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Tadas Viskanta: Luck Plays a Big Role in Investing

The financial blogger and Ritholtz director of investor education discusses direct indexing, retirement income, and his go-to resources for perspective on the markets and personal finance.

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Our guest on the podcast today is Tadas Viskanta. Tadas is the director of investor education at Ritholtz Wealth Management. He's also the founder and editor of the popular financial and investing blog Abnormal Returns, which he launched in 2005. Tadas is the author of the book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere and has coauthored a number of papers that have appeared in esteemed academic publications like the Financial Analysts Journal. Tadas earned his bachelor's degree in economics and political science from Indiana University and his MBA from the University of Chicago Booth School of Business.

Background

Bio

Abnormal Returns

Twitter: @abnormalreturns

Abnormal Returns: Winning Strategies From the Frontlines of the Investment Blogosphere by Tadas Viskanta

Investor Education

Financial Literacy vs. a Fiduciary Standard: Which Matters More?” by Tadas Viskanta, abornormalreturns.com, May 26, 2019.

What Has the Stock Market Taught Us Since 2010? ” by Ben Carlson, awealthofcommonsense.com, Sept. 10, 2021.

Content

Earning the Permission of Your Audience,” by Tadas Viskanta, abnormalreturns.com, Feb. 21, 2021.

Keys to Social Media Success: Curiosity, Conversation, and Patience,” by Sloane Ortel, cfainstitute.org, May 15, 2016.

HumbleDollar

Jonathan Clements

The Rational Reminder Podcast

Retirement Planning and Personal Finance

Don’t Short-Circuit Your Financial Plan With an Inflexible Spending Rule,” by Tadas Viskanta, abnormalreturns.com, July 31, 2019.

Shifting Gears in Retirement Isn’t Easy,” by Tadas Viskanta, abnormalreturns.com, Nov. 23, 2019.

Social Influence and the Rise of Index Investing,” by Tadas Viskanta, medium.com, Feb. 12, 2017.

Canvas platform, O'Shaughnessy Asset Management

Not All That Glitters Is Gold With Tadas Viskanta,” ycharts.com, 2021.

Other

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, by Michael J. Mauboussin

Consilient Observer,” by Michael Mauboussin and Dan Callahan

Transcript

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Ptak: Our guest on the podcast today is Tadas Viskanta. Tadas is the director of investor education at Ritholtz Wealth Management. He's also the founder and editor of the popular financial and investing blog Abnormal Returns, which he launched in 2005. Tadas is the author of a book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere and has coauthored a number of papers that have appeared in esteemed academic publications like the Financial Analysts Journal. Tadas earned his bachelor's degree in economics and political science from Indiana University and his MBA from the University of Chicago Booth School of Business. You can find him on Twitter at @abnormalreturns and on the web at www.abnormalreturns.com.

Tadas, welcome to The Long View.

Tadas Viskanta: It's a pleasure to be here.

Ptak: It's a pleasure to have you. Thanks again for doing this. You're the director of investor education at Ritholtz Wealth Management. For starters, can you talk about what that job entails day to day?

Viskanta: Ritholtz Wealth Management is rapidly growing. And so, we have a lot of communication needs with our clients. And so that's primarily my function, not only as blogging on a daily basis, but also in communicating with our clients via social media and by email and other means. I would view it largely as a communications and research role.

Benz: What has your experience working at Ritholtz with clients and in other spheres of your career taught you are the most important educational lessons to impart? And what's the best way to go about teaching them?

Viskanta: Let me answer the second part first. I think the most important way to teach these things is in the moment. I think one of the challenges in trying to educate clients, or educate anyone for that matter, is having to do something that is disconnected from current reality. I think being able to educate people just in time, I think is important, because you are able to link up the education with the behavior. And I think that's really an important part. And the philosophy of the firm is really as it has been for the last eight years in terms of our approach to financial planning and investment management. So in that regard, I think we've been pretty consistent in our approach to speaking to clients, and that's via all of these different means by which you can find many of the members of the firm who are active on social media, active on the blogosphere, and on various forms of other media.

Ptak: Just to make this even more tangible, can you give a recent example of something where you did some proactive--well, it doesn't even have to be proactive outreach--you did some outreach to clients, to help educate them on an issue or maybe reassure them in a certain way?

Viskanta: I think that's one of the unique things about what we do is that we're constantly communicating with clients. And so, outside of extraordinary events, some of the things that happened back in 2020. Since we're communicating with our clients on a relatively frequent basis, we really don't have to go to them on light up the sirens and communicate to them on an emergency basis. So, I think that consistency is really key. And it differs by client--some clients are going to take a deep dive into all of the content we create, and some of them are going to very lightly address that content, and there's everywhere in between. I think providing everybody with that opportunity to listen to our thinking about things, I think is important. You talked about being proactive, and I think that's where that comes in is where when the markets are going through moments of volatility and crisis the inbound calls to our advisors are, compared with other firms, relatively low, because since we're being relatively consistent in our process we're already speaking to some of the issues that our clients might have in the moment.

Benz: Thinking about the issue of financial education more broadly, one thing we've wrestled with, and we've talked to other guests about, is this whole just-in-time concept, which seems really attractive, and it seems also within your firm you're in an ideal position to deliver it just in time. But I guess the question is, if the broader idea is to deliver just-in-time education to people in other settings, like when they're allocating their 401(k)s or taking out student loans or whatever, do you have any thoughts about how we could do that better rather than doing financial education, like in a classroom setting, and people are removed from the actual decision-making?

Viskanta: I think it's a real challenge. I think anybody that says that there's some sort of silver bullet for this is probably making a mistake. And I think in terms of financial education, I think we have to, in a certain sense, try everything. Because I don't know that we know what's going to work when. And if you look at the academic research, which I know you have, is that it's not great in terms of the efficacy of a lot of financial literacy efforts. And so, in that regard, I think being able to take different bites of the apple I think is important. And so whether it be starting earlier on in schools, whether that be all the way from K through 12 in a sense, to cut all the way to the university level and up. I think all of those are important. I don't think there's any one single thing we can do, but I guess a couple points to me are important. One is I think, again, just in time. Being able to speak to people when they're making decisions, or when they have issues, I think, is important.

And second, I think part of it is an overall educational issue. And so, I've been thinking about this a little bit in terms of and relative to the past 18 months that we've been dealing with--we have a lot of issues in terms of being able to express probabilities, odds, and statistical ideas to people on a mass basis. And I think that's a real challenge. And I think that's a challenge, whether it would be talking about issues in regard to the pandemic or whether we're talking about investments.

Ptak: We're going to talk about some other dimensions of learning and educating oneself, one of which is learning by doing, but I guess I had a related question on experiencing a bear market and how important you think that is to the educational process. We've had some scary episodes--we think back to spring of 2020. And that tested, I'm sure some of your clients; it tested investors generally. But in your experience, how important do you think that process of going through an extended sell-off in markets is to educating investors so that they understand what it takes to succeed over longer periods of time?

Viskanta: I think it's really important because I think it's one thing to be able to see things on paper and say, “This is a theoretical possibility that your portfolio might decrease 20%, 30%, 40%, even 50%, during a wicked bear market.” But it's another thing altogether to experience that. And my colleague, Ben Carlson, wrote a post last week talking about if you had just been involved in the stock markets, or the markets in general, since 2010, you've had a really different experience than what had come before. And a lot of the lessons that you were learning--it's almost like Bizarro World--some that you've learned a lot of really different lessons, and maybe those lessons will continue to play out over time. Or maybe we'll revert back to what we might all describe as being more normal markets. But I think the context is really important. I think we've seen that in a lot of different ways--people who have lived through the depression have a very different approach to money, than somebody who was born post-World War II versus somebody who was living through a decade of super-high inflation during the ‘70s. I think these kind of quirks of timing do have significant effects on our outlooks on money. And I think we just have to keep those in mind, both from a behavioral perspective but also from an educational perspective as well.

Benz: Do you think in a way the bear market of 2020, as short as it was, was maybe not a great learning experience for some people, that maybe it reinforced some bad tendencies?

Viskanta: Well, I think there's certainly that aspect to it. But I think, at that point in time, the markets were almost secondary to what was going on in the broader world. I think fears over the pandemic probably--and maybe I'm speaking for myself--trumped, no pun intended, what was going on in the market. So, I don't know if that's a really good case study. Certainly, it was scary in terms of the markets--that was a very scary period of time. But the fact that it ended quickly and the fact that here we are 18 months later sitting at all-time highs is certainly surprising to me. If you were to have asked me back then whether that would be the case, I would have been skeptical. But, yeah, I think so in that regard, I'd say every bear market is different in its own sense. The great financial crisis was, in a certain respect, maybe had its own scare tactics as it were, when you're fearful of the entire global financial system--that's something different than a pandemic. There's no sort of prototypical bear market anymore. And in that regard, I think people learned something, whether it's the right lessons or not, I don't know.

Ptak: We'll probably come back to learning and education a little bit later in the conversation. I did want to switch gears and talk about content and who better to talk about content with than you. You're a workhorse; you churn out content day after day at Abnormal Returns, which is a blog that's indispensable to many of us that are in investing and financial circles. I'm sure that's given you a great perspective on the way financial and investing information is disseminated. So maybe you can walk us through the full arc of what you've seen since you launched Abnormal Returns, I think it was back in 2005, if I'm not mistaken. And, also, what you think comes next?

Viskanta: Wow, that's a big question. I think that in a certain regard things have changed in a few ways. I think one, you've seen the financial media change. And I think you went from, for lack of a better term, sort of a traditional financial media to one that takes on more of the tone and tenor of the blogosphere and social media. And so I think in that sense, financial media has changed. And I think I'd also probably caveat that with the fact that when I first started blogging, social media was not a thing. And so, I'd almost break up my career pre- and post-Twitter. I think that that had a very big effect on how information and opinions have been disseminated. When I first started, the blogosphere was sort of a bunch of upstarts. And I think that tone and tenor took off over the entire financial media, especially after the great financial crisis, when you had a lot of people coming into wanting to write about their experiences and provide their expertise. And I thought that was a really interesting thing. But I think that once Twitter became central to the way people discuss information and markets, I think that changed things, for sure.

The one thing that I would say is that I think people who are active on let's say Twitter today, probably would have had a blog 10 years ago. I think in that sense, something has been lost by not being able to take some of those thoughts and turn them into permanent content. I think we do lose something; we've kind of lost something along the way.

Benz: So, what do you think comes next?

Viskanta: Well, I think we're seeing it already. I think we're seeing some of this content switch over to--certainly we're talking on a podcast, so I think that's one important aspect of things. But I also think we're seeing things happening on Instagram and TikTok. And I don't think there's any way to get around that. But I think that's a challenge. I think when you're on one of those platforms, you are sort of beholden to the algorithm. And I think that's a challenge for creators, but I think it's also a challenge for consumers of financial content. I think if you're a consumer, you have to recognize that you are being served up, in a very real way, content that the algorithm wants you to see. And that can be for not-so-great reasons. And I think that's a real challenge. I think it's always been the case that, it's sort of “buyer beware” whenever you are consuming content, but I think it's even all the more so when the platform plays such a key role in terms of what you're seeing and what you're not seeing.

Ptak: You sift through huge volumes of information in order to highlight the best bits of it on your blog Abnormal Returns. Everyday investors have to do something like that. What advice do you have for them on how to hone the way they filter the information that's coming at them to focus on the most useful subset?

Viskanta: It's a challenge for me to answer because I'm so deep into it, it's hard for me to put myself in the shoes of somebody else. And so other than being, and giving a self-serving answer to read my blog, it's a challenge, because I think some of it has to do with consistency. And I think you kind of see who shows up on a regular basis. And I think that's an important aspect. I think you have to be able to count on whoever it is that you're following, or reading, or listening to knowing that they're going to show up in good times and bad. And, again, maybe I'm talking my own book here, but I think consistency is key, because it also gives you some context when somebody is talking about things during good times versus when they're talking about things during bad times, and everything in between. I think it's important to be able to compare those two and to have some sort of baseline there.

Benz: One balance we have to strike as people and as investors is to operate with a set of principles, but also be open to new ideas and new concepts. This is something that you probably confront every day in pulling together Abnormal Returns. Can you talk about how you strike that balance, and perhaps give an example of something that you were initially quite skeptical of, but have come to accept?

Viskanta: I think that there's two things involved when I'm thinking about these issues. One is I will rely on, for lack of a better term, theory--like you two, I've read a lot of the academic literature and have some basis in that. So, whenever something new or novel comes along, I want to at least be able to compare that new model to what has come before and think about it in those terms. Secondly, the way that I approach this is a lot of this has to do with the way things trend and the way content comes across my screen. And so once you start seeing things on a more-frequent basis, and you see new people writing about things, you get a little bit of a tingle, and you start thinking, “OK, this is new, this is novel, this is something that I really need to start paying attention to.”

When I first started the blog a long time ago, I was very much approaching it from the reader that I had in my head--a DIY investor. And so that was sort of my approach, and I was skeptical of the need for, for lack of a better term, financial advice. And so over time, and with the build-out of the behavioral-finance literature, and just experiencing more, I think it's become, in my mind, all the more important that investors have a third-party resource on which they can rely, whether that'd be a full-time advisor, somebody who they're paying their fee on an ongoing basis, or an hourly advisor. Just being able to have a check on your own thoughts and behaviors, I think is really important. And I think I probably wouldn't have told you that it was that important 10 or even 15 years ago,

Ptak: Given what connoisseur of the investing and financial blogosphere you are, I was curious who your must-reads are that maybe aren't household names to our listeners. Any hidden gems out there that you want to highlight? We're talking content, so I figured we’d go there right now.

Viskanta: I had to think about this a little bit, because the things that I like end up on the blog. I'm not holding anything in abeyance. There's no secret sites that I'm visiting that I'm not sending along to other people. After thinking about this for a little bit, I had a couple of answers. One site that I would recommend to people is HumbleDollar, and that is a site created and run by Jonathan Clements, who a lot of people might be familiar with from his prior incarnations but may not be familiar with what he's doing currently. And that site is a personal finance-focus site that has a number of different voices that write on there, including Clements, and some people are financial professionals. And some people are just average citizens. And so, it's a nice mix of voices on there, and I'm always happy to visit that site and always find some interesting content.

And I was thinking about this, having listened to The Long View for a long time, one other podcast that I think that people might find--this is my algorithmic response to “if you like The Long View, you might like Rational Reminder Podcast,” which is by a couple of gentlemen who are up in Canada and cover the finance and investing landscape. Cameron Passmore and Benjamin Felix, and it's The Rational Reminder Podcast. So that's one that I think people here in the United States may not be as familiar with, but I think is a good listen.

Benz: I'll have to check that one out. I'm a HumbleDollar fan, too. What do you think is the most overrated or overwrought debate in investing or financial circles? And does your view affect how much attention you'll devote to that topic in Abnormal Returns?

Viskanta: Yes, absolutely. I think like anybody, I'm human in that regard. And so, I get sick of certain debates. And certainly, for a long time, it was active/passive. And so, I'm long since past wanting to listen to anything in that regard. And I think for me, the most recent one is in regard to factor investing. It seems like there was a few years there where factor investing was at the top of everybody's agenda. And I think certainly interestingly it's culled in part because of real-world results, but I think also certainly I am less interested now in reading new papers on factors and how they're going to solve your investment problems.

Ptak: What about the opposite? We talked about the stuff that's kind of overdone; are there topics or subjects that you feel excited when you see them float onto your radar and are happy to feature them in Abnormal Returns, because you feel like they're somewhat underexposed but important?

Viskanta: This is going to sound completely and utterly nerdy, but anything on single-premium income annuities is on my radar screen at the moment. So I don't know if it's a function of just getting older and seeing that that might be for my own personal use at some point. But in a world of super-low interest rates--we've been in a world where interest rates have been low for well over a decade now. And so, I think for people in retirement or in that phase of their life, I think the annuity puzzle, as it were, is really interesting to me. And we can certainly talk more about that. But I think if you want to get on my radar screen, write about annuities these days.

Benz: Well, let's do talk about that. Because you mentioned before the podcast that that idea of retirement consumption--what do we do for retirees in this era of very low yields--was top of mind for you. So, when you think about annuities, would you say that very basic utilitarian, single-premium immediate annuity, is the only product that appeals to you in that vein? Or are there other products that you're maybe curious about, want to know more about? How are you approaching it?

Viskanta: Well, certainly, I would preface this by noting that I am by no means way, shape, or form an expert on annuities. I am talking about single-premium income annuities and maybe deferred annuities as well, in that same vein for people are looking to hedge their longevity risk. I think that's another interesting form of that as well. But that's really the flavor that we're talking about. And so, the research that we've seen of late shows that people who take out those types of annuities are far more willing to consume out of that cash flow. And I think this probably crosses over into some sort of behavioral realm, but I think that's a really important finding. And I think, people, researchers have talked about this being as a puzzle that, why don't people in that phase of their life not consume more? And I think that might be part of it. There’s certainly no panacea and if that can help solve that problem and allow people to better enjoy the consumption during that period of life, I think that's really important.

And so from my perspective, it's less of a bond substitute, looking at it from just a portfolio perspective. For me, it's really the other side of the ledger where those sorts of products might--again everything is sort of tentative--might be able to provide for a better experience for people. And I think that's important.

Ptak: And so, do you find that you are making greater use of things like SPIAs and the solutions that you're putting together for clients at Ritholtz? Or is it still early days on that front?

Viskanta: I think it's still early days. I think it's definitely something that is on our radar screen, but I think it's still early days for that for sure.

Benz: One consideration, that's top of mind for a lot of people in the retirement-planning space is just whether this might be a lousy time to retire, even though we're seeing signs that people are indeed retiring in great numbers, in part because their balances are enlarged. Can you talk about how you and the firm think about that issue? Think about helping clients through this period, where maybe the next decade won't be as great as the last one and that could be especially impactful for new retirees?

Viskanta: I don't know that I can speak for the firm. I think in all of these cases, retirement is such a personal sort of decision. And I think there's so much that goes into--it's a horrible cliché to say that personal finance is personal. But I think, especially when it comes to these big life decisions, I think that is very apt. Leaving the effects of the pandemic aside, I don't know that you can apply some overlay, some sort of macro overlay, in terms of trying to time retirement or other sorts of phase changes in your life. And so, I think that's kind of taking things a little bit too far. And, I think in all cases we have to look at individual situations from a very singular perspective. That's, in fact, the job of an advisor is to do exactly that.

Ptak: Building on your earlier recommendation for HumbleDollar, which I echo, it's a great resource. It seems to make sense to talk about your investment philosophy, which I think I've heard you describe as “do less.” You're a minimalist, who favors, I think, very wide diversification and little tinkering. So maybe you can talk about how you arrived at that philosophy; when did it dawn on you that less is more?

Viskanta: Well, as an investor, I have invested in everything and made just about all the mistakes that you can possibly make. So, it took a long time for me to come around to that sort of philosophy. And so, one other, and I'll mention it as a resource, because it had an important effect on my thinking, and that was reading the Michael Mauboussin book The Success Equation. I would recommend all his books, but I would recommend that one especially. Frankly, the book is, from a thematic perspective, it's pretty simple. It is that luck plays a very particularly important role in--he looks at it from investing business and sports perspective--but luck has a very significant role in investing results.

And so, I probably knew that on some level intellectually, but I think it really took that book to operationalize it in my brain. Just for an example: Just because somebody is on the cover of Fortune, or Forbes, or some Business Week, some portfolio manager, they may be smart, and likely they probably are intelligent. But there's probably a good chance that luck played a pretty significant role in their results. And so I think understanding that and then operationalizing that, I think were two different things. And so that was really important to me to recognize that the importance of luck, and I think it has really kind of stuck with me since then.

Benz: Do you think that people too often ascribe positive turns of events to their own skill and don't give luck enough due, and by the same token, maybe don't think enough about how bad luck may have affected someone else's fortunes?

Viskanta: Oh, absolutely. I think it's perfectly understandable just for us to operate as human beings in the world. Investing is really just sort of a sideshow in that regard. I think we have to--just for our own ego preservation--we have to view that our efforts have played a role, if it's in our success, I think we almost need to do that. And so investing is, in that regard, an interesting use case, in that light. But I think the older I get, the more grey hairs I get, once you start viewing the world through that lens, you start to see it pop up more and more, in all sorts of different aspects of life. And so, good luck, bad luck, we have all experienced good and bad luck in different ways. And, hopefully, any bad luck that we experience isn't something that sets us back, too far too fast.

Ptak: Your firm probably works with a number of clients that maybe skew a little bit younger, I'm guessing, just knowing the nature of your content and the following you've attracted among folks in that demographic group. How do you educate them on the concept of luck? It would seem like they would be most impervious to that kind of lesson, just because they haven't had the kind of life experience that you just referred to, that would help to forge in them an understanding that luck plays a really important role. So, when you're talking to those groups, how do you try to explain to them the importance of luck and why they need to be respectful of it, I suppose?

Viskanta: I don't think that's necessarily something that we've operationalized in that regard. But I think at least in regards to our investment philosophy, is, again, to invest with understanding that we don't have the answers to the markets; we want to invest in as simple and efficient way as possible to try and help people reach their goals. And so, I think focusing on those goals, everything is sort of geared toward trying to have their goals come to fruition. And so, recognizing that the best way to do that, from our perspective, is to invest in a consistent fashion and with those goals is important. And recognizing that there are going to be periods of time—again, going back to earlier in the discussion, there are going to be times like March of 2020 that do happen, in that regard, that could be very much out of the blue. And so, you just have to recognize that that is a part of investing in risky assets. And that is a part of the history of markets and being able to say that it's going to happen is different than when it actually happens. But, in that regard, all you can really do is put on people's radar screens that adverse market events can and do happen and the goal is to get to the other side of them.

Benz: Jeff referenced that “do less” philosophy, but it seems like at least some of the content you link to on Abnormal Returns doesn't line up with that minimalist approach. It might feature someone touting an idea or an approach that demands active management, for example. What's the filter you apply in situations like these where the advice or idea might not be exactly your own cup of tea?

Viskanta: Well that's certainly a challenge. I have been in and around markets for well over three decades now, so I've seen a lot of different things. And, some things are just intellectually interesting to me. And things that I link to, and the things that I write about, I've never claimed to be anything more than the things that I find interesting. They sort of reflect the things that I think are worthy of further reading and research. And so, again, when we talked earlier about how we're sort of tired of the active/passive debate--the folks at Morningstar would point out that it's less about active passive, and it's really more about high cost and low cost. And I think that's about as solid a result you can tell people is that costs matter, whether it be active passive, thematic, ETF, mutual fund, hedge fund, whatever flavor of investing you want to roll out there is that costs matter. And so I think the approach is less important than a solid finding like that.

Ptak: Wanted to shift and talk about, we are talking about, I suppose, indexing in a way, given the fact that there was a focus on low costs versus high costs in your previous answer. I wanted to talk about direct indexing--how do you feel about the trend toward direct indexing? Do you expect that it will have staying power, and which firms or platforms do you think will be able to gain traction in that space?

Viskanta: I don't know that I can handicap who's going to gain traction. I think a couple things come to mind. One, is I would just say that Ritholtz Wealth Management uses a firm to, in the direct or the custom indexing, is another way of talking about direct indexing, and that's the Canvas platform from O'Shaughnessy Asset Management. So, we've made our bet there. And I don't know that I can really talk to the other players in the market space. But I would say that just about all of the major asset managers are making a bet in this space. And I think it's pretty hard to ignore that the Vanguards, the Fidelitys, the Schwabs of the world are all taking note.

And to me it's sort of an echo of what happened with robo-advisors. When robo-advising came on the scene, it was originally centered in the startup space--you had stand-alone companies in this space, and you still have a few that are continuing to do it. But what you saw is that all of the big behemoths in this space kind of co-opted that business model, and I think you're seeing the same thing happening with direct indexing. And so, I think direct indexing is going to continue to take share, in part because it's really just a bet on technology. If we think about the index fund as a technology, it's a relatively simple one--buy these 500 companies in this proportion, rebalance as cash comes in. And if one of the companies gets kicked out of the index, you add the new one. From an operational perspective, it's something that is relatively easy, for lack of a better term, to program. And direct indexing, I think, is another form of that technology. And I think we're going to see it be disseminated more widely among advisors for sure. And I think eventually, it will become a technology that individual investors will have access to in some form or fashion from these big platforms.

Benz: Is that the default setting now for equity exposure for clients? And also, I'm curious, what aspects of direct indexing are the most appealing to you? Is it being able to incorporate ESG considerations? Is it the tax piece? What do you think is the big attraction to direct indexing?

Viskanta: I would say certainly all of those. I think another important aspect to it is for clients who have large positions in a single security, oftentimes through their jobs. So, if you're in the C-suite of a company, you likely have a significant equity exposure to that company through options, RSUs, and just regular common stock. And when you're building a portfolio for that sort of individual, you want to build that portfolio with those positions in mind for a couple of reasons. One is so that the portfolio has the risks aspects that you want it to have. Let’s say, hypothetically you are an employee of Microsoft, and you have a lot of Microsoft stock, and for your domestic equity exposure it probably doesn't make sense to buy the S&P 500, because 4% of that index is Microsoft. And so, there's no reason for you to double up on your Microsoft exposure just as a very simple sort of example. The second example is that when you do have large positions in a company, oftentimes, from a financial-planning perspective, you want to be able to lower that concentration in that security over time. And being able to use a platform like that allows you to do that with tax efficiency in mind.

Ptak: One of the arguments that I think we've heard people make for a personalized approach to investing, or one that incorporates their nonfinancial values as ESG sometimes purports to do, is that they'll stick with it for longer, they'll adhere to the portfolio, I suppose you would say, to a greater extent than they were in just a traditional financial portfolio. What's your experience been working with clients on that front, given the work that you've done for them in implementing direct indexing? Have you found that to be so?

Viskanta: I think that it's a great use case for direct indexing, because you can really be as granular as possible. And while there are a lot of, as you two well know, there are lot of ESG ETFs, and things like that, and oftentimes those ETFs end up looking a lot like the S&P 500. And so what direct indexing allows is for you to get really granular, and I think you're right, the behavioral aspects, being respectful of people's values, I think is important. And that allows you to build a personal portfolio, and I think that's a really important aspect. I think being able to do that is a key feature of that technology. And I think you hit the nail on the head in terms of saying, this is about behavior. You want people to feel good and comfortable with their portfolio. And whatever ways that you can do that, while maintaining the right sort of risk/return profile, I think that's a really key selling aspect.

Benz: We've interviewed several members of the FIRE community on the podcast over the past few years--this is the Financial Independence Retire Early movement. You think that emphasizing the financial independence piece, the FI piece, is more valuable. Can you explain that? And is that something you talk about with clients--forget retiring early, just become financially independent, and then you can stay busy in any way that satisfies you?

Viskanta: I think, like most movements, the FIRE movement was pretty strict in their definitions of what the goal was. And I think it's interesting to see that as time has gone on, you've seen a lot of the people who were somewhat adhering to the FIRE movement, have walked back some of the more extreme views in terms of retiring early to a beach and never having to work again. And so, I think what's interesting to me is the FI part of it, the financial independence part, has shown to be really important. And I think we've seen it just in the past 18 months. For people who now have the ability to work remotely, if they have the wherewithal to be able to move someplace and be able to continue working their job--what I think financial independence really does is it gives you optionality.

And so like we said, during the pandemic, if that allowed you to move someplace that you felt was better reflective of your values and what you wanted out of life, and you could still work remotely, I think that's great. Another thing I was reading this week, a blogger was talking about how financial independence or some level of comfort allowed them to join a startup with a degree of confidence that they wouldn't have had before. So anytime you are joining a new company, one that's especially a startup, you recognize that that is a risky financial proposition, both for good and ill. And if you can do that with a cushion, as it were, that gives you some options--again, no pun intended--that you may not have had before.

I think it's about optionality. One of the other things that I think is interesting is that, certainly for millennials, and Gen Y, and Gen Z, I think they're going to have a very different approach to their career paths than Gen Xers like myself and boomers had. I think they're going to take a much more fluid approach to their careers. Whether that be geographically, careerwise, taking sabbaticals, whatever the flavor of that might take, I think having financial independence, or certainly having your financial ducks in a row, is important to being able to take advantage of those opportunities. I think that flexibility, and that optionality, is going to be all the more important for younger generations.

Ptak: I'm going to shift gears a bit for our final set of questions to talk about consilience, which, for those unfamiliar, is the concept of connecting principles. You mentioned Michael Mauboussin earlier, he's been a strong proponent of this field of study. In fact, I think he heads up consilient research at Morgan Stanley. But the idea is that you range across disciplines, and you try to find connections between them. Knowing that you're a fan of that just judging from your past writings, where do you apply that in your everyday life and also in the way you invest?

Viskanta: I don't know that I have a great answer to that. I think part of it is really just about having a little bit broader perspective. I think one of the things that can easily happen when you are involved in financial markets is to get tunnel vision, and to view financial results, performance, markets--you can easily make that your whole world and kind of box yourself in in that regard. And I think that's one of the interesting aspects of what behavioral finance has done, is that it took finance and turned it from less of a discipline, focused solely on the numbers, and has allowed us to connect to other realms and other ideas and other viewpoints. And I think that's really important. And, again, I’m talking about the Mauboussin idea of luck and skill--I don't have one that comes directly to mind.

But I think it's really important to recognize that all of this that we--the people who are financial professionals--all of this that we're working for, to help ourselves and help our clients amass capital, recognizing that that capital is for something, whether that be for our children, for charitable giving, for whatever it might be, that those dollars on the page, those dollars on the screen, eventually turn into goods and services and charitable contributions in a broader aspect. And so just recognizing that I think is important. Again, touching a little bit on the the idea of financial independence--if you have financial independence, and you don't do anything with it, I think you're missing out on some opportunities there. I think it's really just about framing and having a broader perspective and recognizing that all of these things that we're doing for ourselves and for our clients is in service of some greater good.

Benz: What a field of study you feel is wildly underappreciated when it comes to investing and what do you find people tend to overrate when it comes to investing?

Viskanta: Again, that's a great question. Overrate. I guess here's something that I've been thinking about a little bit of late is that, as I mentioned, I've been in and around financial markets for a long time. And I feel that I'm less confident than I was 10 years ago, or 20 years ago, or certainly 30 years ago, about my beliefs. I think part of that is getting older and having a little bit of perspective and recognizing that some weird things can happen over time, especially, certainly the last 18 months would be an unfortunate example of that. But just recognizing that we're all just kind of finding our way. There's no, contrary to the numbers from the researchers, there's no book that we can look up and say, “Oh, the returns for 2022 are going to be this for equities, this for bonds, and this for cash.” We don't know that. We have guesses, we have estimates, we have models, we have all sorts of things that give us some confidence, or maybe for a better term, some sort of confidence range, on what those might be. But we really don't know. The future is uncertain.

We are all finding our way. I think just recognizing that we live in an uncertain world and knowing that, despite the confident prognostications of analysts, investors, nobody knows what the future is going to hold. And just understanding that is a good remedy to put things in perspective and to recognize that nobody has the answers. Nobody has a crystal ball, and that we're all just trying to figure it out in the best way possible.

Ptak: Well Tadas this has been a really interesting discussion. Thanks so much for chatting with us and sharing your insights. We've really enjoyed it.

Viskanta: Thanks. It's been a pleasure.

Benz: Thank you so much.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Syouth1, which is S-Y-O-U-T-H and the number 1.

Benz: And @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)