The Compound and Friends - How America Invests (with Vanguard's Ryan Barrows), Barry Ritholtz takes a victory lap, "That's fascinating"

Episode Date: January 22, 2021

Join Downtown Josh Brown on an all-new episode of The Compound Show. This week, a conversation about How America Invests with Ryan Barrows (Vanguard) and a brief visit with Barry Ritholtz (Masters In Business) on the inauguration and winning the election bet with Josh. If you're enjoying the show, leaving a rating and review is a powerful way to help us build the audience. Thank you, we appreciate it! Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome back to the green team. Glad you guys are back here this week. We're going to do a whole bunch of stuff today. Very excited for this episode. First things first, we're going to do Barry Ritholtz. So Barry, a lot of people know him as my co-founder at Ritholtz Wealth Management. We named the firm for him. He is the chairman of the firm and the chief investment officer. firm for him. He is the chairman of the firm and the chief investment officer. And Barry's coming on today to bust my chops a little bit. He won a bet, an election and inauguration bet. And there's a little bit of a twist to it. And if you were listening in late October, you know what I'm talking about. But Barry won. I was wrong. He was right. So Barry's coming back on. We'll talk a little bit about what's going on right now. And we'll let him take a little victory lap. And Barry's coming up on his 400th episode of the Masters in Business podcast, which is insane because I know how much quality control and effort and research goes into that each episode. And he's got some big dogs coming up on that podcast. So we'll let Barry talk

about that. Then we're going to talk about how America invests. Vanguard looked at their customer base, 5 million investors, and what do they own? How much stock? How much bonds? How much cash? How much international? How much US? How much ETFs? and how much mutual funds, et cetera. So we go through this whole thing with Ryan Barrows. Ryan Barrows is the head of the RIA team at Vanguard. So he's like the senior guy that talks to firms like mine about their asset allocation and what funds they're using, et cetera. So Ryan's going to come in and just walk us through this data.

I think there's really a lot of exciting stuff. And most people are very curious about how their neighbors are invested and how they stack up against the general public. So there's a little bit of voyeurism going on, but Ryan is a very accomplished Vanguard executive. Prior to becoming head of the RIA channel, He was the lead on Vanguard's advice work outside of the US, including their big joint venture in China with Ant Financial. Ryan led the development and launch of Vanguard's consumer business in the United Kingdom and was involved in their corporate strategy group as well. And prior to Vanguard, Ryan was at Bain and Company, which is private equity, but we will not

hold that against him. So we're going to talk to Barry. We're going to talk to Ryan. One other thing I want to mention, you're going to hear for the first time the new Compound Show theme song. And I recorded that recently with two young, gifted, virtuoso musicians. Ben Goldsmith and James Bandini. Ben and James are in high school. And these kids are incredible. So they are both going places in the music business as they get older. But we sat down. We composed the new Compound Show song.

We recorded it. I keep saying we. James played bass and organ. Ben played guitar and I played drums. So you can hear a little bit of my chops in the new theme song. I hope you like it. But all right, let's do the disclaimer. Let's play that music and let's get right into it. Welcome to the Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Barry Lawrence Ritholtz, the first. You beat me. You were correct. We did a bet on this podcast on October 23rd.

We both thought that Biden would win, but you actually thought Biden would get inaugurated on time and the outgoing president, Donald Trump, ex-president Donald Trump would be out of the White House, and I didn't. So it appears that you were right. I think Donald Trump is in Florida, and Biden has been sworn in. That is correct. I'm not going to say all is well or everything's back to normal, but it was a normal inauguration

day, a sort of normal inauguration day. Where should I wire the million dollars? Just Venmo it over to me. Where should I wire the million dollars? Just Venmo it over to me. What's the limitation on Venmo? 10,000. I won the bet, but I have to give you credit for identifying some underlying issues that either I didn't believe or didn't want to believe. And this bet turned out to be much closer than it appears. It's not like binary, I won, you lost. It's like, wow, I really just skated by and won because this could have gone in a completely different direction.

What was the turning point? The riot was the turning point. Up until the riot, he could have still been in the White House. No, no, no. Actually, the riot was the cherry. So the election is – election day is November 3rd. By that Saturday, Arizona, Georgia, Wisconsin, Michigan, Pennsylvania, they all fell. Biden is the Electoral College winner. And then the noise begins – look, we heard him talk about being rigged, elections being rigged in 2015. And then it started again in 2020.

And at a certain point, a rational person just gives it up. When did the Supreme Court, though, like kind of put an end to it? Twice. Twice. It was, you know, within a week or so of the election. It wasn't the insurrection and riot in the Capitol that made me say, Jesus, Josh is really right. It was the day after we found out, over the weekend, we found out about Trump's call to the Secretary of State of Georgia. Republican. Oh, find me, find me 12,000 votes.

Right. Just find me, right. I just need to win by one. You started seeing hints of this. You started seeing hints of this when he called the two electors from Wisconsin to the people who certify the Electoral College to the White House and they came. Oh, that wasn't normal? The correct answer is thank you for the call, Mr. President. But it is wholly inappropriate for one of the two candidates to bring in judges to the White House to pressure them. So that was the first warning sign. And part of you saying he's not giving this up. Yeah, I thought I was going to win. I have to be honest with you. I just I couldn't imagine Bill Barr and Mitch McConnell going like, all right, it's over. Like I thought that they would help him keep this going through January. So that's where I got it wrong. So, so here's the big debate. And I've been thinking about this

since the insurrection. The debate between you and I is I'm a top-down guy that looks at crowds and institutions and large vectors. And ever since the first day I met you, I knew you had a unique and really, you have the highest EQ of any person I know. We've walked into meetings and like 15 seconds into the meeting, you've leaned over to me under your breath and have muttered, this guy's completely full of shit. Like instantly. But if I always say that, then it's probably not helpful. No, but you say it often enough and have been very consistently right. It's like, so go back to 2015, 2016, our first bet on Trump, which was would he win? And I didn't have the East Coast elite. He's not going to win. I had the view as a New Yorker who took trains in with people who were like lawyers in his office and other people who all said, this guy is not a serious person. He's not a real developer. He's a clown.

I'm defending – I mean, we knew about the thousands of contractors he had stiffed and was in litigation for before he ran. That's just like New Yorkers kind of knew who he was. It wasn't liberal East Coast. Nobody believed us. Right. It was just, no, we know this guy. He's – Nobody cared what New Yorkers thought. I thought that was really interesting. Right, right. And people completely misunderstood that.

So when you first said in 2015, hey, this guy is going to win. You don't understand. He is a PR wizard. And a lot of what he's saying is resonating with people. Now, I give you 100 reasons why he just barely won. It was 100,000 votes spread out over force. I understand all that. But he still managed to squeak it out.

I didn't expect the first one to be remotely close. And it was close enough that he could he pulled it inside straight. See, the thing with with Trump was you never knew if he was being really clever or if he had just accidentally stumbled upon something and then ran with it when it started working. But the smartest thing that he did was not brand it as a rigged election or make it like somebody got tricked.

He branded it as a stolen election. And there's a psychological thing there. I forget whose quote it is. It might be Mark Twain where it's easier to trick someone than to convince them that they were tricked. Just this idea that it's just way easier to fool somebody, but you can't convince someone that they've been fooled. They won't take that for an answer until literally like money is gone, right? Like the Madoff's people eventually, they agreed that they were fooled probably because he confessed, right? Also, the money disappeared.

And there was literally no money. It's always a hint when the cash disappears. But stop the steal was so clever because if you tell someone they were tricked, they say, no, I'm not stupid. You're stupid. I didn't get tricked i never get tricked but if you tell someone something was stolen from them then it's not like a mark against their intelligence so that's what democrats have been saying to republicans for five years you're being conned you're because that shit doesn't work it would so if if they

really wanted to have played trump's game the smarter way to have campaigned would have been you're being stolen from. Trump is stealing from you. All right. So stop. By the way, stop. The steal was coined by this kid that Trump adopted it from. And I think he was one of the people. I may be wrong about this, was busted inside the Capitol or walked away from something that happened the day of the insurrection.

But he was in the news. What a surprise. Anyway, so the Steele concept is – so for future politicians – and let's hope we never have to do this again. But for future politicians who want to demonize the other side, using the term you're being conned, you're being tricked backfires. It's because it's pedantic and it's insulting. You're being stolen from. They're stealing your blank is way more effective as a rallying cry or a persuasive point. Anyway, but let's get back to this. So when did you know that you had this in the bag? When did you know that he would actually walk out the door?

So a little context because I could say noon today. In fact, I texted you yesterday. Hey, he's got 24 hours to win. I still had a shot. Still got an outside chance. I was genuinely shocked how many elected officials – like you could see how this went a different way. So Senator, ex-Senator Loeffler in Georgia, before she was appointed senator, she was the secretary of state for Georgia. And she's revealed herself as a partisan weasel. Had she been secretary of state instead of senator, who knows? Not that Georgia was enough to tip the election. And what's shocking is groups that you would think of – look, even Bill Barr fairly

quickly after the election said he lost. The election was legit. Like he didn't – Mitch McConnell – I didn't think he was going to do that. I was surprised by that. And he did. I don't know if – so now there's a little game theory as we got everything we wanted from him. Why stay on the sinking ship? We got our judges. We got our tax cuts. That's McConnell. Yeah.

McConnell being very crafty could have come out November 10th and said the election is over. Biden won. Let's stop. He still danced around for Iran. And I don't think he could have done that on November 10th. I really don't. I think it would have shifted the whole idea that for two months, Donald Trump basically told the quote unquote, big lie about the election and that there are tens of millions of Americans who believe it, including a bunch of senators and the majority of Republicans in the House.

Now, we know Ted Cruz is actually very smart. Can I ask you a question? Do they believe it or do they just want it to be true and are willing to tell people that they believe it? So type one, type two charlatans, Mike and Ben love that nomenclature all the time. Ted Cruz and Josh Hawley are type two charlatans. They know what they're saying is bullshit,

but they think there's a gain to them to say it. Just to back up. So what Mike and Ben are talking about, when you see somebody like Harry Dent Jr. comes out once every three months and says the stock market's about to get cut in half. He's like an educated man. He has to know. He has to be a type two.

He can't actually believe in what he's saying because he's been wrong so many times for so many years. It would be impossible for him to not know exactly what he's doing for attention. And then it's not actually, I mean, this is my guess. That's a type two charlatan. Type one is like somebody that genuinely believes gold is going to a million dollars an ounce or the economy is going to hell or whatever. Like that's somebody, that's a believer. It's two different things. My favorite pairing is Mary Meeker at Morgan Stanley in 1999, giant internet bull,

and eventually ended up becoming a venture capitalist. She was early and wrong briefly, and then eventually was proven right versus someone like the Salmon Brothers analyst Grubman, who was in the pocket of WorldCom and all these other telecom frauds that blew up. Allegedly. No, he got tossed out. I don't know the resolution of that case. He got into a lot of trouble for his participation and it's kind of a mess. But the true believers are very different than the people who, hey, this is just – I'm going to say some bullshit because it's going to put some commission dollars in my pocket. Two very, very different. The end result might be the

same to the investor. The difference being one is a legitimate loss. And in the other case, you've been defrauded. And that's a big difference. So Ted Cruz knows the election was lost, but he also knows that this whole fan base of diehard Trumpy people are up for grabs in four years when he wants to run for office. Or that could have been a massive miscalculation. The rumors today is that Trump wants to form the Patriot Party, split the Republicans in half, so you're left with moderate, rational Republicans and the Trumpy crazy base. And so America goes from a two-party system to a three-party system. That'll be an absolute disaster for the GOP.

It totally would. You know, when you make a deal with the devil, when he shows up to collect your soul, it's never a fun moment. And right now the devil is collecting the GOP's soul. He has $250 million, a lot of which was raised after the election. Stop the Steal was one of the all-time great fundraisers. Unless the Justice Department goes after it and calls it a massive fraud and claws it back, which is what I would do, but I'm a vindictive brick. Three years from now. And claws it back, which is what I would do, but I'm a vindictive brick.

Three years from now. Oh, you could freeze that tomorrow, file the suit, and say this was part of a nationwide fraud, and you can't take $300 million from the public perpetrating a lie. Let's assume he keeps it. That is probably enough money. Goes right to Deutsche Bank. That's probably enough money, though, to fund a third party and seriously try to make a run at that. He has not put any of his own money into any of this. That's the amazing thing. The beauty of a billionaire running for office is it's a massive war chest.

Just look what Mike Bloomberg did and didn't help in Florida. The issue of money in politics is it's necessary, but not sufficient. So you at least need money to be competitive, but that doesn't guarantee you're going to win. You don't win. Hillary spent a ton of money. It didn't matter. It's necessary just to be in the running, but it doesn't get. Now, to be in the running, but it doesn't get – now, could Biden have won, let's say, Arizona or Georgia, very at best purple states? You expect the blue wall, Michigan, Wisconsin, and Pennsylvania, to lean Democrat most years. Trump surprised people by capturing that in 2016. But Arizona Right. arguably forcing the campaign, the Trump campaign, to move pieces around on the chessboard and take some resources away from Michigan and Pennsylvania.

They had to compete where they weren't supposed to have been forced to compete. Strategically, it was a great move. So I want to pivot a little bit. I want to talk about, by the way, so congrats on your victory. I will see you here four years from now. For the next one. When I tell you that Ted Cruz has lost to Kamala Harris. All right. By the way, the million dollars doesn't even buy the car I want.

So I'll just put that aside. So I wanted to ask you, how many masters in business have you now done? Like you're, because you've plowed through this entire pandemic. I don't know if you're at the same pace you were. Same pace with a couple of actually a couple of bonus ones that I did that are just online only that weren't broadcast. We're coming up on 400. 400 episodes of Masters in Business.

That is incredible. It's shocking. I have some amazing names teed up over the next couple of months, including this guy. I don't know if you've ever heard of him. His name is Peter Lynch. No way. He's worked at this little shop called Fidelity. He doesn't do press ever these days.

Well, I'm interviewing him at the MIT Sloan Annual Investment Conference. I've been sort of their emcee for the past five years. It's been – they're just a great shop and there's a ton of wonderful people. And Fidelity is eight blocks from MIT. So it's not that difficult for them to rope him in. And now the whole thing is virtual. So while I won't be able to meet him, at least I'll be able to interview him. What are you doing this? And next month. So really jazzed about that. What are you doing this? Next month. So really jazzed about that. All right. So this is good timing. I wanted to talk to you about your

segue game. You have one segue in particular that you really seem to lean on a lot. Do you know which one it is? What is it? I know I only have you for a finite amount of time. Let's get to my favorite questions. No, no, no. Even more than that. That's a good one. Fascinating. That's fascinating. Sometimes you'll mix it up. You'll see that's quite fascinating. Here's the thing that people don't know about Masters in Business. Unlike most podcasts, this is recorded not just for Apple iTunes and everyone else, but it's recorded for broadcast radio, for Bloomberg Radio and XM Satellite. And so there are four segments that have to be seven minutes, eight minutes, six and a half, and 11.25. To allow for the commercial breaks on radio. Right, and it's a hard stop.

Now, they can tweak it. If I'm off by 30 seconds, they can fix it. But as we're coming up on the end of a segment, I have a producer in my ear saying- Wrap, wrap, wrap. Three minutes, then I get a 30 second notice and it's like, let's wrap this up. Because if I could hit my marks, it makes the post-production fast, easy. So I interviewed somebody this week. I interviewed a legend this week, Ron Barron. You know Barron Funds.

Oh, yeah. His track record is mind-blowing. And you're like you have to wrap this guy up in the middle of like something that you want. Yeah, it's impossible. So I'm a difficult interviewee. As an interviewee, I'm all over the place. Footnotes and digressions and blah. This guy makes me look completely sober, organized. Oh, it's all tangents. it's footnotes upon tangents upon

digressions but the crazy thing is every story is just so amazing and you just don't want to get in his way i mean he's late 70s he's all right hold on hold on hold on you're tangenting me right now so i i did like a i did like a service for you here i took the liberty of putting together a list of segues for you hit me and you could try these out see how you like them i just want to i want to give you something alternative to um fascinating right that's fascinating so say a sentence like uh so josh uh and that's why Biggie Smalls is secretly a member of the Illuminati. Okay. So now my segment would be, huh?

You ever do that? I've done, huh? I've done, huh? Huh. Because now this past year, we doing this remote. When you're face-to-face in the, in the studio, you kind of can wave your way in. But when you're doing it on this app where you can't see each other, it's like, mm-hmm, mm-hmm. Eye contact is important. All right. Here's another

one. Tell me like what you had for lunch today and I'll give you my segue. I had chicken salad on a everything bagel. Oh, shit. Get the fuck out of here. Now, what do you have planning to have for dinner? So wouldn't that be a great. All right. Wait, I have more. I'm just going to run through these. So let's say you have Ron Barron and he's like, and that's when I had a dream about Elon Musk. And I put the whole book in Tesla.

And then you say dope. Okay. Oh, wait, here's another one that's dope oh yeah just all hip-hop drops i guess they are you ain't lying is it is a great segue what is it you ain't lying i'm bullish on real business alternative energy for 2021. You ain't lying. Let's see. This is one. Oh, my. Oh, my. You have to do the George Takai version of that.

Oh, my. Oh, my. All right. I see. You ever try I see? No. Or is that too, like- I see.

I see. I see. No, no, no. I see. I see. You don't say. I mean, they're all cliches. I see. I see. You don't say. I mean, they're all cliches is the problem. How about this one?

Sweep. I like that. That's a Phil Perlman. Because you have to pivot from one thought into the next. All right. What about golly, mister? Right. Gym neighbors.

All right. I have more. I can share these with you. I just, I don't want, I don't want you to get stuck in this rut of, Oh, here's a good one.

Wow. Did you see somebody on Twitter made a masters in business drinking game? Every time you say all of my cliches, fascinating. And you know, it's hilarious. Intriguing. Intriguing. Intriguing.

That's quite fascinating. You would never say that in real life. The best interviews are where – I think it's amusing we both have a Grogu in the corner, in the background. Don't try to be politically correct. It's still Baby Yoda. Call it what you want. It actually isn't. It's Grogu.

Baby Yoda is a different guy. But IRL, it's Baby Yoda. All right. Go on. I completely lost my train of thought. But IRL, it's Baby Yoda. All right, go on. I completely lost my train of thought. I had no idea what I was doing. All right, let's leave it there. Barry, thank you so much for being a gracious winner of the bet.

Thank you for the million bucks. Absolutely. Check your Venmo later. When the Venmo hits, I'll swing by. I have my eye on a 57 300 SL gullwing. I'll swing you by and take you out for a cruise. I was just saying you need more cars in your driveway. So that's a great idea.

I got a list. I got a list. I'm working, checking them off as I accumulate stuff. By the way, we should do a whole segment on that because I don't think you understand the value of buying deeply depreciated assets that are starting to appreciate. All right. You'll convince me. All right.

Well, we'll talk to you later. I got a truck with your name on it, dude. I got a giant Raptor SVT pickup with your name on it. Thanks, Josh. Hi, Ryan. How are things in Pennsylvania these days? No complaints, man. It's sunny. I got a little snow. So everyone's happy today. All right. Good to hear. So I have not met you before, but you lead the RIA channel

in advisor of services. I didn't realize this, but the RIA unit is actually Vanguard's largest business. You're 2.6 trillion in RIA assets. Is that correct? your $2.6 trillion in RIA assets. Is that correct? Not quite. So the overall financial advisor services, which serves banks, BDs, and RIAs, is the $2.6 trillion. And then RIA is one of the big three in overall financial advisors. Okay. So the $2.6 trillion covers a lot more ground than just independent advisory firms. It does. So what does that include? Custodied assets, ETFs that advisors are using? How do you figure out what your unit comprises?

Yeah, my team serves independent RIAs, right? So in the broker-dealer space, there's duly registered folks and whatnot. So those aren't on my team. We more or less serve the independent RIA channel. So just so you know, we've happened to have the best wholesaler maybe on the planet servicing us. I know you know Jay Tenney, right? Jay should be CEO someday. So I don't need you to weigh in on that. I don't want to cause any problems at the chain, but Jay is attentive, smart, thoughtful, great head of hair. If you guys don't make him CEO,

I might steal him from you. Okay. So first of all, I appreciate you coming on to shed some light on how America invests. So you guys looked at 5.1 million customers, Vanguard customers, which is a massive data set, might be the biggest study of its kind that exists. I'm not sure. And you went back five years and looked at how things have changed from 15 through the end of 19. And then you looked at investor behavior in 2020. But the investors that you looked at hold a total of 2 trillion in their Vanguard accounts. And there's a median account balance of $60,900. You want to give us a little overview of what this report is about and what you're trying to accomplish by putting it out?

Yeah. So it goes back to, we get questions quite a bit from the advisors in terms of, hey, what's happening over on your self-directed side, right? And so we wanted to look at that and be able to give insight into it. So when we thought about things that we could use, when you're talking to a prospect, what might that prospect's asset allocation look like today? Sometimes clients want to know, hey, what do other people like me look like? This gives you as an advisor a chance to be able to use that data. So that was what we were going for. And then I think there were some insights for us, too, that we'll use internally. The amount of cash, as an an example was surprising for me.

Yeah. Like I think there'd be less cash drag in their investment portfolio. I'm sure people are holding cash in their bank accounts as well. So there were a few things that we'll take. Yeah. We're definitely going to go there. I think investment voyeurism is an underrated motivator of a lot that goes on in our industry. I put a book out in November called How I Invest My Money. And we asked 25 financial advisors or people working in asset management to literally like, what's your portfolio and then why? And it was a hit, present tense. It is a hit. And I think it's because people like they want to get a look. They want to get a peek. So, all right. I want to hit you with this number.

You should know what it is. 63, 16, and 21. What is that? Yeah. So equity allocation, bond allocation, and cash allocation, right? Looking at all the Vanguard accounts, 63% stocks, 16% bonds, 21% cash. So that's the cash portion that you thought was higher than maybe you would have expected? Yeah, it was definitely, at least for me, I thought it would have been lower for

Vanguard investors. We like to think that Vanguard investors are amongst the best investors in the industry in terms of buy and hold. And cash drag is one of the things we've talked about for a while. So it was higher than I'd expect. Now, the one thing I should qualify with the research is we have no knowledge of what folks' goals were. So it's perfectly, at least theoretically possible, that's a reasonable allocation, right? Everyone could be saving for a 63-16-21 is consistent between both brokerage accounts and IRAs. So an IRA account would not be allocated to be about to buy a house. You know, I don't know. I think what's interesting about that is where you don't have insight into is what people are doing with the rest of their cash outside of Vanguard. So the Vanguard allocation, maybe part of that cash is money that otherwise would have been held in a bank and there's no interest rate in the bank

anyway. So people are just holding cash at the brokerage level. So that could be part of it. Maybe it's not all drag if you look at it from that perspective. It is. Yeah. And we definitely have what we refer to as product buyers, right? So we'll have some folks, particularly affluent folks who come to Vanguard to invest in one specific thing. And money markets is one of those things, right? If we have the highest yield on money markets, there will be people who only own cash. But when I looked at the data, it seemed pretty consistent across asset levels, which led me to believe, hey, the overall pie isn't just driven by, you know, affluent people who are keeping some cash at Vanguard. You know, it was more consistent

than I thought it would be. Okay. Now let's focus on the 63 and 16. It's still mostly mutual funds. So ETFs are now a 25-year-old asset class. I don't think anyone particularly looks at them as though they're novel or new or untested. But the Vanguard investor to me versus investors on almost every other platform had less of a reason to move to ETFs. First, the ETF is a share class of the mutual fund at Vanguard, which is not always the case elsewhere. And second, it's not like there would be a huge trade down in cost, in fees. So it's almost like, why bother? And then I guess the third thing is the ability to do dollar cost averaging into a mutual fund versus an ETF where you have to calculate the amount of shares, or at least up until recently you had to. Do you think that that's why the average Vanguard

account is still a mutual fund, predominantly mutual fund account? Yeah. Well, I mean, I guess I would start with inertia is always a big driver of these things, right? Like, so one of the other findings for me, I was surprised by was that only 21% of our accounts traded in any given year, right? So that, that blew my mind a bit because I'm definitely at the other end of the spectrum, you know, but given that we've had mutual funds for longer, like, and we have lots of accounts that have been around for 25 years. So I think that plays that you did see newer, younger investors were kind of bigger users of ETFs. But to your point, I think the way we think about it is, what mandate are you trying to invest in first, right? And then think about for you, what works best? Like, I like to do my rebalancing on Sunday night. ETFs are a difficult asset class for me to use on Sunday night because

I don't want to put in a market order, sort of hope for the best and open on Monday morning. So I like the ability to trade sort of at NAV when it comes through. But for folks who value the intraday liquidity, ETF can be a structure. And the ETFs in some cases now are a basis point cheaper than some of the Admiral Sheriffs Mutual funds. Right. So if you do a rebalance trade on a Sunday night, because it's like, all right, I'm getting ready for the week ahead. This is one less thing to have to do during the week. You're going to get executed at Monday, 4 p.m. that NAV. With an ETF, you can have a gap up or down open 2%, 3%. And then maybe your calculations are off and then you want to go back and fix it. And it's definitely a convenience factor with mutual funds that still

exists. It's amazing. Maybe just one public health announcement on ETFs anytime it comes up, you know, we strongly encourage people to use limit orders, right? And so that's actually one I'd love to go back and check later. It's like, how is the trading behavior for the people who are using ETFs, right? Are they using market orders? You know, and obviously the liquidity of the underlying ETF matters. If you're trading one of our more liquid funds at two in the afternoon, you're probably fine. In a relatively small lot, you're probably fine with a small order. But for advisors, just kind of always want to hit the point, make sure you're using limit orders. Yeah, absolutely. Actually, especially if you're an advisor, because if you're an advisor,

there's a higher likelihood that you're doing batch trades or block trades across 100 accounts, 1,000 accounts, in our case, 1,500 accounts sometimes. And that liquidity will actually matter. And you're going to want it there when you're moving. I want to go back to something that you just said. Only 21% of Vanguard clients execute a single trade each year. So are you telling me 80% of Vanguard users never trade at all throughout the entire year? Does that include rebalancing? That includes rebalancing.

It's surprisingly low to me. It's nuts. I figured you'd at least have, you know, the, we see in general, the first week of January is a big week for us because people make their IRA contributions. So I would have thought a lot of people would have won and it would be a buy, you know, in the first week of January or whenever. But yeah, a lot of folks are holding. I also think with things like target date funds, which are very popular, there's no need to trade because the rebalancing is taking place internally within the product, within the fund. Yeah, great point. So it's probably playing a role there.

Let's talk about ETFs. So this is directly from the report. ETF users at Vanguard tend to use them for less than a quarter of their portfolios. So they're using ETFs more like diversifiers than they are using them as core holdings. Again, that gets back to the tenure of some of these accounts and the fact that there really wasn't a big cost savings to switch. But this is a direct quote. Their ETF investments are in addition to already diversified mutual fund portfolios. These households tend to be wealthy and long tenured. However, there is a small but

growing group of ETF enthusiasts, typically millennials who have been with Vanguard for only three years, who are building complete portfolios with ETFs. So these are people that are doing it from scratch, and they don't have a building block to get rid of. They can start fresh, and they tend to start fresh with ETFs, which I think is by design. I mean, that is probably one of the benefits of having both for Vanguard, right? Yeah, for sure. And we actually are big fans of the ETF structure, right? We like that sort of more or less folks incur their own transactions costs. You don't have to incur that in the portfolio. There's some tax advantages broadly to ETFs, as you well know, in terms of the create-redeem process that,

you know, for us, because most of our ETFs are also a share of the mutual fund, we can take advantage of in both. But my read of the play is that, largely speaking, ETF in the industry is becoming more synonymous with tax-efficient index low costs. And so like the newer investors kind of like when they want to invest the way Vanguard's been talking about investing for 45 years, start to gravitate towards the ETF structure. Also, you don't have St. Jack in the media talking down ETFs all the time these days. Did he ever come around by the end or not quite begrudgingly? He definitely acknowledged that if you were a buy and hold investor, the ETF structure was fine. I'm sure your listeners know, but he always said, hey,

you don't want to trade. So why have a structure that's sort of conducive to trading? But he did acknowledge if you're a buy and hold ETF investor, it's a fine structure. He just said, don't get into the temptation to trade it on an intraday basis. Dude, Jack's integrity was literally bulletproof. Just ironclad integrity. You guys had a trillion dollars in ETFs and he was basically like, nope, don't like so off message, but like coming from the right place. And I always, I always admired him. I only got to meet him once, you know, very much toward the end. He showed up in New York. I don't know how they convinced him to come to New York for a Tiburon CEO summit in 2019. But I got a chance to make eye contact with him and tell him how much his stuff has meant to me and how much I've learned from him.

So that was a bit of a thrill. When was the last time you had an interaction with Bogle? I'll tell you a couple stories if that's all right. You know, like my first day interviewing, I was living in Chicago at the time. So I'd flown into Philadelphia and this was in 2012. And I remember you were at Bain at the time, uh, working in private equity. Okay. I tell people I was a, I'm a recovering consultant. So, you know, I'm getting, getting over it, but, uh, uh, you know, walk into the victory building, which is, uh, where Mr. Bogle's office was. And I like saw him in the lobby and it was, you know, walk into the Victory Building, which is where Mr. Bogle's office was. And I like saw him in the lobby. And it was, you know, it was like I saw Bono. I mean, it was incredible to see Mr. Bogle on my first day.

And then, you know, on my last interview, the person who interviewed me gave me a signed copy of one of Mr. Bogle's books. It's like made my day to sort of see Mr. Bogle that first day. And then, you know, it was incredible to your point. I mean, he was in most days and you'd see him. And so my funny story I tell people is I feel like I almost accidentally injured Mr. Bogle one day because I was like, two minutes between meetings and you're like, all right, I'm going to run to the bathroom quickly. And I go like charging into the bathroom, open the door and Mr. going to run to the bathroom quickly. And I go like charging into the bathroom, you know, open the door. And Mr. Bogle was like drying his hands.

And I feel like I like in my mind, I missed the door, you know, hitting Mr. Bogle and, you know, probably knocking him over by about by about a foot. But fortunately, he escaped unscathed and made it out. You don't want that to be your rap on on campus. The guy that hit Jack Bogle with the bathroom door. Talk about a career limiting move. That one would would have been rough yeah so all right so that's that's cool that you got a chance to meet him you know newer employees that join vanguard now they're just they're not going to have that that they're not going to have those stories but that i i could see how that's like arriving at disney world and seeing mickey like immediately. One of my favorite things about going out to dinner in New York City is that the celebrity chef from TV or whatever,

they're like in the kitchen in New York. They're literally walking around the restaurant. I like seeing the owner on the premises. Okay. So I want to talk about 2020 volatility. All of the predictions about how indexers would not be able to stay the course were completely wrong. So listen to this quote from the report and react to it. 22% of households traded in the first half of 2020, a rate typical of trading for a full calendar year. calendar year. Despite the increase in trading, less than 1% of households abandoned equities completely during the downturn, while just over 1% traded to extremely aggressive portfolios. The net result of portfolio and market changes was a modest reduction in the average household equity allocation from 63% to 62%. So the index investor didn't move. It's the same rate of trading and their allocation

was the same. Yeah. I took great pride in us as an industry and us as a company and the behavior of investors in Q2 2020. I think people stayed the course. They heard the message about staying the course. And when people trade, it was largely into equities. The majority of folks who did trade bought into equities and they appeared to be rebalancing portfolios. They weren't huge tactical allocation shifts to your point. It was kind of, no, I bought in 10% or whatever it was. So, you know, and I would just add that was the same thing I heard when I was talking to RIAs in that time period. I said, hey, how are your clients reacting? Are they stressed? And people said, no, they're good.

Dude, I wanted to send like gift baskets to every one of my clients because every one of them did the right. I think we had two panic phone calls the entire spring. I want to thank them for actually listening to everything that we've been saying on our blogs and our videos and our podcast. They tuned out all the bullshit.

Even the contributions, the regular contributions kept coming in in the same size. I remember 08 and 09, people cut their contributions. I'm not saying at Vanguard, but like industry-wide. That did not happen. Now, there's two arguments. One is investors are getting smarter, which is an internal debate we're having. When I talk with Michael Batnick and Ben Carlson, we're trying to figure, because we Michael Batnick and Ben Carlson, we're trying to figure, because we look at all the new brokerage accounts opened at Robinhood in April and May. People came flooding into the market with cash. When's the last bear market where you saw that reaction? So we're trying to figure out, are people just getting smarter?

Or was the bear market so fast that nobody had time to panic or get pessimistic? What do you think is going on? My personal opinion, like I don't know organization what our opinion is. My personal opinion is it's a bit of both, right? So I definitely was reflecting on it and kind of, you know, certainly versus 08, the fiscal response and the Fed reserves response was much quicker and much more substantial straight out of the gate than it was previously. So that meant the market recovered much more quickly. So I was thinking to myself, well, hey, if it had persisted down 35% for six months, would people have been

as sanguine about the prospects, right? But I do think people have done a better job of asset allocation. So, hey, this is for retirement. I'm 42 years old. It'll recover between now and when I turn 65. Here's another silver lining. If you're somebody that just started investing in the last five years, so prior to the pandemic, right? This is now a formative experience for the rest of your life. And I know this because my formative experience was the dot-com bubble. That was my first two to three years on the street. So this is now your formative experience, which is that horrible things can and will happen. No one will be able to see them coming. Stocks will react extremely quickly and negatively. And then solutions will be brought to bear. Stocks will recover. The business cycle will recover. If that's the first formative lesson

that you got to experience as an investor, because you started sometime in 15 or 16, that is such a blessing, I think, for the rest of your life. You agree with that? Totally. Well, I'm happy to stick on the Q2 2020, but that was one of the other super interesting things from the paper for me was we you know, we looked at account tenure, right? Which you can roughly associate with age. But the equity allocations for people who started investing in the second half of the 90s are to this day higher than they are for other periods. And then you have that boom. They remember.

That's when they started, right? Like they started at 24 and they experienced that. And then when you look at the millennials, like the people in their late 20s and early 30s who started investing right around the GFC, they're more risk averse than everyone else. And so you really do see that impact of what was your first experience with investing in your 20s. And it seems to persist over a long time. Okay. I want to spend a little bit of time on this. Allocation by account size was really interesting to me. You guys found that the smaller the account on average, the higher percentage of cash held in that account. So this is your report. Lower balance investors, particularly with balances less than $10,000, have a higher allocation to cash compared with

those with higher account balances. Investors with 500,000 or more have 13% of their portfolios allocated to cash. Those with $3,000 to $10,000 in account assets have a cash allocation that's more than twice as high. And you say people with less than $3,000 have more cash than equities. What is that? Is that lack of sophistication or is this an account that people forgot about? Or is it like they're less financially secure so they keep it in cash in case they need it? What do you think is leading to that?

My strong hypothesis is it's an age correlation with account size, right? So my read is that it's more younger people have more cash, right? So one of the other things that was surprising to me was it was hard to tell what the exact number was, but the 25th percentile millennial investor had zero equity exposure, right? And those are going to be the folks who tend to have lower account balances. So that's my guess is that it's driven by the people with accounts less than 10,000 tend to be younger and younger people right now grew up in the GFC and are more risk averse. So. Right. The zero equity accounts. So that's basically an account where nobody bothered investing or somebody sold something and

forgot to buy something else. Those are mostly accounts that are under two years old and have less than three grand in them. Yeah. And, you know, it's not like the old days of 401k, like someone had to choose an investment when they put in the three grand into the IRA or whatnot. It just means they put it into a money market or a bond fund or whatever it is. Now, I don't know. Maybe some of them put it in there and said, hey, I'll come back and decide what to invest in later and then never came back. But I would guess a lot of them actually made a conscious decision to say, no, I don't want to lose this money. It goes back a bit to our earlier discussion on cash drag.

If you're investing in an IRA, though, you would hope people were thinking 30 years out. So I think still more room to go, particularly with that younger cohort. I'll be honest with you. I'm in the industry, and I probably have some IRAs sitting somewhere that I forgot about. So maybe mine is in that mix. When I joined Vanguard, it was like part of the compliance requirements is you have to get all the assets to Vanguard so we can kind of keep an eye on them. And I definitely found a few accounts I'd forgotten about as part of that process.

Right. Let's do index versus active. So many people are not aware of Vanguard, in addition to being one of the largest index providers in the world, is also one of the largest active management firms in the world. And I think one of the big differentiators is that you guys are using a lot of outside managers to handle those portfolios and those funds. And you're doing it at a very low cost because of the benefits of scale. So you don't traditionally get associated with active management, but Wellington and you've got some great brands. The share or the amount of accounts that had any index fund in 2015 was 71% at Vanguard. In 2019, it ended at 71%. So that hasn't changed, but the active share has. That's gone from 57% of Vanguard accounts held something active in it down to 49%,

which in dollar terms is a big deal. That's probably going to continue, but maybe there'll be a blip because I feel like in 2020 and 2021 so far, active seems to be back in the mindset of investors. They're into the stock market again. They're paying attention. They're picking names. They're trading. I know that's not necessarily the Vanguard investor, but I have to believe some of that zeitgeist is going to leak over into Malvern PA at some point. Yeah, well, I guess a few thoughts.

So you're totally right. Vanguard, actually, when I joined from afar, pre-Vanguard, I thought of Vanguard as being dogmatic about indexing. When I joined, I actually realized Vanguard's not dogmatic about indexing. Vanguard's dogmatic about low cost, right? Like active versus indexing is, we think both equally appropriate choices.

So to your point, on the equity side, we tend to use third-party managers, right? So we have a small quantitative group that manages a bit of the money, but most of our equity active money is run by third party. And then on a fixed income side, we manage it ourselves. But, you know, there's some really long term, high performing active funds. And that's one of the things we always emphasize on the active front is, you know, if you go active, like stick with it for a while, right? Like don't chase the returns. In general, strong performance over the past five years is a very poor predictor of strong performance over the next five. So you don't want to kind of be

piling into the funds that have recent outperformance. You will have periods of underperformance, stick with it. But yeah, we think is a reasonable strategy. Now, I know I didn't really address your question on kind of, hey, is this going to leak back in? I'm with you personally in the sense that I think people see individual equity allocations that seem goofy to them. And I won't name any sort of specific names, but I think that gets people to the, like back in the mindset of, hey, is there someone who could avoid those goofy names and, you know, produce longer term return? I think that becomes more of the thought process. I think we had 10 million new brokerage accounts opened up this year, or I forget what the number was. It's a large number of new investors. And I think whether you're passive or active,

I think you have their ear. I think because they're new and they haven't been steeped in any of these traditions of only passive, only active, I think like every fund family, conditions of only passive, only active. I think like every fund family, they have like a moment on stage to make their case. And Vanguard, you know, obviously Vanguard is almost like a default option for so many people, but this is a new audience. They might not even know what you guys are about. So outreach is going to be important. Yeah. You've heard you talk about it in the past too, right? We are a bit worried about the sort of individual investors becoming stock pickers themselves. Like that's one we think is going to be pretty. The next bear market will take care of that. You won't have to worry about that. Okay. This is not my first time at the rodeo. Yours either. Okay. International diversification. I found this interesting too. By the way, not being internationally diversified has not hurt anyone for the last 10 years. It really hasn't mattered, maybe 12 years.

But let's get into this. So fund-level allocation for Vanguard households, and this applies for taxable or IRAs. It doesn't seem to matter. 64% of assets in Vanguard accounts are in domestic funds, and 17% are in domestic bonds. So probably treasuries or high-grade corporate or munis. And then 15% international equity, 4% international bonds. Throw out the international bonds. Throughout the international bonds, 15% international equity is very low when you consider that the U.S. stock market is only 55% of the global equity market opportunity. So U.S. investors, and again, this hasn't hurt them, but they do not seem to be very much interested in, on average, in international equities.

Do you think that's just a function of backward- performance or is there something deeper going on there? Yeah. To your point, this one's been one we've been saying for a while and have to admit that it hasn't happened yet. But so my read of the investor behavior is again, inertia, right? So, and this was another one where Mr. Bogle's perspective deviated from Vanguard's perspective at times. Let's just let people know. So Jack Bogle basically said, you get all the diversification you need with US stocks. There's no reason to own anything overseas. Yeah, long story short, I think Mr. Bogle would say, hey, US corporations are pretty

global at this point in time. So you're getting exposure to those economies through US companies. Our research, we feel pretty strongly, would indicate there are real benefits of owning international equities. Because Mr. Bogle's core principle is market cap weight, like own the entire market. And to your point, the overall global equity market is 40-some-odd percent international at this point in time. So that's one we would say, we think it's important. I can talk a bit more about that. But to your point, why do people not use international as much? There is part of it in the sense of we launched our international funds later. So you have the general inertia when

you look at Vanguard assets of if you started as an investor at Vanguard 25 years ago, the lineup wasn't as global as it- Well, you found that younger investors tend to have more international diversification and the home country bias was stronger with longer tenured investors. And then you also found that advised portfolios had higher international diversification, which I guess is another sign of better disciplines among investors who were being advised at Vanguard? Yeah, it's definitely people staying the course. To your point, if you looked at the returns for the last few years, you would have had a higher return with a US overweight. But from a long-term, we just published our economic and market outlook and published our 10-year forecast

for different asset classes. And our forecast for international equities is 8%. And our forecast for US equities is 4.6%. By the way, all disclaimers apply to that forecast, by the way. Thank you. Let me just indemnify us both. I want to ask you about product choice and where you see things going from here. So the number of households using ETFs is only 13% at Vanguard, which I'm sure industry-wide is very low, even though that's doubled from 2015 through 2019. And we talked about a lot of the reasons why. A lot of people in the asset management and the wealth management space are now talking about the next leap from ETFs,

which is direct indexing. Is there an official Vanguard house view on direct indexing yet? Are there things that are in the works that maybe we don't know about? You don't have to detail them, but like, what are you guys thinking? Because if you had this slow of an adoption of ETFs, maybe it's not even worth being in that space, or maybe it is. I don't is. What are your thoughts on it? What is Vanguard's house view on that concept? Yeah. So I don't have any house view right now. I will say we're evaluating it, right? We always start with, is this something that's going to help investors succeed over time? Is this something that's going to be good for investors

over the coming decades? Not over the coming three years or five years, like not just, is it a, a trend, but is it something that's going to help? And I think, you know, you have to like direct indexing. There's a possibility. Like we, we see there are at least use cases, right? So, you know, you have, we generally think about. Concentrated positions are a big one. Yeah, exactly. Completion portfolio around kind of, you know, equity,

equity compensation for my employer, you know, tax loss harvesting for, I'm a, I'm a PE executive and the vast majority of my income comes in the form of capital gains. Like, you know, and then you have the ESG side where if you have, if you have individually strong ways that you want to sort of express your portfolio, those may be better suited to, you know, a product where you can expose your own preferences. So we're looking at it as the short version. I don't think direct indexing is applicable to sub $500,000 portfolios. I think it's more firepower than is necessary, more complexity. Now, it could get simpler. The complexity could go away. The investors can get more sophisticated at that lower end too. But I think at the moment, it's probably a 1% type of solution.

And that's obviously not the bulk of Vanguard accounts right now. Yeah, no, it's not. And I personally share your view that pooled products have been a huge innovation for investors. And we think there's going to be a place for pooled products for the long term. So I'm certainly not in the camp of direct indexing is going to be the be-all and end-all. Completely agree. So I want to end by talking about your specialty at Vanguard, which is working with firms like mine, working with independent RIAs. working with independent RIAs. This has probably been a very strange year for you to maintain relationships and help firms where you can't really see them, visit them,

feel what's going on for yourself. But what's your read on how RIAs in general have come through the crisis and where do you think things go in 2021? Yeah. I mean, so RIAs, I think, gone from strength to strength, right? So my sense is the clients felt the value of the advice they had been receiving, right? In terms of the allocation, having the, we talk a lot about in our advisors alpha framework about the value of behavioral coaching. And I think it's times of market stress when people really sort of feel the value of having someone, you know, even if they didn't take action, like having someone where you could just have a chat with and be like, hey, we're good, right?

You know, and keep people aligned with their goals. So we always start again with the why, like, and we want people to have good long-term advice, like the impact the RIA channel has had on the broader financial advice industry in terms of, you know, moving more of the advice world to a fiduciary standard and whatnot has been incredibly helpful. So like when we think about going forward, what I heard from clients this year was, hey, how do we prospect in a virtual environment? The folks who were already in the funnel, they felt good that those were going to continue, but it's kind of, hey, the way I used to receive clients was different.

You may have met them in person or whatever it was. So that was something that folks were thinking about. So I think what you're getting at is a huge concept that I don't even think firms like Vanguard or iShares or anyone even understands what's about to happen now. I'm not even going to be able to barely scratch the surface of this topic, but just maybe some food for thought. We've just been through a year that literally forced 95% of the population to learn to live their entire lives to some extent on the internet. And that ranges everything from seeing a doctor to buying groceries to finding entertainment and finding financial advice is part of that.

And I think what that does when this ends, these people have acquired these skills of feeling comfortable and working with professionals, working with lawyers, accountants on the internet, working with financial advice. So now that becomes, I think, a baseline of how everyone feels they're able to conduct business. And now that blows up some of these geographic advantages for financial advisors who have their home turf or their stronghold on a certain county or part of the country. None of that matters anymore. If you're willing to take legal advice and file your taxes on the internet, you're certainly going to work with a financial advisor on the internet with less

trepidation than ever before. So what does that mean for the way this industry is structured? I think it's just an amazing, 2021 is going to be an amazing year for firms that have figured out how to bring on business from all over the country. Do you see it that way? Yeah. Well, I think there's, in my opinion, no doubt that the world will be more virtual post COVID than it was pre COVID, right? So I think it's a magnitude question, not a sort of, is that the direction of travel question, in my opinion. So like, I always think, when I think about advice, I think the two most emotional topics in anyone's life are their health and their family's health and their money, right? So like, I do think there's a people, like for those

emotional topics, do have a desire to kind of know and meet their people and at least to know, right? So I think the question is, well, will humans be able to get to that threshold of, I feel like I know and trust you the way you want to with your primary care physician and your financial advisor in a purely virtual way over time, like, or will there be a mix? And my hypothesis is there's going to be, there's going to be a mix. I agree with your point in the sense of the geographic's less important. Like my dad's a lawyer and he's got a client in Florida. They see him once a year, like they'd still meet face to face every now and again. And so I still think face to face is going to be a big portion of the financial advice landscape. But I do think, there's going to be more of a willingness to start a relationship with someone virtually with the idea that we will meet face to face eventually. But that is not any longer a precursor to hiring a professional to do anything for you, including a personal trainer, including a doctor. Like, yes, ideally, we would sit down together for lunch, but nobody has time for that.

And we live 500 miles apart. So let's get the ball rolling and we'll, maybe we'll, we'll get together on my birthday. Like, I do think that that's where things are headed and younger generations are even less sentimental about the face-to-face. The physical medium is a means to an end, right? The end is, this is a person who understands me and a person whom I trust, right? Like, and so firms who figure out how to do that, you know, through whatever medium are going to be the most successful over time. Right. Ryan, thank you so much for joining us today. I'm going to link to how America invests in the show notes so people can see all your great charts and all this awesome data for themselves and really appreciate hearing from you. Hopefully, we'll have you back soon. Yeah, no, thanks, Josh. It was awesome. And I have to say as a head RA,

always thank you, Ritholtz as well for being a good Vanguard client. Awesome. Well, we love you guys. All right. We'll talk again soon. Thanks. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.