The Greatest Financial Advisor You Never Knew You Had

Your Money Guide on the Side

In this episode of 'Your Money Guide on the Side,' Tyler Gardner champions the S&P 500 as the ultimate financial advisor—passive, disciplined, and consistently outperforming active managers despite charging minimal fees. He illustrates how the index's

Key takeaways

• The S&P 500 acts as a self-correcting financial advisor by automatically firing underperformers and including only profitable companies with sufficient liquidity.
• Index funds like those tracking the S&P 500 outperform most actively managed funds over time due to lower fees, tax efficiency, and disciplined rebalancing.

Main topics

• Passive investing vs. active management
• The S&P 500 as a financial advisor

Notable quotes

The single greatest advantage the index has over you is that it doesn't have a phone. It doesn't know what happened today.

A quality standard that only applies when it's easy isn't a quality standard, it's a preference.

Conclusion

Tyler Gardner concludes that for most people, investing in a low-cost S&P 500 index fund is one of the smartest financial

Transcript preview

Speaker 1 (0:00) Just stop checking your stuff. The single greatest advantage the index has over you is that it doesn't have a phone. It doesn't know what happened today. Every study of investor behavior points the same direction. The more often you look, the worse you're going to do. Speaker 1 (0:15) Hello, friends. This is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Speaker 1 (0:40) Quick note before we start, September's pre-order bonus for my book, Real Wealth, is something I've wanted myself for years and never been able to find. So I created it. It's called the Real Wealth Money Calendar. 12 months, five action items per month, all on one page. Because most people I know already know what to do. They just don't necessarily know when and they don't have accountability. So this is your 2027 on one page. 60 moves in the month you actually need to make them. Pre-order Real Wealth at tylergardner.com slash book. Let me know you did, and your money calendar will be in your inbox in early October. This week, I want to start by telling you about the best financial advisor I've ever worked with. They've never called me during dinner. They've never invited me to a steakhouse to discuss a rare and privileged opportunity. They have never worn a quarter zip with a company logo on it. never said let's circle back, and have never once sent me a holiday card featuring their family in matching flannel on a hay bale. They charge me about $3 a year for every $10,000 I give them. They fire their own underperforming employees without me having to ask. And over the last several decades, they have beaten the overwhelming majority of professionals who charge 300 times more than they do. If you've been with me since the beginning, you know where I'm going with this, folks. This episode is all about my personal financial advisor, the S &P 500, and they don't even know that I exist. Now, I did a version of this episode about a year ago, but a lot of you are new since then, and this one deserves not only an annual reminder, but also a refresher in the way that flossing and checking your beneficiaries deserves annual reminders and refreshers. We're going to break this into two sections today. First, why simply owning the S &P 500 is one of the most brilliant financial decisions available to a normal human being. Second, we'll specifically address some of the objections that always follow. Well, fine, Tyler, but investing is only half of it. What about the psychology? What about the other complex stuff? Isn't that what I'm paying an advisor for? We'll cover all of that in the next half hour. And, familiar ask before we get into it, if this show has been helpful to you in any way, if you'd consider leaving a review, I would be and already am eternally grateful. It genuinely helps new listeners find the show, and more selfishly, it helps me know I'm not alone in here talking to a microphone in the Vermont woods while a bloodhound sleeps next to me and you might hear her snoring throughout this episode. Now, let's get into it. and talk about why the S &P 500 is the single greatest financial advisor you never knew you had. Part one, the machine that cleans itself. Let's start with a thing almost nobody understands about the S &P 500, which is what it actually is. Most people think it's a list of the 500 biggest American companies. It isn't. It's a curated index, hand-selected by a committee at S &P Dow Jones Indices, who meet, discuss, and vote. There's literally a room. There are people in that room. And I find this delightful. because the most successful investment strategy in modern history is essentially a very disciplined book club. Now, to even be considered, a company has to clear a set of hurdles. It has to be headquartered in the United States. It has to be listed on the New York Stock Exchange or the NASDAQ. And as of the most recent update, it needs a market capitalization of at least $22.7 billion, a number that gets revised upward over time, which is its own legitimate commentary on the state of the market. It also needs enough of its shares actually available for public trading, so it can't include a company that's 90 % owned by its founder's nephew. It needs genuine liquidity. And then there's that one thing that matters most, that hurdle that trips up even some of the most glamorous-sounding storylines in history. It has to be profitable. Specifically... positive gap earnings in the most recent quarter, and positive cumulative earnings over the four most recent quarters. Not adjusted earnings, not pro forma earnings, not EBITDA, which I've always thought sounds less like an accounting metric and more like a Star Wars character who dies in the second half of the film, but that's probably just me. Gap earnings. The numbers you file with the SEC under penalty of perjury. Sit with what that means for a minute, because it's the entire thesis of today's episode. There's a built-in quality filter on this index. A company can be worth $20 billion, be on every magazine cover, be discussed breathlessly at every dinner party in Palo Alto, and still be ineligible because it doesn't make money. Tesla is the old famous example. It crossed the market cap threshold years before it qualified because it couldn't string together the profitable quarters. When it finally joined in December 2020, it entered as one of the largest additions in index history. But the index made Tesla wait. But forget Tesla, because we just got a far better example, and it happened on June 12th. SpaceX went public. biggest IPO in the history of markets. A $1.75 trillion valuation at pricing, $75 billion raised, demand reportedly around two times oversubscribed, and the stock traded above $2 trillion in valuation on day one. By any measure, that matters to a headline, the largest new public company ever created. Now, Ahead of that IPO, SpaceX's advisors went to the index providers and lobbied for early inclusion. Because index inclusion means every passive fund tracking that index is contractually obligated to go buy a ton of your stock. That's not marketing. That's a legally required buyer showing up with a pickup truck. And here's what happened. NASDAQ changed its rules. Footsie Russell. changed its rules. And on June 4th, S &P Dow Jones Indices, after a full formal consultation, announced it was changing nothing. Not the 12-month seasoning period, not the gap profitability requirement, not the public float requirement which says a company has to make at least 10 % of its shares available, and SpaceX was planning to offer under 5%. The biggest company. ever to go public, asked to come in early, and the S &P 500 said no. Not no let's talk about it, just no. SpaceX is now looking at mid-2027 at the earliest, and only if it can produce four consecutive quarters of positive gap earnings just like everybody else. Now, sit with that for a second, because this is your money we're talking about. Every index fund tracking the NASDAQ 100 had to go buy SpaceX in July when it was fast-tracked in, roughly $4 billion worth, funded by trimming a little bit of everything else those funds already owned. So if you hold QQQ, you sold slivers of Apple and Microsoft and Nvidia to buy a company with a 5 % float and no requirement to have ever earned a dollar. Nobody asked you, it just happened because the rules got rewritten to accommodate the arrival. If you hold VOO or IVV or SPY or FXAIX, you did nothing. You own zero SpaceX. Your fund sat there, entirely uninterested, waiting to see the results. That's the filter. That's the whole episode in one news cycle. two of the three major index providers looked at the largest ipo in history and adjusted the rules to let it in the third one checked its own paperwork and said uh come back when you're profitable and bring your dang float that's like a bouncer who still checks ids when the line is around the block the club owner is screaming and the guy at the door asking to be let in is worth two trillion dollars now in fairness and i always want to give you the other side This could look foolish if SpaceX compounds beautifully over the next several years. S &P 500 holders will have missed the early run, and there will be plenty of articles about the stodgy committee that let the future walk by. One prominent ETF analyst said exactly that at the time, more or less. We'll see whether this turns out to be wise. Maybe it won't, but that's not really the point because none of us know. The point is that the rule held under maximum pressure in the exact moment when bending it would have been the popular, lucrative, universally forgiven thing to do, give or take your thoughts on Elon. A quality standard that only applies when it's easy isn't a quality standard, it's a preference. And by the way, this isn't over. OpenAI and Anthropic are both reported to be eyeing offerings of their own that would land them near the top of the U.S. market on day one, which means the machine that manages the retirement savings of most of this country is going to get asked the same question again, probably soon, and probably louder. But good news, it just showed us exactly what it plans to do under extreme pressure. This episode is brought to you by Caldera Lab. Quick confession. In high school, my AOL screen name might have been Pretty Boy Durden. And it wasn't ironic, because while other guys were collecting baseball cards and playing real sports, I was collecting his skincare products and taking my appearance embarrassingly seriously. The problem was that almost nothing was actually made for me. It was either borrowed from my mom's shelf or smelled like a department store had a mild panic attack. Which brings me to Caldera Lab. High-performance skincare engineered for men. Science-backed and clinically tested. The regimen, which I love, is four steps. The eye serum, for when I look like I've been upwriting YouTube scripts until 3am because most likely I have been. The base layer moisturizer. And the good, their best-selling serum with over 3.4 million antioxidant units per drop. And it's backed by real clinical testing, not marketing claims. 100 % of participants, including myself, said