Todd has been retired now for 18 years, and now blogs from FinancialMentor.com where he shares his ideas and insights on retirement and investing – which are also the primary topics of our interview.
Todd takes a radically different view of retirement than most people do, including those who pitch early retirement. He challenges the assumption of working for 40 years, then living off the fat for 30. Retirement, he claims, is all about creating a life of worthwhile work, and using your assets as bridges from one phase of your life to another. Todd even claims that living off your assets can create what he refers to as a “poverty mentality”. His views are unconventional, but he’s a guy whose living the life so many others aspire to.
Todd’s views on investing are equally challenging. He takes issue with everything from the traditional views of rebalancing and buy-and-hold index investing, to the so called safe withdrawal rate of 3% – 4% per year – he thinks you can do better. He flat out asserts that conventional retirement planning methods are mostly myth, because they center on reaching The Number – a goal that is probably unattainable.
This interview may challenge everything you’ve assumed to be true about both early retirement and investing, from a guy who’s been a champion at both.
The following resources are mentioned in today’s podcast:
Books by Todd:
- The 4% Rule and Safe Withdrawal Rates In Retirement
- How Much Money Do I Need to Retire?
- Don’t Hire a Financial Coach!
Other recommended reading:
- Essentialism—The Disciplined Pursuit of Less by Greg McKeown
- The War of Art: Break Through the Blocks and Win Your Inner Creative Battles by Stephen Pressfield
Transcript of Interview
Rob: Todd, welcome to the show.
Todd Tresidder: Thanks for having me, Rob.
Rob: We saw each other at FINCON a few months ago where we had some good conversations and even debates about investing and retirement so I was glad to have you on the show because I wanted to pick your brain more about this sort of thing. But those listening don’t know who you are. So, who are you?
Todd Tresidder: I always love that graphic term, pick the brain.
Todd Tresidder: It always brings up wonderful imagery for me.
Rob: Well, that’s what we’re going to do.
Todd Tresidder: Okay, a little bit about Todd Tresidder. Let’s see here. Well, my site is financialmentor.com. It started kind of as a dare from my wife. If you could see me right now, I’m very grey-haired and I have a grey beard. I’m 53 now, so it was quite awhile ago that I raised a family of four without any real income. It was one of these things where I did something unusual and a lot of people ask me, “How did you do it?” But they weren’t asking the right question. There’s logical sequence and processes that you go through to build wealth and there is an approach to life that cumulatively compounds, not just your wealth, but your knowledge and other aspects of life. I just had a different kind of approach to things and my wife just got tired of me giving standoffish answers. It was just too hard to respond because I needed a whole basis of teaching so that’s what the site’s become— a way of teaching, a different way of approaching stuff.
Rob: Alright. You said you were retired at 35? I have a number of questions that I need to ask about that and if you don’t want to answer any of them that’s fine. Just say Rob I am not going to answer that question. As a lawyer I am good at asking questions.
Todd Tresidder: As a lawyer you are always supposed to ask the questions that you already know the answers to right?
Rob: People say that. And that’s true at trial. You only ask questions where you either know the answer or you don’t care what the answer is. I am going to pretend this is a deposition. What did you do before you retired at age 35?
Todd Tresidder: I ran a hedge fund and ultimately became a partner. Originally, I just joined as an employee and then I became a partner at a hedge fund. I was one of the early pioneers of computer modeling of the financial markets. I build data bases because back then they didn’t have them. I’m going to take you back in time. When I did this the IBM 8088 processor and the Apple II were brand new computers. It was just as I was coming out of college.
Rob: You are old.
Todd Tresidder: Computers were just coming out and personal computers were hitting homes and there were no databases. I started building these databases and started developing computerized training systems. I was one of the early pioneers. Now they have got MIT statisticians doing this stuff but back then, that’s what I was doing.
Rob: Did you go to college?
Todd Tresidder: Yes. I went to UC Davis and UCLA. My degree is officially from UC Davis and it’s a degree in economics.
Rob: Economics. How did an economics major learn to develop computer models to be used in a hedge fund?
Todd Tresidder: Self taught. I had a passion for it. The back story is I was taking an investment course in college. He was a known successful investor. He wasn’t just a teacher. He had a very large real estate portfolio in the town of Davis. He was teaching this course and there was charts on securities, and I looked at him and I went up to him and said, “You know, I get what you are teaching and I get all the stuff you are saying. But it seems to me I could make money off this and know nothing about it. I could just do it mathematically.” He looked at me like I was from another planet. He said, “That can’t be done. Nobody has ever done that.” That was all I needed to get motivated. Then my dad was the only other authority I had in investing and I ran it by him and he said it couldn’t be done— that it never had been done. So, I decided I would do it. I started researching and developing it. I got introduced to another guy who had a similar vision after I came out of college. He had already started a small private placement partnerships which is what they were called back then. They weren’t called hedge funds. We didn’t have sexy names for them back then. He had already had one starter. It was very tiny and wasn’t successful at all. And when he saw the work I was doing—the research I was doing, he was, like, “Wow!” So we teamed up and we grew the thing. Ultimately we retired off it.
Rob: This might be the one you don’t want to answer but I will ask it any way. When you retired at age 35, how much money did you have?
Todd Tresidder: I always tell people I was north of a million and I leave it at that. I don’t give the exact dollar amounts and I still don’t do that to this day. But I was north of a million. I just establish it as a credibility issue.
Rob: I take it, it was less than a billion? [Laughter].
Todd Tresidder: Yeah. [Laughter]. I lead a very normal lifestyle and I am not the richest guy you will ever meet and I don’t pretend to be. There are way richer guys who have been way more success than me. But I live a very nice life and I have flexibility in what I do with my time.
Rob: Are you still retired? I know you have the website and we are going to talk about that. But other than that, are you still retired?
Todd Tresidder: It depends on the discussion of what is retirement? Defining what retirement really is?
Rob: You go ahead define it for us and tell us, based on your definition, if you are retired?
Todd Tresidder: First, let’s do definition of financial independence because in my world, retirement is nothing more than euphemism for old age financial independence. The difference though with retirement is that it has a defined life span to it. Where you can amortize the assets. When you retire at 35, you can’t amortize the assets because the life span’s too long. There is no safe amortization rate of assets over 60 plus years, it just doesn’t exist mathematically. Let’s start with the definition of financial independence which is cash flow exceeds expenses, right?
Todd Tresidder: That’s a very simple definition. Retirement is nothing more than old age financial independence. Basically, you hit a point where cash flow exceeds expenses and you can be “retired.” The myth is that you don’t do anything of substance. When people think of retirement, they think of somebody sitting on a hammock on a tropical beach with Mai Tai in their hands. I enjoy doing something like that but I only enjoy it in the context of meaningful work. I don’t enjoy it as a lifestyle. I have lived all the extremes. I was a workaholic. That’s how I built the business and built the wealth. I worked really hard. And I still work hard to this day. Then I did what I call the pro-leisure circuit, which is that I really did nothing of substance for a period of time. I was living in Lake Tahoe. I was young and I’d go mountain biking, beach volley-balling, water skiing and all that stuff and it was fine for a while. But I noticed something for the other people that had that lifestyle. None of them were really happy. And frankly, I was less happy than I was back when I had goal-oriented activity in my life. I have been through a transition of what happiness is and what creates it fulfillment in life. I didn’t want my life to be a story of, “The last great thing he did was build a hedge fund.”
Rob: What did you do?
Todd Tresidder: Well, I am building a financial manor. I am building an educational resource that can help other people find fulfilling lives and get out of that work-a-day hum-drum if that’s a goal they happen to have.
Rob: So, your website— I assume it earns income for you?
Todd Tresidder: Absolutely. Yes.
Rob: Is it to a point where you can live off of that income without tapping the north of one million dollars?
Todd Tresidder: If I did the coaching along with the passive income sources the answer would be, yes. Just in the last two years it’s paid my bills.
Todd Tresidder: Prior to that it never did.
Todd Tresidder: It was kind of a supplement. When I started financial manor it was really just planned as a nice little boutique coaching business. As I got into it, you can’t hold a good entrepreneur down, I just got into it and got a bug up my rear and just ran with it. Now I have a much bigger vision of where I want to go with financial manor. I am trying to position it for advanced retirement and advanced investment strategy. Something like the next step beyond a Dave Ramsey or a Motley Fool. It’s not all the traditional personal finance stuff you find on every other site. I am providing that next step for everybody that’s already been there done that and with all that basic stuff.
Rob: Right. We will talk about both the advanced retirement and advanced investing concept, but before we get to that, you are married and do you have kids?
Todd Tresidder: Yes, two kids.
Rob: Does your wife work outside home?
Todd Tresidder: No.
Rob: Where did you get your health insurance?
Todd Tresidder: Oh, that! That sucks! I love the United States of America and I am not a national advocate of government involvement. Normally I am a free enterprises guy, but I am staunchly against our health care system. It’s just a mess. I pay my own health insurance and I use the high deductible policy. Fortunately, our family has always been healthy so it’s never been a nightmare. But it’s always that potential nightmare that’s sit out there and it’s just wrong. It shouldn’t be. Nobody should build financial security for themselves and feel threatened by a health issue because our medical system is so expensive and the insurance system is just so broken and unfair that it could get anybody at any point.
Rob: You have a high deductible policy. Do you have health savings account that goes with it?
Todd Tresidder: Yes I do.
Rob: Okay. Do you have disability insurance?
Todd Tresidder: No.
Rob: Why not?
Todd Tresidder: I don’t need it. I am self insured.
Todd Tresidder: If you think about it, if I am financially independent, why do I need it? I don’t, “have to work.” One thing that goes into the whole happiness thing that I found is, meaningful work is a great contribution to happiness. And the other thing too, that people don’t talk about is living off your assets can create poverty mentality. I really prefer the abundance of having income as well as the assets in the background. This is just about kind of maximizing your happiness and fulfillment. I work pretty hard about 8 or 9 months out the year. That’s my balance point. When I work, I work. Then I take off 3 to 4 months a year. Last year I took off for almost 4 months.
Rob: What did you do when you took that time off?
Todd Tresidder: For one month I did a big dessert camping trip and then I hiked the John Muir Trail. It’s 250 miles from the base of Yosemite Valley to the peak of Mount Whitney which is the highest peak in North America.
Rob: Did you take your family with you?
Todd Tresidder: No. The kids are younger. They’re probably going to be up for it in the future and my wife would have done it with me in a heartbeat but somebody had to be home with the kids. I did it in the month of September so that it didn’t destroy the family summer. It’s a long enough trip that would take over the whole family summer which isn’t fair to the kids. What I do is I really cut my work load down. I mainly produce results during the winter months when the kids are in school and then I just scrape along during the summer and we do a lot of vacations in the summer while the kids are out of school. And also on school breaks and coming up for the holidays and stuff.
Rob: Your comment on living off of assets can create poverty mentality, is excellent. I haven’t heard it phrased that way. It absolutely rings true with me. In some ways that’s not a bad thing. At least in the sense that it can cause you to really think about how you are spending money— which I think is a good thing. But you can go too far, for sure. Even when I work I probably fall into that category of folks sometimes. Which is kind of strange, I guess. Interesting concept. So, it sounds like you have basically a miserable life? [Laughter].
Todd Tresidder: [Laughter]. I do the best I can and I am constantly learning and I am constantly improving and growing. That’s one of my values. That’s ultimately what got me out of the hedge fund business into the business I am in now. I reached a point in my investment knowledge where I was going to spend rest of my life trying to figure how to add a percentage pointer to my rich client’s portfolios and that just wasn’t a satisfying existence for me. Once I understood investing in a way that was satisfactory to me, continued research and development in that field was not what I wanted to dedicate my life to. Whereas, this is really fun. The financial manor thing has been amazing challenge because it not only requires me to develop… Like, right now I am building a course of instruction which maybe we’ll talk about, or maybe not. I’m having to develop all those educational course development skills which I never would have done without this business. And, you’re familiar with all the internet marketing skills required, all the copywriting skills required… And that all ties because, ultimately, it’s all about people. How do you connect with people? How do you craft messages and connect with people and deliver value? It’s just so much learning and growth involved.
Rob: Absolutely. Let’s start with advanced retirement concepts because I know you view retirement differently than maybe other folks, and you have got on your site, advanced retirement resources. Talk to us about that.
Todd Tresidder: Let’s start with what’s a really popular myth that you are supposed to work like a dog for 40 years and scrimp and save so you can build your little nest egg, then do nothing of substance for remaining 30 years while you spend it down. That’s just stupid. Somehow we bought off on this through this security being placed at 65 and that became the cutoff point and all that. I think what’s happened is the whole world’s changed recently. And it’s not recent— I mean, longevity has been increasing for a long time. Basically, longevity has been increasing at an average of about one year for every 3 years of time that elapses. When social security was created, the average life expectancy was 65 so security was placed at age 65. That was the life expectancy. So it was a zero-sum game which is how it was always designed. There is no design to support 30 years of leisure and that’s why it’s got problems. This whole myth that that’s how you want to approach life? I think what’s happened is that longevity’s increased and what we have been given opportunity to do is interject a whole new period in life. Life was basically a structure of birth, school, work, death. That would be the four phases of life. Now I think there is this birth, school, work, fulfillment, death. We have added a fifth phase in there with increasing longevity. When I separate work and fulfillment is this idea that the initial part of your career is about establishing your wealth. You buy your home. You get your furniture. You get the two cars or whatever it is. You start getting those base assets and a base savings and then you can enter a fulfillment stage where you don’t necessarily have to amass additional assets but you don’t want to spend down what you have got. You can pursue fulfillment. You don’t have to be in aggressive career stage any more. It allows people to create whole second careers. Like you’re seeing me, with financial manor. Maybe it will go huge, maybe it won’t. It doesn’t have to. There is kind of this additional phase of career that extends out, so your assets change form at that point. Because your assets no longer are designed where they have to support spending in perpetuity, but rather, your assets just have to be bridges as you move from one great phase of your life to the next. You just have to have enough to support those bridge or those phases.
Todd Tresidder: Am I making sense?
Rob: That makes perfect sense as I listen to you. Here is my concern?
Todd Tresidder: How about this? Dough Roller is a great example, right? You’re making a shift.
Rob: Here is the thing. I could have supported my current lifestyle, which is not exotic, from just Dough Roller, started probably in 2010. But I didn’t. I continued to practice law. And I continue to practice law to this day. It’s not been fulltime, but I have a sense of that time. I have been asking myself why I am continuing to practice law. There is something that’s compelling me to keep doing this. I don’t have an answer to it. Other than the closest I can get is fear that if I rely entirely on this crazy thing called a blog and this podcast, if I step off that ledge (that security that the practicing law gives me). I am not sure what’s going to happen. The world as we know it is going to come to an end. [Laughter]. Is that just stupid fear on my part? Do I need to go and see a shrink? Maybe that’s the answer.
Todd Tresidder: If you really want coaching on it, there’s a couple of questions that I would like to ask you. First of all, do you find law satisfying?
Rob: There are aspects of it that I do, but probably not enough to keep doing it.
Todd Tresidder: Let me ask you this. If you had $10,000 a week of mail box money rolling in the door, more money than you need to spend… It just keeps rolling in the door no matter what, whether you get out of bed or not. Would you continue to practice law?
Rob: I would not.
Todd Tresidder: Okay. There’s your answer.
Rob: I know that’s my answer and I have gotten that far of my own, I have to confess. Although I didn’t quite phrase it the way you did. But I am still practicing law. I guess it’s just fear, right?
Todd Tresidder: Right. That’s what I said. You already have your answer. You gave it in your question. Yes, it’s fear of the unknown. You have never been without that career. You have spent your lifetime building that career and you are literally tossing it away. It’s hard to do.
Rob: Yes, that’s exactly it.
Todd Tresidder: It’s not an easy thing when you went to school for it. You trained for it. You have your identity wrapped up in it. You own this thing that Rob Berger is a lawyer, right? And you have this personal identity tied into it and you are taking all that and removing it. And that’s scary. There is an excellent book out by Steven Pressfield called, The War of Art.
Rob: I have read it.
Todd Tresidder: I am way over simplifying the book, but it’s a brilliant book. Readers should go get it. In a nut shell, the concept is simply that whenever you try to move your life forward there is this amazing force called resistance with a capital R because he’s deifying it, right? And it’s inside of us and holds us back. I see it in my life too. Even thought I coach on it and I work with it, I experience it myself. It always amazes me, anytime I move my life forward or anytime I see my clients see moving their life forward, up comes this resistance. And it takes many forms.
Rob: When you “retired at 35,” were you scared? Were you throwing away the hedge fund— the business that’s supported your family? Were you nervous at all?
Todd Tresidder: I was too young to be nervous. I didn’t have enough knowledge of the stupidity of what I was doing, to really understand it. I didn’t have good coaching. I was just being myself and making it up as I went. I call that the biggest financial mistake I ever made, selling that hedge fund. Because that was a cash-flow monster and I literally could have owned it free and clear. The partner was willing to just let me have it and I could have trained a couple of employees. It was all systematic investing so I could have trained people and gone off with whatever life I wanted and just kept the cash flow. But I really was just stupid and I didn’t have the structures in my mind. What happened was I got this “either-or” thinking process where I had to do one or the other. Like, if I wanted to go off and travel and be a vagabond and live out of a backpack and do some of the dreams I wanted to live, then I couldn’t have this business. That just wasn’t true. But somehow I got my thinking going in that direction and it caused me to choose to sell it. At the time I was so enamored with the adventure I was heading off on that I don’t really think I understood the level of mistake I was making.
Rob: Interesting. You mentioned coaching. Tell us about your coaching. What you offer people and how that works?
Todd Tresidder: I am not accepting clients now so this is not even a promo plug because I’m transitioning the business over to info products so I can help more people. I was coaching people on how to build wealth. The whole premise is, yeah, I did it myself, but you don’t know until you can teach it. I went out was working with clients one-on-one for—well, I’ve been doing it for 17 years now. I just got better and better with the years. I developed it into a systematic process. That’s what you see on the site that I’m developing out. It’s called 7 steps to 7 figures. What I figured out is a systematic process to help people no matter what point they came at me in the wealth building process. They would map into one of the steps. Each step is a standalone course that achieves a specific outcome. The learning I had to go through was that there were a lot of skills and personal attributes that I had that I took for granted that was a source of my success. So I had to learn how to train those. When I first started coaching I was making the same mistake everybody else out there makes which is— everything is just about, “Let me show you what I did and then you will do the same, right?” It doesn’t work that way. You’ve got all these gurus up on stage and they’re pontificating the latest strategy on XYZ on how to make money doing this or that. That only works for a really tiny-tiny percentage of people who happen to be just the exact right spot for that message. And the vast majority never implement any of the learning. The reason for that is that they have a different base set of needs. What I have spent the years doing is understanding what are all those different needs and where are people coming in and how do you patch it all into a structured, sequential step-by-step process that anybody can go through. I finally got that done. It’s taken me 15 years to figure out. I really got 7 steps figured out back about 7 or 8 years ago and now I am just building up the platform for the marketing of it and everything like that. Now, since that’s build out, now I’m building the courses themselves. That’s why I’ve I shut off the coaching because now I am focused on converting a course development. In that way I can give to people at a much better price point. When it’s when I am coaching (by definition) it’s going to be expensive. Because it’s a high-service level, high personal-touch thing. When I can info product-style it, then I can deliver the same knowledge at a much lower price point and it’s still a good business model.
Rob: When will those informational products will be available?
Todd Tresidder: The first one I am working is the advanced investing module and that’s the one you and I talked about a little bit at a FINCON. That one is the one with the highest demand and the one that is really changing lives because as you are probably aware, there are so many aspects to investing that cause you to live off your assets at a much lower level than what might be desirable. For example, why is it that you can only have a 3 percent or 4 percent safe withdrawal rate when the average return from investing is 7 or 8 percent compounded depending on how you look at the data and how you structure the portfolio. On the face that doesn’t seems to make sense. How can a portfolio on average return a higher than what a safe withdrawal rate is. And the reason for that is sequence of returns risk or volatility risk. So taming that risk and understanding how to manage that risk can literally transform both the wealth accumulation phase as well as the wealth distribution phase of retirement. It’s just some stuff that’s not commonly understood— about how you put these pieces together, that I am teaching.
Rob: Is that available now?
Todd Tresidder: No, it’s not. It was available just for my one-on-one client’s. Because, again, I tested everything first on my own life and then I tested it with my one-on-one coaching clients. I got it down to the science about 2 to 3 years ago. I have put probably 30 clients through since then and collected testimonials and got it down… So now I am putting it into a product from so that I can just teach it off the top of my head.
Rob: If I heard you right, you believe you have a way in which folks can safely withdraw more than 4 percent of their nest egg each year?
Todd Tresidder: Yes.
Rob: What’s the figure?
Todd Tresidder: I haven’t worked the data yet. That’s part of the post I am going to have put out in 2015 as part of the promotion for this. Another guy I work with— we are going to do the research and put together the estimates. Some of it has going to be pro-forma. It won’t be exact because some of the index data and some of the other material doesn’t exist back far enough to really figure it out over meaningful time period. I am really going to have to figure how to put this together in a way that can stand up to scrutiny.
Todd Tresidder: What I do know is the sequence of returns risk is a fundamental problem. The volatility is a fundamental problem. Rob, you have enough background on this. You know that if you just raise your expectancy by a few percentage points that alone will be a game changer.
Todd Tresidder: When you look at investor return, average return, net of inflation… the number is pretty low.
Todd Tresidder: That’s where your numbers are coming in. When you throw in volatility and the drawdown problems which are characterized as sequence return risks, that’s what really kills the number overall. If you can raise expectancy by just a few percentage points, that makes a huge difference alone.
Todd Tresidder: And, if you can couple that with getting the drawdown down into either low double digits or into single digits, even that changes the game entirely. Because now you’ve basically handled the sequence of returns risk. By lowering the volatility, you can raise the drawdown rate.
Rob: I am interested in that. Typically, as you lower volatility, you also lower returns.
Todd Tresidder: Right. That’s a myth.
Todd Tresidder: Where that’s true, Rob, is in product. In other words, you have to risk return tradeoff that’s exists at the product level and that’s valid. Where the mistake is made is, people think that’s the far it goes and that’s because the mindset is looking it is an asset allocation mindset, when you think the only choice you have is to vary the product because you have to buy and hold it all times. When you shift out of that from a product only focus only to an investment process focus, then you can overturn the risk reward paradigm.
Rob: How does that work? What’s the different between an investment process (as you just described) versus the typical buy and hold asset allocation method?
Todd Tresidder: Let’s use traditional asset allocation as an example. With traditional asset allocation you are looking at stocks versus bonds versus REITS versus commodities (paper commodities) and cash and you have got these various allocations. You can go international. You can go small-cap, large-cap, value growth. You have got all these permutations, right?
Todd Tresidder: Most of it is highly correlated and it gets more correlated with time. That’s what you work with and your service management tool is diversification, and diversification stands on the bedrock of non-correlation. Are you with me so far?
Rob: I am completely with you. I am not sure everyone else is. Maybe I’ll follow up after the interview in this podcast.
Todd Tresidder: That’s the traditional view point in asset allocation. Every time you talk to your investment advisor it’s all about product. It’s about,” This is a good investment or that’s a good investment,” or, “I recommend this that.” It’s all product focused. The one place where process exists within traditional structure is rebalancing. Rebalancing is where you are allocating from the overvalued or best performing assets down to the lower one. This is nothing more—and this is going to get you a little controversy, but okay, you know. It’s your podcast. Let’s get some interest here. That’s nothing more than valuation-based market timing. People want to call it rebalancing because the same people who advocate it, say market timing doesn’t work. But if you really look at it, its valuation-based market timing. And if you look at rebalancing, it’s the only place in the traditional asset allocation framework where you improve both risk and reward at the same time. That’s an investment process.
Rob: It’s interesting. If I understand, you are advocating the rebalancing, right?
Todd Tresidder: Absolutely. Yeah. That’s one process within traditional asset allocation that’s valid.
Rob: For those folks who are your asset allocators— which I would include myself in that. Although I do have some individual stocks. In any event, rebalancing is part of it. It’s an investment process and I might not give it such a fancy term. I might just say rebalanced. It kind of dovetails, in my mind anyway… Asset allocation without rebalancing, to me, it just goes hand-in-hand. Although, it may be not for everybody.
Todd Tresidder: I am not disagreeing with you. I am saying that it’s a crude form of market timing. It’s nothing more than an extremely crude form of valuation-based market timing.
Rob: It’s interesting you call it valuation-based market time. I have to think about that because I look at it a little differently in this regard. Let’s take commodities for example. Commodities are down. I have 5 percent in commodities ETF. In fact I was looking at it just yesterday. I look at my asset allocation at the end of every month. I need to rebalance. It’s low, its lost money. I need to sell whatever… Let’s say it’s stocks that are up and move some of that into commodities, right. That’s based on the valuations. The valuations have gone down for commodities, they’ve gone up for stocks. But I don’t see it as market timing in the following respect; I have no earthly idea where commodities are going to go tomorrow, next week, next month— For all I know, they can keep going down for a long time and I could continue to rebalance—
Todd Tresidder: That’s a great point you are making. That’s another myth I would address which is that market timing has to be predictive. The key point of why rebalancing works, is because it has positive mathematical expectancy. What’s really happening here is that the expectancy of undervalued assets is higher than the expectancy of overvalued assets. That’s why it’s a valid approach. The other thing that’s true is that undervalued assets have lower risks. They have lower volatility as well. That’s why you improve both risk and return through rebalancing. You have to understand the core source of the return. That’s one of the tenants I teach. I teach 10 tenants of valid investment strategies as part of what I teach, and that’s one of the core tendencies. You have to be able to associate the source of return and risk reduction with the methodology employed. That, with valuation, is essentially what I am doing here. I am explaining the source of return risk. The myth that I was going to touch on is the idea that people use terms that they don’t really define and they are not clear on. We just have these assumptions about them. For example, you shared an assumption on market timing which is that its predictive. And one of the tenants I teach is that anything based on any forecast of the future is, by definition, invalid. And that’s because the future can’t be known. If you have an investment methodology that requires a forecast of the future then it’s invalid and you can’t use it. And so, there’s different forms of market timing. There is the predictive type which we can throw out the door because it has no validity, and there is the type that has statistical positive expectancy but has no forecasting capability. And that’s something very different.
Rob: That’s interesting because if you don’t equate market timing, or you don’t see market timing as being predictive, then it sounds like you put market timing into two buckets. One that’s predictive (that you said we throw out the window) and another kind that is not intended to be a forecast or predictive. I suspect you and I see this very, very similarly. Just with some different terminology.
Todd Tresidder: Yes. And the terminology is surprisingly important. It has to deal with the way we think in terms of words. If we play loose with terminology and we don’t really get clear on what it is, what it stands for and what’s really going on, then we can really muddy up our thinking. It’s that clarity of thinking that the students have really come back to me and said, “Wow!” So I really go through and clearly define this stuff, just as you see me doing in this podcast, right? I am going through defining retirement. I am going through redefining market timing. I went through and redefined what rebalancing is and how it really works. Those are important because as you go to a deeper level of understanding— I call it the first layer of understanding and the second layer understanding. And when you go to that second layer of understanding, that’s where it becomes dynamic and these pieces start fitting together. What I call first layer of understanding in investing is just traditional asset allocation, passive index buy and hold. And it’s not that it’s wrong. It’s completely valid. I mean the Bogleheads got it right when they talked about the importance of cost reduction and all those things. That’s absolutely valid and important.
Todd Tresidder: That’s what I call first layer understanding. That’s the ground floor, the foundation on which you grow from. Then you have got to go and take a step beyond that and say, “Okay, where doesn’t it work?” So let’s use the analogy of Newtonian physics as an example. Newtonian physics works great within the realm of what’s visible to the eye, but with the extreme large and the extreme small, Newtonian physics falls apart and that’s where we come into things like relatively theory and quark theory and all these different things that had to solve the problems of the extremes because the data didn’t support the Newtonian model. It’s the same thing in investing. You’ve got an investing model that kind of works but it fails at the extremes. And it’s those extremes of data that tell us so much more. They tell us that there is another level of understanding beyond, that’s absolutely critical. And the reason it’s critical is because that volatility cannot be ignored. That volatility is changing people’s future. We talked about that earlier when we talked about retirement planning and how to sequence the returns risk literally determines how much you can spend from your portfolio. You can double your lifestyle potentially from a change of that risk. Buy and hold apologists will tell you that you’ve got to ignore volatility. But you can’t ignore volatility. It’s so important mathematically that it literally defines the distribution curve of returns.
Rob: The way you address it is the rebalancing? Or is there more to it?
Todd Tresidder: There is more to it. But it all stands on the foundation of passive index buy and hold. I start with that, pointing out what they got right, what they have as half-truths and what’s the next layer of understanding. And we build on top of it. What we do is build layers of risk mismanagement and layers expectancy on top of it. We stand on that foundation because that foundation is sound.
Rob: I will be interested in seeing this as you produce it 2015, because the buy and hold folks, including the Bogleheads , would absolutely say, “Rebalancing is absolutely part of what you teach.” To say I am going to have a low cost, buy and hold portfolio of index funds, but I am never going to rebalance—that would be totally foreign to Bogleheads.
Todd Tresidder: I am agreeing with you. You are absolutely correct. What I am saying is that it’s so much more that they can do than that. We don’t have to stop at that. The problem is that they went through and defined market timing as voo-doo and it’s because they jumbled up the concept of market timing into anything that involves buying or selling becomes defining market timing. But for some reason they redefined rebalancing as not that.
Todd Tresidder: One of the most sound statistical concepts is the relationships between valuation and expectancy over a 10 to 15 year time period from a portfolio stocks. You can look at that you can see that data is absolutely unequivocal. It holds across all time periods. It holds across international, domestic… It’s just very sound. Yet, if you think about buy and hold, it’s saying you’ve to hold regardless of market valuation and the data bases supports that.
Rob: Its interesting. I take a very practical approach to these terms. For me, market timing is making an investment decision based on what you think the market will do in the future. That’s Rob Berger’s definition. You may not find that—
Todd Tresidder: I vehemently redefine it.
Rob: I don’t. And the reason I don’t is because I like where the rubber meets the road and I want to understand my own decisions. For example, if I rebalance my commodities fund because it’s gone down by more than 5 percent… And let’s just assume that’s my trigger. My decision to buy more of the commodities fund has nothing to do with what I think the market will do tomorrow. I suppose you could say it has something to do with what I think market will do long-term, right? And if I thought the commodities fund would eventually go down to zero, I probably wouldn’t rebalance into it. But putting aside that kind of extreme—
Todd Tresidder: Stated more clearly, the only way that’s going to help you is if the asset you are rebalancing toward has a higher expectancy than the asset you are pulling away from. The key you want to get clear on is what are the expectancy of the assets that precedes your decision to rebalance and was the methodology for doing it— does it show a positive expectancy based historical research.
Rob: Exactly. I suppose you could say that’s the extreme at some market timing. But for me it’s not market timing. At least not in a meaningful sense. But, I guess that’s just my view on it. Going back, give us an idea—
Todd Tresidder: What I would say is that the view point dangerously sets you up to miss a deeper level of understanding.
Rob: That’s what I want to get at. You like, as a core index, asset allocation…
Todd Tresidder: Can you drop something in here and we can pick up that line of questioning in a second?
Todd Tresidder: Okay I want to drop an idea in here for this discussion, because we skipped over this. Let’s ask, “What is investing at the core?” Because I’m always redefining these terms.
Todd Tresidder: Investing at the core is putting a capital risk into an unknowable future. I don’t use those words lightly. It is literally an unknowable future. You think about that and that’s quite a conundrum isn’t it? How do you put capital risk into an unknowable future and come out with a profit? There are basically three approaches. The first approach, which you see in the popular media, is where you’ve got talking heads running around trying to predict the future and telling you stock XYZ is going to have a great future. Or the market’s going up or the market’s going down. And that doesn’t work. All the research is clear on it— that doesn’t work. We are going to call that predicting the future and I am going to relate that to an absolute return approach. It’s probably too much to go into in this podcast because I have to do it carefully to make it work. Now, we get down to the relative return approach. We’ll call that the Boglehead philosophy since you are using that term and I am comfortable with it. I think they are probably the most preeminent, or most intelligent version of the passive index asset allocation approach. And certainly, John Bogle has lead the charge. That philosophy is valid. That works. That has a positive expectancy. The problem with it, is that it has a miserable risk reward ratio from extremes. You know, extreme high valuations, extreme low interest rates which happens to be in the environment we are in now. That’s the relative return approach. The assumption of the first is that you can predict the future— that you can know something about the future. The assumption of the second, is that absolutely nothing can be known about the future. There is nothing that can be known about the future whatsoever. Therefore, you must blindly hold through thick and thin at all points. The third approach is the approach I am taking, and I am coining it ‘expectancy investing.’ That approach is that you still don’t know the future. The future is unknowable. However, not all outcomes have the same probability or expectancy. If you constantly align your portfolio with the most favorable expectancies, over time it will work in your favor. Then I take from that premise of those three possible outcomes— absolute return investing, relative return investing, and now I am coining ‘expectancy investing.’ And that’s what my book will be on. That will be the third approach which still comes with the premise that you can’t know anything, however, not all outcomes are the same. They don’t have the same expectancy. Your rebalancing is aligning your portfolio from a lower expectancy asset to a higher expectancy asset and that’s the only reason it’s valid.
Rob: I guess that’s a fancy way of saying, “I rebalanced.” My next question would then be on the expectancy investing approach which you are going to write about. Give us one way in which it’s different. If someone has your typical asset allocation, across the major classes and they rebalance in some sort of systematic way… They have some systematic process that triggers rebalancing. Is that relative return approach? Or is that an expectancy investing as you have described?
Todd Tresidder: What I point out is that rebalancing is a very crude form of an approach or an investment process that moves you towards expectancy investing but there are other ways of going about it.
Rob: I suppose that’s what your book will cover? The other ways?
Todd Tresidder: Yes. Basically, what you are doing is your adding layers of risk management and expectancy to a traditional passive index, asset allocation portfolio.
Rob: Can you give us one example of something that would take people beyond the typical Boglehead buy and hold rebalance that would move them closer to expectancy investing? Give us one example that goes beyond just rebalancing.
Todd Tresidder: I am trying to think on how to do it in a way that will come across in a podcast. I don’t think I can do it off the top of my head on a podcast, Rob. The thing is, I have to build up the knowledge base to get to that point. That was one of the mistakes I used to make when I first started teaching this, I didn’t build the knowledge base for the understanding. When I first started teaching I used to just take people to the answer which is where you are trying to take me, to give you the answer. And almost universally, everybody failed. I would teach it. I would show them the answer and it was, again, a mistake. What I learned in teaching this is that you have to start with where they are at, which is where this conversation’s been so far which is traditional passive index asset allocation. That’s where most people are at. You have to start with that and you have to progressively build their understanding to the point that they can understand the next level answer. I can’t give you that answer at the top of my head and there is no way it’s going to work for this interview.
Rob: Okay. No worries. I was thinking about your definition of investing and it’s not unlike mine. I was thinking I can’t take any credit for originality here. I actually comes from Warren Buffet. But mine is similar to yours. It’s basically putting capital at risk with a reasonable belief of increasing its purchasing power over time. That’s how I think of investing. At the end of the day it’s still—
Todd Tresidder: Sure, but where can you say that reasonable belief comes from.
Rob: It comes from a lot of sources and depends on your approach. Like you said, buy and hold. Why do you have a reasonable belief of indexing, for example?
Todd Tresidder: You can say, what’s the source of return from passive index buy and hold? Why do I even say it’s valid? It’s valid because if you look, there are three components to the return from stocks. You’ve got dividends, economic growth and plus or minus change in market valuation. That’s the formula for return on stocks. The first two are pretty much cast in stone from the day you invest which is the dividends— The economic growth is the constant. So the second component of the equation is pretty much a constant. As a matter of fact, it’s really remarkable how consistent economic growth has been. Dividends… those are set by your initial buying periods so if you are buy in a low valued market, you get a very tiny dividend, right? Let’s just use two percent as a round number for now. I am sorry—in a high valued market you get a really low divided and in a low valued market you get a higher divided. Let’s say 9 percent or 8 percent in an extremely undervalued market. You can only see what goes on with that equation just from two of those points, right? If you are starting with, let’s say two percent real economic growth and you’ve got 9 percent dividend you’re looking at 11 percent before you look at the plus or minus change in market valuation on the third component. Whereas, if you buy from an overvalued market you start with two percent dividend and two percent growth. So you’ve four percent before you go into the third component which is the plus or minus change of market valuation. When you go to the third component, it’s really interesting because the third component… If you’re buying at overvalued market it’s a negative number over a 10 to 15 year time horizon and then it regresses towards the mean. It regresses towards zero over the 30 plus year time horizons. That’s why you always see buy and hold people talk about how you have to have a long-term time horizon. Because, basically what they’re really saying is you have to let that third component regress to the mean before the first two can exert their positive influence and give you a positive return. Quite the opposite when you’re buying in a low valued market your getting a positive return in that 10 to 15 year time horizon and as before regresses it towards the mean for the 30 year time horizon. So long-term, you’ll see it in most books and it’s true… If you expect anything more than dividends and economic growth from a long-term buy and hold portfolio, you’re a fool. Because that’s essentially what you are going to get. The third component is going to regress to the mean.
Rob: Right. Interesting. We’ve have been covering a lot of ground here and I appreciate your—
Todd Tresidder: We have covered a lot of investing stuff but we haven’t hit on the retirement planning at all.
Rob: What should we hit about retirement planning? What’s your take on retirement planning? Do you think traditional retirement— I think I can already guess the answer, but does it hit the mark or does it miss the mark?
Todd Tresidder: What makes you think I’d take the opposite side of that one, Rob?
Rob: Because you take the opposite side of everything.[Laughter].
Todd Tresidder: I have walked the talk and I have read all the books and the books didn’t hold muster to what I experienced in reality. That’s why I created my own retirement calculator, that ultimate retirement calculator on my site? I had that programmed because I couldn’t use the ones in a practical way with my clients. When I look at retirement planning done right, it’s about a life planning and then you embed the numbers into it. It’s basically engineering numbers behind your life plan and seeing if the numbers work or not. I needed a calculator that allowed me to do advance scenario analysis over peoples’ life plans and so that’s how I designed the calculator. Most people approach retirement planning in pursuit of ‘the numbers’, right? Like in the ING Commercials where they have the red letter stamped on a guy’s head as he is walking around until he hits his number? Remember those?
Todd Tresidder: That’s a myth. It doesn’t work that way. There is no such thing as ‘the number.’ That doesn’t mean that retirement planning is an exercise in futility. It’s very useful because what you can do is use calculators to point true North. You know, give you a general goal of where you’re heading towards, a destination. But there is no such thing as ‘the number’ because if you think about it, it’s impossible to do. The inputs to a retirement plan are so many and they’re all premises of the future that are impossible to make accurately. With these forecasts, if you’re off by a percentage point or two on a couple of the numbers, it can double or triple the amount you need for retirement. It can cut it in half. I mean, the differences compounded over a lifetime are dramatic for even small changes in just a couple of numbers. People who approach retirement calculators— the common method that I see is that they will sit there and try to go for increasing the accuracy. Like, they’ll want to separate out spousal assets and REITs return before and after retirement and all these different things. And none of it works. It’s not valid in any way. Really, your retirement plan boils down the ratio of two numbers. It boils down to your savings rate as a percent of your income, right?
Todd Tresidder: And it boils down to your ROI, your rate of return on assets, minus inflation. And in the early stage of the wealth accumulation phase, it’s all your savings rate as a percentage of your assets. Then the later stage, once you have got wealth, it’s all investment return, minus inflation. Everything else is like putting a fine point to it. It’s a detail and it won’t really change things.
Rob: Okay. Does your calculator help folks figure all that out?
Todd Tresidder: Yes. The calculator is written in Java script so it’s totally private and operates in your browser. That probably doesn’t mean anything to your viewers, but a lot of the other calculators out there are data collection machines. I don’t know if a lot of people know that. This calculator operates in your browser. It’s totally private. The other reason it’s done that way is so you can do scenarios in it. And, anytime you want to change that one number, you can just change that one number. It’s all in one screen right in front of you. You can flip numbers around based on— You can calculate based on assumptions of renting a house instead of selling it. Or, what if I do consulting for five years? How will that change my number? And you can just start inputting these life plan scenarios in there, one at a time and see how your numbers change. Some of them are remarkably dramatic.
Rob: Okay. I will leave a link in the show notes to that calculator so that folks can check it out. One question I wanted to ask you is, you’ve read a number of books. You’ve got, The 4-Percent Rule, Variable Annuities – Pros and Cons, and, How Much Money Do I Need To Retire? These are all available on Amazon?
Todd Tresidder: Yes. The lead book is, How Much Money Do I need To Retire? Every one of these books is written based on client needs. They are all written based on my experience of what is not being properly addressed within the marketplace.
Rob: How have these books done for you in terms of sales on Amazon?
Todd Tresidder: The only one that’s really taken off is, How Much Money Do I Need To Retire? That’s the only book I marketed. That was my test for that whole strategy as a passive income stream. The other four were kind of add-on’s to build up. They are all good books but that one is really the main one that people want to start with. It’s a question that everybody confronts, “How much money do I need to retire?” It’s not taught properly. I go through the traditional model which is the asset-based approach to retirement planning. Then I show how you can take a lifestyle-based approached to retirement planning. You can use that to transform your numbers in dramatic ways. Then I go to the third model which is the cash flow based retirement planning approach. I cover each one of those in the book and none of them are mutually exclusive. They are like different dimensions of a puzzle and each approach shows the slightly different dimension. It’s through the understanding of the three dimensions that you can get a really firm grip on your retirement plan. That’s the lead book—the one I really wanted to test the waters with. The book coming out on expectancy investing, I think will be another really strong book. The other ones are more boutique books. They’re more specialty books like the, Investment Fraud book. If you look at my testimonials on my site you’ll see that I have saved quite a few clients from investment fraud and I have an approach to doing that where I can just sniff it out. Then the Recoaching book comes from my experience in coaching. It’s a real rip-off industry. A lot of people don’t have a lot of experience or lot of people are bestselling authors that have coaching programs who employ a flood of people working off manuals— they don’t really deliver value. And so I wrote a consumer’s guide called, Don’t Hire A Financial Coach… Until After You Read This Book. It’s sort of a consumer’s guide from inside the coaching businesses as to how it works, what you want to watch out for and how to select a coach that will work for you. Each one is a different one. They are all really consumer oriented. It’s all pro-consumer stuff.
Rob: Having written those books, particularly the one about how much you need to retire, do you view writing books for Amazon as a viable and worthwhile way to generate passive income?
Todd Tresidder: Yes, absolutely. I like it a lot. It’s revenue producing marketing and a great way to deliver value. I am an avid reader because you get access to peoples’ best thoughts organized in a cohesive fashion all for a couple of bucks. To me, it’s a no-brainer way to grow, learn and explore. I am walking the talk by doing the hard work of organizing some of my thoughts into books on specific topics. I have a whole series planned called, Sixty Minute Financial Solutions. They are all short books of 50 to 130 pages where I am just trying to nail a specific topic because from my experience in talking to my readers is that people don’t want these grandiose books that have 200 pages of filler with only 50 pages of beef. So I am trying to nail very narrow, specific subjects. Another book in there is, Variable Annuities, Pros and Cons. I’d had so many clients getting ripped off with variable annuities, and they’re so complicated and so hard to explain about who they’re for and who they’re not, that I literally just sat down one day—It was more than a day, it took me about a week to write the book on it. It’s a little, tiny book. It’s 30 pages. And it’s funny— I finally figured out how to explain these things because they are so convoluted and so messed up and marketers just make a mess of them. Anyway, I finally figured out a way of how to explain them that totally made sense and I was all excited about it. When I went home and told my wife that I finally figured it out, saying, “I’ve got it, I’ve got it!” She says, “Great, honey. Can you go clean the cat box?”
Rob: [Laughter]. I like her already.
Todd Tresidder: I keep a good memory of that one because I wrestled with that topic so hard and my reward was cleaning the cat box.
Rob: I like her already. She didn’t line it (the cat box) with your books did she? No, she wouldn’t have done that.
Todd Tresidder: [Laughter]. No, no she wouldn’t.
Rob: I appreciate your time. Before I let you go, let me ask you… Other than your books (which I will link to in the show notes) what are three of your favorite books about on topics like personal finance, retirement, investing?
Todd Tresidder: I am building out a recommended reading list on my website. It’s underneath the research and resources tab. I have recommended reading lists by different topics. So I’ve got one recommended reading list on market history and bubbles. One on advanced investing strategy, one on beginner investment strategy. I’m going to put out an entrepreneurial—
Rob: Throw out couple of books that really spoke to you?
Todd Tresidder: That would be the book I am reading right now called, Essentialism-The Disciplined Pursuit of Less, by Greg McKeown. I think that’s an excellent book. With my coaching, going forward it’s how I’ve approached life but he’s really helped me formalize the thinking through the way he structured it in the book. I think that’s an excellent book.
Rob: Great. That’s one I have not heard of.
Todd Tresidder: Yes. Essentialism-The Disciplined Pursuit of Less. It’s really cool. It’s kind of endemic with our life now. I don’t know anybody that doesn’t have more than that they can do. We’re all surrounded by more opportunity and more information and more stuff than we have time to handle. We’ve gone into this world of hyper abundance where you have to go for less but better quality. Because, if you try to take it all in and try to take advantage of all it all, your life is just mayhem— rushing around. And it’s no fun.
Rob: Great. I appreciate that. That’s one I will definitely check out. Any questions I should have asked you that I didn’t? Something should we have covered? We have covered a little bit of everything…
Todd Tresidder: We could go on forever, Rob. Not off the top of my head. I think we’ve covered subjects in a fun way, that hopefully is going to add value for your listeners.
Rob: I appreciate your time. I will include links to all the things we’ve talked about, in the show notes. I really appreciate it, Todd. Thanks for coming on the show.
Todd Tresidder: Thanks for having me, Rob.