Talking Shop with Rubin Miller (EP.238)

0:28We all need to make smart decisions with our money. episode, a little more casual, completely unscripted. I just actually got off the call with him. Now we talked about all sorts of things. We talked about predictions and expectation setting. We talked about AI. We talked about bonds. We talked about cash. So much good stuff in this episode. What I'm finding interesting is that these unscripted episodes tend to be a lot longer. I'd really love to know what you think of the format. We're going to be returning to our normal guest format for the next several weeks, but just trying out some new things for the new year.

1:02See what people like, see what resonates. As always, you can find detailed show notes at thelongterminvestor.com, where I will link to things that we discussed as well as share ways that you can follow my good friend Ruben. But enough of me, let's get into it. Here is my conversation with Ruben Miller.

1:22Welcome to the Long-Term Investor. Today, I have my good friend Ruben Miller with me. Ruben, thanks for joining me today. Always a pleasure. It's not quite Christmas when we're recording, but it is January 7th at the time that this is airing. This is the second episode in a row where I'm trying to keep it casual, trying to give people a little inside look into what some money nerds talk about when things aren't recording. But here we are, we're recording. But it's also prediction season, and you have always notoriously been a loud hater of predictions. I don't think anybody who listens to this show is a big believer in forecasting the future, but love the visual that you put out on LinkedIn the other day about predictions.

2:02You've done it before, but you have the field. There's just also seeing what you have written for your name in the recording, which is great. For those of you in the podcast, his name is I carry Peter's bags. Love it. Talk to me about forecasting. What grinds your gears there? A lot. I think it's one of the standing legacy see spillovers of traditional Wall Street and people thinking that they have to put forward these forecasts, which in my opinion, for most risky assets, are completely unforecastable on the timeline that experts pretend to do this. I think the second order challenge is that for financial planning focused advisors, we have to put in assumptions in financial plans.

2:51I have to model out how a portfolio is expected to grow so that when I add how much a client is earning and take out how much they're spending and do all that, like what are we left with? And can you live the life you want to live? So you have to do some reasonable forecasting. Even if I don't like short-term forecasts, I have to do some long-term forecasting. If you're really prudent about it, it's about describing ranges of likely outcomes for somebody's portfolio and their life. And I just think this idea that in December, if you're a bank, you go publish where you think the S &P is going to be in one year from now.

3:25It's not just a disservice because nobody knows, but it also hides what's actually important about jobs like ours, which is helping people get to where they want to go and live the life they want to live, where we do have to do some reasonable forecasting. And when you're forecasting, tends to give that a bad name. You make a good point on the capital markets assumptions. We use eMoney as our financial planning software. What do you use? Do you use eMoney or MoneyGuide Pro? We use MoneyCapital. I feel like everybody's on one of two, but it shows what I know. I'm not the guy who's running the financial planning model, so I'm the wrong one to list them off.

3:58They're all kind of similar. They all do the same thing. They're like a good user interface of a super spreadsheet. I know at my first job, we ran our Monte Carlo simulations in a giant spreadsheet using crystal ball, which sort of allowed you to exceed the number of cells that is in Excel and do more model runs than you otherwise could. I am responsible for the return assumptions that do go into those models. And one of the things that's crazy to me when I talk to other people in my role is how specific people get with their assumptions and how often they change them. And to me, when you're sitting down and you're running a Monte Carlo, and for those of you watching us, whether you're watching us on Cheddar or on YouTube, or you're listening to us on the podcast, If you don't know what a Monte Carlo simulation is, basically you're running a thousand trials or 10 ,000 trials with randomized returns to figure out, hey, is the life I'm trying to live, is that realistic?

4:49And if not, what needs to change? And the thing is, whether you're 60 or 30, chances are you're running the model for 30 years. What does a 10-year forecast even matter? And to me, you look at long-term real returns on stocks, they're just a little under 7%. On bonds, I guess if I want to be conservative, they're about 2%. although we do know what the next 30-year bond return is going to be. You love talking about that. But talk me through your process. When you have to set the assumptions in your financial planning software, what are you thinking about? With bonds, from a nominal perspective, it's obviously very hard.

5:23Thankfully, after inflation, bond returns are more stable and predictable over time. You tend to do a little bit better than inflation if you own short-term bonds and hopefully a little bit better than that if you own intermediate-term bonds. but obviously any industry environment i have no idea it could be the 70s and we have 18 interest rates or it could be six years ago the industry is basically nothing the periods where you have high interest rates obviously we have high inflation so it's not as dissimilar after you look at the real return comparison but for us on the stock side it's pretty simple because i don't do anything different for almost any clients in their stock exposure compared to any other clients So if I had a 30-year-old who works at apple and makes 400 grand a year and gets paid a bunch of rsus and blah blah And I have an 80 year old who hasn't worked in 20 years And is widowed and blah blah And I say hey, you need to own some stocks They're gonna own pretty similar stock portfolios.

6:22I don't have a reason to change that Maybe the person works at apple and so I don't want to own as much apple stock But otherwise the actual stocks they would own I'm going to try to buy them a little bit of all 13 ,000 stocks across the whole world. The ratio they own them compared to the rest of their assets, that's what's going to be very different. An 80-year-old widow is probably not going to own that many stocks if they have traditional goals in their life. And a younger person is probably going to own a lot of stocks. And so the weight of their life, their equities will be more. But as far as the actual ones we own, I don't have much reason to deviate.

6:54Stocks are stocks. We all own them for the same reason. We want them to grow. Bond size is very different. If I just use those same people, somebody who makes a bunch of money, lives in California, works at Apple, high income, high tax state, all of a sudden, there's different types of bonds that do different things. Municipal bonds help you pay less taxes. On an equivalent yield perspective, muni bonds sound like they might be a great option for someone that makes a lot of money in a high tax state. The 80-year-old who's not really making anything anymore but might have a big portfolio doesn't really have much reason for owning muni bonds, especially if they live in Texas or Florida where we don't pay state income tax.

7:29On the bond side, I just use munis as an example. Bonds are just so different than stocks because they're tools to accomplish a variety of different things. One of them might be lower taxes. Some people might want more predictability, short-term predictability. Somebody else might say, I want to pay for my daughter's wedding in 14 years, and I'm going to buy a treasury bill that matures in 14 years and lock that goal in right away. These are tools. Equities aren't really, they're just one tool. We're just trying to make the portfolio grow. For that reason, on the stock side, it's all similar. And I have no reason to do anything else except say, what is the long-term average of buying people's companies?

8:08That's what buying stock is. So if I go buy a little bit of every stock across the whole world for somebody, what's the long-term return of that? I don't know if conservative is the right word, but I try to use wide ranges because I don't know what it's going to do. Like so noisy. We're in the last week of the year. Markets could go up or down 3 % in the next week. That'd be super reasonable. and that is going to be up 50 or 100 % of some people's expectations for a whole year. It's so silly to get precise, but I think long-term nominal returns for stocks, 8 % to 10 % average seems like a reasonable range.

8:40I think you said, you know, the after inflation tends to be around seven. So that's reasonable to me. And there's many different types of investors. Some people forecast and they would say, well, we're going to do 13 or 15 or two or three or negative 10, whatever it is. I don't do that. I don't think that's productive. because I don't think anybody knows. So the long-term average tend to be pretty reasonable to me. Where it starts to get hard is when equity valuations, so say how much these companies cost, their price divided by how much they make, say earnings, is really high. So stocks are really relatively expensive to historic or really low relative to historic.

9:18And when it is true that if you look at some sort of regression on when stocks are expensive compared to when they're cheap, the next 10 years tend to be a little bit better when stocks started cheap and a little bit worse when stocks started expensive. That is hard for me. How do I want to model in that, but also not pretend like I know where stocks are going the next 10 years. So I don't have a problem with people that do tinker with that a little bit. Maybe since stocks are relatively expensive right now, instead of 8 % to 10%, I might say 5 % to 8%, 5 % to 7%. I don't do that much of that.

9:48We tend to create buffer and client portfolios in other ways when we forecast out. So we don't do it in our actual measurement of the equity valuation. You can do it in many ways. One way might be I'm really comfortable when clients have a 90 % plus likely success rate in their plan. 10 % of the time you have to make some change in your life to make sure you don't run out of money. It's not like you're going to let your clients run out of money. So 90 % is pretty solid. Exactly. Somebody else might say we reduce our expected return on stocks because they're really expensive right now. And so we use six to 8 % for the next 10 years.

10:21And I'm like, okay, well then your 90 % is different than my 90%. You know what I don't like about that either is that if the money call is running a thousand different scenarios within those thousand scenarios, there are going to be periods where the next 10 years are bad. And that's where I feel like so many people do what you talk about. It drives me nuts in two weeks. So I'm not going to totally give up the episode that I'm doing in two weeks after this airs. But I'm talking about like how Planned Corp sets their capital market assumptions. But you're talking similarly to how I think about it.

10:49Like you can't predict the future. And how can you make good long term assumptions? returns might be lower in the next 10 years. They might be higher. But the whole point is 30-year returns, especially 30-year real returns after inflation returns, are very consistently hugging the average. And when you're doing these models, you don't need to worry about what the next 10 years are going to be. That's the whole point of modeling. Something I want to talk about because there are two people who are coming on the show as well. I'm just going to talk about the future of the show the whole time that you're sitting in front of me, Ruben?

11:20Talk about real people that come on your show. Real people. Well, so next week is Lizanne Saunders from Schwab. Lizanne is probably my favorite economist market strategist for my entire career. I've been following her work for about 20 years. How cool. I happened to meet her in person for the first time in November and just told her how excited I was. And I felt like I was standing outside a concert, just dying to see some musician. I'm sure it's totally fanboying. So she's on next week. And there's some things that I'll come back to that I think that people in her position have a tough job because they're not necessarily forecasting the future, but they're creating context for the environment we're within.

11:59But after that's Kevin DiCurio from Vanguard, and he sets the return outlooks for the 10 and 20 years. And that's actually why I brought this up. They were some of the first people I ever saw make projections based on a bell curve. They're not just saying, hey, here's the S &P 500 price target. For the next 10 years, I'm kind of looking at it now. Vanguard says U.S. equities, the median outcome or the median return average return for U.S. equities is 3.8 percent. For bonds, it's 4.3 percent. For developed markets, it's 6.3 percent. So yeah, like they have a 10 year outlook where non-U.S. stocks win, where bonds win.

12:36If I go out to 30 year, though, bonds beat stocks, U.S. stocks. In the median outcome, in the 50th percentile outcome, They have bonds beating stocks. Now, when you go to the 95th percentile where equities have their highest possible return and bonds have their highest possible returns, then obviously equities beat them. But I think this is the right approach. I mean, I don't think year to year there's a whole lot that could change about the world that would make me change my capital market assumptions. But I do find some of this stuff useful for setting expectations. So let me pivot a little with you on the expectation setting front.

13:10You're really good about education. I think it's why you and I have so much to talk about. What are things that you're talking to clients about now? You're going to be writing a newsletter for your clients pretty soon, I assume. What are some of the things that you anticipate talking about going into the new year? It's not forecasting that is the devil here. It's that we should speak more in ranges and then we should add probabilities to it. The post you were talking about on LinkedIn that I published at the end of last year was basically like my response to these forecasters do one year forecast where I basically said, here are my forecasts of the 12 asset classes people do this for eight of them.

13:48I'm not willing to give you one socks, Bitcoin gold. There's literally nothing to try to forecast. There's no way anyone could get close on one year reliably, but I could tell you a range and say, Hey, with stocks, I think 90 % chance, 95 % chance, it'll be negative 40 % to positive 30%. It's just not that helpful. But I think that's a reasonable statement. If you looked at all the data, that's probably about right. Probably that happens 90 % of the time. What are you going to do with that information? What I talk at a high level of clients is going to be like, hey, I can give you these things, but we're an evidence-based data-driven firm.

14:23We have to contextualize them. So I can give you a range of what I think will happen and then give you a probability around what think means. Maybe it's 90%, maybe it's 50%, 70%, whatever it is. but we have to give better backdrops to these comments we make because people take what we say seriously. If I just said to somebody, I think stocks will do eight to 10 % next year. That's a true statement. If you ask me, Ruben, on your deathbed, what will the stocks do next year? I'd say eight to 10%. Why? That's their long-term average. That's my best guess. Do you actually think it'll be eight to 10 %?

14:55No, almost certainly it will not be eight to 10%, but it will almost certainly not be whatever I tell you because it's Randall. The longer time horizon we have, obviously the less random things become. There's a reason we earn a return for buying parts of other people's companies. We're putting our capital at risk and humans tend to be pretty productive and creative and resilient, and they create good businesses that make money. It makes sense that over time, these equity positions we have in stocks, they do better than treasury bills. They do better than bonds over time. We expect them to. I think that when I do set expectations with clients, sometimes it's got to be quantitative, ranges, probabilities of success around that range, what I expect.

15:34If I actually think it'll happen, as I said, I can give you the range, but I might have no confidence that it'll be right. But it's my best guess. The article you're talking about that I posted, the reason why it's like a thing for me was it got picked up in the journal and became a thing for our firm. And it was basically like this anti-forecast forecast. But the thing that so many people miss about forecasting is that, while it's unreasonable for someone to tell you, I think stocks will do 10 % next year and not tell you like, by the way, I'm not that confident in it. That's just my best guess.

16:06I could do that. But if someone says like, I really think stocks can be 10 % this year. That's crazy. No data would allow any human to say that seriously. We all know how random stocks are over a one-year period. However, not all asset classes are like that. So there's a spectrum of things that are super random over short periods, like stocks or Bitcoin or gold and things that are not so unpredictable over short periods or not so random or short periods. The classic one, which was on the visual you're talking about is the one-year treasury. A one-year treasury is a loan with the government. You loan your money to them.

16:40They promise you a return and you can literally on a one-year timeline to the nth decimal, get your actual return. So while I'm not willing to give an expectation on stocks, like I have an NA, on the one-year treasury, it's like to the third decimal because I know what I'm going to get. I don't think everyday investors think that way. If I said to someone like, isn't forecasting crazy? They'd be like, yeah, it's crazy. They don't really know what that means. Like forecasting stocks is crazy. But on the spectrum of risk, there's some things like short-term bonds, ultra short-term bonds that are not so crazy and can make a lot of sense and honestly be very helpful when people have liabilities.

17:18Like I was talking about the pay for your kid's wedding in 17 years, pay for your kid's wedding in one year. You can set these liabilities and use non-risky assets and have a lot of clarity around how to get there. I think what we can do as a better job on education, our firm's fairly traditional. We don't use a lot of cheeky products. What we think is best for clients tends to fit in a fairly tight sandbox. So we can talk about returns, expectations, how randomnesses might impact the outcome of this asset over one year in a fairly narrow way so we can get it done in our annual planning meeting or whatever.

17:48But I think it's our job is to set expectations around the different types of things people own and what to expect from them over whatever timeline we're talking about. The expectations part to me is so important. So much of our job is just creating a good investing experience, maybe even more so than picking the investments. As we wrap up 2025, it's easy to forget. We like had a bear market this year. There are times where I've sat in on client meetings. They're looking and they're confused. Why, as they look at a chart of the year and the portfolio value, like, why is there this dip in April?

18:18It's like, we lost about 20%. We being like the S &P 500, lost to 20%. You forget that. PlanCorp signs a lot like 35%. I don't feel like compliance is going to like that statement. So this will be a test to figure out how closely they're watching. No, no. Market-like returns. But I feel like in general, you're going through this process with people and they want to make sure that there's nothing being missed and they want there to be certainty. And I don't know if you've ever heard this line. I'm somehow coming up on 20 years in this career path. The consistent line I hear is I'm not a market timer.

18:54I know we can't time the market, but dot, dot, dot. We work for about 70 families and I think I'm good for six to seven of those a year. I think the themes that we get on it, they're always political. So it doesn't matter what your political views are. It's basically like if who is in office is on the opposite end of who you voted for, you fall into this. I'm not a market timer, but, or I know we can't time the market, but what about this? I feel like AI is a big one. People don't understand it. And if they don't understand it, they get scared of it. I'm not saying there isn't a bubble there or there is a bubble, but generally speaking, one of the things that we go through in the planning process, and I think you do too, is, okay, so we're talking about returns.

19:34We know that the market's going to fall with a similar magnitude and frequency as it has in the past. And you get people comfortable with the idea that, yeah, you're going to lose 20, 30, 40 % at some point, depending on your mix of assets. If you have a conservative portfolio, maybe you're not losing 40%. But I don't think people get worried about the actual volatility. They're scared of the narrative. And we can't prepare everybody for whatever narrative is going to exist 10 months from now or 10 years from now. And so to me, that's so much of the challenge is how do we keep expectations in line and try to make sure that expectations and reality are tight because the worst thing that any investor can do is change the plan, is react.

20:13Our job here is to create an environment where they don't react, where they stay the course. We had a bear market. We also had one day where the S &P was up 10%. Why don't we ever talk about that anymore? That was crazy. One day and it was up 10%. Now, obviously there was a bunch of bad days that then led to that. That tends to be how market volatility comes, a lot of up days, a lot of down days. But if you jumped out of the market, you missed it. These big events happen in such concentrated periods. And then we recover and people move on with their life. And now people are jittery again about a down 1 % day or whatever it might be.

20:51Do you remember eight months ago when we went up 10 % in one day? Those are the moments and periods that change an investor's trajectory over the long term forever, not these placid period that we're in right now where it's kind of fluttering. Right now, we want a plan that we're just executing, and there doesn't need to be that much communication with clients about the investments today. In the future, when we have something like April again, we still want to do the exact same thing. Our job is to have clients keep just implementing the pre-design plan, but we just need so much more communication around it to get people to go along with us at that time.

21:30It's easy right now. It's a lot harder when we're going through those things. I find that on the political narrative or being uncomfortable with like AI or something, there's another bias where an investor has an opinion. Let's say AI sucks or Trump sucks, whatever your opinion is. Then it's realized in the market, AI stocks get hit or the market broadly starts to go down. Now they're like, hey, market's going down. We should get out. The market's never going down. The market went down. Now I have no idea what it's going to do after this. It might go up 10 % in one day. People latch on to, I have this opinion.

22:10I've now seen inklings of my opinion manifested in the market moves. And now I'm right. And now it's time to get out or get in or whatever it might be. I saw that happen for sure when the tariffs were announced. The election results came in. There was a lot of talk of tariffs. You have inauguration and there's more talk of tariffs and people like it's going to happen. It's going to be bad. And then the tariffs came and it was bad. And they're like, see, see, that literally played out this year. And it sort of ignores the infinite futures that could have happened. And I love it. I've actually never thought of it that way.

22:41I love it the way that you just said it where it's no, they went down. They're not going down. They went down. Now let's look forward. Yes, they could go down more, but you go back to like, what is the most likely outcome? What's the base rate? What tends to happen over the long term? More often than not, the markets do go up. And when you are investing, it's not like you need all your money next year. And if you do, then you're investing incorrectly, I think. But if we only got a newspaper once every 10 years, think of all the great progress we'd have. You're just betting against the human spirit whenever you're selling your stocks, in my opinion.

23:13The access to financial market data, this constant influx people have on their phone or on TV, it drives you a little frenetic, like it's chaotic. But the other thing it does is you're almost always going to be reinforced that you had some thought in your mind that you could have done that would have worked. Because markets go like this. This is what risky assets do. They don't usually go like that. For those on the podcast, he's doing the Macarena. I'm doing the Macarena. They zig and they zag. They might directionally go up over time, but they're very forgiving typically over short and sometimes even medium periods.

23:51Even something like a diversified stock portfolio, it tends to not go straight up. If you're always looking at information about markets and you have opinions and you kind of want to act on them, but maybe you hire someone like us who's trying to keep you in your seat all the time. At some point, you're going to be right. You would have been better not listening to stupid Reuben, selling all your stocks and buying them back two weeks later. You're probably going to be right at some point. So that's one of those things where it's probability wise, you are probably correct that that will work out at some point in the next year to have sold your stocks on that day.