Introduction

Mike: Thank you for joining us today. We’re here with Apollo Lupescu, who’s a Vice president at Dimensional Fund Advisors, one of the premier investment managers in the world, managing around 800 billion in assets. He’s a globally recognized speaker who has delivered hundreds of lectures and seminars to financial professionals, and I’ve been to many of them and individual investors on various investment topics. Apollo is considered the secretary of explaining stuff. This is a knack for explaining complicated issues in a clear and understandable way. Apollo has been with Dimensional in Santa Monica for over 21 years. Prior to that, he taught at the University of California, received a Ph.D. in economics and finance from UC Santa Barbara and a B.A. in economics from Michigan State University where he competed and coached water polo. Rumor has that even to this day, he’s still playing and more recently he’s getting not only in the pool, but he’s also learning to surf. So, Apollo, is that true? Over 21 years since you had your PhD means not a teenager to me.

Apollo: No, no, it’s. It’s been a while, but it’s been an amazing journey. It’s the same company. I feel like I’m so fortunate that in this day and age you find company, you find a company that you really get behind and you know, I love what they do and the people and the strategy. And I’m very fortunate. I’m blessed that I have had this opportunity to work with this amazing organization called Dimensional. And I’ve also had the great privilege of working with advisors like you, which is also one of the most rewarding aspects of my job.

Mike: Yeah, I have been impressed by Dimensional for a really long time. Everything that they do really just seems to be well run and top notch and. Yeah, I wish, I mean, I found it kind of early in my financial career, but I wish I found it even earlier, but it’s been great. But I’ll let Maddie take it away now with some questions.

Background on Dimensional Fund Advisors

Madison: All righty. Your company is perhaps the largest investment manager that most people have never heard of. Can you give us a quick background? Who is Dimensional? Where did the firm come from, and what’s your position in the industry today?

Apollo: Right, well, Dimensional, as you said, is not a household name. And it’s almost by design because Dimensional was established back in 1981. So we almost have 44 years of track record and being in existence. And as you said, Mike, we manage about $800 billion, which makes us one of the top 10 largest investment managers in the U.S. and we’re not a household name because in the very early days, the only investors into these funds were large institutions. And you had, you know, like, whether pension funds or foreign funds, whatever the case might be, they’re institutional investors who had access to funds. And it wasn’t until 1990 when we actually start working with a very select group of financial advisors who can then offer these mutual funds to their clients. But in over 40 years of existence, we have never, ever targeted the individual investors directly. It was either large institutions or certain advisors that we consider to be as sophisticated as the largest institutional investors. And when I said we work together, Maddie, over the past 40 years, we have never, ever, ever paid anybody to distribute funds. In other words, to sell funds to their clients. So the fact that he Yardley uses Dimensional, it is not because we actually pay them anything. It’s not at all the case. It’s that, you know, you work for your clients, you get compensated from your clients, and if tomorrow you find there’s another fund family that would do a better job, you can switch them without, in a heartbeat. So this idea of not being directly targeting individual investors, but rather advisors and institutions is unique in the industry. And that’s the reason that we don’t have ads in Good Housekeeping magazine or whatever else, because you can’t really buy the mutual funds without an advisor. The second thing that I really think it’s important about Dimensional is that from day one, it was established to bring a level of financial science to investing. And over the course of these 40 years, we have worked with some of the most renowned academics in finance, and quite a few of them, in fact, were awarded the Nobel Prize in Economics. And they awarded this prize, before, actually, they start working with Dimensional before they got the word of the prize. So it’s not like, hey, they got the prize. Let’s pay them to put the name. No, they. From Day one, we, we wanted to bring a very rigorous, scientific, data driven approach to investing. And we found that this is an amazing opportunity to tap into this collective wisdom of the academic community and then find what are the practical ways to implement it. And today we are the most successful proselytization between the practical world of investing and the rigorous academic approach. And I think that really separates us from most investment managers out there. And the third is quite interesting that Dimensional strategies, if you’re investing with Dimensional, they’re distinct from the two main ways in which investing is typically described as. One is the traditional Wall street, which involves either picking stocks, finding the right companies and eliminating a bunch of others, or trying to forecast where the market’s going, should I be invested or not. That’s considered to be traditional active management. And on the other side, you have something that’s become known as indexing. And indexing is a different way of investing that doesn’t rely on picking stocks, but rather licensing a list of stocks from a third party committee and creating a fund that’s called an index fund. And Dimensional is actually distinct from both. Our goal is to outperform the index, but the way that we try to outperform is by being really, really smart on the way we implement these great ideas in finance. So what you get with Dimensional is a very distinct strategy from both traditional active and index management that are designed to outperform the market over the long run.

Dimensional’s Business Model with Financial Advisors

Madison: While Dimensional is known among financial advisors, it’s not a household name because your mutual funds aren’t available for direct purchase by individual investors, as you mentioned. So why did you choose this business model that puts financial advisors at the center?

Apollo: Yeah, it’s so important. What we found over and over again, and the research found as well, is there are two sides to investing. There is a rigorous academic science, and that is incredibly useful in building solid strategies, analytical strategies. And what we also found is that there is a big behavioral component to investing as well. And it doesn’t have to do with the markets, kind of that type of behavior, but more like the behavior of individual investors. And what we find over and over and over again is that investors are not experts in everything. They might. If you’re a doctor, your expertise in if is in medicine. If you’re an engineer, you have an expertise in whatever field you might be in, air conditioning, whatever. And this is a very specialized domain. And every single investor, first of all, needs to have a very custom plan. And we couldn’t tell somebody in what they should invest without a financial plan. So we truly believe that the financial advisors play a crucial role in a successful investment experience because it starts with idea of understanding your needs, your circumstances, and then building a plan. And because of that, we couldn’t just tell people, hey, buy this fund, because we didn’t know what’s right for them. That’s the first reason. The second reason that we found is that emotions quite often overtake rational thought. And you have times when the market’s flying really, really high and everybody’s afraid of missing out the good old fomo, and they tend to jump in, whatever strategies might be fancy at the moment, but they’re not really in their best interest. And we also find the opposite. There are times when people are really scared and they just tend to sell in panic and fear, and that’s not good at all either. And what we find is that advisors have a big coaching role in this process. And we wanted to make sure that by working with these advisors, we maintain a level of discipline in the funds that you don’t have, like a huge number of dollar bills coming in any one year and then a huge number leaving because that tends to impact everybody else invested in those funds. So the discipline that comes from advisors creating a plan, but also managing these emotions and coaching folks is crucial to the actual operation of the funds.

ETFs vs. Mutual Funds: Differences and Choices

Madison: Recently Dimensional expanded beyond mutual funds to offer ETFs. What are ETFs and how are they different from mutual funds? And how should investors decide which is right for them?

Apollo: Yeah, so mutual funds and ETFs are, if you want to think about it, they’re a book. So think about the book. Like take a Harry Potter book. You can have it in hardcover or paperback. The content is pretty much the same, but the packaging is different. And I think that’s kind of how you can think about mutual funds and ETFs. There’s, there are two different packages and the content itself, in other words, the stocks that might be in a, for example a US Market ETF versus a US Market mutual fund, that’s the actual stocks might be very, very, very similar. So, they’re not really different. The difference is in the packaging. So what’s the difference in packaging? The difference in packaging is that in the world of a mutual fund, that mutual fund basically can trade at a single price at the end of the day. So throughout the day we don’t know exactly what the value is, even though the stocks within it move all the time. But rather it’s at the end of the day. That’s when you kind of figure out what that price of that share of that mutual fund is. In the case of an ETF, that process happens constantly during the day. So every single second the price of an ETF adjusts to reflect the underlying stocks that are in that ETF. Is one better than the other? I can’t tell you. I mean, some people like the idea that I don’t really need to trade that much. I don’t really know. I don’t really care if I’m going to have this mutual fund for 10 years. Who cares what the price was at 2pm versus 3pm. And some people care, so that’s one reason that the pricing that happens throughout the day versus just at the end of the day. But the biggest one, the biggest distinction is that in the world of a mutual fund, when a stock leaves the mutual fund. So for example, you have a small company fund and in the case of a small company fund, you split the market into two categories of stocks. One are the large companies and then the other one is a small companies and there are two different funds. And let’s say there is a stock that is in here that is a small company and at some point, the price goes up and it grows significantly and then it’s no longer small. But then becomes a large. When that happens in a mutual fund, you want to sell that stock because it’s no longer a small company. And if you want to deliver to investors a pure investment category only to small caps, you cannot have something that’s no longer small. So then you have to sell it and the mutual fund actually executes a sale. So when you execute that sale, if you had bought that stock, for example, at $10 and now it’s $20, well, you have a, or just to make it easy, let’s just say 30 bucks. So then now you have a capital gain. You gained about $20, and that capital gain has to be distributed to the shareholders. So, every single year you pay taxes on the gains that the fund realizes. An ETF has a mechanism that it’s not technically a sale, but rather it’s a different mechanism in which stocks can leave the fund without triggering capital gains. So it’s a mechanism of redemptions and it’s a complicated mechanism. But the bottom line is that in the world of an ETF, when a stock leaves, it doesn’t have to trigger a capital gain. So then in the world of an ETF, you instead of paying gains on these stocks that have left the portfolio during the year, every single year, along the way, you pay them at the end. So you’re not avoiding tax, you’re just pushing them from whenever they happen to the time when you actually sell that ETF. So the biggest difference for most people is in the fact that an ETF avoids some of these taxes on the gains until you sell the fund. Whereas a mutual fund technically has to realize that. Now that’s the generally speaking difference between mutual funds and ETFs. It turns out that at Dimensional, there are ways in which you can have ways to mitigate and kind of replicate even the ETF’s strategy on the capital gains within the mutual fund. So then the distinction between the mutual fund and an ETF becomes even less relevant. So to me, at this point in time, the third distinction might be the biggest one is that depending on the custodian platform that you use, the mutual funds might have a trading cost, whatever it might be, 10, 20, $30, whatever it is to trade a fund. Whereas an ETF might not have a trading ticket, a trading cost, you can just buy and sell for free. And that might make a difference for some people. So ultimately, these are the three big differences and just the first one being that it’s a pricing, that it’s either at the end of the day or throughout the day. How important is that to somebody? The second one is the mechanism by which the ETFs can mitigate and postpone these capital gains, which with mutual funds is kind of coming to the same point. And then the third one is that the trading cost. So ultimately there’s no right or you can do either one of those. It’s just that these are the three considerations that I would encourage people to think about. And that’s what advisors typically do on behalf of their clients.

Madison: Very well explained.

Basics of Investing in Stocks and Managing Risk

Madison: There’s so much written about investing, and the stock market often seems mysterious with its potential for big gains and losses. Let’s cover the basics. What does it actually mean to invest in stocks? And why should people consider putting their money in something that appears risky?

Apollo: Yeah, so I, I think it’s such an important question because to your point, there’s a mystery of the market. There’s so much money to be made and lost. Why should I even do this? So what are stocks? Well, it turns out that Yardley or Dimensional or you name it, your local bagel shop, your local ice cream store, whatever it is. A lot of times the companies start fairly small and they are private companies. And that model, the only people who can participate in the ownership of those companies are the founders, you know, and if the founders decide to allow somebody else to own a piece of it, that’s up to them. So in other words, I can’t just go to Yardley and say, hey, Mike, I want to buy X percent of ownership in your company. Like, no, if they can decide whether or not they let me in. Now it turns out that certain companies, as they get bigger and bigger and bigger, they reach a point where they decide that I would like to open my ownership to the public at large. And that moment is called an initial public offering. And when that happens, at that point, a portion of the ownership stake in that company is released to the public at large. And when that happens, that company no longer has a say into who can own a piece of that company. That’s when it becomes, instead of private, it becomes a public company. So publicly traded company is a company that has opened up the ownership to the public at large, at least for a portion of their shares, and anybody can buy it. Now why would you want to do this? I actually believe this is an amazing thing because it gives us all a stake in capitalism. The fact is that I did not start Microsoft. I have nothing to do with Paul Allen or Bill Gates, and yet I can go and own a piece of Microsoft pretty much like Bill Gates. Not as much as Bill Gates, but certainly I can own conceptually, not conceptually, practically a piece of Microsoft. And the reason I want to do that is because that entitles me to part of the earnings, legally entitles me to parts of the earnings. If I own 1% of the company, 1% of the earnings technically belong to me as a business owner in that company. So the beauty of owning shares of ownership is that you can partake in, in the profits, the earnings of companies that we use every single day. You can buy a share of Apple and Microsoft and Coca Cola and McDonald’s and you name it. And I think this is an amazing thing that gives us all a stake in the companies that we use in everyday life. And it doesn’t have to be only in the US. There are companies around the world in which you can buy ownership. So the reason you want to do this is because ownership in stocks has been just an amazing engine of growth over the long run for somebody’s savings. So if you save money and you kind of say, okay, well, what would have happened with my money over the long run? If you invested broadly into a group of stocks in the U.S. that’s called the S&P 500, and you had invested over the long run, it turns out that that would have been a really nice growth. That over the long run you would average about 9 to 10% growth on your money. And that’s a significant number over the years in this S&P 500 index that I’m referring to that between 1920s and 2023, $1 would have grown to about $14,000. So very, very, very significant growth. And the reason for that is that companies try to find a way to make money and you’re just along for the ride. So I do think it’s a risky proposition in the sense that you shouldn’t expect that every single day you’ll make money. But over the long run, what we see is that the ups and downs in the market are actually leading to good results over the long run. And just to make it even more visual, if you look at the S&P 500 over the years and you look at times when the market’s gone down by about 20%, which is typically called the bear market, and that’s when people find the market as being very risky. What you see is that there are certainly periods which are the yellow zones here where the market drops, and those are bear markets, and people don’t like them. Because in those years, you will lose money. But what’s interesting is that the bull markets, when the market’s running high, what you see is that they last a lot longer. So bear markets do happen, but they don’t last nearly as long as the bull markets. And that’s why since 19, from 1926 to the end of 23, $1 would have grown to roughly about $14,000 in this S&P 500 index. And that’s why I think that people ought to participate, because it’s a really good way to take a stake in these companies. But also from a money growth perspective, there are not that many other good options to grow at that rate.

Mike: Maddie, if you ever get nervous about the stock market, you need to pull that chart up, right? And stick it on your computer. Put it somewhere you can see all the time. Like when people get nervous about the stock market, which I typically don’t get nervous. My concerns are more like, how are my clients feeling? You just look at that and say, like, this bad time generally doesn’t take that long. And then you go to, like, the next big heights that spread out over, over, like a long period of time. And it’s just the way that it works. It’s not unexpected. You know that it’s going to happen. We had a guy who retired a couple years ago, and he said, okay, now if the stock market can just hold on. And I was like, your life expectancy is like 35 years. There’s going to be bear markets, there’s going to be recessions, and it’s okay. It doesn’t matter. We’ve planned for that. That’s in your allocation. Like, it’s just a true fact of life. But look, look at the difference between the, the ups and downs, Maddie. And tell all your friends it really works and you need to get involved.

Impact of Time Horizon on Investment Risk

Apollo: Absolutely. And, you mentioned, you mentioned the retiree. I had, not long ago, I had an opportunity to go with an advisor to retirement community because they were concerned about the market, and I wanted to understand the dynamics. And it turns out there was an investment club that watched the market every single day. And then they went and they played tennis and they felt the market is very risky. So in my mind, I was trying to illustrate to them that the riskiness of the market, in a way also has to do with how often you pay attention to the market. And if you look at the S&P 500 and you look at 2024, you look at the last 50 years, it’s very, very consistent. On a daily basis, about 53% of all trading days in the market are positive and 47% negative. Which is interesting because it means that on a daily basis you almost as likely to see an update as it is a down day. Like you made money or lose money, it’s roughly a split. You have a little bit better odds of making money, but not by a lot. So if you’re like those retirees watching the market daily, you’re going to drive yourself nuts because roughly half the days you’re going to be depressed and half the days you’re going to have a spring in your steps. That’s just the nature of markets. Now, if they were patient enough to wait for the quarterly statement and you look at the last 50 years on a quarterly basis, what you see is that on a quarterly basis, 71% of the quarters have been positive and only 29% negative. Which is quite interesting, Mike and Maddie, because what it means is that if you simply shift your time horizon from daily to quarterly, you are a lot more likely to see a positive quarter than a negative quarter. All you have to do is just shift your horizon. And if you’re patient enough to wait for the whole year and you ask over the past 50 years, what’s been this annual split between positive and negative? Well, 78% of the years have been positive and only 22% negative. So I think what makes this so interesting is that as an investor, the riskiness in a way of the market, if you want to think of how likely am I to see a negative outcome, changes drastically with your time horizon. And if you watch it daily, be prepared to be disappointed roughly half the days. Now, I told you, Mike, that the other hobby they had was tennis. And because I’m a statistics guy, I just wanted to know, okay, so take arguably one of the best male tennis players of all times, Roger Federer. How do you get to become the best of all times? And I was trying to relate the market with Roger and it was interest. If you look at his statistics, Roger Federer, arguably the all time best male player in his lifetime career, which ended a couple of years ago, he won roughly about 54% of the points that he played, which is incredible because this is the all time best, not an average player, lost roughly half the points that he played. So to be the best of all times, you don’t need to win 90% of your points. He won a little bit more than half, but you know what he did? He stuck in there. He played all the points, he won the big ones. And if you give Roger some time and he asks what percentage of the sets that he win, well, that number jumps to about 75%. And if you’re really patient enough to wait for the whole game, well, it turns out that he won about 81% of the matches that he played. So I think it’s so interesting because it does relate to the market. If you see the market going down any one day, it’s pretty much seeing Roger losing a point. Don’t pack your bags and say, I’m out of here, because look, he lost a point, he loses roughly half the points. But give him some time. And the more time you give Roger, the more time you give the market, the more likely it is that you will see a positive outcome. You just have to manage your expectations and you have to realize that I need to give both Roger and the market some time. And the way to become a, you know, a successful investor or, or to become a great champion is really by being in there playing all the points, winning the big ones and, and staying the game.

Mike: That’s a great analogy with the. Yeah, it’s amazing. Like 53% of the points and like how they matched up with the 53%. Crazy coincidence there.

Apollo: Yeah.

Dimensional’s Bond Funds and Fixed Income Strategies

Madison: Switching to fixed income, how are Dimensional’s bond funds different and potentially better than other options in the market?

Apollo: So fixed income, I’m so glad you brought it up because I mentioned earlier the idea of a plan. And if you are an investor, there are two different branches on this tree. One of them is the ownership. And that’s what you get in the stock market. And the ownership is actually very rewarding. It’s basically, as I mentioned, 9, 10% per year annualized growth, it’s $1 turns into 14,000 over the course of 90 plus years. But it comes at the expense of these ups and downs. And we touched on them. So if you don’t really like that, what can you do outside of owning stocks, which might come with a bumpy ride? It turns out that fixed income is a really important, potentially a really important component of somebody’s portfolio because it is not about ownership, but rather about lending. The US government, corporations, they need to borrow money. And instead of going to a bank, what they do is they come to us and say, hey, Maddie, why don’t you lend me a thousand dollars? And if you’re willing to lend me a thousand dollars, we will write up a contract. And in the contract we specify an interest rate for how long you get the interest rate. And at the back end, you get your money back, your principal back. That is what’s called a bond. So a bond is, even if it’s issued by a company like McDonald’s or Apple or Coca Cola, you name it, those bonds have nothing to do with the ownership. It’s a form of lending. You lend money to the corporation. That’s how they borrow, using bonds rather than a bank. And when it comes to these bonds, as an investor, there are two things that you have to be very, very aware of, is that the first thing is that the interest rate that you get on your investment is normally related to the length of the contract, which is called maturity. And historically, what we have seen is something like this. If you think of maturity, which is how long before the contract expires and they give you money back and the whole thing is called off, and you relate that to the interest rate. Well, it turns out that. Also called yield, it turns out that, let’s say you lend your money to a reputable borrower like the US government and you give them the money for 30 days. Well, there’s a certain interest rate that you’ll receive because as the government, it’s a very short term, 30 days later you get your money back plus interest. The interest rate that investors kind of want is not really that high historically has been quite low. Now, if you lend the money to the government for one year, historically what we’ve seen is that the interest rate that investors demand is a little bit higher because my money’s locked up for longer. And if you go to five years, you know, it’s again, I got to get, to get a little bit more for tying up my money for 5 years. And it’s kind of the same idea for 10 to 20 years. So what we’ve seen historically in the market for bonds is that you can connect these dots and get something that is called an yield curve, which basically relates the maturity of a bond with the interest rate that you get as an investor. And that’s sort of the normal way in which it operates. So the thing to know, folks, is that you can make more money in bonds if you’re willing to give them for a longer time. And there’s a risk of money being locked up. But also at any moment in time, the value of the bond, if you try to sell it, also mathematically adjusts with the length. And it turns out that when interest rates fluctuate, the longer bonds tend to fluctuate a lot more in value. So there are some considerations here, but the first thing that I want you to know is that you can lend your money to different organizations. And one of the distinguishing factors on the interest rate that you get is what is the length of the contract, also called the maturity. So that’s the first thing. The second thing is that you can look and say, okay, who am I dealing with? Is this a reputable borrower? And how much trust do I have that I’m going to get paid the interest and the principal back? And for example, if you look at the US government, which has been considered the cornerstone, the most robust borrower out there, not too long ago, they could borrow money for 10 years on these 10 year bonds and they would pay about 4.4% in interest per year to investors. Now the US government is not the only bond that can, the only company that, or the only entity that wants to borrow money. It turns out that private companies want to borrow money. You know, Mickey Mouse wants to borrow money and Mickey would love to pay 4.4, but Disney actually has to pay a higher interest rate because the market doesn’t perceive it to be as robust of a borrower as the U.S. government. And you can go down the line, great American company, Ford they would love to borrow money at 4.4 or 5.5. But the market’s saying not so fast, I don’t believe my perception is that you are not as good of a bet, as good of a risk as Disney or the U.S. government. And Macy’s, I love Macy’s, a great department store, they can borrow money, but the rate that they pay on that money is also higher. So there’s a relationship here between the perceived uncertainty on to repayment of interest and principal and the interest rate that you get as an investor on these bonds. And if you really want to get ambitious, well, you can go and find bonds that are even issued abroad, like Brazil. The Brazilian government has to pay over 14% to investors to, to borrow money. So these are two very important elements here. When it comes to bonds, you have to consider what is the length of the contract and the longer the contract, the potentially the higher interest rate they make, but also potentially the higher risk associated with that bond in terms of fluctuation in value. And the second is what are the quality of the borrower. So the trouble is that if you are trying to hire a manager to manage the bond portion of the portfolio, you have to be incredibly convinced that those folks are not going to chase a higher interest rate and blow your mind. Because the typical way to do that is to buy bonds, like Brazilian bonds. And they say, well, my fund is paying 12%. Yeah, what’s the catch? The catch is that you’re buying bonds that are not as robust. So the first thing is that you absolutely have to make sure that the bond manager that you hire is very consistent with what you need. And the first thing that kind of delineates Dimensional and sets it apart is that we have very distinct funds and we say these are very high quality funds that go up to one year. So the longest bonds they would buy is one year and then they would only be from the, you know, highest quality borrowers. And when you do this, then it gives the advisor clarity onto what happens into that bond fund. So there are no surprises. And I think this is really, really important is that you look at, you look at the bond fund and you have clarity and consistency in terms of the objectives and you’re not surprised by what they bought in there. So there are a lot of things that we can get into. But Maddie, at a high level, it really has to do, it has to start with this idea of knowing what’s in the fund and not being surprised and not chasing this higher interest rate because you can always get it. I can always find you a bond that is very long term, issued by who knows who that pays a very high rate. It’s just what’s the catch there? And I think that’s, it’s really important to know as an investor and as an advisor.

Mike: Yep, there’s always a catch.

Apollo: There’s always a catch. And I can always. Bonds are even easier than stocks. If you want to make a high rate of return on your bonds, that’s the easiest to do because those rates are publicized. It’s just again, don’t be surprised like a lot of people in Puerto Rico or buying the Puerto Rican bonds and, and oh, I’m making 20 of my money. I wonder why.

Biggest Shifts in Investing Over Recent Decades

Madison: Our world keeps changing, and these changes affect how investing works too. What do you think is the biggest shift in how people invest over the last few decades? And what do you think this means for everyday investors?

Apollo: Yeah, it’s so interesting you mentioned that, because for the longest time, at least when I started investing and when I kind of thought about what exactly is investing, about 30 years ago, the prevailing theory was that the way to be a successful investor is by looking at the entire stock market. And let’s just say that this square represents the entire stock market. And then you need to analyze individual companies. This is what Benjamin Graham and Warren Buffett, who actually Warren Buffett was Benjamin Graham was Warren Buffett’s mentor. And the idea is that you want to analyze individual company and just pick those companies that you think are best when you do that analysis and leave out everything else. And that system relied on the idea that you can analyze the information better, or perhaps you can get it faster than other investors, or the information that you get is really different and better than what everybody else has access to. And there’s a whole industry, this whole Wall street industry has been predicated upon this idea that, that you can get information faster, better, or you can process it in a superior way. And that kind of gave birth to this idea of a traditional managing, which is active management, which is really about stock picking. And you know, for many, many years that was sort of the state of the art. And when you ask what’s changed, the biggest change that’s happened, in my opinion, over the past 20, 30 years has to do with information. The name of the game in investing is information. And if you believe that at some point somebody can get better information because they were able to somehow track down trucks or do something to get better information than others, that’s possible. Or you can get it faster because your fax machine was a little faster, or you can process it better. None of those things are in play today. Today, information travels incredibly fast. It’s almost instantaneous. The information available to investor is leveled out. Nobody can obtain information other people have, legally speaking. And again, there’s so much, there’s almost overwhelming amount of information. And also the industry has become incredibly competitive. There are more professionally managed funds today in the US than actual stocks trading on the market. So none of these parameters that might have given an edge to these managers are in fact available to investors today. And when you look at the funds and what’s the evidence, how do they do? Well, these funds, if you look at 10 years a bunch of these funds don’t even survive. And out of the funds that survive, only about 1 in 4, 25% are actually able to outperform, because, again, it makes sense. The information travels too fast, too competitive, and everybody has to have access to the same information. It’s not legal anymore, and it’s kind of not possible to get away. And the more time you give them, in fact, the worst it gets. You look at 15 years and you look at 20 years, fewer and fewer survive. Funds get shut down quite often, and fewer and fewer win. So I think this is really important because what it basically means is that that system of investing that was pioneered by, you know, Benjamin Graham and Warren Buffett, that no longer really has It holds water. It might have made sense at some point, but not today. Now, what’s, what’s the state of the art today? In my opinion, it’s really about the academic research that came out of the University of Chicago back in the 1960s and 70s, and that’s kind of when it all started. And the idea was that instead of analyzing individual stocks, you might want to consider holding them. No reason why not to hold them. But what the researchers try to do is understand the behavior of an entire group of stocks, not of any one company. So in other words, you don’t love or hate anyone’s stock, but you’re interested more in the group to which it belongs. So think of a school of fish. If you watch a school of fish, every fish moves randomly up, down, left, right, sideways. Nobody can predict how each fish moves. On the other hand, if you observe that, you can capture and understand the behavior of the entire school of fish with a lot more precision. So that’s kind of been the big evolution, in my opinion. The idea that we want to fish by the net, not by the rod. And the research, what’s called asset class level, because this, this idea of a comprehensive research what’s called asset class investing. And that has been done typically by large institutions like, like Dimensional academics who have access to computers and data. The outcome of that was that that first of all, information right now gets put in the prices very, very quickly because it’s so competitive. But it also identified something quite interesting, that not all stocks in the market are the same. And if you look at the stock market, you can break it down in certain parameters that are not necessarily based on sector, like technology or financials, which is what the media does, but rather you can — based on the size of the company. You can look at the large companies which are part of the S&P 500, and you can differentiate them from the smaller companies which are also part of the market, but they’re not in the S&P. So think of McDonald’s as being the poster child for large. Shake shack, the poster child for small. And when we do have, interestingly enough, a book that of data, the Matrix book, that is a phenomenal resource. It’s kind of like always on my desk. And if you look at the Matrix book, it kind of gives you an idea of the differences in investment experience. If you look at the S&P 500 from 1920s to the end of 23, that $1 in the S&P 500 index would have grown to about $14,000. And the same dollar over the same exact time period. Investing in the Dimensional Small Cap index, which is a small companies would have grown to over $48,000. So quite significantly more. And then if you look at all the large and small, and that’s what the academics did in the 80s, and look, are they all the same? You can delineate between a group of stocks that have a relatively low price for their earnings or book value, and those are called value stocks. And over the long run, they outperform the more expensive counterparts called growth. So if value beats growth, small outperform large. The one part of the market that ought to give investors the biggest bang for the buck is small in value. And again, if you look at the, you know, Dimensional small cap value index in the Matrix book, what you see is that the same dollar, same time frame would grow to over $152,000. So to me, what’s interesting is that that it offered a primer to investors instead of looking and saying, I want to pick some stocks, because that’s kind of the way to try to outperform the market. What the system now is saying is like, wait a second, what you can do is be very purposeful and you can reshuffle the deck and emphasize more small companies and value stocks. And when you do that, then you give yourself a chance to earn a higher expected return in your portfolio over the long run. So I think that’s been the biggest evolution that the transition from the stock picking to this asset class investing. And that’s what Dimensional pioneered over 40 years ago.

Mike: Great answer. I love, I love looking at that and the difference in the small cap value compared to, you know, small cap as a whole and large cap. It’s just amazing. Maureen here and I, I went and saw you speak last year over by King of Prussia Mall and you had a great chart where you showed like the growth of inflation, the growth of like a T bill and like they’re so small and then you know, the, the difference in, you know, by investing in stocks versus bonds and then in the small cap and the small cap value. It was amazing and something I try to remember and try to, to explain to clients like why we have separate parts in small cap and small cap value and international small cap value. Like it really makes a lot of sense. And yes, maybe recently, you know, you’re not seeing them in the news or anything, but it’s a good place to have substantial part of your portfolio.

Apollo: Absolutely. Yeah. But to your point, I mean I think that the really important thing that he mentioned that it’s hugely important is that if you’re an investor and you see these numbers, obviously small values seem like, wow, it’s a no brainer, let’s put a lot of money there. And, and the same with the, the Roger Federer and everything else. It’s, it’s all about understanding odds and statistics and, if you look for example at value and how often does value outperform growth, which are the two categories I mentioned. Well, it’s about 59% of the time over one year. So just be ready to acknowledge that, you know, in any given year, four in 10 years, it’s not going to be there. You’re not going to see value beating growth. And even if you look at five years, your odds improve. It’s now 70% of the time. And you know there are going to be periods and even over 10 years you’re going to have times when that’s not going to happen. So that’s, you know, you answer, you asked Maddie earlier why work with an advisor, why Dimensional works with advisors is because individual investors who don’t look at these idea of statistics and odds, they see, oh, last year value didn’t do as well as growth. Well, let me get out of value because that’s not working out. You need to have somebody who kind of brings perspective and maintains the discipline of the process. And I think that this is really important. You can, you can absolutely, these numbers are absolutely valid. Just if you expect them every single year to happen is the same way as expecting Roger Federer to win every single point. I can expect that. But I also know that half the time, roughly, is not going to happen.

Mike: Right. Right. Very good.

Benefits of Global Investing and Diversification

Madison: Besides U.S. stocks, investors can put money in foreign markets too. Does it make sense to spread investments around the world? And what’s the best way to do this?

Apollo: Yeah, so absolutely. And in fact we talked about US companies. There are roughly about 3,000 plus companies in which you can buy and sell ownership in the US and they’re, you know, starting with Apple and Nvidia, Microsoft, all these companies that we know and love. And what’s interesting is that if you redraw a world map and instead of Landmass, you would apply the value of all the companies that he can buy and sell around the world. This is what that map would look like. This is at the end of 2023, the US was about 61% of the value of all companies in the world. The biggest chunk. And because of that, what we see as being a pretty smart way to, to go is by allocating money to different markets based on their relative significance in the world. So if the US is about 61%, what we see a lot of advisors doing is you know, putting the bulk of the money, more than half of the money, 60% or even more in the US market. And then each market around the world where you have about 10,000 other companies in which you can invest somehow proportional to their global value. And that to us is like a really smart way to do it. But the question that he asked is a good one. Should we limit yourself to the US or really go all abroad or to some degree abroad. And the way I thought about it is that if you just say I want to buy US Companies, that’s your thought. Well, what he is saying is that I, for example, would like to own a piece of some great American companies. And you can look at car manufacturers, own a piece of Ford, GM, Tesla, and that’s awesome to own these companies. And yet if you look on the streets, you don’t only see four GM and Tesla. You also see German cars. There’s Mercedes, BMW, Porsche, all of these brands that are owned by German companies that trade in Germany. Even great American companies like Jeep and Chrysler, those brands are owned by an Italian company, Stellantis, that trades in Milan. That’s Italian investing. We all are familiar with the Japanese car companies, the Hondas, the Toyotas and so forth. Ironically, great British brands are now owned by an Indian company, Land Rover and Jaguar, and my daughter drives a Volvo, that brand is owned by a Chinese company. BYD is the largest seller of electric vehicles in the world. And you have the Korean shops who are also making inroads so it is interesting because if you look at global investing from the perspective of car manufacturing, absolutely makes sense to own Ford and GM, but why not consider BMW, Toyota and G for that matter, because these are again, brands that we’re all familiar with, and they also, they might be in some driveways around the block. So to me, conceptually, absolutely, it makes sense to do it. Now, that was at the beginning of 2023. And over the course of the year, the US stock market increased in value because the performance was very good of the US market. So at the end of 23, the beginning of the end of 24, beginning of 25, the US stock market was no longer at 61%, but rather 65%. So these percentages change. So the way that we suggest that people do it is by paying attention to these percentages and as they change, make it relative. So in this case, what they would mean is that the percentage that you would allocate to the US would be greater than what you would allocate to other markets. And the second largest market, for example, that, that an investor would have under this concept would be the Japanese stock market at about 5%, so less than a tenth of the value of the US market because again, that’s where the value of companies is that are. So that’s kind of the starting point of the way that we would consider allocation. And the best way to do it is by using obviously funds, whether ETFs or mutual funds, because, you know, we’re talking about 13,000 companies around the world. I mean, any individual investor who tries to go as deep as that would have to have billions of dollars, and which is not likely. The only investor that I know that does that is the Norwegian fund. And they have about a trillion dollars. So if you have a trillion dollars, you can probably try to go buy these stocks yourselves. Otherwise you might be better off just using funds. And they’re very specific funds, US International developed markets and emerging, and then put percentages in those relative to the value of those markets.

Mike: Very Good, thank you. 65% seems so high. I remember it was like 50.

Apollo: Well, what’s so interesting that, that you mentioned this is because like you talk about the Japanese market and, and, and it is, it is a lot where we are today. But it is important to know that these percentages change. And it’s really important to be a global investor because again, things change. And if you go back to the beginning of 1990, what’s remarkable is that the Japanese stock market in 1990 was significantly bigger than the U.S. significantly bigger. And the lesson is that things change. I’m not suggesting that’s a path of the US Market. It’s just things change. And as an investor, you ought to be able to adjust. But to be ready for these changes, I think you do need to own a global portfolio of stocks.

Mike: Yep.

Three Biggest Mistakes Investors Make

Madison: This investing approach seems helpful, yet we know many people don’t follow these principles and miss out on better results. What are the three biggest mistakes that investors can make?

Apollo: Yeah, I think that that, to me, that’s the three biggest mistakes that people can make is the first one is that there’s a very big behavioral component to investing. And what I mean by that, when things are really flying high and everything looks good, that’s when people feel comfortable buying because everything looks good. And then when things go south and then something happens that they’re particularly anxious or afraid, and then fear settles in, well, that’s when they tend to sell. And I have to say the biggest mistake that I’ve seen is people being driven by emotions in the market, because investing should be about buying low and selling high. And if you think about it, emotions make you do exactly the opposite. You buy high, fear of missing out, and you tend to buy to settle low. So to me, that’s a very, very, very big mistake that people make. The second big mistake is that people are chasing fads that, that typically tend to be concentrated in a particular industry or in a particular stock. And you’ve heard so much about Nvidia or the Meme stocks or all this or Bitcoin, all of these investments that are top of mind. And people believe that a way to make a lot of money is to concentrate. And it’s possible. Absolutely. The more you concentrate, the more money you can make. And that’s what everybody’s shooting for. What I think the mistake people make is not realizing the concentration can lead to a lot of, you know, positive, like, you make a lot of money, but the more you concentrate, it can also lead to really negative consequences, really significant losses in the portfolio. So to me, the second big mistake is the lack of diversification and concentrated and see I can make a lot of money into those, and it might work for a while. And to me, that’s a very big mistake because people most often don’t need it. And if you diversify properly, what you basically doing, you’re putting some boundaries. You take away the extreme outcomes, both on the negative as well as the positive side. And to me, that’s something that a lot of people don’t do very well because, again, they’re so focused on not missing out. And like, I want to shoot the lights up, keep in mind that it goes both ways. But the biggest mistake that I see people making is that they start with the Idea of what should I own, what stock, what bond, what mutual fund. And even when I was on the plane last night, somebody said next to me and like, what do you do? I’m an investment manager. Well, what stock should I buy? And it’s just that, it’s just the wrong way to think about it. I do believe that the most successful investors, they actually start with the idea of a plan, a financial plan. And that’s what advisors can basically do, is come up with a plan. What are your circumstances, your needs, how much money do you need, when do you need them, what allows you to sleep up at night, and all of these things that are part of the financial plan, what are assets you have, pensions, whatever. And once you have a plan, then you have to go and kind of say, what’s the process that’s most efficient for me to get there? When it comes to taxes, when it comes to estate planning, when it comes to expenses, all of these. How do I make changes along the way? There is a process to help you implement that. And the very last thing that you got to be concerned about is the product itself. What stock, what bond, all these things. So to me, what I find is that this is the right way to do it. And yet too many people start with the idea of a product. And to me, that is not where you need to start. You need to start with a plan. Because without having a plan is like saying, I want to fly a nice Gulfstream jet somewhere, I just don’t know where I’m going. Well, if you don’t know where you’re going, it doesn’t matter how nice the jet is. You’re going to crash somewhere. You need to have a flight plan. You need to know where you’re going. And that’s why I think that one of the biggest mistakes that that investors make is not working with a financial advisor, not developing that plan, and having the advisor kind of along the way have a process to help get them there and also select the right products. When it comes to taxes, investment approach, expenses, all of these things matter. But it has to start with an advisor and a plan.

Mike: Apollo, I can’t thank you enough for answering with that answer, because I was just talking this morning with Karen and Maureen in here about how different things are. 20, 25 years ago, advisors, even advisors, were so much more focused on what investments or talking about the market. Now, I think finally we have our business so that investments are one part of the financial planning process, and they play their role. But when people come in, we will have an hour conversation with people. Investments will be a small part of that. You know, it’s all planning. What kind of tax preparation or tax planning can we do? Is the estate planning up to date, how’s the cash flow look for it going into retirement or in retirement? You know, and the, the investments are products that, that serve a certain purpose, that work within the financial plan. It’s not just like what stock. And I think sometimes people who don’t really know how we work will ask me about like an individual stock or how the market’s doing and are surprised when I say I have no idea. I don’t know what I, I don’t know what IBM is selling for today. No idea. And it doesn’t matter. I have an idea if the indices and the 10 year are trending up or down recently, but other than that, we’re not paying attention to the daily minutia of the stock market. Those retirees that you talked about like that, that’s just not part of our job. And it leads to bad decisions and anxiety and we want to avoid bad decisions and anxiety in our financial planning process.

Apollo: Well, you have been pioneers in this way. And I’m just, that’s what makes me so excited to work with a firm like yours because there’s so many other advisors who are still hyper focused on selling a product and kind of telling people what’s going to happen which are not really relevant. That’s not what’s going to be.

Mike: I can’t predict the future. I can go out and say that.

Apollo: Yeah. And that’s, it’s, you know, it’s easier to sell fantasy than reality.

Mike: Right, right, right.

Apollo: Documentaries don’t make a lot of money, but. Right.

Closing Remarks

Mike: It’s less, less sexy to hear your advisor say hey, can you upload your tax return so we can take a look? But thank you so much for today. Really appreciate it. We took up so much of your time between the webinar and the podcast. Really, really appreciate it.

Apollo: Thank you so much for the invitation. Thanks, Madison, for everything, and look forward to meeting in person. Hopefully.

Madison: Yes. For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button if you enjoyed this episode. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.