Interview with The AAII Journal Editor Charles Rotblut

Look what can happen when you don't put all your eggs in one bucket.
Look what can happen when you don't put all your eggs in one bucket. Photo by: Stephen Swintek / Getty Images

STAN:  Stan the Annuity Man with my cohort Jimmy Dot Direct participating in an interview with Charles Rotblut, CFA, Editor of The AAII Journal and a Vice President at the American Association of Individual Investors.

Over two million people use the non-profit organization AAII for information, model portfolios, stock screening, and other financial information.  He has appeared on CNBC, Bloomberg Television, Fox Business, and is a prolific contributor to SFO Magazine and

 He also wrote the book Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. Great to be meeting with you, Charles.

CHARLES:  Stan, you're with Annuities Dot Direct. You and Jimmy Dot started this direct to consumer model so people can shop for annuities.

STAN:  Absolutely, it fits right in the wheelhouse of American Association of Individual Investors because both platforms provide information so consumers can make good financial decisions.

Jimmy and I have spoken across the country to AAII chapters about annuities, and other financial matters.

Tell us a little bit about yourself and American Association of Individual Investors.

CHARLES:  Sure, and thanks again for having me. It's always good to speak with you. AAII is a non-profit organization founded in the late 1970s, and our goal is to educate individual investors to empower them to be better managers of their portfolios.

We cover all aspects: portfolio management, stock selection, and fund selection, for example.

We also do behavioral finance. The process of investing is not just about picking the investment that's going to make the highest return, it's really about figuring out, what the optimal strategy is for individuals.

What strategy and what mix of assets to hold that's going to help you get to your goal, which is really having enough money and enough cash to last throughout your lifetime. Then obviously, having a little bit more if you hope to leave something for your heirs or for your favorite charity or congregation.

STAN:  How did you land in Chicago with AAII? How long have you been there?

CHARLES:  I've been there six and a half years. I was previously working at Zacks Investment Research in Chicago. AAII vice president Adam Pfeffer called me up and said,”You know what? You need to come in and talk to us.”, when my predecessor, Maria Crawford Scott announced her retirement. About five minutes into the interview, I realized this could be a really good fit and a really good opportunity, and haven't looked back since.

STAN:  I see you're also a Kansas Jayhawk. So you come from Midwest America, or did you just fly into Kansas to go to school?

CHARLES:  I went to Kansas for school. I actually grew up on the east coast in Northern Virginia. I knew Kansas had a good journalism school, and having a good basketball team didn't hurt either.

JIMMY:  Welcome and thanks for talking with us, Charles. Let’s jump right in and hone in on the phrase behavioral finance.

What’s your take on the role it's starting to play in the financial world for advisors as well as financial education in general?

Touch on a little bit of what you guys do with that.

CHARLES:  We've been increasingly building our library of articles about it, and we're trying to get people to understand the concept. When I speak to groups, I show them a slide of potato salad. Why am I showing potato salad? Last year there was a campaign by somebody on Kickstarter where the guy came on and said, I'm just looking to make potato salad. Nobody was promised potato salad, nobody was offered the recipe, yet he raised $52,000.

If humans were as rational as economic theory holds us out to be, no one would have ever donated to this guy. Data shows that most people really aren't financially rational. We're very emotional, we're very reactive. AAII is trying to spend a lot of time getting people to understand this. Hopefully get investors thinking about this reality and how to prevent themselves from really hurting their long-term financial success.

It's a real risk that a lot of people don't consider, or actually downplay, though they're subject to those very same emotional and reactive errors in financial judgment.

STAN:  So, if someone goes to, where would you steer them first?

CHARLES:  It really depends on what they want to do. The journals are a huge resource. If there's something particular you want to understand, whether it's retirement planning, social security, or access to models going back to the late 1990s, you can find it through the search box.

We actually have two model portfolios. Our shadow stock portfolio model is well known. Stan, you've written some good articles for us that are available on our website as well.

STAN:  Jimmy spent 30 years in the managed money side. I know he wants to dig a little bit deeper, but we don't want to lose people either. What have you got on your mind?

JIMMY:  Let’s go back to this behavioral finance idea. This behavioral aspect is very important. I think people just make too many mistakes when they out think themselves.

What do you tell people is the number one thing they need to focus on when they're looking at the markets?

CHARLES:  I think the biggest thing is just not to look. Jack Bogle actually wrote on our website to start investing when you're young, and don't look at your statements until you retire. He advocates having a doctor nearby, because he thinks you'll have a heart attack when you see how big the number is. It's very hard emotionally to do. Obviously, you could turn on any news outlet, and hear how the market did this or did that every day.

The reality is that the day-to-day volatility is not your biggest risk. The biggest risk is really whether you will have money at the end of your life.

What I would tell people is just try to train yourself not to look at the market, and just use your calendar. Say to yourself, “I'm only going to look at my portfolio on these days, and when I look at it, I'm going to have this strategy to compare it against.” I think the biggest problem for people is that we become so focused on the day-to-day moves, it’s as if we're watching the baseball season, instead of trying to figure out, “Okay, what's the longer term here? What am I really trying to do?”

JIMMY:  It's interesting you bring that up because we conducted a webinar which talks about the longevity risk people have relative to their money.

Longevity risk is the risk of outliving your money. How would you recommend that people address diversification or model allocations to balance this out? Give an overview, a recommendation, or describe where to go on your website to find information about that?

CHARLES:  There are a couple of approaches. The Founder of AAII, Jim Cloonan, is coming out with a book end of summer 2016 called Investing at Level 3.  He basically advocates being fully exposed to stocks, and having four years of living expenses in cash if you're retired. The idea is that if there's a bad market crash, you'll be able to at least ride it out and not touch your assets.

What I tell people is to think about what works well for you. They can search Re-Balancing in the AAII journal to see what I’ve written about it. I've been following a portfolio of index funds going back to 87. All vanguard funds, showing how this portfolio would have done over time. Basically steer your portfolio back to its target allocations.

I think a bucket strategy might work better for some people where they have the money they need for the long-term invested in stocks, and money they need in the shorter term invested in shorter term assets. Perhaps they use annuities in a bucket providing cash flow to supplement social security, and stocks in another bucket for the long term, and then maybe a mixture of bonds to supplement income as a little cushion.

People need to think about their behavioral tendencies. What type of allocation setup is really going to work considering their specific behavioral standpoint?

It really doesn't matter what allocation platform you're following, as long as you stick to it over the long term, and you don't jump in and out of the stock market.

JIMMY:  We interviewed Paul Merriman, and we discussed the use of asset allocation models and spreading out your portfolio, so that you can ride the waves of all these different asset classes. People really are under-allocated across the asset classes. When you're speaking to people, what do you find over-weighted in their portfolios?

CHARLES:  It really depends on 30 year. I think sometimes people are going for stocks too much when they need bonds. Then when the market gets risky, I think people tend to get out of stocks. I don't think it's so much being over or under-weighted long term, as much as it's not being consistently weighted. Not consistently being able to stick with the stock market.

The market's going to do whatever it's going to do. A determination and ability to just stick with it is necessary, because we know over 130-yeartime frames, stocks tend to be the best performing assets. The hardest thing for people to do is find their mix. It can be a basic 60% stock, 40% bond mix, or more complex.

Sticking with a plan and making sure the portfolio stays on track with a particular allocation pattern will help people do far better than trying to time the market or jumping in and out.

STAN:  There is a rise of robo-investing and a trend toward that type of an allocation. Jimmy and I look at that, not as a replacement, but as an allocation based on a personal algorithm.

What are your thoughts on robo-advisor platforms?

CHARLES:  We did an article about a year and half ago. What we found was just a lot of variance. Not only in terms of how they're determining the allocations, but also in terms of what type of services they were providing. There doesn't really seem to be any consistency. It even varies in terms of how easy it is to contact some of these advisors, and whether or not you can talk to them face-to-face or in person.

I think it's still early on, and a really well thought out, computerized model can help a lot versus maybe a person who's created a website and is putting themselves out to be a planner, but really doesn't have a lot of education.

We need to see how they evolve now that the bigger players are getting in. I do think we're still going to see a lot of evolution occurring in this field.

JIMMY:  Going forward, what role do you see the Department of Labor Fiduciary Rule playing, not only for the advisors, but for individual investors as well?

CHARLES:  I'm personally in favor of it. I wrote an editorial in favor of it in our 2016 May issue. Given the current landscape, if someone's a registered investment advisor, a CFP, or a CFA, they already have some level of fiduciary duty that they're required to follow. I think most investors, if asked, would indicate they want their advisor’s interests aligned with their own.

The Senate may try to get rid of the DOL's rule. It's likely that Obama's going to veto that, and questionable whether there would be enough votes in the Senate to overturn the veto.

Long term the DOL fiduciary rule is a good thing, because it does force advisors who are not following the ethical codes to really step up and make the right decisions.

The responsibility is still on the investor to do the background check making sure the advisor they're working with is a good person Most of them are. Like any industry, bad ones generate bad press, but the majority are good, smart people trying to actually help their clients.

It's important for people to sit down with their advisor and discuss their expectations, their investment personality, and determine their fit with the advisor's personality.

A good advisor is worth their weight in gold, so make sure the advisor's mannerisms, way of managing money and philosophy match what you need as an investor.

STAN:  I don't think the senate will block it. The intention of the law was good. Like anything that goes to Washington with good intentions, by the time it comes out there’s a thousand pages of gobbledy gook. Still, I think it will go through, so financial consumers need to be very careful between now and January of 2018 when it should be fully implemented. The sales sharks will be trying to feed.

The 10,000 baby boomers retiring every day are creating a demographic daily tidal wave. A lot of them are looking for guarantees. Annuities Dot Direct is a safe and available way for consumers to look for and compare simple contractually guaranteed annuities. They can make their decisions steered by their motivations alone.

Have you considered putting together a portfolio that would include a guaranteed annuity payment like an immediate annuity? We're big fans of building an income floor, or creating an income stream that lasts a lifetime combined with social security and pensions, in lieu of bonds.

We have asked Paul Merriman and Dana Anspach the same, and I talked to Harold Dubinski. Can you envision it, or is it only considered on a case-by-case basis?

CHARLES:  We haven't talked about it internally. We've run articles about it with people advocating for it. As an organization, we haven't thought about and haven't discussed it.

I definitely think it's a tool that people should consider. Certainly just from an economic standpoint, having that cash flow guarantee for the rest of your life has some advantages.

I recently spoke to Moshe Milevsky, who's a big annuity person, and he brought up an interesting point stating that the approach is really for people in the financial middle. Somebody who's very high net worth, maybe they don't need it. If somebody hasn't saved enough, it's not going to help them. It can really play a role if they saved a lot, but not enough to last the rest of their life.

STAN:  Maybe that's a topic for the next AAII convention in Orlando. Jimmy and I both believe that annuities are not for everybody, number one. Number two, people should be looking at the simplistic annuities like an immediate annuity, a deferred income annuity, or a QLAC. These are contractual guarantees in non-correlated assets.

How do they fit into a model? How would you fit that guaranteed floor of income, and then on top of that, layer in the model portfolio? Jimmy, have you any thoughts on that?

JIMMY:  That's why the federal government created QLACs, the Qualified Longevity Annuity Contracts. The idea was to allow a part of that retirement account to be deferred out as far as age 85, to guarantee that people wouldn't run out of money. It would be interesting to run the risk ratios of that future allocation guaranteed, against how you manage your portfolio today, and what allocation it could take on. I think it would be an interesting study.

CHARLES:  Yeah, absolutely. It's always tough trying to figure exactly the right amount to allocate. One thing I have heard is just try to make sure your expenses are blocked off using the annuities and using your social security. It's an interesting discussion. I haven't found a consensus.

STAN:  Yeah, and it's kind of getting ahead of the curve. I do think that the DOL fiduciary rule will simplify the choices, which is a good thing. We're not big fans of the complex products that make up the bulk of annuities primarily sold. The variable and indexed annuity products and fees are too complex. They should be simplistic. I do think that the law is going to force carriers, just from an exposure standpoint, to not offer as much of that junk, and go back to annuities as originally designed in the Roman times. Designed for income, whether it's income right now or income down the road.

JIMMY:  Going back to the different ways to manage risk in a portfolio, can you explain a little bit of portfolio strategy on how to manage the risk your behavioral, psychological self presents, if we can call it that.

Specifically, I'm interested in how AAII sees going forward low interest rate environments and the impact of that on income streams going forward. Especially with regards to 10,000 baby boomers retiring. Any thought as to how that is going to play into this?

CHARLES:  We haven't directly, simply because we just don't engage in market forecasts. They have such a high error rate that we try to avoid even considering them. Obviously, if rates are lower it could actually lower returns overall, simply because people are going to demand less return for equities versus bonds.

Of course, if the rates are low, inflation will be low, so it will lower the amount of return you actually need to realize anyway. We just really focus on what the historical data is for the returns, versus trying to guess where interest rates are going to be.

We're certainly in a new environment, and it'll be interesting to see what happens. Even if the fed does continue to raise rates, we just don't know what pace and magnitude they're going to do it at.

We just provide the historical data showing what we've known has worked over the last 50 to 70 years, instead of trying to predict how things are going to unfold over the next 10 to 20 years.

JIMMY:  If you look back 5, 10, even 15 years, bond rates really have returned to their 200 year historical rates, which is around the 2%, 3% range. Do we need to be a little bit more proactive than reactive, relative to our portfolios, in light of what's going on?

CHARLES:  Yeah, I think the challenge comes back to that behavioral problem. By trying to be more tactical, more active, are they going to end up putting themselves further behind? That's always the tough thing about it.

There's definitely an argument right now to be made for being more active, but that comes at the risk of making a mistake down the road, which would be worse than just sticking with a traditional portfolio allocation. We kind of steer more on the side of trying to avoid making those big risks and those big mistakes that happen when trying to be tactical with your decisions. Certainly, there's going to be people who argue with that approach, but it's just the stance we take here at AAII.

You have to balance the ability to make the correct decisions versus the possibility of overconfidence, unexpected events, and other overlooked financial realities. There's certainly valid arguments in either direction.

STAN:  I totally agree. In closing, I want to make sure that people understand what has to offer. When you join at $29 a year for a membership, you get a lot. They also offer a free 30 day look at it. You get 12 issues of the journal, free stock model portfolios, access to the full website including top mutual fund and tax planning guides, access to the local chapter, and stock screens. There is so much available I could keep going. Jimmy and I have been fans of AAII for a long time. We love going to their shows, and the people that come to the AAII national convention are the smartest, most in-tune individual investors we run into.

JIMMY:  I've always enjoyed the AAII show, the conferences and local chapters I get the privilege of speaking at. People are looking for good, simple solutions and good, honest answers. It's a great community to participate in.

STAN:  Charles is a Vice President at the American Association of Individual Investors, as well as the Editor of their well respected journal. It is a must read in the financial industry. It’s also easy to sign up for their newsletter. The American Association of Individual Investors has local chapters to join across the country.  

Check out for more information.

Charles, any lasts thoughts?

CHARLES:  No, I certainly appreciate you having me on.

STAN:  Thanks for joining us, Charles. We will hold you to the challenge of putting together a portfolio with an income floor using a SPIA or a DIA.

Thanks again for your time spent talking with Stan The Annuity Man and Jimmy Dot Direct from Annuities Dot Direct.