Darrell Armuth – Sensible Portfolios

Darrell Armuth is a financial advisor who is married to a dentist and has advised quite a few dentists and physicians on how to grow their retirement nest egg while minimizing risks and keeping fees to a minimum through using smart funds. He talked to us about:

  • What a smart fund is and how through their simplicity they are transformative
  • How diversification with smart funds reduces risk
  • The lower cost of smart funds
  • How through using smart funds you are investing globally

To access Darrell’s ebook A Case for Sensible Investing, click here.

Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines. Today, we’ll be talking with Darrell Armuth from Sensible Portfolios in Reno, Nevada. Darrell is a financial advisor who has advised quite a few dentists and physicians on how to grow their retirement nest egg while minimizing risks and keeping fees to a minimum. Darrell, welcome to the show, and how are you today, buddy?

Darrell Armuth: Hey, I’m well, Josh. Thanks for inviting me on to your podcast. I think it’s an exciting tool.

Josh Mettle: I appreciate that and I appreciate you spending some time with us, and you have a lot of interesting stuff to unpack. I’m going to jump into it, but before we get right into the meat of the questions, I would like to know just a little bit about your background and history, tell us how you got started with Sensible Portfolios, and how maybe you got started down the path of advising physicians and dentists?

Darrell Armuth: Well, this is how it rolled out, Josh. I was married to a dentist, and we had our second child, and we decided somebody had to stay home. This was back in 1991. There weren’t many dads staying home. I left my job in accounting‑ I’m a CPA‑ and I started raising my kids, and we ended up having one more child. What happened was I became a hobby investment advisor. I started managing money for friends and neighbors, and then, eventually, 10 years later, I had a full-fledged practice and my wife retired. I work fulltime.

Josh Mettle: That’s great. Well, I know that you have more patience than me. If you’ve become the fulltime dad there for a while, so you got me beat there.

Darrell Armuth: Yeah, it’s hard.

Josh Mettle: Well, that’s great. So, I understand now your practice kind of revolves somewhat around dentists and physicians. Tell us what you most enjoy and maybe what uniquely enables you to serve them better than colleagues in your field that don’t have that similar background and experience.

Darrell Armuth: Yeah, I think my practice focuses mainly on investment management. What I enjoy the most is getting to talk to young dentists and telling them that there’s a new and more intuitive way to invest, and somewhat more complicated is trying to convince older dentists that there’s an easier way to do it. That’s the most exciting part, and that revolves around, Josh, what I call are these new smart funds.

Josh Mettle: Interesting.

Darrell Armuth: These new smart funds were kind of a byproduct of an increase in technology back in the 1980s, and as technology got stronger, mutual fund managers were able to create more sophisticated mutual funds. It’s the smart funds that I like to introduce my clients to.

Josh Mettle: Well, that sounds very interesting.

Darrell Armuth: Yeah, before we go on though, Josh, I want to let you know that when I say the term smart funds, I’m not referring to any brand of funds, you know, having people off their main market, the term smart funds. I’m just using it kind of like I would use the term smartphone. You know, there’s smartphones, and then there are smart funds. That’s what I’m kind of driving.

Josh Mettle: Okay, that makes sense. Well, tell us a little bit more about that, what are the components of smart phones and how does that all work?

Darrell Armuth: Well, the successful smart funds are able to integrate or incorporate components of successful investing into their funds. What it does it makes investing from the investor’s point of view a lot more intuitive. In fact, these new smart funds, Josh, are so streamlined that investors often overlook how transformative they are. Have you ever heard Steve Jobs say, “Simplicity is the ultimate sophistication?”

Josh Mettle: That’s beautiful. I love it.

Darrell Armuth: Yeah, that’s what these new funds are like. They make people question if they’re even worth investing in because they’re so simplified and streamlined. I’ll give you a couple of examples. One is asset allocation. Asset allocation, as you know, refers to how you slice up your investment pie. It’s a very important concept because about 90 percent of your portfolio’s return is driven by how you allocate your assets. Traditionally, the decision to allocate your assets was made by the investor or his or her advisor. But today, the strategic decision on how to allocate your money is made by the managers of the smart funds, and believe me, Josh, these guys are really smart. They designed these – these new funds are designed over 50 years of peer-tested academic research. As you probably know, last October, the Nobel Prize in Economics was awarded to a University of Chicago professor for his work involving how to slice the investment pie. He and two other Nobel Prize laureates are a team that builds and manages smart funds. That’s one component that’s inside these new funds.

Another one I think is diversification. Diversification is how the smart funds manage risk. Just think of a suspension bridge, and the deck of the suspension bridge is held up by these large cables. These cables are threads of tiny small wires bundled together, and the bundling of these cables eliminates the risk if one wire should break. That’s exactly how diversification works. They own a lot of companies in order to reduce the effect of one company going under.

Now the smart funds, they take this power diversification, they take it way out there. A traditional portfolio might own 300 to 500 securities. Some of the smart funds today hold more than 10,000 securities from over 43 countries.

Josh Mettle: Wow.

Darrell Armuth: Yeah, and they put them in one fund. You know what the annual report is that’s the report of list of all the holdings in the fund? When you got the smart fund annual report, just page after page after page of holdings, so when it comes to diversification, more is better. Probably, the next real benefit to these new funds is they lower the cost of owning a mutual fund. I would say easily the cost of a new smart fund is 66 percent less than the traditional fund. As a general rule, higher fees and expenses in a fund generate lower returns. Once again, the smart funds have solved the big problem, that is, how do you control investment costs and expenses?

It’s kind of like the Tour de France, Josh. Riders go faster on lighter bikes, and your portfolio is going to grow larger when your fees and expenses are reduced. There’s three good examples of what a smart fund can do. There’s the portfolio is designed based on academic research. There’s proper global allocation, and the cost of ownership is very low.

Josh Mettle: Wow. So, just a question on something that you said there. I understand the concept of diversification. Talk to us just about asset allocation. Now, are they investing in small cap, large cap, emerging, biotech, commodities? Is it diversified not only in terms of you know, you mentioned 10,000 securities in 43 countries, but is it also diversified as far as types of assets such as ‑

Darrell Armuth: Yeah.

Josh Mettle: And that kind of thing as well?

Darrell Armuth: Yeah. That’s probably the real benefit. The smart funds that I used, they’re basically fund-of-funds, Josh, and they hold maybe 10 or 11 mutual funds inside the one fund. That’s how they do it.

Josh Mettle: Got it.

Darrell Armuth: And there’s – they get small cap, large cap value. I’ll give you a good example. A new strategy was released. Academic research identified a subsection of the global stock market that had a positive risk-reward relationship, and these new mutual fund managers took that research, took the findings, and updated the smart mutual funds. They updated the funds from their side, so the investor automatically drives the value of that research without having to buy any new funds.

Josh Mettle: Interesting.

Darrell Armuth: Yeah.

Josh Mettle: Well, can you tell us what types of smart funds are out there, and maybe give us some names of maybe the ones that you think are better than others?

Darrell Armuth: Yeah. There’s probably two funds out there, two mutual fund families that are the leaders in the smart fund world. One is Vanguard, and they’ve been around since 1980. They’re known for their index funds. For your readers that don’t know what an index fund, it’s just a mutual fund that tries to track the performance of some financial benchmark. It’s pretty simple. It’s pretty vanilla. Probably the Apple of the smart fund world is Dimensional Fund Advisors. They have the smartest smart funds. They’re the company that I referred to earlier that had the three Nobel Prize laureates on their team. Dimensional is kind of a leader in generating these new funds that tackle the components of successful investing. What was I going to tell you about that?

Josh Mettle: So, Dimensional actually has these three laureates that work on their team, and they’re deciding of the mutual funds that are out there, they’re looking at the different diversification, the different asset allocation of those mutual funds, and then, they’re deciding which to pool together to make their smart fund, and then, I guess on top of that, they’re deciding how much of their assets they want to invest in each of those mutual funds? Is that how that pie kind of all comes together?

Darrell Armuth: Yeah. They pretty much, I’m not sure if it’s the actual professors, but the team using the professor’s research tried to optimize the risk, you know how much risk you’ll assume for the expected return. So, they sit down. They crunch the numbers, and they say, “We think a prudent investment portfolio would be 10 percent large cap, 15 percent small cap, 10 percent emerging markets, 5 percent global real estate.” They kind of design it based on what their research leads them to. Basically, if you think about it, Josh, you get when you buy one of these Dimensional Mutual Funds, you basically get the whole academic community working for you because what happens is all the universities in the United States that do financial research like this, they all kind of meet together, and they all talk about findings. I think Dimensional is kind of where they all end up. That’s probably the biggest benefit of these funds as you get a lot of proven theory.

Josh Mettle: So, I’m trying to just wrap my brain around this, and what it sounds like you’re saying they’ve essentially taken their hands around the entire globe and they’re saying, “Okay. We’re going to take a piece. We’re going to take a little bit, and we’re going to put our basket around all of these major economies and all of these sorts of asset classes.” I’m guessing that you talked about the bridge and the cables being bundled together, I’m guessing that the theory or the science behind this is that if we have a crash in America, let’s just say, that that money really doesn’t disappear off the face of the planet. It just moves, right? It moves into emerging markets or it moves into biotechs, or it moves into more developed economies in Europe, and it just kind of almost like the tide of an ocean, it just kind of swaths over to this side. And so, when they’re so diversified with these smart funds that if the America is, you know, is certainly the leader still in Fortune 500 companies and major industry, but if we lose a big chunk there, that assets are just going to shift to other places, and you’re going to gain on the other side of the planet. Is that kind of how that all works out? Is that the thinking behind it?

Darrell Armuth: It’s exactly, Josh, and here’s the best example. Remember the tech bubble in 2000?

Josh Mettle: Certainly.

Darrell Armuth: In 2000, I think it was ‘01 or ‘02, the S&P 500 dropped 50 percent in two years.

Josh Mettle: Yeah.

Darrell Armuth: Well, this globally diversified smart funds went down 8 percent during the same period. That’s because most of the turmoil took place in the large cap U.S. companies. So if you were globally diversified, you didn’t even get beat up during the tech bubble.

Josh Mettle: I just need to wrap my brain around this. If we took a 50 percent bath here, and globally, in the smart fund, we only an 8 percent bath, what that means to me is that 42 percent of the loss of funds here locally just moved its way over to other securities around the world. Eight percent, the actual 8 percent loss in the smart funds was probably people panicking and pulling money into other asset classes like maybe real estate or cash or bullion or something like that‑

Darrell Armuth: Yes.

Josh Mettle: That wasn’t a part of the basket, but boy what an incredible insulation against the government doing something crazy or a war or something, you know, monstrous like that.

Darrell Armuth: Yeah. Diversification is how you manage risk. When the Great Recession took place, sometimes you just can’t avoid the damage. That was the time when the whole globe was devalued. It was a rough time for these smart funds as well, but if you stayed in them, you’re more than whole right now.

Josh Mettle: So that brings me to my next question. Whenever we talk about diversification that it’s such that it minimizes risk, I always wonder, “Okay. That sounds great because I like less risk, but is my money still working for me?” So, I don’t know if you have those numbers in front of me or you can give me some approximates, so let’s say the S&P is up whatever it is, 30 percent, how do these smart funds compare to the rebounding effect that we’ve seen since the last crash?

Darrell Armuth: Well, you know I have these model portfolios that pretty much track these smart funds, and if you look at my ultra aggressive model portfolio, it’s 100 percent stock, and the S&P was up 32 percent, 33 percent last year, and the global pie was up less than 26 percent.

Josh Mettle: Wow.

Darrell Armuth: And if you go back to 2008, aggressive 100 percent stock, global stock was up about 7 percent a year. So, I guess the answer to the question is that last year, the global market underperformed the S&P but not that much.

Josh Mettle: Yeah. Here’s my thought on physicians in private practice, dentists and the like, and you tell me if you agree. The primacy concern to me isn’t just putting yourself in a situation where you’re going to be able to hit a home run because with consistent savings, with living within their means, I hate to say the B word, budget, but you know, consistently putting some money away and living within your means, they’re going to have plenty of nest egg at the end of the road. It’s the catastrophe that seems to be more the risk than the need to hit a home run. Would you agree with specifically with physicians and private practice dentists, this is a smart class for them.

Darrell Armuth: Yeah. I agree that physicians and dentists discount how successful they’re doing at an early age, and they think they have to take more risks if they want to be successful in the end. It’s probably just the opposite ‑

Josh Mettle: Yeah.

Darrell Armuth: Just go plain vanilla, buy a smart fund, and go play baseball with your kids.

Josh Mettle: That is ‑

Darrell Armuth: You know the way to look at it, Josh, is money doubles every so many years, right?

Josh Mettle: Yeah.

Darrell Armuth: It flips. I call it a flip. When you make a bad decision midway through life, say you’re 35 and you get out of the market and you buy some real estate and it goes down, you lose. What happens when you get out of them, when you make a bad decision during your investing life cycle, you end up losing your last flip in life. So, say, you have $2 million, and your last flip in life takes you to $4 million, right? So when you make a stupid mistake at an early age, it’s costing you a $2 million flip. That’s probably the biggest mistake I see dentists and doctors make is that they make bad decisions that cost them their last flip in life.

Josh Mettle: I think that’s well said, and I’ll tell you what. When you talk about financial security, I think you said such a true statement you said. We’re paraphrasing, but you know “Financial security is being able to go play baseball with your kids and just be present and being there with your children.” That speaks to me, having two younger children.

Darrell Armuth: Yeah.

Josh Mettle: I love it.

Darrell Armuth: Yeah.

Josh Mettle: Well, I got you off track with Dimensional funds. Did you want to say anything else along those lines, along those Dimensional funds?

Darrell Armuth: No, you know, the big difference between Dimensional and Vanguard is you have to access Dimensional products through an approved advisor. They aren’t available to the public. Sometimes people will say, “Oh, Vanguard is better because you don’t have to pay for the advisor.” My thought on the thing is between – there’s always a debate between Vanguard versus Dimensional. Well, I look at this: You debate on who’s the better basketball player, Lebron James or Michael Jordan. It doesn’t matter who you pick. Both are going to make your team a winner, right?

Josh Mettle: Yeah, absolutely.

Darrell Armuth: Don’t get hang up on debating who’s’ better. Just put your money in one of them.

Josh Mettle: Great. I love it. Just a great analogy.

Darrell Armuth: Yeah.

Josh Mettle: Darrell, in our practice, we work with a lot of residents, fellows, and likewise young attending physicians. And I’ve always believe that even if they have very little to invest early on, it’s a good idea to get started if for no other reason than just to further their financial education. I noticed you’ve written an article. It’s the Five Things Every Young Investor Needs to Know, and I wondered if you would just unpack that for our med students, residents, fellows, and young attending physicians that might be listening.

Darrell Armuth: Yeah, and I think the information I’m going to tell you about that blog, these new smart funds are the answer.

Josh Mettle: Wow.

Darrell Armuth: So, the first point is you got to live below your means. I know that’s true because I have older dentists that don’t, and you see the problems they have when they prepare for retirement. I think you have to probably buy a smaller-sized house, don’t drive those big, fancy cars, and put that money in the bank. Put that money into a smart fund, and let it work for you. Living below your means, that’s the secret to life.

And then, you got to develop regular savings habits. You have to take 10 percent off the top of your paycheck and put it and invest it. A lot of people don’t do that, so get in the habit. If you can live below your means, and you can save 10 percent of what you make, and you don’t make any stupid decisions, you’re going to have a nice retirement lifestyle. It’s that simple.

Then, I think the other comment that young investors need to know is that when you’re young, invest in the stock market because let that money work for you. Maybe it’s going to go up and down short-term, but over a 30-year period, you can probably expect the stock market to generate around 9 percent, maybe 8 percent. If you just keep putting that money in every month, every paycheck, every year – here’s the funny thing, Josh, is investors don’t realize how powerful money is until they get like $1 million and they wake up one day, and they go, “Crap. My fund went up $85,000 this year.” When you got $30,000, and it goes up $300, yeah no big deal, but when you get to those bigger numbers, and you start seeing the $200,000 increase in your portfolio, that’s when you become a believer. So, the trick is to believe before, when you’re young. So, that’s pretty much what my blog was about.

Josh Mettle: I think you nailed it on the head, and I just want to park here for just a minute because you’re more seasoned than I, and I remember in the not too distant past, having a smaller nest egg and thinking, “Well, it’s almost inconsequential.” And so, I need to try and put this in a penny stock because I’ve seen these penny stocks, you know, with my $5,000, that could turn into $50,000, and ‑

Darrell Armuth: Yeah.

Josh Mettle: But I think so many people have a natural intuition to invalidate their small contributions early on and make then want to strive for a home run, and that intuition or that kind of natural reaction is exactly the wrong way. It’s like if the same reaction is pausing at an intersection and then getting nailed when you should have just put on the gas and gone through the intersection, it’s just a human reaction that is faulty. I think what I’m hearing you say and the point that I want to drive home is that I don’t think it matters if it’s going through residency and fellowship, and it’s a couple of hundred dollars. If it’s 10 percent of a $1,500 paycheck, great. It’s $150, but the point is you’re creating the ritual.

The point is you’re creating the habit, and if you don’t create that habit young, and the point is there will be a point where you look at that and go, “Hey, I got a couple of grand in there. I’m going to start thinking through this a little more.” You’re going to start your investment education, and it’s not something that you get. This financial education is not something we get in medical school. Starting down that track with such an irrelevant amount of money is actually incredibly important in the long term, and I think you have a couple of stories of some dentists that you work with that didn’t take those first steps, those first seemingly inconsequential steps. And because they never got started, it caught up to them and maybe got started way late in the game. I’d love to hear those from you.

Darrell Armuth: Yeah, you know. Here’s my story is, I married a dentist, and we were about 29 years old when we got married. In Reno, the dental community is very close knit. So, in the early ‘80s when my wife took me to dental society meetings, everybody was talking about how smart of investments they were making. They kept thinking, “I got it. This is the home run that you were talking about. I’m going to hit that home run.” Everybody was talking about it because they didn’t have the smart funds available at the time. Investors made, I think, poor decisions, and one by one, these dentists, not all of them, their home runs blew up and that set them back 10, 15 years. That’s my story is that from my 20 years of investment advisor, it seems to me when you get about 40, 45, 50, is when you make your most expensive mistakes because you start getting some real money, and then, you still think you have to hit that home run and you don’t‑

Josh Mettle: Yeah.

Darrell Armuth: And you miss it and you strike out. That’s my story –  is,  when you get middle aged, just continue to be focused on contributing each month and not taking an excessive risk.

Josh Mettle: Well, we unpacked a lot in 30 minutes, and that’s exactly what I try to strive for in these podcasts. You taught me something, and so, I appreciate you. I appreciate your time, and I think that our listeners may want to find out more and have questions. And so, where can they reach you and how they find out more about your strategies and these smart funds?

Darrell Armuth: Well, first of all, I like to say I love working with young dentists. If you only have $500, well I’ll get you started. I may not charge you a fee because I can’t any money on $500, but I will get you pointed in the right direction.

Josh Mettle: I love it. Thank you.

Darrell Armuth: You go to my website, sensibleportfolios, with an S, dot com. I have my blogs there. I have an e-book, Josh, that talks about kind of introductory overview of investment and investment terms and some of the stuff we talked about today. Go to my website. If you need any help, give me a call, and we’ll see what I can do.

Josh Mettle: Darrell, thank you. Sensibleportfolios.com, and if they want to maybe email you directly, are you okay to give that out?

Darrell Armuth: Sure. It’s just darrell, my first name, D-A-R-R-E-L-L-, two R’s, two L’s, Darrell@sensibleportfolios.com.

Josh Mettle: And with your permission, we’ll put those links up on our site as well. We may even put your e-book up there. Would you okay if we put your e-book‑

Darrell Armuth: Sure.

Josh Mettle: At least a link to your e-book‑

Darrell Armuth: Sure.

Josh Mettle: On our site?

Darrell Armuth: Yeah, yeah.

Josh Mettle: Okay, great.

Darrell Armuth: You know I have a pretty interesting – Basically what I’ve done, Josh, is I’ve simplified the investing process by creating six model portfolios to choose from.

Josh Mettle: Okay.

Darrell Armuth: You know, ultra conservative to aggressive, and I put my performance numbers out each month, so if any of your listeners want to see those numbers, I’m glad to share it with them.

Josh Mettle: Excellent. That’s great. Well, I appreciate you. I appreciate your time, and I’m sure we’ll be connecting soon. Thank you very much for your time today, Darrell.

Darrell Armuth: Thank you, Josh.

To access Darrell’s ebook A Case for Sensible Investing, click here.