Why You Should “T-Bill and Chill” Instead of Using a Savings Account, with Cullen Roche

26:06What strikes me about the tent strategy is that it's a way to manage sequence of returns risk. You know, and then as you go deeper into retirement, you can actually be more aggressive. Yeah, it's kind of counterintuitive. And it's very different than the, you know, the age and bonds rule, because what's actually happening inside of the bond tent is that the, you know, and so for people who are watching it, the allocation will literally go, the bond allocation goes way up, and then the bond allocation can go way down. Because this is the other thing that I think a lot of people, they worry in retirement that the danger zone they think of is running out of money.

26:41And that's actually not usually, or at least in my experience, hasn't really been the danger zone. The danger zone is actually the early years of retirement. That's when people are, they're most behaviorally at risk. And it's the most difficult time horizon also because when you retire at 65, you might still have, who knows, 20, 30, maybe even 40 years left of funding that you need to live off of. And so your time horizon might still be really long. And so behaviorally, that's just a really taxing experience to go through for a lot of people because there's so much uncertainty around it. In the bond tent, what happens is you build up that big bond allocation.

27:20It creates a lot of certainty for you around the age of 65. But then weirdly, as you get older, your whole time horizon changes. Your time horizon gets shorter, but in a lot of ways, it changes because now you have to start thinking about all sorts of different estate planning needs and whatnot. And your portfolio for a lot of people, it actually becomes maybe even longer in time horizon because now you have to start thinking about things like multi-generational aspects. Like I work with a lot of retirees who they have IRAs that they're never going to touch and they're going to turn into inherited IRAs down the line.

27:55and when you start thinking in that sort of multi-generational context, well, it's beneficial to be more aggressive and cut down that bond allocation as you get closer to death, basically, because the money's not going to be yours and it might be your kids and the kids are going to inherit it and who knows what their time horizon is. Their time horizon, you know, if your kids are 30 years old when you're retiring, well, their time horizon might be, who knows, it might be 60 years. And so they're the beneficiaries of this. And one of the best things that you could do for your kids is be really aggressive and own the assets that are likely to earn higher returns because their time horizon is so long.

28:32Right. And even without that legacy planning component, I mean, once you're out of the sequence of returns danger zone, it seems, and correct me if I'm wrong, once that danger zone has passed, you can just, even if your goal is to die with zero, and you're only concerned about your own life, you still could be more aggressive, even though your time horizon is shorter because that specific sequence of returns. No, you're totally right. Then that's the perfect way to think of it is that once you've reduced or mitigated that sequence of returns risk, and so for listeners who don't know what sequence of returns risk is, it's the risk that when you retire or you have a need that you're drawing on your portfolio, that the portfolio might go down a lot.

29:18And this creates sequence risk, meaning that the path of your returns could be unduly damaged by a big bear market. Basically, it's the risk that you retire in 2008. Exactly. And the trauma of 2008 is that somebody who retires that year, let's say they've got a million bucks and they're 100 % equities and they think they're supposed to be very aggressive. And by the time Lehman Brothers goes bankrupt that year, the account is down to$600 ,000. And if you're living off of the portfolio, and let's just say you had like a simple 4 % withdrawal rate. Well, all of a sudden you started with a 4 % withdrawal rate, but by the time you get to October of 2008, your withdrawal rate is what?

30:01It's like 7 % or 8 % or something. To get that same amount of money. To get the same amount of money. And so you're drawing down more of your portfolio. You've got a far lower balance. And all of a sudden, you know, by the end of 2008, that retiree is looking at things and being like, Like, holy cow, I might have to go back to work or something, you know, or worse. They're thinking, oh, my God, I need to sell some of my stocks to create more certainty in my portfolio. And that's like the worst possible outcome, because then they're selling into the bear market and they're changing their risk profile completely because they're scared and they're trying to create certainty.

30:37And so that sequence risk in retirement, as you get deeper into retirement, the sequence risk starts to decline. and you're able to more predictably navigate retirement as you get deeper into retirement because you should have more certainty around your expenses and your ability to fund everything. There are many people who are listening to this who are planning on an early retirement, and that could be 55, 50, maybe even 45. How does that change the approach? I think the right approach is typically someone who has to be really, I talk about behavioral robustness a lot. One of Buffett's superpowers was that he just is incredibly disciplined.

31:20He has the behavioral robustness of like nobody else out there. And he's got this ability to ride through big bear markets and not get worried. He never sells into downturns. For people who are thinking about early retirement, you've really got to have that sort of a mindset because you're going to have to navigate a really long time horizon and you're going to have to go through the inevitability of there's going to be big bear markets, there's going to be weird things that happen. And it always feels different this time in a bear market because the narrative around what's going on typically feels very accurate.

31:55Like, you know, COVID, everybody was scared because we'd never been through anything like that. And so the stock market is down 20, 30 % and everyone's looking at it. And I mean, even Warren Buffett is saying at the time, ooh, this actually is different this time. And Buffett actually wasn't buying during COVID. He didn't get scared during COVID and sell, but Buffett and Bill Gates, and I remember all these sort of famous people, they were like, wow, this is really unheard of. This hasn't happened. You know, there's never been a global pandemic quite like this, and we don't know how it's going to play out.

32:25And so when you're in the throes of it, you know, it's funny being a financial advisor because I used to send these like phony questionnaires to people where I would say like, you know, what do you do in a bear market? Do you, you know, the stock market's down 30, 40%. How do you respond? And everybody answers exactly the same. Everybody says, oh, I won't get scared. I'm going to buy more. I'm going to stay the course. But then when you get into it and you're actually in COVID, you know, I'm fielding phone calls from all these same people. And they're like, Cullen, this is scary as hell. What do we do now?

32:54Should we sell everything? Because it feels so accurate in the moment. There's a real reason and why the market is down and why you're scared. And so the mentality inside of that environment is not, oh, I should buy more. It's, holy crap, what if this is something like the Great Depression, where talking about that 80 % decline chart, when people are down 40%, they're thinking, well, wait a minute, what if this is going to go down to the 80 % point at some point? And that's how everybody thinks in a bear market. So it's interesting thinking about the psychology. You've got to be, man, you've got to, if you're in the fire movement and someone who is going to try to retire early, you've got to have a really, really robust behavioral profile.

33:39Right. Because you don't have the bond allocation of income. Yeah. You don't have the dry powder. Most people, the dry powder to make new contributions comes from their job. Yeah. And so when you hit a downturn, you don't have a job to be able to make those new contributions. Yeah. So a downturn really is all downside. And with that long time horizon, you should properly be taking probably a decent amount of risk because you need the high return yielding instruments like from the stock market to actually fund your needs over the long term. And so you've got to go into it knowing that. And I think that's part of it is, you know, you've got to understand what you own.

34:16And if you're someone who's retiring at 55, let's say, and let's say you've got 40 years of retirement funding left, well, you've got to go into that probably with a somewhat aggressive portfolio. And you've got to know that, okay, I really cannot allow myself to get scared when the stock market goes down a lot because I need to own these instruments that are higher earning types of return instruments that are going to be in the short term also really frightening at times.

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36:17Let's talk about some other model portfolios. Tell me about the Bernstein portfolio. Yeah, so this is Bill Bernstein's no-brainer. and Bill is a famous boglehead. And Bill is a neurologist who is a literal genius. And he makes a bunch of money working as a neurologist and gets interested in managing his own money and sort of realizes, oh, I think I'm getting hosed by my financial advisor or something like that. And he gets so into it that he starts building his own sorts of portfolios. And Bill's no-brainer portfolio is sort of a, it's like a more elaborate boglehead type of portfolio. where he's built something that goes beyond like the Boglehead three fund portfolio and kind of builds components, utilizing a little bit of academic theory and things like factor tilting, where he's buying, you know, say tilting to certain types of either value or growth or whatever it might be.

37:12But the other thing that Bill is a big advocate of is tips ladders. Tips ladders are treasury inflation protected securities. And the reason that Bill loves these things is that they're bond ladders that are perfectly inflation protected for retirement planning purposes primarily. And so Bill likes to build a tips ladder that kind of front loads a protective component for income. And it's he typically tries to build it so that it's matched kind of like certain expenses. And you've got a tips ladder then that is serving as an inflation protected bond component of the portfolio. But then he's got this equity component that is customized around a very simple sort of indexing strategy that's functionally just a more elaborate sort of Boglehead approach.

37:58It's interesting comparing and contrasting Bill Bernstein with someone like Taylor Laramore, who Taylor Laramore was the creator of the Boglehead three fund portfolio. And the Boglehead three fund portfolio also has sort of an interesting origin story because Taylor creates it without any experience in the financial services industry. Because again, he thinks that he's getting hosed by his financial advisor. And Taylor, interestingly, he was married to a beautiful model who was like the highest earning model in Miami back in, you know, gosh, I guess this was the 40s or 50s. And he comes into so much money through her income that he starts getting very hands on with it.

38:39And he reaches out to a guy named John Bogle. They correspond and And Taylor learned so much from Bogle over the years that not only does he end up implementing what he kind of distills down into like the purest form of Bogleism, but he becomes one of Bogle's like greatest friends throughout his life. So he distills this down, though, to these three very simple funds where, you know, you could almost argue it's probably the simplest portfolio. And in certain ways, I'm minorly critical of the three fund portfolio because you could argue, I think that it's almost like too simple. Yeah. But that's what Bill kind of builds on is Bill takes, you know, kind of the same components of a Boglehead three fund portfolio and all the basic principles of being diversified and maintaining low cost indexing types of strategies and being really cost aware.

39:31But then Bill kind of builds on this and allows you to sort of customize it and do things that are a little bit more elaborate, but not overly elaborate to the point where, you know, you maybe feel like you have what I would call like diversification in the portfolio where you're actually making your whole structure worse because you're so diversified across so much, so many things that you've actually made the whole process counterproductive to some degree. I just realized the joke in a neurologist like Bill Bernstein calling it the no brainer. Yeah. Let's start with the foundational building block, the Boglehead Three Fund.

40:06Can you walk us through what are those three funds? Total stock market, total bond market, and then is international? Yeah. Yeah. So he's doing a domestic, international, and total bond market component. And it's just three funds. You can almost think of it as two funds that you could distill this down into something even simpler where you're buying, Like if you own just like Vanguard Total World, VT, that's basically like the two funds that Taylor likes to use. And then if you're buying something like BND, the total bond market, that's your whole bond allocation. And that's it. You've got two or three funds that they're serving your entire portfolio needs.

40:44And if you've got that allocated to match your risk profile or whatever, you know, that's the other thing. Taylor doesn't like necessarily build this in a fixed sort of manner. or he says, you've got to build this to your risk profile so that that three fund portfolio, it could be, it could be 33, 33, 34, something like that percentage wise, or it could be 60, 40, it could be 80, 20, and you've got to match that to your risk profile. But the main kicker from that is that you should be ultra cost aware because you can own this portfolio now for, you know, like 0.03 % in totality. So it's, it's not free, but it's really damn close to free.

41:21And that's the thing is that that Bogle especially liked to emphasize was that costs matter a lot. You know, one paying 1 % fees may not sound like a lot, but you have to think of things in what I call real, real returns. And this is your, your after tax, after inflation, after fee return. And those returns are much, much lower than what people typically think of when they hear, you know, if you're watching financial media, you might hear that the stock market averages 10 % a year or something. And that's true at like the aggregate level. But when you back out the taxes and the fees and then the inflation, well, you're probably earning something closer to like four to 5%.

42:01And so when you're paying a 1 % fee on that in the long run, it ends up being a huge, huge part of your total investment returns. And so that's why Bogle was such a critic of fees was that these seemingly small figures actually add up to gigantic sums in the long run. So it's beneficial to be like hyper cost aware. And so the three fund portfolio is just really beautiful because it's very diversified. It's relatively complex in the way you're getting different exposures, but it is beautifully simple and it's something that is incredibly easy to maintain because there's no real leg work required in managing two or three funds over the course of the long term.

42:42Right. Right. So then what does Bernstein do to make that a little bit more diverse? So Bill is a he's a brainiac. So he's familiar with the academic theory behind things like factor investing and factor investing for people who are listening who may not know. This is basically like the Gene Fama and Ken French theory that the stock market generates returns from different factors. There are drivers of the stock market that sometimes they generate outperformance, actually. And Fama and French actually went in and identified what are these factors that drive these things. And they're typically things like small caps beat large caps on average over the long term.

43:22Or there's the momentum factor where this weird sort of phenomenon where companies that tend to have good returns tend to generate continued good returns. And that's a function of maybe it's their high quality firms or their very profitable firms, but there are these fundamental drivers in portfolio management that drive returns inside of the stock market. And Bill is a believer in this idea that you can identify these things and it could make sense to tilt the portfolio a little bit to something, you know, like a small cap instrument or a momentum fund or something like that. Or even if it's like an international type of driver, Bill likes to take this sort of simple asset allocation and go a little bit beyond it where you're doing what is, you know, a lot of Bogleheads might call it factor tilting, where you're taking something that is a fundamentally a very simple sort of Boglehead type of portfolio, but then you're tilting it a little bit to either generate maybe a little extra return.

44:22And if it's done in a low cost manner, which it can be done now, Vanguard has all these factor tilting funds basically that are super low cost. You can build something that's a little bit more elaborate that maybe it might earn a little better return than the S &P 500 or something like that. And, you know, I think that's not necessarily a bad approach. Right. That reminds me of Paul Merriman's ForeFund portfolio, you know, where you've got just a little extra exposure to small caps. Exactly. Yeah. And, you know, I think the thinking there is basically that you're trying to capture a little bit of that factor tilt with the hope that, hey, maybe my portfolio will do a little bit better than the S &P 500.

44:59And that's, it's weirdly one of behaviorally for a lot of people, it's one of the hardest parts of investing actually, is that when you make a portfolio that is a really boring sort of indexing portfolio, I think a lot of people look at that and they say, this is no fun. You know, like I, I'd like to sex this up a little bit or something. I'd like to do something a little bit different that maybe I can't pick stocks like Warren Buffett, but I could, I could own something that's a little more exciting that might earn a little higher return, whether that's, you know, like a technology fund or a small cap fund or an emerging markets fund, something that adds a little bit of juice to the portfolio that might generate higher returns in the long run without exposing you to either crazy risks or crazy costs.

45:41What that does often is it introduces an ongoing line of questioning. For example, adding a small cap component to your portfolio. We know that historically small caps over the long term have outperformed large caps. We also know that we're currently living at the cusp of this big AI revolution where maybe that might change and maybe AI has fundamentally changed the game such that large caps will be dominant from here on out, as we've seen with the crazy outperformance of the Mag 7. So now there's this question, you know, and that's a question that if you had a Boglehead 3 fund, you wouldn't be asking.

46:21You might ask the question, do we still need international? Yeah. You know, that's probably what the Boglehead 3 fund would cause you to ask. and then you add in small caps and now you're asking a different set of questions. So I think that the questions that you ask with the introduction of different types of asset classes cause you to constantly second guess. Yeah. When you get into asset picking then, it's one of the things that I try to kind of approach this as like an independent analyst where I'm not necessarily endorsing a particular strategy. I'm trying to just describe what the strategies are and then kind of say, hey, this is what's good and bad about the strategy.

46:56This is who it might be good or bad for. And that's part of with the factor investing component is that the main criticism to me for factor investing is exactly what you're talking about, where you're functionally still picking stocks inside of a factor investing strategy. Because what you're really doing is you're saying, okay, well, for the last 40 years, small caps outperformed. And now I'm going to go in and I'm going to buy a group of stocks that are functionally, I'm picking these stocks and I'm expecting that return to continue into the future. And so you're making this very implicit prediction about future returns inside of a specific component of the portfolio, which is a weird thing to do for a Bogle head type mentality because, you know, Bogle famously was the advocate of just buying the whole haystack.

47:42Don't don't try to find the needles, just buy the whole haystack. And that way you don't have to pick factors because you own all the factors inside of a total market fund. You make a super valid point, and it's especially interesting today because the small caps have really sucked compared to the large caps. Even with the academic theory that we know about, it just hasn't fundamentally changed. And that's what makes, I think, stock picking and asset picking hard in the first place is that you're making these predictions and you're trying to basically say, I know something that the market doesn't know right now, which so often turns out to be wrong.

48:18That's why Bogle was such a big advocate of just buying the whole thing. Right. And even there, buy the whole haystack. But which haystack? U.S. versus international? There were many voices that said, hey, again, AI revolution, U.S. and China are poised to be the winners here. So why not just concentrate there? And then we look at 2025's returns and international, like, smoked the U.S. in 2025. Yeah. And Bogle was an advocate of owning only the US. So there's this other weird component where everyone's active to some degree. One of the portfolios I actually talk about is what I call the global financial asset portfolio.

48:59And it's kind of like the purpose and the benefit of understanding this portfolio is that you understand the total market portfolio. It's basically all of the world's outstanding financial assets. And that's the true benchmark for everything, basically, because it's literally the market portfolio of all outstanding financial assets. And everybody deviates from that. There's nothing wrong with that. So this is part of what makes investing fun and difficult is that everybody deviates from that. And everybody has to make these personalized choices where you have to decide, you know, do I want to own European stocks when, you know, Vladimir Putin is dropping bombs on Eastern Europe all day, every day?

49:39Do I want to own the risk of China potentially invading Taiwan and causing disruption in the region? Or do I just want to keep it simple and know that, hey, if I own the S &P 500, I own a lot of companies that they have international exposure, but they don't necessarily have like this direct risk exposure to the European economies or the Asian economies and things like that. Again, it's you've got to find the portfolio that's perfect for you. And part of that is making these tough decisions about, OK, I want to be diversified, but what is the right amount of diversification for me? And so it's it's hard.

50:17It's part of the you know, we all have to be active to some degree. And there's very there's very stupid ways to be active. Like I'm hypercritical these days about there's this like gambling mentality with so many things where you can't watch a football game these days without seeing, you know, 100 betting ads. And it's just like, you know, and I'm sort of militantly against gambling and, you know, playing the lottery and things like that. But those urges are interesting because everyone's kind of got, you know, a certain degree of that. And when I was, you know, in my 20s, I used to day trade and do sort of silly things that, you know, I now look back on and I'm like, man, how much money did I light on fire just doing stupid stuff, kind of learning the ropes through this industry.

51:00And so it's interesting, though, because that element is what makes investing difficult because you have to be active to some degree, but you're trying to find the right level of activity that is sensible and going to generate decent returns, hopefully, but also isn't being counterproductive in a lot of ways. Right. And there is that interesting psychological phenomenon of it is precisely when people feel desperate, meaning that when they're in a worse financial position, that they tend to take bigger risks. The thinking is almost that being more aggressive can compensate for a lack of contribution.

51:38Yeah. But it is that overly aggressive posture that actually ends up often hurting them. Yeah, and I think that's what drives a lot of the sort of gambling mentality, not just in the financial markets, but also in literal gambling markets, is that I think a lot of people, everyone wants to get rich quick. You know, like everybody would like to be able to afford anything as quickly as possible. To some degree, that's what happens with a lot of young people when they're getting into the financial markets. They are introduced to stocks and they say to themselves, well, gosh, I've got$10 ,000. if I could start turning this$10 ,000 into$5 ,000 every month, maybe I won't have to work anymore.

52:21And then, you know, you start running the numbers on this and you start thinking, well, gosh, if I can take really high risks and generate really high returns, well, you know, maybe I won't have to work anymore and I can just, you know, retire early and become part of the fire movement or whatever it might be. So this drives this sort of gambling mentality for a lot of people where They end up doing things that are sort of silly, but it's this get rich quick mentality. And the stock market is not where you get rich typically. You can make, obviously, a lot of money investing in the stock market, but I don't even like using the word investment portfolio because I literally will think of your portfolio as your savings portfolio, that you're generating an income and the income allows you to save a certain amount of money.

53:04And then you're taking that savings and you're reallocating it into things like stocks and bonds. What we call an investment portfolio is, to me, actually like your savings portfolio. And saving money and allocating savings is fundamentally boring, which is, I think, the right way to allocate your assets, though, because these, again, going back to sort of like the time horizon of the stock market, well, the stock market can't, in aggregate, generate 100 % returns every year for everybody. It just mathematically can't because the underlying entities are, let's say they were paying out all of their profits every year.

53:41These are entities that are growing at who knows, like, you know, six, seven, eight percent a year in aggregate. That's the cash flow that they can mathematically pay out every year. And so in the long run, the stock market is this. It's a higher yielding instrument than the bond market. But again, it takes a long time for those cash flows to accrue. And you've got to be patient. So to earn that 6%, 7 % return on average, you've got to be really patient with it. And you can't make the stock market generate a higher return than it fundamentally can through the underlying cash flows of the underlying instruments or entities.

54:16Right. And it's interesting the framing of this is your savings portfolio because savings is deferred spending. I think often people with a predisposition to save a lot of money have a hard time with spending, ultimately. That's one of the challenges that we see in retirement is if you've spent your whole life saving, saving, saving, saving, it's hard to flip that switch. Yeah, and that is so front and center in retirement planning, too. I mean, I see it every day. People have a lot of trouble making that. It's the other big component that makes retirement really sort of psychologically difficult for people is that you spend your whole life accruing savings and reallocating it into stocks and bonds.

55:02And then when you retire, all of a sudden you start to live off of the portfolio. And you're now maybe your portfolio isn't growing anymore. Maybe you're withdrawing 4 % a year or whatever. And after all your returns from the instruments you're allocated in, you know, maybe your portfolio is actually declining. And that's another thing that's psychologically just so difficult for people to get accustomed to because they've spent 65 years or whatever just accruing savings, earning an income, and then reallocating the savings into this set of instruments. And all of a sudden now they're living off of the portfolio.

55:39So it's the other element of retirement that's really psychologically difficult. Right. And that's tough. Even if you just take a sabbatical, I took a sabbatical knowing fully that I was going to go back to work afterwards, but to suddenly not have an income and yet continue to spend money, even at the sabbatical level, at the mini retirement level, that was a huge challenge. Yeah. I talk a lot about time horizons because understanding the way that your time horizons are related to your financial assets is super, super important because when you take a sabbatical or when you retire, your time horizons are changing fundamentally because you, if you don't have that income component anymore and you're drawing down your portfolio, you have to be more sensitive about your ability to navigate the short term.

56:25And so, you know, if you're someone who, you know, you, you take a year off from work for a sabbatical or whatever, and you're, if you're a hundred percent equities, well, you weirdly, you have a lot of sequence of returns risk in there, you know, cause you're, you're now exposed to this weird environment where let's just say you were taking your sabbatical in 2008, you've got the same sequence risk basically that a retiree has, even though you're only taking a year off, you might be planning to go back to work in 2009, you still have to go through the psychological battle of watching that portfolio go down a lot.

56:57And if you're withdrawing money from it, you're perpetually selling into the stock bear market through 2008. It's one of the benefits again of like owning something like the Warren Buffett portfolio where, you know, you've got enough allocated in sort of a cash equivalent where you kind of know, okay, I'm going on sabbatical for a year and I've got a 90-10 allocation, but this 10 % component, it's going to fund all of my expenditures for the course of this full year where it doesn't matter what happens to the 90 % part. And that's the other thing about thinking about things in time horizons and thinking of the stock market, especially as a fundamentally different long-term instrument is that when you compartmentalize things like this, it allows you to have that freedom to look at the cash component and say, okay, well, I've got X number of dollars allocated into an emergency fund basically, or the spending component of my portfolio.

57:54And that frees up a lot of behavioral bandwidth. You can then look at the 90 % part and say, I don't care what that thing Because if it goes down 50%, it doesn't change the fact that I've completely covered all of my expenditures through the 10 % component. Right.

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58:57about T-Bill and Chill. We've talked about the Buffett portfolio. Tell us about Virtue and Vice. This is another sort of psychological portfolio where sometimes you should do things that are parts of your portfolio that you like because you feel a certain way about whether it's, you know, owning bonds to just keep you more comfortable or a lot of people, they want to do something good with their money. And so especially in the last 10 years, you know, what's called ESG investing has become very popular. And this is sort of a virtuous sort of way to allocate your assets, where you're investing in things that, or companies that maybe you're super anti-gun, for instance, and you don't want to have any exposure to any gun makers inside of like the S &P 500.

59:42And so maybe you'll own like the S &P 499 in a certain way by getting, you know, a gun maker out of the S &P 500. And, you know, that kind of aligns things in a way where you're still building a very diversified and low cost portfolio, but you psychologically, you know, like, Hey, I'm not putting my money into things that I don't believe in. And this is an interesting one because it gets into the whole aspect of stock picking again, where you're kind of saying, well, I know something the market doesn't know. And I'm going to, I'm going to pull out these companies because I believe a certain thing.

1:00:20And so I'm sometimes minorly critical of ESG investing because I tell people, this is just fundamentally stock picking. And it's not that I don't think it's a good thing necessarily. It's that I just don't believe in stock picking basically. And so when people deviate from the index a lot, I typically just say, well, this probably has a little higher costs and the benefits of deviating from the market portfolio are probably not gonna pay off in the long run. And I always tell people, hey, if you wanna do good, Why not earn the higher return from owning the full S &P 500 and then donate the difference or something like that?

1:00:51But again, this is super personal. And if you're someone who you don't believe in or you don't like certain types of corporations, there is totally nothing wrong with removing those components from your portfolio through something like an ESG portfolio where you're doing something that you believe is a little more virtuous. But more importantly, it might help you stay comfortable with the way you're allocating your savings so that you stay the course. And that was the other big lesson from John Bogle is that Bogle would always tell people you've got to have a portfolio that keeps you comfortable so you can stay the course through thick and thin.

1:01:25And if something that's a little more virtuous or the flip side being a vice portfolio, maybe you're someone who really likes guns and, you know, or things like that and things that other people might say are vices in the world, you know, maybe those are the things you really want to invest in. And if that if it makes you comfortable and that's the thing that sort of keeps you staying the course, you know, again, that's your perfect portfolio. I think one of the challenges with ESG is that every person's definition of good and bad is so different. I mean, alcohol, for example. Yeah. The perfect example of it's common in our society.

1:02:01There are a lot of major alcohol companies that are publicly traded, but alcohol is also involved in 100 % of drunk driving crap. Yeah. Like, you can't drive drunk. That's why I called it the vice and virtue strategy or chapter is because one man's vice is another man's virtue. Right. You know, getting into the definitions of all this is another thing that I'm kind of minorly critical of the ESG movement because it's, again, you're getting into these sort of subjective debates about, well, what is a vice or what is a virtue? And, you know, the even more interesting component of that is, you know, when you start making these predictions about things like, you know, maybe people hate an oil company, for instance, and you look at a company like ExxonMobil or Chevron and you say, you know what, I don't want to own this company because I think that, you know, petroleum is destroying the ecosystem and this is bad for the world.

1:02:49But at the same time, the weird thing with companies like that is these are some of the leading investors in renewable energies at the same time. Because these are – the thing that makes stock picking really hard is that, you know, who knows what ExxonMobil is going to look like in 25 years. ExxonMobil might be a fully renewable energy company in 25 years because they're doing all these things that they, I think, are looking forward to. They're trying to manage the company in a way where they're saying, well, you know what? Maybe petroleum isn't the future of energy and we need to stop having such a concentrated exposure to that segment of our business.

1:03:23And we need to be investing a lot in renewables. And so, again, you're trying to make a prediction about something that might be really fundamentally different in the future. And that's the thing that makes stock picking so hard is that you're trying to predict what are these companies going to look like in 25 or 30 years. And the reality is nobody knows. And it's, I think, even more so true these days because the world is changing so fast. I mean, a lot of like the MAG-7, none of these companies even existed 30 years ago. So it's crazy. Companies are coming out of nowhere really fast. And companies are dying also faster than they ever have.

1:04:00And it's because of this sort of technological kind of creative disruption that's going on or creative destruction that's going on inside of the stock market where the entities are getting increasingly difficult to actually identify the top performers because the world is changing so fast. Right. Which brings us to a major question that I often hear from this audience and just kind of out in the world is everyone has a prediction about AI and a lot of people have fears that we're living in an AI bubble and there's sort of a hangover from the dot-com bubble that people are very worried that we're just repeating the dot-com bubble again 25 years later, 26 years later.

1:04:42Do you have a framework for how to think about that? I mean, you must have financial advisory clients who probably have to. Yeah, you know, I always tell people, I mean, the interesting thing about the AI bubble, if we were going to call it that, if you look back at the NASDAQ bubble, if you had bought the very, very peak of the NASDAQ bubble back in 2001, you actually have generated an 8 % annualized return since then. So the weird thing about thinking about the Nasdaq bubble is that the Nasdaq bubble wasn't actually wrong. You know, people were really overly enthusiastic about the Internet then.

1:05:16But the Internet did end up being this like incredibly transformative, life changing technology that those investors, if they held on for the long run, they ended up being right. But what happened in the intermediate term? You went through this incredibly traumatic 15 year bear market where it took, you know, especially in real terms, it took a really long time. you had a huge amount of sequence risk basically in that component of your portfolio. And so I try to communicate the same thing with AI that the way I think of AI is that, you know, the mag seven and the super high valuations in the U S they potentially expose us to higher sequence risk in the short term.

1:05:54And I'm kind of an advocate or believer in that AI is going to be this incredibly transformative technology in the long run, but the path to getting there might be really bumpy. And so I think when you own things like technology and growth and even domestic versus international these days where the valuations are colossally different across all these different sectors or even tech versus value in the domestic market, you should acknowledge that, hey, in this component of my portfolio, I might have a lot more sequence risk today than we do on average. And so I tell people, again, kind of going back to the time horizon thing, if you own a lot of tech, you might just have to be really, really patient with that component because you might have a lot more sequence risk inside of that portfolio.

1:06:41And so it's another argument for either owning international or, you know, tilting more towards like a value factor or something like that. Or maybe you own more bonds because you're trying to offset, you know, some of the sequence risk inside of the portfolio. But it's a time horizon thing. And who knows what's going to happen, though? I mean, you could very well have an environment where the MAG-7 and the S &P 500 just continues to beat the pants off of international and everything else because AI really – the market is completely right. And you just continue to see these high returns in this segment of the market.

1:07:15But I do think from a framework perspective, I think it's good to go into it and acknowledge that high valuations are – they're functionally high expectations. And what happens when you have really high expectations is the risk of underperformance for unusual reasons becomes sort of outsized because when people expect a lot of you, it's really easy to disappoint. And that's what's built into the AI component of the market right now, just super high expectations. And if you get either some underperformance, maybe AI doesn't turn out to be quite as great as people think or weird things happen. You know, COVID happens and, you know, maybe China rolls into Taiwan and all of a sudden, you know, Taiwan Semiconductor is, you know, a Chinese company.

1:08:00And, you know, supply chains get totally messed up from everything that happens there. You know, there's going to be weird things. And I think that that creates an environment where because the expectations are so high, the potential for disappointment becomes potentially higher. And that creates that sequence risk that we've talked about. We've talked about a lot of model portfolios for a while. Before we leave the topic of model portfolios, I do want to ask you about the 100 % stock approach, the all equities approach. That is personally what I have for people who can stomach it. Tell us about the pros and cons of that.

1:08:35Yeah. So this is kind of the full octane portfolio. It's the, you know, you're even going beyond what Warren Buffett does. And so you're attaching yourself to probably the highest return instrument in the economy. And what I would describe as also the longest duration instrument in the economy as well. And so you've got to be someone if you're buying, you know, there's and there's a million different ways to do this, too. I talk about, you know, you could buy just the S &P 500. You could buy Vanguard Total World. You could start splitting it up. You could build your own sort of three fund portfolio where let's say you just own the domestic market, the foreign developed and emerging markets or something.

1:09:15And you've got a hundred percent three fund portfolio that's all invested in inequities. But the basic principle there is that you're buying the highest yielding long duration instrument that exists and with the expectation that you're trying to generate really high returns. And for someone like you, it could make a ton of sense because, again, going back to that idea that your income or your job is sort of this fixed income, you've got this embedded fixed income allocation. And it frees up the bandwidth for you to be able to take a lot of risk. And so when people are, especially for younger people, people with a long time horizon, the 100 % portfolio or 100 % stock portfolio could be the exact right portfolio for you.

1:10:01And, you know, there's a lot of different ways to implement it. But I think that the thing that you've got to really be comfortable with is the risk, the volatility of it. And you've got to know that the stock market's going to do weird things at certain times. And, you know, our friend Nick Maggiulia always says, you know, keep – just keep buying. Just keep buying, yeah. And you've got to have that sort of mentality with it too. You've got to know that, you know, the stock market is going to go down a lot and you should. You should just keep buying because that's where you're allocating all of your savings again that, you know, coming from your income.

1:10:32And so it's one that is going to be, you know, really behaviorally difficult for a lot of people. But again, if you've got a, the stable fixed income component coming from your job, it frees up that behavioral bandwidth to be able to take a lot of risk. But again, you've got to have, you know, for people who, you know, maybe you work in a, an industry where you're, you, maybe you don't have the job security. you've got to be aware of that, that if there's a risk of you potentially losing your job for some reason, you've got to account for that inside of your portfolio where you're assessing that risk and knowing that, okay, well, what if this fixed income component that is giving me the behavioral bandwidth to be 100 % equities, what if that just goes away one day?

1:11:15And then all of a sudden, you're exposed to the sequence risk again. These are all things that people have to sort of assess at a very personalized level. And it's, again, why I am so communicative about the idea that you've got to find what's right for you because everyone's different and everyone's got different risks and different jobs and different allocations that they have to account for. Right. There's one other one that I also want to ask you about. Somebody like me who is, I have no intention to ever retire, if we define retire as a cessation of income producing activity, I have no intention to engage in that at any time in the foreseeable future, if ever.

1:11:57Versus somebody who is right on the cusp of the cessation of income, they might be interested in something like risk parity. Can you talk to us about risk parity? Yeah, so risk parity is made famous by Ray Dalio, who Ray Dalio runs Bridgewater Associates, which is the biggest hedge fund in the world. And Dalio's basic principle was kind of similar to the permanent portfolio and the idea that you're trying to create a portfolio that the risk exposures have parity across all of the different elements of the portfolio. And so going back to like the 60-40 portfolio, a risk parity advocate would look at the 60-40 and they would say, well, Bogle called this a balanced index fund, but actually the risks that you're taking inside this portfolio are not balanced at all because the 60 % component and is actually driving roughly 85 % of all the risk because the 60 % piece is so much more volatile than the 40 % piece that when you look at where's the volatility contribution actually coming from, it's almost all coming from the 60 % piece.

1:12:58So in a year like 2008, 60-40 is down 30%, which is crazy because the 40 % piece was not down at all. So the whole driver of the downturn is coming from the 60 % piece because it's so much more volatile. And so what a risk parity advocate would say is, no, this is totally wrong. You should do something in your portfolio where you're creating more balance inside of the way you're getting your risk exposures. And so they would build in ways to actually try to create this parity where maybe you're, you know, there's a lot of different ways to skin this cat again. And, you know, there's a lot of different there's actually an ETF issued by Bridgewater, ALLW, and this is also called the all weather portfolio because it's designed to create this sort of parity where it's designed to sort of be able to ride through all weather.

1:13:47But there's other ones. There's I think I mentioned a number of the ETFs that try to do something like risk parity. There's mutual funds from AQR and a lot of ETF issuers that have risk parity portfolios. But what they're basically doing is all kind of the same in that they're doing some way of basically either reducing the stock market volatility in some way or boosting things like the bond market volatility so that there's parity in the way that you're getting the risks from the portfolio. And the theory behind this is that you basically you want to create more parity in the risk exposures, and that should generate a more stable type of return in the long run.

1:14:26And it's actually, it was one of the more interesting ones to study because the actual implementations of it haven't done that well. So when you look across the board at almost all of these, they've done fine. And they've done basically what the advocates have tried to get the portfolios to do in that they're generating typically much more stable types of returns. But when you look at something like a 60-40, it's interesting comparing and contrasting these because they haven't done that much better even on a risk-adjusted basis than something like 60-40. And so, again, you can get really, really customized.

1:15:01Dalio would say that you need 15 different types of return streams to be able to build a risk parity portfolio and utilize these different components in a way where you're creating the parity across all of these 15 different instruments. And you can get really complex really fast doing something like that, which again, going back to kind of the burden of having this sort of second job managing a portfolio, risk parity can very quickly, if you're trying to do it in a more customized manner as a DIY investor, it can get really complex really fast. And so it can be easier to just utilize an ETF if you're into that.

1:15:40Or it might be even at the ETF level or the fund level, you might look at it and say, the fees on this are a little too high for me or what the underlying manager is doing just seems a little too complex. So it takes a sort of, I think, specialized investor to be comfortable with the risk parity strategy. Yeah, it seems to me as though risk parity is ideal for somebody who is going into retirement or is maybe a couple of years, you know, two to three years out from retirement. And their retirement, quote unquote, job, so to speak, is going to be managing their portfolio. And so in retirement, they will have the time to actually manage a risk parity model.

1:16:22Totally. To your point about retirement and risk parity, I think that one of the benefits of something like a risk parity portfolio is that you're adding other layers of diversification as well. They go into a lot of different types of instruments. And, you know, it's one of the things that it adds cost to the portfolio, but it also adds other elements of diversification. And we see this, especially in a year like 2022, where the portfolio, if you're owning something like a 60-40 in 2022, stocks and bonds both go down at the same time. And a lot of people, especially retirees, they might look at that and they might say, well, wait a minute, my 40 % bond piece was supposed to reduce my sequence risk.

1:17:02And it seems to have compounded it. So there's an argument that is increasingly convincing that adding in other forms of diversification can be beneficial because it can add a layer of diversification that might reduce your sequence risk if you're only stocks and bonds. And so it's an interesting portfolio for people that want a little bit of extra diversification, but you've got to acknowledge that the added complexity is probably going to add to higher costs and those added costs might not be beneficial in the long run. Right. Right. 2022, I think, was a year that surprised a lot of people seeing that stocks and bonds are not inversely correlated.

1:17:40Yeah. And it's a totally different interest rate environment, too. I mean, when interest rates are at zero and they go to five, that creates a lot of principal volatility in bonds because as interest rates go up, bond prices go down. And so we're fundamentally in just a very different environment these days. Like, you know, I probably wouldn't even have written the T-bill and chill chapter in 2018 because, you know, T-bills were earning zero percent. There was no chilling to do in T-bills at that point. Whereas today, it's a totally different interest rate environment. And I would argue that the interest rate risk and the bond components, you know, a lot of people have been saying that 60-40 is dead or the bond market is dead.

1:18:17And I have been kind of dismissive of that in recent years because the interest rates are just so much more attractive. So, you know, chilling in T-bills or owning an aggregate bond index or something like that is a lot more attractive today than it was, you know, five or 10 years ago because Because interest rates are just – they're so different. And that creates a very different risk environment where you probably – I don't want to say you don't have to worry about 2022 happening again. But the risk of bonds and stocks both going down in this sort of an environment is different because interest – you're starting from a totally different interest rate component today with overnight interest rates now are still whether they're 3.8 % or something.

1:18:59Yeah, 3.75 is right in that zone. Yeah. Did you coin the term T-Bill and Chill, by the way? Is that you? I don't know. Actually, I don't know. I've heard many people talk about VTSAX and chill, but like T-Bill and chill has just got a much better ring to it. I'm not sure. I feel like I've heard Meb Faber use it in the past, and so I probably stole it from him. I'm not that original, so. Well, that closes out part one, but we look forward to you joining for part two later this week. In the meantime, where can people find you if they'd like to learn more? So our website is disciplinefunds.com. My firm is Discipline Funds.

1:19:38And if people want to read more of my commentaries on the bloggy part of the website, it's Discipline Alerts and people can subscribe and hear more from me there.

1:19:51Thank you, Cullen. What are three key takeaways that we got from today's conversation? Key takeaway number one, there's no perfect portfolio. there's only the portfolio that fits you, your life, your goals the best. A lot of investing advice gets packaged like an off-the-shelf product, but Cullen pushes back on that and talks about why portfolios need to be personal. There is no perfect portfolio for any single individual because everybody's different. Everybody has different needs. Everybody has different expenses. I think everybody needs to find a portfolio that works for them. And so, so much of the salesmanship in the industry is built around pushing strategies on people and trying to convince them that, hey, you should buy this fund or buy this strategy.

1:20:36That's not the way it works in real life. That is the first key takeaway. Key takeaway number two, diversification works if it makes you uncomfortable. A diversified portfolio, by definition, always has something that you hate. And so if you are frustrated with a portion of your portfolio, that's a feature, not a bug. That's the point. The point is there should be part of your portfolio that annoys you. Diversification is learning to hate some part of your portfolio all the time. And that's super true with 60-40 because the 40 % piece, it's going to drive you crazy at times when you see the stock market booming.

1:21:19And then when the 60 % piece goes down a lot, you'll look at the 40 % piece and you'll say, thank God I have that. Finally, key takeaway number three, cash feels simple, but it can be quietly expensive. So I personally, I thought this was the most interesting part of today's conversation, the T-bill and chill. Cullen talks about why many cash products that are marketed as being convenient actually are skimming value. So he basically talks about why managing the cash portion of your holdings deserves more attention than people give it. And the irony in that is that typically a high-yield savings account is much lower yielding than the treasury bills are.

1:22:01The way I think of it is even if it's, say, 0.1 or 0.2 percent lower than the treasury bills themselves, well, you're kind of getting hosed on that. It's a double whammy too because the treasury bills in most states are tax advantaged. And so the bank is buying the treasury bills. They're getting the tax advantage. They're getting the full 100 % yield from the government there. They're giving you a little cut of the action and they're not passing on the tax savings to you. Those are three key takeaways from this conversation with Colin Roche. And this conversation is part one of a two-part series.

1:22:40So make sure that you hit the follow button in your favorite podcast player so that you can tune into part two of this interview with Cullen Roche. Thank you so much for being part of this community. If you enjoyed today's episode, please share it with friends, family, neighbors, colleagues. Share it with the people in your life. That is the most important thing that you can do to spread the message of F-I-I-R-E. Subscribe to our newsletter. It's free. Affordanything.com. slash newsletter. And don't forget to leave us up to a five-star review in your favorite podcast player. Thanks again for tuning in, and I will meet you in our next episode where we share part two of this interview.

1:23:26My name is Paula Pant. This is the Afford Anything Podcast, and I'll meet you in the next episode.