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Episode #608 - Don't Get Cute with Your Retirement Investments

“Just because I was invited didn't seem like a good enough reason to attend.”

-Greg McKeown

Roger: Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence to lean in and rock it.

Welcome to the show. My name is Roger Whitney.

We have a provocative title for today's show, don't get cute with your retirement investments. I would say that it is true when doing your retirement planning as well. We have a lot of obstacles that get in the way of us not getting cute with these things.

The intent of the entire exercise of retirement investing or retirement planning is to give you the confidence to lean in and rock retirement, lean into your life. Where does confidence come from? It comes from clarity. So the more we complicate things, the less clarity we have, and the more that we have to manage on an ongoing basis, the more work we create for ourselves. That's why we have the four pillars of building a retirement plan in the order that they're in.

First, vision, what do I want in my life going forward? Turning those into goals.

Then second, organizing your financial resources to identify, is this the feasible path for us to be able to create this life financially?

Then third, making it resilient so you have clarity on exactly how you're going to fund that life, especially in the near future.

Then we can get cute in optimization and look at how we can optimize it by trying to just be a little bit smart with our money. But that can be a slippery slope to get invited to participate in more complicated planning or more complicated investments. There can be some value there, but they're tools that shouldn't be pulled out as often as you would think they should be pulled out. That's why this topic is so, so important.

We're going to have Peter Lazaroff on chief investment officer of Plan Corp. To talk about complicated investments, private equity and other things. He deals with this stuff every day at a very high level, and he has a lot of wisdom on this subject. We had him before to talk about private equity.

I just think this is an important topic because I think we overcomplicate everything when it comes to retirement planning. If our intent is to create a great life. So why do we do this? Well, if we go to Michael Easter's book, The Scarcity Brain, he highlights a lot of research as to why we accumulate things and over complicate things. Initially, let's talk about addition bias, and there's studies on this that he quotes in his book Improvement Always is assumed to be adding something more is better, more is safer. This goes back to caveman days. Hoarding money or things brings us, psychologically, security and studies have shown that when you ask somebody to improve something, almost always they do it by adding something to whatever the situation is, rather than subtracting. It's just hardwired into us over thousands of years of evolution. We have an addition bias. We want to add different strategies to our plan. We want to look at adding investments to our plan. Now let's go to a second thing. We tend to want to over complicate things. We have a complexity bias. Again, this is highlighted in Michael Easter's book The Scarcity Brain. We'll have a link to that in The Noodle. If something is more complex, it must be better. It must be more sophisticated. So complexity in our mind makes it feel like it's got to be better. Because look at these smart people, they put all this stuff together. That comes from how we are hardwired in that more effort must mean a better result. Things we work hard. That's the American work ethic. Work hard and you'll have better results. There's a lot of truth to that. But we tend to have a bias towards that. Wow, if they're doing all of this stuff and they have that crazy team and they're doing all this fancy thing, it must be better. Also, we have just simply the fear of missing out. So these things act in our subconscious that we have to manage that pull us towards adding things to our retirement planning or to our investment portfolio.

In addition, we have a bias towards complexity because we think it's more sophisticated. Coupled with that, and this is something Peter and I are going to get into is there is a financial, industrial complex that is aggressively marking all types of investment products.

Taleb says anything one needs to market heavily is an inferior product

I have a quote from Nassim Taleb from Not Fooled by Randomness. What's antifragile? Which I think is interesting, he works in financial markets and has for years. He's a very prolific writer.

He says,

“Anything one needs to market heavily is either an inferior product or an evil one.”

Now, I don't know if that's true. You know, he has the bias that marketing should just simply be informing people of what you have. But if you're marketing it heavily, it may be inferior. That's something that we need to be aware of when we're dealing with planners or with investment houses because they like all their cool toys and I'm not saying that anything is evil, but it's cool to them and they're very excited about it, so they're going to market it. But most of the time, for you to achieve your intent of rocking retirement, you don't need it. So that's. We're going to. That's my little rant.

Now let's get to a story of Rocking Retirement in the Wild and then have our chat with Peter.

ROCKIN’ RETIREMENT IN THE WILD

Today we're going to have a story from Todd, who is focused on why do we travel? It's a little bit long, but I was going to parse it up and then I thought, I'm just going to read Todd's comments.

Todd says,

“On episode 597, a retired couple shared their experience traveling and it was fun and helpful. At the end, you ask them why. Why for travel, and I've been thinking about that ever since. It made me recall your previous podcasts about aligning your hobbies with your values.

I think some retirees just travel because it was expected of them and either figure out a way to like it or give up on it. This was me in first year of retirement. We did not plan to travel a lot, even though it was what everyone simply assumes a healthy and wealthy retiree would do. I hadn't put enough thought into aligning the possibility of travel, he says, with my values and healthy habits.

After reflecting on these things and getting started, in mid-September, I will be taking my third trip from our North Carolina home to national parks in the western U.S. Crater Lake, Redwoods and a couple others with my adult son. I have seen at least seven national parks by year's end, lord willing, and might even squeeze in one or two more.

I think the popularity of travel for retirees is that it's very flexible in terms of what you want from it. For example, there are so many options that make travel a prime habit stacker for hobby. It can align with many different values. For me, travel to our national parks with one or more of my family members fits that bill. We get out on the trails. The harder the better. It gives us physical activity. We often add something else, such as cycling, whitewater rafting or kayaking, etc. This motivates me to stay in good shape in between trips, keeping me on track with diet and exercise. Going to the park gives me a greater appreciation for this beautiful country, which makes me thankful for living in the US and for our chronically underfunded National Park Service. It also aligns with my spiritual values. I can praise God for who made it and the wonder that he's created. Travel also provides incredible family memories, especially the bad and silly things that happen. Todd, those totally end up being the best memories since my wife and two adult kids enjoy this as well. It's really a blast. We don't rough it at night, preferring to stay in nice places and have good food together. So for those not sure about travel, I wasn't either. But I found a way to do it that aligns with several of my values and it hasn't required a single winery, riverboat, trans-oceanic flight yet.

My hopes are to do as much of this kind of travel as I can while I am still able to maximally enjoy it physically and our kids can come sometimes with us.”

Todd, I love this. If you're coming out west, ping me, and if you're going through Colorado and maybe we can get together and do a hike together. I love this idea of habit stacking and aligning with your values. It's a wonderful story. I hope you have a safe and wonderful trip.

INTERVIEW WITH PETER LAZAROFF

Now we're going to chat with Peter Lazaroff, Chief Investment officer of Plan Corp, about private investments and more complex investments and whether there's a need for them in your portfolio. I'm going to summarize a couple things because he and I, well, we go off on a little bit of a rant because we're a little bit passionate about this. A couple things came out of our conversation that I just want to highlight. That is one, think of your assets, of dividing them between what are the resources I need to fund the life that I want to rock retirement. Think of those resources in, ah, their own bucket and make them as simple as possible. If you are blessed to have excess resources, more money than you need, it is perfectly acceptable to go explore interests or opinions that you want to express via investment vehicles, sometimes complex vehicles. It is totally fine to do that, but you want to think of them separately. He uses the analogy of taking money to Vegas. Isn't the money that he needs to provide for his family for that period of timeframe? So that's number one.

Number two is that when we think of complex investments, they are essentially just private investments. They are just active managers in a different wrapper, he says that right at the end, I'm like, yeah, that's it. So if you don't believe in active management and you use index funds by looking at private equity funds or hedge funds or, or any kind of alternative investment, you're essentially engaging in active management, and that is fine, but just think of it in those terms. So Peter and I are going to get a little bit technical. We're going to get a little bit ranty, but we're both very passionate about this because we care about you achieving the goals that you want in life.

All right, we're here with Peter Lazaroff, chief investment officer of PlanCorp. What's going on, Peter?

Peter: Roger, I'm doing great and I'm thrilled to be back so soon. after our last conversation, so many of your listeners reached out. I could tell they really appreciated the angles we're tackling. So I'm excited to see where today's conversation takes us.

Roger: And we'll have a link to that in our noodle email. We talked about private equity, and I thought of that as a very important public service announcement. And I, I think of this episode that way as well, Peter, of how to not over complicate your life and your investments and focus on what the whole point of retirement investing is.

You offered a free book and you got an overwhelming response to that

So let's start off first. I want to talk about your book because you offered a free book and you got an overwhelming response to that. So let's talk about your book.

Peter: Yeah. So to be clear, I have a new book coming out in 2026 called the Perfect Portfolio, which is not available for ordering yet. And my publisher would be horrified that I'm even saying and promoting a book that's not out for another nine months. But my prior book, Making Money simple. When I came on the show, Plan Corp was remodeling a lot of the office, and we had a who bunch of boxes of books. I said, hey, if you want to go to Peter Lazaroff.com and I’ll mail you a free book. Over 1,000 people reached out asking for a copy of the book. And I sent everybody an email being like, oh, my gosh, I don't have this many. Then I decided, you know what? I'm going to order more from the publisher. I fulfilled every single one.

Now, I have gotten a couple emails, honestly, in the last, I don't know, two or three weeks, being like, I never got my book. I said, well, just send me your email again or your mailing address again and I'll send it to you. So, Roger, here's what I'm going to do. From that last order, I have four boxes of books. I don't know if I would make another order out of pocket if there's overwhelming demand, but if people go to peterlazaroff.com/freebook I'll send you a copy of Making Money Simple. You will get added to my newsletter, which comes out every other Wednesday, and I promise it will add value. You won't want to unsubscribe right away. and whenever you hit reply to that email, let me know what you think of the conversation. I mean, I respond to every email that comes for those. So your audience is the best. I've been on the show a lot. Part of that's because you're the best and you develop such a great group of people, all trying to create a great retirement. So, please go ahead. If you're listening to us, follow that URL. Give me a few weeks to get them in the mail.

Then, yeah, Roger, let's dive into this. This is such a good topic. So important these days.

Roger: First off, though, I remember you texting me a photo of you, I think, and one of your kids, because you guys are actually doing the envelopes, which cracks me up. Mr. All Impressive Peter Lazaroff stuff in envelopes. I love it.

Peter: My kids earned their Roth contribution from stuffing, maybe a thousand different envelopes. It was a good little assembly line we had at the office and they really enjoyed it. It's, you know, anytime you can find a way to max out your Roth IRA when you're 12 and 8 years old, that's a pretty good gig.

Roger: That's a good gig.

Peter: We might put ‘em back to work. I'm not afraid of like saying he actually, your job's not done yet. You have to keep working for it even though it's been paid out. But the whole family got involved. So, yeah, appreciate everybody reaching out.

Roger: So I want to set this up, is that the core intent of doing retirement planning and investing is to have confidence that you can live as much of the life that you want now, but also when you're 90, I think it's important to establish that's the whole point of the exercise.

Then secondly, Michael Easter, who's been on the show a number of times, talks about we are biologically, I guess, wired, or evolutionarily wired, if that's a word, to add things. Adding things makes it feel safe, like hoarding food. I mean, it comes back from the caveman day. So we humans as a whole have a need to add and overcomplicate things and ultimately the goal in retirement planning, and this is my setup and maybe you have a thought on this, Peter, is elegant simplicity, which is not simplistic.

Elegant simplicity is actually pretty sophisticated. It takes a long way to get back to elegant simplicity so you can save yourself from future decisions or dealing with unintended consequences of all the things that happen complication wise. Would you agree with that setup?

Peter: 100%, and elegant simplicity is differentiated from just simple. And I think that a lot of the investor community has gotten accumulation in a simple form dead on. Right. when I started my career 20ish years ago, there was a lot of debate of the best way to save for retirement. But it's you max out your tax deferred accounts, you invest in the cheapest index funds you can find, and then you don't worry about it. That's perfectly fine. That's simple. There are variations that are also simple and thoughtful. But when you remember what it's all for, to create a great life in retirement, to use your words, I can't think of a scenario where earning the highest possible returns is necessary for that to be true. I mean, you can't just put all your savings in cash. If we could all put our savings in cash and have no risk and just know that we're going to be taken care of, that'd be great. My more technical thing that I say, but I like yours better, is like, hey, the reason we invest is our savings need to outpace inflation without taking unnecessary risks. Yeah, elegant simplicity. It's Einstein. I'll dramatically shorten, like make it as simple as possible, but no simpler.

Roger: Yeah.

Peter: There is something with the elegant process where it could be very complex to end or thoughtful to end at a simple solution, but it doesn't mean that it's not thoughtful and effective.

Roger: This is especially true for those that have won the financial game where they have the means to create the life, and that's through years of this accumulation protocol that you described. But there's a lot of things that get in the way of that. You know, I was going to say you're part of the problem, Peter. No, you're an, you're chief investment officer of a very large corporation.

Peter: That my title exists is part of the problem. I actually won't disagree with that. Yeah.

Roger: But I define it as the financial industrial complex in that we have a lot of really smart people that get together and I think with good intent build strategies. This could be private equity, this could be floating rate securities, it could be oil and gas. It doesn't matter what it is and then sell. Those strategies are generally from institutions first and they do really well, but then the stream of business is more. When they've saturated the institutional marketplace, let's say for private equity, which we'll get to in a little bit, then they want now who can we package this to next? What ends up happening is that it all gets packaged and sold to consumers in various forms. This is a cycle that has happened over and over again.

Peter: Generally not for hundreds of years, not even like decades. Ah, for hundreds of years, yes.

Roger: Yeah, yeah. And, and, and there have been some positive outcomes but it creates a lot more complication. Now that is just natural business cycle. There's no value statement on it. It just is what it is. But that creates the siren song of, I can get a higher yield than a money market and it still is safe, or I can be more diversified because it's not tied to the equity markets. or I can protect my principal and still have upside. Those things are very attractive to us when we are in a fearful state or a greedy state.

Peter: A lot of what you're talking about is the business of investing, whereas you and I are in the profession of investing. I so often see parallels to the medical community with what we do both in financial planning and in investing. Because if you are a true professional, you should be evidence based. You go to a doctor and they're not just saying whatever was on, you know, their TikTok feed or on the news. You know, they're, they're reading peer reviewed research and financial planning. Not all of it, but most of it is actually pretty black and white. If you know your tax rate in the future, it's even more black or white. If you know the date you're going to die, then it's perfectly black or white. But other than that, you know, things are pretty objective on when to do something and when not to do something.

I think that the business of investing, or Wall Street as we commonly say, really takes advantage of investing in shades of gray and Wall Street uses factual statements, but they're not actually relevant. I think one of the hardest things about the narrative around private assets and the thing that is tripping up more investors and more decision makers than I think makes sense is that a lot of the case for them are based on facts, but not all facts are actually relevant.

I want to mention a good example of complicating a portfolio, because we are going to talk about private investments and I don't want to totally bury the lead here, but PlanCorp does private investments for clients with $20 million or more. There is some magic behind that. Like some magic math that goes into, like why that large? But a lot of what you mentioned, like, once you have created a great life in retirement, you might be what I would call overweight liquidity or have a portion of your portfolio that can take a different level of risk. When you are at a certain size investor, you're able to write multiple $500,000 or $1 million checks to different managers. Whereas the democratized private investment world these days, you can invest for $50,000. I promise you, those are not the same investments.

Roger: Another way of saying that is in PlanCorp, if you have excess wealth, you've already secured the kind of lifestyle that you want, but then you have all this excess wealth you over saved or overgrew or whatever that is a separate bucket from m the meaningful money that is needed to create your life. In some ways it's like, I can take this thousand dollars and go to Vegas and my life will still be okay if I lose it.

Peter: That's right. That's a great example for me because I do unabashedly love going to the casino. When I walk into the casino, I don't walk in with my ATM card, I walk in with cash. If I lose it all, it's done, like game over. That takes discipline in your portfolio because you see, something about investing creates this illusion of control. Unlike gambling, where we know it's chance, even though we still fall victim to some of those illusion of control moments in a casino or on a sports betting app or whatever. But the control tricks us into believing that we can be smarter than everybody else and avoid what ultimately is a lot of random outcomes.

When you think about what you created a great life. If I am sitting down with a client who has $5 million or $2 million and their financial plan is very, very strong, the first risk move I would consider in terms of complicating the portfolio is just owning more equities. What's crazy to me, Roger, is you see somebody with a 60/40 portfolio, stocks to bonds or maybe even an 80/20 portfolio who want to add an exposure, whether it's buffered ETFs or floating rate securities or private assets because they feel like they can take more risk. I think, well, why not just increase your equity allocation? That's the simplest answer and probably the most effective. It's just, it's interesting.

Roger: Yeah. There are some siren songs around safety with alternatives. You know, recently there was some news on Wall Street and some of the issues from a liquidity standpoint, which is I, I believe that's like, just a private lending platform.

Peter: Yep. Where they had lost 100% of their money.

Roger: Yeah. They work and they're safe until they're not. So they're very binary that way. Madoff is a great example, although that was literally a scam. It was the siren song of Safety and Yield. It works until it doesn't. In that case, it was fraud. But there were a lot of unknowns that weren't caught in the brochures. Now I am in BDC, which is a private investment that I bought, I think in 2009. At the time it was energy and infrastructure and I have an investment in it. I have a number of clients that have an investment in it. It made sense. The whole pitch was, we need to build out the energy infrastructure, pipelines, blah, blah, blah, blah, blah, and everything else. It's so underdeveloped and all this money is going into it. Made sense. I had played in that world for a while, for a couple decades in public investment. So like, yeah, this makes total sense to me. I'm not all in it, but I put an investment in it and put clients in it, 08 happens, they close down, oil goes from 100 plus to whatever and then they close down liquidations. I had been sitting on this dog of an investment for, what is it, 2008 to now. They changed the name, fired the manager, because that's what they do. Now it's about to go public and we're all just going to be happy to get out and take our loss, but you probably just want to wipe it off the statement, even if you don't get your money back.

So, yeah, maybe Roger was just stupid here, but these are the things that you create of what seems like certainty or safety, the liquidity and all these other potential unintended consequences can come in. That's cool if this is your excess money where you're expressing your views and maybe trying to get a little more. But you don't need to complicate it that much, that is the point.

Peter: No, and look, we can certainly get into the pros and cons and cases and such. However I want to make one more point that isn't anything specific other than the benefit of simplicity. The research is so strong on cognitive decline starting in 60, your 60’s and accelerating in your 70’s, where the more moving parts you have to make decisions on, the harder. Imagine I flip a coin and I have a 50% chance of getting it right. Well, what's my probability of getting two coin flips right? You know, 0.5 times 0.5 is 0.25. So now I have a 25% chance and another coin flip, I'm down to 12 and a half percent. You know, another coin flip I'm at, what is that? 6.25%. Every decision you make, there's a chance for a mistake. I think investment success is all about avoiding mistakes and staying the heck out of the way of compound interest. You have to remember the choices you make today, you have to think about future you, who's going to have to deal with them.

You also, I think, really ought to be thinking about the people who are going to be settling your estate. The more complicated your estate, the more work it is, the more arguing you open up among heirs for, like, what to do with this, that or the other. so I think there are some like, okay, let's create a great life in retirement. Then if you do happen to care about what happens to your heirs, or you do believe that you'll experience cognitive decline slowly enough that you'll never notice.

Kind of like putting your hand in a pot that's heating up. You'll notice once it's boiling, but like, you don't feel the incremental change until it gets too hot. This is a good case for simplification beyond just return.

Roger: One thing a lot of these types of investments introduce is the lack of optionality. Easy to get in, extremely difficult to get out, even if, like in my case with the investment I referenced, they had a liquidation provision, but they also had the right to suspend it, unlike a public market where there it's always bid.

Now, let's talk about recently there was an executive order signed that is paving the way for private equity to become part of 401ks and that's one reason why I wanted to have you back on. Because this is becoming more democratized, that we're going to have access, and we already do, outside of 401ks to lots of sophisticated investments or private investments. What are some of the negatives of it coming downstream to us normal folks?

Peter: It's a great point. Whenever it happens that private assets are able to be in employer sponsored retirement plans, whether that's your 401k or 403b or whatnot, all that this tells me is that we're just getting more and more access, even if it's in your IRA or your taxable account. When I think about whether or not to add a portfolio exposure in general, and I should have listened to our conversation before that we had like a couple months ago because I might be repeating myself, my views are very consistent. but basically, you know, it's sort of like when the FDA approves a drug, you are trying to approve something that might have side effects but like overall net benefits, your health. The risk of like being too worried about the side effects is that you risk not approving a drug that would in fact help. I really believe that's a nice framework for how to choose what to invest in and what not to. It's interesting, the timing of this conversation.

One of the chapters of my book that's out in 2026, I'll have to come back in a year and talk about this is this probabilistic decision framework. You basically have four steps.

The first is why do you expect positive returns? The second is does the investment meaningfully improve your portfolio? The third is does the investment introduce unnecessary complexity? The fourth step is, are you ignoring base rates or over extrapolating recent success?

You ask these question of me, Roger, what does the executive order that makes it easier for private assets to get into 401k accounts, and the business of investing pushing more product to people with lower and lower net worths, how does that stuff stack up? I think it's important to go have a process as opposed to reacting. Roger, you are so good, you talk about agile planning all the time. I mean process doesn't have to be rigid, but you apply that same sort of discipline to the investment side that you do. Your financial plan, you probably have a process for booking vacations that you're unaware of and you follow the same process every time. You don't just like go on Expedia and hit go. Now if you do, I’m sort of jealous because you just live a very spontaneous life and you have lots of free time. but realistically, and I can go into any of those steps of how I view the space, I just think that, hey, it's more available just because it's available, do I need it in my portfolio. and you can cut this here because I can go like, I can quickly do those four steps on whether or not private assets meet those needs. I can quickly go through those four steps I mentioned and we can dig into anything you want, Roger.

But like the first step, like why do you expect positive returns? If we say private assets, we can mean private equity, private credit, infrastructure, real estate, all sorts of stuff. But we expect positive returns because these are real businesses. Without going on a huge tangent, like Bitcoin, for example, doesn't create cash flow. You might argue that you wouldn't expect positive returns because that is not a productive asset. It is a speculative asset. Maybe I'm going to trigger people listening, but we'll just let that one go. Okay, cool.

Step two. Does the investment meaningfully improve your portfolio? So in my mind, it's sort of like when you add something, you should be doing it to either enhance returns or improve diversification. But as you add more assets, you get a diminishing benefit from the diversification piece. So if the starting point is a hundred percent stocks, global market exposure. Let's just pretend like global market index fund, the first, most important diversification act is going to be adding bonds. Like huge difference after that, very, very small, like everything's at the margin, or if we were U.S. only stocks and just bonds and then we added non U.S. Stocks, that'd make a little bit of a difference. Adding emerging markets makes a little bit of a difference. But with private assets, yes, you are adding another asset that maybe zigs at a time while other things zag. Or maybe if they both zag, it's slightly different, but it's not that big of a difference.

Roger: Isn't private equity. We'll stick with private equity. Isn't that simply a stock company ownership in a different form?

Peter: Yes, it's basically a micro-cap company. That's one of those pieces where you see the percentage of stocks that, excuse me, the percentage of like companies that have a hundred million dollars of revenue or more, you see that fact thrown around all the time.

Roger: Couple things, but basically it's a microscopic stock. It's equity in a company just in a different form and it's a smaller company. If you go to a credit strategy, it's likely going to be a bond that's just private and probably higher, you know, higher yield, higher risk. I mean, it's, it's not more complicated than that, is it?

Peter: I think that's exactly right.

One person a long time ago used to ask me like, what's the benefit of being private versus public as like a way to think through some of these things? Yes, you don't have to report as often, but if all else equal, you are a company the size of Microsoft, then yeah, being private can be very valuable. What happened, I think, and this kind of actually steps ahead of step three, which is, does it introduce unnecessary complexity? Step four is, are you ignoring base rates or over extrapolating recent success? In the case of private equity, it is very difficult to benchmark returns because they use internal rates of return or IRRs, whereas every other investment you've ever made uses a time weighted return. A time weighted return takes the timing of cash flows out of consideration. It's what you should want on your statements from your financial advisors. It's what you should want on statements from any ETF or mutual fund provider. But because private assets don't invest the cash right away, like if you first are our clients who are in what's a traditional drawdown fund, they make a capital commitment of a million dollars and that capital might get in one year or three months or three years and then they start sending you the capital back. There's all this cash drag, and so they report IRRs, internal rates of return which makes it difficult to really compare. When someone says we have an IRR of 16% per year, you're like, oh, that sounds good. But the time weighed return, you're starting to get better data, particularly through Pitchbook, which Morningstar purchased. I don't really remember when, but I think most people will be familiar.

Roger: So we're all putting our geek hats on right now because we're getting a little geeky.

Peter: But yeah, that was a good disclaimer. We should have had like some sirens go off and like from 2020 to present, private equity has not added return over public equity, but ultimately, when I talk about are we ignoring base rates or over extrapolating recent success? If you look from 2020 to present, private equity has not added return over public equity. If you look at 2011 to 2019, there is a little bit more evidence that perhaps it did. But the dispersion among managers is very wide.

Roger: Like the percentage of winners and losers are all over the place.

Peter: Yes, and so if the top percentage or the top 25% of managers are earning, let's say above 16%, like the middle 25%, you might think it's like a progression down, like a margin, gradual, progression down. But it's like no, it's way worse. It's like single digit returns, losses. The dispersion is so wide and so manager selection is important.

Now Roger, this isn't the over extrapolating piece. Like yes, it returns from 2011 to 2019. There is some evidence that there were excess returns in private equity, but they were driven by only a small group of managers. Even if you and I knew which manager was going to outperform, they're not taking our money. They want Yale's money. They want institutions who they've built relationships with over time. Oh, by the way, they're not taking money like Merrill Lynch's money or Morgan Stanley. I think it's a pretty big no, it's a misconception. They would actually rather probably have your and my money, that our clients’ money than somebody at a brokerage, because brokerages are notoriously unreliable partners, capital partners in that sense. They want long term money that they know they can trust will keep coming. When you look at like private credit, example, private credit since 2010 has been bananas and that's the story they're pitching. But going forward, like are we over extrapolating, like what is the base rate? What should we expect? Given that the world's pretty random, these instruments have not been through a credit crisis last, just really quickly, like private credit, it used to be done by the banks. But after the financial crisis, the regulators said, hey, this stuff's too risky. You got to get it off your balance sheets, and so there was no one to do loans.

Now hopefully you all just heard what I said. This stuff is too risky. Get it off your balance sheets. There was an opportunity. People made a lot of money. What the story is its investment grade and it sits at the top of the capital stack in the event of a bankruptcy. But look, I mean risk and return related, when you get a high yield on something, there is a reason for it. If it were less risky, they wouldn't have to pay as high of a yield.

Roger: The key with that too, and this is where I think it comes into play with private investments is if the yield is high or the expected return is high and you can't find the risk, it doesn't mean it's not there.

Peter: That's right. And importantly, when there are high returns, and this is something, Roger, that I find myself debating among colleagues at other firms, like other people, other chief investment officers or directors of research of big firms, where let's say your private equity portfolio did earn 16% a year. Now let's ignore the fact that The S&P 500 just had like a crazy couple decades. Like even saying aside the fact that that's like 13 or 14%, like that's pretty high. That's not something that's talking about base rates. That's not the base rate. That's not what you'd expect in perpetuity. But when you earn 16% and you beat something like the S&P 500, you probably feel good. If your advisor puts you in it, you probably like your advisor. But what you didn't really understand or didn't see was the risk that you took to get it. I would argue that 16 isn't a high enough return. It should have been 20. That's the piece when the risk shows up is when people get unhappy.

I didn't mention at the onset we do this type of investing for certain types of clients. And one of the most important conversations and when we do it, I'm in every single one of those meetings because what I want them to know is that if I won the lottery and I had $100 million after tax money, I'd probably own private investments. But why would I own them? And this goes back to your first question, which is the most important. The why behind me do this Is to create a great life in retirement. My private investments would probably center around industries that interest me, opportunities to personally get involved in those businesses, opportunities to support friends. Maybe, maybe every once in a while I'd be like, this manager seems smart and their thesis seems good. What the heck? I don't need this money anyways. It's like, play money, let's go for it.

Roger: It's expressing your views, not securing your life.

Peter: I can make a case of the portfolios we build. You know, a lot of when we sit down with a client, we don't have a single like model of privates that we do for everyone. We have a menu based on like, what their objectives and goals are. And I think it's really Important, just like any other financial planning decision or investment decision to understand the why. And, and some people really like pointing to a piece of real estate that they drive by frequently and be like, I own a piece of that. If you could own a part of a sports franchise which is becoming, you know, more popular in private equity wrappers that are available to the mass affluent or the high net worth, group, that is pretty cool. Especially, especially if it isn't through a fund. Like you actually get to go to like the meetings with the owners of the. That's something I would probably be into just so I could go to games and be like, I'm one of the owners of the team. When you're doing it through a fund, it's not quite the same thing. But this is all to say that expectations need to be managed. When you are evaluating these things, I do think perhaps people are overly negative on them, that they are evil. I don't think they're evil. I think they can benefit, but I don't think they're necessary. Even for someone with $100 million, I don't think they're necessary. I don't think they have to be harmful. And if you're going to do it, you really have to understand what the process is. Process is just everything in selection. But if you're adding a private investment into your IRA or your trust and you insist, I mean the way I would think about it is the same way I would think about going out and buying Amazon or Nvidia or Bitcoin. You know, you're, you're making a bet and that, I'm okay with people expressing themselves in their portfolios. I just don't think it makes sense to be a core part of the strategy that you're using to create that great life in retirement.

Roger: I think that's the main thing here is none of these things are good or bad, and I feel like there's a little bit of, you know, we're ranting this time and last time. I think it's more be, my intent in this is we don't need this. And it adds complication. If you're going to do it, do it with the right bucket of money, that excess money that you want to express your views, et cetera. But make sure you secure the most important thing, which is having the structure for you having confidence to rock retirement.

Peter: Roger, can I give you an example of complexity that I would be more welcome to?

Roger: Sure.

Peter: Because I think what we're ranting. You're right, because it's creating complexity and I don't think that the data supports it. We'll hear a pitch and they'll be all full of facts. But I promise you, if I were sitting there next to you, I would point out why those facts aren't always relevant. Key point. But like complexity. This is funny. I texted Roger the other day. He did one week before I did an episode on direct indexing and SMAs did one on his own. So if you want to scroll back in your podcast platform and listen to Roger's SMAS is one of those examples of something we're talking about.

Roger: Separately managed accounts.

Peter: Yes, thank you. Sorry. So like some people refer to them as direct indexing now where instead of owning like a mutual fund or an ETF, it's sort of like a mutual fund for one person. You know, you get the professional management and the main reason you would do it is, you know, tax loss harvesting or if you have a customization need. What's interesting about it is that this is a, this is one of those instances where the business of investing is pushing them very hard and, but they are really useful in some instances and the, the profession of investing will apply them strategically.

I for one have looked at the research on tax loss harvesting and I don't think I don't think it’s worth anything. But if you don't have a specific need for the losses, my interpretation of it is that it is not as great as it's all chalked up to be. But if you know that you are having stock vesting, if you know that you are selling a business, if you know that you have a specific need for losses, then suddenly I'm a very big fan of a separately managed account. The problem then becomes, I see people these days come to us with separately managed accounts that have like one or two hundred thousand dollars in it, and I'm like, well, what did that even do? That's not going to generate enough losses. It can be a good idea. But that's an instance where scale and size really make a big difference and people want them because they hear the benefits. I think people do overvalue capital losses, especially when there isn't a specific use case for them. People will say, well, I can offset $3,000 of my income. I'm telling you, I, I have an episode on it. Roger, maybe I'll send you a link where I go through the math, like I'm just not sure most of the benefit of tax loss harvesting comes if you cut a new check to your account for the tax savings. I've been in this business long enough to know that nobody does that. So just for whatever that's worth, if that's where all the mathematical benefits coming from, it's a stretch, but when you have a use case, let's introduce some complexity. Let's have an account that adds 1,000 holdings to my tax return. that's an instance. I'm not saying I'm anti complexity. I just think you need like a place.

Roger: Well, it's like it's pulling out the proper tools, not just thinking the coolest, most sexy tool is the one that everybody needs to have.

Peter: It's a great point. I have a handyman in my house right now. He has a big toolbox. I guarantee you he's not using them all on our cabinets. He's probably using it. I mean, I'm not handy at all. Hence the handyman in the house. I don't. I can barely change a light bulb. Roger, I'm really sorry to let the world know this. actually, ChatGPT has made me immensely more handy. You take a picture and then have it, like, draw you diagrams on how to fix it. And then by the time the handyman comes, because I maybe didn't fix it, it sounds like I know what I'm talking about. Then he's like, oh, yeah, you know, I feel like really cool. A little bit of a sidebar.

Roger: I would much rather have you thinking about all of this investment stuff and let those people handle that part of it.

Peter: Specialized, specialized, specialized. But, you know, he's not using all the tools. Not all tools are useful. They exist because there was demand for them.

Move from traditional active funds to passive indexes took all the revenue away from active managers. You said something earlier like institutions started a lot of the demand for private assets. When there's demand, Wall street or the investing business will find a way to make money off that demand. And here's my personal feeling, Roger, is that the huge move from traditional active funds to passive indexes took all the revenue away from active managers.

You know what private investing is? It's active management. It is people with a thesis buying a handful, or even if it's like several hundred companies, then maybe they have an active hand in the management, but this is just active management in a new wrapper. I probably take, oh, my gosh, I don't want to say this and have compliance upset with me, but I bet it's over 100 manager meetings a year and they all say the same things. But they all do have slightly different theses. It's, you know, what you're really doing is interviewing active managers at that point. Maybe that's something we should have said in the process. Kind of in thinking out loud, arriving at this point is if you don't believe in traditional active management, you should be out on this. That is, it should just be nonstarter.

Roger: That is actually a great way to sum this up.

Peter: Yeah, let's just rerecord and do that first, Roger.

Roger: All right, thanks for hanging out with me. We'll have links to some of the episodes you mentioned as well as to where to get your, your latest book and then we'll have you on again, buddy.

Peter: Roger, always great seeing you. Thanks for letting me rant on private investments with you.

TODAY’S SMART SPRINT SEGMENT

Roger: On your marks, get set, and we're off to take a little baby step we can take in the next seven days. Not just rock retirement, but rock life.

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The opinions voice in this podcast is for general information only and not intended to provide specific advice or recommendations for, for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.