibility

Dan Goldie:  Yes, I think that’s a great point.  That comes up quite regularly in my practice where someone has a defined benefit pension plan or some sort of old-style plan where they’re getting a fixed payment for life, and that equates to a giant bond, and we can calculate the present value of that bond and assume that that present value amount is invested in fixed income and build the portfolio around that so that their actual investment portfolio would be more allocated to stocks than would otherwise be the case because they’ve got that guaranteed cash flow coming.  They can afford to do that, and it enables them to be positioned for higher returns with all of their money and just have all the money more appropriately allocated.  Otherwise, they’d be invested too conservatively.

Jim Lange:  Yeah, I agree with you there.  If we can move on to the issue of diversification?  By the way, I should mention that your book has some testimonials from literally the top asset allocation and diversification experts.  We’re talking about Gene Fama, Ken French, Harry Markowitz, these names might not be familiar to a lot of our listeners, but to the financial advisors, and I know we have a lot of financial advisors listening, I know that these names are familiar.  Harry Markowitz might be considered the father of modern portfolio theory.  So, could you tell us about the benefits of diversification, and how has that worked in practice, somebody being well-diversified if you will?

8. Diversification of Asset Allocation Pays Off Over Time

Dan Goldie:  Well, what we’re calling the diversification decision is really the next cut down from broad allocation.  So we’re saying, so, within the stock market allocations that you’ve chosen, if you’ve chosen to put in 60 percent of your money in stocks, well, OK, which equity asset classes do you choose?  And so, there, we would want to look at real estate, foreign stocks, domestic stocks, small companies, value companies, all the different potential asset classes of equities that you would put your money in, and the same thing with fixed income, and doing it in a smart way, and our belief is that if you diversify well across these asset classes that, over the long run, they’re not going to correlate perfectly.  So, you will get some diversification benefits and that will have some risk reduction to it and some possible return enhancement, particularly from the small cap and value stocks, which, historically, have outperformed broader markets.

And so, the knock on diversification that some people will say is that, well, diversification is all well and good, but when markets really turn south badly, like they did in ’08 and ’09, all the asset classes go down together.  All the equity asset classes go down together.  And that is true, and that’s been the case for a long, long time.  In fact, in ’73 and ’74, the same thing happened.  All the equity classes went down during that downturn.  So, diversification does not say that it protects you on the downside during those extreme downward movements.  That’s why you have fixed income in your portfolio.  But over full market cycles, I think there is a mathematical advantage to being well-diversified across these categories.

Jim Lange:  You brought up a point that you kind of glossed over that I think bears closer examination.  You said that, historically, value has done better than growth and small-cap has done better than large cap.  Can you, let’s say, expand on those thoughts?  Because I think there’s a lot of people who kind of think that the market, if you will, and specifically even the domestic market, not even talking about international, is the S&P 500, and you’re saying, “Wait, wait, wait, there’s some divisions within the stock market, and the large-cap growth, which is what most of the S&P 500 is, is not necessarily the historically best-performing asset class.”

Dan Goldie:  Well, if you take all of the stocks that trade, say, in the United States, and you were to divvy them up by risk factor, what the evidence is that I’ve seen is that there are two additional risk factors other than the stock market’s overall risk that are at play that determine risk and return, and one of those additional risk factors is company size, and this seems rather intuitive to most people, which is that smaller companies are more risky than bigger companies.  They’re more susceptible to economic downturns.  They don’t have large financial support like a big company does.  So they would naturally seem to be inherently more risky.  Certainly, the stock price volatility is greater just mathematically.  So, smaller companies being more risky than large companies, that seems intuitively clear to most people, and so my view is that smaller companies, because they’re more risky, they should be priced by the market on average to get higher returns, and if you look back historically over long periods of time, you see pretty consistently that small companies do deliver higher returns than big companies.  And the same thing for value stocks.

This is another risk factor that’s not so obvious that a value company, the way the academics would define it, is these are companies that have low stock prices relative to earnings and book value and sales and other measures of valuation, and the reason that these companies have these low stock prices is because they’re in some sort of distress.  And so they’re inherently more risky because they’re struggling for some reason.  The stock market knows it and prices them low, and at that moment, when they’re priced low and they’re in distress, they are more risky and therefore from that point going forward, they should have higher expected returns as a group than the market.  And what studies have shown, though, is that only a small percentage of these small cap and value companies actually capture these higher returns, and they do so in such a magnificent way that it lifts the average of the whole group up.  So if you invest in small cap and value stocks, you should expect more volatility, more risk, but higher average returns over longer periods of time.

Hana Haatainen-Caye:  When we come back, we’ll continue this enlightening conversation with Dan Goldie and Jim Lange on The Lange Money Hour, Where Smart Money Talks.




Hana Haatainen-Caye:  Welcome back to The Lange Money Hour, Where Smart Money Talks.  We still have some time for a call or two, so feel free to call in with your questions for Dan Goldie.  The number is (412) 333-9385.


Jim Lange:  Before we leave the question of asset allocation, and Dan, I know that one of the groups of funds that you work with is the Dimensional Funds.  Do they, or are there other mutual funds that tend to favor some of the asset classes that you have been talking about that have performed better over a period of time?  So, is there something either unique about Dimensional Funds or other funds that do tend to favor some of these classes that have done better, such as small cap and value?

Dan Goldie:  Well, Dimensional Funds, those are the funds that I know very well, and many of those funds are designed specifically to capture the small cap and value premiums and tilt the portfolios towards small cap and value, both in the U.S. and in the international markets, as well as the emerging markets.  So they certainly offer investors the ability to tilt the portfolio to the more risky but higher returning areas.

Jim Lange:  Is that the way that, you know, sometimes, people are pretty skeptical and they say, “Hey, Dimensional Funds are really a passive approach” — and we’re going to get into passive versus active in a few minutes — “but they’re still basically an index approach.  How can an index approach beat the index?”  Is that one of the ways they do it, through a slightly different asset-allocation recommendation?

Dan Goldie:  Well, a plain vanilla index fund is basically going to track a third-party benchmark, like the Standard & Poor’s 500 index will hold the 500 stocks in the S&P index in the exact proportion of the index, and a firm like Dimensional will not do that.  They will hold stocks in differing proportions depending on the efficiency of trading and the different stocks at different times and so forth.  So, they try to take a passive approach, meaning a no-forecasting approach, but they don’t make themselves a slave to a third-party index.  They think that enables them to be more patient and effective traders, and there’s other advantages that they believe comes to the table without having to mirror an index and reconstitute to the index and those types of things.  But you’re getting very specific when you talk about all that stuff.

Jim Lange:  OK.  All right, well, maybe we’ll just go back a step a little bit and talk about the difference between passive money management and active money management and what has historically worked better?

9. Odds Are Against Individual Investors Out to ‘Beat the Market’

Dan Goldie:  Well, my view, for most individual investors, I think that the evidence is pretty clear that really trying to beat the market, either by trying to select stocks yourself or trying to find that mutual fund or investment manager that’s going to be the market-beating person, the odds are against you, I think, when you’re trying to do that.  The costs are certainly not on your side, and the evidence is pretty clear that the vast majority of professional investors underperform their benchmarks on average over a longer time period, and so I think a smart individual investor looks at that and says, “Well, I’m going to put the odds on my side and take a more passive approach,” using either index funds or some sort of passive vehicle where, in essence, what you’re trying to do is capture the returns that markets make available to you over a long period of time, and if you can do that, you’re probably going to outperform the vast majority of all other investors because most people are not following that low-cost passive route, and their expenses are higher and their mistakes are greater and they’re going to end up with lower returns in the long run.

Jim Lange:  And by the way, I should also mention that I’m kind of a hybrid because I actually work with both passive money managers and, specifically, with Dimensional Funds, and a specific Dimensional Fund advisor, P.J. DiNuzzo, who I think does a great job, and I also work with active money managers, who, I think, are the exception to the rule that you’re talking about.  So, I don’t want to agree with you 100 percent, because I do think there are some active money managers who do add value.  So, I think we’ve hit four of the investment answers, but I do want to get to one more before we wrap up, and then have a few other closing comments and a few other questions that might not be specific to the “five answers,” if you will.  But the other one was when should you buy and sell assets in your portfolio?  We touched on this a little bit earlier, but I think that that was one of your answers when you should buy and sell assets in your portfolio.

Dan Goldie:  Yeah, so here, we’re talking about rebalancing a portfolio.  So what we’re recommending investors do is figure out all of these decisions and what their portfolio allocation targets are, and once you know those targets, of course markets will move your money up and down as markets fluctuate over time, and periodically, then you’ll need to rebalance your portfolio back to your original target.  So, for example, if you started out with 20 percent of your money in large value stocks, and large value stocks have a good few months, and now you have, say, 25 percent of your money in large value because it’s outperformed other asset classes in your portfolio, then it might be time to taper that back some, sell some large value and buy something else.  And so, that rebalancing decision, it sounds simple, but it really is quite hard to do in practice because our emotions tell us to buy what has done well recently, to buy more of it, and rebalancing has you doing the opposite.  Rebalancing, on average, will have you selling when things are high and buying when things are low, and that’s what you want to be doing.

Jim Lange:  And emotionally, that’s the exact opposite, because in 2008, after you just lost your shirt, your emotions say, “Get the heck out of here,” where rebalancing would say, “Hey, put more money into the market where you just lost your shirt, not pull money out,” and likewise, when you’re feeling great and the market’s good, and you’re saying, “Hey, I think I can put a little bit more money in the market,” you’re saying the rebalancing, assuming you’re going to stick with your original asset allocation plan, would be to, in effect, sell things that have just done well.

Dan Goldie:  That’s right.  It’s counterintuitive in many ways, and it’s very difficult.  That ’08-’09 period in particular, and the end of ’08 through the early part of ’09 when the market was bottoming out there and we were really under a lot of distress.  I know, in my firm, we did a number of rebalancing cycles through there where we bought equity funds for clients, and that was very difficult, but it turned out to work out well.

Jim Lange:  Yeah.  How often do you rebalance?

Dan Goldie:  Well, what we do here is we look at portfolios every six weeks and we have parameters around the target percentages that we allow some movement up and down.  So, the rebalancing doesn’t happen every six weeks, it happens about once or twice a year, but we do review portfolios often so that we can catch any times that the markets may be out of alignment.

Jim Lange:  Yeah, and could you distinguish between rebalancing and timing?

10. ‘Timing’ Is a Forecast Method; ‘Rebalancing’ Looks at Past Goals

Dan Goldie:  Well, timing I view as a forecasting method.  So, timing is when you’re going to make changes based on what you think is going to happen in the future, and rebalancing is merely adjusting the portfolio to what has occurred in the past with no anticipation of the future.

Jim Lange:  All right, and finally, you have a little section on alternative investments, because it seems to me that if you were really going to be really well-allocated, that we should want as many asset classes as we can.  Why not gold?  Why not some of the hedge funds?  Why not some commodities, for example?  Why shouldn’t some of these asset classes where at least some people at some time have made money, why would that not add greater diversification and enhance a portfolio?

Dan Goldie:  Well, the point of view that Gordon and I have on that is that those alternative asset classes like the ones you mentioned just aren’t necessary.  Some of those are already sort of included in a broadly diversified portfolio, like you’d have gold mining companies in your diversified portfolio if you take this approach, for example, and other commodity operating companies would be in the portfolio already.  So if you’re buying these metals on the side, then you’re really, in our view, speculating, because these metals basically are not operating companies.  They don’t pay dividends or interest.  They’re just metals, and the long run expected returns of the metals should be the rate of inflation.  And so, we just don’t think that that’s really a necessary part of a well-diversified portfolio.  I mean, if you wanted to do it, we would say keep the amount small, but I would say really it’s not necessary, and with hedge funds and these types of more exotic alternatives, I just think that they’re so expensive, and the really good ones are just not accessible to the average investor.  It seems to me that that’s not something that the average investor should be messing around with, and the same thing with private equity.

Jim Lange:  Yeah, it’s interesting.  One of the money managers that I work with, a guy named Charlie Smith at Fort Pitt Capital, says, “Don’t invest in gold.  Invest in mining companies.”  So, if gold does well, you will do well, but you are still investing in a live company, just like you’d mentioned, that is out to try to make profit and pay dividends and add value to the investor.

Dan Goldie:  Yeah, I would agree with that.  Yeah.

Jim Lange:  Yeah, so what you’re saying, I think, makes a lot of sense.  By the way, we only have a few minutes left.  I just want to tell people again, one of the nice things, as a radio host, I like to read the book of my guests, and sometimes, as one example, Jane Bryant Quinn was on and her book, which is a very good book, by the way, but it was about 800 pages, and it was pretty tough to get through.  Yours, on the other hand, is much shorter.  It looks like it’s about 85 pages.  That even includes some of the indexes, so it’s really about 70 pages and not even 70 big pages.  So, it’s a relatively short read.  I think most people could probably read it in one sitting.  It is called The Investment Answer, by Daniel Goldie and Gordon Murray.  Dan, would you recommend that people get it at Amazon, or should they go to your website to get it?

Dan Goldie:  The book is not available through my website, so you can go to Amazon or any of the online bookstores or most of the physical bookstores would have the book.

Jim Lange:  All right, well, again, I’m going to recommend the book.  Do you have any last thoughts for our listeners regarding anything that we’ve said or even anything that we haven’t said?


11. Don’t Pessimistic About Investing in America

Dan Goldie:  Well, maybe just to say, you know, have faith in America and invest in America.  I think that there’s so much pessimism that I hear on the airwaves now that I think we run the risk of scaring a whole generation of investors away from a proper investment strategy, and I see so much money flowing into ultra-conservative investments.  My worry is that we’re going to have a whole generation of people that get very low returns on their money, and I believe that equity investments and broadly diversified portfolios will give the returns the people need and I want people to have faith that that way of investing will work over the long run.

Jim Lange:  And even in today’s volatile market?  You know, I have clients on both sides of the political fence saying, “Oh, this is really a mess.  The United States is going to have a horrible future.  I should just put my money in cash or gold or whatever,” but you’re saying no, have faith.  Let the system work and have a well-diversified portfolio with low cost passively managed.  Is that a fair summary?

Dan Goldie:  Essentially, yes.  I mean, I think markets reflect the fact that there’s a lot of concerns out there, and historically, those have been good times to buy, and I don’t see why this would be any different.

Hana Haatainen-Caye:  OK, well, hearing that we should have faith in America and continue to invest in it.  I want to thank you for that, Dan, and thank you for being our guest tonight, and I want to thank our listeners for joining us for The Lange Money Hour, Where Smart Money Talks.