Odd Lots - Cullen Roche on the Art of Building a Perfect Portfolio

Episode Date: January 12, 2026

For a long time, you could make plenty of money and sleep easy at night with a simple 60/40 portfolio. You put 60% of your money in stocks and 40% in Treasuries. The stocks generally went up. The Treasuries cushioned you during times of volatility and provided income. Then we got the worst inflation in 40 years, and the Treasury part of those portfolios got obliterated. So does it still work? And if not, how should an investor think about their own personal allocations to various asset classes. On this episode, we speak with Cullen Roche, the founder and CIO of Discipline Funds and the author of the new book, Your Perfect Portfolio: The ultimate guide to using the world's most powerful investing strategies. His book goes through a number of different ideas in portfolio construction, talking about their pluses and minuses, as well as their history. In this conversation, he explains his general philosophy and how one should think about evaluating a person's circumstances to optimally design an investment portfolio.Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

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Hello and welcome to another episode of The Odd Lots Podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, I know like everyone is like really into what's the hot stock these days? Invidia, how do I play the AI boom? It's interesting. You can make a lot of money and get the right stocks. I love the general topic though of just like optimal portfolio construction.

It seems like a fascinating. puzzled to me, how to fit different types of assets together in one coherent thing. It always felt to me like a study in behavioral science almost because I think everyone always says, you know, just invest in an index fund or maybe 60, 40, although as we saw in 2022, that has its own problems and we can talk about that. But I think this is like the one area in people's lives where they actually crave complexity, right? Like it doesn't sound right to be like, I know. Just put your money in an index fund and forget about it. I know. It's like the simplest, it's like the simplest investing strategy is the hardest for people.

It's really hard, though. Like when you see people making life-changing amount of money, it goes like, oh, I was in, you know, sand disk, right? And suddenly everyone wants memory because of AI. And they're up 500% in years. Like, damn, you know, like, I'm really happy with my 12% year that I've been making. But I've really, it's really hard. I was 100% invested in a leverage. Doge ETF, right? Yeah, right. Like, if you did that and then you retired the next day, I'd be like really annoyed. I'd be like really upset. But it is a fun puzzle.

You mentioned 2022 and we saw what we've seen really since COVID. What we've really seen since the worst inflation in 40 years is that some of these portfolio constructions that work very well for a very long time, particularly anything that sort of resembles that 60-40 thing, which just worked so beautifully in the 2010s. but even before it hasn't worked as well. I think you're still doing fairly well. But yeah, so it gets you, the question is like, well, I remember we asked Bill Gross, why even own bonds at a time?

He was like, well, don't. Yeah, he don't. He's like, I'm in pipelines. That's where I'm getting my, or I'm in whatever, MLPs or whatever. That's where I'm getting my yield. But yeah, I think there's some real question about like, why own treasuries? Why own whatever, et cetera? Well, the other thing is timing.

This is the thing that everyone has to consider, right? So in 2022, if you were about to take out a big chunk of your portfolio to buy a house, or if you were a retiree and you needed to make some chunky payment, you were really, really unlucky in 2022 if you were, if you had taken everyone's advice and invested in a 60-40 portfolio. So this is the other thing. You can try to smooth out returns, but your own spending is going to go up and down quite a bit. There's one other issue that I think a lot about with the very standard, and it sort of relates

exactly to this, with the sort of standard advice. So in theory, it's like we're not supposed to time the market. You buy the highs, you buy the lows, et cetera. In 2020 was a great time to buy. March 2020 would have been a fantastic time to buy. The problem is layoff surge. And there's this sort of phenomenon where often the best times to invest in the market are when you don't have a job and you don't have income. And actually, Yeah, they always say don't sell, don't panic sell at the bottom. There's a good chance that's when you might need to sell. That's maybe when you lose your job or something.

The ability to sort of mechanically actually follow the rules, setting aside behavioral stuff, just the ability to like have the income or have the ability to like hold through drawdowns, buy the dips, etc. May not even be possible. Absolutely. Well, anyway, I'm excited to say we really do have the perfect guest. Someone we've had on the podcast before. Also someone we've just known for a very different. very long time. One of the most interesting thinkers in the realms of investing in portfolio

managing and so forth, a voice of sanity, I would say, which is very rare these days. We're going to be speaking with Cullen Roche. She is the founder of Discipline Funds, and he is the author of a brand new book called Your Perfect Portfolio about exactly this topic. Cullen, thank you so much for coming back on the podcast. It's nice to see you. It's so nice to be here. Why did you write this book? Well, this is a problem that I've always run to throughout running my businesses that I think as the portfolio manager and financial advisor, I've run into this issue where I'm trying to construct a model portfolio that is ideal for my business so that I can easily implement something and then kind of just plug and play it in the client

portfolios. And what I've realized over the course of managing money for, you know, however long it's been now multiple decades, is that everyone's different and everyone needs their own level of customization. And so it's very hard to do. just take a model portfolio and then plug and play. And the, you know, the kind of funny thing with the financial services industry is it's largely built around these ideas that you take a product and then you sell it to the client. And oftentimes what I find is that when you're trying to sell that product to the client, it just doesn't mesh with their needs. And so everyone needs to find their own perfect portfolio. So the book isn't titled The Perfect Portfolio. And the purpose of the book,

really is to, what I do is I go through a number of sort of famous portfolios and some of them are very boring and some of them are more sophisticated. But the overarching ethos of the book is that you have to understand all these different approaches and then you can plug and play the way that you want to build your own perfect portfolio so that it works for you. One thing I'm curious about, because I've never had a professional financial advisor or anything, but how do you actually evaluate your client's needs? Like, what do those questions look like? I imagine. I imagine. you know, there are probably a lot of finances involved, but are there questions like, how do you feel about losing 40% of your portfolio in a single year?

That's actually, that's my very favorite question. Okay. The question I hate the most, because for, I don't know, 20 years, I used to print out these phony risk profile questionnaires, and I would send them to people. And one of the questions is always, you know, how do you respond to a market that falls 30 or 40 And literally 98% of people will answer that question the exact same way because they know the right answer. They'll say, oh, I stay the course. I will buy the dip or whatever.

And then COVID happens. And 50% of my clients are calling me like, this has never happened before. What the hell do we do now? This is terrifying. We need to sell everything. Right. And I'm there. Even I'm looking at that.

And I'm kind of like, you know, because in the throes of it. Yeah. That's the hard part about investing into a bare market, especially. When it's actually going on, it all feels rational. It feels justified. Totally. And you're looking at it. One of my favorite charts in the book is a chart of the Great Depression downturn.

And it shows this horrific 80% downturn where the market just went down like every month for basically three or four years. And it goes down a full 80%. And when you're in the throes of that sort of 30 or 40% downturn that we saw, say, during the GFC or during COVID, you're thinking to yourself, well, wait a minute. I know that the market has gone down 60, 70, 80% in the past. So if we're at 40, that means we probably have another, you know, 40% haircut or coming down the line. And so that's the psychology of it when people are actually in the middle of it. And yet I remember it vividly during COVID because even people like Buffett and Bill Gates, like some of the most practical thinkers in the world, they're sitting around there saying,

this has never happened before. We've never seen this. No one living has seen what is going on right now. And so it all feels rational. And then, you know, so from a risk profiling perspective, it's really difficult because that sort of subjective nature of it all is really sort of irrelevant. Because when you're actually in it, it all will feel totally rational. Now, I remember thinking that even like obviously April of last year during the brief,

but very sharp sell-off after Liberation Day. And it's like, well, Trump just changed the rules of capitalism. This is going to be different. This is really different. Or going back to COVID, like we all say we're going to just hold through the downturn. But in that moment, we're like, oh, no, this is really, this is not like the other cell. This is different. This is not like dot com or there was just an overvaluation.

This is not like 1991 when we had a Fed engineered recession. This is something different. The old rules about buying and holding must not apply this. Yeah. It's funny. You know, I see a lot of people get mocked. A lot of the analysts back then were, you know, they were changing their estimates and they kind of. you know, after the tariffs more or less got scrapped, they then, you know, up their estimates

for the year on targets. And in retrospect, that looks kind of stupid. But in the throes of it, if you remember, like they were saying they were going to replace the income tax. And like, I'm writing, you know, they're doing the math on that. And I'm like, wait a minute, that's a $2.5 trillion dollar corporate tax increase. Like, that's a gigantic number of incredibly frightening number if it's true. And then, you know, of course, the CEOs of Home Depot and Target and all them walk into the White House and are like, do not do this. And so they're still doing the tariffs and they're still impactful and there's still a corporate tax and whatnot. But they're not nearly the size that, you know, they were going to be, you know, that they were claiming to be. And so

that frightening moment where, you know, they announced that, you know, got quickly scrapped when they kind of reversed course on it. I feel like we should note here that we're recording on January 8th. And we are expecting the Supreme Court to make a decision on some of the tariffs. So the entire game could change again. Could change again, yeah. You mentioned the Great Depression. And one thing I thought was really interesting in the book is you talk about how no one really quite knows the origins of the 6040 portfolio, even though it's become fairly standard in finance. But you trace it back to the Great Depression.

So tell us how you did that. Yeah, well, I don't know if I did do it correctly, but it was kind of a guess. But I found that so fascinating that 6040 is arguably the most famous portfolio of all the portfolios. And we all probably own something that kind of looks like 6040 at some point in our lives. And it was actually Corey Hofstein, who manages the return stacking ETFs that he asked on Twitter one day, where did this thing come from? And there were hundreds of responses and none of them seemed to write. And so I just had so happened to be writing the book at this time and I'm writing the chapter on 6040.

And I started digging into it and have found the story about this guy named Walter Morgan, who's running a fund called the Wellington Fund. And Wellington Fund, obviously, you know, famous because it turns into a Vanguard fund. Later is run by John Bogle, who some people may have heard of. And he's doing this, though, in a very unusual way back in the Depression where during the Depression, equity investing was kind of the dominant way to actually allocate assets. And Morgan had been burned before that. So he goes into the Great Depression.

he launches the Wellington Fund right before the Depression, but he does something really unusual. He adds a huge chunk of bonds to the portfolio. And the thing gets crushed in the Depression, but it gets crushed way less than everything else got crushed. And so then all of these research analysts are starting to look at, you know, kind of, you know, picking through the dust of the Great Depression and the returns there,

and they're noticing that, hey, this fund did really well in a relative sense. So Morgan's fund kind of takes off because of this, because the relative performance was so good. And then the story is interesting because then Walter Morgan hires John Bogle. Bogle runs the Wellington Fund through the World War II and the boom of the 1960s. And then the scary inflation of the 1970s, Bogle actually does something really weird. He turns the fund closer into like an 80-20 fund kind of chasing performance, which was sort of like antithetical to everything that Bogle ultimately is kind of known for.

And then we all know the story from there. The 6040 from 1980 to present day has been kind of like one of the best performing portfolios ever. So it's, you know, through all of these trials and tribulations, though, this portfolio has done incredibly well. And I traced its origin mostly back to the Great Depression in the way that Wellington Fund was sort of built as the first real balanced index fund. On April 4, 2023, around two. in the morning. A man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, we did this to you. What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App.

From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. That's actually you zoom out or back up a little bit and talk theory, because you said that many of us or most of us, we'll have some portfolio that is 60-40-ish. But there's going to be various modifications and people are going to, I want to slug of real estate or commodities, whatever. But what do you talk about maybe from the academic perspective? Like, what is the 60-40 portfolio really is? And like, what is it theoretically achieved that is given it this sort of,

it's Lindy, this sort of enduring effect that it accomplishes his goal? Talk to us about like why from the perspective of a planner, Maybe it's not perfect for everyone, but it has certain qualities that this is a good portfolio. To me, the 6040 is like the good enough portfolio. So just to be just to define it. So a 6040 portfolio means basically 60% equities and 40% treasuries. Exactly. Okay.

But talk about why it's good enough. What are the properties of it? So it's the portfolio that by owning 60% stocks, you will, you'll do well enough. You'll capture enough of an equity market, bull market. and also conversely during a bear market, because of the 40% bond slice, you typically will buffer the equity volatility in the portfolio just enough that you won't capture all of the downside. And so it is balanced in this way that it doesn't capture all of the upside or all

of the downside and kind of can help you stay the course. I talked specifically in one chapter about something called the global financial asset portfolio. And I really like understanding this portfolio, especially from like a theoretical perspective because the most interesting thing about it actually is that nobody owns this portfolio. Because it's mostly uninvestable or you can't fully invest it. And it's actually, you know, I talked to a lot of famous researchers about this topic when I was researching the book. And they all kind of concluded that the screwyest part about actually quantifying that portfolio is that it's actually

really controversial how to quantify it because all of the assets in that portfolio are not investable. So for instance, like China A shares are not necessarily invest. So, for instance, like China A shares are not necessarily investable for foreign investors. And there's lots of assets that are held by, you know, the Swiss National Bank owns a lot of assets that make the assets then uninvestable. And so, you know, the Fed has been buying a lot of treasury bonds. So technically you could say, you know, what happens to the market cap of outstanding bonds when the Fed is the owner of a lot of these bonds? And you can start getting into these sort of very academic theoretical debates about, well, what is the market portfolio and what's actually investable versus uninvestable? And it's a special. And it's a

interesting from like a theoretical. And in theory, that portfolio includes like gas stations in Burma, right? Yeah. Well, God, if you go into all of the assets, you know, I did financial assets only. So I kind of excluded all the non-financial assets. So things, because then the whole portfolio kind of turns into a real estate portfolio. Oh, okay. It's basically everybody's houses is everything that we own.

But from a financial asset perspective, it was really interesting because especially when you look at things like the full cap versus the free flow, which is basically the actual assets you can invest in versus the portfolio that is actually the issuance of outstanding financial assets, these portfolios are really different. And like, for instance, in today's environment, the outstanding market cap of stocks versus bonds is roughly 65, 35. And when you look at the, sorry, the equity market, when you look at the U.S. versus foreign, it's 65 versus 35. But when you look at the actual issuance, the full cap, it's almost the opposite. And so the U.S. way smaller from a full issuance perspective, but from an actual investable perspective,

the U.S. is, you know, what we call like this extraordinary market, this unusual, huge part of the full market cap, which is weird to think of because when Vanguard and some of these big index funds create these products, they have to issue what is investable. They can't just say theoretically, like I sometimes will tell my clients, well, if you want to actually own the true market cap portfolio or the market issuance portfolio, you should actually be closer to like 40% U.S. you should be underweight the U.S. market versus foreign in this environment because that actually is representative of the full issuance.

Whereas if you're vanguard and you're running this index and you have to buy what has actually been issued, it's almost the exact opposite. And you're way overweight U.S. So you get into these interesting sort of like theoretical debates about how to even do this in the first place. I want to talk more about illiquid assets like real estate because for most people, this is their biggest investment, right? their actual house. But before I do, you just reminded me gold. So in the book, you talk about gold as

like one of the true uncorrelated assets. But of course, over the course of last year, it looks like a momentum stock, right? How are you judging gold at this moment in time? You know, gold and commodities are really hard to compartmentalize in the portfolio construction process because I typically think of commodities in general as they're just, they roughly track inflation. Because they are just cost inputs in, you know, corporate, you know, costs. And so they should roughly reflect something close historically to the rate of inflation, which is pretty close to what the data shows. Gold is a really screwy one because gold has this whole other element to it where there's huge swathes of the population that view gold is money, even though, you know, in a modern monetary

system, you could argue that gold is actually a pretty terrible form of money just because it's impractical to use for the most part. It's got this store of value. you in this sort of, I refer to it as a faith put inside of it, where its price almost gets like a premium because it's not just an input and cost inputs. It is something that people believe in that people hold and people have demand for because it's got this other strange use. And so it's weird in the context of today's environment. Another concept I talk about is I talk a lot about time in the book about how important it is to think about portfolios and asset performance across time horizons. And, you know, I do a lot of asset liability matching, and that basically entails

working with somebody where I'm quantifying liabilities and expenses over time horizons, and I'm matching assets in not a similar way to like maybe a big pension fund would or banks might operate. And that's all about understanding time and an asset liability mismatch. And if you get that wrong, you end up like Silicon Valley Bank. And which you talk about in the book. Yeah. And the interesting thing about even like a retail investor, you know, and it took me for, you know, two decades working in the business to realize this, that the better way to go through a risk profiling process is not to ask people phony questions about this subjective nature of how they feel in a bare market or something like that. It's figuring out, it's solving

that asset liability mismatch because what happens to an investor when they go through a bare market is they're realizing that they own too much of, I refer to equities as long duration instruments. Corporations are very long-term entities by design, by function. And, When someone owns 100% stock portfolio and they go through a big bear market, what happens to them is they get scared. They're realizing I don't have enough safe assets to make me feel comfortable with this. So if they own the 40% slice like the 6040, maybe they feel more comfortable. Or if they own, you know, there's a whole chapter on what I call the T. Bill and Chill portfolio,

which is like the liquid reserve portfolio. You know, I heard a story. I don't know if it's true. Speaking of T. Bill and Chill, though, I don't know if it's true because I heard the second hand. Someone was telling me there was like some famous like very, very, very successful trader, like Goldman Sachs, who was like trading commodities, pulling down millions and millions of dollars each year. And he just like had all his money in T-billies. Look, look, I make a ton of money. I just like basically want to save it. I don't know if that's

even true. But I do wonder, so when we're talking about alternate ways of assessing risk profile, do you think about like try to get a sense of the client's income volatility? So like maybe someone who, you know, a federal judge who is going to have a job for life, et cetera, and a guaranteed pension, maybe they don't make a ton of money, but you are very confident that you could predict their income for the next 50 years, maybe. Whereas someone who makes a lot of money, but they're like a real estate developer in Miami and the odds of those guys

going broke every 10 years is pretty high, et cetera. Talk to us about like sort of that role of calculating expected income over time. It's arguably, I would say, the most important part of the whole equation because one of the things I talk about in the book is I frame your human capital and your income as a literal fixed income allocation. So I almost like to think of your income and your job as like a bond allocation. And so in the context of like, you know, someone like you're talking about or let's use an even simpler example of someone who's, you know, 25 and they make a decent amount of money, that person not only has a really long time horizon,

but if they've got a really stable job, they've got this imbursed. bedded fixed income allocation, that maybe they don't actually quantify it like that on a, you know, portfolio statement. But that has a net present value. Exactly. Yeah. You know, so if it, the really simple example is if you make 100 grand a year in, you know, you could almost think of that as I've got a million dollar bond that earns 10% a year.

And what that does, especially if it's a very stable fixed income, it frees up a huge amount of behavioral bandwidth for you to take other risks. And that's one of the arguments why if you're 25 and you're 25 and you're. you've got, you know, 40 years to retirement or whatever, and you've got a stable, you know, solid income. Well, you can think of your income versus your balance sheet as being super stable, which allows you to take a lot of risk with your balance sheet that you might not otherwise have. And that's another thing. I talk a lot about retirement planning in the book, because the thing that I've seen very front and center is that when people get close to 65,

that income issue becomes hugely important because people start to realize, that, oh crap, that fixed income allocation that I've had all these years, it's about to just disappear overnight or it's about to shrink down to whatever your Social Security income is or whatever. And so people go through this sort of psychological mind trip where when they near retirement and then enter retirement, they struggle with that, you know, adapting to this big, big change in their income because they're realizing that, hey, I don't have this fixed income that I could fall back on for the last 40 years. Is investing time horizon more important than macro?

Because in the book, you do talk about the importance of macro. But on the other hand, if people are reacting to a changing economy all the time, then that looks a lot like what you're not supposed to do, right? Yeah, I mean, gosh, I generally, in my practice, I am constantly trying to downplay macro econ and geopolitics and things like that. I mean, it's funny, you know, the reason that I probably even know you guys is because I've written so much about macroecon. And I'm not an economist, but people, I think, sometimes think of me as a macro thinker in large part because I've spent so much of my career fielding bad questions about, you know, hey, is the U.S. government going bankrupt? Or, you know, what is going on with China?

And I'm trying to sort of write about this stuff, not because it's important in the context of portfolio construction, but because it's more. so about understanding how these things operate at more of a sort of a first principles level where you can look at a bond allocation. If you own a huge slug of, you know, U.S. Treasury bonds, for instance, or T-bills, you know, you can look at these things. When you understand them more mechanically, you can look at these things and say, okay, well, the odds of the U.S. government actually going bankrupt are extraordinarily low because I understand how these things function. I understand that the U.S. government is not going to run out of money. I understand that, you know, maybe bond vigilantes aren't quite as powerful as we've all been told. And you can understand these things in the context of

owning something so that you're more comfortable with what you're doing. And that's actually the hardest part about all of this is that it's all very complex and it's all very emotional. And if you don't understand what you own, then you won't be comfortable with it and you won't stick with it. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivering right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually

rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Let's talk about real estate. I bought a house in 2016. I think it's done all right. But then sometimes I'm like, man, I really wish I just put that all into QQQ or something like that. And then the other thing with House,

that I think is interesting, which is like, you could look at, maybe I'd say you own a house outright, and it's like, oh, it's worth a million dollars or something like that. You can't really sell it because then you have to buy a house. And so it's like, I'm not even sure, like, I got to live somewhere. And so I don't know, you can't monetize that to the same degree you could, you know, sell your stock and buy stuff. But talk to us about how one should think, let's start this, how one should think about the role of their home in their overall portfolio. It's the hardest asset to buy, I think, because it is, it's an instrument that you want to generate a return on. So you want to do like some financial analysis on it and, you know, try to, nobody wants to buy a house in,

you know, 2007 or something and then see it go down 30 percent. But also your house is where you live. It's where you're going to raise your kids and you're going to eat most of your meals and where you're going to do all the little boring things in life that are actually really important to you. And so there's this really personal part of it that it makes the, to some degree, it throws all the financial math out the window. But from a basic, you know, first of all, going back to your 2016 purchase, I would say, you know, that was unbelievable timing because the, the, thank you. You could argue that going through COVID, I mean, any house that was leveraged, did you have a mortgage? Yeah. Yeah. So any house that was leverage was the best inflation hedge. Right.

Maybe the best inflation hedge trade of the last 50 years, you could argue, just in terms of just providing this stable level of certainty. You know, the low mortgage is an inflation hedge. You got 50% price appreciation or probably something like that. So that's interesting, too, to think about that when, you know, kind of going back to the question on gold that I didn't fully answer, what happens when an asset goes up so much in the short term, the way I like to think of it at least is that let's say that housing typically generates a low real return or even historically it hasn't generated a real return.

The way that I like to think about things like that are environments where you get these, what I call a price compression, you get a huge boom in an asset class. And it's almost easier to think of this in like a fixed income market where like when the bond market goes down a lot, interest rates go up, the math completely changes on all that. So a lot of people these days are saying like bonds are dead. And I would say like, no, bonds are actually probably more attractive because mathematically, from a yield perspective relative to the falling price decline, the future returns are much more stable now, much more probable. And so what happens in an environment where you get a 50% increase in real estate or, you know, what was gold up last year?

65%. You know, let's say that, let's just be generous and say gold is going to continue to do 8% per year for the next, you know, however many years. When you get 65% of that return all crunched down into one year, I think what happens is you create a higher probability of what a financial advisor would call sequence of returns risk, which means that the probability that the future returns are going to be much more volatile becomes much higher. And so that's one thing with real estate is that, like, I'm not super optimistic about future real estate prices for now because we went through this big boom. It creates this price compression. And you get lots of returns into one year all crammed up.

And that means that the likelihood of either sideways or, you know, not great returns is pretty, probable. So, you know, going forward, you know, I think that it's good to think of your house as basically a, it's a block of commodities on an appreciating piece of land. And, you know, the thing that's important with real estate is I talk about this a lot in the book that you have to think of everything in terms of real, real returns. And that means you have to back out inflation and you have to back out all the other costs. And that's the thing that, you know, I have probably the worst housing story in the world because in 2017, I bought a house in California that had a small waterway on it. And without knowing that, which I should have probably known in the state of

California, anything with water on it in the state of California is basically the biggest permitting nightmare that you could possibly imagine. It gets the EPA involved. It gets the Coastal Commission involved. It gets the state Department of Fish and Wildlife involved. And all of a sudden, you get an introspective look at, you know, how all these government agencies work together. Now I'm really curious, what were you trying to do? We were literally just trying to remodel the house. Yeah. So we bought this old.

So you weren't touching the water at all. No, we weren't touching the water at all. And in fact, the water is not even, I mean, San Diego gets 10 inches of rain a year. So, you know, that's very, very little rain. And so this waterway, we call it, is really, it only has water in it, I mean, 10 days a year or something. It's crazy. It's not like it's a lagoon or something. This is how you're a libertarian.

arc. Well, it's really funny because my wife is very, very liberal, and we were going through the permitting process, and she was like, these people are trying to turn me into a libertarian. I get it. Oh, actually, since you brought up your wife, I got to ask, there's a bit in the book where you talk about marrying a portfolio, and then you have a tiny footnote that says apologies to my wife, and then it says, I'm just testing if my wife actually reads this. Did she read it? She caught it. She actually was the first editor of the book, so she, and she did go through, it and she caught it. She didn't just jam it all through GPT, which she kept trying to convince me to do. But no, it's funny. There's another footnote about my mother-in-law there that she has not caught yet.

Oh, what's that one? I didn't see that one. So she got trapped with us during COVID. And I make the joke that I had just had my first daughter right after COVID. And the shutdown happens, the international travel shutdown happens. She lives in France. So she just happened to be visiting us for the baby's arrival and she gets trapped with us for six months. And I make this joke about how I was crying in the shower every morning. Not because of the baby. Screaming into a sock, I think you said. Just going back to bonds for a second, it is true that, you know, you see investors behave in exactly the opposite way that they should be behaving when it comes to bonds. If you like bonds at a 2% yield, you should love them at like a 7% yield. Talk a little bit more about, you know, what you're talking

about just now with gold and real estate is a momentum factor, right? And momentum seems to have done very, very well over the past few years. I mean, this is why we say flows before pros, right? Can we just follow what everyone else is doing? That seems to be the way now. Yeah, gosh, I mean, there's momentum. There's the momentum factor and the momentum factor in this is the more academic version of portfolio construction where in the factor investing chapter, I talk very specifically about, you know, it's called cross-sectional momentum, basically. And this is basically picking the stocks that have performed well in the past with the expectation that they continue to perform well in the future. And they weirdly, the data actually shows that that is a thing. And so it frustrates

people like Gene Phama of the efficient market hypothesis. But it's interesting because in the context of today's world, that momentum factor is basically just everything tech, everything that's performed the best. And so you're, which has, you know, weirdly continued to work and work and work throughout the years. And so you get this like self-reinforcing cycle, right? Yeah. And there's also, you know, the one chapter that I actually thought was almost even more interesting than the momentum one is one that's related, which is called the trend following chapter. And that is very different in the sense that these guys, these traders are, they're not necessarily just looking at the past and trying to, you know, they're not picking stocks necessarily and then extrapolating it in the future. These guys are

just trying to find trends and they're looking, maybe they're looking at, you know, chart data or whatever. But, and they're, it's a go anywhere strategy. So one of the most interesting things about this strategy is that it is one of the truly, fully uncorrelated strategies to everything else. And it's had this sort of big resurgence in the last. It became very popular after the GFC because it beat the pants off of everything and was uncorrelated, had these huge asymmetric returns, and then went through this period of like a 10-year lag. And it had kind of like what I was referring to earlier where you had this like, you had that price compression. The trend following things all went up. All these CTA funds go up, you know, 50, 100 percent. And then they all lag for, and they lag for a long time. And that's the thing about

finding uncorrelated assets that sometimes these uncorrelated instruments, they're not like cash flow generating instruments like stocks and bonds necessarily. So the trend followers, though, they go through this 10-year period of lagging, which exposes people to all these behavioral biases. I remember CTAs also became a really convenient scapegoat for anything weird that was happening in the market. They were like the multistrats of today, right? I forgot how much we used to talk about CTAs in the early 2010s as an important driver. Actually, can we talk a little bit about tech stocks for a second? Because this strikes me is very important.

And I think about this all the time. You know, you see these surveys that Bank of America does as a fund manager. Like, what's the most crowded trade in the world? Tech. They've been saying that since like 2013, you know, and it still just performs. And all these other, there are all kinds of other knock on things. You know, it's like people talk about U.S. versus international exposure. But at the end of the day, this is just a bet on tech when we're talking about the U.S.

And the other thing I think about tech a lot is that setting aside sort of theories of portfolio construction, these companies make gobs of money and they make more and more and more each year. You know, we recently did an episode and a Ben Snyder, the top equity strategist of Goldman was on. He's like, well, the big tech company is it's like 33% of S&P 500 earnings. And I listen to that as like, well, that's another 67% of total earnings for them to gobble up. But it strikes me that, like, can you just talk? Like, it must drive portfolio managers crazy that there's this one sector. And, you know, this is a novelty, right?

Because these are big companies that are growing faster than almost anyone else, which is not the case in many environments when we associate big companies with maturity and slow growth. So, like, there is this thing going on for years and years and years that just sort of feels to bust every other strategy. And if you're not overweight tech, you're probably underperforming. Yeah. And it's really frustrated the hell. of people, especially the factor investors who haven't been in the momentum trade, who have been more value oriented or, you know, the people who know that small has outperformed large in the

long run. Like, it's all been flipped on its head. Yeah. So I, again, going back to the time horizon thing, the way that at least I try to think about this is tech and growth is really interesting in the current environment because in going back to the NASDAQ bubble, you can actually, you know, a lot of people make that corollary. And the interesting thing about the NASDAQ bubble is that if you bought the very tippy top of the NASDAQ bubble and held on to today, you've made like 8% per year. It's great. You've done really, really well, which is crazy. But you had this crazy sequence of returns risk because especially in real terms, you went

through this traumatic, like 15 year downturn over that period. So the interesting thing, you know, compared to then is that, like you said, these entities are completely different. Like, everybody was expecting the internet to be a big thing. And it was. And everybody expects AI to be a big thing. And I think it will be. But the interesting difference between that environment and this environment is that these companies are, they make more money than any entities have ever in human existence.

So this is completely different than the national. And every year they be an analyst expert. It's crazy. And they're growing crazy, crazy fast. So it's almost unbelievable. But the thing is kind of going back to that whole idea of like price compression and thinking about time horizons. The way I think about it is that, and I write about this specifically in probably my favorite chapter to write in this book was, an original strategy that I call the forward cap portfolio.

And what I did was I took five huge macroeconomic trends and I distilled them all down and I try to extrapolate data out into the future. And one of the big ones is tech where I look at something like e-commerce retail sales and I say, you know, this is currently whatever it is, 25% of all e-commerce retail sales as a percentage of total retail sales, it's 25%. And that number, you know, is probably going to go to 50%. 50 or 60 or 70% at some point in the future. All retail sales will just turn into e-commerce sales at some point.

Like you said, like, you know, there's 75% more for e-commerce to gobble up. I believe that. And so if you believe that and you want to buy technology, well, what should you own? Should you own the market cap weighting of 35% like it is now in the S&P 500? Or should you go to like 50 or 60%? And the way I kind of frame it in the book is it's skating to where the puck maybe is going rather than when you buy a market cap weighted index fund, what you're doing is you're basically skating with the puck, which is it's a good strategy. It works really well, but you're not necessarily

trying to skate to where the puck is going. And so I'm doing a lot of guesswork. It's obviously very active. And, you know, there's a lot of estimates that are involved in all of this. But if you think forward, like I don't think it's unreasonable to say that in 40 or 50 years, the market cap of technology in the S&P 500 might be 50. 60, 70 percent. Who knows? Like, everything's probably turning into a tech company. It might be two years. But the tricky part about that is that when, especially when valuations are really high, I talk about how valuations are the equivalent of high expectations. And when expectations are really high, it doesn't take much to disappoint. So your margin for error when expectations are really high is just

really low. So what that does is it causes this potential where you have higher sequence of returns risk in the short term where, you know, I would say if I'm talking to, you know, a 20 year old who's coming out of college, you just got a great job on Wall Street or something, I might tell him, well, hey, your time horizon is so long and you could be so aggressive, you should maybe just go by a growth fund and just, you know, lose the password to your brokerage account for like 40 years. Yeah. And open it up and you'll probably have done really well. But if you look at that thing in five years, it might be down 50%. You don't know. And so that's the way I kind of frame it. And so if you're very time sensitive, I would say, you know, the retiree who is retiring next year and they're loaded to the gills with Nvidia and Google and Microsoft, that person has a totally different risk exposure than that 20-year-old does.

How do you think about the index providers in this equation? Because, you know, there's this perception that you put your money in an index fund. It's a passive investment. But actually, it's kind of active because the index provider is making decisions about what to. do. And I know the index providers always say they're just holding up a mirror to the market, but, you know, some of that seems very subjective to me, like whether or not you're going to add Chinese bonds into a debt index and things like that. Are we just outsourcing our investment decisions to the indexes? To a large degree, yeah. I mean, I talk about how there's no such thing as passive investing a lot, more than I should, because it annoys a lot of people. But there's a lot of people who demonize passive investing, I think for kind of phony reasons. And a big part of that is this fact that, you know, the reason I talk about and try to quantify the global financial asset

portfolio is because I was trying to create a benchmark for if we were going to define something as passive as, you know, truly passive to me is you're buying the full market portfolio. You're not deviating at all. You're not making any active decisions at all. And so when you quantify the GFAP, you can actually create a benchmark there where you understand, okay, well, this is the only, if you were truly fully 100% passive, this is the only thing you would own. And the funny thing is nobody can buy this thing and nobody does buy this thing. Because even at a stock bond weighting, the stock versus bond weighting right now is something like 4555. So you're inherently underweight stock.

So it's not even that close to even like the 6040 portfolio. And so everybody deviates from this. And I write about how that's totally fine. There's nothing wrong with deviating. There's nothing wrong with being a little bit active. And so even from the indexing perspective, though, like I laugh at like the, you know, the way the S&P 500 is constructed. It's a committee of people that are constantly picking and choosing which firms to introduce. And it's very methodical.

It's, you know, very data dependent. So it's a very systematic sort of process. But at the end of the day, they're choosing the 500 companies that go into that index in the first place. And so, you know, in the context of the global equity market, it's even more interesting because they're excluding, you know, thousands of other entities just, you know, by their own volumin. So everyone's active and, you know, there's very smart ways to be active and there's very stupid ways to be active. And I would say that, you know, a lot of the things, the most sort of disconcerting thing that I see going on these days is that I see the issuance of a lot of strategies and especially with the rise of crypto. There's a lot of things going on that I would describe as stupid active where people are more having like a gambling mentality approaching all of this than anything else. If we had like another hour, actually, I would love to just pick your brain about.

the investment advisory business, like less the portfolio construction per se and just how this world works, because I have so many questions about that. But I've won, and, you know, we've seen you, we run into you every once in a while down at the Future Proof Conference in Southern California, you know, or there's a lot of advisors, and then there's a lot of vendors, and they're selling various products. And one of the hot things that we know that they're trying to get people excited about owning private assets or so, you know, various alternatives, et cetera, not non-vanilla things. In your perspective, for most clients that you see, is there like a compelling reason for some of these novel products or for some of it to include like, yeah, private credit,

private assets, whatever it is? Do these solve problems for the portfolio manager or for the investment advisor that the existing publicly liquid assets don't provide? Yeah. Yeah, 2022 messed a lot of people up because when stocks and bonds become highly correlated and you own that 60-40 portfolio that, you know, the bonds go down 15% or whatever and the stocks also go down 25%. Well, then you look at your portfolio at the end of the year and you say, I don't, I'm not actually diversified. If you were that retiree that you mentioned Tracy that is retiring that year, you feel like

you made a bad decision, even though the 6040 portfolio for the most part is a pretty good portfolio, there is an increasingly compelling argument in that context for things like alternatives. I, me personally, I tend to just default towards simple as better because I think that this whole process can get so complex so quickly that the little things you can do to create organization and structure to simplify it as best as possible is going to result in a better process, a better outcome in the long run. So, you know, little things like, I mean, God, I woke up 10 years ago.

and I looked at me and my wife's financial accounts, and I was like, oh, my God, we've got, I've got an old Merrill Lynch 401K, and I've got, you've got old Fidelity 401Ks, and you've got a bank account over there. I have a bank account over here. We've got three brokerage accounts at Charles Schwab and, you know, different custodians, TD Ameritrade or whatever it might be. And I was like, this is, I can't manage all this. I've actually forgotten the password to some of these accounts or something.

And so collapsing all this down and consolidating and simplifying it, and trying to own, you know, something that is very, very simple. One of the portfolios I talk about is the Boglehead 3 Fund portfolio in the book. And I think one of the reasons that so many people love that, and those, the followers of that portfolio, they're very almost militant about it. And I think in part because it is so simple that it is, it's just beautifully elegant in its simplicity. But then you could get into debates about, is it too simple? What is it?

The Boglehead three? It's basically a bond aggregate. And then, and you can mix this up, you know, in different slices based on your risk profile. But it's three funds. It's a domestic equity fund, a foreign equity fund and a bond aggregate. And these investors will buy this. And they'll buy it for, you know, costs like three basis points or something in total. Yeah.

And so it follows like all the sort of like Taylor Laramore was the founder of it. And Taylor was, he's someone I interviewed in the book. And he's not, he wasn't really in the financial advisory business. But he became great friends with Bogle over the years because he was just emailing with him. actually a funny backstory where he comes back from World War II and he fought in the battle of the bulge and jumped out of airplanes and had all these cool stories about it. He comes back and I guess he married like the hottest woman in Miami or something and she was a model and she's making crazy, crazy amounts of money modeling. And so he comes into all this money and he doesn't know

what to do with it. And he hires a financial advisor who hoses him and he starts emailing John Bogle and Bogle then starts telling him like, nah, you should be doing this, this and this. They become great, great friends. Bogle ultimately crowns him the king of the Bogleheads later in life. And so he's kind of like the most famous of all the Bogleheads now. But he distilled all of Bogle's thought processes down into like the simplest of all possible portfolios, which is this famous three fund portfolio.

But it's arguably, I am minorly critical of it because I would say that to some degree, there is such a thing as too simple also, where, for instance, like if you own the three fund portfolio in 2022, you probably wish you owned some of the T Bill and Chill portfolio, or maybe you wish you owned, you know, something completely uncorrelated like the trend following portfolio or something, you know, that added a little bit of diversification that kept you, you know, helped you, stayed the course, as Bogle would say. I've really enjoyed the Warren Buffett portfolio chapter, in part because it demonstrates how people get decision paralysis around. all of this. So even if you're trying to replicate Warren Buffett's investment style, you come up with

three different ways to do it, right? So it just seems like an infinite way to invest. But the thing I want to ask you is you also say that you wrote to Warren Buffett and you actually got a response. What did he say? This was like before you wrote the book early in your career. Oh, this was in my early 20s when I was too poor to own a share of Berkshire. So in order to go to the shareholder meeting, you had to be a shareholder. And I was too poor to own a share of Berkshire back then. So I wrote him a letter and I said, hey, could I come to the conference, even though I'm this poor schmuck who can't even afford to buy your shares.

And I get a typewritten letter on, it comes in like a, you know, probably a five by six little piece of paper. And it's typewritten. And it was from his assistant on behalf of him, but he wrote and invited me. Oh, that's really cool. It was awesome. I had a family event. I ended up not going, which was in retrospect.

I've never been. I've never been. So a terrible decision, but. I went once, and it was a fantastic experience. It was extremely cool. Yeah. We should do an all-thots from. Well, he's done.

Oh, yeah. There's not going to be, I mean, I guess there will probably still be one, but it's not going to be the same. Yeah, you guys should definitely do an odd lot with one. Yeah. Yeah. Can you introduce us since you're corresponding. Hey, do remember I can.

Do you have a typewriter? Yeah. No, but I can find one. Colin Roche, really fun. Thanks for coming in studio. Congrats on the new book. Let's stay in touch and really enjoy chatting. Thanks for talking.

That was a lot of fun. Tracy, have you heard of the fintech startup Acorn? Yeah, that's the one where you like invest tiny bits of like your loose change. Yeah, yeah. So years ago, like I think actually probably about 10 years ago or 9 years ago or something like that. I read about it. I was like, I was curious how it worked. So I, like, signed up for an account.

And it, like, takes this, like, small amount. And also the app, at least I'm not trying to slag them. It doesn't work very well. My password is always getting reset. But every, like, year and a half I remember that exists, that has outperformed every other investment. Because it's, like, the one thing that I've, like, lost my password to it. And I can't access it. Oh, seriously?

Yeah, yeah, it's done great. What did you actually invest in? Like a growth fund? It's just, yeah, it's like their growth, whatever their growth fund is. It's not very much, but God, like that one thing where it's just like the one I think about and look at absolutely the least because I could never open the app. And every once in a while I go through the effort to reset the password. It's done very well. But this is like, this is the entire irony, right?

We talk about how there's no such thing as passive investing. But actually, if you just forget the password to your account and never look at it, you tend to outperform. You come close. Yeah. I really, I just find this to be such a fascinating topic. It does feel like, again, it feels a little unsexy because people are so. interested in the incredible amounts of money that people have made in crypto and AI, etc. But like the puzzle of like putting it all together and how you find assets that make money

across cycles but are sufficiently uncorrelated, et cetera. It's like an interesting intellectual exercise. Right. And you also have this entire industry that's built on the promise of outperformance mostly. And it feels really difficult to resist, I guess, the mostly masculine urge to outperform. I liked your question in the beginning because it's something I've always thought of like about actually assessing risk profile because as Cullen put it, everyone knows the right answer. Oh, I'd buy and hold. But I just, I've always been skeptical that anyone is a good judge of their own risk profile. So to hear him talk about, no, let's not talk about it like that. Let's math it out. Let's talk about asset liabilities.

Let's talk about the predictability of your income stream, how that is a de facto fixed income asset strikes to me as a much more sort of sound. way to think about it, then just sort of try to imagine how you're going to behave the next time a pandemic. Well, it also gets back to what we were talking about in the intro, right? Which is, you can say, I'm going to buy the dip if there's a 40% drawdown. But chances are a 40% drawdown is happening in a very bad economy where you might lose your job and not have that much to actually buy stuff with. No, like March 2020, it felt like the world was ending. Who wants to buy? Like, Colin used the word rational, which is I think exactly right. Like it feels rational all the time. Everyone should be selling at this time. It's very hard, very hard to

actually adhere to like simple rules. Yeah. Shall we leave it there? Let's leave it there. All right. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our guest, Cullen Roche. He's at Cullen Roche. And of course, check out his new book, Your Perfect Portfolio. Follow our producers, Kerman, Armin, Dashel Bennett, at Dash, and Kel Brooks at Kell Brooks. For more Odd Lots content, go to Bloomberg.com slash odd lots. We'll be a daily newsletter and all of our episodes.

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