Peter Lazaroff on The Perfect Portfolio

Bogleheads On Investing Podcast

Host Jon Luskin interviews Peter Lazaroff, author of 'The Perfect Portfolio,' regarding the construction of resilient, long-term investment

Key takeaways

• A perfect portfolio is defined by its sustainability over decades rather than just maximizing expected returns.
• Investment strategies should be adaptable to life stages, much like dietary needs change with age.

Main topics

• Portfolio adaptability
• Inheritance planning

Notable quotes

The perfect portfolio... is certainly more on the spectrum of what is the portfolio and strategy I can stick with for decades on end.

Conclusion

The episode serves as a guide for investors to prioritize behavioral c

Transcript preview

Speaker 2 (0:00) John Luskin, your host here for the 98th Bogleheads on Investing Podcast. We're going to try something new for this episode and jump right into the interview. Stick around to the end for important announcements and my final thoughts. Peter Lazaroff, Chief Investment Officer over at an investment shop that oversees billions in assets. Why write a book about the perfect portfolio? Speaker 1 (0:20) Well, John, you know, it's one thing to manage, I guess, over $10 billion for clients at this point across the country. It's another when you're trying to educate the masses. I host a podcast called The Long-Term Investor. You can go to thelongterminvestor.com to learn more about that. But one of the things I've learned over the years is that there is so much information that if you need a resource to try to have, like instill all of the best advice from the investing classics and incorporate stuff like behavioral finance, incorporate things that didn't exist when investment classics were written. It's hard to just give somebody one book. I feel like all the time people are like, Peter, what is a book I should read that would, you know, get me a little more educated, better understand your philosophy? And I feel like I have to give them six or seven different books. Here, I could try to do something that's approachable, that uses more modern examples, and, you know, is not 400 pages long and just kind of hits those high points and maybe makes you think about things. that differently or learn something new, even if you've been a student of the market for a long time. Speaker 2 (1:29) Well, speaking of favorite books, I'm biased. Jack Bogle's Little Book of Common Sense Investing is one of my favorites that I recommend to a lot of folks who are first starting to learn about investing. I'll link to that in the show notes for folks to check out. Let's jump to an audience question. This one is from Zaneth from Bogle Ads Reddit. They ask, what's the goal? of the perfect portfolio? Is it the highest expected return or is it something that you feel confident that you can stick with for the long term? Speaker 1 (1:58) Wow, that is actually an incredible question. For me, the perfect portfolio, first of all, there's not like a one size fits all universally perfect portfolio. I make it very clear right out the gate that I think that there is a perfect portfolio for all of you out there. You just have to find it and understand some. things, some basic foundational ideas in order to find that portfolio. And to me, it's not necessarily about return maximization and is certainly more on the spectrum of what is the portfolio and strategy I can stick with for decades on end. Because most of investment success is about minimizing mistakes and just making sure you don't interrupt compound interest in an unnecessary fashion. So for me, it's definitely that what can you stick with for multiple decades? Speaker 2 (2:47) In the book, you have a great little analogy about cereal. Tell us about that and how it relates to investing. Speaker 1 (2:54) Well, sort of, you know, I just mentioned how the perfect portfolio is more about the one you can stick with for multiple decades. But that doesn't mean you can't make changes. Like, it has to be a little bit adaptable. And in the opening chapter, I talk a strangely large amount about food. But I note how for much of my life, I would eat. I mean, four, maybe five bowls of sugary cereal right before bed, whether it's Froot Loops, Cinnamon Toast Crunch, Corn Pops, like whatever, I'm all in on it. And as I've aged, so I turned 42 this year, I can't really do that anymore. And I mean, I still love cereal, but that's not good for my body. And certainly that much of it right before bed, that's not a thing that is necessary and or good for me. Whereas, you know, in my teenage years, in my 20s, actually, I had a hard time gaining weight. And so anything I could consume that I enjoyed eating, I should eat. You know, things change over time. So with your portfolio, what you need in your 20s or your 50s or your 70s is obviously going to change. So the perfect portfolio is not just a static portfolio. If anything, it's this philosophy and strategy and process for making decisions so that you can adapt as life changes with you. I think one of the biggest things that is different in people's lives, like we could try to corner certain decades of life, but I don't know how you feel about this, John. But to me, the playbook is if there's this official playbook, maybe we could write a book called The Playbook to Accumulation is largely agreed upon. It's, hey, max out your tax deferred accounts, keep your investment costs low, like save, you know, spend less than you earn, save money effectively. It's all pretty basic. It's not that complicated. Decumulation, on the other hand, I don't feel like there is a one size fits all because everybody's objectives are so different. And that's the thing with investing. I think a lot of investing, both the classics and the current books, address investing for the accumulator. Whereas I think holistically, one, the accumulators are all going to have different goals, like whether you are a few years away from retirement or having just entered retirement or just getting started in your career. you're going to have different goals and objectives. And so I think, you know, the cereal thing is a good example of, hey, the way that I eat has changed. Now, I used to, you know, everybody who's listening to this podcast has had to deal with the terrible effects of aging and how you have to eat less and less and less over the years. But it's not just quantity, it's types of foods, you know, it's the types of things that maybe will make your stomach upset that didn't used to. I think you could make an easy, almost cliche analogy to investing of the things that make your stomach upset as you get older versus when you're younger as an investor. So to me, I think it kind of this perfect portfolio, especially with the food stuff, for whatever reason, as I was writing, maybe I was just hungry the whole time. But it just occurred to me that like everybody's perfect meal is different. And John, if you and I go to the restaurant or any restaurant, not the restaurant, but you we could order. Any number of things, the likelihood of us ordering the exact same thing is pretty low. And even if we do, we might like modify the side or like have it cooked a little differently. But even if somehow we have truly the exact same order, you and I are going to have physiologically different responses to that order. We're going to react to it. We're going to enjoy different amounts. And so, look, I think I really just wanted to talk about cereal in my book. I've written about it in more casual blog posts before. I'm a huge cereal. aficionado. But, you know, hopefully it does tie nicely to the adaptability and changes that we go throughout life in. Speaker 2 (6:34) Yeah, I thought it was a pretty neat analogy, how it just spoke to the fact that what you could do when you're young, you can no longer necessarily do when you're at more advanced stages. And the same applies to your portfolio. The portfolio that got you to retirement isn't necessarily the same portfolio that will get you through retirement. So let's talk a little bit more about some of those changes that. you may be making to your portfolio over time. This is actually a question we got from the booklets community for our last interview for our last guest. Didn't have time to get to it, but it's really interesting topic. And you touch on it in the book. You have a pending inheritance. How should one invest in light of that? Speaker 1 (7:12) Such a good question. And there's going to be always this caveat that it depends on your situation. However, here's what I will tell you is when we're working with clients at PlanCorp, at least, if someone thinks they're having an inheritance and we are building a financial plan, we don't account for it. And I believe in that approach. I don't think you should. really count on an inheritance until it's like in an irrevocable trust and it is yours. Because a lot can change. Let's say mom and dad have told you that you're going to inherit money, but either mom or dad passes away and then the other one remarries. And then a totally different set of circumstances comes in. Or maybe there's a lot of health complications at the end of life. There basically are always health complications at the end of life. And so I think when you're investing, I don't think investing as if you're getting an inheritance to sort of bail you out is the right approach. Maybe if your investment plan and overall financial plan is in really solid shape and you decide that you want to take a bigger vacation, or maybe you don't travel as much with your spouse and your children or whomever as much as you'd like, and you've done a really good job and you can like, maybe you can't take your inheritance to the bank, but you can count on something being there. Well, maybe we should live a little this year. And so I think it doesn't have to be a permanent lifestyle choice, but I don't think you have to fully ignore it. I just, I always feel really uncomfortable, bake it into a financial plan. Now, one last thing that I would consider is, you know, and this is where the caveat depends on how old you are. So if you're in your twenties or thirties, I think you need to invest as if it doesn't exist. If you're in your fifties or sixties, what you have saved for retirement, you know, most of the compounding is going to happen based on what you've already saved. And so like maybe the calculus and the psychology around it changes a little where you get more flexible, not just in how much you save