Afford Anything - Why You Should “T-Bill and Chill” Instead of Using a Savings Account, with Cullen Roche

Episode Date: January 27, 2026

#684: Most people search for the perfect portfolio — the one allocation that works in every market, at every age, for every goal. This interview starts by explaining why that portfolio does not exist. We talk with Cullen Roche, founder and chief investment officer of Discipline Funds, about why copying someone else’s portfolio can backfire, and why portfolio design works better when it starts with your own constraints instead of rules of thumb. We walk through real portfolio models. The conversation begins with the classic 60-40 portfolio. You hear where it came from, how it held up during the Great Depression, and why it became so widely adopted. We also talk about its trade-offs — why it feels boring in strong markets and comforting in crashes, and how that emotional balance plays a role in investor behavior. Next, we shift to a Buffett-style portfolio. You hear why the takeaway is less about stock picking and more about structure. The discussion covers why Buffett keeps a small allocation to cash-like assets, how that “dry powder” functions during downturns, and why psychological stability matters as much as returns. The episode then turns to cash management. We talk about high-yield savings accounts, money market funds and Treasury bills. You hear how many cash products are built on T-bills, how banks capture part of the yield, and when managing cash directly may make sense. The concept of “T-bill and chill” comes up — along with when the extra effort may or may not be worth it. Finally, the conversation zooms out to time horizons. We discuss why income from a job functions like a bond allocation, how that changes risk capacity when you are younger, and why the early years of retirement carry the most danger. The episode closes by explaining sequence-of-returns risk and why portfolios need to work not just on paper, but in moments of fear. Resource: Cullin's website and newsletter: https://disciplinefunds.com Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (00:00) Intro  (02:00) No perfect portfolio (03:34) 60-40 portfolio starts (06:38) 60-40 keeps calm (08:00) Buffett portfolio basics (12:11) Stocks vs cash fear (13:34) T-Bill and Chill (18:22) TreasuryDirect is clunky (23:42) Income as bond proxy (25:33) Bond tent buffer (29:12) Sequence risk explained (31:42) Early retirement mindset (32:36) COVID panic calls (42:49) Three-fund portfolio basics (58:41) Get-rich-quick trap (1:18:21) Risk parity and All-Weather Share this episode with a friend, colleagues, your preferred financial advisor: https://affordanything.com/episode684 Learn more about your ad choices. Visit podcastchoices.com/adchoices

A lot of people think that they're quote-unquote bad at investing because they don't know the right strategy. So people are looking for more information about how to be a better investor. The real reason that you're quote-unquote bad at it is actually quite a bit simpler. It might be that you're using the wrong portfolio for your life. The portfolio that you have doesn't adequately match the life that you have. In today's episode, we're going to talk about how to solve that. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. The show covers five pillars. Financial psychology, increasing your income,

investing, real estate and entrepreneurship. It's double-eye fire. Today's episode is about that second letter I investing. Our guest today is Cullen Roche. Cullen is the founder and chief investment officer of disciplined funds, which is a low-fee advisory firm that focuses on building portfolios that are designed around people's goals, people's time horizons. Early in his career, Colin worked at Merrill Lynch, where he was part of a team that managed a bunch of client assets, and he eventually left that and went on to build the Orcom Financial Group, which was an independent advisory. He serves on the board of ETF trustees at Cambria Investments, and he's the author of two books. One is called Pragmatic Capitalism, which explains how markets and money and investing work,

and his latest book is called Your Perfect Portfolio. It's all about how to build a more personalized investment portfolio. Today's interview is part one of a two-part series. Our next episode will also be Colin Roche. Our next episode will be a continuation of the ideas that we are going to lay down today. With that said, to talk about how to build a better investment portfolio, here is Cullen Roche. Hi, Colin. Hey, Paula. So you're a financial advisor. You have constructed a whole bunch of different model portfolios for your clients, but then also for the rest of us. And that's what you're going to share today. Tell me why isn't there just one perfect portfolio for everyone? Yeah, it's funny.

You know, the whole world of finance is constructed a lot around sales and I think promoting certain strategies for people. And it's interesting having worked in the field as a practitioner for as long as I have because over the course of my career, I realized there is no perfect portfolio for any single individual because everybody's different. Everybody has different needs. Everybody has different expenses. I think everybody needs to find a portfolio that works for them. And so so much of the salesmanship in the industry is built around pushing strategies on people and trying to convince them that, hey, you should buy this fund or buy this strategy. That's not the way it works in real life. It's not the way people should approach it. And so the

analogy I use is finding your spouse over the course of your life, that everyone's unique, everyone's different, and what works for somebody else won't necessarily work for you. And you have to approach portfolio construction and finding your perfect portfolio in this very customized and niche sort of way where you have to find something that works for you. So I want to go through a whole bunch of the different model portfolios because what I love about the fact that you've laid out so many models is that this is practical, it's hands on, it's tactical. On this show, we talk a lot about theory. This is something that people can implement. So let's start with the 6040 portfolio, the golden portfolio. Tell us about that.

This is arguably the most famous portfolio in history. And it was really interesting, like actually thinking about this, I go through a lot of the history of the portfolios to kind of give people background because a lot of the strategies in the book are they're famous because somebody famous created them or they have some unique origin story. And the funny thing about 6040 is that this is arguably the most. famous portfolio in the world, probably a portfolio that the vast majority of people out there are using some sort of version that's kind of like 6040. And it has no origin story, which is really

weird to think about, that this super famous portfolio doesn't have an origin story. And I think the origin story was essentially like the Great Depression and that this portfolio manager named Walter Morgan creates a fund called the Wellington Fund, which famously became part of Vanguard and still actually exists and was later run by. John Bogle, who everyone obviously knows. But the interesting thing about Walter Morgan was that he creates the 60-40 because he had previously been burned before the Great Depression. And so he creates what he called this sort of like balanced index fund.

And it's roughly a 60-40 stock bomb portfolio. And he launches it like right before the Depression. The fund gets crushed and performs really poorly during the Depression, but it performed way better than everything else. Because back then, the vast majority of investors were basically. 100% stocks or approaching the, you know, the markets through the equity markets and this diversification that Walter Morgan implements in 6040 on a relative basis performs really well. So the fund falls something like 40% during the Depression, but everything else was down like 80%.

It scars me, it hurts me to look at when you see that chart of just four years of straight declines going down to like 85% during the Depression. It's like unimaginable to think through living that. But it's an interesting strategy because it goes through all these different trials and tribulations over the course of the next, you know, whatever 100 years. It goes through World War II and it goes through the traumatic inflation of the 1970s and then has this like epic run in the last 40 years that kind of has made it the most famous portfolio. And it stood the test of time. That's like it's relatively simple. And yet with all this simplicity inside of it, it has, been arguably like one of the most robust portfolios in existence.

A lot of people would say that 40% bond allocation is too conservative. Yeah. Particularly for younger people, because there's that rule of thumb of your age minus 10 when it comes to your bond allocation. I like to think of things in time horizons. There's sort of these simple rules of thumb of, you know, your age and bonds or, you know, age minus 10, something like that. And it's true.

I think that you have to consider the time. horizon over which a portfolio is serving specific needs for you. And I think you're right. I think that 6040 in a lot of ways, it could be too conservative because it's the way I think of it, in totality, it doesn't necessarily have a long enough time horizon to serve the needs of people who are allocated to it. But again, it's tricky because part of the beauty of 6040 is that it's behaviorally robust. That 40% piece will keep you calm when that 60% is, you're piece is making you really scared. And that's kind of the kicker with 6040 is that it's balanced in a way that it really is there to help you sort of ride through all of the ups and downs of the market

and help keep you a little more stable, I think, through bull markets and bear markets, because it's never going to be the perfect portfolio because it's never going to be performing perfectly or better than everything else. It kind of just, when the stock market goes down a lot, it'll do better than, you know, the broad market. And when the stock market's booming, it'll do worse. And that's kind of like part of it. My buddy Brian Portnoy says that diversification is learning to hate some part of your portfolio all the time. And that's super true with 6040 because the 40% piece, it's going to drive you crazy at times when you see the stock market booming.

And then when the 60% piece goes down a lot, you'll look at the 40% piece and you'll say, thank God I have that. Let's switch gears then. Let's talk about a totally different portfolio model, the Buffett portfolio. Yeah, Buffett's interesting because it's a minor regret of mine in the book is that I don't endorse stock picking at all in the book. And I don't really show people how to do stock picking. But part of that is that Buffett himself, the most famous stock picker in the world, tells people don't pick stocks. Yeah, exactly. You should be an indexer, which is sort of interesting to think about. And he says, you know, just go buy a low-cost, and P500 index or something like that. The most interesting takeaway from the Buffett portfolio was not so much the actual

implementation of the portfolio and the way he actually allocates or picks stocks. To me, the more interesting thing was, again, kind of the history behind Buffett and the way that he creates a process and a structure around his portfolio where he builds something that at the time especially was really unique. like Buffett weirdly is, you know, someone who, when his career started, he was like an activist hedge fund manager, essentially. And he was picking stocks in a taking really, really concentrated positions, taking, you know, 50% positions in a, you know, for his whole partnership, which is not what Buffett's really known for now. Buffett's known for having this like diversified equity portfolio to some degree.

Even though he's a stock picker, he's still diversified. But that's not what early Buffett was like. Buffett was running, you know, a hedge fund that was essentially an activist entity. But then the most important thing that Buffett does is Buffett buys insurance companies later on. And this is really fascinating because Buffett is essentially buying insurance companies and insurance companies earn premiums from their clients, basically. And those premiums operate as what he thought of as like, sort of like interest-free loans. and that premium float from the insurance is then leveraging and Buffett's taking the cash flow from these entities and he's reinvesting it into public equities, which is a just a super innovative and different way to use the cash flows from a corporation. So Buffett's whole structure was in a lot of ways more about the, I think, the process and the structure of the way he built Berkshire.

and originally Buffett partners and built this entity that was super unique, the way that it was earning these cash flows and earning sort of a leverage. And then he's doing this very innovative thing where he's then reinvesting it in the public equity markets. So then if a person listening wanted to construct a Buffett portfolio or a Buffett-inspired portfolio, can you describe what that would look like? Well, Buffett basically runs a 90-10 stock T-bill sort of portfolio. And his is, you know, the 90% piece is stock picking. obviously. But Buffett would say go out and buy something like VLO, like the S&P 500, Vanguard 500 index,

with 90%, and then hold a 10% slug of something like treasury bills. And treasury bills are ultra-safe, cash-like instruments that they earn, you know, a little bit of interest. And that gives Buffett, you know, a little bit of dry powder. So Buffett's famous for sort of jumping on bare markets and, you know, being greedy when other people are fearful. And that 10% slug of T-bills gives him sort of this dry powder that he can invest in the market, you know, big opportunities and things like that. But it also, I think, it helps keep him somewhat calm. That kind of similar to the 6040, that 10% piece of cash equivalent is basically keeping him calm during times where he knows that if the stock market falls a lot, he's got this, you know,

safe asset that he can reinvest in the market at times. Yeah. And that dry powder is important for having the cash on hand to be able to invest during downturns because so much of the time, I mean, if you've got 100% stock allocation, which we'll talk about later, the downside of that is that when things fall, don't have cash on hand to be able to make bigger contributions. Yeah. Unless you think of your income as functionally your bond allocation, but we're getting ahead of ourselves a bit. Your risk profile is, to a large degree, a function of the time horizons over which you have

certain assets allocated. And when people sell stocks in a bare market, what they're really doing is they're buying cash. Because psychologically, they realize during a big bare market, they say, hey, I'm scared as hell. And a big part of that is that I've got this, what I would call, I would call stocks like long duration instruments. They're very long term by design, basically. The corporations in the underlying, or they're earning their cash flows over very long time horizons, corporations on average are just their long-term entities. So the right way to think of the stock market is to think of the stock market in a similar fashion, that these are real businesses, that they have very long time horizons over which they exist. And when people get scared,

I think they realize that, hey, I own an instrument that is in the short term very volatile, very risky. And the security of cash alleviates that. It's the offset that gives you, you know, a sense security. And so it's interesting to think about all of this stuff over different time horizons, because what people are doing when they sell stocks in a bare market is they're buying a short-term instrument that gives them security in exchange for a long-term instrument that is very, very risky. And on the topic of short-term instruments, that really brings us to T-Bill and Chill. Yeah. Can you tell us about that? Yeah, so T-Bill and Chill is one of the most interesting portfolios to write about, actually,

because a lot of people are in love with things like high-yield savings accounts and CDs, and I'm sort of militantly against things like this, because the way that I view a high-yield savings account or even the CD or even some money market funds out there, essentially what most of these instruments are is they're comprised of treasury bills, and treasury bills are U.S. government issued super short-term notes. They're cash equivalents. The interesting thing about a money market fund or a high-yield savings account,

is that typically what the entity that issues that instrument is doing is they're going and they're buying treasury bills. And that's the underlying income stream that they're utilizing in their portfolio. And then they're giving you a little cut of the action. And they call it a high yield savings account or something like that. And the irony in that is that typically a high yield savings account is much lower yielding than the treasury bills are. You know, the way I think of it is even if it's, say, 0.1 or 0.2 percent lower than the, the treasury bill. bills themselves, well, you're kind of getting hosed on that. It's a double whammy, too, because the Treasury bills in most states are tax advantaged. And so the bank is buying the

treasury bills. They're getting the tax advantage. They're getting the full 100% yield from the government there. They're giving you a little cut of the action, and they're not passing on the tax savings to you. And so things like high yield savings accounts and money market funds in a lot ways, they end up being one of the highest cost instruments in the entire industry because they're charging you functionally something like half a percent or 1 percent, and they're keeping the full yield from the Treasury bill itself. And so I always tell people, when you're managing a cash equivalent type of account, you should just go and buy the Treasury bills yourself, T bill and chill and implement the portfolio yourself where you're actually getting all the

aggregate benefits of the instrument and you're cutting out all these other middlemen. And it's an interesting one too because I always tell people the stock market is where you should be really hands off. Your cash is where you should be more hands on. And so it's this short-term instrument that weirdly I think people think of it in a lot of ways the opposite. They think they should be really hands on with their stocks and really hands off with their cash.

And I think it's kind of the opposite where people should actually have T-bills that they're, you know, they're reinvesting and managing on their own. and building a T-bill ladder or something like that over time where they're taking the full benefit of the cash. But isn't that cumbersome? I mean, to build a T-bill ladder and to actually have to do the work of maintaining that T-bill ladder. Yeah, it is. There are easy ways to do it, too. I mean, you can buy ETFs that, you know, say there's a million ETFs now,

and a lot of them are really interesting and cool zero-to-three-month T-bill sort of ETFs. And there's some more intricate ones. the box ETF, they're building box spreads inside of an ETF, and they're turning T-bill income, which gets taxed as ordinary income, into long-term capital gains. And so it kind of like leverages the tax effect of it. But these are all instruments that in an ETF wrapper, they're all very hands-off. You can just buy and hold them basically like you would with the, you know, the S&P 500 ETF or something like that. I'm more hands-on, but this is my day job to be hands-on with people's money. And so, you know, as a financial advisor, I'm rolling, you know,

millions of dollars of T bills almost every day. That's for me, it's just part of like my, my job. And you're right. For I think the average person, it probably is, I think, a little bit intimidating because buying the individual bonds is usually sort of a clunky process inside of like, you know, if you're working with Schwab or Fidelity or whoever it is, their bond desks are sort of and their bond trading operations are sort of clunky and whatnot. But there's very easy ways to do it. Hey, you could just buy this ETF or this ETF and just buy and hold it. And it's functionally doing the same sort of thing. And they're charging you, you know, a small fee typically along the way, but it's still better than buying a high yield savings account or a CD. For the average person,

if they did want to build out a T bill ladder, and I guess we should probably pause here and define what a T bill ladder is. But for a person who wanted to go that route, I mean, Should they buy the ETF or should they just go to Treasury Direct and do it directly? Because it almost seems to me like if you're not going to go the high yield savings account route and you are going to be a little bit more hands on, the ETF seems like almost the worst of both worlds in a sense because you're hands on just enough, but you're not getting the full benefit that you would from Treasury Direct. Talking about clunky websites, Treasury Direct is like the clunky as I usually tell people don't open a Treasury Direct account because you'll probably forget the password within a year or you'll just get so overburdened with trying to navigate the website and rolling the T-bills yourself that you just, you know, we'll stop doing it at some point. You should try to make your portfolio process as simple, as simple as you can so that you're not overburdened. You don't feel like you have like a second job managing money all the time. not having a lot of accounts as part of that.

And so I typically tell people, like try to use one custodian, don't have accounts at, you know, Treasury Direct and Schwab and Fidelity, and then you've got probably like a 401K, like a different custodian, and it can all get very confusing and disorganized very easily, very quickly.

With T-bills, to go back to your point about the ladders, just to explain to the listeners, a ladder basically means that you're building something that looks like a ladder, basically, where the rungs are attached to certain time horizons. So let's say you were building just a really simple three-rung, 12-month T-bill ladder. You might just buy three, six, and 12-month T-bills.

And what happens is that every three-month, then, you have a T-bill that's maturing. And as you climb the ladder there, the rungs are maturing, and you're reinvesting into the long end of the ladder. So the ladder always stays the same size, basically. And you've got these three rungs that you're just constantly reinvesting. And so I like to say, you know, hey, if you can't look at your money once every three months in place one trade,

you probably shouldn't be two hands on with your money in the first place. You know, so that's where the benefit of owning an ETF that kind of simplifies a lot of this is beneficial because it takes a little bit of that legwork out of having to feel like you have this second job managing the money. But at the same time, it's simple enough that once you get used to it, it's very easy to implement and maintain and, you know, sustainably in the long run where you don't feel overburdened by managing the latter. At what level of savings is this worth it? I'm thinking about how there are some people listening to this who are like, all right,

I've got $5,000 in my savings account. At that level, you might as well put it in a high-yield savings account because it's just too small of an amount to really matter. You know, the juice isn't worth the squeeze. Yeah. But there are other people listening to this who are like, you know what, I'm saving up to take a sabbatical for a year and I want to have $40,000 set aside or 50 or 60 or however much. Where is that crossover point at which the juice is worth the squeeze? Yeah, that's a great question.

And it's one that is really personalized. I don't know if there's even a simple rule of thumb. I mean, the math on it depends. I mean, because, you know, five years ago when interest rates were zero, the juice is never worth the squeeze, you know? There's nothing to do really with cash equivalence because there's no yield to earn. Whereas today, it's very, very different. Like, I've been a big advocate of like a T-Bill and Chill portfolio for people who are especially more conservative, or, you know, if you're saving money for, you know, a sabbatical or a house down payment,

something like that, I mean, the T-Bill and chill portion is perfect for that sort of a portfolio. But again, you've got to run the math on it. I mean, if you've got $100,000 that's sitting in Bank of America, Bank of America is taking the cash and they're buying T-bills. So you might as well take that, move it to your brokerage account, and you're earning, even today, you're earning, basically getting a free $3,500 from the U.S. government. You've got to run the math and there's that whole question of like, is it worth moving my money all over the place and trying to optimize it? I have, there are people I know who they will not let cash sit in an account for even 24 hours. I mean, they are so hands on that it's almost maniacal.

And I'm not like that. So the answer is it depends. It's, you know, again, you've got to find what works for you and figure out, you know, is it worth it to me to take $10,000 and invest it into treasury bills just so I can earn an extra $350 a year? You know, a lot of people would say, ah, you know, screw it. I'd rather just leave the money in Bank of America and let Bank of America earn the money. And, you know, I just don't care enough to have to actually manage it and shuffle it around.

So it depends. Yeah, yeah. I can also see if a person is in a job where putting in extra hours or extra effort isn't going to yield them any type of higher income, then it might be more worth their time versus somebody who has more of a direct relationship between their effort and their compensation, those extra hours spent at work might be. might be more meaningful. Yeah, totally. Your human capital is really the thing that's driving all of this. It's driving your ability to earn an income to save money. And then you're able to take some of that savings.

And then you're able to start doing interesting things with it, like allocating. That's when things get really fun and interesting is when you've got enough savings that then you can start thinking about, oh, you know, should I own a T-Bill and Chill portfolio or should I own a Buffett portfolio or, you know, whatever it might be. But optimizing your human capital and really leveraging your skill set. to optimize your income is the driver of like this whole thing. Speaking of which, you compare income to a bond allocation. Tell us about that framework.

Yeah. I like to emphasize that it's one of the things. I work with a lot of retirees. And one of the really hard things about retirement is that people lose their income or their income changes. They, they downgrade basically from what was their income to like Social Security. And so it operates as like this huge pay cut, basically. And that's psychologically really taxing.

And really, it's hard for people to adjust to that change because the income, you know, we call in the bond markets, we call fixed income. And your income from your job is literally like a fixed income. You kind of know I'm getting, you know, say, $2,000 every week. And I know that that means that after taxes, I can afford to buy X, Y, Z things every two weeks. And so you've got this structure in your mind about, okay, this is how much I I can afford because I've got this income. So people's jobs are weirdly, they're like an asset that operates almost like a bond

allocation in their portfolio. And it's one reason why I like to emphasize, especially for very young people, that you can be really aggressive because to a large degree, you've got this embedded fixed income allocation in your portfolio. And you may not think of it as a bond allocation. But functionally speaking, you've got an income stream coming from an asset that you have, that is your human capital. basically, and that's allowing you to have a certain degree of sort of predictability that allows

you to take different types of risks. And so you can then be very aggressive in the stock market because you've got this sort of like synthetic bond allocation through your job. Then that all changes as you get older. As your time horizon actually starts to close down when you get to retirement, the math on all of this changes in that one day, you know, you turn 65 and all of a sudden it's just like poof, the bond allocation is gone. And so one of the strategies I talk about later is Michael Kitsis's bond tent strategy, which is a, it's sort of a popular retirement planning strategy where when people get close to or in retirement, they'll actually increase their bond allocation much more so than a rule

like the age and bonds rule or age minus 10, whatever it might be. And they're actually doing something that is the opposite. They're actually increasing their bond allocation significantly and building sort of a tent, right over those sort of the danger zone around retirement. And the thinking behind that, basically, is that you need to boost your fixed income to create like a behavioral buffer so you can more easily navigate those sort of trying years where you're adjusting to this big income decline, basically.

What strikes me about the 10th strategy is that it's a way to manage sequence of returns risk, you know, and then as you go deeper into retirement, you can actually be more aggressive. Yeah, it's kind of counterintuitive. And it's very different than the, you know, the age and bonds rule because what's actually happening inside of the bond tent is that the, you know, and so for people who are watching it, the allocation will literally go, the bond allocation goes way up. And then the bond allocation can go way down because this is the other thing that I think a lot of people, they worry in retirement that the danger zone they think of is running out of money. And that's actually not usually, or at least in my experience, hasn't really been the danger zone. The danger zone is actually the early, years of retirement. That's when people are their most behaviorally at risk. And it's the most difficult time horizon also because when you retire at 65, you might still have, who knows, 20, 30, maybe even 40 years left of funding that you need to live off of. And so your time horizon might still be

really long. And so behaviorally, that's just a really taxing experience to go through for a lot of people because there's so much uncertainty around it. And the bond tent, what has, happens is you build up that big bond allocation. It creates a lot of certainty for you around the age of 65. But then weirdly, as you get older, your whole time horizon changes. Your time horizon gets shorter, but in a lot of ways, it changes because now you have to start thinking about all sorts of different estate planning needs and whatnot. And your portfolio for a lot of people, it actually becomes maybe even longer in time horizon because now you have to start thinking about things like multi-generational aspects. Like I work with a lot of retirees who,

They have IRAs that they're never going to touch and they're going to turn into inherited IRAs down the line. And when you start thinking in that sort of multi-generational context, well, it's beneficial to be more aggressive and cut down that bond allocation as you get closer to death, basically, because the money's not going to be yours. And it might be your kids. And the kids are going to inherit it. And who knows what their time horizon is. Their time horizon, you know, if your kids are 30 years old when you're retiring, well, their time horizon. might be, who knows, it might be 60 years. And so they're the beneficiaries of this. And one of the best things that you could do for your kids is be really aggressive and own the assets that are

likely to earn higher returns because their time horizon is so long. Right. And even without that legacy planning component, I mean, once you're out of the sequence of returns danger zone, it seems, and correct me if I'm wrong, once that danger zone has passed, you can just, even if your goal is to die with zero and you're only concerned about your own life, you still could be more aggressive, even though your time horizon is shorter, because that specific sequence of returns date is no, you're totally right. Then that's the perfect way to think of it is that once you've reduced or mitigated that sequence of returns risk, and so for listeners who don't know what sequence of returns risk is it's the risk that when you retire or you have a

a need that you're drawing on your portfolio that the portfolio might go down a lot. And this creates sequence risk, meaning that the path of your returns could be unduly damaged by a big bear market. Basically, it's the risk that you retire in 2008. Exactly. And like the trauma of 2008 is that somebody who retires that year, you know, let's say they've got a million bucks and they're 100% equities and they think they're supposed to be very aggressive. And by the time Lehman Brothers goes bankrupt, that year, the account is down to $600,000. And if you're living off of the portfolio, and let's just say you had like a simple 4% withdrawal rate, well, all of a sudden, you started with a 4% withdrawal rate. But by the time you get to October of 2008, your withdrawal rate is what? It's like

7 or 8% or something. To get that same amount of money. To get the same amount of money. And so you're drawing down more of your portfolio. You've got a far lower balance. And all of a sudden, you know, by the end of 2008, that retiree is looking at things and being like, holy cow, I might have to go back to work or something. Yeah. You know, or worse, they're thinking, oh, my God, I need to sell some of my stocks to create more certainty in my portfolio. And that's like the worst possible outcome because then they're selling into the bare market

and they're changing their risk profile completely because they're scared and they're trying to create certainty. And so that sequence risk in retirement as you get deeper into retirement, The sequence risk starts to decline, and you're able to more predictably navigate retirement as you get deeper into retirement because you should have more certainty around your expenses and your ability to fund everything. There are many people who are listening to this who are planning on an early retirement, and that could be 55, 50, maybe even 45.

How does that change the approach? I think the right approach is typically someone who has to be really, I talk about behavioral robustness a lot. One of Buffett's superpowers was that he just is incredibly disciplined. He has the behavioral robustness of like nobody else out there. And he's got this ability to ride through big, bare markets and not get worried. He never sells into downturns. For people who are thinking about early retirement, you've really got to have that sort of a mindset because you're going to have to navigate a really long time horizon and you're going to have to go through the inevitability of there's going to be big bare markets, there's going to be

weird things that happen. And it always feels different this time in a bare market because the narrative around what's going on typically feels very accurate. Like, you know, COVID, everybody was scared because we'd never been through anything like that. And so the stock market is down 20, 30 percent, and everyone's looking at it. And I mean, even Warren Buffett is saying at the time, ooh, this actually is different this time. And Buffett actually wasn't buying during COVID. He didn't get scared during COVID and sell. But Buffett and Bill Gates, and I remember all these sort of famous people, they were like,

wow, this is really unheard of. This hasn't happened. You know, there's never been a global pandemic quite like this. And we don't know how it's going to play out. And so when you're in the throes of it, you know, it's funny being a financial advisor because I used to send these like phony questionnaires to people where I would say like, you know, what do you do in a bare market? do you, you know, the stock market's down 30, 40 percent. How do you respond? And everybody answers

exactly the same. Everybody says, oh, I won't get scared. I'm going to buy more. I'm going to stay the course. But then when you get into it and you're actually in COVID, you know, I'm fielding phone calls from all these same people. And they're like, Cullen, this is scary as hell. What do we do now? Should we sell everything? Because it feels so accurate in the moment. There's a real reason why the market is down and why you're scared. And so the mentality inside of that environment is not, oh, I should buy more. It's, holy crap, what if this is something like the Great Depression where, you know, talking about that 80% decline chart, when people are down 40% they're thinking, well, wait a minute, what if this is going to go down to the 80% point at some point? And that's how everybody thinks in a bare market. So it's interesting

thinking about the psychology. And you've got to be, man, you've got to, if you're in the fire movement and someone who is going to try to retire early, you've got to have a really, really robust behavioral profile. Right. Because you don't have the bond allocation of income. Yeah. You don't have the dry powder. Most people, the dry powder to make new contributions comes from their job.

Yeah. And so when you hit a downturn, you don't have a job to be able to make those new contributions. Yeah. So a downturn really is all downside. Uh-huh. And with that long time horizon, you should probably. be taking probably a decent amount of risk because you need the high return yielding instruments, like from the stock market, to actually fund your needs over the long term. And so you've got to go

into it knowing that. And I think that's part of it is, you know, you've got to understand what you own. And if you're someone who's retiring at 55, let's say, and let's say you've got 40 years of retirement funding left, well, you've got to go into that probably with a somewhat aggressive portfolio. And you've got to know that, okay, I really cannot allow myself to get scared when the stock market goes down a lot because I need to own these instruments that are higher earning types of return instruments that are going to be in the short term also really frightening at times. Right around New Year's, I watched the master class that was taught by Chris Voss on negotiation. Chris Voss is a former FBI negotiator and in his class, he talks about tactical

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The Farmer Wellness Initiative is here to help. Call 1-866-267-625 to access-free, unlimited counseling. Funded in part by the governments of Canada and Ontario under the Sustainable Canadian Agricultural Partnership, a five-year federal provincial territorial initiative. Let's talk about some other model portfolios. Tell me about the Bernstein portfolio. Yeah, so this is Bill Bernstein's no-brainer,

and Bill is a famous Boglehead, and Bill was a neurologist who is a literal genius, and he makes a bunch of money working as a neurologist and gets interested in managing his own money and sort of realizes, oh, I think I'm getting hosed by my financial advisor or something like that, and he gets so into it that he starts building his own sorts of portfolios. And Bill's no-brainer portfolio is sort of a, it's like a more elaborate

Boglehead type of portfolio where he's built something that goes beyond like the Boglehead three fund portfolio and kind of builds components, utilizing a little bit of academic theory and things like factor tilting, where he's buying, you know, say tilting to certain types of either value or growth or whatever it might be. But the other thing that Bill is a big advocate of is tips ladders. Tips ladders are Treasury inflation protected securities. And the reason that Bill loves these things is that they're bond ladders that are perfectly

inflation protected for retirement planning purposes primarily. And so Bill likes to build a tips ladder that kind of front loads a protective component for income. And he typically tries to build it so that it's matched kind of the like certain expenses and you've got a tips ladder then that is serving as an inflation protected bond component of the portfolio. But then he's got this equity component that is customized around a very simple sort of indexing strategy that's functionally just a more elaborate sort of Boglehead approach. It's interesting comparing and contrasting Bill Bernstein with someone

like Taylor Leromore, who Taylor Leromor was the creator of the Boglehead three fund portfolio. And the Boglehead three fund portfolio also has sort of an interesting origin story because Taylor creates it without any experience in the financial services industry. Because again, he thinks that he's getting hosed by his financial advisor. And Taylor, interestingly, he was married to a beautiful model who was like the highest earning model in Miami back in, you know, gosh, I guess this was the 40s or 50s. and he comes into so much money through her income that he starts getting very hands-on with it and he reaches out to a guy named John Bogle. They correspond and Taylor learned so much from Bogle over the years

that not only does he end up implementing what he kind of distills down into like the purest form of Bogleism, but he becomes one of Bogle's greatest friends throughout his life. So he distills this down though to these three very simple funds where, you know, you could almost argue it's probably the simplest portfolio. And in certain ways, I'm minorly critical of the three fund portfolio because you could argue, I think that it's almost like too simple. Yeah. But that's what Bill kind of builds on is Bill takes, you know, kind of the same components of a Boglehead three fund portfolio and the, all the basic principles of being diversified

and maintaining low cost indexing types of strategies and being really cost aware. But then Bill kind of builds on this and allows you to sort of customize it and do things that are a little bit more elaborate, but not overly elaborate to the point where, you know, you maybe feel like you have what I would call like diversification in the portfolio where you're actually making your whole structure worse because you're so diversified across so much, so many things that you've actually made the whole process counterproductive to some degree. I just realized the joke in a neurologist like Bill Bernstein calling it the no-brainer. Yeah.

Let's start with the foundational building block, the Boglehead three fund. Can you walk us through what are those three funds? I'm total stock market, total bond market, and then is international? Yeah, yeah. So he's doing a domestic, international, and total bond market component, and it's just three funds. You can almost think of it as two funds that, you know, you could distill this down into something even simpler where you're buying, like, if you own just like Vanguard Total World,

VT, that's basically like the two funds that Taylor likes to use. And then if you're buying something like B&D, the total bond market, that's your whole bond allocation. And that's, that's it. You've got two or three funds that they're serving your entire portfolio needs. And if you've got that allocated to match your risk profile or whatever, you know, that's the other thing. Taylor doesn't like necessarily build this in, in a fixed sort of manner. He says you've got to build this to your risk profile so that that three fund portfolio it could be it could be 33 33 34 or something like that percentage wise or it could be 6040 it could be 80 20 and you've got to match that to your risk profile but the main kicker from that is that you should be ultra cost aware because you can own this

portfolio now for you know like 0.03% in totality so it's it's not free but it's really damn close to free and that's the thing is that that bogal especially like to emphasize was that costs matter a lot. You know, one paying one percent fees may not sound like a lot, but you have to think of things in what I call real, real returns. And this is your, your after tax, after inflation, after fee return. And those returns are much, much lower than what people typically think of when they hear, you know, if you're watching financial media, you might hear that the stock market averages 10% a year or something. And that's true at like the aggregate level. But when you back out the taxes and the fees and then the inflation, well, you're probably earning something closer

to like four to five percent. And so when you're paying a one percent fee on that, in the long run, it ends up being a huge, huge part of your total investment returns. And so that's why Bogle was such a critic of fees, was that these seemingly small figures actually add up to gigantic sums in the long run. So it's beneficial to be like hyper-cost aware. And so the three-fund portfolio is just really beautiful because it's very diversified. It's relatively complex in the way you're getting different exposures, but it is beautifully simple, and it's something that is incredibly easy to maintain because there's no real legwork required in managing two or three funds over the course of the long term.

Right. So then what does Bernstein do to make that a little bit more diverse? So Bill is a brainiac. So he's familiar with the academic theory. behind things like factor investing and factor investing for people who are listening who may not know. This is basically like the Jean Phama and Ken French theory that the stock market generates returns from different factors.

There are drivers of the stock market that sometimes they generate out performance actually. And Fama and French actually went in and identified what are these factors that drive these things. And they're typically things like small caps beat large caps on average over the long term or there's the momentum factor, where this weird sort of phenomenon where companies that tend to have good returns tend to generate continued good returns. And that's a function of maybe it's, you know, they're high quality firms or they're very profitable firms. But there are these fundamental drivers in portfolio management that drive returns inside of the stock market. And Bill is a believer in

this idea that you can identify these things. And it could make sense to tilt the portfolio a little bit to something, you know, like a small cap instrument or a momentum fund or something like that, or even if it's like an international type of driver, Bill likes to take this sort of simple asset allocation and go a little bit beyond it, where you're doing what is, you know, a lot of bogleheads might call it factor tilting, where you're taking something that is a fundamentally a very simple sort of bogelhead type of portfolio, but then you're tilting it a little bit to either generate maybe a little extra return, and if it's done in a low-cost manner, which it can be done now, Vanguard has all these factor-tilting funds, basically, that are super low cost,

you can build something that's a little bit more elaborate that maybe it might earn a little better return than the S&P 500 or something like that. And, you know, I think that's not necessarily a bad approach. Right. That reminds me of Paul Merriman's four-fund portfolio, you know, where you've got just a little extra exposure to small caps. Exactly. Yeah. And I think the thinking there is basically that you're trying to capture a little bit of that factor tilt with the hope that, hey, maybe my portfolio will do a little bit better than the S&P 500. And that's, it's weirdly one of behaviorally for a lot of people, it's one of the hardest parts of investing actually is that when you make a portfolio that is a really boring sort of indexing portfolio, I think a lot of people look at that

and they say, this is no fun. You know, like I'd like to sex this up. little bit or something. I'd like to do something a little bit different that maybe I can't pick stocks like Warren Buffett, but I could I could own something that's a little more exciting that might earn a little higher return, whether that's, you know, like a technology fund or a small cap fund or an emerging market fund, something that adds a little bit of juice to the portfolio that might generate higher returns in the long run without exposing you to either crazy risks or crazy costs. What that does often is it introduces an ongoing line of questioning. For example, adding a small cap component to your portfolio, we know that historically

small caps over the long term have outperformed large caps. We also know that we're currently living at the cusp of this big AI revolution where maybe that might change and maybe AI has fundamentally changed the game such that large caps will be dominant from here on now, as we've seen with the crazy outperformance of the Mag 7. So now, now, we're not, you know, there's this question, you know, and that's a question that if you had a Boglehead 3 fund, you wouldn't be asking. You might ask the question, do we still need international? Yeah. You know, that's probably what the Boglehead 3 fund would cause you to ask. And then you add in small caps and now you're asking a different set of questions.

So I think that the questions that you ask with the introduction of different types of asset classes cause you to constantly second guess. Yeah. Will you get into asset picking then? It's one of the things that I try to kind of approach. this is like an independent analyst where I'm not necessarily endorsing a particular strategy. I'm trying to just, you know, describe what the strategies are and then kind of say, hey, this is what's good and bad about the strategy. This is who it might be good or bad for. And that's part of with the factor investing component is that the main criticism to me

for factor investing is exactly what you're talking about, where you're functionally still picking stocks inside of a factor investing strategy because what you're really doing is you're saying, okay, well, for the last, 40 years, small caps outperformed. And now I'm going to go in and I'm going to buy a group of stocks that are functionally, I'm picking these stocks and I'm expecting that return to continue into the future. And so you're making this very implicit prediction about future returns inside of a specific component of the portfolio, which is a weird thing to do for a Boglehead type mentality because, you know, Bogle famously was the advocate of just buying the whole haystack.

Don't try to find the needles. Just buy the whole haystack. And that way. you don't have to pick factors because you own all the factors inside of a total market fund. You make a super valid point, and it's especially interesting today because the small caps have really sucked compared to the large caps. Even with the academic theory that we know about, it just has it fundamentally changed. And that's what makes, I think, stock picking and asset picking hard in the first place is that you're making these predictions and you're trying to basically say, I know something that the market doesn't know right now, which so often turns out to be wrong.

That's why Bogle was such a big advocate of just buying the whole thing. Right. And even there, buy the whole haystack, but which haystack? U.S. versus international, there were many voices that said, hey, again, AI revolution, U.S. and China are poised to be the winners here, so why not just concentrate there? And then we look at 2025 returns and international, like, smoked the U.S. in 2025. Yeah.

And Bogle was an advocate of owning only the U.S. Right. So there's this other weird component where everyone's active to some degree. One of the portfolios I actually talk about is what I call the global financial asset portfolio. And it's kind of like the purpose and the benefit of understanding this portfolio is that you understand the total market portfolio. It's basically the all of the world's outstanding financial assets.

And that's the true benchmark for. everything basically because it's literally the market portfolio of all outstanding financial assets. And everybody deviates from that. There's nothing wrong with that. So this is part of what makes investing fun and difficult is that everybody deviates from that. And everybody has to make these personalized choices where you have to decide, you know, do I want to own European stocks when, you know, Vladimir Putin is dropping bombs on Eastern Europe all day, every day? Do I want to own the risk of China potentially invading Taiwan and causing disruption in the region? Or do I just want to keep it simple and know that, hey, if I own the S&P 500, I own a lot of

companies that they have international exposure, but they don't necessarily have like this direct risk exposure to the European economies or the Asian economies and things like that. Again, you've got to find the portfolio that's perfect for you. And part of that is making these tough decisions about, okay, I want to be diversified. But what is the right amount of diversification for me? And so it's hard. It's part of the, you know, we all have to be active to some degree. And there's very, there's very stupid ways to be active.

Like, I'm hypercritical these days about there's this like gambling mentality with so many things where, like, you can't watch a football game these days without seeing, you know, a hundred betting ads. And it's just like, you know. And I'm sort of militantly against gambling. and playing the lottery and things like that. But those urges are interesting because everyone's kind of got, you know, a certain degree of that. And when I was, you know, in my 20s, I used to day trade and do sort of silly things that, you know, I now look back on it.

And I'm like, man, how much money did I light on fire just doing stupid stuff, kind of learning the ropes through this industry? And so it's interesting, though, because that element is what makes investing difficult because you have to be active to some degree, but you're trying to find the right level of activity that is sensible and going to generate decent returns, hopefully, but also isn't being counterproductive in a lot of ways. Right. And there is that interesting psychological phenomenon of it is precisely when people feel desperate, meaning that when they're in a worse financial position, that they tend to take bigger risks. The thinking is almost that being more aggressive can compensate

for a lack of contribution. Yeah. But it is that overly aggressive posture that actually ends up often hurting them. Yeah. And I think that's what drives a lot of the sort of gambling mentality, not just in the financial markets, but also in literal gambling markets, is that I think a lot of people, everyone wants to get rich quick. You know, like everybody would like to be able to afford anything as quickly as possible. To some degree, that's what happens with a lot of young people. when they're getting into the financial markets, they are introduced to stocks and they say to themselves, well, gosh, I've got $10,000. If I could start turning this $10,000 into $5,000 every

month, maybe I won't have to work anymore. And then, you know, you start running the numbers on this and you start thinking, well, gosh, if I can take really high risks and generate really high returns, well, you know, maybe I won't have to work anymore and I can just, you know, retire early and become part of the fire movement or whatever it might be. So this drives this sort of gambling mentality for a lot of people, where they end up doing things that are sort of silly, but it's this get rich quick mentality. And the stock market is not where you get rich typically.

You can make, obviously, a lot of money investing in the stock market, but I don't even like using the word investment portfolio because I literally will think of your portfolio as your savings portfolio, that you're generating an income and the income allows you to save a certain amount of money and then you're taking that savings and you're reallocating it into things like stocks and bonds. What we call an investment portfolio is, to me, actually, like your savings portfolio. And saving money and allocating savings is fundamentally boring, which is, I think, the right way to allocate your assets, though, because these, again, going back to sort of like

the time horizon of the stock market, well, the stock. the stock market can't, in aggregate, generate 100% returns every year for everybody. It just mathematically can't because the underlying entities are, let's say they were paying out all of their profits every year. These are entities that are growing at, who knows, like, you know, six, seven, eight percent a year in aggregate. That's the cash flow that they can mathematically pay out every year. And so in the long run, the stock market is this, it's a higher yielding instrument than the bond market. But again, it takes a long time for those cash flows to accrue, and you've got to be patient. So to earn that 6, 7% return on average, you've got to be really patient with it. And you can't

make the stock market generate a higher return than it fundamentally can through the underlying cash flows of the underlying instruments or entities. Right. And it's interesting the framing of this is your savings portfolio, because savings is deferred spending. I think often people with a predisposition to save a lot of money, have a hard time with spending, ultimately. That's one of the challenges that we see in retirement is if you've spent your whole life saving, saving, saving, saving, it's hard to flip that switch. Yeah, and that is so front and center in retirement planning, too. I mean, I see it every day.

People have a lot of trouble making that. It's the other big component that makes retirement really sort of psychologically different. for people is that you spend your whole life accruing savings and reallocating it into stocks and bonds. And then when you retire, all of a sudden, you start to live off of the portfolio. And you're, you're now maybe your portfolio isn't growing anymore. Maybe you're withdrawing 4% a year or whatever. And after all your returns from the instruments you're allocated in, you know, maybe your portfolio is actually declining. And that's another thing that's psychologically just so difficult for people to get accustomed to because they've spent 65 years or whatever

just accruing savings, earning an income and then reallocating the savings into this, you know, set of instruments. And all of a sudden now they're living off of the portfolio. So it's the other element of retirement that's really psychologically difficult. Right. And that's tough even, even if you just take a sabbatical, I took a sabbatical knowing fully that I was going to go back to work afterwards, but to suddenly not have an income and yet continue to spend money, even at the sabbatical level, at the mini retirement level, that was a huge challenge. Yeah. I talk a lot about time horizons because understanding the way that your time horizons are related to your financial assets is super, super important because when you take a sabbatical or when you retire, your time

horizons are changing fundamentally because you if you don't have that income component anymore and you're drawing down your portfolio you have to be more sensitive about your ability to navigate the short term and so you know if you're someone who you know you take a year off from work for a sabbatical or whatever and you're if you're 100% equities well you weirdly you have a lot of sequence of returns risk in there you know because you're you're now exposed to this weird environment where let's just say you were taking your sabbatical in 2008 you've got the same sequence risk basically that a retiree has, even though you're only taking a year off, you know, you might be planning to go back to work in 2009. You still, you have to go through

the psychological battle of watching that portfolio go down a lot. And if you're withdrawing money from it, you're perpetually selling into the stock bear market through 2008. It's one of the benefits, again, of like owning something like the Warren Buffett portfolio where, you know, you've got enough allocated in sort of a cash equivalent where you kind of know, okay, I'm going on sabbatical for a year and I've got a 90-10 allocation, but this 10% component, it's going to fund all of my expenditures for the course of this full year where it doesn't matter what happens to the 90% part. And that's the other thing about thinking about things in time horizons and thinking of the stock market, especially as a fundamentally different long-term instrument, is that when you

compartmentalize things like this, it allows you to have that freedom to look at the cash component and say, okay, well, I've got X number of dollars allocated into an emergency fund, basically, or the spending component of my portfolio. And that frees up a lot of behavioral bandwidth. You can then look at the 90% part and say, I don't care what that thing does, because if it goes down 50%, it doesn't change the fact that I've completely covered all of my expenditures through the 10% component. Right. At Medcan, we know that life's greatest moments are built on a foundation of good health, from the big milestones to the quiet winds.

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We've discussed the 60-40, we've discussed Bogelhead, we've discussed Bernstein, we've talked about T-Bill and Chill, we've talked about the Buffett portfolio. Tell us about virtue and vice. This is another sort of psychological portfolio where sometimes you should do things that are parts of your portfolio. portfolio that you like because you feel a certain way about whether it's, you know, owning bonds to just keep you more comfortable or a lot of people, they, they want to do something good with their money. And so especially in the last 10 years, you know, what's called ESG investing has become very popular. And this is sort of a virtuous sort of way to allocate your assets where you're investing in things that or companies that maybe you're super anti-gun, for instance. And you don't

want to have any exposure to any gunmakers inside of like the S&P 500. And so maybe you'll own like the S&P 499 in a certain way by getting, you know, a gunmaker out of the S&P 500. And, you know, that kind of aligns things in a way where you're still building a very diversified and low-cost portfolio. But you psychologically, you know, like, hey, I'm not putting my money into things that I don't believe in. And, you know, this is an interesting one because it gets, into the whole aspect of stock picking again, where you're kind of saying, well, I know something the market doesn't know, and I'm going to pull out these companies because I believe a certain thing. And so I'm sometimes minorly critical of ESG investing because I tell people, this is

just fundamentally stock picking. And it's not that I don't think it's a good thing necessarily. It's that I just don't believe in stock picking, basically. And so when people deviate from the index a lot, I typically just say, well, you know, this probably has a little higher costs and the benefits of deviating from the market portfolio are probably not going to pay off in the long run. And I always tell people, you know, hey, if you want to do good, why not earn the higher return from owning the full S&P 500 and then donate the difference or something like that? But again, this is super personal. And, you know, if you're someone who you don't believe in or you don't like certain types of corporations, there is totally nothing wrong with removing those components from your portfolio. through something like an ESG portfolio where you're doing something that you believe is a little more virtuous. But more importantly, it might help you stay comfortable with the way you're

allocating your savings so that you stay the course. And that was the other big lesson from John Bogle is that Bogle would always tell people, you've got to have a portfolio that keeps you comfortable so you can stay the course through thick and thin. And if something that's a little more virtuous or the flip side being a vice portfolio, maybe you're someone who really likes guns and, you know, or things like that and things that other people might say are vices in the world. You know, maybe those are the things you really want to invest in. And if that, if it makes you comfortable and that's the thing that sort of keeps you staying the course, you know, again, that's your perfect portfolio.

I think one of the challenges with ESG is that every person's definition of good and bad is so different. I mean, alcohol, for example. Yeah. The perfect example of it's common in our society. there are a lot of major alcohol companies that are publicly traded, but alcohol is also involved in 100% of drunk driving crap, you know, like you can't drive drunk. It's why I called it the vice and virtue strategy or chapter is because one man's vice is

another man's virtue. And, you know, getting into the definitions of all, this is another thing that I'm kind of minorly critical of the ESG movement because it's, again, you're getting into these sort of subjective debates about, well, what is a vice or what is a virtue? The even more interesting component of that is, you know, when you start making these predictions about things like, you know, maybe people hate an oil company, for instance. And you look at a company like ExxonMobil or Chevron and you say, you know what, I don't want to own this company because I think that, you know, petroleum is destroying the, you know,

the ecosystem and this is bad for the world. But at the same time, the weird thing with companies like that is these are some of the leading investors in renewable energies at the same time. because these are, it's the thing that makes stock picking really hard is that, you know, who knows what ExxonMobil is going to look like in 25 years? ExxonMobil might be a fully renewable energy company in 25 years because they're doing all these things that they, I think, are looking forward to. They're trying to manage the company in a way where they're saying, well, you know what?

Maybe petroleum isn't the future of energy. And we need to stop having such a concentrated exposure to that segment of our business. And we need to be investing a lot in renewables. And so, again, you're trying to make a prediction about something that might be really fundamentally different in the future. And that's the thing that makes stock picking so hard is that you're trying to predict what are these companies going to look like in 25 or 30 years. And the reality is nobody knows. And it's, I think, even more so true these days because the world is changing so fast. I mean, a lot of like the MAG 7, none of these companies even existed 30 years ago.

You know, so it's crazy. companies are, they're coming out of nowhere really fast and companies are dying also faster than they ever have. And it's because of this sort of technological kind of creative disruption that's going on or creative destruction that's going on inside of the stock market where the entities are getting increasingly difficult to actually identify the top performers because the world is changing so fast. Right. Which brings us to a major question that I often hear from this audience and just kind of out in the world is everyone has a prediction about AI. And a lot of people have fears that we're living in an AI bubble.

And there's sort of a hangover from the dot-com bubble that, you know, people are very worried that we're just repeating the dot-com bubble again 25 years later, 26 years later. Do you have a framework for how to think about that? I mean, you must have financial advisory clients who probably ask. Yeah, you know, I always tell people, I mean, the interesting thing about the AI bubble, if we were going to call it that, if you look back at the NASDAQ bubble, if you had bought the very, very peak of the NASDAQ bubble back in 2001, you actually have generated an 8% annualized return since then. So the weird thing about thinking about the NASDAQ bubble is that the NASDAQ bubble

wasn't actually wrong. You know, people were really overly enthusiastic about the internet then, but the internet did end up being this like incredibly transformative, life-changing technology that But those investors, if they held on for the long run, they ended up being right. But what happened in the intermediate term? You went through this incredibly traumatic 15-year bare market where it took, you know, especially in real terms, it took a really long time. You had a huge amount of sequence risk, basically, in that component of your portfolio. And so I try to communicate the same thing with AI, that the way I think of AI is that,

you know, the MAG 7 and the super high valuations in the U.S., they potentially expose us to higher sequence risk in the short term. And I'm kind of an advocate or believer in that AI is going to be this incredibly transformative technology in the long run, but the path to getting there might be really bumpy. And so I think when you own things like technology and growth and even, you know, domestic versus international these days, where the valuations are colossally different across all these different sectors, you know, or even tech versus value in the domestic market, you should acknowledge that, hey, in this component of my portfolio, I might have a lot more sequence risk today than we do on average. And so I tell people, again, kind of going back to the time horizon

thing, if you own a lot of tech, you might just have to be really, really patient with that component because you might have a lot more sequence risk inside of that portfolio. And so it's another argument for either owning international or, you know, tilting more towards like a value factor or something like that. Or maybe you own more bonds because you're trying to offer set some of the sequence risk inside of the portfolio. But it's a time horizon thing. And who knows what's going to happen, though? I mean, you could very well have an environment where the Mag 7 and the S&P 500 just continues to beat the pants off of international and everything else because AI really, the market is completely right. And you just continue to see these high returns in

this segment of the market. But I do think from a framework perspective, I think it's good to go into it and acknowledge that high valuations are, they're functionally high expectations. And what happens when you have really high expectations is the risk of underperformance for unusual reasons become sort of outsized. Because when people expect a lot of you, it's really easy to disappoint.

And that's what's built into the AI component of the market right now, just super high expectations. And if you get either some underperformance, maybe AI doesn't turn out to be quite as great as people think, or weird things happen. You know, COVID happens.

And, you know, maybe China rolls into Taiwan. And all of a sudden, you know, Taiwan semiconductor is, you know, a Chinese company. And, you know, supply chains get totally messed up from everything that happens there. You know, there's going to be weird things. And I think that that creates an environment where because the expectations are so high, the potential for disappointment becomes potentially higher. And that creates that sequence risks that we've talked about. We've talked about a lot of models.

portfolios for a while. Before we leave the topic of model portfolios, I do want to ask you about the 100% stock approach, the all equities approach. That is personally what I have for people who can stomach it. Tell us about the pros and cons of that. Yeah, so this is kind of the full octane portfolio. It's the, you know, you're even going beyond what Warren Buffett does. And so you're attaching yourself to probably the highest return instrument in the economy. and what I would describe as also the longest duration instrument in the economy as well. And so you've got to be someone if you're buying, and there's a million different ways to do this too. I talk about, you know, you could buy just the S&P 500.

You could buy Vanguard Total World. You could start splitting it up. You could build your own sort of three fund portfolio where let's say you just own the domestic market, the foreign developed and emerging markets or something. And you've got a 100% three fund portfolio that's all investing. in inequities, but you're, you know, the basic principle there is that you're buying the highest yielding long duration instrument that exists and with the expectation that you're trying to generate really high returns. And, you know, for someone like you, it could make a ton of sense because,

again, going back to that idea that your income or your job is sort of this fixed income, you know, you've got this embedded fixed income allocation and it frees up the bandwidth for you to be able to take a lot of risk. And so when people are, especially for younger people, people with a long time horizon, the 100% portfolio or the 100% stock portfolio could be the exact right portfolio for you. And, you know, there's a lot of different ways to implement it.

But I think that the thing that you've got to really be comfortable with is the risk, the volatility of it. And you've got to know that the stock market's going to do weird things at certain times. And, you know, our friend Nick Mujillo, says, you know, just keep buying. And you've got to have that sort of mentality with it, too. You've got to know that, you know, the stock market's going to go down a lot and you should. You should just keep buying because that's where you're allocating all of your savings again, you know, coming from your income. And so it's one that is going to be, you know, really behaviorally difficult

for a lot of people. But again, if you've got a stable fixed income component coming from your job, it frees up that behavioral bandwidth to be able to take a lot of risk. But again, You've got to have, you know, for people who, you know, maybe you work in an industry where you're, you maybe you don't have the job security, you've got to be aware of that, that, you know, if there's a risk of you potentially losing your job for some reason, you've got to account for that inside of your portfolio where you're, you're assessing that risk and knowing that, okay, well, what if this fixed income component that is giving me the behavioral bandwidth to be 100% equities? What if that just goes away one day? and then all of a sudden you're exposed to the sequence risk again. You know, these are all things that people have to sort of assess at a very personalized level. And it's, again, why I am, you know, so communicative about the idea that you've got to find what's right for you because everyone's different and everyone's got different risks and different jobs and different, you know, allocations that they have to account for. Right.

There's one other one that I also want to ask you about. somebody like me who is, I have no intention to ever retire, if we define retire as a cessation of income producing activity, I have no intention to engage in that at any time in the foreseeable future, if ever, versus somebody who is right on the cusp of the cessation of income, they might be interested in something like risk parity. Can you talk to us about risk parity? Yeah, so risk parity is made famous by Ray Dalio, who Ray Dalio runs Bridgewater, Associated. which is the biggest hedge fund in the world. And Dahlio's basic principle was kind of similar to the permanent portfolio and the idea that you're trying to create a portfolio that the risk exposures have parity across all of the different elements of the portfolio.

And so from going back to like the 6040 portfolio, a risk parity advocate would look at the 6040 and they would say, well, Bogle called this a balanced index fund, but actually the risks that you're taking inside this portfolio are. not balanced at all because the 60% component is actually driving roughly 85% of all the risk because the 60% piece is so much more volatile than the 40% piece that when you look at where is the volatility contribution actually coming from? It's almost all coming from the 60% piece. So in a year like 2008, 6040 is down 30%, which is crazy because the 40% piece was not down at all. So the whole driver of the downturn is coming from the 60% piece because it's

so much more volatile. And so what a risk parity advocate would say is, no, this is totally wrong. You should do something in your portfolio where you're creating more balance inside of the way you're getting your risk exposures. And so they would build in ways to actually try to create this parody where maybe you're, you know, there's a lot of different ways to skin this cat again. You know, there's a lot of different. There's actually an ETF issued by Bridgewater, ALLLW. And this is also called the All Weather Portfolio because it's designed. to create this sort of parity where it's designed to sort of be able to ride through all weather. But there's other ones. There's, I think I mentioned, a number of the ETFs that try to do

something like risk parity. There's mutual funds from AQR and a lot of ETF issuers that have risk parity portfolios. But what they're basically doing is all kind of the same in that. They're doing some way of basically either reducing the stock market volatility in some way or boosting things like the bond market volatility so that there's parity in the way that you're getting the risks from the portfolio. And the theory behind this is that you basically, you want to create more parity in the risk exposures, and that should generate a more stable type of return in the long run. And it's actually, it was one of the more interesting ones to study because the actual implementations of it haven't done that well. So when you look across the board at almost all of these,

they've done fine and they've done basically what the advocates have tried to get the portfolios to do and that they're generating typically much more stable types of returns. But when you look at something like a 6040, it's interesting comparing and contrasting these because they haven't done that much better even on a risk adjusted basis than something like 6040. And so again, you can get really, really customized. Dahlio would say that you need 15 different types of return streams to be able to build a risk parity portfolio and utilize these different components in a way where you're creating the parity across all of these 15 different instruments. And you can get really complex, really fast doing

something like that, which again, going back to kind of the burden of having this sort of second job managing a portfolio, risk parity can very quickly, if you're trying to do it in a more customized manner as a DIY investor, it can get really complex, really fast. And so It can be easier to just utilize an ETF if you're into that. Or it might be even at the ETF level or the fund level, you might look at it and say, the fees on this are a little too high for me or what the underlying manager is doing just seems a little too complex. So it takes a sort of, I think, specialized investor to be comfortable with the risk parity strategy.

Yeah, it seems to me as though risk parity is ideal for somebody who is going into retirement or is maybe a couple of years, you know, two to three years out from retirement. And their retirement, quote, unquote, job, so to speak, is going to be managing their portfolio. And so in retirement, they will have the time to actually manage a risk parity model. Totally. To your point about retirement and risk parity, I think that one of the benefits of something like a risk parity portfolio is that you're adding other layers of diversification as well. They go into a lot of different types of instruments. And, you know, it's one of the thing that it adds cost to the portfolio, but it also

adds other elements of diversification. And we see this, especially in a year like 2002, where the portfolio, if you're owning something like a 6040 in 2022, stocks and bonds both go down at the same time. And a lot of people, especially retirees, they might look at that and they might say, well, wait a minute, my 40% bond piece was supposed to reduce my sequence risk. And it seems to have compounded it. So there's an argument that is increasingly convincing that adding in other forms of diversification can be beneficial because it can add a layer of diversification that might reduce your sequence

risk if you're only stocks and bonds. And so it's an interesting portfolio for people that want a little bit of extra diversification, but you've got to acknowledge that the added complexity is probably going to add to higher costs, and those added costs might not be beneficial in the long run. Right. 2022, I think, was a year that surprised a lot of people, seeing that stocks and bonds are not inversely correlated. Yeah. And it's a totally different interest rate environment, too.

I mean, when interest rates are at zero and they go to five, that creates a lot of principal volatility in bonds because as interest rates go up, bond prices go down. And so we're fundamentally in just a very different environment these days. Like, you know, I probably wouldn't even have written the T-Bill and Schill chapter in 2018 because, you know, T-bills were earning zero percent. there was no chilling to do in T-bills at that point. Whereas today, it's a totally different interest rate environment. And I would argue that the interest rate risk and the bond components, you know, a lot of people have been saying that 60-40 is dead or the bond market is dead. And I have been kind of dismissive of that in recent years because the interest rates are

just so much more attractive. So, you know, chilling in T-bills or owning an aggregate bond index or something like that is a lot more attractive today than it was, you know, five or 10 years ago because interest race are just, they're so different. And that creates a very different risk environment where you probably, I don't want to say you don't have to worry about 2022 happening again, but the risk of bonds and stocks both going down in this sort of an environment is different because interest, you're starting from a totally different interest rate component today with overnight interest rates now are still, you know, whether they're 3.8% or something. Yeah, 3.75 is right in that zone.

Yeah. Did you coin the term T-Bill and Chill, by the way? Is that you? I don't know. Actually, I don't know. I've heard many people talk about VTSAX and Chill, but like T-Bill and Chill is just a got a much better ring to it. I'm not sure. I don't, you know, I feel like I've heard Med Faber use it in the past, and so I probably stole it from him.

I'm not that original, so. Well, that closes out part one, but we look forward to you joining for part two later this week. In the meantime, where can people find you if they'd like to learn more? So our website is disciplinefonds.com. My firm is discipline funds. And if people want to read more of my commentaries on the bloggy part of the website, it's discipline alerts and people can subscribe and hear more from me there. Thank you, Cullen.

What are three key takeaways that we got from today's conversation? Key takeaway number one. There's no perfect portfolio. There's only the portfolio that fits you, your life, your goals, the best. A lot of investing advice gets packaged like an off-the-shelf product, but Cullen pushes back on that and talks about why portfolios need to be personal. There is no perfect portfolio for any single individual because everybody's different. Everybody has different needs. Everybody has different expenses. I think everybody needs to find a portfolio that works for them.

And so so much of the salesmanship in the industry is built around pushing strategies on people and trying to convince them that, hey, you should buy this fund or buy this strategy. That's not the way it works in real life. That is the first key takeaway. Key takeaway number two. Diversification works if it makes you uncomfortable. A diversified portfolio, by definition, always has something that you hate. And so if you are frustrated with a portion of your portfolio, that's a feature, not a bug.

that's the point. The point is there should be part of your portfolio that annoys you. Diversification is learning to hate some part of your portfolio all the time. And that's super true with 6040 because the 40% piece, it's going to drive you crazy at times when you see the stock market booming. And then when the 60% piece goes down a lot, you'll look at the 40% piece and you'll say, thank God I have that. Finally, key takeaway number three, cash feels simple. But it can be quietly expensive. So personally, I thought this is the most interesting part of today's conversation, the T-Bill and Chill. Cullen talks about why many cash products that are marketed as being convenient actually are skimming value.

So he basically talks about why managing the cash portion of your holdings deserves more attention than people give it. And the irony in that is that typically a high-yield savings account is much lower yielding than the Treasury bills are. You know, the way I think of it is even if it's, say, 0.1 or 0.2% lower than the Treasury bills themselves, well, you're kind of getting hosed on that. It's a double whammy, too, because the Treasury bills in most states are tax-advantaged. And so the bank is buying the Treasury bills. They're getting the tax advantage. They're getting the full 100% yield from the government.

government there. They're giving you a little cut of the action and they're not passing on the tax savings to you. Those are three key takeaways from this conversation with Colin Roche. And this conversation is part one of a two-part series. So make sure that you hit the follow button in your favorite podcast player so that you can tune into part two of this interview with Colin Roche. Thank you so much for being part of this community. If you enjoyed today's episode, please share it with friends, family, neighbors, colleagues. Share it with the people in your life. That is the most important thing that you can do to spread the message of F-I-I-R-E.

Subscribe to our newsletter. It's free. Afford-anithinging.com slash newsletter. And don't forget to leave us up to a five-star review in your favorite podcast player. Thanks again for tuning in, and I will meet you in our next episode where we share part two of this interview. My name is Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.