Clearing Up Confusion About Mutual Funds, Index Funds, and ETFs – Episode 210

Mutual Funds, Index Funds, and ETFs, oh my?!

In this episode of the Dentist Money™ Show, Reese and Ryan discuss both the differences and the similarities between mutual funds, index funds, and ETFs (Exchange Traded Funds). Find out why choosing the right funds for your portfolio doesn’t have to be an either/or decision.

All of these funds are actually collections of stocks with some differences like expense ratios, tax structure, and volatility. But all three may have a place in your investment strategy.

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Podcast Transcript

Ryan Isaac:
Hello, Dentist Money Show listeners. I’m a guy named Ryan Isaac, and we’ve got a great show for you today, Reese and I, talk about some common misconceptions about things like mutual funds, ETFs, and index funds, what those things are, how you pay for them, what do they cost, how to know which ones to put your portfolio, all those questions that lots and lots of people are always asking.

Ryan Isaac:
We got today’s question from our amazing, possibly the best Facebook group, on Facebook. It’s the Dentist Advisors Facebook page. Check it out dentistadvisors.com/group. Join it. As always, if you want to ask more questions and more detail to one of our advisors, go to our website dentistadvisors.com. Book a free consultation, talk to us, chat with us, spill your soul. We love helping. We love educating. We love teaching. We love pointing people in the right direction. So, thanks for joining us. Thanks for being here. We really love and appreciate the support. And as always, please for the love, enjoy the show.

Announcer:
Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now here’s your host Reese Harper.

Reese Harper:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m your host Reese Harper. Here with my trusty old co host, Sir Ryan Isaac.

Ryan Isaac:
It’s good to be here. It’s good to be trusted. It’s good to be present. Just happy to be around. I actually had someone request at a… I was speaking, where was I speaking? Maybe in Denver recently. And someone asked if I had the chime so I could do C for [chai 00:01:42]. Someone actually asked about that live.

Reese Harper:
Where is the chime? Has anyone seeing that chime? I see, we got a chime. I’ll bring it at some point today. We’ll bring it into the episode.

Ryan Isaac:
You can incorporate. I just thought it was like, I was glad that someone wanted the chime live, a live chime.

Reese Harper:
What people don’t realize about the chime is that it was actually my first instrument, as a young-

Ryan Isaac:
So, you play [crosstalk 00:02:13]?

Reese Harper:
Yeah, as a young boy. And Christmas time, the chime usually comes out and this is an episode starting to approach Christmas and we thought maybe we re-bring it back.

Ryan Isaac:
Time of… Oh yeah.

Reese Harper:
That’s not the strongest C, so I’m going to try a different object here. There you go. Do you feel that?

Ryan Isaac:
It was a good strike. I did feel it?

Reese Harper:
The reason we played C today is not just for Christmas time. For those of you who have been longtime listeners, C means C for [chi 00:02:50]. And that means Zen, because today the topic we’re going to be covering, it’s going to require us to remain calm and thoughtful. And we can’t get up. We can’t get our britches in a wad. For all of these.

Ryan Isaac:
That’s exactly what I wanted you to say for this intro. That’s perfect. Today’s topic actually comes from a question that was posted in what may be the best Facebook group, on Facebook. I don’t know if I can make that claim in marketing. I don’t know what the rules are in marketing for saying the best.

Reese Harper:
Okay.

Ryan Isaac:
It’s not statistically proven, but I think it might be the best Facebook group on Facebook.

Reese Harper:
Is it the one about the cats? The cat group. The kitties.

Ryan Isaac:
Not that one, that’s the one you spend time in after hours.

Reese Harper:
Yeah. Cats and Yarn. The cats and yarns Facebook friends.

Ryan Isaac:
You’re into the cats in yarn. You’re moderator on that, aren’t you [inaudible 00:03:51] or something?

Reese Harper:
I’m a conversation starter in cats and yarn, Facebook group.

Ryan Isaac:
Cats and yarn.

Reese Harper:
No, that’s a band name. That’s our new band name.

Ryan Isaac:
Cats and yarn?

Reese Harper:
Yeah. Just think about it. You’d be playing bass for that and I just want to produce that group. I don’t want to be in the band.

Ryan Isaac:
You don’t want to be in the forefront in cats and yarn?

Reese Harper:
I’ll produce it thou, I could go places with that group.

Ryan Isaac:
I’ll go public in cats and yarn. This one comes from the Dentist Advisors Facebook group. You can find it @dentistadvisors.com/group-

Reese Harper:
Surprising. Okay.

Ryan Isaac:
… you just search for Dentist Advisors on Facebook. Okay. So this was asked by our good friend named Ben. This is a really good question. There’s quite a few pieces to this we want to dissect a little bit. And this is a really great question.

Reese Harper:
Shout out to Ben. What’s Ben’s last name?

Ryan Isaac:
Shout out to Ben. Do we say it?

Reese Harper:
I think you can, it’s not illegal.

Ryan Isaac:
I withheld it.

Reese Harper:
Okay.

Ryan Isaac:
Thou, it’s posted in there.

Reese Harper:
Shout out to Ben.

Ryan Isaac:
Okay, so question. I’m going to just do this in pieces. Or maybe I’ll just tell you the overview then we’ll hit it in pieces here.

Ryan Isaac:
But the question is, he says, “What are your thoughts on a mutual fund versus an index fund?” And then he says the Russell 2000 or Vanguard 500. So that’s the first main question. What are your thoughts on a mutual fund versus an index fund?

Reese Harper:
Should we pause here? I think it’d be good to pause on it and answer it piece by piece.

Ryan Isaac:
Do you want to go piece by piece?

Reese Harper:
Because I remember this was a multipronged question and I don’t want to overwhelm the listeners.

Ryan Isaac:
Yeah, well you posted, for anyone that wants extra content, bonus content, if you will, there is an excellent video of you sitting in your truck, a loosen tie and a great hair day and you gave a 13 minutes video response to this question in our Facebook group. Here’s the thing, that’s what the people can expect when they join the Dentist Advisors Facebook group, is like, can I get a dental specific CFP financial advisor with years and years of experience to just answer a question for me? And what do they get? They get Reese Harper in truck on a 13 minute video response.

Reese Harper:
That’s where I was sitting and I was waiting for my lunch appointment.

Ryan Isaac:
Okay.

Reese Harper:
And it just sounds once in a while, you’re going to answer the questions. I think we have some even additional content though during this podcast we’re going to cover it. This was like a great question and I want to make sure. Thank you Ben for actually having the guts to share the question because it’s scary to sometimes to share a question, especially when your questions being used in our example today as a way to educate people around various topics.

Reese Harper:
So thank you so much. It does require a lot of, I guess courage is probably the right word to share a question that exposes sometimes your lack of knowledge and the ideas that you’re trying to learn about. So good for you for sharing.

Ryan Isaac:
But I think our group, there’s a lot of plugs for the group to be honest, but I’m not usually a huge fan of Facebook groups. They usually descend into chaos pretty quickly, but shout out to our group because everyone there is like really respectful and I think people are being vulnerable and asking questions that you know, everyone’s wondering or a lot of people are wondering and people are asking really, really good questions and they’re so good because, we wouldn’t use them as a podcast topic. We wouldn’t spend an hour on this stuff unless they were really good questions.

Reese Harper:
So how about this? Let’s take a quick break now that we’ve really tease this topic out.

Ryan Isaac:
Yup.

Reese Harper:
We’re going to take a break. You listen to the commercial while you’re listening to the ad, go to dentistadvisors.com/group and sign yourself up in this Facebook group-

Ryan Isaac:
Sign yourself up my friends.

Reese Harper:
Give yourself a holiday gift, an early holiday gift if you will-

Ryan Isaac:
Finance is better with a buddy. It really is-

Reese Harper:
… and then we’ll meet back.

Ryan Isaac:
And there a lot of buddies inside a Facebook group.

Reese Harper:
We’re going to do that T shirt next. We’ll come back and let’s dive into this question when we get back.

Ryan Isaac:
Hey, Matt, what do you like to drink or snack on when we do our webinars every month?

Matt Mulcock:
Yeah, it’s a good question. I’m usually hitting a red bull, but it’s hard because it’s an evening webinar.

Ryan Isaac:
These evening webinars taking place, 6:30 PM Mountain Standard Time.

Matt Mulcock:
Mountain time?

Ryan Isaac:
Once a month.

Matt Mulcock:
Where do you find it?

Ryan Isaac:
Well, if you’d like to find the webinar or you’d like to register for it, you go to dentistadvisors.com/webinar or just go to the website, click on webinars under the education tag.

Matt Mulcock:
It’s a good time.

Ryan Isaac:
It’s a great time. What kind of things do we cover in our webinar, Matt?

Matt Mulcock:
So each month we’re going to hit an element, right? So it’s going to be some component of your financial life. We’re going to dive a little bit deeper than we would on the Dentist Money show, right? We going to draw pictures, there’s live poles. You can ask questions.

Ryan Isaac:
It’s a great time.

Matt Mulcock:
Yeah. It’s a good time.

Ryan Isaac:
Well, we’d love to see you in attendance at one of our fantastic webinars. Just go to dentistadvisors.com sign up today for the next one. Thank you very much.

Ryan Isaac:
Okay, we are back and let’s get into the first part of this question from Ben. The first part of it was, and this is really the meat of the question, and then there’s some sub categories here that are really good. What are your thoughts on mutual funds versus an index fund?

Reese Harper:
Let’s give a shout out to the first mutual fund to ever exist, which was, The Massachusetts Investors Trust and it’s still in existence today, started in 1924. Okay? And you might have heard of the company MFS.

Ryan Isaac:
MFS global.

Reese Harper:
MFS investment management is the company that still manages the Massachusetts Investors Trust. A mutual fund was a first open-ended mutual fund. An open ended mutual fund means that you can buy and sell shares inside of a fund at any time you want, any day and instead of being able to buy one stock, there was quite a few stocks still in 1924 but not a lot.

Reese Harper:
So the mutual fund, what it did is it combined a lot of stocks and then you could buy shares in a fund, instead of shares in one company. So instead of buying shares in one company like Johnson & Johnson, you could buy shares in the fund that owned Ford and Johnson & Johnson and General Electric and a bunch of other companies. And that’s what a mutual fund is.

Reese Harper:
A mutual fund is just a place that you can buy shares inside of a fund firm. But the second part of the question was, should I buy a mutual fund versus an index fund?

Ryan Isaac:
Versus.

Reese Harper:
And an index fund is a type of mutual fund. And the first index fund actually didn’t start until 1975. The difference between the first mutual fund ever and an index fund is the first mutual fund ever bought stocks that the Massachusetts Investors Trust thought were good stocks to own.

Reese Harper:
And it selectively got only a few stocks in the fund, where an index fund takes, it buys all the stocks that participate in a specific index. So there are lots of indexes that-

Ryan Isaac:
Give us an example of an of a name and what-

Reese Harper:
Ben gave one, he said the Russell 2000. That is an index that tracks the smallest 2000 stocks in the United States. And those 2000 stocks, it’s not the whole market, it’s very different than the S&P 500. The S&P 500 index tracks the 500 larger stocks, but-

Ryan Isaac:
Both of which are indexes.

Reese Harper:
Both of which are indexes. You can’t buy an index, you can just buy an index fund. You can buy a fund-

Ryan Isaac:
That tracks the index.

Reese Harper:
That buys stocks that are in the index. And as the index resets, meaning every day that passes the smallest 2000 stocks change, right? There some that go bankrupt, maybe not every day, but on a weekly basis there might be substantial changes. On a monthly basis. There might be definitely our changes to the index. Meaning some companies are no longer in the index or the minute they go from the bottom 2000 to now they’re in the top 1000. Or they just change their place in the market because they’re growing so much.

Ryan Isaac:
Okay. So what you’re saying is, you can own an index mutual fund or a mutual fund that tracks an index.

Reese Harper:
Yes.

Ryan Isaac:
So they’re not exclusive things that a mutual fund or an index fund. As the question was asking, which I think is a really common one and I’m going to throw a third one in here, because you can also hear about ETFs. So let’s just throw that in there too. If someone’s like, should I buy a mutual fund, an ETF or an index fund?

Reese Harper:
Yeah. So what do you think about that?

Ryan Isaac:
Those are all just different types of products. You can buy an index mutual fund or you can buy an index ETF. Vanguard sells ETFs and mutual funds. They’re both funds with lots of stocks and bonds inside of it. They’re just bought and sold differently. If a mutual fund, for example, one difference is the mutual fund has one price per day that settles at the end of the day. The price of the mutual fund that day is determined at the end of the day. An ETF was invented to be like a mutual fund, but have its price fluctuate all day long instead of just at the end of the trading day.

Reese Harper:
Yeah. I’m going to ask you a trivia question. I don’t know if you know this, but you’ll probably know the answer once I tell you. Do you know what the first-

Ryan Isaac:
[inaudible 00:13:52]

Reese Harper:
Do you know what the first ETF was, that was ever created? You can’t Google it. You just have to guess.

Ryan Isaac:
I won’t.

Reese Harper:
Okay.

Ryan Isaac:
Just give me five seconds. I want to actually try. No idea. I’m going to say BlackRock made it.

Reese Harper:
It was the SPDR.

Ryan Isaac:
Not BlackRock. That was the SPDR?

Reese Harper:
The S&P SPDR.

Ryan Isaac:
The SPDR funds. Those were the first ones ETFs?

Reese Harper:
Yeah, the S&P 500 SPDR, was the first ETF. It trades-

Ryan Isaac:
When someone saying, SPDR. Someone’s like what’s SPDR?

Reese Harper:
Well, SPDR is the name of the company. S-P-D-R that created the index. It’s called State Street Advisors now. SPDR is like an acronym that they use, but S-P-Y, is the ticker symbol for the first S&P 500 index-ETF. And that was from 1993. So an interesting trivia for all of you investing cats out there.

Ryan Isaac:
Little history. So going back to-

Reese Harper:
That’s a different investment type. A different investment vehicle, that wasn’t the question. The point is these are all synonymous ETFs, index funds and mutual funds are just collections of stocks that you can invest in as opposed to individual companies.

Reese Harper:
They’re very different in how they’re structured. Very different. They’re different from a tax perspective. They’re different in how they perform. But you probably want to think of them more as synonymous as opposed to… In one account you might choose to have the SPDR that I talked about, right? The S-P-Y. And on top of that you might choose to own the Massachusetts Investment Trust index fund from MFS. And then you might also want to have a traditional Vanguard mutual fund index, an Admiral index, VTSMX and all three of those could exist in one account and they could all accomplish very similar outcomes and you just would have three different types of investments that are tracking very similar things. So-

Ryan Isaac:
Cool. I think it’s-

Reese Harper:
That’s TMI, but definitely-

Ryan Isaac:
No, it’s perfect.

Reese Harper:
This is critical one on one data that people need to know.

Ryan Isaac:
Yeah. Well, I think a lot of people wonder this stuff too. Because it’s not… Where do they teach this? Just-

Reese Harper:
Here, on the Dentist Money show and-

Ryan Isaac:
You’re supposed to [inaudible 00:16:32]. That’s what they teach us, that was a trick question-

Reese Harper:
Dentist Advisor on Facebook group.

Ryan Isaac:
Facebook group from the Dentist Money show, everyone knows that. So I don’t know if this is the scope of today’s conversation, but I think I would probably wonder this if I was hearing this podcast would be, how do I pick? How do I know, should I buy a mutual fund or an ETF? And how do I know which index to put in my portfolio?

Ryan Isaac:
And part of Ben’s question, if you keep reading this question, he says that his IRA and investment accounts, that’s managed by a third party broker at a bank. They’re all comprised, he says, of dozens of mutual funds. So that’d be my next question as I’m learning this stuff. I would go, “Okay, well how do I know which ones to pick?”

Ryan Isaac:
I actually was reading something recently. There are more funds, mutual funds and everything, more funds than even companies that exist in the world.Like public traded companies, more funds attract the companies than there are companies that exist. So I think my next question would be like, how does someone go about beginning to know which ones to pick and how do you choose which funds you should put in an account and do you stop at three? Do you stop at two dozen? But we’ve seen it all over the board, so.

Ryan Isaac:
I don’t know if that’s the scope of today’s conversation, but I think at least maybe point in the right direction would be helpful.

Reese Harper:
What do you think? I will let you answer that.

Ryan Isaac:
The number one thing is, you first have to know, what is your philosophy, what is your belief and expectation about what public markets even are in the first place? Do you look at this collection of 14 or 15, whatever thousand stocks around the world, publicly traded companies? Do you look at that and go, my philosophy is I believe that me or someone out there that’s smart enough can pick the top 100 and rotate through that and always be picking the best ones.

Reese Harper:
Yeah.

Ryan Isaac:
Or do you look at this thing and do you go, I don’t believe anyone can predict who’s going to be the best over any long period of time sustainably. So I just want to own the whole thing, proportionally to however I should, and just save money into a whole different 20 years. [crosstalk 00:18:46]

Reese Harper:
I think we should get into that a little bit at the end of Ben’s question. I’m just looking at Ben’s question now to realizing that. I think he ties into that a little bit at the end of his question and-

Ryan Isaac:
Yeah, what should I, okay. Yeah, so-

Reese Harper:
I think the second thing that you’re highlighting though or that he highlighted was, he was worried about fees, I think. Right? That was-

Ryan Isaac:
Exactly.

Reese Harper:
He was worried about fees and he was adding up each of the funds inside of his investment account. And his question just says that, “It seems each mutual fund has a fee that is 0.5% to 1.3%.” Right? So, we’ve got this account and each of the funds he went through and found this website that helped him be able to understand the fees.

Ryan Isaac:
Yeah. I was going to say, let’s just start there. How do you pay for a mutual fund? So let’s just say you figured out your philosophy, you figure out your strategy of how you’re going to put mutual funds in your [inaudible 00:19:49]. Let’s just say you put five mutual funds in your investment account. How are you paying for that? Aside from an advisor, aside from a bank like trading costs or any custodial fees for having the account in the first place, how do you pay what a mutual funds charge? That’d the question asked. The answer to that is, it’s something called an expense ratio and it’s the subject of a lot of marketing wars now I feel like.

Reese Harper:
Who can be the cheapest and the lowest and earn the most-

Ryan Isaac:
Or free.

Reese Harper:
For free.

Ryan Isaac:
Or nothing. Years ago, expense ratios is very common because there was just fewer funds and it wasn’t such a commodity. They were much, much, more expensive. You’d see expense ratios, which is just… It’s a percentage that you’ll pay every year just for the fund. It doesn’t go to your advisor. Well, it could, depending on how they’re paid, but it pays the mutual fund company for hiring a team of people and running a mutual fund.

Reese Harper:
Yeah.

Ryan Isaac:
And it’s called the expense ratio. It used to be common that they’d be in excess of a 1% every year as an expense ratio. Nowadays, that’s ridiculous. That’s really expensive. Nowadays you’ll see expense ratios, literally nothing. You’ll see them below 0.1%. It’s still normal to buy funds with expense ratios of 0.2, 0.3, that’s still a cheap inexpensive fund depending on what you’re getting. But they’re much, much less expensive than they used to be.

Ryan Isaac:
They used to be expensive but that’s how you pay the mutual fund company for owning their product. That’s their product fee, is the expense ratio. And they each have one. So you could have five different funds with five different expense ratios of different ranges inside of one portfolio.

Reese Harper:
And one thing I want to clarify that I think a lot of people will get confused by is, and Ben seemed to get confused by this too potentially, is he was adding up all 12 of his funds, which ranged from we’ll say half a percent to one and a half percent in fees. He added up all those fees and you the fee was starting to get… Index is probably pushing 10% in his math. Because he was saying, I’m going to add 0.5% to this one, that’s 1.3. Then I’m going to add my third fund cost one, my fourth fund cost 0.75, and all of those fees added up. If you times those by 12, he said, then I don’t have any more earnings.

Ryan Isaac:
Yeah it’s crazy, it’s all fees.

Reese Harper:
I think that’s a common misunderstanding of how fees work because what really, the way you should calculate it is, you don’t add up the fees of each fund cumulatively to get your fees. Each fund only has the 0.5% to 1.3 charged on that one fund. So your average fee across your whole account might only be 1% instead of like 10% or something. Right? Which is-

Ryan Isaac:
The mathematical term for this as a weighted average. Again, go to dentistadvisors.com/group join the group and Reese posted a video, a response where he explains how this weighted average concept work [inaudible 00:23:11].

Reese Harper:
Just for fun.

Ryan Isaac:
Fund fees.

Reese Harper:
For everyone though Ryan.

Ryan Isaac:
Just for fun, because this is the life of a nerd. You sit in a parking lot of a taco shop and you explain how to calculate a weighted average on mutual fund expense [crosstalk 00:23:26] and that was for fun.

Reese Harper:
That was a fun thing, I enjoyed that.

Ryan Isaac:
You can go see the explanation there.

Reese Harper:
Then I think that’s an important thing to highlight just so that people don’t get confused about how to calculate your expenses. Whether you’re paying 1% or you’re paying 0.5%, that doesn’t necessarily mean that the person paying 0.5 is better off. I think this is an important segue here, is as index funds become the accepted norm, okay, lot of people listening to this ideally know this whole story of just cheap index funds, buy and hold. I’m going to just hold it forever and keep my costs low.

Reese Harper:
I just want to ask people to think about a world in the future where everyone invested in index funds. There was no old Massachusetts Investment Trust like there used to be in 1926, right? Or whatever. I don’t remember the year I said.

Ryan Isaac:
Great, that’s probably true.

Reese Harper:
Imagine a world where everyone just was like, “You know what? Index funds, that’s what I heard from Vanguard they told me to do. So I’m going to do that.” Imagine if everyone in the whole world invested in the S&P 500 index fund, right? And no one actually knew anything about the underlying companies.

Reese Harper:
Everyone got so tired of this whole financial analysis job of meeting with the executives and asking them questions, the opposite of an index fund is a company like American funds.

Reese Harper:
Okay. They’re almost opposite of an index fund. They have been around for a long, long time and they hire very, very smart people to actually pick stocks in their funds. Same thing with MFS. That example I used earlier, the Massachusetts Investment Trust, I went to a conference, I remember it was 10 years ago and it was in California and I got to listen to three PhDs in either neuroscience. One was a neuroscience PhD, one was-

Ryan Isaac:
Gerard, right?

Reese Harper:
Well that was a different company.

Ryan Isaac:
Was a different conference? Okay.

Reese Harper:
I went to an American Funds Conference an active management conference where they were talking about their expectations for Amazon. And this was 2008 maybe, right? This was, 07, 08, before things had really crashed and the detailed picture that… There was a 55 year old gentleman that had been managing stocks forever. Right? I believe the fund, that American Funds, he was over his fundamental investors and he was just talking about how he really believed that Amazon was going to be the future of retail. And at the time they weren’t, in 07, Amazon wasn’t like… They were a fraction of the size they are now. Now they’re one of the-

Ryan Isaac:
I think you could still rent movies from Blockbuster back then.

Reese Harper:
Yeah. He was so far ahead of his time. He was just convinced, because the portfolio had a heavy weight towards Amazon at this point.

Ryan Isaac:
And people are like, why?

Reese Harper:
Why? And tell us your story. This doesn’t make any sense. They’re not performing well. Their model doesn’t seem to be working. They’re not making any money-

Ryan Isaac:
They are not even profitable. How do they get any money?

Reese Harper:
They’re non-profitable, nothing is making sense. And he just had to defend his thesis because the mutual fund that he managed was actually taking a big hit at that time, for his overweight in a very unprofitable, not obvious story. And in hindsight, just looking back, I’m like, “Man, that guy, he had spent hundreds of hours with Amazon management looking at…” So I’m just saying-

Ryan Isaac:
Reading reports, sitting on calls.

Reese Harper:
He had a strong conviction in Amazon. Okay? Now imagine a world where that guy doesn’t even exist. Okay? There are no more people to analyze stocks and do reports and analyze financials. This will never happen by the way, okay? It won’t ever happen, but I’m just asking you to think about this world for a second with me.

Reese Harper:
Imagine the world where you only invest in index funds and we’re all investing in the S&P 500. Amazon gets its natural weight, meaning S&P 500 is an index. There’s 500 stocks in it. And the way all of our money gets invested is based on the size of these companies. So if Apple is the biggest, which they are, right? Then Apple gets the most money. Ryan, what are some of your thoughts on what that world would look like? If the whole market was investing that way, what consequences might there be, if any? Could you see any?

Ryan Isaac:
Well, just off the top of my head and when you think about that, it’s just like if everyone’s always getting the predictable flat amount based on representation and size, there’s no fluctuation.

Reese Harper:
Yup.

Ryan Isaac:
Right? Isn’t that the outcome? There’s no fluctuation and returns in a market come from fluctuation. They come from prices going up and down and being able to buy prices lower sometimes and higher than others, and then being able to hold it for a long time. So I think in that scenario, at least in my mind, there’s no volatility, there’s no fluctuation.

Reese Harper:
Financial planning is really about getting a lot of jobs done. Some of those jobs are just a pain and they take a lot of time. I recommend getting a buddy involved. One of my favorite songs from back in the 90s is my buddy, and I’m going to sing it to you now. My buddy, my buddy, my buddy, my buddy, my buddy and me. That is what happens when you hire a Dentist Advisor, go to dentistadvisors.com. Click the book free consultation button and get a buddy.

Reese Harper:
What you should know is that index funds on average because they’re investing in the whole market, they earn the market return. You get the return that the whole market offers. My point is, there is going to be a point in time and there still is right now, there are some cases in our firm where the costs of active management, a very, very capable, smart people, they’re coming down so much right now that index funds aren’t always the right answer for every investment strategy, every time.

Reese Harper:
The right answer for everything is not put an S&P 500 index fund. In fact, a lot of index funds are starting to craft themselves in a way that highlights attributes of markets.

Ryan Isaac:
What do they call them?

Reese Harper:
Let’s just take like a straight index fund that’s tilting towards value or growth or towards small cap. You can bring the cost of stock picking down a lot just through a computer model trying to emphasize certain attributes that are scientifically and academically proven to have higher returns over time. I just think it’s important for people to know, just don’t get caught up in this idea that it’s just so simple. I can get online and buy an index fund and my life’s going to be fine.

Reese Harper:
That’s a recipe for disaster because what you’re basically saying is I never have to look at this. I don’t have to even think about it and I’m just telling you that’s exactly what the index fund provider wants you to think, number one. Because Vanguard is incentivized to have you buy that and never touch it, right? They want you to never think about this. That’s their business model.

Reese Harper:
They don’t make money when you’re selling their mutual fund. If you want to call customer service and ask hard questions or ask what’s going on to your account, that increases their cost as well. So the cheapest way for an index fund provider to make money is to convince the customer that they can just buy something and then never touch it and never think about it again.

Reese Harper:
But what if you wake up in 10 years and the index that you bought it’s totally changed. You bought an S&P 500 index and put X percent in your account. Right? But now the United States stock market is like a third of the global market and Europe and Asia are double the size of the United States. And you didn’t ever have any money invested in anything in Europe.

Reese Harper:
I don’t like the idea that the alternative here is, I’m just going to buy an index fund and put my head in the sand and everything’s going to be fine. Because I really do think that’s a recipe for people not knowing what they own. They’re going to bail when the market’s down, they’re going to be worried about things when things are going haywire. And they might have mediocre returns throughout their career. But I love index funds. We use them all the time in our portfolios. I just wanted to highlight that for people because I don’t think they know the difference between-

Ryan Isaac:
You’re saying there’s difference between the commodity of the investment product. Like here’s a cheap index fund. They’re easier than they’ve ever been to purchase. Everyone can do it. You can do it on an iPhone app. It’s easy and cheap and accessible. There’s a difference between just getting it and then actually using those products to implement an investment plan.

Reese Harper:
Yes.

Ryan Isaac:
And follow an investment strategy.

Reese Harper:
Yeah.

Ryan Isaac:
Which would be different between different accounts that you own. Your 401k strategy and plan will be different than your short term down payment emergency fund account. And that’ll be different than the brokerage. And that’ll be different than maybe the Roth and, huge difference there between product. I think that spurs a great conversation. That’ll make a lot people wonder like, “What do I buy?” Mutual funds, ETFs, index funds. And I thought-

Reese Harper:
I don’t think it actually matters that much. Which one do you buy, an ETF, an index fund or a mutual fund, whatever you’re buying it should be a fair price for the value it’s delivering. And Ben’s question, of saying 0.5 to 1.3%. I know that model, there’s probably ways for him to reduce his costs for sure and get better performance because that mix of fees doesn’t smell right in today’s market.

Reese Harper:
Even the guy I was telling you about, the old gentleman that was insightful enough to see Amazon way ahead of its time and has actually managed a fund that’s done quite well relative to the index. Even that fund isn’t 1.3%. Those good active funds are getting down on the 0.3 to 0.4 range and you can get pretty good active management for 0.5%. So, I don’t know.

Ryan Isaac:
But again, it’s philosophy, right? It’s not like is that evil is active of an actively managed fund? Is that bad compared to an index fund? That’s not really the biggest question. Biggest question is, what’s your expectation, your philosophy? What are you trying to get out of this thing?

Reese Harper:
Yeah. Where is that fund invested? What is it buying? How is that going to affect its return? Those are difficult questions. When you said earlier, how does someone do this? Number one, I just don’t have a belief that most dentists should be managing this part of their financial life. I don’t believe that it’s efficient. I don’t believe it’s a good use of time.

Reese Harper:
You can argue about how you should pay for the expertise here, but at a minimum level, every dentist should be getting a second opinion from someone for at least a handful of hours per year on the funds that he or she owns. Even if you’re not having someone do any comprehensive financial planning or management of your funds, even if you’re just managing them on your own, you should get second opinions at least annually on your own investment strategy.

Reese Harper:
I don’t think you’d ever… I would say that to anybody. I’d say that if you’ve got a PhD in finance, I’d say you should get a second opinion annually. You should never manage your money on your own with no second opinion from someone else. The cost of you doing it wrong is just too high. The downside is too great. And then some people should outsource it completely and have someone else handle this for them.

Reese Harper:
But I don’t think anyone should be doing it on their own. And consequently, that’s where this calm conversation between regular index funds, ETFs, tilted indexes, active funds, private investments, bond holdings, dental… It’s a very complicated evolving world. What about currencies? Should I have currency exposure? Should I have precious metals exposure? Is gold an important part of my portfolio?

Reese Harper:
What about real estate? In the public market, where does that come in? It’s like Ryan’s saying, it’s definitely not as simple… I don’t want to make it sound too complicated, but it’s not as simple as just saying, should I self direct this thing and put it in an index fund or just get pillage by my broker who’s charging me one and a half percent. Right?

Ryan Isaac:
Damn. That is [inaudible 00:37:27]. It’s the definition of-

Reese Harper:
Those are your only options. There’s a happy medium option that still involves you getting adequate support from someone and we’re not the only firm that can do that, or the only group that can do that. But I do think that people should consider getting one-

Ryan Isaac:
We are a decent one.

Reese Harper:
There are two people in the United States that do a good job.

Ryan Isaac:
It’s us [inaudible 00:37:49].

Reese Harper:
We are one of two.

Ryan Isaac:
Pick one. I think that’s great man. I think moral of the story, well shout out to Ben, first of all, shout out to Ben. This is a great discussion. Anything else you want to end with or [cap 00:38:02] off with Reese from what he was saying, I think he covered-

Ryan Isaac:
He covered a lot man. I really appreciate that.

Ryan Isaac:
By the end of it, the point is get a second opinion. Because it is complex and it does, an investment product like these end products, they should fit in with your entire financial life. Just like a crown in my mouth, it’s a tool of implementation. It’s a dental product that goes in my mouth, but it should fit in with my entire overall oral health plan, it is not the end plan. And so investments are the same thing. So, that’s [crosstalk 00:38:41].

Reese Harper:
Good job for Ben for answering the question and shout out to him for that. [inaudible 00:38:47]

Ryan Isaac:
Ben gets all the points. This episode basically is brought to you in part by Ben and we appreciate it. It’s awesome. Maybe we’ll meet Ben one day. So since we’ve talked about the Facebook group, lots of great discussion over there and we pull obviously content from there. That’s dentistadvisors.com/group, but, if you’re sitting on a portfolio that you’ve either built or someone else has built for you and you’re starting to wonder what’s this been costing me and why do I own this and what’s it doing and should this be more clear or simple or a different, a different strategy, then just give us a call, go to dentistadvisors.com, click on the book consultation button and just find a time to talk with one of our advisors.

Ryan Isaac:
We’ll walk you through everything and point you in a good direction. Hopefully you’ll read some good solutions there. Here’s what also I would recommend you do when you go to our website. Check out the events page, because we are in States near you quite often and it makes us very happy to see people in person. So, dentistadvisors.com/events we also do a monthly webinar where we dive in really deep down in all the details of each element, that we work on every month with all of our clients. So that’s all on the website. Check it out or just give us a call if you want. If you’re old school, pick up the phone with the curly cord attached to the wall it’s 30 feet long and you walk around the living room. 833-DDS-PLAN. Thanks for tuning in and being here with us. We really, really appreciate the support. Have a good one.

Reese Harper:
Carry on.

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