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Investing Specialists

Charles Rotblut: 'It's the Dot-Com Bubble All Over Again'

The author and AAII Journal editor discusses the concept of 'dumb money' and how small investors can gain an edge.

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Our guest on the podcast today is Charles Rotblut. Charles is vice president at the American Association of Individual Investors, and he's also editor of the AAII Journal. Charles wrote the book Better Good Than Lucky, which was published in 2010. And he's a CFA charterholder.

Background

Bio

AAII Journal

Better Good Than Lucky: How Savvy Investors Create Fortune With the Risk-Reward Ratio, by Charles Rotblut

AAII

PRISM Wealth-Building Process

Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay,” by Drazen Prelec and Duncan Simester, Marketing Letters, NYtimes.com, June 8, 2000.

Aging’s Adverse Impact on Decision-Making,” by Charles Rotblut, aaii.com.

AAII Investor Sentiment Survey

Meb Faber: ‘To Be a Good Investor, You Have to Be a Good Loser,’” The Long View Podcast, morningstar.com, Sept. 7, 2021.

Investor Behavior

A Rules-Based Approach to Managing a Portfolio,” by Charles Rotblut, aaii.com, April 6, 2017.

A Process for Creating Your Own Investing Plan,” by Charles Rotblut, aaii.com.

Using the Power of the Written Word to Improve Your Returns,” by Charles Rotblut, cannonfinancial.com, September 2018.

The National Weight Control Registry

Save More Tomorrow:™ Using Behavioral Economics to Increase Employee Saving,” by Richard H. Thaler and Shlomo Benartzi, journals.uchicago.edu, February 2004.

There’s a Brilliant Reason Why Van Halen Asked for a Bowl of M&Ms With all the Brown Candies Removed Before Every Show,” by Julie Zeveloff, businessinsider.com, Sept. 7, 2016.

Avoid the Psychological Traps of the Market With The Dreman Screen,” by Charles Rotblut, forbes.com, Oct. 6, 2021.

Investing at Level 3, by James Cloonan

The Portfolio Size Effect and Using a Bond Tent to Navigate the Retirement Danger Zone,” by Michael Kitces, kitces.com, Oct. 5, 2016.

Managing Sequence of Return Risk With Bucket Strategies Vs. a Total Return Rebalancing Approach,” by Michael Kitces, kitces.com, Nov. 12, 2014.

Transcript

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Charles Rotblut. Charles is vice president at the American Association of Individual Investors, and he's also editor of the AAII Journal. Charles wrote the book Better Good Than Lucky, which was published in 2010. And he's a CFA charterholder.

Charles, welcome to The Long View.

Charles Rotblut: Thanks for having me.

Benz: Let's start by talking a little bit about AAII, American Association of Individual Investors. How did it get started? And what is its mission?

Rotblut: So, we were started in 1978 by James Cloonan. At the time, he was professor at the University of DePaul. He had also previously run an options firm. And back then one of the things he noticed was that there just was not many resources for individual investors, including on how to invest, how they manage their portfolios. There are some books, some schemes, but there really wasn't much formalized for individual investors or resource they could tap to really learn what they should do. And so, Jim, from his experience working in options, and, I think, just from being a professor, saw an opportunity to really create an organization that could help individual investors. And the idea from AAII, even the original founding of AAII, really started from Jim's kitchen table. He, his wife, Edie, played a big role in starting that. And it started really as a family affair, and it just grew from there.

And our mission has never changed throughout the now more than 40 years, and that's really to empower individual investors to become effective managers of their own assets. And we try to do that through education, through information, and through research. But that whole time we've been a nonprofit and we've never lost sight of our bigger goals, which is really helping individual investors become better portfolio managers of their own portfolios.

Ptak: AAII appeals to a lot of investment hobbyists, if we can call them that. And it's open to a lot of different ways of investing. Is that part of the philosophy of AAII that there's no single way to investment success?

Rotblut: It is sort of. Internally, we do have a bias toward value investing, a bias toward small-company investing, because historically, those are the cheap parts of the market from a stock standpoint that have realized the highest returns if you go back to the 1920s. But we realize every individual investor is different. I've seen some studies that say whether you're a value investor, or if you're a growth investor depends on both how you're born, really nature, and then, also your upbringing, and what type of upbringing you grew up in. And so, we do have a lot of members, a lot of varied investing philosophies, and we do try to accommodate them.

When I personally speak, one of the first slides I often show simply says that the optimal strategy is the one you can stick with no matter what the market is doing. And so, some of our members are diehard indexers, some of them are really strong growth investors, some are deep value. We have a lot of members who use technical analysis and all sorts of different degrees in between. So, we don't try to pigeonhole our members into you must do value, you must be small cap. We talk about, we show them the numbers, we have examples. But we make a lot of other strategies available to them. In fact, on our website, we have close to 60 predefined stock screens, and there's growth in there, there's dividends in there, there's value, there's momentum. So, it really spans the gambit. And we're more concerned with really just helping members to be disciplined and find a strategy that works well for them as opposed to saying, “Here's strategy A and don't vary from it,” because I don't think that fits the reality of most investors.

Benz: What compels a member to join AAII? What do you offer an investor that he or she couldn't get on their own, especially given the profusion of data and enabling technology that's now available to do-it-yourself investors?

Rotblut: It's interesting you ask that because I think for a lot of individual investors, it's turned from maybe a small stream of knowledge back in the 70s to now where there's almost a firehose on full blast. And if you're trying to step up to it and take a drink of water, you’re going to get blown down the streets. For us, we really try to boil down things to really providing knowledge, providing information, providing research. And as a nonprofit, we're not making any money off of our members in terms of how they deal with their investments. We're not trying to sell them specific products, say, mutual funds, or advice. Our goal really is education.

And one of the nice things about working at AAII is that we're able to bring in a lot of experts from both academia and practitioners. I've been at AAII for actually now 12 years. And during that time, I've had the luxury to sit down with four different Nobel laureates. And I've been able to actually share the conversations with the AAII Journal. So, even though there's a lot of information out there, we really try to think about what information is credible, what insights can we bring members. And even when I talk to fund managers, it's not what are you holding in your portfolio, but trying to have a deeper conversation of how are you investing, what are you looking at, what's your strategy, why. So, we offer that, but we also offer various tools: mutual fund guides, ETF guides, screeners, portfolio tools, and all of us really making the content at AAII. We're all individual investors, and so, we're constantly thinking about what challenges do individual investors have, how can we address them, and how can we help them. We're really trying to not only provide a wide range of information from a variety of experts, but really do so in a way that helps individual investors solve the problems and solve the challenges they're facing.

Ptak: I'd imagine that for some of your members, part of the appeal of AAII is the in-person engagement--you can offer the meetings as a social outlet or a learning experience. How has AAII adapted to the pandemic, given that in-person meetings are mostly on hold for now?

Rotblut: It was a really radical shift. So, if you go back to March 2020, we basically had to put everything on hold. We were supposed to hold a conference at the Paris Hotel in Las Vegas in November 2020. For obvious reasons, that got canceled. But we immediately did a switch. And we had been talking about doing more things digitally, more things online. And when the pandemic happened, we just really accelerated those efforts. So, most of our local chapters--and we have close to 40 local chapters in major cities across the country, and they are volunteer-run--most of them are still meeting via Zoom. We've given them protocols if they want to go back to in-person meetings. So far, that hasn't happened, mostly because the delta variant has made that unappealing. But we have turned to facilitating their meetings via Zoom.

We had talked internally about doing webinars. We quickly pivoted to putting on webinars ourselves. Even in early days of the pandemic, I just called up my iPad and started shooting videos right off the bat to communicate to our members. And then, this year, we did a conference virtually. We made the decision really late last year, early this year, before we had much clarity about what was going to happen with the virus. So, we quickly made the pivots, did our first virtual conference. And so, we're thinking, going forward more about digital, but we do realize there's still an avenue for in-person meetings. We're empowering our local chapters to make that decision based on what they feel comfortable with. Because, obviously, the coronavirus restrictions varies by geography. So, we're letting those local groups, which are volunteer-run, make their own decisions. For ourselves here at the national organization, we are still doing digital. In terms of our conference, we're looking out in the future and trying to plan what that looks like, because obviously, in a post-COVID or at least a post-pandemic COVID world, that could change how things occur. And we're studying that right now, what does that future look like.

Benz: I wanted to ask about that, Charles, because Jeff and I have now done a few podcasts where we've talked to retirement experts about the benefits of socialization throughout our lives, but perhaps especially as we age. So, how do you think about that? What gets lost as you move to a mostly virtual sort of meeting environment? Do you feel that that will be hard for a lot of your members to transition away from gathering in person? I'm sure it has been hard so far.

Rotblut: I think it depends on the member and how comfortable they are getting on Zoom. We are doing more digital engagements. Really, just a couple weeks ago, we launched our online community and really an online forum where AAII members can gather together, discuss. We call it a collective mind where they can tap into. So, we are trying to engage them digitally. But there are certain things you do lose when you're not in person. We use the term “hallway conversations” where you see people talking in a hallway. I know when I speak--Christine, you've probably had the same thing, too--if I'm answering questions after a presentation, I'll see a few people actually surrounding me and some of those people are just standing there wanting to hear other members questions.

So, even though we can engage online, engage digitally, there still is something to be said about meeting in person that's really hard to replicate online. And I think as we go forward, we're going to consider that and try to figure out what is the right mix and what is the right balance. Right now, to be honest with you, we don't have a clear answer. And I don't think we're alone either. Obviously, things that have changed pretty drastically over the last 18 or so months. Hopefully, we've seen the last surge in the virus. And as we move past that, trying to figure out how events are and how we actually host events, and on what type of platform we host events.

Ptak: How has your membership changed since the pandemic? We've seen an explosion in traders and speculators. But have you also seen a swell of new investors who maybe share your philosophy and world view and were drawn to the organization for that reason?

Rotblut: Our membership has risen a little bit. We're fortunate that a large portion of our membership are life members. Ballpark about 60% of our members have actually bought a lifetime membership. So, they pay once, and they are members. But we've been seeing membership growing. Our membership does tend to skew older. And I saw the same thing--I used to work at Investools and Telescan, and I worked at Zacks, and it was that same demographic where it usually tends to be older demographic that tends to get involved in individual investor services. But when we look at our web stats, we are seeing a broad range in terms of age groups, from really 20s and 30s, 40s and 50s, 60s and 70s, those brackets that Google Analytics is looking at, shows us there's actually a mix of people engaging online. And ourselves, we've been relying more on digital marketing. We're on Facebook advertising; we have Facebook groups. We send a lot of electronic newsletters. So, we are seeing a younger audience coming in.

But every place I worked at in the individual investor space has been that older demographic. And my theory is that people get to a certain age where either they haven't managed their finances themselves, or maybe they are at the point where they have a large enough nest egg where they realize they really need to take control of it. I think that's at play. But I think there's also a certain level of experience where maybe if you're younger, maybe you don't think you quite need as much help--unfortunately, we see this over and over, this evolution where “I'm going to trade more aggressively; I'm going to chase after what's hot now.” You go through that phase, you get burned once, maybe get burned twice, and then you circle with evolution of, “Well, maybe there's a better way. Maybe I need to take a step back and figure out how do I really do this and how do I really take advantage of what everybody says is the benefits of long-term investing.”

Benz: I wanted to pick up on that. Given the trading of things like crypto and NFTs and SPACs among individuals, what's your take on the whole “yolo” boom that we've been seeing over the past year and a half? I'm especially curious to get your perspective because you've lived through a lot of different eras that have seen investors flit from one hot fad to the next.

Rotblut:. This really feels like it's the dot-com bubble all over again. A lot of similarities. We're seeing people day-trading. They have access at the time in the 1990s to the big things everyone had access to online brokerage accounts--E-Trade for the first time, Ameritrade for the first time. And now, instead of that, you have Robinhood and instead of commissions being only 9.95 or 12.95, or whatever these commissions are, now it's free. And if I have $100, I can still buy a fraction of Tesla. So, definitely, things have changed a little bit. But I think we do continuously see these waves. And I think it's human history. Sam Stovall uses the phrase that: “History doesn't always repeat, but it rhymes.” And I think that's a good phrase here that we're saying that people always want to buy into those bubbles. We saw the dot-com bubbles, we saw the housing bubble. If you go back through history, you saw at one point, bowling alleys and anything bowling related was a hot thing. You obviously had bicycles in England at one point, and we can obviously go back several hundred years to where tulip bulbs were the big hot thing.

So, it seems to be this ongoing process where people don't understand history, and they somehow think now is different. And I just think we're unfortunately seeing history repeat itself. And while there have been some people that have probably done really well, I think there's a large number of people that really misjudged, maybe bought too late, or didn't realize how volatile some of these assets are, unfortunately learned a pretty costly lesson. And I hate seeing people go through that, but it just seems to be part of human behavior.

Ptak: What about the role of, call them frictions, in the process? You already alluded to the fact that with enabling technology, it's easy to trade freely. And in some ways, that's great. It gets more people involved; in other ways, maybe it enables some of our worst and most self-destructive impulses. What's your perspective as somebody that's looked on investors through the years?

Rotblut: I definitely think when you make things easier to do, you start separating yourselves. And there's a study several years ago of behavioral finance, and what they found on that study that people go into a store with cash in hand, they spend less than if they use credit cards. Because when you have that credit card, you have the detachment where you're spending now, but you're paying later. And now, when you're looking at Robinhood, it's very easy to trade. They used to give people confetti when they first placed their trade. And I understand they've stopped that now. But I think the fact that when it's made too easy to trade, you do lose that moment to actually take a step back and think about what am I doing?

And one of the things I've told investors for years is before you place a trade, just stand up for a second, take five deep breaths, and then stop and take a look at it. Because it's simple, it's easy to make mistakes. Maybe you wanted to buy, and you clicked sell. Maybe you wanted to buy 20 shares, and you accidentally typed 200. Or maybe you just typed in the ticker symbol wrong. It's just simple human error. And just by taking a step back, it allows you to take a look at your screen. But I think when somebody is in an excited state--maybe they're looking at Rent the Runway, and they saw that just went public, and they're really excited about it. Just getting that little bit of break might get you a chance to stop and think do I really want to place this trade, what do I know about the stock, am I making the right decision? And I think that applies to trading. And obviously, now, we have the sports-betting apps. And I think it's the same type of thing where it's too easy to engage in a behavior. We tend to revert to our impulses versus if there's some type of barrier, just something that just stops you for a second, it helps you reset your brain and really start to think through what you're doing. It doesn't necessarily stop you completely. But sometimes just having that moment of detachment can make a big difference.

Benz: Some of the AAII members are incredibly savvy about their investments and they've done a great job of managing their portfolios and their finances. How do you counsel them to safeguard their finances against cognitive decline? And I'm also curious whether you think even dedicated do-it-yourself investors might engage an advisor as they age rather than continuing to manage things on their own?

Rotblut: When I talk about portfolio strategies, I always bring it up. I started talking to people who might be in their 70s, might be older. When I first started doing it, I literally thought they're going to come at me with pitchforks and torches, because I'm sitting in front of them saying, basically, “Here's the data, you're going to lose your mind and lose your ability to manage your finances.” But what's interesting, when I do talk about it, I usually see people very engaged or paying a lot of attention. And it's a very serious risk and something I don't think gets talked about enough, because there's a growing amount of evidence showing one of the first signs of cognitive decline is your inability to manage your finances. And it's not just your ability to manage your portfolio, it's even balancing your checkbook, paying your bills on time. And so, I think one of the things people can do is just engage an outsider, maybe it's a child they trust, maybe it's a close friend they trust, or maybe it's a financial advisor. But I think it's very helpful to have someone at least looking over their shoulder.

Another big thing is a lot of banks, and a lot of financial institutions, now allow people to list a trusted contact. And a trusted contact is someone who can be called if a representative of the financial firm suspects something is going on that's just not right. For instance, maybe you have an older adult shows up the bank and suddenly wants to withdraw $15,000 and there's someone sitting next to them that the bank teller has never seen before. It gives the teller the ability to call that child or perhaps a close relative, or the advisor and say, “I've got Bob here, I've got Sue here, and they want to make this big withdrawal, and I'm a little bit concerned that they're not thinking through things.” So, I think that's a big help. But I think people need to realize it's a real threat as they progress through retirement. And I think it's also important to realize that whenever you're dealing with cognitive issues, whether we're dealing with Alzheimer's, if we're dealing with some other form of dementia, you start forgetting what you used to remember. And so, it's really easy sometimes for people not to realize that they're not cognizant of what's going on.

I certainly know people who are in denial about their cognitive decline. I've had conversations with friends, where they've had a parent that, even though multiple doctors have said, you have Alzheimer's, they're insisting they don't. And so, it's very important for people to realize that you may not realize you have it, or you might be in denial, and when you're in denial about it, you may be showing signs of it, but because you're denying it, you may not be realizing you're showing signs of it. So, I think it is really important to have those safeguards in place, so maybe someone else can really step in and maybe give you a nudge, or say, “Hey, let's sit down and let's figure out what's going on,” before something really bad happens.

Ptak: Let's shift gears a bit and talk about the AAII Sentiment Survey, which your organization is well known for. Maybe we can start with basics. How do you gauge sentiment? And how should investors in your opinion use the survey, if at all, to inform their own investment decisions?

Rotblut: So, the survey itself, we've been asking it since 1987, and the question has never changed. It's simply over the next six months I feel the market will be up bullish, down bearish, or relatively flat, which is a neutral. The only thing that's really changed with the survey is sometime in the 1990s, we used to mail out postcards and count the postcards by hand each week, and now everything's done online. But because we have this large amount of data, we're able to go back and look at things and see how it's correlated with market moves. And even though there's that old saying about that people should buy when there's blood on the streets, what we found with our Sentiment Survey really is optimism, not pessimism, that's the big indicator. And so, if you look at optimism, which is bull sentiment, when it falls to an unusually low level, which in statistical terms, it's more than one standard deviation below average. So, right now, the historical average is about 38.5%. If it falls to 28% or lower, that tends to be a bullish sign. What we've seen is, whenever it falls to an unusually low level--bullish sentiment, that is--the S&P 500 has tended to realize above-average and above-median returns over the following six months and over the following 12 months.

At the other end of the spectrum, when optimism is too high, in this case of about 48% or higher, then we've seen the S&P 500 tend to underperform. And I'll point out, it underperforms doesn't necessarily sink because over most six-month periods, the S&P 500 tends to be up. But you do see the S&P 500 actually realize about 3 percentage points less in return on a six-month basis, and then a slightly bigger gap on a 12-month basis. But I do want to point out that it's not causal. The market doesn't necessarily outperform or underperform because sentiment in our survey is unusually optimistic, or it's unusually pessimistic. Rather, it's usually a sign that there's something else going on.

I think it was Meb Faber, who actually mentioned on your show a few weeks ago, that bearish sentiment had its all-time high in March 2009 right as the housing crisis and that financial crisis bear market was hitting a bottom. But the markets didn't rebound then because bearish sentiment hit an all-time high; it's because the markets bottomed, and the valuations had gone too low. So, I always suggest when people look at our Sentiment Survey, and they see an unusually high or low reading for sentiment, stop and ask yourself, “What else is going on; what are the valuations; what's going on in the economy; what's going on in the broader world that would cause people to either be overly optimistic or overly pessimistic?” Because that might be really what you're looking at that could be a driver of stock prices going forward.

Benz: Well, let's look at where we are today. I took a look just recently, 47% of respondents in the Sentiment Survey recently characterized themselves as bullish, meaning that they expect the market to be higher in six months. So, that's pretty close to that 48% that you referenced. What, if anything, should we take away from that? Is it a contrarian indicator?

Rotblut: It's interesting. It was actually right at that edge. And when I looked at how the Sentiment Survey correlated to market returns, I actually went through and figured out what was unusual at this point of time. So, it's easy to do with a spreadsheet. Numbers actually vary, but it was a constant I could keep. I didn't look at, what if it's at 45% or what if it’s 48%. But it was at that level. As of today, we've seen that number drop to about 39%. So, it was a pullback. But I do think investors are trying to figure out what's going on. And I think what we saw last week when it hit 47%, we saw some volatility in the market. And now that earnings season is going on right now, third-quarter earnings, I think investors are reacting to the fact that we really didn't necessarily have a correction occur. And I think it was almost a sigh of relief, perhaps that people were expecting stocks to drop, but when they turned around, they realized that maybe some of their pessimism was too high. And so, some people, maybe their pessimism wasn't that they were bearish on the market, but just causing them to be neutral instead of optimistic.

Ptak: More broadly, we often hear individual investors characterized as the dumb money in the market. So, first question is, do you agree with that assessment that individual investors are the least informed? Or do you think that's overblown? And then, my second question is, how has your perception of individual investors’ knowledge of the market, how has that changed through the years as you've observed your membership?

Rotblut: That's a great question. And I would say, there's probably almost a difference between knowledge or wisdom, and it's probably even more so access to data versus behavior. And the reason why I say that is, when you look at a lot of people running the institutional money--so they are "smart money"--I commonly hear that a lot of professional money managers are hired or fired based on a three-year performance. So, you have these committees making decisions for pensions, making decisions for endowments, and they're very short-term focused, which is a really terrible behavior. And it makes it tough for people who are following, say, a value strategy that is prone to periods of underperformance because they always have to worry about the relative performance. And we even see that the mutual fund managers where they're often just trying to stay close to the benchmark or trying to stay just ahead of their benchmark, as opposed to saying, “You know what, I'm going to really be active, and I'm not going to worry about straying from my benchmark because I know if I stick with the strategy over 10 years, my clients are going to be very happy with my returns.”

So, I think there's a lot of bad behavior on the part of the institutional side that really doesn't get talked about. And I also would point out when you look at the big moves in the markets--yes, for individual stocks, say, your GameStops, your Bed Bath & Beyonds, your AMC--there are individual investors driving those stock prices. But when you look at the big market moves, it's often the institutional investors that are really moving the market. So, individual investors, is there varying levels of competence, is there varying levels of investment knowledge? Absolutely. But I don't think you can necessarily say that individual investors are the dumb money, and all the unknown institutional investors are the smart money. I think there's a lot of nuances in between, and a lot of reality that actually goes on that gets overlooked that's overshadowed by trying to paint both groups with separate brushes.

Benz: What competitive advantages do small investors have that pros don't?

Rotblut: I think the biggest advantage is never having to report your performance. And I cannot understate how big an advantage that is, because when you're a professional, and you have to report your performance, or maybe you’re an endowment, and you're running the endowment, and you have to report your performance to the boards, you're under pressure in terms of that short-term performance, and you're under pressure to achieve a certain level of return. But when you're an individual investor, you're really saving for your goals. So, you're playing a different game. If your goal is retirement, then it really is at the end of the day getting enough money saved to fund retirement and as you transition toward retirement, thinking about, well, I need to start taking withdrawals, so maybe I give up a little bit of a return now to ensure that if short-term volatility hits the day I retire, I'm not having to sell part of my portfolio. I think it also gives individual investors the ability to follow longer-term strategies, such as small-cap value, which has a great long-term track record, but can be very volatile over the short term.

And so, I think, really, if you're going to be a stock investor, an individual stock-picker, you really want to be someone who's trying to be truly active. And when I say truly active, I don't mean actively trading, but I mean being different than the index, having a portfolio that looks a lot different than the S&P 500 or looks a lot different than the Russell 2000. Because that's where you're going to have your edge going into the stocks that are less looked at, less frequently traded, less talked about--you're going to find more mispricing, and that's where you're going to have a bigger advantage. But to invest in those stocks, again, you have to be willing and have to be very comfortable with earning a return that's different than the market. And if you're not comfortable with that, index funds work really well and there's nothing wrong with it, but that just means that you're making a conscious choice not to be an active stock investor, but to take comfort in the role of index funds. And that's a perfectly fine way to invest. Every person is a little different in terms of their investment preferences and in terms of what type of investing they're comfortable with.

Ptak: Maybe that's a good segue to another topic that we wanted to explore with you, which you've already alluded to, which is investor behavior. And you're quite right, individual investors, they don't have that career risk, they can be more long-term-minded, stray from the index the way professional investors can. But there's also that behavioral dimension of being somewhat alone in the positions that they've staked out. And so, that's a good pivot to investor behavior, which you're a student of. I think you're a fan of rules-based investing approaches to help counter some of those negative behavioral impulses. So, maybe you can provide some examples of rules-based approaches that work.

Rotblut: Absolutely. I'm a big proponent of rules-based approaches. And one of the examples I use--I use weight loss quite a bit and physical exercise. Because really with weight loss, we all know what we're supposed to do. We're supposed to eat our vegetables; we're supposed to watch our calories; we're supposed to exercise. And it's just like investing. We all know we're supposed to invest for the long term, keep costs low. But trying to do that in reality is tougher. And the reason why I bring up weight loss is, I'm actually in a study it's called the National Weight Loss Registry. And to be in it, you had to have lost 30 pounds and kept it off for over a year. And I'm in it. And the way I got into it, even qualified for it, was just a process. It was simply measuring out portions. And no one sees me in the kitchen except for my wife with me having measuring cups up, making sure I don't eat too much. But having that process that's repeatable has really worked for me. And I think when you get to investing, it's really about thinking about how am I going to invest and having that process.

So, to give a good example, I look at my 403(b) plan--AAII is a nonprofit, so we have a 403(b) plan instead of a 401(k) plan for those people who are not familiar with the various aspects of the tax code. But I only look at it twice a year. And when I do look at it, I only look to see are my asset classes, are they within the allocation range, are they off target by too much? And if they're off target by too much, I rebalance. And the rest of the time, I don't even look at the balance. I don't want to know what the balance is. Because what I can control is how I save and my discipline. And so, again, same with those barriers to acting. If I don't know what the portfolio is valued at, if I don't know how much that value is swinging, I'm not going to be reactive to it.

But I think another example, and I think one of the greatest things that's probably happened for individual investors is Richard Thaler's "Save More Tomorrow." That whole concept of autoenrollment where you're automatically enrolled to your workplace retirement plan and that feature of auto-escalation, which means that with every year or perhaps with every salary increase, what you contribute gets automatically increased, I think is just a massive help to many people, because it takes the behavioral component out of it. Things are automatically set up once, and then it's up for each individual worker to go in and change it. And we know humans tend to be creatures of habit, tend to be creatures of inertia. So, once that plan is set up, they're less likely to make that effort, even if it's just sending an email to the HR person saying, “Hey, change this,” they're less likely to do it. So, I think anything people can do--except those bears--helps.

But the other thing is, I'm just a big fan of checklists, and just having a simple checklist that every time you go through to make a decision regarding your portfolio, or maybe you're looking at an investment, just walking through that every time really starts building that discipline, and it's a good reminder of what you should do each and every time. And checklists have been shown to work in medicine, they've been shown to work in aviation, they've been shown to work in construction. One of my favorite examples actually comes from the band Van Halen. They were known for years for not wanting any green M&Ms in their candy jar, and everybody's thinking it was kind of funny, why would they care about that. Well, it actually was a checklist because--I think it was David Lee Roth once said in an interview--we had very complex stage setup, and we knew that if we saw green M&Ms in a candy dish, it meant someone wasn't going through the contract line by line to meet all our specifications. And so, it was a sign to our roadies to go and check everything and see what else has missed. So, again, just having these little checklists, these little behavior-type things can really help discipline quite a lot. There's no reason to keep it all in your head when you can have a process-based approach that makes you what you do repeatable, less emotional, and more disciplined.

Benz: We've had a long-running rally in stocks and other risk assets. What are some of the mistakes that investors might be inclined to make in an environment like the current one, and how can they protect themselves?

Rotblut: One of my favorite quotes, I think, regarding portfolio allocation comes from James Montier of asset manager GMO, which was, “If you don't know what the markets are going to do, don't stress your portfolio as though you do.” And I think investors commonly make that error. They think they know what's going to happen. Maybe it's because of politics, maybe it's because of the economy. Obviously, right now, we have the virus. But we all know--and you two have worked in the markets long enough to know this as well--the markets never quite behave the way we think they are. And so I think we are seeing a lot of people reaching for yield or perhaps lowering their allocation for bonds and going more into stocks because they want higher portfolio income. And certainly, there's a financial aspect--but we've had this long period of really pretty light volatility. We did have March 2020, where we had that very rapid bear market. But we really have not had a very long, painful bear market, like 2008 or we saw back in 2000-01. And I think it's easy for people to forget how they felt during those years. And for younger investors, maybe they are millennials, maybe they are Gen Z, or that really have not lived through that as an investor, they don't necessarily understand some of the pain that can inflict and how uncertain and how hopeless or helpless it can make people feel when they're in the middle of this and they are seeing their portfolio going down. So, I do think there's that combination of people overpredicting what the markets will do and overestimating their ability to stick with a strategy when a down market hits.

Ptak: One strategy that AAII members often enthuse about, and I think this is true maybe of retirees more generally, is buying a basket of dividend-paying stocks and living off the income. Is an equity-only approach appropriate for retirees? Or do you think they're irrationally latching on to income at the expense of what ought to be other important considerations?

Rotblut: It can be. The secret, though, is to have what's known as a barbell strategy. And Christine, I know you're a big fan of buckets. And a barbell is basically just a two-bucket strategy. And our founder, Jim Cloonan, talked about such a strategy in his book Level 3, which he wrote in 2016. And what he proposed in his book was having most of your portfolio allocated to stocks, but then having about two to four years' worth of living expenses held in very safe investments--cash, money market accounts, very short-term Treasury bills. And so, when the market was doing well, when it was within 5% of its high, you withdraw from your stocks. But when the market was below that level, you withdraw from your safe assets, from your cash holdings. And that 5% number can be moved up or down. But the whole idea is that you have this bucket of very safe, nonvolatile assets. So, if your stock holdings fell in value, you weren't forced to sell when the market dropped. And there's various iterations of that. One argument in terms of retirement is that some people should really lower their allocation to stocks. We've found Michael Kitces had that V-shaped allocation, where they call for going down to about 30% equities at retirement, so you're not having to sell stocks early in retirement if a bear market hits.

But going back to the subject of having a high-dividend allocation, I think if you're going to do that, then you really need to de-risk on the other side and really have this portion of your portfolio that's very conservatively invested. So, if you do have a bear market, you're not forced to sell stocks when you're down, and you have enough saved so that you're not forced to sell stocks. But the other part of it, I'll add, is you also have to look at what your guaranteed cash flow is. So, if most of your living expenses are covered by pensions, Social Security, maybe you have annuity income, then your decision to allocate to stocks is almost a little bit easier, because then you're probably thinking more in terms of, I want to leave money for my heirs and maybe I'm using that portfolio income to fund vacations, or do some other activities that I can cut back on in a bear market. So, that does change the equation. So, it's not just a simple yes or no answer, should I or should I not do this? But it does depend both on where you're able to do in terms of de-risking, and then also, do you need to de-risk, or do you have other sources of income in retirement that allow you to take more risk with what you do invest?

Benz: Following up on Jeff's question about income, is there any spot within the income arena that’s on your skull and crossbones list where you think they're investment types that are sold based on their outsize yields, but that consistently burn or disappoint investors? I know older adults especially really love current income from their investments.

Rotblut: In general, I'm not a fan of illiquid investments. And I know before the pandemic advisors were trying to sell private real estate investments. In general, I think they tend to be higher cost. I think they tend to be riskier, and they're also harder to value. My career in finance started off valuing privately held businesses, and I know private equity is a new thing now. And I think it's a mistake to think that just because an advisor is offering it, or just because it's not offered to a lot of people, that it's necessarily better. I think investors really need to stop, look at the costs, look at the returns that are being promised and the yields that are being promised, and ask a lot of questions. And grip their wallets tight until they get every question answered.

Some of these products are probably very good products. I don't want to say they're all bad. But I think there's enough risk there that I think investors really need to ask themselves, is there enough upside to this relative to what I could get in a mutual fund or an ETF or some other asset I can sell on a dime? Am I being compensated enough to pay the higher fees and to also have my money locked up and have an asset that isn't regularly valued by the markets, but instead is not traded very frequently? And I said, there are some good investments, but you also have to stop and ask yourself, is this a really good thing, or is this a case--and to use a Groucho Marx analogy--do I want to participate in any investment, private investment, that will allow me to participate in?

Ptak: What topic do you think is underdiscussed and deserves more attention in the field of investing? And conversely, what do you think gets too much attention, given its importance in investors' success or failure?

Rotblut: There's a whole lot to that. The most obvious thing is just the discussions of being a long-term investor, and what's required to be a long-term investor. And that stuff makes for boring TV. So, you don't hear about really a lot. But that concept of just not engaging with your portfolio as much, making fewer decisions, and when you make decisions, being really rational--none of that's exciting. But I think the other end, when you look at the investment media as a whole, there's a focus on really a small number of stocks. I don't know what those stocks are. But you can almost imagine some of them--your Teslas, your Facebooks, your Twitter--and sometimes I'll hear these earnings and they are saying, well, this company reported earnings. And I'm always thinking to myself, so who cares, I'm not buying that stock. And there are people that own the stocks, these very popular stocks, and I realized those numbers really do matter to them.

But I think what doesn't get discussed is that there's about 5,000 publicly traded companies, and that's not getting into the approximately 30,000 mutual funds, there are approximately 2,500 ETFs, and then thousands of bonds on top of it. So, there's this huge sandbox of investments that nobody's even talking about. And maybe you should go take a look at those because there might be some things in there that are really mispriced and perhaps bargain priced. Always a good analogy is going into the store--what they put their very front of the stores are the stuff they want to move, generally higher-priced items. And that clearance rack, you have to go find, it's way in a corner, it's probably crowded, not easy to get to. But where are you going to find the better deal on a shirt or a pair slacks? Well, it's going to be going digging into that clearance rack. And when you think about investments, you're going to probably find that better bargain if you start looking where nobody else is. But you don't tend to see that talked about; you don't tend to see managers, fund managers, or money managers who go looking at that in those areas, really being called into investment media coming out and saying, here's an investment you'd never heard of, but I like it. And the reasons they list why they like it are characteristics that many people would probably like it. So, I don't think that gets talked about enough. And for those of us who do look at that area, it's actually probably a benefit because it gives us a better chance to outperform because there's less competition to find those bargains.

Benz: So, what are your go-to resources for staying current on investing?

Rotblut: There's quite a lot. I do read The Wall Street Journal daily. I do contribute content to them on their panel of expert panelists. But I'm a reader. So, I do read The New York Times. I do look at Kiplinger's magazine, but I also look at a lot of research on the SSRN websites, probably monthly, going through various research reports. NBER, the National Bureau of Economic Research, I look at what they're putting out. I do look at various retirement newsletters as well. Now that's coming up to tax season, because I write our tax guide, I do pay attention to #TaxTwitter, that's the national hashtag people can use. I'm actually one of those brave people who does actually look at the IRS website this time of year to see what they're putting out. But I'm also an avid reader, and I joke I'm probably much more of a bookworm than I'll ever care to admit to. So, I do read quite a lot of books, mostly nonfiction, and quite a number, either dealing with finance or dealing with investing.

Benz: Well, Charles, this has been such a great conversation. We really appreciate you taking time out of your schedule to be with us today.

Rotblut: Thank you. I enjoyed it.

Ptak: Us too. Thank you so much.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: 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.)

Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, 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.)