It's time for work quite well watch -- Christopher manslaughter. Partner and founder of worst point LLC. Tired of the same sales pitches disguised as financial advice. Is this certified financial plan. Here's -- first. Well I don't mind. To this show Austin, Texas this is -- prevent. Like certified financial planner. And I am here with my two colleagues today who Leonard is themselves now. Good afternoon and Scott O'Brien certified financial planner when the partners net worth point. And I'm Morgan Smith certified financial planner and also one of the partners here then we get together each week on Sundays to. To give you a peek under the hood of what goes on in the world wealth management. We wanna give you the things that you probably wonder about the conversations you love to hear. Professional advisors talk about when you're not around you're gonna hear here. You can find us on Linkedin. FaceBook. And on the Internet at work point radio dot com. We'd love to have you sign up for our social media but love to hear thoughts and comments. So please feel free to do so. Scott. And he literally reading this week. We had good news this week. Good news good news so did you in -- was a little ashes will last week but we didn't have time title last week that you did you you both heard about the debt ceiling being raised. Did you not you yeah. I did so we're gonna have that I didn't think that was a good thing well it's a good thing in the -- -- remember what happened last year with all the -- is twice that happened who went up to the brink and at 1159 of some night they actually decide to -- and and raise the debt limit so that we didn't technically default on our debt so. Let Jenna has just say we were not to have that fight for -- re gonna go up and open up the skylight at their head. It's going to -- -- but this doesn't sound good guy -- we gave up the debt ceiling without a fight how they're good well it will there was little bit of fight thanks to senator -- And you India tried to. Trying to get into a filibuster wouldn't work but he did did put up the good fight in so we're till march of 2015 before we have this battle again which gets both parties. Through the -- mid term elections which is what they are both trying to accomplish. Well I think I'm sure that there is that is they think after the last. Debt ceiling fight that the Republicans and getting blamed for everything happening ditched it just giving up her latest on how they're both in the single digits where did that the in terms of not being liked by the public I think the Republicans feel worse but I think they're dialing 9% and and Democrats are twelve or something there was who has -- -- it's it's amazing how you can be lashed for fiscal responsibility. Well if I -- out of my house on my control bringing it on home the stock market has just been on screen the last few days so. Will dip there after the beginning of the month but I think all the the markets have come roaring back to new all time -- -- -- -- back in it do we had a who can technically get a correction in the -- look at 10% but where. We had a little bit and dipped as you said we're back got pretty close to where -- -- to -- -- year. Makes us happy advisors with happy colon cancer. So today's topic thumb it's very popular around our segment of the business and -- suppose is pretty. It's pretty essential to. To those of you out there trying to figure out how to invest your money and it's really it's this this this never ending debate about whether active managers. People like -- Warren Buffett. Can beat the market. Right they they employ these tactics called stock picking where they. Read the tea leaves and they decide that the price on the stock is this the wrong price in the patient died before people wake up and figure out with the right price should be. And and then there's this other group of people they're called index yours. And they just say that -- it you know eight out of -- you active managers don't beat the market so we're just gonna be data out of -- by just buying market. Which doesn't like a bad idea then and as a whole new school of thought called factor investing. And it it basically says. Well well stock picking and market timing don't work. There are some things in the restructure your portfolio. That would help determine your long term return. And this this battle's been going on since the sixty's really. And you know I guess I did you say that the indexer is in the factor investors are winning because the market is choosing. To put a lot of money into those types of strategies what I read of the largest mutual fund in the world is vanguard index 500. Yeah that's right -- Pimco bond fund used to be they had such area of Pimco that's my new favorite person to pick on the other that they equity experts now. Well they tried and and they were -- and bond funds like -- the huge outflow. Anybody out there on the Pimco -- -- out on front not only outflow of cash but Mohammed. Has left him. We'll see what happens there. The and but you're right that the vanguard fund is the largest. Fund in the world now turn to cash within an inch and there's nobody driving the -- there are no active management. That's right and it's it's an index londoners it's it's of it is a podium we have this active vs passive I think it's been sort of in the media. When they talk about active management and the copilot opposite term which is passive but there's really something in between which is which is which are talking about these factors. And but there's a battle goes on that. The active managers keep singing and they can beat the markets and the evidence shows otherwise. Well I think unique perspective to put on and is you know when you thinking about active management or what is who is it and it's. Did she is about to very highly paid people write well and suffers -- problem I think good analogy is you drop down the road. And your planes kind of kind of -- it's not moving very fast and you look over the next -- and say hey. I think that one's gonna go faster any move over there so that that's. Kind of a good idea what -- management is and I think the good thing to think about those listeners out there. Oftentimes with tickets some guy like Warren Buffett or some company but oftentimes individual investors. They are active managers because there trying to kind of predict the future and change -- to. Mr. very few of us are constructing -- an index funds and expect to get just about all of you out there who are picking your own stocks and deciding when to buy and sell your own stocks or are active managers. So that's really the -- today -- let me just. When they wanna do in the first segment is just frame the definitions so active investors. Trying to outperform the market by picking stocks. Or by timing the market. Then you can -- something called hedge funds into the same group. All those hedge funds or are. Really a vehicle which probably. Well we'll talk about hedge funds a little bit but we don't want those in with the active managers index there's -- people that by a list of stocks that some company like S&P you're. Over -- borrow puts out a list of blindly which isn't a bad way to do it and and certainly when you look at their respect to. Active managers and then there's this factor is or structured investment approach which is. Kind of newfangled. But it's really taken the investment world by surprise. That we'll talk in the next segment about. The recent mention of the kings of factor investing on what was the magazine cover to Barron's -- and her alone. Time I really haven't there's another radio guy -- Iowa and complaints he's addiction and parents and let them play and slammed a lot of. Yeah they did a nice article how to get on the how does factor guys get on the -- and -- what where are where is that firm. Well thankfully. It is a short drive from. -- point headquarters. Actually -- Wii is we -- DFA funds as hunter talked about is in their headquarters is now here in Austin I don't you know when he moved here because you are your thing but between California and they like Morgan. Thought better of living in California and moved to moved to Austin. Part of the California accidents cancer but it's a great resource here. For a person and for investors it's it's it's a fascinating. New development really. In investing and it comes. When I think indexing and passive world I mean they've they've kind of they think they've -- thought they had sewn up but this is really disrupted. A lot of were you ever an active manager unless I was I'm recovered what are we gonna go to break now. When we come back and ladies and gentlemen we're gonna talk about each of these things specifically and plays and stories about. Some good some bad and intense. Think I'm gonna hands yeah. Between -- government spending and uncertainty about our economic future most Texans are having doubts about their own financial future are you ready to take a serious look at your financial goals using the experience the only certified financial planner practitioner is it -- point. Would you like a second opinion on your current advisor who may be selling you investments and insurance for commissions visit worth forty radio dot com to make an appointment or call 888544776. -- that's worth player radio dot com 8885447768. Welcome back to work quite well watch giving you an unbiased people under the hood of wealth management investment and financial planning. Once again here's Christopher -- look. Welcome back Austin, Texas. I'm here we have Scott O'Brien then Morgan Smith. Certified financial planners I'm Christopher -- like with the -- point and we are discussing. The eternal debate. Index funds vs active managers -- vs factor investing. And I know that for those of you who are hobbyists investors this is continuous and ongoing debate. -- think really you know what fascinates me if you look at this from a scientific perspective when you look at the statistics and you look at the academic studies. There's very little argument for what we call active management this whole industry. Called Wall Street. Which is built around the idea that if you know if you -- such and such firm. The right amount of money that they'll let you get better returns than all your friends. This or what powers all those lovely homes on the Hamptons and those big tall glass buildings in the Super Bowl commercials. But. Guys what -- money come from throw that stuff well who pays for all that. What comes from investors of course because they after the in the end they pay for all expenses in return they get is only after all expenses but they get superior returns -- they do get better returns and all their friends of -- other firm right. I was there were true. -- and therein lies the rub just about any investment out there you confined to the -- this just happened. It's gonna have a period where does well right I mean look look out. All investments most investments they're gonna have a pure they really look did. And somebody -- -- it'll look at this period here for a couple years but really year's united stated that period where. It's -- when did you really existed in 102030 years down the road and that's the dangerous so you wouldn't so even though a blind squirrel even finds a night you wouldn't wanna hire a black pearl. To go looking for nice every now and then even a blind squirrel just -- to -- you can. Mean I think it's playing great yeah. Not exactly what was Mark Twain said it it's is not what you don't know it's what you do you know living true. And and so we -- it -- we aren't well read until I had no. Yeah arsonist in a Clemens and Israel that Israel can but but the statistics are if I can board the audience will be a sadistic says I know they love -- yeah. But 2000 tell him with a -- trip to Connecticut. 2012. The latest data is that the on global Flow International funds. That 61%. Of the actively managed -- couldn't beat their benchmark. 61% since -- -- five years or five years which. Which is a pretty good number. In for five years for domestic funds it's almost 7% -- And then four fixed income if I can find a real quickly here is almost 90% -- so. So -- thanks guys. That -- 40% of those active managers to beat the market. I'll want one of those guys. It. And that's the problem. You can never. Forecast in advance. With those guys are gonna be a bit you us as investors we have a tendency to think well yeah I'm gonna pick one of those those guys that beat the market but that it. It's called the fools play investing you never can. -- I've I've heard someone say that it. It seems on American you know I mean there's this notion in this country that if I work hard and I'll work my peers. That I should I should do well I should do better than most people. An analogy I like he uses you know if you sent the world's greatest fisherman to a -- -- -- how many fish we catch. Not this is an efficient electric so this really isn't about you know and it's not your friendly local stock -- isn't trying hard. This -- that it's it's his brain or her brain. Against the collective wisdom of all investors millions of people voting every second of every day on the price of the security. For people you know it just it strikes especially October Norris you know people that really have Bristol locked themselves and they just believe that they ought to be able to hire some of the can apply the same principles that they did in and do better with their money. What will look at it it's a good point really entrepreneurs -- with drives a lot of wealth and generally what happens wouldn't. -- stickers and entrepreneurs that create a whole bunch of money where they lose a whole bunch of money and if that's your game. Bill -- but. That's that the game marine. What game we know we're not in the game. Yeah. Have you guys had have you guys had clients who. Have come across them with a guy like him who. What you know what you track record and he beat the S&P 500 and personal accounts and he come across and with clients or prospects there there are a lot of people who have been trained to ask that question because they've been pitched investments many times in the they if they think that's the question to ask him unfortunately. You know people active commanders are very good at com. But they say figures lie and liars figure -- -- very good it. You skating there. Actual track record so yeah I've been asked that. But I you know I just bust up the stats say listen in the aggregate all those people that are doing all that stock picking market timing. They don't beat the market so let's don't even let's just take that off the table what I like about. Getting to the point where you're indexing which -- -- talk about nexus. You automatically beaten almost all the active investors frank if you choose to index if you choose a passive approach to investing. Then by definition the -- in using your example between sixty and 90% of your peers your fellow investors are gonna lose to you. I like those odds. Yeah those are probably that's so it's a probability right so there's always people Morton has mentioned that could hurt the -- that. The goal -- to beat duke beat somebody and you know -- -- 30% chance and I call those speculators because they're just they're trying to hit a home run. And the odds of them hitting home are not very high but they're still don't gonna try to try to do is mistaken but does the odds are against him and in and we're kind of geeks so that was our research because we like. We like to give people. Evidence based investing in what we call it. And and so people. And implement -- system are quite a set of marketing base hit it yet. Guided it to me Obama sort of logical person sonic C data I stood died I'd say that that's what I need but some people still sing now. I saw -- if I can you do 2% better than somebody else does. Our ability S&P 500 in Minnesota great benchmark the first place but it's it's a symphony here on in the media is that is one it sells those. So look let me just review the history so in the sixties -- drama the professor finances Chicago comes up but this idea that that people can even beat the market. So the index fund industry is born in the seventy's now the largest fund in the world as the index 500. And then along comes. Some ideas from pharma and his. His students that there's some don't factor investing. And that has really drawn the attention of a lot of professionals and some non professional investors but shall take in the world by storm. Factor investing is where you don't trying to beat the market by picking stocks are figuring out when to get in and out but you do. You do research on the returns and the market and you notice things. Like the fact that small companies be large companies that -- companies -- expensive companies. And the company's all of a hell all other things being held equal that have more profits today we'll have more profits tomorrow and therefore higher return. And if you put all that together in an equity portfolio and holder over long periods of time. You do clobber the market. It says that affect the case I mean do we have members to show that. -- -- -- We do you we do know what I think the guys and I think the guy -- pharma who. There really was a pioneer of a lot of that research and certainly got that coined the term efficient market hypothesis. Just won the Nobel prize in December projecting. In what figured you're trying to describe is really what the difference there's a difference between. Active and passive and indexes is really three different categories and we who sort of dismissed the idea that active can. They can work but I think maybe we come back a couple that just briefly about what's -- passive. An index because there's a difference there. Yeah it was certainly is -- -- factoring is not indexing or passive. It's the identification of certain types of securities in your portfolio. That are riskier and where we find more return and find more risk. And allows you assemble your portfolio and away. That give you better chance for higher returns so that risk return relation ships still can't get away from that I can get away from -- been trying for years. They're gonna go to break now ladies and gentlemen we will see you. In a couple minutes and continued the discussion on factor -- -- Between -- government spending and uncertainty about our economic future most Texans are having doubts about their own financial future. Are you ready to take a serious look at your financial goals using the experience the only certified financial planner practitioner is it worth point. Would you like a second opinion on your current advisor who may be selling you investments and insurance for commissions visit worth -- radio dot com to make an appointment or call 8885447. 760. That's -- radio dot com 8885447760. Welcome back to work quite well why should giving you an unbiased people under the hood of wealth management investment and financial plan. Once again here's Christopher advanced life. Welcome back. Austin, Texas welcome to the -- point show. We are talking today about indexing vs active vs factor investing. Just kind of went over the definitions of of the three. Active is people trying to beat the market by picking stocks better than other people and by deciding when to get in and out. Indexing is just sort of buying a list of stocks that somebody else creates and factor investing his. Is. More Nobel Prize science. Related. Wave investing where you define certain parts your portfolio. According to what you'd expect the risk to be. And you assemble portfolio that might have a better risk reward characteristic then. And indexing in this kind of a new wave. And professional circles. And we thought we would just chat with you folks on the radio and and give you some awareness of it since the kings a factor investing dimensional funds are here in Austin, Texas. So let me and told you with a little. Idea of why this factoring engineered. Portfolios may be a little different and perhaps better. Then indexing. Which has had -- yardage did you much of roses. I did not but I bought some chocolate and some jury Boca and the -- are very expensive -- for -- that while the golf. It as and I said I never never heard about -- don't buy expensive cuts but we'll get started until it yeah. Happy Zaurus. And I kept a dishonorable campaign. So those are good examples are roses. Diamonds and chocolate. On Valentine's Day those are kids indexes. For Valentine's Day and generally how indexes were let's let's -- -- -- roses. What happens. To prices. Let's say you've got this Valentine's Day Rosa -- is still up yeah everyone has to buy roses on that day. Break so. Towards Valentine's Day anyway I didn't to have a good that's. Good point so the prices -- the -- are gonna go up and and you're gonna buy those roses let's say that's your index mr. Valentine stands next. What you -- roses. Next day don't just -- -- with a few what's up in the -- of the -- crashed crashed. To -- a similar thing happens with -- indexes. You've got this index may -- it's an S&P 500. They've got to buy all these roses just all of their decks and all the other rose indexes have to by the same thing the prices go up on that one day in and -- that traverse the shareholder you have bad people on the fund I have to buy expensive -- death so. Made the difference between that an index fund and what we're talking about this factored engineering news. What if every day was Valentine's Day in and you could go out by roses every day when you thought depresses her. Would that be a better thing for you that's help patients treated very well so that there is really what kind of factored in junior in an interesting. Works like in comparison to indexing and they can really be a big advantage for investors in its its pretty significantly. Because what happens when someone has an index fund and they invest money what is the index fund do -- of that money. That -- -- buying the stocks that are on their list and it listed is determined by what some company like standard course. -- a free samples and the S&P 500 as of today Apple Computer is the largest component of the S&P 500 spoke 3% of the S&P 500 so if you put in a thousand dollars into that Barack commander at shortcuts to -- but it's pretty -- thousand dollars today how much. How much of that thousand dollars -- going to Apple Computer. Popular and thousands and and a historian apple computers 3% and the S&P 500 -- the -- -- after my that there were thirty bucks it's 3% and so. So they're forced their pocket so they're forced to buy Apple Computer. Because of the of the week it is in the index -- Apple Computer could be for Arnold to share could be 800 dollars share but no one's making the determination whether it's of value that data kissing. It's 3% the on the list it's on the listeners at 3% I got by it and gone back to Valentine's Day. Everyone's gotta buy that turned the same time so so one of the problems -- -- -- decided that. If if you index are gonna be eight out of ten investors are because we know that active managers lose somewhere between six and 86 and nine times out of ten. Two two indexes but there's some problems and indexes and one of them is that all the funds have to by the same stock or roses. On the same day which drives up the price and when they take things off for the index they'll have to sell the same thing on the same day debut as an investor holding that index. Can suffer I mean it. It can be significant but just five or 6% recycled so so patient trading is one way that this new factor based investment approach and can help you put to -- either. What all of its bigger yeah I think so if you look at the potential for return between indexing in factor based return really most of that is in the factors. So I I'd I seemed. The numbers added up of the small effect the value of -- in the profitability effect. And I I think it's between two and 300 basis points or two to 3% per year. Difference when you look at the historical returns of these two approaches hold everything else constant same expenses. Same rebalancing techniques. If you have one portfolio that's got these small value profitable stocks this is just a qualitatively. Described portfolio it beats the other portfolios are the index market portfolio between by between. Two and 3% per year so you're saying there's an advantage to holding. Smaller stocks -- -- and if I'm gonna take stock risk in Ramallah my portfolio bounce around all the time I wanna get paid as much as I can't break. And if I don't like it bounce and around all the time. I can put some stocks in there that have a higher potential for return like a factor based approach and I can have more bonds. In the end let me sleep a little easier at night and he -- releasing about that is. Before this research came out yeah. Everybody kind of invested in large growth companies. And most portfolios if you look at your portfolio up their mr. or mrs. listener. You'll probably find you have a lot of large cap growth companies out there and it's exactly the opposite of what Christopher talked about a worried should be with these factors. Yeah and the and he goes back to the researchers shows us that but you telling people follow the -- it's it's boring sometimes. -- -- and mr. statistics we have. -- laugh a little bit today but it is so it is is sort of boring it's more exciting to go try to my FaceBook is making money exciting. You can you think it would be enough but he I -- I -- clients. 34 years ago who want in on the FaceBook IPO off and none that wouldn't go so there's such a great idea and Chris I kept all know it's not really 100 shares and -- we got them for him. And course -- tanked immediately now it's done pretty well so they're now they're feeling. Good about themselves quality and Scott was -- sport even though went down from. But kind of dwindled to share amounts whatever it is now also know that the whole market went up I wonder if marketed in ninety celebrates but it. And but the fact they took -- you were -- it to that risk on one stock. And they were putting a lot of potentially once stock ruined diversifying and perhaps FaceBook was in one of the index as they could -- But they just they just wanted to take take a flyer and I want stock in Seattle the Seattle went. So also helped the the list is out there if you have if you want to use this factor braced approach. How how can you put together a portfolio that emphasizes. Extremely profitable small cheap company. What to do it right you've got -- -- thousands. Of stock so I would not recommend going out there and give non. You know. 101000 stocks around the world. You what you wanna do is is find an advisor who can go ahead in -- use the leverage of their relationships out there in the institutional world. And build a portfolio for you that's a great idea because it isn't easy to do. Ladies and gentlemen we're gonna have to leave you now. Again this is worth pointing this is worth point show you can find this on Linkedin. And FaceBook or what point radio dot com we will see you next week and we're gonna talk about life insurance everybody's favorite topic. But it's so oversold and misunderstood we're gonna clear up -- but nobody else. You can imagine then that. Okay. Then. Need me.