The Greatest Financial Advisor You Never Knew You Had

0:00Just stop checking your stuff. The single greatest advantage the index has over you is that it doesn't have a phone. It doesn't know what happened today. Every study of investor behavior points the same direction. The more often you look, the worse you're going to do. Hello friends, this is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

0:40Quick note before we start, September's pre-order bonus for my book, Real Wealth, is something I've wanted myself for years and never been able to find. So I created it. It's called the Real Wealth Money Calendar. 12 months, five action items per month, all on one page. because most people I know already know what to do. They just don't necessarily know when, and they don't have accountability. So this is your 2027 on one page, 60 moves in the month you actually need to make them. Pre-order Real Wealth at tylergardner.com book. Let me know you did, and your money calendar will be in your inbox in early October.

1:19This week, I want to start by telling you about the best financial advisor I've ever worked with. They've never called me during dinner. They've never invited me to a steakhouse to discuss a rare and privileged opportunity. They have never worn a quarter zip with a company logo on it, never said, let's circle back, and have never once sent me a holiday card featuring their family in matching flannel on a hay bale. They charge me about$3 a year for every$10 ,000 I give them. They fire their own underperforming employees without me having to ask. And over the last several decades, They have beaten the overwhelming majority of professionals who charge 300 times more than they do.

2:03If you've been with me since the beginning, you know where I'm going with this, folks. This episode is all about my personal financial advisor, the S &P 500, and they don't even know that I exist. Now, I did a version of this episode about a year ago, but a lot of you are new since then, And this one deserves not only an annual reminder, but also a refresher in the way that flossing and checking your beneficiaries deserves annual reminders and refreshers. We're going to break this into two sections today. First, why simply owning the S &P 500 is one of the most brilliant financial decisions available to a normal human being.

2:40Second, we'll specifically address some of the objections that always follow. Well, fine, Tyler, but investing is only half of it. What about the psychology? What about the other complex stuff? Isn't that what I'm paying an advisor for? We'll cover all of that in the next half hour. And familiar ask before we get into it, if the show has been helpful to you in any way, if you'd consider leaving a review, I would be and already am eternally grateful. It genuinely helps new listeners find the show. And more selfishly, it helps me know I'm not alone in here talking to a microphone in the Vermont woods while a bloodhound sleeps next to me, and you might hear her snoring throughout this episode.

3:21Now, let's get into it and talk about why the S &P 500 is the single greatest financial advisor you never knew you had. Part 1. The machine that cleans itself. Let's start with a thing almost nobody understands about the S &P 500, which is what it actually is. Most people think it's a list of the 500 biggest American companies. It isn't. It's a curated index, hand-selected by a committee at S &P Dow Jones Indices, who meet, discuss, and vote. There's literally a room. There are people in that room. And I find this delightful, because the most successful investment strategy in modern history is essentially a very disciplined book club.

4:09Now, to even be considered, a company has to clear a set of hurdles. It has to be headquartered in the United States, it has to be listed on the New York Stock Exchange or the NASDAQ, and as of the most recent update, it needs a market capitalization of at least$22.7 billion, a number that gets revised upward over time, which is its own legitimate commentary on the state of the market. It also needs enough of its shares actually available for public trading, so it can't include a company that's 90 % owned by its founder's nephew. It needs genuine liquidity. And then there's that one thing that matters most, that hurdle that trips up even some of the most glamorous-sounding storylines in history.

4:58It has to be profitable. Specifically, positive gap earnings in the most recent quarter, and positive cumulative earnings over the four most recent quarters. Not adjusted earnings, not pro forma earnings, not EBITDA, which I've always thought sounds less like an accounting metric and more like a Star Wars character who dies in the second half of the film, but that's probably just me. Gap earnings. The numbers you file with the SEC under penalty of perjury. Sit with what that means for a minute, because it's the entire thesis of today's episode. There's a built-in quality filter on this index. A company can be worth$20 billion, be on every magazine cover, be discussed breathlessly at every dinner party in Palo Alto, and still be ineligible because it doesn't make money.

5:52Tesla is the old famous example. It crossed the market cap threshold years before it qualified because it couldn't string together the profitable quarters. When it finally joined in December 2020, it entered as one of the largest additions in index history, but the index made Tesla wait. But forget Tesla, because we just got a far better example, and it happened on June 12th. SpaceX went public. Biggest IPO in the history of markets, a$1.75 trillion valuation at pricing,$75 billion raised, demand reportedly around two times oversubscribed, and the stock traded above$2 trillion in valuation on day one.

6:38By any measure, that matters to a headline, the largest new public company ever created. Now, ahead of that IPO, SpaceX's advisors went to the index providers and lobbied for early inclusion. Because index inclusion means every passive fund tracking that index is contractually obligated to go buy a ton of your stock. That's not marketing. That's a legally required buyer showing up with a pickup truck. And here's what happened. NASDAQ changed its rules. FTSE Russell changed its rules. And on June 4th, S &P Dow Jones Indices, after a full formal consultation, announced it was changing nothing. Not the 12-month seasoning period, not the gap profitability requirement, not the public float requirement, which says a company has to make at least 10 % of its shares available, and SpaceX, and SpaceX was planning to offer under 5.

7:40The biggest company ever to go public asked to come in early, and the S &P 500 said no. Not no, let's talk about it, just no. SpaceX is now looking at mid-2027 at the earliest, and only if it can produce four consecutive quarters of positive gap earnings just like everybody else. Now sit with that for a second, because this is your money we're talking about. Every index fund tracking the NASDAQ 100 had to go buy SpaceX in July when it was fast-tracked in, roughly$4 billion worth, funded by trimming a little bit of everything else those funds already owned. So if you hold QQQ, you sold slivers of Apple and Microsoft and Nvidia to buy a company with a 5 % float and no requirement to have ever earned a dollar.

8:36Nobody asked you, it just happened because the rules got rewritten to accommodate the arrival. If you hold VOO or IVV or SPY or FXAIX, you did nothing. You own zero SpaceX. Your fund sat there entirely uninterested, waiting to see the results. That's the filter. That's the whole episode in one news cycle. Two of the three major index providers looked at the largest IPO in history and adjusted the rules to let it in. The third one checked its own paperwork and said, uh, come back when you're profitable and bring your dang float. That's like a bouncer who still checks IDs. When the line is around the block, the club owner is screaming, and the guy at the door asking to be let in is worth$2 trillion.

9:28Now, in fairness, and I always want to give you the other side, this could look foolish. If SpaceX compounds beautifully over the next several years, S &P 500 holders will have missed the early run, and there will be plenty of articles about the stodgy committee that let the future walk by. One prominent ETF analyst said exactly that at the time, more or less. We'll see whether this turns out to be wise. Maybe it won't, but that's not really the point because none of us know. The point is that the rule held under maximum pressure in the exact moment when bending it would have been the popular, lucrative, universally forgiven thing to do, give or take your thoughts on Elon.

10:14A quality standard that only applies when it's easy isn't a quality standard, it's a preference. And by the way, this isn't over. OpenAI and Anthropic are both reported to be eyeing offerings of their own that would land them near the top of the US market on day one, which means the machine that manages the retirement savings of most of this country is going to get asked the same question again, probably soon, and probably louder. But good news, it just showed us exactly what it plans to do under extreme pressure. This episode is brought to you by Caldera Lab. Quick confession, in high school, my AOL screen name might have been Pretty Boy Durden, and it wasn't ironic, because while other guys were collecting baseball cards and playing real sports, I was collecting skincare products and taking my appearance embarrassingly seriously.

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13:38That's Tyler and the numbers two and zero. Join delete me dot com slash Tyler 20. Part two, how the garbage gets taken out. Now, on the other end, getting in is one thing. But what makes this index behave like an advisor rather than a museum is that it also removes companies. Companies leave the S &P 500 in a handful of ways. They get acquired, they merge, they get taken private, they shrink until they're no longer representative of the US large cap market and the committee replaces them, they go bankrupt, they get delisted. Every one of those creates a vacancy, and every vacancy gets filled by a company on the way up, which means the S &P 500 is doing something for you automatically that human beings are famously terrible at doing for themselves.

14:33It sells its losers immediately. Not emotionally, not after a family meeting, not after three months of telling itself the story that this is a great company, that the market simply just doesn't understand it yet, that it's a value play, that it'll come back. It just removes them, replaces them, and moves on with the cold efficiency of a hospital changing sheets. And every one of us, without fail, is statistically very bad at this. I was a professional managing other people's money, and I was very bad at this. The technical term is the disposition effect, the documented tendency to sell winners too early and hold losers far too long.

15:15Because selling a loser requires admitting you were wrong, and holding it lets you pretend the story isn't over. We are all sitting on some version of a stock or a hobby or a Peloton that we refuse to sell because selling makes the loss official. The index, however, has no such ego. The index has never once said, let's just give it another quarter. So when someone calls the S &P 500 passive, I'd push back pretty strongly on that word. It's ruthlessly active about quality control and completely passive about your feelings. That's exactly backwards from most humans, including the ones who bill you quarterly to manage your money.

15:59And here's something else that should truly comfort you. The doomsday scenario where a handful of giant companies collapse and take the index down is not the index failing. That's the index working. Those companies shrink in weight as they fall, get replaced by whatever's rising, and the index goes on being the index. The S &P 500 of 1980 shares very few names with the index of today. And the index didn't die. It changed the roster while the jersey stayed exactly the same. And as Herb Brooks and Mike Arruzzioni both know, that name on the front of the jersey is a lot more important than the name on the back.

16:40You have been investing in the entire team, not the individual players. Part 3. The International Exposure Argument. Okay, objection number one, and I hear this constantly, but Tyler, you have no international exposure in the S &P 500, and an advisor could help you identify which international markets are underpriced. Fine, here's my honest position, and I'll give you the caveats too, because I'd rather you trust me than agree with me. The S &P 500 today is not a basket of American companies selling to Americans. It's a basket of multinationals that happen to file their paperwork in Delaware. Depending on whose methodology you use, somewhere between roughly a quarter and roughly 40 % of S &P 500 revenue comes from outside the United States.

17:31Goldman Sachs pegs foreign sales at about 28 % of revenue. S &P Dow Jones indices own historical foreign sales reports have run considerably higher in the low to mid 40s. Other shops land around 41%. Why the spread? Well, because companies report geographic revenue inconsistently, and different analysts handle the gaps differently. I'm telling you that rather than picking whichever number best serves my argument. The honest version, though, it's a lot. Somewhere between a quarter and 40%, and in technology alone, it's over half. In semiconductors, roughly two-thirds, and you all know how much you love the semiconductor story right now.

18:12So when you buy the S &P 500, Your dollar is going to work in Seoul and Stuttgart and Rio. It's just doing it inside companies governed by U.S. securities law, audited under U.S. accounting standards, and reported in dollars. Now, the honest caveat. Revenue exposure is not the same as currency exposure, and it isn't valuation exposure. If international stocks are cheaper than U.S. stocks, owning American multinationals doesn't get you the discount. So if someone holds international funds for valuation or genuine currency diversification, I'm not going to tell you or them they're foolish. That's a real argument made in good faith, and it's what many professionals do who actively tilt their portfolios towards international markets whose CAPE ratios are lower than historical averages.

19:05What I will say is that the version of the argument that goes, you have no exposure to the global economy, is simply false and has been for a couple of decades. Your S &P 500 fund sells software in Berlin, chips in Taiwan, sneakers in Shanghai, and burgers in essentially every country that has roads. You are diversified globally. You just got there through a different door. Part four, the thing everyone loves to hate, concentration. Now this is a big one. This is the objection of the moment, and it arrives in my inbox roughly 40 times a week. The index is dangerously concentrated. The top 10 companies are an enormous share of it, so this isn't diversification, it's a tech fund waiting to collapse.

19:54I'm going to make three arguments here, and again, because I care more about your trust than about winning, I'm going to give you the strongest version of the other side too, which almost nobody selling you an alternative will ever do. Argument one, just so you know, concentration is not new. It is in fact the historical norm, and the recent past was actually the anomaly. Throughout the 1950s and 60s, the top 10 stocks regularly made up around a third of the total index. During the nifty 50 era, when investors decided that about 50 blue chips were one-decision stocks you could buy and simply never think about again, the top 10 climbed above 40 % of the index.

20:36By late 1972, the top five stocks alone were roughly 23 % of the market cap. Go back further and researchers estimate the top 10 were near 40 % around 1900, a century and a quarter ago. Then concentration fell below 20 % by the end of the 80s. In 1990, the 10 largest companies, IBM, Exxon, General Electric, Philip Morris, made up roughly 19 % of the index. It rose to roughly 23 to 27 % at the dot-com peak, unwound again, and sat in the high teens and low 20s for years. As recently as 2015, the top 10 were under 20%. So when someone tells you concentration is unprecedented, what they usually mean is that it's unprecedented since the last time it happened, which is a completely different sentence.

21:31Argument two, and this is the one I really want to land, the index's market cap weighted, which means it self-corrects without anyone deciding anything. So when you hear that a giant company is now a huge percentage of the index, the anxious interpretation is, well, I'm dangerously overexposed to that company. But the mechanism that created that weight is the same mechanism that will unwind it itself. Nobody at S &P decided to make that company 7 % of your portfolio. The market did by pricing it that way. And if that company stumbles, its price falls, its weight falls with it, and the money doesn't evaporate from the index.

22:13Other companies simply become a larger share of what remains. I do want to be careful here because this can be oversold. Market cap weighting does not protect you from losses. If a company that's 7 % of the index falls by half, you're going to feel that. Roughly 3.5 % of your equity value can be gone and no rebalancing mechanism refunds it. What market cap weighting does is guarantee that the index reorganizes itself around the new reality without requiring a human to make a call, pay a tax bill, or be right about the future. The correction is automatic, continuous, and best, free. And in the long run, that's what matters.

22:56Because the alternative is somebody deciding when to trim, which brings me to argument three. There's no such thing as being overweight the S &P 500, and I mean that quite literally. Overweight is a relative term. It requires a benchmark. When a portfolio manager says they're overweight technology, they mean relative to the index. When they say they're underweight energy, they mean relative to the index. The index itself isn't a position, it's the measuring stick. Saying the S &P 500 is overweight big tech is like saying your ruler is too long. Compared to what? The market's actual composition is the definition of neutral.

23:43Everything else is a bet against that neutrality. Now, that's a semantic point. I don't want to hide behind semantics, so let me steel man the other side properly. The strongest version of the concentration argument is this. Today's top 10 weight of roughly 40 % is genuinely high, higher than the dot-com peak on most measures, and it has roughly doubled in a decade. More importantly, the top 10 share of the index's weight has been running meaningfully above the top 10 share of the index's earnings. Weight has risen faster than fundamentals. That gap is real, and that's the honest thing that I would worry about.

24:23And there's precedent for what happens next. Research from the CFA Institute points out that the unwinding of 1990s concentration contributed to the lost decade, where the cap-weighted large cap index delivered negative returns over 10 years from 2000 to 2010, while the middle of the market did much better. Something similar followed the 1960s concentration peak. So the person telling you this could mean a decade of flat returns for the S &P 500 specifically is not some quack because that exact scenario has happened twice. So here's how I hold both truths at once, and it's the actual takeaway.

25:05Concentration risk is real, and the honest response is not to abandon the index. It's to know your time horizon. A lost decade is devastating if you needed the money in eight years and had 100 % of that money in stocks. But it's a rounding error and frankly a buying opportunity if you're 35 and contributing every two weeks and don't need that money for 30 years. Every one of those lost decades was followed by recovery for people who kept buying and holding. The people it destroyed needed the money during it or sold during it, and that's not an index problem, that's a money management problem. Which is why I've never believe the answer to market structure anxiety is portfolio cleverness.

25:51It's structural discipline about your own time horizon. This episode is brought to you by Thrive Market. I spent this past winter in Sedona eating out almost every single day, and though I want to tell you it was glorious, it was not. By week two, I would have traded any meal on the menu for one night at my own stove. Because I love cooking. It's the best hour of my day and the best time my family has together. What I hate is the grocery store. I'll be deep in a flow state writing a newsletter, and the thing that breaks it is realizing I need two ingredients. 45 minutes, a parking lot, and a cart with one wheel that has its own agenda.

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28:33Visit joingelt.com slash Tyler to get started. That's joingelt.com slash Tyler. Part 5. Why it works. Some unglamorous reasons. Let me rattle off just a few other reasons why this thing wins because they're less about philosophy and more about basic long-term math. First, cost. You can own the entire index for about three basis points. On a million dollars, that's roughly$30 a year. The typical active fund charges between half a percent and a full percent and the advisor charging 1 % on top is charging roughly 300 times the fund's fee for the privilege of choosing it. As I say over and again, costs are the only variable in investing that are guaranteed, known in advance, and entirely within your control.

29:24Everything else is probability, but the fee is a certainty that you can control. Next, tax efficiency. Index funds trade rarely, so they distribute capital gains rarely. So in a taxable account, you're not paying tax on somebody else's trading enthusiasm. Active funds generate turnover, and turnover generates tax bills that arrive in December like an uninvited relative. Third, no manager risk. When you hire a star manager, you're taking on the risk that they leave, retire, get promoted into management, lose their touch, or become famous, which in my experience is the most dangerous of the five.