Setting up and maintaining a well-diversified portfolio can be simple. That's what SMI's Just-the-Basics indexing strategy is all about.
Our executive editor Mark Biller joined host Rob West last week on Faith & Finance to explain why passively managed indexing is a good approach for many investors, especially in a workplace retirement plan.
Mark and Rob also answered questions from callers.
To listen, click the play button below. Scroll down to read the transcript.
Faith & Finance airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(For more radio appearances by members of the SMI team, visit our Resources page.)
Transcript
Rob West:
Does investing have to be complicated to be effective?
Hi, I'm Rob West. Today, Mark Biller joins us to explain SoundMind Investing's "Just-the-Basics" indexing strategy and why simplicity, diversification, and a little flexibility can go a long way.
And then it's onto your calls at 800-525-7000. That's 800-525-7000. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (opening music ends)
Mark Biller is the executive editor and senior portfolio manager at Sound Mind Investing, a long time and faithful underwriter of this program. For more than 30 years, Sound Mind Investing has helped Christians apply biblical wisdom to their investing decisions with practical guidance designed to help them steward their resources faithfully.
By the way, this is your day to call if you have questions specifically on the market, the economy, whatever your question is today, Mark Biller will stick around and answer those investing-related questions when you call 800-525-7000.
Mark, great to have you back, my friend.
Mark Biller:
Thanks, Rob. Great to be back.
Rob West:
Mark, for decades, SoundMind Investing has offered an indexing strategy called "Just the Basics." And as the name suggests, it's designed to keep things simple. So before we unpack the thinking behind it, give us the big picture. How does indexing work generally and what's SMI's spin on it?
Mark Biller:
Sure, Rob. So indexing is based on the idea that an investor is going to give up trying to beat the market, and instead they're just going to earn the market's return by using super low cost index funds. Now, over time, that approach has worked really well. And one of the big reasons is actively managed funds and strategies tend to have higher expenses, and it's been really hard for most active managers to overcome those higher costs over time.
Now, SMI's indexing strategy, as you mentioned, is called Just-the-Basics. We designed that to be our simplest strategy, the ultimate and simplicity. So it uses three stock index funds, and if your asset allocation calls for bonds, we add one bond index fund.
That's it. So just those four funds. Anybody can set it up in just a few minutes, and it only requires their attention once a year for a quick portfolio rebalance.
And for our members who use a lot of active strategies, Just-the-Basics really makes it easy for them to add an indexing element to their portfolio. And just like with other types of diversification, that can really help smooth out a portfolio's annual returns over time.
Rob West:
Just based on the calls I get here every day, Mark, I know there's a ton of listeners right now who are saying, "That's exactly what I need. I'm just getting started. I want something simple. I want to be able to do it myself." And this idea of Just-the-Basics, setting it up in minutes, and then look at it once a year is just a huge benefit.
Go ahead and tell where somebody can go to get access to that.
Mark Biller:
Yeah. So the easiest way is probably to our soundmindinvesting.org website. I'd also mention, Rob, that for probably the first 20 years that we had The Sound Mind Investing Handbook in publication, Just-the-Basics was the only strategy that we detailed in the handbook. Now, we've since added a couple of our active strategies as well, but you can still get all of that Just-the-Basics information out of the SMI Handbook if you'd prefer, as opposed to our website.
Rob West:
Excellent. Every call today on topic, we'll send you a copy of the SMI Handbook as our gift to you, 800-525-7000 with your investing questions.
Now, something in your recent article on this caught my attention. If the goal of Just-the-Basics is simplicity, why use three different stock funds? Why not just use maybe the total market index ETF and leave it at that?
Mark Biller:
Yeah, that's a great question, Rob. You're exactly right that using a single fund, like Vanguard's Total Stock Market Index Fund, would be even easier. The original reason we went with the three funds is actually because we're so old that Just-the-Basics predates Vanguard's Total Stock Market Index Fund by two years. So it didn't exist as an option when we first rolled out Just-the-Basics in 1990, but of course we could have switched if that was the only reason.
The main reason we stick with the three fund approach really has to do with people's retirement accounts. See, indexing is particularly well suited to 401(k)s and other types of retirement accounts where people often only have a limited number of fund choices available to them. And what we've thought about in this regard is that a lot of those investors in 401(k)s and other company retirement plans, they don't usually have access to a true total market index fund choice.
Now almost everybody has access to an S&P 500 index fund in their company plan. And so our concern has been that if we recommended just use the Total Market Index Fund, that a lot of those people would say, "Well, the closest thing I have is this S&P 500 index fund." And so they would end up with exposure to U.S. large companies, which is what the S&P 500 is, but they would be missing out on a lot of the rest of the U.S. market as well as foreign stocks and so forth.
So because of that, we have divided up Just-the-Basics to, yes, the biggest share goes into the S&P 500 index fund, but then we put in a smaller amount with small companies and an even smaller amount with foreign, and that gives them a much better diversified portfolio.
Rob West:
Yeah. Very helpful, Mark.
800-525-7000. We're going to continue to talk about this Just-the-Basics indexing strategy from soundmindinvesting.org — by the way, you can check out the article on this topic at soundmindinvesting.org. But we also are going to get to your questions for Mark Biller today on investing. Every call on this topic, we'll send you a copy of the incredible resource. It's so foundational. It's The Sound Mind Investing Handbook.
Let's go to Louisiana. Wilfred, how can we help?
Caller:
Hi. So I've listened to Dave talk against indexing funds. And on the other hand, I've listened to Andrew, who is considered the godfather of Indexed Universal Life. And I'm kind of confused because both men sound so knowledgeable and they sound like authorities in their field, yet they confuse me because they are so far apart, like Republicans and Democrats, they don't see eye to eye.
So I'm glad that we have the guest today, and I just want to know what path would he counsel me to take as far as this issue is concerned?
Mark Biller:
Yeah, that is such a good question, Wilfred. And you're right on as far as the not seeing eye to eye. That's been going on for 40 years in the investing world between the indexing camp and the active managed camp. And just like our political debates, there are a lot of good points made on each side and there's some kind of half-truths and stretched things that get thrown out there as well.
And I would just want to reassure you, Wilfred, any listeners out there who've been confused by this, that this does not need to be an either or kind of debate. It doesn't have to be one side is great and the other side is terrible. Both indexing and active strategies can have a place in a portfolio. In our SMI private client managed accounts, we could design that any way we want. We could use any type of investment we want.
And we've chosen after looking at this every day for the last 37 years to include both index funds and some actively managed strategies. So that just tells you that our conviction is that there's a role for both of these.
And I would definitely stress that for certain investing situations, like the person in a 401(k) who really only has a handful of good index fund options available to them, they shouldn't feel like they're getting a bad investment mix just because they're limited to those index funds, but nor should somebody who really likes a particular actively managed strategy feel like they're doing something dumb because they're hearing somebody from the indexing camp say active management is bad, it's dumb to pay the high expenses, all of those types of arguments.
There's a place for both in a decent portfolio and it's also fine if someone looks at both and says, "You know what? I'm just going to use one or the other." That's okay too. But again, Wilfred, to your main point, this doesn't need to be either or. This can be both/and.
Rob West:
Wilfred, is that helpful?
Caller:
Yes, it is. I think my follow up question, if you don't mind, what scenarios would be best to apply either or both strategies?
Mark Biller:
Yeah. For the typical individual investor doing it themselves, indexing is certainly the much easier path. It's easier to understand. It's easier to build a really solid portfolio with index funds. So if someone, especially just getting started, is wanting to set this up themselves, I would probably encourage them to go the indexing route. And that's why for years that was the only strategy we discussed specifically in our Sound Mind Investing Handbook. And then as someone gets a little more experienced, if they want to learn more about some of the active strategies, that's maybe the second step, whereas indexing would be a really easy first step.
Rob West:
Wilfred, thanks for your call today. Hang on the line. We'll get your information and send you a copy of The Sound Mind Investing Handbook as our gift to you. Thanks for that great question.
Let's go to Texas and go to John. John, go right ahead.
Caller:
Yes. My company recently went to a different financial way of managing my 401 and I have not paid attention to the financial markets or any of that for way too long. And basically the way that they've got it structured is they ask you questions like how much money do you have on hand? How much money do you make? What's your level of risk?
And basically the shortest story is they had almost 30% in bond market and I've always been told that you don't really want to have a lot in bonds because you might as well just stick the money in the bank. And the way that their system is set up, they couldn't get it any lower than 20% in the bond market. And it seems like that's too high. And I was wondering, hey, is that true that it's too high or have I been given bad information in the past?
And if that's the case, maybe I need to look for a different financial advisor that could tweak that a little bit better to get me a better return.
Rob West:
Yeah. John, what is your age?
Caller:
I'm 52.
Rob West:
Okay. All right. Let's do this. We're headed again up to a break here in just a second and I want to give Mark a chance to respond fully to this. So we'll do that right after the break. But you are talking about your 401(k), right? So I mean, you're limited to those options in the plan.
Caller:
Correct. They said that I could do other options outside.
Rob West:
I see. Okay. Yeah. Usually you're limited to the menu inside the plan — or through a brokerage window you could go out — but we'll get Mark to weigh in on that right after the break. Stay right there, John.
We'll be right back on Faith & Finance.
Rob West:
Before the break, we were talking to John in Texas. His company changed the way their 401(k) is invested. Based on what he's in, he's understanding the minimum he can put in bonds is 20%. He's wondering whether that's an effective strategy. He had long heard that you might as well put the bond allocation in cash because you're not going to do much more than that.
Mark, weigh in on John's question.
Mark Biller:
Yeah, there are a few different facets here. One is that it is very common in 401(k) plans for the primary options to be some variety of what are often called target-date funds or life-cycle funds — some kind of age-based product that takes the person's age and based on that, puts them in an asset allocation that is deemed appropriate for that age.
I'm not exactly sure that that's what's going on with John, but it's a similar situation either way, where they are looking at his 52 year old age and deciding that they're going to put 30% in bonds or a minimum of 20% in bonds.
Now, in my experience, it's been fairly unusual for that to be an absolute kind of restriction that there's just no way to get outside of that type of allocation. So I would press a little bit with human resources or if you can talk directly with the asset manager if there's not some way, whether through a brokerage window, like you were talking about before the break, Rob, or some other way to get that allocation exactly the way you want it.
But I would also say that this is a good example of kind of what we're talking about bigger picture today — the difference between indexing and active management, where an indexed approach, you tend to lock into a set allocation between stocks and bonds in this case, and then stick with that through thick and thin. That's a very indexing approach.
And I wish that maybe we were having this conversation next month because our October SMI cover article that we'll release in about two weeks is all about the active approach that SMI has taken to this exact problem of high static bond allocations in a portfolio and what we do instead of that, as we have over the last 10 to 12 years really been concerned about the upcoming bond bear market that we're now six years deep into. Bonds have had relatively flat returns for six years now if you're looking at the major U.S. bond index.
So that's a great case where, what I was saying earlier, sometimes it can really pay off to have a mix of indexing and static allocations like this and some active strategies that can be a little bit more flexible.
For John, I think at 52 years old, having 20 to 30% of a portfolio in bonds is probably pretty appropriate. I think the question you have to ask at that point in a career, typically with a decent amount saved up in that 401(k), is am I really okay with that whole balance falling by say 30% in a stock bear market? When you're young and your portfolio is $10,000 and you lose 30%, that $3,000 loss stings a little bit, but you can kind of get over it. When you get towards the end of your career and maybe you've got a million dollars in your 401(k) and it drops $300,000, the same 30%, that's a real psychological blow to come back from.
And so that's part of the reasoning behind having that minimum bond allocation, that 20% or 30% in bonds. And I would also say that while we've had six bad years of bond returns, that's been as bond yields have been going from one half of 1% on a 10-year Treasury bond up to 5% today. Well, with bond yields up at 5% today, that's a much better starting point for decent bond returns going forward.
So, I don't want to mislead anybody. I still don't love bonds here, but I'm a lot more constructive on bonds in a portfolio today than I was five or six years ago when they were coming off of the zero boundary and those rates were rising rapidly from there.
So hopefully that helps John a little bit.
Rob West:
Yeah, that's great. John, so that leads me to believe, and I would have agreed, I would have said the same thing, that you can stick right with that same 20 to 30% allocation and be just fine, but give us your thoughts.
Caller:
My biggest thought is I only have about $50,000 in my account right now, which to me is nothing. I might as well not have a retirement account. That's why I'm trying to get my money to do the most it can in the short amount of time that I have. So to me, I'm looking at, I have a very little amount and I'm trying to get it to have the maximum growth. And I do understand what you're saying about if you had a downturn in the market, losing 30% is going to be pretty detrimental. But at the same time, I am kind of in that first part. Like you said, if you only have $10,000, $3,000 isn't a whole lot. So that's why I'm really particular. If I could maybe even 100% into stocks or majority in, I don't know, I need help trying to do it.
Rob West:
So Mark, what do you say to someone who's willing to assume the higher risk, feels like they're playing catch up? Do you ever advise going 100% stocks if they understand the risk associated with it?
Mark Biller:
Yeah. I think at 52, you can reasonably look at that and say, "I can have this money invested for 20 years and not touch it." And if you are pretty confident that you can emotionally handle the ups and downs, the 30% drawdowns in stocks and that you are dead set on that type of a long-term investing path, then I think in that situation, if you want to amp up that risk and go higher stock, that's okay. You just need to be very honest with yourself about what it's like to see that drop 30% and have to make back almost 40% to get back even after that. So yeah, but I also, 10%, 20% in bonds can really smooth the ride. So it's a good thing to think through carefully.
Rob West:
Thanks for your call, John. We appreciate it. I know we've got your information. We'll get that book right out to you.
Mona is in Kentucky. Mona, go ahead with your question for Mark Biller.
Caller:
Good morning, gentlemen. I actually have two questions, if that's okay. And they might be interrelated. The first question is, I teach in higher education and so our 401(k) is with TIAA and I receive a match. I would have to re-look at my contract. It's either 3% or 5%, but currently I'm putting 15% of my paycheck because I'm also trying to play catch up from — up until 40, I didn't start investing in an employer plan, I should say. And so I am having 15% put in there now.
And I don't feel like those folks over there that provide the management side listen to me well. And so I wanted to figure out how I could have a little more command over my own investments in a 401(k) company like that.
And then. my second question is I would like to take extra money I do have and put it in stock, which I used to do on my own prior to having this retirement 401(k) with an employer because I was self-employed. But I was interested in DJT — Donald Trump stock, the Trump stock. But because he's such a volatile figure, I have a little bit of hesitation in putting my money into a company such as that. So any advice you could give me would be wonderful.
Rob West:
All right. Mark, go ahead.
Mark Biller:
Yeah. Mona, I think that for your first question, there are two possible paths to having more flexibility in your investing. One is to check into your plan and see if they offer any type of a brokerage window or some other way that would allow you to control the investments outside of the set list of investment options and choices within your plan. And if you can get that type of brokerage window, then you have really almost full flexibility to invest in anything you want to right from within the plan. So that would be the easiest if that's available.
If it's not available, a very simple workaround would be to contribute less to the 401(k) plan and take some of that money and start investing that in a traditional or Roth IRA, which would, you'd be saving the same amount of money, you'd just be distributing it differently. And the IRA money, you would have complete control to invest that however you wanted to using any strategy you wanted to. So those are two paths to get a little more flexibility.
As far as the specific Trump stock that you're talking about, this kind of gets back to what I was saying a little bit earlier in the program. With any individual stock — let's take Trump completely out of the picture — as soon as you start trying to pick individual stocks, your risk goes way up, as far as in comparison to buying well diversified ETFs and mutual funds.
So you need to understand that whether it's this Trump stock or any other individual stock, you've just cranked the difficulty level up to high in your investing by just going into the individual stock route. Now again, that doesn't mean it can't be done. Lots of people do it, but it does make it harder.
And so the easier play, the way to keep the difficulty down on easy for your investing plan is to use well diversified ETFs and mutual funds where you're getting exposure to lots of different companies. And if any one of them blows up or has a big problem, it's not going to cause your portfolio a big problem. That's the risk that you have, especially as you noted, like with the Trump stock. There are any number of things that could make that thing soar, but also any number of things that could make that plummet. So I would recommend sticking with well diversified funds and ETFs.
Rob West:
Is that helpful to you, Mona?
Caller:
It is. Thank you. I have a meeting with my annual meeting with one of the advisors because they provide an advisor with TIAA and I didn't know that I was looking for a brokerage window. So that is very helpful to know the terms so I can have a little bit more command.
And actually investing, it wasn't stocks, it was mutual funds. I invested in a lot of different mutual funds. So thank you for explaining the difference between an individual stock and what I was already doing. I appreciate you.
Rob West:
Yeah, very good. We appreciate that question, Mona.
Mark, as we put a bow on this today, take us full circle to where we started today and perhaps just make the case for somebody who's just getting started or wants to have a more simple strategy, why a Just-the-Basics could be what they're looking for.
Mark Biller:
Yeah. I mean, indexing is the simplest way to get a well-diversified portfolio put in place quickly and to have it be a robust strategy that you don't have to do a lot with. It's the ultimate and "set it and forget it" type of investing.
And the experience of the last few decades is that you are not necessarily sacrificing any performance for all of those benefits, which makes indexing a very compelling way to go, particularly great for limited retirement plan situations where you don't have a lot of options. You almost always have good index fund options. So indexing can be a really compelling piece or even the whole portfolio for someone, a great way to get started.
Rob West:
Very good. And Mark, obviously for those who want to delegate, want to be hands off and let an advisor do that for you, that's really where the Private Client group comes in at SMI?
Mark Biller:
Yeah, for sure. And even within Private Client, you're going to get a blend of indexing and active management. You're just having an advisor oversee that for you and be responsible for those allocations and changes. Yep.
Rob West:
All right. Very good. Mark, always appreciate your time, my friend. Thanks for being here.
Mark Biller:
Thanks, Rob. Appreciate it.
Rob West:
That's Mark Biller. He's executive editor and senior portfolio manager at Sound Mind Investing. You can learn more and check out this article we've been referencing today called Checking Up on Just-the-Basics: SMI Indexing at soundmindinvesting.org.
You can also become an SMI subscriber, and that way you'll have all the details on the Just-the-Basics strategy, including their other strategies, which may be a great solution for you if you would like to do it yourself.
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