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099: Versus “The Gathering Darkness” Part 8 – Defining The Great Companies of the US and the World

In this episode, I take you through the ins and outs of equity investment, peeling back the layers of complexity to reveal a clear, tax-efficient strategy that can grow your wealth with ease.

We talk about the power of global all cap portfolios and how they might just be the one-fund solution you’ve been looking for. Together, we’ll explore why market timing and security selection might not be the keys to investment success that they’re often made out to be.

I’ll share with you my personal journey towards embracing a portfolio that’s not only simple to manage but also aligns with my belief in responsible investment. I’m also excited to dive into the heart of our ongoing series ‘Versus the Gathering Darkness’ in Part Eight, where we tackle the psychological hurdles to investing and celebrate the forward- thinkers who ensure our money is never idle.

This episode isn’t just about understanding the ‘what’ and ‘how’ of investing in great companies globally—it’s also about the ‘why’. It’s about adopting an investment mindset that moves beyond the individual to consider our collective impact on society and the environment.

So join me, and let’s journey together towards a future where our financial decisions help build a more prosperous and ethical world.

Key Takeaways

00:00 Mindful Money Management for More Life

09:12 Low-Cost All Cap Index Investing

Memorable Quotes

“If you understand that market timing and security selection cannot add value over time and are more likely to reduce performance, then one global all-cap portfolio could, and perhaps should, make up your entire equity portfolio.”

“Performance favors indexing. At the same time, quality of life—lower stress, fewer decisions, less regret—also favors indexing.”

“There are no facts about the future. We do not know what is coming next, and even if we did, we could not predict how markets would react.”

Mindful Money Resources

SPIVA Scorecard – https://www.spglobal.com/spdji/en/research-insights/spiva/

Domestic Indices:

S&P 1500 – https://www.spglobal.com/spdji/en/indices/equity/sp-composite-1500/#overview

S&P 500 – https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

S&P 400 – https://www.spglobal.com/spdji/en/indices/equity/sp-400/#overview

S&P 600 – https://www.spglobal.com/spdji/en/indices/equity/sp-600/#overview

Russell 3000 – https://www.investopedia.com/terms/r/russell_3000.asp

Russell 1000 – https://www.investopedia.com/terms/r/russell_1000index.asp

Russell 2000 – https://www.investopedia.com/terms/r/russell2000.asp

Wilshire 5000 – https://www.investopedia.com/terms/w/wilshire5000equityindex.asp

Global Index Providers:

S&P Global – https://www.spglobal.com/en/

FTSE – https://www.lseg.com/en/ftse-russell

MSCI – https://www.msci.com/

For all the free stuff at Mindful Money: https://mindful.money/resources

To buy Jonathan’s first book – Mindful Money: https://www.amazon.com/Mindful-Money-Practices-Financial-Increasing/dp/1608684369

To buy Jonathan’s second book – Mindful Investing: https://www.amazon.com/Mindful-Investing-Outcome-Greater-Well-Being/dp/1608688763

Subscribe to Jonathan’s Weekly Newsletter: https://courses.mindful.money/email-opt-in

Capture the most important benefit of an advisor – behavioral support – without the 1% fee: https://courses.mindful.money/membership

For more complex, one on one financial planning and investing support with Jonathan or a member of Jonathan’s team: https://www.epwealth.com/our-team/berkeley/jonathan-deyoe/

Website: https://mindful.money

Jonathan on LinkedIn: https://www.linkedin.com/in/jonathandeyoe


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Episode Transcription

0:00:00 – Jonathan DeYoe
If you understand, as I do, that market timing and security selection cannot add value over time, that in fact, they are far more likely to result in reduced performance the longer you pursue them than it is arguable that one of these three could, even should, make up the entirety of your equity portfolio. And in my personal portfolio, my largest holding is one all cap global portfolio such as this. It is simple, it is tax efficient and it takes absolutely no work to manage it. If you want to pursue this path, just Google S&P Global BMI All Cap ETF.

0:00:44 – Speaker 2
Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs and advisors about how they mindfully minimize the time and energy spent thinking about money. Join your host, jonathan Diyo, and learn how to put money in its place and get more out of life.

0:01:10 – Jonathan DeYoe
Welcome back to Mindful Money. Today we’re going to get into part eight of our Versus the Gathering Darkness program, which I often summarize by calling it our step-by-step case for owning publicly traded shares in the great companies of the US and the world. If you’re just tuning in, over the last seven weeks we have suggested that wealth is created by owning businesses, and the reason most people don’t own, or don’t own enough of the great businesses of the US and the world can be summarized with the Gathering Darkness. We’ve gone over and discussed how words matter in investing, specifically noting the psychological implications of calling the thing we own equities or stocks instead of calling them great businesses. We’ve outlined the importance for investors of having an adult memory. We’ve stated my favorite characteristic of rational profit-seeking businesses, which is their absolute refusal to lose money our money for any longer than they must. And then the second piece of the same of these unique characteristics their embrace of innovation. We’ve described why all retirement income investors should absolutely love owning shares of the great companies of the US and the world. It’s for that beautiful thing that we call growth of income. And we’ve revealed the summary objection to owning equities this time is different which, once understood, allows one to dismiss it without digging into the details and know with confidence that this too shall pass. And then last week, we looked at how a commitment to owning the great businesses of the US and the world would look in terms of lifetime asset accumulation, retirement income, production, legacy read, inheritable assets and, most importantly, personal transformation from owner of capital to steward of capital.

The only thing left after this is to define the equities I’m talking about when I say the great companies of the US and the world. Unlike the previous weeks, this today’s episode is not a controversial topic. It is definitional only. So it’s the shortest of the whole list. After last week, I think you could probably use a little bit shorter episode Over the last eight weeks, first describing the gathering darkness and then laying out the case for owning the shares of the great companies of the US and the world as the best investment to employ. Versus the gathering darkness, two questions keep popping up over and over. First, jonathan, which companies are these great companies of the US and the world that you speak of? And second, what about social responsibility, which is SRI or ESG investing, especially the E bit for the environment? Today we’re going to answer the first question. Next week we’re going to touch on the question of social responsibility. So there are 27 million businesses in the United States. Fewer than one tenth of 1% of these are publicly traded a little over 10,000 companies in the US. Of these, the vast majority are completely unknown to most investors.

When I described the benefit of investing in the great companies of the US and the world, I’m not suggesting that you research individual companies. The academic research is clear on this. Attempting to pick individual, read the right stocks and then to buy or sell them at the right time is more likely to get you into trouble than it is to give you any advantage. Not to mention it’s going to take more work while adding both to your stress level in the moment and regret over time. According to the SPIVA scorecard, the longer the period you research individual companies in the attempt to select the right ones, the lower the probability you will be successful. After 15 years, among professional domestic large cap managers, less than 8% successfully beat their index, and that’s pre-tax and pre-feeze. Once we factor in taxes and fees, the numbers got to approach zero.

The point is a simple one After stock selection, no market timing is necessary or even beneficial to a long-term investor. So why do it? Instead, we want to own all the publicly traded companies that qualify for one of the predominant indices S&P, russell, msci, etc. So to be included in an index, a company has to meet some very basic criteria. They’ve got to be of a certain size we’re talking about market capitalization. They have to have enough shares owned at least partially by the public, as opposed to the original founders or other insiders, and there has to be a minimum number of shares that trade on a regular basis to provide liquidity to owners and a reliable sense of current price.

Before inclusion in the major indices, companies exist in pretty much obscurity because no one is following them, no one is reporting on them, no one is researching their business or analyzing their financial statements. When I think of publicly traded companies that are not part of an index, I often think of the movie Wolf of Wall Street with Leonardo DiCaprio. If someone is telling you to buy shares in such a company, they’re not doing it for your benefit. Each index has its own specific criteria for inclusion and so long as you’re using one of today’s major index providers, that’s really all you need to know. Now, the ordinary person out there in the world may not know which index providers are among the major providers, but you can just take a quick look at the main index product companies like Vanguard and Fidelity and Schwab and iShares that are owned by BlackRock and DFA and State Street and see that they all provide portfolios based on a variety of indices from S&P, russell and the MSCI. One does not have to go much outside these groups to find all the tools one needs to build a great portfolio. That’s all we look for.

Index inclusion. For simplicity, especially for folks who do it themselves, I prefer an all-cap index. An all-cap index includes all different capitalizations, which is another way of saying sizes of companies, and also both growth and value companies. These can be broken down into component parts allowing for over and underweighting of different asset classes if one so chooses. Not recommending it. And here are a few standard domestic all-cap indices.

So first, the S&P 1500 includes the S&P 500 large companies, the S&P 400 medium-sized companies and the S&P 600 small companies. So 500 plus 400 plus 600 equals S&P 1500. Or the Russell 3000, which includes the Russell 1000, which is large companies, and the Russell 2000, which is mostly medium and small companies. Or you can look at the Wilshire 5000. This is so named because they’d actually started with 5000 companies and it includes all companies across capitalizations small, medium and large with readily available prices. So in the end there’s about 3,700 companies in the Wilshire 5000.

By including such a broad swath of companies in one geography, it doesn’t much matter which index provider you choose. In the below, in the graph we see here, you see the S&P 1500, dark blue, the Wilshire 5000, purple and the Russell 3000, light blue, and you can see that for the last 20 years they are pretty much in lockstep with each other. This is usually because the Wilshire 5000 is inclusive of the Russell 3000, and the Russell 3000 is inclusive of the S&P 1500. They are made up mostly of the same companies. There’s a point at which it doesn’t matter if you add another tiny company. It’s simply too small to move the needle in either direction. So when we talk about owning the great companies of the US and the world, we’re talking about owning them all through a low-cost index.

There are many ways to own the index. The graphic we’re going to show you in a second expresses different subsets of the great companies of the US and the world, different indices. The first four columns can be accomplished by using purely index portfolios. In the simplest portfolio of great companies, there is a single holding a global all-cap equity portfolio, the leftmost column. There are multiple options for global all-cap indices as well as domestic indices. There is the S&P Global BMI, which includes over 14,000 companies from 25 developed and 24 emerging markets. There is the FTSE Global Equity Index series covers 16,000 stocks from micro-cap companies to mega-cap companies across 48 countries, and the MSCI All-Country World Index contains nearly 15,500 stocks from 47 different countries. All three of these indices cover 99% of the global investable equity universe.

If you understand, as I do, that market timing and security selection cannot add value over time, that in fact, they are far more likely to result in reduced performance though longer you pursue them, then it is arguable that one of these three could, even should, make up the entirety of your equity portfolio, and in my personal portfolio, my largest holding is one all cap global portfolio such as this. It is simple, it is tax efficient and it takes absolutely no work to manage it. If you want to pursue this path, just Google S&P Global BMI All Cap ETF or FTSE Global Equity All Cap Index ETF or MSCI All Country World Index ETF. That should lead you to a specific ticker symbol that you can buy. Alternatively, you could check my second book, mindful Investing. Check it out at the library, buy it from Amazon and find a list of low cost ETFs and funds in the appendices.

All that being said, you don’t have to stay in the left column. You can add complexity by moving to the right. In column two, you can split the simple global portfolio into geographies, domestic, developed, international and emerging markets. You could move to the right one more. In column three, you can separate the geographies into growth and value, and you can move to the right one more. In column four, you could divide growth and value into small companies, medium sized companies and large companies. Finally, in column five, which is the furthest right column, you find the most granular and complex way to own the great companies in the US and the world buying individual equities. The further you move to the right, the more complex and unwieldy your portfolio will be. You could create an equity portfolio using indices alone that has 18 different holdings with very little overlap.

This is the fourth column. Rebalancing such a portfolio is far more complex and time consuming. It creates tax inefficiencies and fee inefficiencies and just forces you to think and work a lot more to manage it over time again, without any provable long term performance improvement. If you do this yourself, I’d recommend you keep your portfolio in the two left most columns. Most advisors will do their work in columns three and four, not that anyone could prove that doing so adds anything in the way of performance. I’ve done this my whole career. But it’s more likely that this is used to enhance the belief in the complexity of markets and challenges of investing and thereby somehow justify higher fees. As we said above, the academic evidence suggests there is little long term portfolio value in straying into the fifth column on the right, so I avoid it. Would recommend that you do the same. I’m not sure I’ve stated this plainly enough yet, so allow me to just do so before we wrap this episode up.

There are no facts about the future. We do not know what is coming next, and if we did, we still could not know how markets would react. There is no way to know, much less prove, that one portfolio will perform outperform another portfolio going forward, and there’s plenty of evidence to suggest that. The longer we, on our own or by hiring professionals, employ active management in an attempt to create greater performance, the lower the probability we will do so. Keeping it simple, adding money when we can, withdrawing money when we need to, is just as likely to get you there arguably more likely than all the strategic and tactical trading genius combined Over time.

Performance favors indexing. At the same time, quality of life, lower stress, fewer decisions, less regret also favors indexing. If you still feel the pull towards the attempt to select better investments or time the market, you’ve got to ask yourself where that pull is coming from. Is it ego? Is it hope? Is it regret from a past decision, or what else might be going on? Stay in the far left lane with broad based global indices and you will be happier and likely experience similar or better lifetime returns. Next week we’re going to wrap up this entire series focused on increasing your, our exposure to the great companies in the US and the world with some thoughts on socially responsible investing or ESG investing. So thank you for listening and happy investing.

0:15:17 – Speaker 2
Thanks for listening. Full show notes for each episode, which includes a summary, key takeaways, quotes and any resources mentioned are available at mindfulmoney. Be sure to follow and subscribe wherever you listen to your favorite podcasts and if you’re enjoying the content and getting value from these episodes, please leave us a rating and review at ratethispodcastcom forward slash mindful money. You’ll be sure to read those out on future episodes.

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