International Stocks: Do I Really Need to Own Them?
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Compared to US stocks, international stocks look undervalued, quote unquote. What that means to us is we have to expect a higher rate of return over a long period of time from international stocks than US stocks.

Welcome to Stay Wealthy San Diego, a show for successful professionals doing all the right things with their money and are ready to take their financial plan to the next level. I'm certified financial planner, Taylor Schulte, and I'm here to teach you advanced financial planning strategies in plain English.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪

Welcome to the Stay Wealthy San Diego podcast. Hello, podcast listeners. Today, we're going to be talking about investing in international stocks. And I know we've touched on it in some prior episodes, but today we're going to really take a deeper dive into the world of investing globally. And then we're going to take that information and parlay that into a conversation about how to properly construct a portfolio.

Specifically, we're going to share three really important things that we think you should take into consideration when putting your portfolio together.

And no, keeping costs low isn't going to be one of them. You beat me to it. We've beat that drum enough. Keeping costs low to us is table stakes. And I don't think that we need to make that point again. If you're new to this podcast, go back and listen to prior episodes. We can't talk about it enough. It is so critical to pay attention to the fees and expenses, not just the transparent ones, but the ones that hide behind the scenes.

So we're going to leave that out. The three things that we're going to talk about today in regards to portfolio construction are number one, what asset classes belong in a portfolio? There's all these asset classes that are out there. It's overwhelming, large growth, small value, international emerging markets, junk bonds, convertible bonds, high yield bonds, Bitcoin, Bitcoin, hedge funds, commodity, like the list goes on. So

We want to talk about what asset classes actually belong in a portfolio. Number two, how much should you allocate to each asset class? So you've picked out these asset classes that belong. You've gotten rid of the junk. Now, how much do you allocate to each of those different asset classes? 100% Bitcoin.

And then number three, what is the best way to implement this portfolio? You've got this basic framework down. You understand it. It makes sense. Now it's time to implement it. And of course, watch out for fees and expenses. So we'll talk about how to implement that portfolio. I'm glad we do get to talk about costs at the end there. Just a little bit. Just a little bit. Okay. So let's dive into international stocks before we really kind of pick this apart. I want to mention two things.

When we reference international stocks, we're referring to the MSCI IFA index, unless we note otherwise. So when we just broadly reference international stocks, that's the index we're referring to. For US stocks, the S&P 500.

The second thing I want to mention, this is not advice. This is for informational purposes only. I know you guys know this by now, but please consult with a professional before making changes to your personal situation. I want to quote Paula Pant here. Consider this the unfunniest comedy show ever. Nice. I like that.

All right, John, I'm going to share a couple stats with you on international stocks and just kind of give me your general thoughts here or reactions. Maybe that's a better word. So since 1970, and we're using 1970 because that's as far back as the data goes for us. So we're using what we've got. There have been 12 bear markets in international stocks.

And a bear market is defined by a loss of 20% or more. So since 1970, up until now, 12 bear markets in international stocks. Seems like a lot of good buying opportunities. Yeah. Hey, that's a nice way to spend it. Check this out. During the same timeframe, US stocks, again, the S&P 500, have only experienced six bear markets. Wow.

So just giving you that information would lead you to what kind of conclusion? I guess it depends upon how you look at it. If you only want the market to go straight up,

then, and most people do, US stocks sound good. But of course, when there's a bear market, there's a buying opportunity. There's mean reversion, which is what goes up must come down and vice versa. So there's certainly some diversification value, at least that's what I hear when it comes to holding international stocks. Yeah. And also mentioned too, that during that timeframe, US stocks had losses of like 18%, 19%. So it was close to 20%. So it's not a perfect statistic. But

but there have been more bear markets in international stocks. The second stat I'll share with you, during that same timeframe, 1970 to the end of 2017,

international stocks total return, average annual rate of return, 9.6%. So pretty good. During that same timeframe, US stocks, 10.5% average annual rate of return. And you have to consider that those are index numbers. Investing in international stocks does cost a little bit more money. So you got to take just a little bit off the top of that international figure relative to the US. And if we just read those two stats to most people or...

A big media outlet mentioned those two statistics. Twice as many bear markets, a lower rate of return. Most investors are going to conclude, why don't I just invest in US stocks? I mean, a higher rate of return, less potential chance of loss. Why would I even touch international stocks?

So we kind of cherry picked those statistics here to share with you, but let me kind of spin this around and show you the other side. John already kind of mentioned how important diversification is. From 2000 to 2009, the S&P 500 experienced what we call a lost decade. And actually it was more than a lost decade. During that 10 year time span, the S&P 500 fell almost 10% in total. Wow.

In that same time, international stocks, the MSCI IFA index rose almost 20%.

So, stretched out over a long period of time, U.S. stocks did a little bit better than international. But we can look at these time periods where U.S. stocks are getting crushed and international stocks are actually doing pretty well. Yeah, and that is a value of diversification. I mean, there's no doubt the U.S. is a powerhouse. The U.S. is...

where the economy grows, it's where all the good stuff comes from. But sometimes it can take a really long time for that to show up. And in the meantime, you can get a little bit of value by diversifying outside of the US. And it goes the other way around too. From 2008 to the end of 2017, international stocks have kind of lagged behind. They've had an annual average rate of return of about two and a half percent.

during that same time period against a short time period, but from 08 to 17, US stocks average about eight and a half percent rate of return. So it can go the other way too. But our point is that you're never going to be able to time this perfectly.

You're never going to be able to jump from international to US at the perfect time or vice versa. We love this quote, and I think we have to attribute it to Brian Portnoy. He's the only name that comes up when I Google it. But the quote is, diversification means always having to say you're sorry. I love that one. Yeah, you know, you're never going to be right. You're never going to have the highest performance.

performing portfolio. Hopefully you're never going to have the worst performing portfolio. You're always going to wish you had a little more of something that's diversification. You're going to kind of hover around the middle and get that nice, smooth rate of return. Yeah. The middle is indeed where you're going to find yourself. There's this great resource.

by Dimensional Fund Advisors, which is a mutual fund company that we use. And it lists out the returns of the various asset classes, various things you can invest in year by year. And you'll see there's pretty much no pattern with the exception of a diversified portfolio. And that's always going to be right there in the middle. So

If you want to decrease your risk, if you want to decrease your volatility, then diversification is the way to go. And like I mentioned, we're just talking about the S&P 500 and the MSCI IFA index. And these are the two popular indexes for each of these asset classes.

We can take investing one step further and we can try and go after what we call in the investment world premiums. And one of the popular premiums that exists out there is something called the value premium. John, maybe you want to try and just simply explain what the value premium is and why that exists. And then we can talk a little bit more how that applies to international stocks. I love the value premium because it's you're getting a deal.

It's basically you invest in the stuff that's temporarily on sale, it's temporarily unpopular, and then you just wait for it to become popular, and then you do pretty well, right? Now, the inverse of that is what's called growth. You're going to buy what's super popular. So what's super popular right now? Well, Google, Amazon, Netflix, Facebook. Everyone loves these stuff, and everyone's buying them. So the prices on them are shooting up and up and up. But on the flip side, you can say, well, what aren't people buying?

What doesn't look cool right now? And then you buy it and then you wait and you wait and then it does very, very well for you. Yeah. So I think it was Warren Buffett who said something along the lines of buy when there's blood in the streets. And

And if you can find these asset classes or even individual securities, if that's your thing that are beaten up and unpopular and no one wants to own them, these would fall into the value camp. These are value oriented companies. They're discounted. They're on sale. It doesn't feel good when you buy them, but you're buying them at a cheap price, hopefully, and you patiently wait.

And hopefully over a long period of time, which this value premium has existed. But if you hold these securities over a long period of time, you're going to do better than other asset classes or just buying the market as a whole. So there is this value premium that exists and you can invest in mutual funds or index funds that try to get this value premium for you.

So one of the indexes out there is the Fama French International Value Index. And this is an example of how you might be able to go after the value premium overseas. So we shared with you that the broad market indexes, US stocks, the S&P 500 did a little bit better. But if we compared it to the Fama French International Value Index,

That index actually did better than US stocks. It was up about 14% from 1975 to 2017, while US stocks or the S&P 500 were only up 12%. So by taking your portfolio to the next level, understanding what these premiums are and why they exist in the marketplace and tapping into them at a cost-effective rate,

price, you might be able to increase your rate of return overseas and actually add some value to the portfolio. Absolutely. And again, it'll bring your portfolio from experiencing wild swings, just investing in the large companies of the US to something a little bit more palatable, something with a little bit less risk by investing outside of US companies.

And if you're interested in learning more about these premiums and why they exist and what other premiums are out there, you can Google Fama French. They've written a ton of research and papers on this. Dimensional Funds has a public website that has a ton of information on this stuff. It's free. So you can go to the Dimensional Funds website and poke around there and learn a little bit more. And then throughout this podcast in the future, we'll definitely dive deeper into premiums that exist out there.

So before we kind of wrap up and share our conclusion with you about international stocks, we can't help but mention John Bogle. We talk a lot about Vanguard. We love what Vanguard does. We love what they've done in the investing world and what they've done for consumers.

But John Bogle is pretty passionate about this debate, international stocks versus U.S. stocks. Absolutely. He's a huge proponent of only ever investing in the U.S. He makes a case for the three largest international developed economies and saying, here's why they aren't going to do well over the next decade or so. And if you want to learn a little bit more about that, you can check out our blog post in the show notes. So again, his case is you don't need these

international economies in your portfolio, just invest in the US and you'll be fine. And I think that probably over 30 years, he's probably right. The US economy is, it's a powerhouse. It's absolutely fantastic. But

You don't have to dig too far into the historical data to see that on shorter timelines, there is a big diversification value in holding investments in other countries. To kind of sum up Bogle's arguments, one, he's just less optimistic about the other large countries out there, Britain, Japan, and France. He's just less optimistic about them in the future.

And then two, he mentions that big US large cap companies that we all know by name, Apple, Google, Facebook, they have this global reach. So they're here in the US, we know them, we feel comfortable with them. But you can invest in those companies and know that they do business outside of the United States. And so you're kind of getting that diversification there.

So actually 40% of S&P 500 companies get their sales from overseas customers. So it's a pretty decent number. Yeah. And it's not to say that Bogle is wrong about that. U.S. companies definitely have exposure to gaining profit outside of the U.S., but that doesn't mean that the people who are invested in those companies aren't going to panic and sell when everyone else is. So that's

the real diversification value is getting outside of the mass hysteria of investors that regardless of how well the U.S. companies are doing, regardless of how well diversified their profits are coming from the U.S. internationally, if they're going to panic and sell, that's going to impact your investment return. It doesn't matter where their profit's coming from. So while we think

John Bogle might have a point that over the long term, if you're making a really long term bet and you're able to just stay committed to that bet that owning US stocks, that might be the way to go. But

But our conclusion is that the value of holding international stocks is not necessarily a higher rate of return, but the chance to earn more money or even just kind of keep your portfolio intact if U.S. stocks were to underperform in short periods of time. And I think if I had to sum that up, I mean, one of the hardest things

about investing is staying committed to your portfolio, right? Your portfolio goes up, you're excited, it goes down, you want to sell everything and put everything under the mattress. It's really, really hard for us as human beings to stay committed to our investment plan.

So if we can add some diversification to create a buffer for some of these wild swings in the market, we might be able to stay invested through thick and thin and stay invested for a longer period of time, which allows the tax deferral benefits that we talk about to work, which allows compounding interest to work. But the worst thing that we could do is jump in and out of the market. And if we just put all our money in US stocks,

and watch that go up and down and up and down, we might drive ourselves crazy and we might not be able to stay committed to our portfolio. So I think if there's like one reason why you own international stocks, it's purely for that diversification benefit and to make sure you can stick with your portfolio for a long period of time. Absolutely. I think that's such a great way to put it. Imagine opening up your account statement and you see your various funds and

And you see your S&P 500 fund and it's getting murdered. And you're like, oh, oh my God, I want to get out of this. But then you keep looking down the rest of your statement. You're like, oh, well, my, you know, my U.S. small value fund did good. All right. Oh, and my international small value fund did good. Oh, my emerging markets fund also did pretty good. Oh, my emerging markets small cap fund actually did good too. So it's nice to have those other pieces to balance out the volatility of your other investments. And...

look, if swinging for the fences and the highest rate of return is your goal, and you really understand this stuff and you're not worried about the short term, there are very few people out there that meet all those criteria. But look, you might put all your money in small cap value index fund and not look at it for 40 years and probably be in pretty good shape. But most of us are not capable of doing that. And so we need to build this diversified portfolio to

Because the second reason that we believe in owning international stocks is just like the future is uncertain. We have no idea what the future holds. We can talk about historical data all day long, but we really have no idea what the future holds. And I don't know, maybe Bogle's not very optimistic about Britain and Japan and France, but that could change in 10 years. And if you're investing for the next 30 years, it's just, there's a lot of things that are going to change in between now and when you potentially retire. So

The future is just uncertain. We're not going to pretend to have a crystal ball. And like we've said before, we just want to kind of tilt the odds in our favor as best as possible. Absolutely. The last reason why you might consider adding international stocks to your portfolio and why we believe one of the reasons why we include international stocks is...

valuations. We just talked about the value premium and buying when there's blood in the streets and buying these unloved asset classes. And in recent months and recent years, international stocks have kind of fallen into that camp. They've gotten beaten up. The valuations have been beaten down compared to US stocks. International stocks look undervalued, quote unquote.

What that means to us is we have to expect a higher rate of return over a long period of time from international stocks than U.S. stocks.

Whether that actually occurs or not, nobody knows. But that's kind of what the data tells us and the current valuations tell us is that we should expect a higher rate of return over long periods of time from international stocks based on current valuations. It's almost taking the value investing pro-share asset classes, right? U.S. stocks are expensive.

international and emerging they're a little bit less expensive so there's no reason why we should ignore those other types of investments now that's not to say that we're encouraging everyone to go out and try and market time and say hey look this stuff is cheap now i'm going to buy all of it or oh my god this stuff is expensive i'm going to buy it none of it that's certainly not the solution but you just want to uh take a look at valuation and realize that on a long timeline it's

it will definitely impact your investment return. And if you want to just get a general idea of the market sentiment, I mean, go out there and ask your friends how they're invested, what percentage of their portfolio is invested in US stocks. 100% Bitcoin. You'll probably find out that a large percentage of most people's portfolios are invested in US stocks. Absolutely. It's what's popular. It's

what we know and feel comfortable with. It's where most of us live. It's where we were raised. And our portfolios end up being heavily weighted towards US stocks. And tell that same friend that you're thinking of allocating a good portion of your investments to emerging markets or international stocks and listen for their reaction. They might say, why would you do that?

Even ignoring the performance of the various asset classes, most people are just dumbfounded by the idea of investing outside of the US. Sometimes it takes a lot of time to figure out how to do it.

real conversation with someone to explain to them, there's an opportunity here, there's value here, you should be investing outside of the US. Hopefully that was helpful to you guys in this conversation about international stocks. We're happy to dive deeper on any of this. We're trying to kind of keep a high level. But please send over any questions, feedback, comments, podcast at stay wealthy, San Diego.com. And let us know what you think.

So like I said, we're going to kind of take that conversation about international stocks and parlay that into a conversation about portfolio construction. So maybe you agree with us that yes, international stocks belong in a portfolio. Okay. So we're all in agreement there.

How do we actually take that and implement the portfolio? What percentage do we put towards international stocks? So let's talk a little bit about portfolio construction and starting to put the portfolio together. And let's start with what asset classes belong in a portfolio outside of U.S. stocks and international stocks.

What else do we need to include in a portfolio? Well, the first thing we want to do is we want to figure out what we want to do. Well, we want to invest in businesses. So...

The U.S. has some fantastic businesses, so we're going to invest in the U.S. economy. We're going to invest in the S&P 500. If we want to risk on, we're going to target those smaller companies, those undervalued companies. We can invest in U.S. economies that are smaller and less expensive. And then we're going to invest internationally as well. So we can invest in

developed economies, again, like Japan, Britain, France, etc. And then we can also invest in emerging economies, Brazil, Russia, India, China. Maybe a good way to kind of sum this all up is just to share with you guys the exact asset classes that we use for our own portfolios.

And to start our first asset class, like John kind of alluded to, is the U.S. broad market. So that could be a total stock fund. It could be an S&P 500 fund, but just a broad based U.S. stock market fund.

We'll also attach to that a U.S. large value fund. So again, going after that value premium and using a U.S. large value fund. We also use a U.S. small cap value fund to go after the smaller cap companies and try to increase the rate of return there. International broad market, same thing. There are these MSCI, IFA, broad market index funds you can use. International large value, international small value,

And then we have our emerging markets, which is an important piece of the portfolio. REITs, which you didn't mention, will include REITs in a portfolio, nominal US government bonds, and TIPS. And maybe I'll just back up and say, we didn't just throw a dart and come up with these asset classes. Every asset class in the portfolio means something.

Like it has a purpose for being in the portfolio. We just didn't decide, you know, let's just throw an extra couple of funds in there just because you want every single asset class, every single fund to serve a purpose. So we're extremely intentional about what asset classes we included. And then more importantly, what asset classes we've excluded. So some of the asset classes we've eliminated from our portfolios would include commodities,

hedge funds, gold, John's favorite, Bitcoin. And all cryptocurrencies. All cryptocurrencies. And then maybe one of the controversial ones is all other types of bonds except for US government bonds and tips. John actually wrote a research paper that was published in the Journal of Financial Planning,

last year. We'll link to that in the show notes, but wrote a paper on using government bonds versus corporate bonds or even other bond asset classes. So we don't include corporate bonds or any of these other bond asset classes in the portfolio. We simply use nominal US government bonds and tips. And maybe you want to explain a little bit more about that. Well, if you are someone who is not swinging for the fences...

then it makes sense to have some safety in your portfolio, some relatively safer investments. And the relatively safer investments are going to be United States Treasury bonds. Now, there's all sorts of other bonds out there, but they're not as safe. So if you're targeting a safe investment...

then you shouldn't choose the risky version of bonds. You should choose the safe version of bonds. So we make sure to keep our bonds safe and our stocks relatively risky. That is how we're going to ensure the best success. Now, let's talk about why we chose these particular asset classes. Why U.S. stocks? Why government tips? Why real estate? Well,

We want to pick the asset classes that are going to grow. When you invest in economies, they're going to grow. The U.S. economy is going to grow. International economy is going to grow. Real estate is going to grow.

It's important that the investments that we choose have potential for growth. The other thing is that we have to be able to access these investments at low cost. That's why a lot of the other investments get thrown away. You can't access a hedge fund at low cost. You can't access private equity at low cost. So those investments get the boot.

Next, they have to be diversified, right? We have to be able to spread our risk out. So we're not going to invest in just one U.S. company. We're going to invest in all U.S. companies. And again, that's why private equity gets the boot because all your money goes into just a handful of companies. Those are really good points. And I think I'll just add that you had mentioned we want our bond portfolio to be safe.

And we want to take our risk in stocks. So if we want a higher rate of return, then we'll just simply own fewer bonds and we'll add more stocks to the portfolio. US government bonds is one of that rare asset classes that typically moves in an opposite direction to stocks. So during really catastrophic times, think 2008, 2009, US stocks are just getting hammered.

U.S. government bonds are one of the few asset classes, maybe even the only asset class that actually performed well during that time period and held the portfolio together. Yeah, U.S. treasury bonds are just an amazing diversifier. If you want protection against the U.S. stock market going down, then...

then your best bet is holding treasuries. It's just what happens. Other types of bonds just aren't going to do that. So again, if you're holding bonds because you want to decrease your risk, well, then you should probably hold the bonds that will decrease your stock risk the most. And those are treasuries. The nice thing about US treasuries is you can get access to them very cheap. Hedge funds tell a great story about protecting you on the downside and protecting against these catastrophic events. But

Hedge funds in theory are great, and these people are really smart behind the scenes, but they're expensive. And cost alone just erodes any of the value that they might provide. So although hedge funds tell a really great story, if you really want to protect your portfolio and you're worried about a catastrophic time period,

I mean, US government bonds is kind of what you want to own. Yeah. And while hedge funds can protect you from some risk, they can't protect you from all the risks. I mean, long term capital management is just an amazing case study. A hedge fund run by geniuses, their portfolio was protected up to an eight standard deviation event. And basically what that means is just a

a very rare event of the market losing value. So they'd run all the numbers and they set themselves up. So if there was an eight standard deviation event, then everything would be fine. And then guess what happened? There was a 25 standard deviation event. So it doesn't really matter how smart the guys in the room are. You really want to put your portfolio together that makes sense for you and your goals. All right. We will move past all of that. If you have any questions, just let us know.

The second point we want to make about portfolio construction is how much should you allocate to each of these asset classes? We just named, I think, 10 or 12 different asset classes that belong in the portfolio. One of the things that we see a lot of when prospective clients share their investments with us in their statements is these really small percentages to these meaningless asset classes or even a meaningful asset class. They've got this 3% allocation to international stocks or...

a 5% allocation to REITs. Sometimes we'll see that two, two and a half percent allocation to gold or commodities. And when we include these asset classes in a portfolio, like we said, it's because they serve a purpose. And if they serve a purpose, then we want to put some meaningful dollars and meaningful allocation towards that asset class. So it actually does what it's supposed to do.

So we kind of have this rule of thumb that we've stolen from David Swenson, which is each asset class should make up no less than 10%. So if you're going to own emerging markets, make sure you own at least 10% in the portfolio. And I love that you brought that up because while we know a little bit about financial planning investing, we certainly don't know everything. So we don't try to reinvent the wheel. We like to...

stand on the shoulder of giants. And David Swenson has put together some amazing resources on investing. So we more or less took his model and applied it using a low cost strategy and tilting a little bit towards small in value to

eke out a little bit extra return. So to answer this question, how much should you allocate to each asset class? Again, like John said, I mean, David Swenson is just an amazing, amazing person. He's done so much research in this department. We thought we would just share with you his portfolio and his recommendation. Again, we've kind of taken his portfolio and stacked some things on top of it to what we think improve it just a little bit and tilt the odds further in our favor.

But David Swenson's 70-30 portfolio, 70% stocks, 30% bonds, this is his suggested allocation. You've got 15% in nominal US government bonds, 15% in tips. So there's your 30% fixed income allocation that aligns with John's research on government bonds versus corporate bonds. It's super simple. It's super low cost. It's easy to get access to. And it's actual protection for the portfolio.

For the stock portion, he's got 10% in emerging markets. So there's that magical 10% number. 15% in developed international stocks.

15% in REITs or real estate investment trusts. And these are publicly traded REITs. So stay away from the non-traded stuff that's out there that's really expensive. Run far away from that. And then lastly, he's got 30% in broad-based US stocks. So pretty simple allocation, fairly simple to implement. Is it perfect? No. Could you make it a little bit better? Sure, absolutely. But it's a great starting place to build a portfolio. Absolutely. And it's

all funds and asset classes that you can access at ultra low cost and be diversified. Whether you're at Fidelity or Schwab or TD or Vanguard, you can find a fund that represents all these asset classes and they're relatively liquid and they're all ultra low cost.

All right. So what is the best way to implement this portfolio? You understand what asset classes belong, what asset classes don't belong. You understand this concept around including international stocks and making sure we have a sizable weighting of at least 10% to the asset classes that we are including. So you

You've wrapped your head around all this. It all makes sense. Now you're like, how do I go and actually implement this? So we have a few ideas. The simple, simple, simple solution. And this is far from perfect. And there's so many ways to improve it. But but it's a pretty darn good place to start if you're new to investing or it's just daunting to you.

Vanguard has these life strategy funds. I think there's only four or five of them to choose from, but it's one mutual fund that invests in all these asset classes we just talked about. So you only have to buy one fund and it does the rest. You just pick the one that matches up with your level of risk that you want to target and you're done. It's low cost. It's diversified. It's simple. It's easy. It's

Is it perfect? No. There are plenty of things that we could pick at and improve upon, but it's an okay, good place to start. It's low cost and it's diversified and it's investing in the asset classes that make sense. If you want to take things up a notch, you're feeling more comfortable, maybe you've invested for a period of time and you kind of know the drill.

Vanguard has something called a three fund solution. And I actually think it's just these Bogle heads, these, these Vanguard investors, they don't work for Vanguard or anything. Just kind of came up with this idea of this three fund solution that you don't need a bunch of different asset classes and funds to have a successful portfolio. Again, in our opinion, is this perfect? No,

No, I think there's a lot of things you can still do to improve the portfolio and and eke out some extra return and put the odds in your favor. But it's a pretty good place to start. So this three fund solution is three mutual funds, a total U.S. stock fund, a total international stock fund and a total bond market fund. And that's it.

Pick your allocations to each of those three funds, and you're pretty well diversified. And to Taylor's point, it's not perfect because we're perfect. Well, I'd probably choose a treasury fund over the total bond fund because it's going to be more pure on average. It's going to offer you better average protection during U.S. market drawdowns than a total bond market fund would.

If you guys want to geek out on this, there is a new book out by famous, but well, maybe not so famous, but if you're a Bogle head, you know who he is by famous Bogle head, Taylor Larimore. And we'll link to his new book in the show notes, which is all about the three fund portfolio. If you're itching for something a little bit more than that, you understand this and you're like, you know, I still want to attack that large value, small value premium. I want to include some of these different asset classes like REITs and emerging markets and

You can, once again, take things up a notch and you can purchase an index fund for each of the asset classes that we've spoken about that should be in a portfolio. So go out there, you know, make sure you look at the costs associated with those index funds and keep the costs low. But if there's 12 asset classes that belong in a portfolio, you can find 12 index funds to fit each of those asset classes.

Our kind of rule of thumb with this is if you're doing this on your own, if you're investing through Vanguard, use Vanguard index funds. If you're investing through Fidelity, use Fidelity's index funds. If you're using Schwab, use Schwab's index funds. Don't go to Fidelity and use Schwab funds. That doesn't make any sense from a cost perspective.

So keep that in mind if this is an avenue that you want to pursue. And the reason why is because if you go over to Schwab and you buy the Vanguard funds, Schwab is going to charge you a fee. Now, if you go over to Vanguard and buy the Vanguard funds, Vanguard's not going to charge you a fee for using their own funds. Same thing for Fidelity. Fidelity is not going to charge you a fee for using their own funds. But good news, over at Vanguard, you can actually now buy everyone else's funds and

for no fee. But just because you can buy it through Vanguard doesn't guarantee that it's a low cost fund. So make sure you're aware of the expense ratio of the charge, what it costs to actually buy into that fund. And also look out for a little thing called the bid ask spread, which is another cost of investing. And if you want to learn about that little nuance in investing and how to mitigate that cost, we will link our blog post in the show notes. And if we just...

confused the hell out of you. And this just all sounds really daunting or maybe more importantly, you own a business, you're a parent, a full-time professional, or you just have other hobbies you want to pursue. And you're like, I just don't have the time for this. Like,

I could do my own taxes, but I'd rather spend time with my son and go travel with my family or work and build my business. I don't really want to spend time doing my taxes. So if you're in that camp and you want to hire a professional to help with this, we always recommend napfa.org.

So that's N as in Nancy, A, P as in Paul, F as in Frank, A as in apple.org, NAPFA. And they're an organization. It's a way to go and just put in your zip code and find fee-only financial planners in your area that can help you implement some of this stuff. On the flip side, if you really want to nerd out on this stuff,

then I would recommend picking up one or both of Swenson's books that can tell you all about investing. And we'll link those in the show notes. All right, to kind of wrap this all up, it's really, really fun to talk about investing and these asset classes and percentages and returns. And that's fun. That's the sexy conversation. I love it.

But as you know, John, investing or choosing the best investment strategy isn't nearly as important as your savings rate. Absolutely. So I like to say making more money and saving more money is way more important than worrying about the best investment portfolio. 12% to emerging markets versus 8% means 4%.

far less than maxing out that 401k and doing those backdoor Roth contributions and putting money in a taxable account and reducing your costs and just putting more money away, it's going to mean a heck of a lot more than picking the perfect mutual fund. I couldn't agree more. If someone came up to me and they said, John, I've got so many hours in a day, I can either spend those hours making more money so I can invest it in this one-stop shop, low cost Vanguard fund, or

Or I can spend that time reading every single book on investing at the expense of not being able to save as much money. I'd say go save more money. If you're in a low cost fund, you're 99% of the way there. And maybe a really good place to just end this episode is a quote that we've referenced before that we love, which is, you can save your way out of an investing mistake if

but you can't invest your way out of a savings mistake. Absolutely. So pay more attention, depends where you are in your journey, but pay more attention to saving more money, making more money. And again, there are resources out there to help you invest your money properly if you're at that stage. Yeah, just think about it. What's gonna be more valuable? If you can save an extra hundred or thousand dollars a month,

or if you can increase your investment return from 10% to 20%. But if you're only saving a dollar a month, it doesn't really matter if you have some amazing investment return. Your capital, the amount of money that you're saving is only going to get you so far. So thank you all for listening. As usual, we've had a ton of fun. We're really enjoying this. Thank you for all of your feedback and support so far. If you have questions, comments, any additional feedback,

You know you can always email us at podcast at staywealthysandiego.com. We read and respond to every email. We'd love for you guys to engage and become a part of the community. So thank you, and we'll see you in a couple weeks. Take it easy, guys.