Real Talk with Rabih: Diversified Portfolios – Episode #363

You’ve made a long-term commitment to dentistry. You also need to approach your investments with the same in-it-for-the-long-haul attitude. On this episode of the Dentist Money™ Show, Ryan, Matt, and Rabih take a close look at portfolio diversification. How does it work and why does it help—and what does career longevity have to do with your investment strategy?

 

 

 

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Podcast Transcript

[music]

Ryan Issac:
Hey, everybody. Welcome back to another episode of the Dentist Money Show brought to you by Dentist Advisors, a no-commission, fiduciary, comprehensive financial advisor, just for dentists all over the country. Check us out at dentistadvisors.com. Today on the show we have Rabih and Matt and we are talking about a mattress store, furniture store legend, the biggest payout in sports betting history and diversification in a portfolio, what it means, how you do it, why it works and why you should have a diversified portfolio. Many thanks to Matt and Rabih for being here and giving us their wisdom and their insights. We really appreciate it. We’re thankful to all of you for tuning in every week like you do and listening to the show. If you have any questions, just go to dentistadvisors.com anytime. Thanks for being here. Enjoy the show.

Announcer:
Consulting 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, Ryan Isaac.

Ryan Issac:
Welcome to the Dentist Money Show where we help dentists make smart financial decisions and avoid the bad ones along the way. We are a panel of friendly financial advisors and a CFA. I’m Ryan, and I’m here with Matt, and we are here with Rabih. Matt and Rabih, what’s up, fellas? Thanks for joining today. How are you doing?

Rabih Dimachki:
Hello.

Matt Mulcock:
Hey, guys. This is amazing. I honestly love these.

Ryan Issac:
These are the best.

Matt Mulcock:
They’re so fun. The energy with Rabih… Ryan, you and I have great energy obviously.

Ryan Issac:
But dream team. It’s team and dream team.

Matt Mulcock:
We have a special connection I think. But Rabih… You bring Rabih in and the energy just goes up to a new level.

Ryan Issac:
It goes up. It’s a new… It goes to 11.

Matt Mulcock:
Yeah. It’s amazing. It gets me jacked up…

Ryan Issac:
Rabih, thanks for being here.

Rabih Dimachki:
Thank you for having me. I’d like to give credit for the three chocolate bars I have before the episode. [chuckle]

Ryan Issac:
Oh, really? Okay. That’s yours? That’s how you…

[overlapping conversation]

Rabih Dimachki:
That’s where the energy comes from.

Ryan Issac:
That’s where it goes.

Matt Mulcock:
Are you sensitive to sugar? You hit sugar and you feel it for like… You’d actually feel that?

Rabih Dimachki:
Yeah. My sugar metabolism is a 5-year-old’s, I’ll be jumping on desks. I love it.

[laughter]

Matt Mulcock:
That’s amazing.

Ryan Issac:
Okay. Now that I know this, we’re gonna make sure that we feed him sugar before we record in the future.

Matt Mulcock:Yeah.

[chuckle]

Matt Mulcock:
That’s amazing.

Ryan Issac:
I like that. Today we have some good stories. I’m gonna start with a question though. So we’re recording this in… Where are we? November, 2022. Are you guys baseball fans? Did you follow World Series this year at all? Yeah, I’m not either.

Matt Mulcock:
Here’s the thing. I’m not a baseball fan but I did…

Ryan Issac:
Everyone just shook their heads no, so…

Matt Mulcock:
Yeah. I’m not a baseball… Well, there’s two questions there. I’m not a baseball fan but I…

Ryan Issac:
But did you follow?

0:02:32.4 S3: As it gets to… Here’s my problem with baseball. Two problems. Number one, the season is just ridiculous and long.

Ryan Issac:
So many games. Yeah.

0:02:39.3 S3: Even baseball fans who I know, some of my best friends are baseball fans and even them, they’re like, “This is insane.” That’s hard to really get into it. And second of all, it’s just super boring.

Ryan Issac:
It’s kind of boring. [chuckle] Yeah. Yeah.

Matt Mulcock:
But I will say, the playoffs, I watched a few games here, there during the World Series or leading up to this. I watched the last part of this World Series. But… Anyway.

Ryan Issac:
Okay. And for the record, and I only know this because of the internet, not because I watched it. Houston Astros won the World Series 2022, second time in the last three or four years or something like that, five years. Wasn’t there a scandal with the Astros a few years ago? Right?

Matt Mulcock:
Huge scandal. Yes. They were like the pariah. I think they still are. They’re like the pariah of baseball.

Ryan Issac:
They must feel really good…

Matt Mulcock:
So I think it really pisses people off that they won. Yeah.

Ryan Issac:
Exactly. Must make people mad and must feel good to them and their fans. So, shout-out to the Astros, I guess. Well, the reason why I asked it because we have a story. Today we’re gonna talk about diversification in a portfolio. That’s why Rabih’s here. That’s the topic for today. What role does it play? How does it work? Why does it help a dentist? Why does it matter? All that stuff. But we’re starting with a story that has to do with the Houston Astros. One of the biggest sports betting people in sports betting history in our country, is a furniture tycoon that they call Mattress Mack. Have you ever heard of this? His name is Jim McIngvale. Ingvale. Ingvale. McIngvale. Let’s say McIngvale. McIngvale. I don’t know. Mattress Mack.

Matt Mulcock:
McIngvale.

Ryan Issac:
McIngvale. Yeah. You ever heard of this guy before?

Matt Mulcock:
McIngvale. I’ve never heard of Mattress Mack. No.

Ryan Issac:
Okay. No. No for you Rabih. Okay. So, his story is actually…

Matt Mulcock:
I might request a new nickname though. Mattress Matt. [0:04:20.7] ____ I’d love to see. I don’t know.

Ryan Issac:
I was gonna call you… Oh. Okay. Well…

[laughter]

Matt Mulcock:
Yeah. Yeah. Sleep. Ryan. [laughter]

Ryan Issac:
Moving on. So, Mattress Mack. He’s actually… He’s 71… Let’s see. 71 years old. He’s, actually a cool story. He runs this gigantic furniture company called Gallery Furniture out of Houston. It’s just been his career for a long time. He’s got a really cool history though, and he’s like… He’s a really great community person. He started this furniture business back in the day. One of the things he was famous for was he was failing in business, this is decades ago, and he put this… He took all of his money in the whole business and his savings was like 10 grand at the time, and doubled down on some radio ads for TVs in his business and that was like, the gamble was either gonna work or not, and it worked out and then his business exploded from there. Some of the things he’s known for though, besides sports betting, which is a different story, is he’s opened up his facilities to community and people when there’s been big natural disasters there. A lot of the flooding and hurricanes.

Matt Mulcock:
Yeah, the floods. Yeah.

Ryan Issac:
And some of the utility and power outages over the last couple of years there. I was watching some YouTube videos on this guy. It was really cool, man.

Matt Mulcock:
So he’s just a good guy.

Ryan Issac:
Good dude. He was opening up his facilities to these people and they were joke… ‘Cause they had bathrooms and bedrooms set up and they had eating facility set up, and a gym facility and they were like, “Yeah, basically our store is now like a community center with a furniture store in the back.”

Matt Mulcock:
Oh. So, he never turned it back? It’s just…

Ryan Issac:
No. Eventually he did, but during those, that time…

Matt Mulcock:
Oh, okay. Okay.

Ryan Issac:
Yeah. It was nuts, and he’s known for this and he’s done this multiple times, taking people in. Anyway, one of the things he’s always done in his marketing is he offers an insane sale or a rebate, or a cashback incentive based on an outcome of a sports team. He’s a huge sports… And especially Houston Astros fan. For example… And by the way, the bet he just won, he just bet on Houston Astros winning the World Series was the largest sports betting bet in history, of sports betting history.

Matt Mulcock:
I saw that. Holy cow.

Ryan Issac:
Yeah. He bet a total in a series of bets of $10 million, and he won 75 million dollars [chuckle] back. But this is really… The reason why we’re talking about this today is, it’s kind of a hedge against what he’s doing on the other side. So the other side of this thing and he does this all the time… ‘Cause he’s one of the most renowned winners of sports betting in large amounts. But what he does on the other side is, right now he said, if you spent $3000 or more this year in his store and the Astros win, he doubled your cashback. You spent four grand, you come back and he’ll give you $8000.

Matt Mulcock:
Well, yeah, ’cause he knew he was gonna win $75 million. It’s amazing.

Ryan Issac:
Well… Yeah. Yeah. What he does is he hedges his bet… This whole conversation could be about hedging but we’re not doing some sophisticated options trading hedging strategy. Okay? Go to Reddit or Facebook friends for that. This is about, I wanted to talk about diversification. ‘Cause this guy’s diversifying his risks. That’s what he’s doing. But that’s… So he’s been doing this for years. He’ll just offer some insane rebate or cashback thing to his customers, and then he’ll just put a bet on the other side of the… On the thing. And he always nets, he comes out…

Matt Mulcock:
Pretty impressive.

Ryan Issac:
Yeah, super… It’s cool. And the fact that this furniture store guy who’s been a pillar in the community was the one… It was the biggest sports betting payout ever in history, and it’s a furniture store play. On diversifying his furniture store sales. It’s just cool. It’s just super.

Matt Mulcock:
Yeah it’s really cool.

Ryan Issac:
If you ever have a chance…

Matt Mulcock:
Good for him, 75 mil.

Ryan Issac:
No, good for him. Yeah. If you ever have a chance, go find a Mattress Mack commercial on YouTube and you’ll just be like, “I like this guy.” Mattress Mack. And you know what’s cool? He works in the store every single day greeting people. His business card has his personal contact information on the back of it and he said, he just likes wandering around his store so people can see him saying hello, greeting people, talking to his team daily. Just… That’s cool, man. That’s how you do business.

Matt Mulcock:
That’s cool. Yeah.

Ryan Issac:
So, this got me thinking about the role of diversifying a portfolio. ‘Cause the reason why I thought this is I heard… When you hear the story, biggest sports betting win in history, you think like, “Oh, it must be all upside, total gravy for this guy. What a cool thing. I wish I could win $75 million… ” Maybe Jake will one day, actually. Jake Elm.

Matt Mulcock:
He probably will.

Ryan Issac:
He’ll get there. But when you hear that it was offset by huge costs that just went out the door to his customers, you realize that one side of this thing was awesome and the other side was not so awesome. And that reminded me of what diversification feels like in a diversified portfolio. When you own US stocks and emerging market stocks and non-US stocks and some bonds and some tech stocks and not tech stocks, and big ones, small ones, value, growth, whatever, there’s always… And we talk about this, there’s always something in a portfolio you’re excited about, when you’re diversified and you have a big basket of stuff, and then there’s always something you’re like, “I wish I didn’t have this right now.” And then they flip-flop. You’re mad at your emerging markets but you love the US and you wish you had all US stocks, and then all of a sudden it switches and the emerging markets takes off and the US tanks for years and then you’re just like, “Okay, I think I see what diversification does.” So, when I saw this story that’s…

Matt Mulcock:
So you’re saying you’re destined to be miserable all the time.

[chuckle]

Ryan Issac:
I think proper diversification, a good indicator is there’s always something you’re excited about and always something you wish you didn’t have. I think that means, that could be an indicator that you’re properly diversified. If you had all winners all the time or all losers all the time, you might worry a little bit because all those winners can turn into losers at some point. Anyway, here are a few of the points and then I want you guys to comment on any things I’ve said so far. But here’s a few of the points we’re gonna hit today. What does diversification even mean? And we’re talking in the context specifically of like a public stock and bond mutual fund portfolio, but we can do it a little broader than that. How does it work in that context? Why does it help? Why does a person… How does a person do it? We’ll define asset classes.

Ryan Issac:
Rabih’s gonna talk about how correlations interact. A correlation is just how they relate, how one thing go up and another thing will go up too, or go down. That’s correlation. He’ll talk about the stability of that. I wanna talk a little bit about how, diversification that you can achieve in a portfolio, how it’s hard to do in other asset classes. And then I wanna talk about the typical dentist balance sheet. We build balance sheets for people we get all their assets, all their debts, and we have these little charts that are like pie charts that show how their assets are distributed. And I wanna talk about how those look on average. So, those are the points we’re gonna hit.

Matt Mulcock:
Diversification and the conversation around it, is probably the most frequent conversation we have in some form or fashion. Meaning, someone bringing something up that comes back to like, the answer being diversification. And I think that’s because it’s the most fundamental core principle of what we preach with investing.

Ryan Issac:
Can you give an example of some of the questions that come up that bring up when… What comes to mind?

Matt Mulcock:
Yeah, I just had this the other day, from a client last week. Basically the context was, they’re… They heard a podcast, another podcast, it’s not as good as ours.

[laughter]

Matt Mulcock:
I’m guessing. I’m only guessing.

Ryan Issac:
Wait, there’s other podcasts?

[chuckle]

Matt Mulcock:
Yeah, other podcasts apparently.

Ryan Issac:
Weird. I didn’t know they existed.

Matt Mulcock:
They had heard a podcast that was talking about why the stock market is not the answer to build wealth and why that you need… Disparaging diversification without actually saying that.

Ryan Issac:
Got it.

Matt Mulcock:
But it’s more like, “Hey, come try this strategy,” which was very much like concentration in their… Whatever it was. And she came to me and was like, “Hey, why are we… Maybe I should be thinking about these, like insert private investment and not be so diversified because the market is down so much.” And you started questioning like, “Why are we doing this? It seems so boring.” And so that was… Again, those types of conversations are happening all the time, and it comes back to explaining just why we believe in this. And it usually comes down to that core tenet of diversification.

Ryan Issac:
Totally. Yeah, it’s such a good point. Rabih, do you have anything about what we’ve said so far you wanna comment on?

Rabih Dimachki:
Yeah, I like the example about the mattress guy. I would argue that, in his mind he wasn’t looking to build the most profitable mattress selling business but the most robust mattress selling business. Because when people decide that, I don’t know, there’s a new invention, you can sleep on the ground… It’s not a new invention. [chuckle] But let’s say you can sleep on the ground, and people, I don’t know, they’re following something on social media that says, “You don’t really need that cushioning under your back. Just sleep on a flat earth. It will be better for you.”

Ryan Issac:
I know… There’s people who actually do advocate for that. Is that Liver King guy or some of those…

Matt Mulcock:
Liver King. I was just gonna say that.

Ryan Issac:
Some of those hardcore alpha male dudes that are like, “You don’t need modern comforts to live and be a man.” Yeah, I do. [chuckle]

Matt Mulcock:
Which is funny. Yeah. He’s totally natural too, for sure.

Ryan Issac:
Yeah. Anyway, Rabih, yeah, go ahead.

Matt Mulcock:
Yeah. Sorry.

[chuckle]

Rabih Dimachki:
That’s funny. But the point here is, when this hype picks up, this mattress business is not gonna be selling as much as it would be. So they would… As a business owner, he’s supplementing his revenue from another stream, or an asset class in this case, and it’s a betting business. And he’s good at it. Casinos are betting businesses, but they’re on the winning side. And his circumstance, he is a winning betting business and he’s supplementing his revenue. If we start looking at diversification instead from the perspective of it as being the tool to build a sustainable or… And robust investment, rather than the most profitable investment, we can really grasp the value that it might provide to a portfolio or to a business.

Ryan Issac:
This is why Rabih’s here. I say this every time…

Matt Mulcock:
Exactly right.

Ryan Issac:
Rabih’s on the show, I end up forgetting that we’re recording a podcast for thousands of people and I just wanna ask you personal questions about everything you say. [laughter]

Matt Mulcock:
That’s the thing. I’m sitting here talking about… The first thing that pops in my head is song lyrics from some annoying song…

[laughter]

Matt Mulcock:
And Rabih’s got this poignant amazing point. I’m like, “Yeah, I’m just gonna sit down and not talk.”

Ryan Issac:
Let’s reiterate what you just said. I’m gonna say this back to you in my own dumb words. Diversification should be looked at as a process to build something sustainable and robust, like our portfolios, and not as something that maximizes profits or return in the highest possible way. Yeah, I…

Rabih Dimachki:
Exac…

Ryan Issac:
Yeah, I…

Matt Mulcock:
Oh yeah.

Ryan Issac:
I love that because in my head I think, if I’m going to… If you’re gonna maximize return in the highest possible way, the other lever you have to crank up is risk. You have to. Of a lot of kinds, like illiquidity, or permanent loss of capital, or costs, or whatever. You have to crank that knob up. But when we’re talking to an audience of dentists, who for the most part have pretty long careers, can have long careers, have high cash flow, have the ability to have a high savings rate, and will be career savers for probably half a century or more, career and post-career. We need to build something that’s sustainable and robust, like their careers. We talk about this, like the career of dentistry too. This isn’t the race to get the highest amount of income squeezed out of your business as fast as possible so that you can be done. This should be a sustainable robust thing that you’re building that’s enjoyable along the way. Sustainability, that’s everything. Thanks for bringing that up. I think that’s… That’s really awesome actually. [chuckle] It was a point I wasn’t thinking about.

Rabih Dimachki:
And an extra point on top of like, if you want that high return you’ll have to crank up the risk. Well, too much risk might… It’ll break somehow, and you will not be able to gather what you want. Some risks, you can take on and you will manage, but some risks you really don’t want. For example, in the context of dental practice, you hedge, you buy disability insurance because the risk of not being able to work is too high to handle. Whereas there are some risks, you can handle them. For example, your windshield wiper broke down. I’m fine whenever this breaks down to go replace it. I replaced mine this morning.

Ryan Issac:
Oh, [0:16:55.7] ____ that’s fine… Okay.

[chuckle]

Matt Mulcock:
So, this is a risk that I am okay handling and I’ll diversify by each time buying a different brand of windshield wiper because I’m… If those don’t last much for a long time, I’ll buy another one. When we think about diversification, it’s important to know that it’s simply a risk management approach. And not all risks should be diversified. Some risks should be hedged, others should be diversified. And when it comes to diversifying the risk, you are talking, “Why do you need to diversify them?” And the answer should be, to stretch them out as much as you can. Harvest the return you can get from them without them breaking you.

Ryan Issac:
Okay.

Matt Mulcock:
This is such a good point, ’cause… Sorry, I was gonna add. ‘Cause we talk about… This is a theme we talk about all the time, right, and anyone who’s a long-term investor is thinking about and talking about and preaching the concept of time, time in the market. Rabih, what you’re basically saying in the core piece of this, it sounds like you’re saying, diversification is allowing you to basically take advantage of the greatest asset that is investing, which is time. It allows you to stay solvent, long enough to extract as much value as possible from the market. That’s basically what it is. ‘Cause if you go too concentrated in one area thinking you’re gonna hit it out of the park, and you’re gonna be the guy who put in all his money in Shiba Inu coin and be a billionaire. It’s like, well, chances are you’re not going to last long enough, you’re not gonna be solvent long enough to actually take advantage of that time in the market.

Ryan Issac:
Such a good point.

[music]

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Ryan Issac:
Let’s start with one of the points Rabih brought up, which is, let’s just define asset classes for a minute. Rabih, that was one of the points, if you wanna just lead off on that. The question was, how do you diversify, and defining asset classes? So let’s do that before we talk about, what does it mean to diversify in a portfolio? So maybe a little bit broader.

Rabih Dimachki:
Yeah, sure. And the conversation here is in the context of an investment portfolio. I’ll leave it to you guys to bring it under the bigger umbrella of financial planning…

Ryan Issac:
Perfect.

Matt Mulcock:
You guys are much better than me. But when it comes to portfolios, we talk about diversifiable risk and undiversifiable risk, and that’s why if you buy one company, there is a risk that you will lose all your money. But if you buy an index fund, for example, you have a much lower risk than, the whole thing will disappear.

Ryan Issac:
Can I pause right there just on something you said? A comment I’ve heard, not infrequently, is someone will say, “Well, Ryan, I mean, what if I just put a lot of money into one company?” But it’s a company that’s totally not going anywhere. Someone will say Disney, Netflix, Apple, Google…

Matt Mulcock:
GE… Oh, wait. Oh, bad example. Bad example.

[chuckle]

Ryan Issac:
Yeah. It’s easy to look back and be like, “Well, there’s some big companies that have folded.” And right now we’re watching, in the end part of 2022, the leader of a brilliant innovative company, in the future of automobiles, venture off into policing a social media network, [chuckle] and you’re like, “I can see how a company can get derailed quickly depending on who’s at the helm.” So, Rabih, what would you say to that kind of take about, like, “Well, what if I just put a lot of money into a really stable company that clearly is not gonna go anywhere”?

Rabih Dimachki:
Unfortunately, the data does not support that companies can sustain their profits indefinitely. The most recent example I can think of is Blackberry. Do you guys remember Blackberry phones?

Ryan Issac:
Ohh. Totally. Was anyone a Blackberry guy? Any… You guys?

Matt Mulcock:
I was too young, I think, to enter that mode…

Ryan Issac:
Me too. To use it…

Matt Mulcock:
Of corporate world of…

Ryan Issac:
Blackberry.

Matt Mulcock:
I was like, I missed it barely.

Ryan Issac:
Yeah. I didn’t have one.

Rabih Dimachki:
Well, Blackberry isn’t public, but as a company, given… What made Blackberry go away? Or what made Kodak go away?

Matt Mulcock:
I was just gonna say, look up Kodak. Yeah.

Rabih Dimachki:
Yeah. It’s not that they did something wrong, the management could be perfect, top schools MBAs. They have great relationship with their suppliers, with their customers, it’s part of our lives, it’s not gonna go away. The argument is there. It’s a valid argument. However, there are many other stuff that are beyond our control, such as a shift in the industry and new technology coming up, that might really catch this company off guard and it’ll go away. Kodak disappeared, Blackberry became a cybersecurity company…

Ryan Issac:
Really? I didn’t know that. Oh, wow.

Matt Mulcock:
What would… Really, this overconfidence bias, that, “Yes, the company won’t go away.” So when we talk about an asset class, we are talking about a big huge group of companies, or financial assets in the sense of bonds, that have very similar characteristics that you can’t diversify or take individual risk out of. And that’s why we say there’s large cap stocks, there are small cap stocks, there are value stocks, there are growth stocks. You’ve got credit bonds, you’ve got treasury bonds, you’ve got municipal bonds. All of these…

Matt Mulcock:
You’ve got I bonds.

Ryan Issac:
Oh, the I bonds.

Rabih Dimachki:
Those are under the…

Matt Mulcock:
Just sayin’. Hot topic.

[chuckle]

Rabih Dimachki:
Yeah. Those under the umbrella of inflation-protected assets as an asset class. So each one of these is an asset class by itself that you can diversify away, and it’s an asset class that will give you return for embarking on that risk. When you buy as an individual company, you might not be rewarded for taking that risk, but with an asset class, if you take on that risk, you will be rewarded.

Matt Mulcock:
And I think that has to be pointed out time and time and time again, and burned into your brain, this idea that if you invest in a well-diversified portfolio, globally diversified portfolio of stocks, and I know we’ll get more into this, the risk of that… The value of that going to zero does not exist. It cannot happen. I guess it could, but if you’re saying it can…

Ryan Issac:
The world’s over.

Matt Mulcock:
The world is over. And no one cares about your 401k, you don’t care about your 401k. And I think that idea gets confused a lot with people. When I ask people, “Why are you sitting on so much cash?” Or, “Tell me about why you’re afraid to invest.”

Ryan Issac:
Risk.

Matt Mulcock:
And it comes down to this idea of risk, but there’s a big difference between short-term uncertainty, and the actual risk of permanent loss of capital.

Ryan Issac:
Yeah. Which people mostly relate, or they mostly just think about values going down as risk.

Matt Mulcock:
Exactly. Again…

Ryan Issac:
Fluctuating, uncertainty.

Matt Mulcock:
Yeah, uncertainty, right, short-term uncertainty. Exactly.

Ryan Issac:
Let’s go right on that point, Matt, that you were just hitting which is, Rabih, you are in charge in our company of overseeing portfolios for clients and doing trading and rebalancing and research on portfolios. Let’s talk about, just, maybe some basics of diversification of portfolio. Matt mentioned global diversification. You were talking earlier about different types of stocks of diversification. So let’s talk about diversifying different parts of the world, or big companies, small ones, expensive ones, cheap ones. I was just looking at a chart this morning on my stocks app. First thing I do is wake up and check the market, all blurry-eyed. It’s actually not true. I checked the surf report. [chuckle] That’s the first thing I check.

[laughter]

Matt Mulcock:
Yeah, don’t lie. Don’t lie.

Ryan Issac:
But I do check the market. There was this article about the disparity between energy companies because of shortages and the war and everything, and the growth they’ve had, and then the huge disparity between tech companies, and how they’ve just gotten tanked because of interest rates and different problems they’re facing, and this chasm between the two. So I’m just thinking, like, man, what if you bet on one or the other? What if you’re all energy this year? You’d be like, “Oh, this is a great year.” But up until this year, you probably should have been a tech investor. So having all of it reduces that risk. But let’s talk about those types of diversification, Rabih, that we have in our portfolios right now.

Rabih Dimachki:
Right. I will first start with a comment on your example. When we talk about sectors, energy versus technology versus staples versus consumer discretionary, all those sectors, and you hear about sector rotation strategies, individual sectors are not asset classes. They can be further diversified away. They have risks that if you take on, you will not be compensated for. Whereas, investing in growth companies, which are companies that have a high market perception embedded in their price compared to what their book value is, or cheap value stocks which have lower market perception about future growth embedded in their book prices. Those can’t be further diversified away, and you will be rewarded for all the risks that you take on. Our portfolios at Dentist Advisors, and this is related to our investment philosophy, where we do not seek the highest return possible, but the most sustainable return possible to reach the investment objectives, really focuses on what research in the academia community tells us, and it’s evidence-based. And over the past couple of decades in investments, there have been two major themes talking about how to diversify a portfolio.

Rabih Dimachki:
The first one is global diversification, which means you have to invest in multiple regions across the world, because how countries interact with one another, how the economies dynamically shift according to the products sold between two countries, stock markets in different countries will have different performances. And if you have the option to buy more than one region, you would diversify the risk away of having one country underperform in certain timeframe. The first, I would say, note of diversification that we follow at Dentist Advisors is global diversification. And over the last 10 years, a globally diversified portfolio which invests not only in the US, but also in developed international markets like Eurozone, like Canada, like Japan, like Australia, mainly across all the world and emerging markets like India and South Africa, like BRICS and China and Brazil. When you combine all these together, they do not perform as well as the US did in the last decade. However, their performance is much more sustainable and predictable than what the US performance has been. Backing up 10 years further, we have the example of the last decade where investing in global diversified portfolio did better than investing in the US per se. However, during…

Matt Mulcock:
And significantly so, right? I mean, significant.

Rabih Dimachki:
Significantly so. Actually, investing just in China during… Or emerging markets, I would say, during the last decade, gave you 12% annually, whereas gave you a negative 0.2% annually in the US. So when you are going into a globally diversified portfolio, you are choosing the path where I have a higher probability this year that I’m gonna be positive, rather than going and focusing on one region of the earth and having a lower probability of being positive, but if you are positive, you’re really high, and if you are negative, you’re really low.

Ryan Issac:
You’re really low, yeah.

Rabih Dimachki:
We’re focusing on the sustainable approach here.

Ryan Issac:
Yeah. You just said the word “probability” and you were talking… Either you or Matt were saying earlier, we just did an episode on why the stock market is like a casino but you are the house. That was Matt’s genius phrasing.

Matt Mulcock:
Yeah, totally.

Ryan Issac:
But I think, Rabih, you were talking earlier about how casinos, they are gamblers too, but they’re gambling on probabilities, and that’s why they come out ahead and win, and why they’re profitable. I like that probability phrase with the sustainability, and just maximizing our portfolios for that exact reason, because I think it’s a fair question. Someone might ask, “well, why wouldn’t you maximize for profit in return? Why wouldn’t you just try to pick the region in the world that’s gonna perform the best?” But that’s the age-old question that no one’s ever nailed before. And I think this needs to be a webinar, so we could show some visuals, because I’m thinking of a visual that we show clients all the time, that, basically, just picture a quilt with hundreds of different colored squares all over the place, and it’s a map of which parts of the world have the highest and lowest returns in any given year, and each little squared colored box represents a different country around the world.

Ryan Issac:
And it’s, literally… Couldn’t be more random. It is the most random quilt of colors you ever seen. When we’re talking about sustainability, and maximizing for sustainability, and playing the probabilities, that’s what we’re trying to do. It is natural to say, “Well, why don’t we just look ahead and just bet on the country… ” Why wouldn’t you just go emerging markets during all the 2000s? But there’s nothing during the 2000s that would have told you to do that, except for when it was over and you had hindsight.

Matt Mulcock:
Yeah. Yeah. I’ve got a response to this thinking that comes up all the time, like, “Why wouldn’t you just bet on Amazon in 2001 and put all of your money into it?” It would be much easier and more effective to just pick the region of the world every year that’s gonna be better, or the company, and it’s like, yeah, it would be. That’s the concept of true but useless, TBU.

Ryan Issac:
Okay. Yeah.

Matt Mulcock:
I always think of this, when I’m thinking thoughts…

Ryan Issac:
True but useless. Yeah. Okay. [chuckle]

Matt Mulcock:
And I’m thinking like, “Oh, yeah… ” I’m thinking of like, “Oh, yeah, that would be a great strategy.” True, but useless, because good luck.

Ryan Issac:
You can’t. Yeah…

Matt Mulcock:
You’re not gonna do that…

Ryan Issac:
Yeah. No one’s done it to-date. Yeah.

Matt Mulcock:
There’s triple PhD rocket scientists that are trying to figure this out when they can…

Ryan Issac:
80 hours a week, yeah. Totally. Yeah.

Matt Mulcock:
80 hours a week. Again, I just think of that concept, if it’s true, yes, it would be but it’s useless because that’s not possible.

Ryan Issac:
Yeah. I love that we’re bringing all this to attention. Going back to the principle here, we’re talking about diversifying where we can. And so we’re talking about diversifying geographically. You’ve given the examples of the last decade, and then the last 10 years, where the US has outperformed. We talked about growth and value stocks, which an easy way to think about that is expensive and cheap stocks. What else are we talking about when we’re talking about diversification in a portfolio?

Rabih Dimachki:
All of these examples were about diversifying within equity as an asset class within, you are an owner in the company, and the risk for you is that the company goes bankrupt. But there are other asset classes like fixed income where you aren’t an owner, but you are a lender to the company, and the risk for you is that the company goes insolvent and can’t pay you your debt back. It doesn’t mean it went bankrupt, just couldn’t…

Ryan Issac:
You’re talking about bonds, for everyone listening. Yep?

Rabih Dimachki:
Exactly. We’re talking about bonds. And in bonds, what’s interesting about bonds, you don’t really invest in them. And we’ve had this in the previous episode I was on. You don’t invest in them for growth, but you invest in them for diversification, for income, for a different usage in a portfolio. But the magic of diversification happens is the timing of when bonds pay off and when equities pay off. And because there’s, I would say de-synchrony, if that’s an English word… [chuckle]

Ryan Issac:
I’ll use it… Yeah. Hey…

Matt Mulcock:
Absolutely.

Rabih Dimachki:
Okay…

Ryan Issac:
Hey, let’s let the guy who has English as a second language tell us what that word… Fine. I don’t care. I don’t know. You’re smarter than me.

[chuckle]

Ryan Issac:
Just go.

Matt Mulcock:
I believe you.

Ryan Issac:
I believe you. 100% I believe you. De-synchrony. I’m on board.

Rabih Dimachki:
So if they are out of sync, I think I corrected it…

Ryan Issac:
Oh, really? Okay.

Rabih Dimachki:
If the payout between equities and bonds is out of sync, it gives a stability to the portfolio.

Ryan Issac:
That’s the main takeaway here is, again, we’re trying to build something, as Rabih said multiple times, probable and sustainable for the average dentist whose investing career, which will change, the way you invest will change over time, but it is probably a 50-plus year career, investing career, all through your working years, and after, into retirement. And so what Matt’s just saying is totally true. We have to build something that’s going to last during all of that. During the pandemics that crashed everything, that we didn’t really see coming, 2020, to the 2022 inflation interest rate stuff that we kinda did see coming because we’re doing this on purpose, rates are going up on purpose, it’s policy. And then everything else in between that has happened and going to happen, over the entire multi-decade investing career. Again, the principle in this whole discussion is, we have to build something that’s gonna last a long time, that’s gonna last through the most amount of scenarios, knowing that sometimes there’s gonna be some anomalies and they’re gonna throw us off a little bit. I’m gonna throw into the mix in here also, ’cause we’re talking about diversifying across the globe. We’re talking about diversifying across types of stocks in terms of price. We’re talking about diversifying in size of companies, because those are different.

Ryan Issac:
: With dentists, dentists usually end up having multiple types of accounts too. And so we’re talking about, for a dentist, we have to talk about how you diversify, like where money goes in different types of accounts throughout your career. 401ks, IRAs, Roth, brokerage accounts, profit sharing, pension, cash balance. Rabih’s talking about diversifying across stocks and bonds in all of these different types of accounts too. All this stuff has to work together, which is all this is just to say, in my opinion, that although it can seem easy sometimes to just say, “Oh, it’s just a cheap index fund. How hard can it be?” But when you’re talking about a 50-year investing career over multiple types of accounts, in big dollar amounts, that needs to be sustainable over all kinds of economic and world conditions, that is not that simple. It’s very complex. And the reason why we talk about this so much is because we meet people all the time who are trying to do stuff on their own, or on apps, or whatever, and they’re just not quite hitting it right. They’re over-concentrated, and then they’re doing well for a while, and then they just get killed in another type of… So they’re trying to find solutions to this, and that’s why we’re talking about all this, sustainability, it’s the key to everything.

Matt Mulcock:
The other layer of this is one of temperament, right? It’s like, you also have to have something that, behaviorally, you’re going to stick with for the next 30, 40, 50 years…

Ryan Issac:
Yeah. Once you built it. Yeah.

Matt Mulcock:
Once you built it.

Ryan Issac:
Yeah, you have to clear all these hurdles we’re talking about just to build it. But then you’re saying, “Okay, now you gotta hold it.” [chuckle]

0:36:49.2 S3: And stick to it. Yeah, you’ve gotta hold it. When Rabih… As Rabih’s pointing out, over the last 10 years, let’s say you believe us, right, and you’re like, “Okay, I believe these guys and I should be well-diversified globally as one of the foundational pieces of this.” Well, you have to look back over the last 10 years and you have to look at the alternatives in hindsight and say, “Okay, well, I believe these guys and I was globally diversified, but I should have just been on the S&P 500 like Warren Buffett said.”

Ryan Issac:
Totally.

Matt Mulcock:
“And, well, I screwed up.” And now you’ve gotta continue to stick with that after you see that. Or flip that, again, lost decade. You have to end up in 2009, 10 years after starting in 2000, and saying, “Well, I just was in the S&P 500, and I had a negative rate of return, or zero rate of return, and I should have been globally diverse… ” So, the whole point is, the most important part of any strategy is one that you can stick with. And that all comes down to temperament. There’s some tactics obviously involved, but it’s like you have to be able to say, “Okay, I believe these guys, I’m gonna go build this and put this in place, and then I’m actually not going to waver when things don’t… ” Like when bonds go down, when they shouldn’t type of thing. It’s really hard.

Ryan Issac:
It is really… Yeah.

Matt Mulcock:
That is the hardest part of this.

Ryan Issac:
And that’s where planning comes in, because when you’re trying to also apply that temperament, which changes across people, that means that one person’s portfolio might be more heavily tilted towards stocks than someone else’s. Someone else, because of temperament, might have to have a slightly more, call it conservative, call it less volatile, portfolio. Because that’s not gonna maximize return, but it will maximize sustainability. They’ll be able to sleep at night. That’s also why planning kicks in when, again, you have all these different places dentists can put money, different types of accounts. They also have debt that they can pay down fast. They also have businesses to invest in. And I said earlier, when we build a balance sheet for people, our software will kick out this pie chart that’ll show what assets make up this person’s total asset mix. And when you look at the average dentist, especially like early even into mid-career, the bulk of that pie chart is gonna be in a private business, dental practice, and in real estate, house and a building. And then, the remaining slivers are liquidity and stocks and bonds and mutual funds. And a lot of times people can get overwhelmed when markets go down and they’re like, “I feel like I’m putting in so much money, and shouldn’t I be putting it in other places?”

Ryan Issac:
And you just show them this pie chart. You’re like, “70% of your assets are still contained in a private business in real estate. And a lot of that real estate’s personal use, you live in it. It’s not even investment.” So, we can go the next 15, 20 years of your working career just trying to balance out that pie chart of more liquidity in other assets besides private business and real estate. And so, you’re just bringing the point, Matt, which is what financial planning brings to the table, which is doing all this tactical stuff and strategic stuff and then bringing in the behavioral, and the personality components, and all the tons of life choices that come up for a dentist every single year, and then just combining all that and being like, “How do we stick to this thing we’re gonna build? And how do we react to changes?” When you have to move your building or bring on an associate, or there’s a divorce or a death, or stuff we can’t plan for. That’s what planning is. And so, it’s a lot. I feel tired just thinking about it at this point. And we should probably call it. There’s more subjects. We should probably do diversification part two.

Matt Mulcock:
And a webinar.

Ryan Issac:
Yeah, I think this should be a webinar so we can show… There’s a lot of cool visuals around this that we’ve already brought up that we could do. Let’s just do this. Any parting thoughts that you guys wanna bring up? We’ll go back to Rabih first.

Rabih Dimachki:
Parting…

Matt Mulcock:
God dang it, I gotta follow Rabih…

[chuckle]

Ryan Issac:
Oh, again? Oh, yeah. Sorry.

Matt Mulcock:
No, no, it’s good. I like it. Let’s go.

Ryan Issac:
Well, then you can just say ditto. You can just be like, “He’s still [0:40:39.5] ____ mine.” Yeah. Okay.

Matt Mulcock:
I might say that. I might say that.

Rabih Dimachki:
I’m gonna pull a Matt, and tell you “I’m thinking of a song right now.”

Ryan Issac:
Okay. Alright.

[laughter]

Ryan Issac:
You are, really? What’s the song?

Rabih Dimachki:
Are you really?

[laughter]

Ryan Issac:
Oh, dang it. Dang it. Dang it.

Matt Mulcock:
Oh, he’s just making fun of me. Okay, I get it.

[laughter]

Rabih Dimachki:
But a parting thought with diversification would be, when your investment horizon is over your career, 50 or 60 years, the diversification strategy that you put down there is there to service that investment horizon. If you are looking at your portfolio on annual basis and you’re like, “Okay, stocks and bond diversification this year did not do what it’s supposed to be,” it doesn’t mean that diversification broke down. It just means that diversification is really connected to your investment horizon and that’s what a sustainable portfolio should be like.

Ryan Issac:
Long timeframes. Yeah. It’d be the equivalent of running a great dental practice, but you just go through a year where you lose people, and you had a flood, and competitors moved in, and you’re like, “Well, dental practices are broken now, ’cause it got hard this year.” You’re like, “No, don’t… ”

Matt Mulcock:
“Yeah, this is pointless. Let’s just… ” Yeah.

Ryan Issac:
Yeah. No, they’re not broken. It was just a tough year. And so, you’re gonna have more, and you’re gonna have good ones. Alright. Rabih, long timeframes. Matt, ditto, or do you have something else you wanna add to that?

Matt Mulcock:
I feel bad… Now I’m the guy. He said, “I’m gonna pull a Matt.”

Ryan Issac:
“I’m gonna pull a Matt.”

[laughter]

Matt Mulcock:
He made my…

Ryan Issac:
You’re the, yeah, song guy now…

Matt Mulcock:
“I’m gonna pull a Matt” and just say “I’m thinking of a song.”

Ryan Issac:
Yeah, that’s [0:42:00.8] ____ forever.

Matt Mulcock:
That’s the guy I’m known as.

Ryan Issac:
Yeah. That was [0:42:02.8] ____ forever.

Matt Mulcock:
Okay, well, I’ll take that. No, I love the point, the theme of this that Rabih brought up earlier, which is the whole idea of diversification is sustainability, and remaining solvent long enough. I just think of, I’m either a song guy or a quote guy ’cause I have no original thought.

[laughter]

Matt Mulcock:
But I think of Charlie Munger, one of the greatest thinkers ever. He’s the lesser known partner of Warren Buffett, has a great quote, which is, “The first rule of compounding is never interrupt it unnecessarily.” And so that comes back, I think that encapsulates what Rabih is talking about, is, one way to interrupt compounding is to blow yourself up by getting too concentrated or making too big of bets in a concentrated position. And so that’s why I think, again, the core tenet of this is, what Rabih was saying, is the whole point of this is to remain solvent as long as possible over your time horizon. And if you’re thinking, to Rabih’s point again, that, “Well, I’m only gonna work for 20 years, so that’s my time horizon.” No, it’s what Rabih said. It’s probably 50, 60 years because your investing career does not end at your working career. And so I think just thinking about that whenever you’re questioning, “Should I go all in on this or that?” The point is not to maximize those returns, it’s to remain solvent long enough to see the returns, even bear fruit for you.

Ryan Issac:
Yep. Cool. I’ll add my piece, which will just be an invitation. So my invitation is, it’s really common to feel overwhelmed by this stuff and to, maybe, get it wrong. And it can be a good thing if you accidentally get it wrong and you bet on the right overly concentrated thing [chuckle] during the time that it goes up. But you’ll feel it when it doesn’t go up anymore. And not only just doing that extreme of an example, there’s just a lot of people out there who worry that they haven’t built a portfolio that’s sustainable, that is gonna last 50 years. So the invitation is, we love talking about this stuff all the time. You can chat with an advisor easily, anytime you want, and ask questions of this nature, or any other kind, anytime you want, by going to dentistadvisors.com. There’s so much stuff to check out there, a lot of free resources, but you can chat with us. There’s a calendar, get on it and chat with us. We’d love to help you answer your money questions and point you in the right direction. Matt, as always, thanks for being here, as you always are. Rabih, very short notice, but just showed up with just…

Matt Mulcock:
Always.

Ryan Issac:
So good.

Rabih Dimachki:
Spitting fire.

Ryan Issac:
Thank you for being here, Rabih…

Rabih Dimachki:
My pleasure.

Ryan Issac:
I really appreciate it. Thanks to all you for joining and tuning in, listening, and we will catch you next time on another episode of Dentist Money Show. Take care now. Bye-bye.

[music]

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