Bonds, Bots, and Bullion: Making Sense of It All for Investors

Well, welcome, everybody. Thank you for joining us today on our webcast about bonds, bots, and bullion, which is our fun way of having a conversation on interest rates, on artificial intelligence, and then, of course, gold. So I'm Mark Gochnour, head of global client services. I'm joined today by Jake DeKinder, head of client communications, and a very special guest today, Gerard O'Reilly, who is our chief investment officer and our co-CEO. Now, we have received some outstanding questions that are going to find their way into the conversation here today. Thank you for sending those. Feel free to send them along as you go through the discussion here today. I'll be following those. And then also the slides are available for download. If you just go down a little bit, you'll see an event resources tab, click on that, and you should be able to get access to the slides we'll be reviewing today. So with that, let's dive into it. Lots of good stuff to talk about here today. Jake, as always, good to have you in the studio. You are normally the special guest, but not today. I do not take offense today. We got a better special guest today. We got a better special guest. Gerard, great to have you. Thanks for joining us today. Thanks for inviting me to the Mark and Jake show. Always a pleasure to be here. Great addition to it. Yeah, you fit in very nicely. All right, so here are our roles today. I'll be monitoring questions as we go along. Jake, you manage the slides. We'll be doing some drawing. Gerard, your role is to give really smart answers to the questions that we send your way. Hope not to disappoint. All right. Ready for that one? I'm ready. Okay. And probably correct some of the things that Jake and I say along the way. All right, so let's get into it here. Now to start the conversation around bonds, I wanna start out looking at a slide to see what, we say the term interest rates, have looked like over time. So let's take a look at what we've seen historically with the Fed Funds Rate. Now, as a reminder, this is the overnight rate that banks charge each other when they borrow and lend with each other. And you can see that's ebb and flowed over time, in some cases very steep. What we're looking at here goes through March of this year. So it does not include that quarter of a point that 25 basis points that the Fed just announced a couple days ago. So that'll be up there right around 5% or so if we're update that through two days ago. Now, one thing I want to do to this is let's overlay this with the yield of the 10-year treasury. And there's a couple points I wanna highlight in doing so. And the first point is when we think about what rates are going up, first question is, does that mean all yields go up exactly the same? And this case, we can look at this chart and say that it doesn't. That these things ebb and flow very differently. There's a lot of factors that go into what's driving the yield on any particular bond at the moment. So we see that on the yellow line. Now the other thing I wanna highlight here, and this is, Gerard, something that you pointed out, and I think it's a very important point, is when you say interest rates, be very clear which rate are you talking about because there's many out there. Yeah, there's many interest rates out there that might drive the returns of a globally diversified bond portfolio. And the Fed Funds Rate is one rate among many, but you've just showed a 10-year rate. But there's also corporate rates, triple As, double Bs, triple Bs, all the way, you know, across the corporate spectrum. You have different currencies. Bonds are issued in euros, in British pounds, in Australian dollars. So there's lots and lots of different interest rates out there. Many hundreds of different interest rates, in fact. And the way that we look on it is, well, you know what they have done, rates have gone up, you don't know what they will do, which is the important question, therefore, diversify and, you know, use that hundreds of interest rates to your advantage, either to increase returns or manage the volatility due to a change in any one given rate. Well, and that's something that I think you phrased very well is, you know, you used the past to inform when you thinking about the future, but we did get a question submitted, particularly around the 10 year, that said specifically on the 10 year, what's gonna happen with the 10 year rates going into the rest of the year? So, I mean, you kind of alluded to it just now, but I know there's been tons and tons of research. Is there any way possible to forecast what rates are going to be going forward? There's no reliable way to say what rates will be, any given rate, the 10 year rate, the five year rate, the one year rate, will be, you know, one year hence, two years hence, three years hence. You can't do that reliably. But the good news is to have a successful investment experience, you don't have to. If you're well diversified and use the information that rates are giving you about where expected returns are higher and where they're lower, you can have a good risk managed portfolio that focuses on higher expected returning securities. And so you don't have to be able to forecast that to have a good portfolio. All right, we'll unpack that here in just a bit. We just looked at a trend there of what rates have been the last 20 years or so. But Jake, let's take a deeper look into where they are today. Yeah, definitely. I mean, we know that we've seen a change in the shape of the yield curve over the last couple of years, and looking at this chart right here, I mean, we've even seen a change since Q3 of last year, and we know that rates are moving all the time. Some of the questions that we're starting to get in now is, let's address the inverted curve. You know, there's a lot of articles that are written of, there's an inverted yield curve, and therefore it's going to predict a recession, right? It signals a recession. And to me, that's a broader point, which is investors, a lot of times, are looking for some signal that's gonna give them that certainty about the future. I see X and, therefore, Y is going to happen. And Gerard, I think that's one of the more challenging things with investing. And you hit on the point of we don't know what's gonna happen in the future. If it was that easy, if I could look at this signal and it was going to happen, quite frankly, investing probably would be a lot easier. I agree. You know, there's no one signal that's going to be able to predict the future for you. Market prices do the best job that we know how at incorporating all available information. They're looking to the future, so you can use them in your portfolio. But I think the real underlying question there is, well if I were to tell you that we're going to be in a recession three months hence, what are you gonna do about it? And if you know, probably everybody else knows, it's already reflected in market prices. So from an investment perspective, an asset allocation perspective, there's nothing that you have to do about it. Markets are already taking care of that and reflecting them in prices today. That's a great point there. I mean, you know, we get all different types of questions that come in, and I love what you said, "So what are you gonna do about it," right, if you have that information. So you're gonna drastically change up your asset allocation? Well, if your goals haven't changed, why are you making major changes to your allocation? Exactly. I think there's two ways to look on it. And one is you may change some things that you do, let's call it, in the real world. So you may say there's a recession coming, so unemployment may be higher, and other things may impact your spending habits. So you may decide to save more, or you may decide I shouldn't retire quite right now, I'll put it off for another couple of years. They're decisions that can have a meaningful impact on your quality of life in retirement, or whatever you're saving for, but changing your investment portfolio because of an inverted curve or that you think you know there's a recession coming that's far less useful in terms of improving your outcomes in the future. Well, and that's really where a financial professional can come in. I mean, those are productive discussions of, have your goals changed? Is there some life circumstance that have changed? I mean, that's why we've always worked with financial professionals to help create that in a great investment experience. But to your point, be very careful changing it up because, one, you think you have some prediction about the future, you're concerned about this, and certainly don't make major short-term changes to the allocation on a regular basis. One of the other questions that we're getting a lot, that's coming in a lot, is you're looking at this curve right here, we're looking at where rates are, and you might look at this curve and say, "Well, the rates are higher on that short end of the curve." So then we start to get some questions in which is, should I change my duration or my fixed income allocation? Or maybe more specifically, "Hey, I'm seeing these CDs, these one, two, three-year CDs, and they look really attractive. Should I go into that? You know, Gerard, how do you think about the question around CDs in general? Yeah, I think that I'll broaden the question a little bit out into what are your goals when you're investing in fixed income, and there's lots of different goals that people have. Some people are saving for something that they wanna spend on one year in the future, right? Then CDs may be a useful saving vehicle for that. They have a known certain amount of money they want to use. Often, though, people are saving for something 30, 40, 50 years out into the future. And there you think about your goals as maximizing expected return for a given level of risk that you're willing to take. And, of course, diversification is your buddy whenever it comes to investing. So you may use information in the shape of the yield curve that tells you where expected returns might be a little higher now and where they're a little lower now. But that doesn't mean a broad-scale change to all of your fixed-income investments because of the shape of yield curve in a well-balanced, globally diversified portfolio in stocks and bonds. So I think it just depends on the goal, and all questions in relating to investing start with a goal and then what are the tools that help you achieve that goal? And then what's the discipline that's required when you're using those tools to maximize the chance of achieving that goal? I like the conversation you guys are having around that. I feel like I'm in a tennis match, kind of going back and forth with that one. But the conversation's very appropriate for some of these questions we got. You know, one was, you know, "Why would I want even own bonds at all right now?" Which I think goes back to that point you were probably making there around, should I just get a CD, on that one. And then another question quite the opposite, you know, was, "Is it time to overweight longer term bonds right now?" So it's a good point to go back to the goal, and Jake, I think it gets challenging at times perhaps to stick to the goal when we go through some tough times. Last year, obviously, interest rates went up, that had a negative impact then on the dollar value of bonds. So we get that question then of, well should I stick to my plan as I'm thinking about some of these bonds because I just took a loss on them. Should I think about things differently? I don't think that 2022 surprised equity investors. I think people know that the stock market can have reasonably large drops. I do think that there was a little bit of surprise in 2022 around fixed income allocations. But to your point there of, you know, have your goals changed? And if the answer is no, let's talk about how we can think about what happened in 2022. So, you know, going into 2022, we were in a a relatively low and relatively flat environment for interest rates. Now, what happened in 2022? Yields went up across the board in a lot of different areas. And so what's gonna happen to the price of my bonds? Well, they're gonna go down in value, and that's what people experienced. So now I'm at this lower starting point here, but what's also true is, is that we're in a new environment where fixed income where, as we move out towards our goals, we may have the potential to actually be at a better spot out there in the future. And let's talk just briefly about what this crossover point is right here. You know, we go out and we talk with financial professionals all the time, and we ask 'em questions about their fixed income allocations and clients that are in them. And I'll ask them and say, "Hey, you know, how long do you think you're gonna keep your clients in average in this bond fund?" And most of the time they're gonna tell me, "I don't know, 15, 20, 25 years," a reasonably long period of time. And then I ask 'em a follow-up question and say, "Okay, so what's the average maturity of your bond portfolio?" And we can call it duration, but we don't need to get too technical. Just thinking kind of in general the average maturity of the bonds in there. And they normally say, "I don't know, four, five, six, maybe seven years." But those two inputs are really important for bond investors in the current environment because as long as your time period you plan to stay in the fund is longer than that average maturity or the duration of your fund, you actually are probably gonna be better off in the long term as a bond investor sticking to your goals. Again, if you're in this area right here and you sell, yes, you will have a loss. But what we experienced for many investors in 2022 in their bonds, quite frankly, was probably more of a loss on paper than an actual loss. And those that are gonna stay for 10, 15, 20 years in there, they're gonna end up over in this part, and that actually could be a very good thing for them. So it comes back to what Gerard said of just get real clear on your goals, and if, coming off of 2022 into 2023, your goals haven't necessarily changed, I don't know if I can make the argument that you should make a major change to your fixed income allocation. Gerard, how do you think about that? I agree 100%. I mean, there's always a silver lining. It was a pretty challenging year from a returns perspective, but the expected returns on the bonds have gone up. And so that's the point that you are making, the expected returns of the bonds have gone up. Now, are you going to be there long enough to enjoy those higher expected returns to offset the loss that you've just experienced? 'Cause that loss is already in the books, it's in the past. Investing is about looking to the future. And I think that's the way to look at it. We have a new level of interest rates now, and that implies new expected returns going forward. And interest rates change every day and so they will change going forward, and I think that after 2022 there's no new evidence that would suggest that we can predict where all those many hundreds of interest rates are going to end up a year or two years, or three years from now. So if we haven't learned anything that new about bond investing, we might have learned something new about ourselves and our own risk aversion, but we haven't learned that much new about the markets, therefore, why should your investment approach change? That's right. And Mark, sorry, just quickly, we should know we've got a great piece that's actually, and I'll write it on the chart here. You know this is, it's called short-term pain or long-term gain and that's the title of the piece when we think about 2022. And it's available to financial professionals, but it's also available to investors, it's an investment ready piece for investors that can kind of walk through exactly what we just discussed here. Yeah, and for the audience out there, reach out to your advisor, and they can get you that piece there. Gerard, I wanna go back to a point you made there about what we learned last year, and I think one of the things that we just got reinforced is diversification works. There's a question here just around the role of international bonds and different, you know, yield curves that we see outside the US, and, you know, did that help us as a US investor this year? And it did, and I think there's two parts of that question. Diversification works, but diversification does not mean that you never have a negative return. You can be very well diversified, and in our view, that's generally going to be the right approach, but it doesn't guarantee that you're going to have positive returns all the time. What diversification does is it prevents you or lowers the probability of having a catastrophically negative return. And if you are invested in just one bond and that one bond or that one issuer went bankrupt last year, that could be a catastrophic outcome. But if you're invested in the bonds of many hundreds of issuers issuing in all different types of currencies, that's gonna smooth the ride as you kind of go forward and your overall investment experience. Okay, let's sort of shift gears, we'll stay to somewhat on the topic here. A couple questions coming in, which is very consistent with what we received prior, which gets into okay the government debt and the debt ceiling, the risk of default, which I guess it's always possible, but I would put it as extremely, extremely low. But I'm gonna just throw it all out there, Gerard, then you can sort of give your thoughts and weave through this. So we have that, the national debt. I wanna read a couple questions that came in, and I think it's probably somewhat related to that as you think about the debt, perhaps the debt ceiling. A couple questions on the US dollar as a currency so let me read these. One was, "What would be the impact of the US dollar no longer being the sole international trade currency?" And then, somewhat related is, we're getting a question around "What happens if there's a collapse of the dollar?" Which I think you're kind of, for me, I wouldn't say odd, but maybe an aggressive positioning to say, "Hey, we go from, yeah, there's some debt out there to the collapse of the US dollar." So I'd love to get your take on how we think through some of those things. You know Fama had a interesting piece recently. He did an interview online where he was talking about this very question, and he made the point that, you know, transactions happen in lots of different currencies, but they're often stated in terms of US dollars, and so you could change the currency, and that's the currency, you know, the de facto currency is the currency that things are usually stated, and you can change that de facto currency, but transactions are still happening in lots of different currencies. So that by itself doesn't necessarily mean much to what the US dollar will do or won't do going forward. I think people often extrapolate from recent pasts, so has the dollar depreciated recently and if it's depreciated recently, they often say, 'The dollar is tanking.' No, the dollar has gone down in value, we don't know what it will do going forward. And there's a couple of lessons there, in my view. One is that, well, what was the impact of that dollar having gone down? Well, one is that it enhanced the returns of your portfolios that hold non-US stocks because they're denominated in other currencies, and those currencies appreciated relative to the dollar. So you actually had a benefit from that in your investment portfolio. Two, if you're going on a vacation abroad, you may not be able to afford as much because a dollar is worth a little bit less than it was a few months ago. There's been so much academic work done on trying to predict what currency movements will be in the future over the next one month, three months, you know, and so on and so forth. And that flip a coin, that's kind of the summary of that academic research. It's incredibly challenging to predict that with any kind of accuracy such that you can make, you know, an investment decision from. So my view on it is be globally diversified, then your assets are going to be invested in companies that produce revenues in dollars, revenues in euros, revenues in British pounds, revenues in all different types of currencies, and that ultimately leads to what their values are going to be worth. And so if the dollar goes up or down in the future, you know you have a broadly diversified portfolio. So back to diversification being your buddy, that's always a good stock answer to help address any client concern. Well, and from a US investor's perspective, owning non-US that gets you a little boost on some of those returns as well, if in a declining US dollar there. Correct. So I have to buy nauseated wine when I go overseas, is what you're telling me on that one? All right- Maybe we cut back on the amount of wine. Cut back on it. Let's not go that far. All right Jake, one of the things that we talk a lot about is when you get certain questions, you say, "Okay, well, what's my alternative? Okay, if I'm worried about the stock market to decline in my stock, what's the alternative? You go to cash?" It goes back to the goals, but Gerard, I go back to you then, So let's just say, what is the alternative to the US dollar? And I'm getting way over my skis on this from a macro perspective. You and me both. But you think about, let's go back to your comment there about so many of these things are using US dollar for transactions. What do you need to be a dominant world currency? You need to be a dominant economy, probably a very stable political environment. And then the infrastructure's already in place, where everything's built around using the US dollar. So I just say, okay, with that said in mind then, so what is the alternative? And I just don't know what else is quite out there that would be a true threat to that. Well, that could be very accurate. What is the alternative, and how would that change over time? We've seen alternatives like the IMF uses the SDR, so it's a basket of currencies and that's already quite widely used and it contains many currencies weighted in a particular fashion. I think the more important question for investors is, what Jake highlights, well, what are you gonna do with that information, and is there anything actionable that you're going to do with that information? And unless you can use that information to out guess market prices or predict the future better than markets forecast the future, there's nothing actionable in your investment portfolio from that information. I think that's always the important point, which is, when you get these types of macro questions is, how does it relate to your investments, and how is that not currently reflected in the prices that people are transacting at in the market today? And then we think about currencies, they're always fluctuating, sometimes pretty significantly in short time periods, and over longer periods of time, we think expected returns from that are probably somewhere around zero over time. Yeah, around developed markets. I mean, that's kind of the expectation that, between developed market economies, that currencies go up and go down, but on expectation, they're kind of flat over time. And you know, it wasn't too long ago that we were talking about the strong dollar and how it had appreciated by so much over, you know, a period of a couple of months in particular versus, you know, the British pound. And there was a lot of discussion on that. So we go from these discussions of, well the dollar has gotten strong, what should I do? The dollar has gotten weaker, what should I do? And the discussions will be ongoing, and I think that that's organizing framework. Market prices contain information, no need to worry, be informed, but it doesn't necessarily have to change your investment approach. Okay. Great. It's a great point there though about reading about the strong dollar, now you're reading about concern about the weak dollar, you know, there's always sort of the hype of the day around so many things with investing, and you just have to be careful focusing on that short-term noise that the media, quite frankly, is pushing forward. I mean, talk about the depreciating dollar, I mean, go back to the mid-2000's. Look at the fall of the price of the dollar back then, it's larger than what we've seen more recently. So people, sadly, I think, get short-term memories, and the media helps to sort of exacerbate that. They don't help out with, "Hey, take that long-term view, have a little bit of a historical perspective," and to Gerard's point, come back to basic fundamentals about investing. Yeah, and we've been through all this before with many of these things. Okay, you want to talk a little bit of bots, a little artificial intelligence? All right, so Jake, we hear a lot about ChatGPT, and you and I like to joke that internally at Dimensional, we have one of those, we call it Chat Gerard. Chat Gerard, if I had to phone a friend, right at the top of the list buddy, right at the top list. And we do say that, you know, you can ask Gerard any question, you're gonna get a very thoughtful real-time answer, which is, you know, a real-time answer ChatGPT may or may not be always thoughtful. So we have Chat Gerard here to talk about some of this stuff. But, you know, going back to the headlines you were just talking about, I mean it has gotten intense, particularly these last couple months around the idea of AI, artificial intelligence. And so, Gerard, let me read three questions to you that came in around the topic, and then we'll dive into this a little bit. So we got several questions actually that have come in on AI. I'm gonna bucket them into three major themes. The first one is, "Can you use AI for identifying any missed pricings in securities?" Number two, "Is it real or is it just hype?" And then the third major theme is, you know, "How does Dimensional use machine learning, or artificial intelligence, in what we do day-to-day in the way we manage assets for clients? Yeah, you know, David has a great paper coming out on this very soon. And so I think that will be an interesting read for all those folks asking about AI. So let's take the first one. "Can you use it to identify overpriced or underpriced securities in either stocks or bonds?" And the way we like to think about the market here is it's our super AI, and, you know, the market is aggregating a lot of information from a lot of investors, and those prices are forward-looking. AI may be good at organizing data, but currently it is not good at predicting the future, right? That's not, typically, what your chat functions are trying to do. And so the market is great at organizing data as well, reflecting all of that information to the price. And it is about trying to forecast the future. That's what those prices are. And so our view on that is that we have lots and lots of evidence of new tools having come through the marketplace over time, new ways of organizing information, 'cause that's, you know, we have almost a hundred years worth of US market data. And over that time, there's been many technology kind of innovations. And when you look at the data and you look for evidence of our market prices, biased too high or too low, you don't find much compelling evidence in the data. So our view is that the market is the best form of aggregating data that we have. And we're not that worried about AI allowing, you know, investors to come up, you know, with better prices or better ways of stock picking. And if it does provide investors insights, what are they gonna do with those insights? Trade on them. Trade, yeah. Place to trade. And what does that do to market prices? If those insights are good insights, makes market prices better. And so even if there are good insights that you can glean from these tools, what it's going to do is make market prices better and, therefore, even harder to out guess in the future. Well, you've often said too, let's just say somebody was able to come up with something from a way to identify them as pricing. Once that trade's made, now it's public, right? Everybody know. And everybody knows. Everybody knows. Yeah, right away. Yeah. All right. So I love that term, super AI- Super AI. around that. And in David's piece, you'll also see aggregate intelligence describing the market, which, I think, is is a good way to describe it. One of the things too, and I'm gonna go back to even the blockchain, because that was always a hot topic a couple years ago with crypto and things like that. And I remember a comment you made, which was, you know, the idea of blockchain that's been around, I think, for decades. You said when you were at Caltech, you guys were talking a lot about it at that time. So a lot of these innovations that we hear so much about right now, they've been around for years, I mean, in some cases, decades. Many companies are using it to get better at what they do, understand data better, get more efficient, more innovative. And as a global investor, we have access to all of that just through owning these securities all around the world. Yeah, I mean, if there's an innovation that drives efficiency or leads new companies to form that they can generate revenues from providing new services to society, and you're a global investor, you're gonna get rewarded from all of those innovations. And I think that's another way to look at the benefits of AI for all society. I'm sure they will lead to tools and so on that are helpful for companies to manage themselves, you know, better and identify client needs better in the future. And all that's part of the market already. All part of the market. Anything you wanna add to that? No, I think it's a great way to think about. I love that idea of just how powerful the market is. And it does relate very closely to what we're talking about around ChatGPT of it's aggregating a lot of information and it's coming up with an output. That's what the market does every single day with stock and bond prices. All right, let's talk a little bit about how we use some of that here at Dimensional, machine learning. We obviously have a tremendous amount of data, and we accumulate it every day. How do we use it, and what do we do day-to-day? So I'll back up a little bit on the hype question and then get into the Dimensional question. Is it all hype or not? I think that there is the potential that lots of interesting tools will come out from AI that will help us, will help advisors, will help investors. And the way I think about any tool is kind of categorized into three things, which is the quality of the tool, the purpose that you're going to use it for, and the skill of the user, right? And when you look at things like AI or machine learning, or natural language processing, the quality has improved over time because the quality, there's three components that are gonna drive that quality. One is the quality of the software that's written to process the data, and software techniques, and coding, and all that sort of stuff has improved over time. Codes have become more sophisticated. The data sets that they're trained on have also gotten larger and have improved over time. So again, more improvements there. It hasn't happened overnight, it didn't just happen this year, it's been happening for decades. And then the computational power that's available to run these tools has also increased. So if you typed in a question and it took you two hours to get an answer, that tool is far less useful than if you type in a question and it takes you one second to get an answer, right? So all of those things have improved the quality of machine learning, AI, you know, natural language processing tools, however you want to call it, has improved the quality of those tools over time. I think the purpose though is important because when I think about AI and functions like the chat types of functions, where they do well is when the kind of the truth, the objective truth is unambiguous. Is there a cat in this picture? Yes or no? It does a great job there because you can train it on many thousands of pictures. You can give it great feedback, you were right this time, you were wrong that time. And it can learn, and it is kind of unequivocal. The truth is right there. Where it also does a good job then is, can you make that cat meow for me? It can look at hundreds of videos of cats meowing and say, "Okay, let me make that picture of a cat meow." Okay, great, so it does a good job of those types of things. But when there is not a kind of objective, unequivocal truth, like, is the discount rate applied to the future cash flows of this stock too high or too low? There's no truth there that people will agree on, and it does a far less good job of answering those types of questions. So you have to understand the purpose that you're using any tool for, and that's kind of an important facet. The last part I would say is the skill, and skill is always important. And this is why I don't think it's gonna replace humans anytime soon. It's what's the right question to ask? How do you interpret the answer that you've gotten from that question? And then how do you act upon that answer? And those still require people, because if you don't ask the right question, the answer that you're gonna get is kind of meaningless. How do you ask the right question? You have to understand the data that it's using and how you want to use those data to actually address a particular question. And I think with AI, people don't understand fully the data sets that are being used, 'cause the data quality of anything you can find on the internet, probably some of that data quality is low and then some of that data quality is high, but nobody understands the total breadth of that data quality. What to do with the insights, that requires expertise as well. So I always think about a tool as the quality, the purpose, and the skill, and all of those are equally important when it comes to AI and what are the right ways to use it in an organization. Well, we used to talk about that quite a bit a handful of years ago, which was you have this idea of protocols, and systems and processes, but you have to have judgment and expertise as well. Those things have to go together. Yeah, I agree. I mean, even when you think about academic research and, you know, there was new data sets in the '50s and '60s, and then Jim Davis gathered more data in the '90s. The data had to be incredibly well understood, coupled with economic theory, to say, what are the right questions to ask? And then how do I use these data, 'cause I understand them very well, to answer those questions. And nowadays, I don't think that we're quite there yet with AI that we're gonna get some massive set of breakthroughs on how to pick stocks or organize portfolios because that understanding is not there. It may come in the future, but it's not there today. Anything you wanna add to this? No, just in general, I love the way that Gerard thinks in these frameworks, right? The quality, the purpose, the skill, and then, to the points that you just hit on is, do you understand the data? Are you asking the right questions? Can you draw the right inferences? And then what are you gonna do about it? I just find that, I find that very helpful when you have, what I'll say is, can be a complex talk topic to start to organize your thoughts around that, so. That's good. So Dimensional. Yep. What do you wanna know about Dimensional, Mark? Well, you know, I think giving some examples and tangible examples are helpful for people to understand that. So, for example, we were talking a little bit about, you know, we remembered several years ago when you could do searches, and all of a sudden you're hearing people say, "Yeah, but I'm gonna analyze all the searches done on Google to identify trends and maybe move in advance of where trends are going." But again, the market's aware of that, and everyone's doing that, so that's already reflected in prices. And so I think anything tangibly to help people think through, you know, what do we do when we think about machine learning? What do we do when we do have these significant amounts of data, and what inferences do we take from the data that we look at? You know, Bob Merton has a nice way of calling AI, assisted implementation. So you can call it, you know, aggregated intelligence for the market, assisted implementation in how people might use the tools. And we use the tools for exactly that. We get a lot of large data sets, as you allude to, and we use those kind of machine learning techniques to understand better at the data sets, understand outliers in the data sets so that we can more efficiently clean and have good data delivered to our investment approaches. Even applications, like, you know, that we have the separate account program where advisors can go on and, you know, launch a separate account on behalf of their clients. Often, they upload a tax lot file, but they upload tax lot files in all sorts of interesting ways. Well, we use different types of machine learning to help us process the tax lot files that advisors upload so that we can more naturally and easily get it into our systems. We've even used some of these types of tools with respect to our legal kind of documents and organizing documents. But I think what people find is when they look back at what they use in their current life, they'll realize they're using different versions of AI and have been for a long period of time already. And whether it's you're asking Siri a question or you're using Google Maps or even, you know, Microsoft, I don't know if you've noticed on your emails these days, it gives you three or four options on how to respond to an email, and that's been around for quite a period of time. So there have been aspects like this in your life for a long period of time, and you should expect that to continue to improve going forward. Okay. But nothing there that says we can outsmart market prices. Exactly. Okay. Anything you wanna add to that, or shall we move on? Let's move on. Bullion? Bullion. Okay, so we can touch that one here. We're getting more and more questions around that, so let's just take an approach to it. Now, what are some of the ways, when we hear about using gold, what comes to mind as one of the reasons people use it? We hear a lot of different arguments for it. One of the ones that people put forth is, it's a good inflation hedge. And so let's just quickly unpack that, and that's relevant because, look, we've been in a period where we've had high inflation, high unexpected inflation, and we hadn't been in a period like that for a while. So it's not surprising that people are starting to ask the question and they're looking for solutions. You just have to say, is it the right solution? It comes back to the goal, like, what's your goal? And then have the right tool to accomplish that goal. And let's take a look at this. So what we're gonna look at right here is inflation, here in the US going back to the 1970s, and we know we get some periods where it spikes up a little bit, falls off. We had a long period where it was relatively low, and then more recently, everybody knows what we've gone through. And what I wanna do is I want to overlay the price change for gold on top of CPI right here. And this, to me, is a great visual of, I have the wrong tool for the goal. And what I mean by that is, if inflation is relatively flat and relatively stable, it's really hard to hedge something with something that moves like that. You need an asset that's gonna move roughly in line with it. So not here to say whether, and we can unpack this in a second, whether it's a good or a bad investment, but if your goal was to hedge inflation, I think maybe you got the wrong tool to do that. Yeah, we would expect that to be right on that inflation line if that was a proper hedge for it. So maybe then invest, say, "Okay, well, it's not really an effective inflation hedge," but maybe you look at the returns and say, "Well, maybe it's a goal to outpace inflation over time, and is gold effective at doing that?" So let me give you some numbers here, Jake, I'm gonna ask you to write these numbers down. And then, after we go through this, we'll get Gerard to weigh in on some of this. But let's just look at then if I had, I always like to use a million dollars. Okay. Okay. So let's just say I had a million bucks and I invested it back in 1970, I think we're looking at here. And over that time period, I got the return of inflation. Okay, so you're gonna gimme inflation first, okay? So CPI, yep. CPI. And you want the actual return over that time period? Sure. Gimme the return first. It was 4.0%. 4.0 was the annualized return. And that's from '70 to 2022, as we see on the chart here. Is that right? Yes. Okay, perfect. Actually, what I'm giving you is March 2023. So this is March? Three months updated. Okay, got it. Okay, keep going. Now let's look at gold. Okay. That was 7.8%, and that's one of the reasons I wanted to use March is gold's done very well lately. Yep. Okay, good. Okay, so how's it been effective in and outpacing inflation? Now let's put some dollars to that. That's where I like to say I start with a million dollars, Because I'm an investor. I really care about then what do I have in terms of growing wealth over time and what do these percentages mean to me as an investor. So if I had a million bucks, I got that 4%, over that time period I would now have $8 million. $8 million. 8.0. $8.0 million, got it, okay. If I had a million bucks in gold and I held it that whole time, I would've 55.7 million. Okay. Significantly more wealth if I owned gold. But let's go back to the question, the goal, and the tools. So if the goal is to outpace inflation over time, is there a better tool for that? So let's just look at the return of stocks. So I'm gonna give you the S&P here, S&P 500. Now, the return of that was 10.5% annualized over that time period. We always like to joke, it's always gonna be somewhere around 10%. Anybody ask you the long-term, just say 10% for the long term return of the market, you're probably gonna be safe. Gonna be in the ballpark. All right, now, for the audience, what does that mean for wealth? How much more wealth does that, in this case, oh, you think it's only about 2% more? What does that mean for wealth? That million bucks grew to 206 million, and I wouldn't even give you, it's 0.3 in case you're interested. We have Gerard, I wanna be precise. Alright, so that's where we go back to, I think, a couple things here again, as an investor we tend to talk a lot about percentages, but I think dollars sometimes make a real sense because that's what is more real for us. We can get our arms around that too. But then, going back to tool, what's the right tool for that job about pacing inflation, if that's the particular goal you're after. So, Gerard, love for you to weigh in and get your thoughts on both of those topics. Yeah, I agree on the idea of outpacing inflation and what are the right assets for that. So let's start there. And when you think about an investment in the stock market, why should that have a positive expected real return? Because the companies that are kind of doing their business, they're trying to grow their revenues and you're getting a claim on the future cash flows of those companies. So there's a claim on something. You're gonna need a claim on the productivity of people, and we expect people to want to do better for themselves. We expect people to want to innovate. And we always know that, you know, innovation comes with change. That's part of life, that was part of our AI topic. Things will change, but that's part of innovation. And that innovation leads to more wealth creation over time. So you can participate in that, and, you know, there's very sensible reasons about why you would expect that investment in the stock market to have positive, expected, real returns. When you invest in gold, you'd say, "Well, why should I expect that to outpace inflation over time?" And it might be because, well, supply is limited and demand will keep on growing. And that may or may not be true. I think that I have a lot more faith that people are going to innovate, they're going to try and improve their lives. They're going to, you know, invest in their businesses and all of those types of things, than I would have that 20 or 40 or 50 years in the future gold has any use in society, innovation will have use in society. I don't know the gold will or it won't. And so you kind of think about, well, what do I have more faith in, in terms of producing those positive expected real rates of return, and I think that's what you're seeing here with some of this market data. I also agree with Jake on the hedging, you need to choose the right tool for the job. And if you're trying to hedge inflation buy an inflation-linked bond, has a much better job of hedging inflation than gold ever will. I wanted to give an example here, and then we'll go to a framework conversation, but this was, I think it was Warren Buffett who came up with this. If it wasn't, all of you send me a note, correct me on who it was, but I think it was Warren that came up with this and said, you know, "Imagine there's some aliens up there in their little spaceship and they're looking down on earth, and they'd be thinking, 'What on earth are those earthlings doing? They're digging up all this shiny gold stuff over here, in this continent, they put it on a boat, haul it across the ocean, then bury it in some safe over on this continent.'" Like does that make sense or not? So it goes back to your point there, I think about you have to have some sort of an earning stream on the investments when you think about that. Was that quote verbatim? I think Mark could tell you- He probably said that better but we got time constraints. All right, so correct me if I was wrong on who actually said that. Hey, one other note too, just on the numbers that we're looking at right here, and I'm trying to remember some of these off the top of my head, but I think we looked at standard deviation too of gold versus S&P over that period. And I wanna say gold was closer to 19 and S&P was closer to 15. That's right. So on, you know, a risk-return trade-off, at least looking at risk by volatility, you'd say, "Well, I didn't get as good a growth of wealth, and it was a little more choppy." So again, best tool for the job? Maybe, maybe not. Yeah, that was an interesting number. It was actually more volatile than what stocks were over that time period. Okay, Jake, let's go to a framework conversation here. And this is something that came out of some work Gerard did a few years ago, and I think it's absolutely outstanding for anybody thinking through, does an investment belong in my portfolio? There's four major things you want to consider. So let's run through these real quick here. And the first one we've talked about today, right? What's the goal? Number one, any investment. And, you know, we're connecting this to gold here. You know, does gold fit in my portfolio? What's the goal? Number two, what's the expected return? And you like to say in the chance of you don't really care sometimes necessarily if we're expect to return. How do you like to phrase that? What would I expect to make on this invest? I mean, look, in this industry, we're guilty of jargon, we try to simplify things down. You're guilty of it, Gerard, we all are. And so I just like to think of, "I'm gonna invest in this, what would I expect to make on it?" Okay, that's number two. What do I expect to make? Number three, of course you wanna understand the risks. What are the risks inherent in that particular investment? And then, number four, what are the costs? Again, it's just such a nice, simple framework to organize it. I have money that I want to put to work. What are the logical questions that I should ask before I put that money to work? And that's, again, that's what this framework does for me. Yep. You made it, Gerard. We love it. It's outstanding framework. Anything you wanna add to this? No, you covered it beautifully, Mark. Well, let's talk about then where did this framework come from. And we are hearing something, two and a half, three years ago, all the time. It wasn't gold as the shiny object, it was crypto as the shiny object. And, again, you know, why were we getting questions about cryptocurrency? Because it had done well. Why are we starting to get questions about gold? Because it's close to an all time. I mean, this is just change out literally, whether it's gold or crypto or SPACs or anything that you want to put in there, we get lots of questions when it does well. And you're looking at a chart right here. This is the price change in crypto, actually in Bitcoin, over time. And as I like to joke, I'm like, "You know, when we started to get questions about it?" We got questions here, we got questions here, here, here, maybe here, we didn't get a lot of questions about it right here, but what are we seeing now? We're seeing the price of it go back up. So I would expect to start to get some of those questions. And it's interesting, if you look at some of these price drops. You know, we talked about volatility on gold, and I don't wanna spend too much time here, but again, you look at some of these major, major pullbacks in Bitcoin, and it goes back to that framework of, what's my goal? What's the expect return, what's the risk, and what's the cost? And it gets at, is it the best tool to accomplish the job? And to me, that's what you want to keep coming back to as an investor, establish that goal, work with a financial professional, and then put the right tools in place to help you accomplish the goal. Yep, and we just got a question here, and this goes back to, you're talking about your crypto at that point, we're hearing a lot about, well it can be an inflation hedge as well and it can also be a nice diversifier. That's when it was up around 60,000, we're getting those commentaries. You don't hear too much about that now, but Gerard, we just got a question here about, you know, "As I think about gold or commodities, how do I think about it? Is there a nice diversification benefit you get from it?" So maybe not exactly sure they expect a return of commodities over time, but is there enough value in diversification to where it belongs in a portfolio? Yeah, there's a few things that you often look for when it comes to diversification and adding an asset category and might it provide diversification. One is that it doesn't move in the same way as the other things that you hold. So, for example, when stocks are up, gold is down. When stocks are down, gold is up. So that notion of correlation, right? That's one thing that you may look at. But another thing that you would look at is whether it has a positive expected return, to your point, Jake. And if you can't come up with a really good argument about why you should expect gold to keep on appreciating from now out until perpetuity, well then does it diversify? So it's something that doesn't co-vary as much with what you have, but it may not have a positive expected return. So then you ask yourself the question, does it hedge some type of risk that I care about? Maybe you're interested in buying a lot of gold jewelry in the future, and you're not buying it today and so, therefore, you can put some money on gold because you wanna spend money on gold in the future, right? That could be a reason, but if it doesn't hedge something that you care about and it doesn't have necessarily an obvious positive expected real return, then regardless of what its co-variation is with the rest of the assets that you hold, mmm, it may not deserve a place in your portfolio. So it really goes back to the goals and then just thinking about what the asset category is, right? What it really is and what it represents. We should make one other comment just quickly on gold. You know, we were in Boston last week, and we talked a little bit about this to financial professionals, and we got some comments just around, there's an emotional aspect of gold. There's a sentimental, maybe there's a historical family element, or societal element, cultural element with these things. That's not to say that that type of stuff is not important. It's not to say don't have beautiful gold jewelry, if you like beautiful gold jewelry or if you want to have some gold coins, that's great. I think the question there is, is that if you want to take a substantial amount of money and put it into an investment, then you go to these questions that we've laid out right here. Yeah, whether it's crypto or gold, it's not you have to have it or you shouldn't have it. It's just be very clear on those four items as you go through, does it belong in my portfolio? And just know exactly where those items fall out. Okay. Let me mention a couple things that I've jotted down here today as we wrap up the session here, and then you guys can add to them. A couple key items jumped out for me. One, Gerard, I loved the super AI comment. I'm thinking about the market as super AI. I thought that was great. Clearly, we had a focus on know your goal. We talk a lot about can I forecast the future? And there's no evidence you can, whether it's currencies, whether what the market's going to do. So then you stick to your plan, and that's where the role of the professional is so incredibly valuable. The advisor to help you define the plan that's appropriate for you and where you are and sticking to that over time. So stick to your plan. And then the last thing we talked a lot about is diversification, in the sense of it can be a great risk reducer, but then also by owning all these companies globally, you're getting access to all these innovation that's coming out. Whether it's artificial intelligence, whether it's better ways of doing things, more efficient ways of doing things. We are going to benefit as an investor by getting exposure that way. I'll go to Jake first. Anything you wanna add to that as we wrap it up here? The only comment I'll make is, is that it's interesting, we get lots of questions, whether it be about different types of investments, about recessions, about the debt ceiling, about inflation, about all of the topics that we do love to talk about. And I think you want to have good frameworks and logical answers for it. But a lot of it just comes back to really basic investment principles. Diversification is your buddy, risk and return related. Keep your cost down, take a long-term focus, don't let your emotions creep into it. And it's hard sometimes because you say, "Well, that's such a simplistic view of investing," but that really is what gives you the best shot over time. So those are the only final comments I would make. Two comments I would make. One is that 10.5% number is an explosive number, and your money basically doubles every seven years at a 10.5% rate of return. And that's how you really do get rich if you're a long-term investor in the markets. The second one is the element of hope that all of these tools that people are concerned about today, probably will lead to innovation. Innovation comes hand in hand with change. So there will be change, but that's what drives us forward. That's what generates new sources of revenue for companies in the future. New services for society. And that's an element of hope in my view, that you can rely on markets, trust market prices, have a good investment proposition, and the world will get better. And your investment portfolio we'll grow over time. All right. Thanks, guys. A lot of fun today. Gerard, thanks for being our special guest here. I loved it. I like the Mark and Jake show. It always keeps me entertained, so I was happy I could be part of it. Well, we may have you back again someday. All right. Thanks to all of you for joining us here today as well. We appreciate your time. Happy Cinco de Mayo today for everybody. And then don't forget Mother's Day next Sunday. Moms are absolutely unbelievable. Special. Call 'em, tell 'em you love them. And everybody, go enjoy the weekend and be safe. Thanks for joining us today.