Brutally honest guide to not losing money in the market

**Shaan Puri** (0:00)
If you could tell me something in the next 15 minutes that would make me a better investor, what's the first point you would just hammer into my head?

**Barry Ritholtz** (0:06)
Oh my God, put the phone down. Stop trading.

**Shaan Puri** (0:21)
I think the interesting place to start is we've had a few different people from the school of investing wisdom come on. The value investing genealogy. Me and Sam, although we are not investors, we're definitely entrepreneurs first and then investing as a hobby sport type of thing. We're so attracted to it. We love the investment wisdom, especially your version, which is the aw-shucks common sense version of investing, which is less about how to be super smart and do advanced things and just how to be less stupid than you already are, and don't worry, you'll be fine. And so I'm excited to talk to you. You have a cool story.
You started off really in the content game, in the media game, blogging back in GeoCities early on with podcasting, and built a large investment advisory shop called, named after yourself. I think you guys got to what?

**Barry Ritholtz** (1:15)
That was a placeholder, by the way. That was not supposed to be permanent. Like, let's just call it Ritholtz for now, someone else said, and we'll find a better name, and then we never found a better name. The background is, go to law school, do really well, hate being a lawyer.
A client is running a trading desk that was a predecessor shop to E-Trade. And so I started on a trading desk and found it was just mayhem. It was just random and volatile, and I was more fascinated by why the people around me, some days were killing it, some days were getting killed. Like, what's going on with their process? And that sent me down the rabbit hole of behavioral finance. It just was the only explanation I found as to why the same person could be doing really well one week and applying the same process gets shellacked the next week. It's decision making, it's emotions, it's cognitive biases.

**Shaan Puri** (2:18)
Can you explain your Christmas tree analogy for constructing a portfolio?

**Barry Ritholtz** (2:24)
Sure, that's really easy. So we know that historically very few people beat the index on a regular basis. In any given year, less than half of active managers beat their index. You take that to five year, it's something like 21 percent. You take it to 10 years, it's less than 10 percent, one out of ten people.

**Sam Parr** (2:48)
So that includes huge firms?

**Barry Ritholtz** (2:50)
It includes everybody. Any active mutual fund, ETF, hedge fund, whatever. And then go to 20 years and it's a handful of names you know. Peter Lynch, Warren Buffett, etc.
So if the core of your portfolio is a broad index, you can't get alpha, meaning outperformance, if you're not at least starting with beta. And when we say people don't beat their index, it means not only are they not getting what the market gives them, they're getting less than that. So forget beating what the market gets, they're not even getting what the market gets. So pick a number, 50, 60, 70 percent of your portfolio is that core. And by core index, I mean US broad-based market indexes. Vanguard's VOO last week became the first ETF over a trillion dollars. And that's just a super low cost broad index. You want to own some overseas stocks, that overseas indexes, that's fine. Now the tree is the the garland, the decoration, the lights, the tinsel. That's whatever stink of your own you want to put on your portfolio. So if you like momentum, great. And you want a little more tech, however you want to decorate it. You know, we've looked at these assortments of different portfolios. They all more or less end up in a similar place. Some are a little better, some are a little worse. They all end up trailing the index.
If two-thirds of your money is in a broad index, well, at least you know you're starting with that basis point. And hey, I think Japan is great. I'm going to own EWJ or I think India is the next big country after Korea. So I'm going to own that ETF.
If you want to have a little bit of decoration on the tree, that's fine. Just recognize you're aiming to outperform and the odds are very much that you're going to underperform.

**Shaan Puri** (4:44)
So is this a little bit like when you do a diet and they're like, yeah, we're going to do a cheat meal on Sunday. And it's not that the cheat meal is good for you. It's just that it's probably the only thing that's going to keep you on the guardrails of the other six days of the week being on track. Is that why you even have the decorations or would it just be better to be 100% in the passive index and call it a day?