Scott Puritz: Hello, I’m Scott Puritz, Managing Director of Rebalance. Today, we are really excited to welcome Charley Ellis, who just published a new book, his 21st, Rethinking Investing. In this book, Charley’s fresh insights challenge conventional wisdom and offer investors a clear modern perspective on building lasting wealth. Dr. Charles Ellis is the founder and former Managing Director of Greenwich Associates, where he advised institutional investors in over 130 financial markets around the world.

He has taught investment management at both Harvard and Yale, served on the Board of Directors at Vanguard, and earned a lifetime recognition from the CFA Institute for his contributions to the investment profession. Charley has served on the Rebalance Investment Committee for 12 years, and his expertise continues to shape our clients’ portfolios. Charley, welcome, and how are you doing this morning?

Dr. Charles Ellis: Just great, Scott, thanks.

Scott Puritz: Charley, we’ve talked about it many times before, but could you share with the audience why you decided to join the Rebalance Investment Committee?

Dr. Charles Ellis: Well, candidly, I was asked. Scott and Mitch and I all went to the Harvard Business School, and that’s a common denominator that draws people to say, oh, well, if you went to our school, I’d be interested in chatting with you. And then they had a vision of what they wanted to do that I thought was constructive, providing a broadly diversified service at a very low cost to the individual investor, and that’s something I deeply believe in doing.

Scott Puritz: Well, it’s an absolute pleasure to have an opportunity to sit down and chat with you and discuss your, is it your 21st book, Rethinking Investing?

Dr. Charles Ellis: Yes, it is.

Scott Puritz: That’s an extraordinary number. I guess what I’d love to start with is just a simple question. At your age, most folks are focusing on grandchildren, your health, travel, here you are publishing your 21st book, which is a fantastic read, by the way. I bought a copy for all of my family members, my nieces, nephews, all of the staff at Rebalance. So what made you write your 21st book?

Dr. Charles Ellis: There are different parts to it. One part is I’ve had an extraordinary privileged life. My career in investing has been really magical. I’ve worked with and advised and consulted with virtually every major investment management organization in the world at one time or another, most of them for year after year after year after year, and that’s been a wonderful experience. Then I’ve been on a string of investment committees. The investment fund supporting King Abdullah University for Science and Technology is one of the best managed in the world, and it’s huge. It’s either the first or second or third largest educational endowment, depending on which way you look at it. But a brilliant group of people most of whom came out of the World Bank, and they are not only individually gifted, but they are a superb team. And then I had 17 years of serving with David Swenson on his investment committee, and I’ll tell you, that was without a doubt one of the great experiences anybody could ever have, because David was an extraordinarily intelligent, creative, disciplined investor, and he also was very inventive in creating the whole concept of the endowment market.

And working with people like that is really compelling to, well, gee, if you had that privilege aren’t you gonna share it with other people? And because I do like teaching, and I do like explaining things, I have a dreadful facility for sitting down and saying Charley, you really ought to explain yourself. Sometimes in hotel rooms, sometimes on airplanes, very seldom in an orderly situation.

I write little bits and pieces together, and then finally put them out as an article or a book. And Scott, this particular book, as short as it is, less than 100 pages long, and so anybody reading it has already finished, or almost finished, when they first start. This, to me, is a marvelous, privileged experience of having thought about things, talked about it with other people extensively, and tried to figure out, in today’s world, what should someone be doing?

And candidly, I had this experience of Eureka. It all came together. It’s a clear- cut formulation. It’s exactly what I would recommend to my children, and do, and it’s what my wife and I do. It’s what our church does, because I persuaded the investment committee to follow the precepts. That is what I would recommend any investor to seriously consider doing, and almost every investor should do it.

Scott Puritz: You’re a fantastic writer, Charley. You take a topic that’s bone dry and bring it alive. How would you describe your writing style? I mean, how do you write?

Dr. Charles Ellis: Well, first of all, a confession. When I was at the Harvard Business School, you may remember we had a course called Written Analysis of Cases. We were given a case, and then Saturday night, you had to turn in your final paper.

It was a limit on how much paper you could, how many pages you could use. We really worked hard at it, and I didn’t get it. The purpose of the course was not to see whether you could figure out a good analysis and do the numbers and make references to brilliant insights. The whole purpose of the course was write it so that an individual who’s bright, talented, and not at all concerned about business will understand what you’re talking about and why. So the graders were recent graduates from Radcliffe or Smith or Wellesley, and honestly, they didn’t know, nor were they expected to know anything about business. They were supposed to be clear- minded. Are you making this easy to understand. Well, I didn’t get the message until the very last part of that course, and it was a terrific learning experience.

And once you have one of those, oh my gosh, I just barely figured out what it was all about, it kind of sticks with you. And then I do believe that trying to explain things in the listener’s way of thinking, or the reader’s way of thinking ,is a wonderful discipline that I like playing around with, trying to make things easy and clear.

Scott Puritz: How much rewriting do you do?

Dr. Charles Ellis: Lots.

Scott Puritz: Do you have a sounding board? Does your wife act as a sounding board or your editor?

Dr. Charles Ellis: It’s one of the great privileges of my marriage is my wife is a very sharp editor, and she will go through, and she’s very kind and willing to spend the time to go through.

Scott Puritz: Get that red pen out.

Dr. Charles Ellis: Yeah, she’s terrific. 

Scott Puritz: Oh, great. In your book, you have this broad, overarching theme of the power curve. What do you mean by the power curve, and why is it so centrally important?

Dr. Charles Ellis: Well, the power curve, or compounding, America’s favorite investor Warren Buffett over and over and over again talks about the extraordinary power of compounding. And if you just think about it, something is doubling. Goes from one to two to four to eight to 16 to 32 to 64 to 128. Wow, that last doubling is huge. That’s the power curve that you get more and more and more and more every time you double. And the rate of change goes up quite rapidly. And most of us miss two things in life, in the investment life. The power of compounding, which we all underestimate.

Boy, I’ll tell you, if you could go from 32 to 64 to 128, you’d say that last 64 to go to 128 was really, really worthwhile. It is, but the key to that, of course, is to start soon enough and have long enough. And most people think long- term is six months and 10 days, because that’s what the tax man says. And long- term, most of us start investing in our 20s, and we’re still investing in our 80s. So that gives you 60 years. And instead of taking a whole bunch of different slices, why not take the whole month and try to think about if I had 60 years, would I want to do with it? And the answer is you would want to compound.

And if you could compound over 60 years at a reasonable rate of return, you’ll wind up with a very substantial pool of savings when you might need it. And if you don’t need it, your children might find it very helpful to have in their lives.

Scott Puritz: A related concept, Charley, is the rule of 72. Maybe you could expound upon that and the power of rule of 72.

Dr. Charley Ellis: It’s very powerful, simple to use, and everybody should know about it. And I think almost everybody should use it all the time. It’s not exactly precise, but it’s very close to accurate. What interest rate times what time period equals 72? Well, if you’ve got a 10% rate of return, take 7.2 years to get to 72. If you have a 3% rate of return, well, it’s gonna take 24 years to get to 72.

So the higher the rate of the longer the amount of time that you’ve got, the more you can double and then redouble and then redouble that and then redouble that. And that’s where the compounding and power curve both come in. But the rule of 72 gives you a quick, easy to use, wet finger in the air to tell about the direction of the wind. And it’s so close to accurate that most people say, no, I’m gonna pretend that it’s perfectly accurate because it’s so convenient. It works so very, very, very well. It’s good to use also when somebody’s giving you, you know, you’re gonna double your money in three years. Okay, let’s see. Three into 72, 24% annual compound interest. That’s incredible. Correct, you’ve just saved yourself from being suckered. Very, very useful to think about much of a benefit you can create for yourself saving, investing and staying invested.

Scott Puritz: That’s a nice transition, Charley. In your book, you talk about this concept of shifting the saving mindset. What do you mean by that?

Dr. Charles Ellis: Well, there are two different ways that people can look at saving. One is negative. I have to give up what I wanted to do. I can’t do something I wanted to do. Candidly, it’s a burden to be saving. I don’t like it. Another way of looking at saving is, saving gives me an opportunity to have the things I really want, when I really want them. Saving is a wonderfully positive part of my life. Actually, saving can be quite enjoyable when you think about how much have you saved and look at in terms of what it’s gonna enable you to do.

Either protect yourself in times of retirement or to have more fun as a result of having saved enough so you can afford to do something you really care about. So the happy savers are the ones who are constantly converting something they don’t really care about, something they don’t really need, something they don’t really want into something that they can use anytime they want to to do something that really, really pleases them. And I’m a big fan of being a positive saver. And I’m not at all interested in being a negative saver.

Scott Puritz: That’s really a whole different way of looking at savings. As you mentioned, you’ve been involved in the investing industry or industries for many, many decades. What are some of the broad changes, the most compelling changes that you witnessed during your many years in the business?

Dr. Charles Ellis: Well, be prepared for a long answer, Scott, because there are so many changes. I’d start by saying virtually everything that was important about investing in the 1960s has been obliterated or transformed or so massively changed that nobody would recognize it. You go back and you think about it, the 1960s, you look back, there was the 1930s, which was a terrible time in the economy. 1940s, World War II. 1950s, Korean War and the Cold War and a lot of anxieties. And a lot of people were very defensive in the way they thought about investing and what they were trying to do. If they did think about investing, most companies had a retirement plan that was set up, the company ran it, the company would pay you a pension during your retirement and you didn’t have any chance to influence that one way or another.

Those plans, defined benefit plans are basically eliminated from the corporate sector, still have them in the public sector. But think of the other changes. When I came out of Harvard Business, oh, the Harvard Business School in 1963 did not have a course on investment management. Did not have a course on investing, didn’t have a course on financial analysis. It started a year later, just after I graduated. Wonderful professor named Collier Crum created a spectacularly successful course and there are now seven or eight different courses on investing at the school and it’s the same school, but boy, they changed the curriculum in the investments area. So no courses at the Harvard Business School or at any other leading business school.

Trading on the New York Stock Exchange, million shares a day, that was a big deal. Got up to 3 million shares. No longer required to open the exchange Saturday morning. Used to be, before that, everybody had to come down to work Saturday morning and then go home for Saturday afternoon maybe. But think of the impact of having the weekend, the whole damn weekend was the time that you were able to play with your family or do what you wanted to do with your friends.

So 3 million shares a day. That’s now six, seven, 8 billion shares a day. New York Stock Exchange listed stocks on the market, off the market, various different ways. That’s an enormous change. We’re talking about 2, 000 times multiple.

Okay, another change. It used to be back in 1960, let’s say, that about 10% of trading was done by people who did it for a living. 90% was done by individuals. The people that did it for a living were mostly bank trust departments. In those days, we had 14, 000 banks in and most of them had a trust department. Guess who went to work in the trust department? The guys who were not good enough to do the lending. They just weren’t that bright or that ambitious or that willing to work. So, okay, find a place for them and it’s a public service. It was not expected to be a profitable business and so nobody got paid very well, but it was nice and quiet and if you showed up by 9:30 or 10 in the nobody would complain and if you left at 4:30 or 5, nobody would complain.

So it was a compromise and people who were not too bright could go into the trust department. What did they do? Well, they mostly managed personal trust. And in personal trust, you would be very careful you don’t speculate. So you buy dividend paying blue chip stocks and hold them forever. And you have about 60% in stocks and 40% in bonds. Or maybe 40 in stocks and 60 in bonds. Then the bonds were all allotted maturity. Then it was very plain vanilla work.

That 10% that was quote unquote professional been revolutionized. The people that dominate the professional now are hedge fund traders. They’re smart as the dickens. They went to fancy schools. They are very ferocious in their competitive instincts and they are extraordinarily well informed in ways I’ll talk about in just a minute but just think about it.

That 10% is now 90%. A little over 90%. 90% of the trading is done by expert professionals who have fabulous information. And to think about the information advantage that they have, they all have Bloomberg terminals. Most of them will have Bloomberg terminals in their office. Some will have Bloomberg terminals in their home and a few will have a Bloomberg terminal in the limousine that brings them to work or takes them home at the end of the day. With a terminal, you can find out anything about anything you wanna know at any time. All of them have powerful computing. When I was coming out of Harvard Business School, there was a terrific enthusiasm for the IBM 360 series of computers. They were amazing. Well, now almost all of us have in our pockets cell phones with more power than the 360.

Just in terms of the revolution that’s taken place in computing power, and we all have computing power and computing models, and so does everybody else. So what looks like a distinguishing advantage when you look at your own company, turns out to be an equalizer in the fact that everybody else has it too. Then you look at the information. The days gone by when 90% of the trading was done by individuals. They had no access to any research of any use at all, none. now there are thousands of people all over the funneling information into the internal system. Some comes through the internet some comes through Bloomberg terminals, some comes through computing power. But all of that information is known by everybody at exactly the same time.

So it’s a little bit like playing poker with everybody has the cards face up and you can see exactly what everybody has. You know who’s bluffing and who’s not. You know exactly where you stand all the time. That extraordinary information turns out to be no help at all because everybody else has it too. So those are the people that are competing for setting the right price. And while the price you could argue is never quite precisely right, it’s so darn good that it’s very hard to be better. And that’s the reason that 85% to 90% of mutual funds over a 20 year period fall short of the benchmark they chose as their target. It just can’t keep up because the markets are so quote unquote efficient or correctly priced.

But that’s the role of markets. Markets are supposed to find the right price. And the more you have more participants in the market and more information to the participants more convenient devices for the closer and closer and closer you’ll get to having accurate prices. So the whole purpose of investing in the early 1960s was to find information that nobody else had, which was easy because companies would, if you called a company and said, I’ve done my homework, I’ve prepared myself carefully, I’d like to come in and interview one of your senior officers for an hour or so, they would usually say, sure, come on in, glad to have you. And if you’d like to stay for lunch, that would be great. Whom else would you like to speak with?

Their purpose was to be sure the stock price was reasonably good, i.e. reasonably high, so they wouldn’t be taken over by a raider. And they thought it was part of their job. Well, today that kind of a conversation is illegal. The SEC has made a rule called regulation fair disclosure. They can’t, any corporate executive cannot provide factual information to any one investor that might be useful from an investor’s point of view without making a concerted effort to get that information into the hands of every investor.

So what they do is pretty simple. They have an 800 number and four times a year they give a quarterly report that everybody can tune into that everybody who would like to knows all that everybody else knows at exactly the same time anybody else knows it.

So the market has been transformed. And the possibility of beating the market, which was candidly, pretty easy in 1960, 62, 64, now it’s virtually impossible. Nice thing that has happened, of course, is there is a the solution. And the solution is indexing. Low cost indexing is a sensible way. It’s exactly what I do. It’s what my family does. It’s a very sensible way for anybody to invest and it takes all the fear and anxiety and worry about the stocks individually and sets them aside. And candidly, there’s one other part that’s really quite amazing that most people never pay attention to. What’s the biggest benefit of indexing? Most people say, well, you get top quartile results pretty much all the time. That’s pretty good. And it’s very low fees. That is pretty good. Anything else? Yeah, you get wide distribution.

So diversification is a real advantage. Anything else? I don’t think so. Well, I do. I think the biggest advantage any of us get is an extraordinary saving because behavioral economists have been able to figure out that individual investors make mistakes when they’re trying to do something to improve their results. And they’re really trying to improve the results but they wind up making mistakes. And it’s a fascinating field, behavioral economics. And if you haven’t read Daniel Kahneman’s wonderful book, Thinking Fast, Thinking Slow, it’s really worth taking the time to study it because it tells us who we are as human beings when we’re faced with all kinds of complicated or important decisions. We tend to get it not quite right. We tend to get it a little bit wrong. And that turns out to be expensive. Well, how expensive?

Scott Puritz: So here’s a corollary: if markets are so efficient and indexing is so logically the way to go, why do so many investors still pay attention to active management?

Dr. Charles Ellis: Well, I’m not a psychiatrist, but I do know that people really like to believe they can do better by trying hard. We go to school and our teachers teach us, if you do your homework, you’ll get better grades. And then we go to work and our employers tell us, if you work hard, you’ll get a better raise. You might even get a bonus. And in every part of our lives, if you happen to like to play tennis. The tennis coach will tell you, if you really want to get better at tennis you really ought to be out on the court quite a lot, practicing, practicing, practicing, And the same thing is true of every other sport, every other activity. It’s true about music. It’s true about everything in our lives, almost, that we would do better if we tried harder. And so I think one part of active investing is why not try hard?

Another part is mythology. If you read the newspapers, you would think, God, there are a lot of people who are really doing terrifically. And that’s because if you’re a newspaper editor or a newspaper writer, the only subject that you want to write about is something readers will find interesting. And who wants to read about, and there was another day when another guy lost a little bit of money. That’s not fun, but is it fun to read about somebody who was able to figure out a particular company and make his fortune on it? Terrific. Do we write about what he did in the next six years? No, we don’t. We go on to somebody else who happened to have a wonderfully positive experience. So you got to watch out for who we are as people.

We’re trained to believe by trying harder, we’ll do better. We do believe that we’ll do better by trying harder. And we usually, most of us have experienced in our lives that would prove that that was a sensible thing to do.

The second thing is there’s always hopefulness and we hope that our team will win. And that’s how people bet, that’s how they cheer. And none of us expect to have unhappy marriages. And all of us are looking forward to things working out reasonably well. So all of that kind of keeps coming back together again. Then the one last part that I just think is, isn’t that interesting? Passive. Who in the world wants to be described as passive. It just doesn’t fit.

Scott Puritz: Oh, come on Charley now. Like you’ve been at this for 60 years. You are a lover of the English language. Sure that you can come up with a different name.

Dr. Charles Ellis: Yes, indexing. Indexing, okay. I use indexing a lot. I never ever talked about being passive. Okay. Passive is a negative experience in most worlds. But in one world, passive is just a description. In the world of electrical engineering, there’s a passive, which is the hole in the wall that’s got two or three holes in it. And there’s a plug that’s got either two or three prongs on it. Active is the prong part. Passive is the holes part. And nobody has even thought about that having a negative connotation. It’s just a description. But the guys who developed indexing happen to be electrical engineers and they use the term passive, not intending to offend anybody.

But I think the real reason is that indexing has not become more substantially successful is that people don’t like the term passive. So I never use the term passive because it gets people going in the wrong direction. They don’t want to be passive they therefore want to be active in their investing. And if you think about it, maybe that’s what slowed down because all the data says the really sensible thing to do is to go indexing. All the data. Yeah, I know there’s some stories here and there occasionally talking about somebody who had a short period of time that was really exciting as an active this or an active that. But the long- term data overwhelmingly says, go indexing and it’ll work out.

Indexing is now larger than active investing for individuals in assets and it keeps climbing and climbing and at a more rapid rate. So it’s a slightly accelerating curve, but I do think it’s going to keep right on going until someday comes. And that someday, someday, someday is pretty far out. That’s the day when people say, you know, active investing doesn’t work and it won’t work. And so I’m going to get out of it. The people that are actively involved in setting prices are extraordinarily well- paid. They love the work that they’re doing. They’re deeply committed to it, intellectually and emotionally. And they’re not about to give it up because it’s exciting and it’s fun. They’re not going to give it up because it pays really well.

Not going to give it up because it’s what they do. And if you think about it, how many people have left active investing in the last year? Actually, it’s the other way around. More people have gotten into active investing than have left. And then you think, what happens when somebody’s 45 or 50 and comes to a realization that this isn’t actually working? Well, too late to become a dentist too late to become a physician too late to become a doctor. I guess I’ll just soldier on. By the way, when I get to 65, there’s no reason I have to stop because it’s a mind game. And so I could do the same sort of work in my 70s and 80s. And you never know, I may find those individual stocks here or there or another place that’s a real winner. Then while it may not be appropriate for my clients, it might be a chance for me to shoot the moon and make a fortune.

Scott Puritz: Recently, Wall Street has been making a strong push for Congress to liberalize the rules around private equity and individual investors. What do you think of that initiative?

Dr. Charles Ellis: Nothing that I think is favorable. Scott, that would be a really serious, open the door to serious trouble for most individuals. Looking backwards, the record is pretty darn good for the very best players. But if you look at venture capital, for example, the extraordinary successes are simply spectacular. But the average dollar invested in venture is at best broken even. Generally, it comes to a small loss. That’s the average dollar. And to get to the average, you have to take all those winners and match them with some really big losers.

And there’ve been lots of big losers. In the case of private equity, it’s sort of the same direction. The people who’ve made a lot of money are the people who’ve produced the private equity investment management firms. And they have done really rigorous work and gotten paid very, very well. But their investors have done very well if they were very skilled at selection of the managers. And they’ve been disappointed if they weren’t particularly skilled. And individual investors don’t have the time or the information or the analytical prowess to be able to figure out where could you put money and leave it for the next 15 years, which is basically how long you stay tied up with private equity. That’s a long, long time out there in the future. Lots of things could change. And chances that people get it right are very low.

Scott Puritz: Like you Charley, I am a dog lover. And in your great new book, Rethinking Investing, you compare buying an active management fund to buying an adorable puppy to illustrate linked cost. What do you mean by this analogy?

Dr. Charles Ellis: Well, when you buy that puppy for $12 at the local corner store, it’s a wonderful experience, particularly if your daughter or your son fell in love with the puppy before you decided to buy it. But then you’re going to have veterinarian expenses, food expenses. What do you do when you go away for a holiday. There are a lot of different ways that an adorable creature can accumulate cost for the owner. And you really ought to look at the cost of the puppy, not as the purchase price, but as the over time total experience price.

And the same thing is true with investing. People say, well, it’s only 1% And you think, gee that doesn’t sound like very much at all, is it? No but it’s 1% of your assets and you take all the risk. So let’s take a look at 1%. 1% of assets typically works out to be 15% to 20% of returns, particularly after taxes. And then all of a sudden you say, wait a minute that’s not cheap. Then if you say, well, I can get index funds for two or three basis points. So an active manager that’s charging normal fee, what is that fee as a percentage of the incremental returns above the index. Because that’s what I’m supposed to be getting from an active manager.

And the answer there is the fee is infinitely larger than the benefit by the active manager in the whole. It’s, I know that there are individual managers that would say to you, the last 10 years, I’ve had such a good record that you should have been with me, fine. But that doesn’t mean that the next 10 years are gonna be anywhere near as favorable. So when you look at fees, it’s really, I think, quite helpful to look at fees as a percentage of what? Of assets? Sure, it makes it look awfully small. As returns, looks pretty large. As incremental returns above the index, they’re huge.

Scott Puritz: I remember the first time I read this in Elements of Investing, it’s like the foundational concept is that you can get a market return for free, basically. If you buy an index fund that’s virtually free, it’s six tenths of 1% or something, you’re gonna get a market return. So what an active manager should be compensated for is delivering an above market return at the same level of risk. No one ever talks about apples to apples risk, but that’s really, and they don’t. 95% of the time, they don’t deliver it. And then the minute you go through that logic, and this was the insight for me, you’re like, why would anyone invest any way else? And then you realize, well, most institutional investors invest through index funds. The smartest money does it this way. This whole concept of trying to beat the market which you might’ve been able to do 30, 40 years ago, you can’t do anymore. So it’s certainly not in broad index funds, and broad is sort of for most of your portfolio.

Dr. Charley Ellis: Well, that’s why I call the book Rethinking Investing is to keep coming back and looking at, think through each element of your policy, your practice, is it really working for you? And when you rethink investing, I think you come around to very simple prescription. Indexing makes good sense. Saving turns out to be wonderful if you get a decent rate of return. How do you get the best rate of return? Minimize costs. Minimize the cost of behavioral economics. That helps a lot. Minimize the cost of active management. That helps quite a lot. You get that higher rate of return. It means that you rule of 72, will double your money sooner. Double your money sooner again and again and again.

And then I come back to the power curve. One to two, it’s not all that big a deal. No, yeah, but two to four starts to get us, four to eight, that start, eight to 16, my gosh, that’s starting to get really, really interesting. 16 to 32, 32 to 64, 64 to 128, Ooh wee, I love that, lush. 128, where’d that come from?

It came from having enough time and enough of a return to compound on a power curve that pays off wonderfully. So that you can do whatever you really, really want to do. 

Scott Puritz: Rethinking Investing is just a wonderful summary of investing themes and with a refreshing new spotlight on them. One of the most provocative topics that you bring up are the roles of bonds in portfolios. Would you care to expound upon that?

Dr. Charley Ellis: Sure, when you think about investment portfolio mix, if your focus is what’s gonna be like for the next year, and that’s really the dominant factor, then in my personal opinion, you should put that money in treasury bills.

If you’re thinking about, well, no, I’m thinking longer term than that, I’m thinking about the next five, six, seven years, then I think it makes sense to have your money put into bonds, particularly if you have a specific purpose, like sending the kids to college or buying a home or some other bullet expenditure. If you’re thinking about long- term, and I go back to, we start investing in our 20s, we stay investing until our 80s, that’s 60 years, and that’s a really important differentiating length of time.

You think about long- term like that, how much time is there between today and when you’re gonna spend the money. That’s the measure that I think is the most important. And if you’re in your 30s and you’re saving for and your retirement might start at 65 or 70, but it will continue through 80, 85, maybe to 90. Most typically, I think people ought to be expecting that sort of thing. You’re talking about 60 years, at 30 years of age, 60 more years that you’ll be an investor. In 60 years, you certainly shouldn’t be investing in treasury bills. 60 years, you certainly shouldn’t be investing in bonds because the money isn’t going to be spent. You don’t care about whether it fluctuates or not.

I always use the analogy, I’m not sure anybody else sees it as being quite as entertaining as I do, but I use the analogy if you’re on a cruise ship, you’re crossing the Atlantic Ocean, it’s a beautiful sunny day, and the steward comes by and says I just wanted you to know that it’s going to be high tide in 10 minutes. 10 minutes from now will be high tide. Would you care? Would you notice? Would you give a damn at all? I don’t think I would because in the open ocean, it doesn’t matter. If you look at 60 years or 50 years or 40 years, the day- to- day, month- to- month, year- to- year fluctuations don’t really matter. What matters is the upward slope.

So it’s not the up and down part, it’s the steady progression over time part. And all of us ought to be doing the best we can to focus on that slope of returns. Well, in that context, when you get to 20, 30, 40, 50, 60 years, bonds don’t make any sense at all, particularly if you’re not going to be spending the money. So you might want to say, look, I want to have a cushion just in case. Fine, I have nothing against fire extinguisher bond portfolio, but that should be $10, 000 or $5,000. shouldn’t be 10%, 20%, 30% of your total portfolio. And the rest of it should stay invested for the long, long, long term. And anybody investing for the long, long, long- term would make a total investment in equities.

Scott Puritz: Great points, Charley. How do you think of the role of international stocks in the typical investor’s portfolio?

Dr. Charley Ellis: Well, there are two different ways of looking at it. And I personally think anybody should just honestly first make it their own personal free choice. I’m a very big fan of indexing. Fine. The U.S. companies that you would get in an S& P 500 index or some other broad index do an enormous amount of business overseas. Coca-Cola makes more money overseas than it makes in the United States. Now typical of the very large companies, they’re everywhere. So you get a lot of international diversification even if you stay with U.S. companies only. If you said, no, I’d kind of like international diversification because it’s more of it, fine. Roughly half is U.S., roughly half is not the U.S.

So you never get away from the U.S., but still you get another round of diversification. I feel very comfortable with either of those two choices. And I would urge individuals to make the one that they feel comfortable with personally.

Then when you get to more specialized questions about international, I think it gets harder. But that’s the same thing with specialized questions about the U.S.. I am not in favor of ETFs as much as I think they’re just terrific when they’re broadly diversified. There are a lot of ETFs that are highly concentrated in a single industry and individuals should stay away from them. Those are for professional investors who are hedging out different registers and going along. And they have very specific highfalutin reasons for doing what they’re doing.

And they’re experienced in that kind of work. The rest of us should stay away from leveraged ETFs or specialized ETFs. The same would be true for specialized by nation or specialized by geography.

Scott Puritz: Okay, the related question is how do you feel about the role of publicly traded real estate for individual investors?

Dr. Charley Ellis: Fine.

Scott Puritz: A positive though, a must have?

Dr. Charley Ellis: A positive in the sense that I would not be opposed to anybody who said that’s what I want to do. But I would urge them to do it in a fraction of their total portfolio to be sure they’ve got the broad diversification. Anybody who wants to do REITs and thinks they have a knowledge base that would allow them to do better than average, fine.

Just be sure you’re gonna stay with it for a long, long, long time. Otherwise you’re speculating, not investing.

Scott Puritz: Charley, how does everything that we’re talking about today influence the Rebalance Investment Committee?

Dr. Charley Ellis: Well, I think in the investment committee we try to be sensible. Diversification is a very important part of that. And patience is a very important part of that. So we teach ourselves to think long- term and then we also think of it, if this were my personal family fortune, what would I do? And that’s a good discipline always. Would you do it yourself?

I love the phrase, we eat our own cooking. Nice restaurant recommendation. I think the same thing would be true for the investment committee that we would wanna be making investment decisions that would be very comfortable, would be appropriate for the individual investor who’s a lot like us.

Scott Puritz: So what of your books would you recommend that someone who’s new to investing start with?

Dr. Charley Ellis: It depends on how deeply interested you are in learning and mastering. I would have a very strong view that Rethinking Investing is a nice, easy way to get started. Then Burt Malkiel and I jointly did a book (A Random Walk Down Wall Street) I think you might find interesting and enjoyable. That’s a blend of our thinking together. And then another book that’s sold almost a million copies now is Winning the Loser’s Game. All of these books are written deliberately at a level of interest for individuals who are not gonna be investors but withstand the very rigorous demands of someone who was a full- time investor. So there’s a balance between experts and beginners or people who are just interested in the field.

Any one of those would be a great place to start but I’d really recommend reading all three of them. And then as I suggested earlier, Daniel Kahneman’s book, Thinking Fast, Thinking Slow. But that book in and of itself is longer than all the other three books added together. So be careful, it’s a substantial undertaking but if you do it once in your life it will give you a lesson of great value. So those four I would recommend.

Scott Puritz: Charley, this has been an absolutely fantastic conversation. Really insightful. Let’s boil it down. What would you like our listeners to take away from this discussion?

Dr. Charley Ellis: Well, the most important thing you’ve got going for you is time because if you’re just getting started you’re relatively young.

Life goes on for a long time but it’s your life and investing, saving now for your future self is a very generous thing to do for someone who really needs your help because later in life is too late. So do the saving.

The second thing is be realistic. The world is filled with people who are making money by giving you advice and managing assets for you but they’re doing it because that’s how they make their money, not how they make your money. And I would urge you to give serious thought to what can you do to keep your investing simple, easy, not particularly entertaining of course, but effective and doing a really good job for you. And it’s a little bit like you want to have an automobile that works very well every day.

You don’t want to have some days when it just doesn’t do anything for you. You want to have your electrical system in your home working on a regular basis, the plumbing system in your home working on a regular basis. You want the same thing in the investing world. Indexing makes it easy and turns out to be a higher success rate than not indexing. Because it’s, as I said earlier, because it’s boring you don’t do the clever things. You may remember your mother saying to you when you had a cut, a scab on your arm, don’t pick at it. Don’t just leave it alone. It’ll cure faster if you leave it alone. But mom, it itches. I know, but if you can leave it alone it will cure itself faster. And the same thing is true of investing. You do better if you leave it alone.

Scott Puritz: Well, Charley, thank you so much for your time. Thank you for your-

Dr. Charles Ellis: You do a great job of setting things up. I have to tell you.

Scott Puritz: Thank you for your wisdom. This is again, just a wonderful book. It’s a extraordinary that it’s your 21st book because it’s great. You’ve written a lot of great books. This is probably my favorite. So thank you very much.

Dr. Charles Ellis: Pleasure to be with you.

Scott Puritz: Really appreciate you making this happen.

Dr. Charles Ellis: Thanks Scott. Pleasure, take care.