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Tim Fortier: Rules-Based Investing

On this episode, we are talking to Tim Fortier. He is a rules-based investing expert. He's been at this for over 30 years as an investment professional. He's been a broker, advisor, a chief investment officer and a consultant. He is the Founder of Portfolio Cafe. He is showing folks how to remove the emotion from investing.

In this show, you're going to hear about the magical question you ought to be asking whenever you're sitting across from somebody selling you a system or a process. I think this is the million-dollar question because it really makes the other person explain themselves, and it makes you really think about what it is that people are saying and how they're structuring essentially the pitch. I think this is incredibly powerful.

We also talk about the Wall Street myths and actually how a lot of stuff being designed now, even though we've got the fancy technology and we've got access to so much data, is based on the habits from 1950 and how this can be misleading us into bad investment mindsets.

We're going to learn a key strategy about consistency, which obviously in the context of this show is about how to have consistent returns and to have a consistent mindset here. I believe this applies to everything in life. If you are into stock investing or maybe you want to be in the stock investing, you're going to absolutely love this show.

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Dustin
Tim, you've been through the ‘90s boom, the Tech Bubble, the Housing Bust and the Credit Crash in 2008. You've seen it in your career. How do you even function? A lot of people can say, “There's so much volatility out there in the world. Why should I even jump in when we've got all these corrections and an uncertain future?” How do you wake up every day and have a smile on your face and how do you look at this as an opportunity?
Tim
I think this is an opportunity because there are new ways to approach investing and that's part of what rules-based investing is all about. It's how you take emotion out of the equation and how you move forward with some peace. It’s embracing a new approach to investing that removes the need to worry about what the future is because it's going to be an approach that adapts to this dynamic with the market.
Dustin
I want to jump in here and talk about this. When you say emotion, obviously, you get a buddy or a friend that gives you a stock tip or maybe you love Apple and you're an Apple superfan and you've got all the products. Those seem like simple things. I want you to define it a little bit for us.
Tim
Let's start with the fact that every year for the last twenty plus years, DALBAR has been reporting on basically the state of investors. They show, “Here's what the markets return. Here's what the investors return.” Every year without fail, the investor return has been about one-half of what the market returns have been and it doesn't really matter. This has been during the decade of the ‘90s and the 2000s. Good markets, bad markets it really hasn't mattered. Why is that? Humans are wired in such a way that we make ourselves lousy investors. I hate to say it, but it's true. It goes way back to primitive man. We have a limbic system that fires off our fight to flight responses and so investors tend to buy when they should be selling and selling when they should be buying. There are all kinds of other cognitive biases but basically, these are just a fancy way of saying that we do a lot of things to inflict our own harm.
We tend to extrapolate the future, the current realm into the future and we miss turning points as a result of that or we tend to think we know more on a topic than we actually do. We have this intense desire to impart our own desire or our own knowledge into a situation, but yet it doesn't really add any real positive attribute. I saw a chart that showed well over 100 of these different cognitive biases that have been identified. In fact, there’s a whole field of behavioral finance that has evolved around this intersection between money and in behavior. The whole point of using rules-based investing is to remove or prevent these interferences that all too often get in the way.
Dustin
When you say rules-based investing, is this like, “When a stock hits this, if I've lost 10% of my portfolio, I’ve got to get out?” Is that what we're talking here?
Tim
The essence of rules-based investing is to have a predefined methodology to manage money. It can come in different forms. By definition, our approach is quantifiable or quant-based which means we use lots and lots of data. In fact, the more data the better. We're using evidence which is presented in the data. What we can do is we can approach a market, whether it be the stock market or fixed income market. It really doesn't matter. We can have a pre-established set of rules that define what securities we're going to buy and what securities we're going to sell. I'll give you a really simple example. Back in 2006, there was a paper published by Meb Faber and it's downloadable on the internet for free. It was basically a way of investing in five basic asset classes, bonds, US stocks, foreign stocks and real estate. It was a really simple rule that as presented in this paper, you would be invested in those particular asset classes as long as the monthly price stayed above the ten-month moving average. In any time that the price closed below that ten-month moving average, you move to cash. What does this do? It basically establishes a line in the sand that minimizes risk.
It keeps that catastrophic bear market losses from occurring. You suffer maybe a small loss but certainly not a horrific large loss that can be part of bear markets. That's one simple example. There are many other types of approaches. What I would like the audience to think about is not so much the product that they're buying because we're drowning in financial products. There are thousands of funds, ETFs, individual stocks and bonds, UITs and everything else. All those are just means to an end. What I think is more important to think about is the process. Make the process the product. Think about the methodology. Different markets have different approaches that work better. It’s understanding the bigger picture context of how money is being managed and not just focusing on whether it's Apple or Google or ABC mutual fund. At the end of the day, that stuff is a lot less important.
Dustin
I want to give you two scenarios here. The first scenario being I've got some money, I haven't made an investment yet haven't done anything with stocks or anything in the markets. How do I now go out there safely and soundly base on what you shared? How do I go in that scenario? What's my first step?
Tim
I want to back up to 30,000-foot for just a moment and talk about something that I don't think really gets enough attention. I'm going to give you two dates. The first is the year 1915 and the next one is the year 1935. The point I want to make here is that something that's not often talked about enough is the context of how luck or our timing in life has a hugely important factor in our investment success. Let's assume that the first investor who was born in 1915 wants to retire at 65.They'll retire in 1980. What was incredible about 1980 was that you had very low market valuations. You had dividend yields of 6%. You had a low price to earnings ratio and it couldn't have been a more perfect time to invest.
That investor gets to retire and enjoy for the next couple of decades returns that are about twice the historical average, near 20%. That puts you in the league of Warren Buffett and the top hedge funds in the world. It was simply by the fact that they were born at the right time. Now, let's take our investor from 1935. That investor also retiring at age 65retires in 2000. In 2000, you have market multiples at all-time highs. Valuations were very expensive and we all know what happened. For the next decade, the returns in the market were about zero. We're still playing out what the next decade looks like. The factor of just where you were in that stream of returns played a huge factor if you were just going to take a market-based approach, which is to say that you're just going to go in and buy the market and hope for the best.
Any investor no matter what the age, I don't think hope should be part of the investor equation. I think an investor needs to be a little more proactive. I would think you would agree that there's really only a couple of kinds of data. The data we know which is more and more historical data and then there's unknown data which is everything in the future. There's not an investor that knows what the future is going to bring us. If we just say let's invest in the market and hope for the best and then we're really investing no better than going to the casino because that's really what we're doing. When I get back to rules-based investing, it's about putting a predictable process in front of the unpredictable data. Meaning that we are going to have this process that we're going to use day in and day out no matter what the data that's coming to us. How does that work in real life? If we have a simple set of rules that keeps us invested in the best parts of the market and helps us avoid the worst parts of the market. It doesn't really matter at that point what the market does. I got started in this business close to 30 years ago. First of all, the cost of transactions was much higher. Our minimum trade cost back then was $40 per trade. Now, you can trade for free. The other thing that's happened in recent years is that through creations of things like ETFs, exchange-traded funds, you can now access about every asset class in the market whether it's going up or down.
There's a way to make a profit in the market somewhat agnostic of a trend. I really feel like investors have never had it so much better in the fact that you can now access financial products at the lowest costs but it can't go any lower than free. We can be somewhat less concerned about the direction of the market. What's missing and this is the role that I think is part of our mission is to really provide the rulebook. The tools are there. It’s just how do we use these tools in new creative ways so that we get more predictable results? I think that's what's missing. I think one of the things that cause angst for investors to the point of your question is like, “The market's been going up. There's all this volatility.” It causes angst because there's all this uncertainty. What if we could remove the uncertainty through a process that basically dynamically adjust so that no matter what the market's doing, we're going to be as properly positioned as we can be? It will give you what this looks like in real life since we do this with real money.
For much of the year, our portfolios have been using a rules-based process. What did we own? We owned things like technology, ETFs, healthcare and those kinds of things. As the market volatility has been increasing our cash and our portfolios, as we sit here now, it's around 62%. It happened automatically through the application of the rules processes that we've built. Our models are adjusting with the market. We don't have to really think about it. In fact, I joke about it but when we're investing, we're not imparting our subjective thoughts in terms of what we think the market's going to do. We're just simply following the models.
Dustin
I'm curious about the rules. The question I asked for sure to give some tactical knowledge into making trades and getting into the market but who creates the rules? How does one determine? If I'm younger, am I going to be more risk-happy because I've got many years versus if I'm older in life I'm going to change those rules? How does the selection of rules come to be?
Tim
It’s a two-part question. First of all, I think that coming to any type of successful money management, young or old, is the fact that you can't compound your losses. It sounds silly to say that but the fastest way to the growth of a pool of capital is consistent compounding. Any time your portfolio goes through any type of loss, that’s a loss both nominally as well as in time which is another whole dimension. There are a lot of people that that got through the 2003, 2008, or 2009 periods and maybe their portfolio has recouped that. Another ten years of life has gone by. If we can condense the losses, if we can keep losses small, we also shorten the recovery time. Agnostic to age it really doesn't matter. It's simply more of a mathematical law here that consistent compounding and keeping losses small yield to better results. I think that the type of rules that are applied are somewhat similar. Our flagship strategy is used by all different age groups. The reason is that it does just that. It keeps the compounding more consistent and the drawdowns much smaller.
When I say drawdown, we measure how much loss has occurred in the investment. If we look at the S&P 500 in 2008 to 2009, the S&P fell by about 55%. If you're just following the index along, it now takes over 100% return to recoup from that let alone the amount of time it took to do that. If we have a strategy that maybe it only loses 5% to 10%, now our recovery time is much smaller as well as the nominal amount of capital we need to grow back. First of all, I would say that the rules apply somewhat universally. The second place is where you can get these rules. There is a vast amount of academic research out there. There are some websites like SSRN. There are white papers published virtually weekly by some of the most noted professors and hedge fund managers and so on that all show different styles and approaches to money management.
Part of the reason I started a website called Portfolio Café was that I recognize there is this vast amount of knowledge out there. Frankly, some of these white papers are very full arcane formulas and things that most people aren’t going to want to read. Yet it was important information. The reason I started the site was to become a bridge between this academic world and the practical application of these strategies so that everyday investors can have easy access to them for a very low cost.
Dustin
I want to go back because you set the foundation, you set the stage. Having rules limit losses and it makes us make smarter decisions because we're removing the emotion out of it. Let's go back to that scenario. I'm the young guy, I have some money. I want it now to get into the market. Obviously, Portfolio Cafe is my back pocket if I've got that as a resource. What is the first step now? Do I go set up an account? Do I look for what I think is a great stock? Am I investing in the whole market? Give us some clarity here.
Tim
You're going to want to set up a brokerage account, assuming you're going to do this on your own. We have also people who reach out to us and say, “This all sounds great. I have my own life I don’t want to do this.” We can steer you to someone who is licensed to use our stuff. For someone wanting to start up, you would find low-cost brokerage type of account. Obviously, there’s a Robinhoods now that you can trade for free. Most of your Big Three, your Fidelitys, your TDs and Schwab, they all charge now $4.95 per trade. There are places like Interactive Broker who charge even less. I would go probably at any of the aforementioned types of brokers. We do run stock models but we run them as a model. We don't run them as I'm going to go buy Apple per se. If we're buying a stock, it's because it's part of a bigger model and that model is being driven by what we call factor research. Factors are just attributes that have been identified through lots and lots of studies to have a favorable outcome to owning stocks. Low price to sales or debiting yields and debiting growths. Those are just common examples of how we might rank stocks.
Assuming you've got the brokerage account opened, then you need to decide on the approach. I think ETFs are probably one of the better ways for individuals starting out because, with a click of a mouse, you can buy a whole entire basket of securities. These come in all different flavors. Every country, every nook and cranny of the market is pretty much identified through these. There’s the rule process. Which rule process are you going to use? Then it's a matter of following along. Here's what's amazing. A lot of people find this hard to believe but when you're using the rules-based process, not only does the stress go down but the amount of time you spend also goes down drastically.
If you have a good system, we rebalance our systems once a month. You might spend fifteen minutes a month looking at what the new signals are if there are any, looking at your brokerage account and making any adjustments and then you're off pursuing your own pursuits. You’re not really worrying about your portfolio to the next month rolls around. That's the beauty of rules-based investing. You're not spending all of your time managing a portfolio. I'm making the assumption that you don't want to become me and spend all your day doing finance. You want to go out and do the things that you enjoy whether it be the golf course or the lake or time with the kids or whatever.
Dustin
If someone has one of those accounts that you set up with TD Ameritrade and they have rules-based investing. Is this something that they're putting into the software? How are people able to easily identify the rules that are being broken and I need to get out immediately?
Tim
You're going to be subscribing to a service like we offer or something similar and it's important to understand what the process is behind it. If someone's presenting to me a system, one of the first things I'm going to look at is what's called the max drawdown number. What has this system experienced in the past? It's not just the destination but the quality of the ride. If it's a white-knuckle ride with ups and downs and 40% or 50% losses, I think most people would bail on that before they ever get to the finish line. I look at loss and rift numbers first. I also look at the facts. Is this simply purely backtested data or is it something that's had real-life testing? That's really important because you want a system that's been actually running real experience. One of the criticisms of models is that they often get curve fitted and backtested to perfection which works great in the past. What about going forward? It's something that I would question if I'm looking at some type of system. A lot of our models have been running live money or out in the public domain for ten-plus years. It’s a fair amount of auto sample data as we call it.
Dustin
You mentioned if you're just getting started, ETFs maybe a great way to get started. We had two scenarios. One is for the younger person maybe getting into the game or the rookie person getting into the game. Let's talk about somebody that has investments but has not been operating under rule-based investing. What are some things that they need to be thinking about? Is this scenario different at all?
Tim
It's really not different because again I think the basic needs remain, which is to have consistent compounding with minimal losses. I go back to our flagship strategy being used by young and old alike. We know of investors in their ‘90s using our strategies, we know of younger investors using our strategies. Why are they being used? It's simply because that we limit the drawdowns and we try to keep the pot moving forward at all times. It's mathematics. I think there are two real factors. The larger the pool of the capital, the more important limiting losses becomes. I also think that the age becomes really important when a person is approaching retirement or is at retirement because here you don't have time to make up for losses. You're often using the capital base for income. The worst thing that can happen, going back to our 2000 scenario, is that you retire, you mask the sum of money that you've diligently saved and all of a sudden the market starts to tank.
What do you do? A lot of investors set themselves up so they start liquidating a portion of their portfolio monthly quarterly to live on. The problem of doing that in a declining market is that you're liquidating more and more of your portfolio to maintain your cost of living. You've got two choices. You keep liquidating, hope things work out or you have to reduce the amount of income you're spending. Bear markets and market losses can be life-changing. It's unfortunate. I think that particularly older people do need to be more sensitive to this loss prevention because of those factors.
Dustin
It keys into what you say, which is managing risk is the most important aspect of portfolio management. I would like to define that a little bit. Why do you believe that's the most important factor here?
Tim
It gets back to just mathematics. If we look at a portfolio and there's a concept called volatility drag. I'll expand on this. You can have a portfolio that has an average return of 7% but if we actually look at how much it's compound, it turns out to be less, maybe 5% or 6%. Why is that? It's because that during the market declines, you're not compounding those losses. You're making up losses. Back to I was talking about earlier, you're losing both the principle that you have to recoup and you're also losing the time. The consistency of return mathematically is more important than trying to hit the home runs. In baseball, it's more about the consistency. The RBIs, the singles, the doubles. If you're able to do that more often, you're going to be a better player. In investing it's the same thing. It's more about being consistent as opposed to hitting the home runs.
Dustin
It seems like it's getting crazier. I'm sure every generation says that. The advent of radio, the advent of TV, the new technology. I'm sure it's the same old conversation. It doesn't feel like that obviously because I wasn't around and we weren't around for some of these. No matter what happens, the next tech wave, all these unicorns coming out, there are more unicorns than ever before. None of this stuff really concerns you because you find faith in just a rule-based world.
Tim
A lot of people they almost refer to this like a spotlight approach and it is. I'm a big fan of market history and what you just spoke up is exactly true. If we go back to the late1800s, the 1880sand 1890s, there were hundreds of railroad stocks of course none of them hardly exist now. If we go forward into the 1900s, there were dozens of auto stocks and then there were things around record and telephone. You're exactly right. Every era brings forth new technology and new potential blossoming companies. They say that history repeats and it does. It's always off just a little bit in this case that we're talking. What's new now? We've got new blockchain. We have biotech. We have Cloud. We have all these things that we didn't have 30 or 40 years ago. You can still always filter through. One of the nice things about rules-based is it helps filter out. If we're talking about stocks, we can apply certain metrics.
We can demand that the stocks we're buying in are profitable or show a certain amount of sales growth or a certain amount of return in equity. That will help filter out the ones that we should probably be avoiding. William O'Neil is the founder of the Investor's Business Daily that held a seat on New York Stock Exchange and he developed a method he calls CAN SLIM. That’s one of the very first things I learned to do. CAN SLIM is an acronym that stands for certain attributes that you look for in fast-growing companies. Quarterly earnings growth and annual earnings growth in a niche or something new and exciting and so on. The point is you can apply this formulaic approach and it will help you identify fast-growing winners. In fact, IBD, Investor's Business Daily actually publishes multiple lists. They have the IBD 50 or 100 which are some of the fastest growing companies in America. Those rules or those lists are really a formulaic rules-based approach on being published that everyone can access. If you want to get even deeper into that approach, IBD publishes different online chart services and other things that are all useful tools for investors looking for more of a disciplined way to invest and focus on quality rather than just everything else is out there.
Dustin
I'm very curious about this. Let's say you are the person that is from the industry and you are starting to subscribe to what you talk about, rules-based and removing the emotion out of it. I don't want to see you have inside information. It's not the right way to say. Let's just say you're in blockchain. You see the potential growth that it has, you're a big believer and it's only going to expand. Is there a rule-based scenario for that person or is that like, “Let's do rule-based over here, and if you want to take riskier investments because you have a resolute belief that this industry is going to grow, you do that.” How do you balance that?
Tim
I think what you're describing the latter is really with a more sensible approach because you've got your serious long-term capital money. Let's go through what's more realistic for most people. Most people, their first line of investing is the 401(k) at the business or if they're a business owner it's through a qualified plan they set up for themselves. In a lot of cases, those investments are going to be directed more toward funds like investments, mutual funds, ETFs and the like. Sometimes there are very limited choices as to what they can invest in. The big advantage you have there is you're getting matching oftentimes through your company. That's your first place of investing. It is possible to follow a systematic approach to mutual funds in the 401(k). Let’s just say that 401(k) is the first choice. The next would be more discretionary money. I would say that following a disciplined approach for the majority of that makes more sense because it's more of a proven approach and then allocating a smaller portion to these fliers.
If they work out they have great impact but history often demonstrates that a lot of them don't. If you're younger, you can recover from those. I think again, the mistake is imparting the idea that we know more than what data might suggest. The rules-based or data-driven approach is cold in the sense that it's purely data-driven but that use of data, it's that power of that data that makes it so powerful in the long run. The human brain can only compute so little in one time, whereas powerful computers can look at every aspect of a company's balance sheets and sales growth and revenues growth and institutional movement and put all these together in ways that we can never do on our own. That's the power of using more of a computer algorithm-based approach.
Dustin
This begs the question for me in my head. The data should go all the way back to the beginning. Ever since we have a public record, we want as much data as possible.
Tim
The more data the better for sure. There are some limitations but many like FactSet and some of these institutional datasets go back to at least the ‘60s. A lot of the indices, we can go back to ‘70s and ‘80s. ETF data, a lot of these ETFs have not been created until the last decade or so. In an individual security data, it's a little more limited but you're absolutely right, the more data the better.
Dustin
The fallacy would be if you somehow got access to data that was limited, that didn't portray the whole picture then now you're making decisions off of something that's more volatile or riskier.
Tim
There's definitely a quality of data issue. It’s something that a person who is trying to do this on their own is very aware of the source of data. Some of the free online screening services and ranks, I’m not saying this is done intentionally, but there's this thing called survivorship bias and versus a point in time data. Here's the difference. You want a database that if we went back fifteen years to this date, it reflects everything exactly as of that day. Meaning that if there is a company that went bankrupt for example, three years into the future, we would have the opportunity to invest in that because we want our database to be as accurate as possible. We don't want a database that's been cleansed of companies that no longer exist because that would do exactly what you're suggesting which is that it would taint our research going forward. We don't want a clean database. We want a database that's accurate to the day we were hypothetically investing. For that, S&P, FactSet, which is the one that we use and Bloomberg data, they’re institutional and they're more expensive but they do give us a true point in time data.
Dustin
With the data that exists out there, with the services that exist like yours, why aren't we doing better overall as a whole? Is it our lack of discipline? Is emotion such a powerful driver? What is it?
Tim
I think it's a habit. I'll be honest with you, I'm somewhat critical of our industry. Our industry has given investors sound bites over and over to the point where we think that's the truth, but they are more half-truths as I call them. Let me give you an example. There is this big discussion about index funds versus active funds. If the majority, 92% or 93% of active managers in a given year outperform the benchmark, everyone throws up their hands and says, “We should just buy index funds. If you can't beat the market then we must just join the market.” That's partially true. It is a fact that a lot of managers can't beat the market. We can go into reasons why but it's another rabbit hole. More important to that though is this. What the index fund group, what that side of the argument doesn't answer for us, is this question. Going back to our examples of our investor from 1980 and in 2000. Our future index returns are going to be adequate for us to reach our financial goals. We don’t know. The future is unknown.
There are those things like that that says, “We'll buy the market or buy an index fund,” those things are just perpetuated over and over. That in itself is really not enough because it may or may not work. To basically take that approach is truly a game of chance. We also hear about how to diversify, buy a portfolio that's got large cap US stocks and emerging markets and small caps and all these different things. Even that, if we go back and if we look in 2008 and 2009, diversified portfolios fell 30% 40%. That in itself again is not enough. It's part of it. I'm not saying diversification is bad but I'm just saying that they're often presented in sound bites that make you think “That's my safety net.” I hate to say it. That's really not a safety net. If we look at what's happened, whether it be 100 years or the last few decades, I think an investor has to sit there and ask themselves, “Is the future likely to be anything similar to the past?”
Let’s talk about where we are now in terms of the market. Fixed income is often considered the safety part of your portfolio. Let's take a look at fixed income. Fixed income today from basically the 1980s to more recent interest rates fell from 14% to 1.5%. If we look at the ten-year treasury, we've gone from about 1.5% up to 3.2%.Now, a lot of things comes guaranteed but something I feel is pretty certain is that the last 30 years of bond market performance with rates falling from 15% to 1.5%, it's not going to happen again in our lifetime. That's impossible. That kind of financial modeling is still being built into a lot of portfolio approaches, but yet it's completely unlikely that's going to happen again. In fact, I can make some argument that fixed income has quite a bit of risk in it now. If we look at the fact that at almost all levels corporations have increased debt. Central banks have increased debt in the last decade. There's a lot more leverage in the system. The quality of the debt has come down. There is an awful lot of triple B investment grade bonds hovering on being downgraded, which has some very systemic risk issues concerns. It's quite possible that the portion of a portfolio that's considered or is supposed to be the portion that contributes less risk actually may have as much risk now as equities.
If we look at equities in general from an evaluation point of view, in fact, John Bogle from Vanguard just came out with his own set of numbers. He is saying that his expectation for future returns of equities is a low-single digit. I would bet you that if you were to poll most investors now, if you were to say, “What do you expect for equities to return over the next decade or so?” Most would probably come up with those 8% 9% or 10%numbers because that's the number we hear over and over, but’s that’s unlikely. From a valuation point of view, our market today is richly valued as it was in 2000. Just from the history books, there are many different periods of time where average returns for the market even over twenty years spans have been low single digit. I think the concern I have is that some of the common approaches that are repeated are prone to disappoint because the expectation of return is much higher than was probably likely to occur.
Dustin
You obviously know a great deal but I guess what really resonated with me and I want the whole WealthFit nation to think about it. I want you to help me phrase this but what's bouncing around in my head is this idea of the modeling or the approach used to put together the model. Essentially, what is it based on? What would be a good question for somebody looking at an approach and looking at a model to ask the person that they're sitting across from or just somebody to understand the backstory on how they arrived at these projections and numbers?
Tim
I'll come back to your question but the finance industry is undergoing a great amount of transformation and some of it is quite exciting. We're seeing all this new FinTech, we're seeing these new platforms that the Robo advisors which give advisers easy access to their computer to be able to set up accounts and create diversified portfolios. What's interesting is that here we are using all this modern technology to do this but the engine that's driving the portfolio is oftentimes attributed to something from 1952 which is when a lot of the ideas behind modern portfolio theory were first formed. Yet think about how much the world is different now? We trade in a day what traded in months back then. Our economies are much more intertwined. We globally traded. The correlation between the markets is much higher now. The suggestion that the past is going to repeat again in the future is I think somewhat questionable at least in the confines of how all of these portfolios are constructed.
I'm looking more for a dynamic approach. Here are the questions I would ask though. What is the process for buying and selling? Is it just based on a strategic static type of portfolio or is that something that's going to dynamically adjust? The problem I have with static portfolios is that it forces you to own stuff even when it's not working. In 2018, emerging markets at one point were down about 16%. Is that something I necessarily want to hold to take that right down or would it have been better to have maybe gotten out in February? You can go back to even 2015 when the same effect took place when you had pockets of the market like emerging markets that were down quite a bit. What's the approach? Is it static? Are you going to force me to own something that is not performing just because or is it something that you can adapt to no matter what the market throws to us, it's going to try to dodge the lemons and keep us out of trouble?Is real money being used on it? Is this just theory and fiction? There are a lot of approaches. Obviously, I use rules-based and I'm biased to that. What's the bias of the person presenting it to you? What's their tracker? Why are they presenting it? I think I make my points of why I do what I do pretty clear. Who benefits?
Dustin
I know you're big on removing the emotion from investing but I'd be remiss if I didn't ask you. With the future that's coming out, with technology accelerating, what are you excited about in investing? What are you excited about for the future, for what's coming or what you see coming?
Tim
I think that the intersection between technology and artificial intelligence is making it easier and easier for investors to access high-quality, high caliber and institutional-like strategies. Because of the low cost and because of the creation of all these new instruments, it's an awesome time to be an investor. The tools are there to do really well. What I think investors have to just recognize is you've got these new tools in one hand, but why are we still using the old set of rules on the other hand? Let's adopt. Let's embrace new thinking. Let's embrace new approaches to money management. We don't have to do it as we've always done for the last 50 years. I'm pretty sure the next 50 years are going to look a lot different. It's this intersection between technology that it has hit finance. It has hit in many other pockets of the industries but in the last five or ten years, it has really hit finance. There's a lot of good I think can come from that.
Dustin
I appreciate you sharing your wisdom helping us remove the emotion or completely removing the emotion out of investing. If folks want to continue with the conversation with you, see what you're up to, discover more about Portfolio Cafe, where can they do that?
Tim
You can find this at PortfolioCafe.com where you’ll see some of our models. We also have another site that's more based on our research and our IP. It's RobertsStrategies.com. Any of those ways, you can find this and drop us a line. It's on our Contact forms. We'll be happy to get back with you.
Dustin
Thank you, Tim. I appreciate having you on the show.
Tim
It’s awesome to be on the show. Thank you.
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