Just-the-Basics Indexing with Mark Biller

0:00This Faith and Finance podcast is underwritten in part by Sound Mind Investing. For more than 30 years, do it yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org. This investing have to be complicated to be effective. Hi, I'm Rob West. Some investors prefer active strategies while others want to simply track the market. But what if the best approach isn't either or? Today, Mark Biller joins us to explain Sound Mind Investing's just the basics indexing strategy. And why simplicity, diversification, and a little flexibility can go a long way. And then it's on to your calls at 800-525-7000. That's 800-525-7000.

1:02This is Faith and Finance, Biblical Wisdom for your financial decisions. Well, Mark Biller is the executive editor and senior portfolio manager at Sound Mind Investing, a long time and faithful underwriter of this program. For more than 30 years, Sound Mind Investing has helped Christians apply Biblical wisdom to their investing decisions with practical guidance designed to help them steward their resources faithfully. Mark, always great to have you with us. Welcome back. Thanks, Rob. Good to be here. Mark, for decades, Sound Mind Investing has offered an indexing strategy called Just the Basics. And as the name suggests, it's designed to keep things simple. Before we unpack the thinking behind it, give us the big picture. How does indexing work generally and what's SMI's spin on it? Yeah, Rob. Well, indexing is based on the idea that an investor is going to give up trying to beat the market in favor of just earning the market's return.

2:03And they do that by using super low-cost index funds. Now, over time, indexing has worked really well because mainly active managed funds and strategies tend to have higher expenses. And it's been hard for most active managers to overcome those higher costs. So SMI's spin on indexing, which we call Just the Basics, is designed to be really the ultimate in simplicity. We use three stock index funds. And if your asset allocation calls for it, one bond index fund, a person can set it up in just a few minutes. It only requires attention once a year for a quick portfolio rebalance. And so for us, we have a lot of active strategies. But just the basics makes it really easy for a person to add an indexing element to a portfolio. And just like other types of diversification, that can really help smooth a portfolio's annual

3:04return path over time. Yeah, that's really helpful. Now, some investors tend to see active management and indexing as an either or choice. But I know SMI takes a more flexible approach than that, doesn't it? Yeah, we do Rob. We're probably better known for our active strategies, but ironically, just the basics was actually the first strategy that was presented in the SMI newsletter 37 years ago. And we've had it in there ever since. When it comes to active versus indexing, we really think it's better to think both and instead of either or our private client managed accounts use both. And that blended approach really works well for a lot of SMI newsletter members, often because a lot of them only have access to index funds in their workplace retirement accounts. Yeah, now something you mentioned in your article caught my attention. And that is if the goal of just the basics is simplicity, why use three different stock funds? Why not just

4:08use a total stock market index fund and leave it at that? Yeah, that is a great question, Rob. You're exactly right. Using a single fund like Vanguard's total stock market index would be even easier than what we do. There are a couple reasons why we do it this other way. The first is actually that are just the basic strategy debuted in SMI two years before Vanguard even launched to their total stock market fund. So it didn't exist yet. It wasn't an option. Now obviously, we could have switched to that. But the reason we stuck with the three funds approach is that most investors in their 401ks and other company retirement plans, they don't often have access to a true total market index fund option within their plan. But they almost always have an S&P 500 index fund, which just tracks US large company stocks. And they also usually have some kind of a small company

5:08index fund. So our thinking has always been that if we called for a total stock market index fund, most people would substitute that S&P 500 index fund. And then they'd have US large company exposure, but nothing else. So we've always thought that would be a little bit sub optimal, even though it's been really hard to beat US large company stocks over the last 15 years. Makes sense, folks. Good investing doesn't have to be complicated. Check out this article, SMI indexing checking up on just the basics at soundmindinvesting.org. We'll be right back. Are you a financial professional looking to grow your practice while offering advice that aligns with your Christian values? By becoming a certified Kingdom advisor, you'll gain the Biblical wisdom and professional credibility to serve clients who are seeking faith-based financial guidance. Each year, more than 75,000 people search for a certified Kingdom advisor.

6:10Join our community and share your expertise with clients looking for someone who shares their faith and values. Start your journey today by going to KingdomAdvisors.com slash get certified. FaithFive is grateful for support from 1Acent. 1Acent believes that your values inspire why you invest, and how they can inspire how you invest. 1Acent's goal is to provide solutions designed for every need and invest in businesses that bless the people and places God has made. They want to help investors do well by doing good to explore a new way of investing that aligns with your values. More information is available at 1Acent.com slash faithFive. Good investing doesn't have to be complicated. A simple, diversified strategy you understand can help you faithfully steward what God has entrusted to you. Today joining us, my friend Mark Biller, he's executive editor at Sound Mind Investing. He's written an article recently for the SMI newsletter called SMI Indexing checking up on

7:15just the basics and perhaps it's exactly what you're looking for is you get started and investing. When you go to soundmindinvesting.org you can check it out again that sound mind investing.org. Now Mark that brings us to diversification. SMI has intentionally maintained exposure to both smaller companies and international stocks in this strategy. Why do you believe those areas still deserve a place in the mix? Yeah, we've always wanted that specific exposure to small companies and international stocks. But admittedly the strong performance of US large company stocks over the last 15 years or so has made that a little bit more controversial. And over time we have reduced our allocations to small companies and international stocks based largely on the long-term trend toward using the SMP 500 index in a lot of global indexing. And as a result the correspondingly

8:20lower interest in US small company and international stocks. But for us Rob, you know reducing those allocations isn't the same as eliminating them. And we still believe that having some exposure to small cap stocks and foreign stocks still makes sense. So a couple of years ago I guess SMI adjusted the strategy to put more weight on large companies while still maintaining exposure to smaller ones. How did that decision come about? Yeah, you know one of the most challenging aspects of being an investor today is honestly deciding how much weight we should place on the stock market's behavior over the last 15 years versus really everything that's happened before that in market history. You know the most recent 15 years has been all about US large cap stocks. Before that that wasn't necessarily the case. And the adoption of indexing which has really driven a lot of that performance

9:25you know has been a big part of the story of investing the last couple of decades. Now as we looked in this article at the last 30 years as a whole going back to 1996 the large company SMP 500 index has slightly outperformed the extended market that's mid caps and small caps. But in that article we break that 30 year period apart into two 15 year segments. And when we did that it makes it really clear that while the SMP 500 has been a lot stronger the last 15 years the extended market index actually outperformed during the 15 years before that. So that kind of convinced us to keep some of that extended market exposure. And I know you kept a small allocation to international stocks and other interesting part of the strategy because they've of course trailed US stocks for some time now. Tell us why you still see a role for international stocks in

10:29the portfolio. Yeah honestly Rob this was the harder piece to justify because foreign stocks have legged US stocks by a significant margin over the last 30 years and especially the last 15 years. So keeping any international stock exposure really requires more faith in the market's tendency toward long term mean reversion. That's a fancy term that investors use to describe the tendency of an asset class to rally after a period of underperformance or cool off after a period of superior performance. Now we've written about it SMI and you and I Rob have discussed on prior programs together how the historical data shows US and foreign stocks tending to trade leadership back and forth over these long decade or even two decade long periods. Yeah.

11:30We wrote an article a couple years ago which we talked about on this program that explains some of the reasons why we thought a couple years ago that we were likely moving into a period that would favor foreign stocks again and fortunately that's proven correct because international stocks have outperformed the last couple years. At the same time you did reduce the international allocation so this wasn't just about sticking with the old percentages and waiting for history to repeat itself right. Yeah that's right we did cut our foreign allocation in half from 20% of the portfolio to 10% of the portfolio and that's really in line with how we have kind of evolved our thinking towards foreign stocks across all of our strategies. In our active strategies we've moved to include foreign stocks in larger allocations only when they're currently demonstrating

12:31strong momentum and then we've switched things so that we will often exclude them entirely during periods when they aren't showing that strong momentum but going back to the indexing strategy one benefit of using an indexing approach like this is it's so easy to modify. So if a person wanted a little bit more foreign stock exposure super easy to just bump up that allocation. On the other hand if they didn't want foreign stocks at all it's also very easy to make that adjustment too. Really helpful. Let's come back to the both-and approach we started with. Beyond diversification mark is there also an emotional benefit to knowing part of your portfolio is simply tracking the broader market while you pursue active strategies elsewhere. Yeah for a lot of investors they're definitely is you know this is going to come more from an active manager perspective but when you

13:32use active strategies you always feel great as long as they're outperforming the index. Yeah. But as soon as they start to lag the index you're always tempted to think man I should have just bought that index. Yeah. You know I'm going through all this active work and I'm under performing and so investors feel that and this way you know if you include at least a little bit of indexed exposure in your portfolio that can really take that all or nothing feeling out of using some active strategies because you know that part of your portfolio is going to be simply riding along with the broad market and from an emotional standpoint a both active and indexed approach is going to yield better emotional benefits than taking an either or approach. Yeah. Mark if someone's listening today and they're thinking well this is exactly what I need and they wanted to use just the basics what does it look like to get access to that?

14:35Yeah the beautiful thing is whether you're doing it exactly the way we do it and just the basics or maybe you just have a 401k and you look at your fund options and you've got an S&P 500 fund, small cap fund and an international fund. You know basically we're just setting that up in a roughly 60% S&P 500, 30% small cap, 10% foreign and if you're even in the ballpark of that type of allocation you're good to go and you've got a very good plan for your 401k or your other workplace retirement plan right there just with that kind of simple allocation. If you're older and you need some bonds of course you can add that into as well. Excellent. Mark this has been so helpful thanks for your time today. Always the pleasure, Rob. That's Mark Biller Executive Editor at SoundMindInvesting.org. Check it out today. This article is there and consider becoming a member for further help.

15:37All right a quick break and then back with your questions 800-525-7000. Call right now. We'll be right back. I was in ministry full of time and I was always looking for a way to integrate my faith with this new industry around money and finances. This is Mark. He is a certified kingdom advisor. As a CKA, one of the best things that all for my clients is trust in knowing that they're working with a professional that understands their values and I think in all of the different challenges that clients go through. We can go back to trust in God and He'll make the past straight. You can find an advisor like Mark at findacca.com. Faith and finance is grateful for support from SoundMind Investing. If you have money in an investment account you know sometimes the stock market can seem like a roller coaster but it's possible to enjoy both profit and peace of mind as a do-it-yourself investor no matter what's happening in the market. A short video webinar about that is available

16:42at SoundMindInvesting.org. Financial wisdom for living well. SoundMindInvesting.org. You know here on this program each day we want to help you see money as a tool to accomplish God's purposes. Recognizing money is a good gift. We should use it to enjoy and provide. We also need to understand that the use of money is highly spiritual. There's a connection between how we handle money and our hearts. Remember Jesus said where your treasure is there your heart will be also. You know when he called out the widow and celebrated her giving out of her poverty versus the Pharisees that were giving far more that he really scolded. You know I think what we were seeing there is that the way we handle money has a way of illuminating what we truly treasure and that means that our spending tells a story it reflects our values and the question is what story is it telling. You know

17:42does it does the way I'm handling money reflect what I want to be most important to me and if not what changes do I need to make. Well each day on this program we want to help you understand the Council of Scripture as it relates to managing God's money but also in doing so help you answer those very practical questions that you have going on in your financial life. So if there's something you're wrestling with call right now 800 5257000 the calls are coming in but we still got a few lines open 800 5257000 we'll go to Andrea in Georgia go ahead. Hi thank you for taking my call. I'm 56 and retired at 65 and started taking social security my husband is 70 he also got early social security at 65 we had a 401 each of us did through our work but my husband liquidated both of those to pay off all of our debt which I didn't agree with but I am trying to learn to yield his decisions. I did go back to work about six months ago to try to put some more money away

18:50so that we would have something in retirement we only have about 30 thousand dollars now left in savings. So my question is with my income with my job which is only part time but I do make pretty good money at it I'm wondering if I should just talk that whole amount away in my 401k through my employer or is there a redaway to invest that money. Yeah well I realized the challenge there because that is good news that you're debt free the downside is giving up that nest egg to get there is challenging and your husband is fully retired at this point is that right. Yes correct. Okay yeah and then you both locked in the social security at a lower rate so you have some good income coming in now at least as a base but obviously you took a little bit of a haircut on that. Does your new employer offer any kind of matching? They do I believe it's five percent of the first I'm not sure that they know. Sure well we want to take full advantage of that so I

19:53would say just make that 401k your home base and really the goal here is to rebuild savings while you're still earning and so you know contribute at least enough to receive that full employer match and if possible increase contributions over time you know we want to maintain that emergency fund we want don't want to take on any more debt we want to keep spending as lean as possible and let's just you know try to treat that income that you have if you can is really just money to rebuild savings and try to suck as much of that away as you can and build up a little bit over time and is he willing or able to go back with maybe take on some part time work to do the same thing? No he tells me enough to do something part time but he did work really hard he's worked for 46 years and he really didn't want me going back to work either but I wanted something there to fall back on but now he will not entertain that problem. So what is what is his plan currently Andrea is he thinking you all can just make do on the Social Security alone?

20:58Yes they're pretty much you know take it at the time yeah yeah okay yeah I mean I think let the number speak for themselves because you know I mean obviously you know you're going to have expenses that come up even if you own your home free and clear homes age and you know you could have some major projects along the way are you all completely debt free including the home or are you renting? Yes we have to be a close and we pay off everything. Okay and what is the value of that house? I completely try to 300 thousand yeah it is on the lower end of the market. Sure so the other option that you could look at would be you know to take a reverse mortgage what's called a home equity conversion mortgage because your really major and only significant asset is your home equity and it's very illiquid and so you know you have the ability to tap into that either as a monthly check or a line of credit most people take it as a line of credit you never

22:01have to make a payment although you can and you might say well what happens well the balance will grow over time but the home will continue to appreciate and even if you slowly tapped into that home equity you know and you used it all up you wouldn't have anything to pass on to errors but you would never owe more than the homeless worth the FHA ensures that but it would give you the ability to at least have some cushion to be able to enjoy you know this season of life and take a trip or something every now and then or do a major home repair or even to take a reverse mortgage to buy a property that was you know a little newer if you all needed something that you know was more accommodating as you age but even if you just wanted to stay right there you could convert it to a monthly income stream just to give you a little more cushion so that would be probably one lever you could pull in addition to the one you're already pulling which is to work as long as you can find something that's enjoyable for you and you know maybe that leverages your God given skills and abilities doesn't work you too hard in this season but allows you to you know

23:06socks and good money away over time but what are your thoughts on the reverse mortgage? Yeah we've considered that but you know you're some negative and some positive things about that so we haven't made a decision to do that just not knowing if that was a good thing to do or not yeah I mean it shines in situations just like this I mean this is really the sweet spot for a reverse mortgage because you can't ever owe more than the home is worth no matter who passes away first the other spouse can live there throughout the rest of your life when both of you pass away or move out if you needed to move to another place or move into assisted living then the home is sold the mortgage is paid just like a conventional mortgage but the key is it's you know non-taxable income that you could have access to because you're sitting on a major asset you just can't touch it and this would allow you to get access to it so I think it's something worth looking at let me do this I'm going to send you a copy of Harlan Ackles book home equity and reverse mortgages for you and

24:07your husband to read it's very educational it'll make sure you fully understand what these products are and then you can decide it's not for everyone but I think in the situation I'm hearing it might make some sense yeah great Josh and thank you so much all right happy to do it thank you for your lives and that local council it's priceless well well thank you for saying that Andrea and it's my privilege and honor to serve you and and all the listeners to this radio ministry each day and I do it with an amazing team today Tahira Taylor Josh Omar and the entire cast and team here at FaithFive there's a lot of folks that make all this possible I just show up and talk each day and they make me sound good but I appreciate it and thanks for that kind remarks by the way folks if you love the broadcast you found something helpful consider making a gift today when you head to faithfy.com slash give that's faithfy.com slash give we will see you tomorrow bye bye. Faith in finances provided by faithfy and listeners like you.