Most financial advisors and planners have known since the 1990s that global diversification of client investments using funds and ETFs is an outdated technique. The system just doesn’t perform well, so why are we still doing it? 

In his new book, The False Hope of Global Diversification, Mike Ross explains why it doesn’t perform well, laying out step-by-step what financial advisors should be doing instead to protect their client’s assets. 

The book shows you how to grow your client’s wealth using a diversified portfolio of primarily US based companies and US companies and US company bonds, to improve portfolio performance, reduce cost, and raise client satisfaction to new heights.

Hey, listeners. My name is Drew Appelbaum and I’m excited to be here today with Mike Ross, author of The False Hope of Global Diversification: Confessions of a Portfolio Management Maverick. Mike, thank you for joining. Welcome to The Author Hour Podcast.

Mike Ross: Thanks for having me.

Drew Appelbaum: Mike, help us kick off the podcast. Can you give a brief rundown of your professional background?

Mike Ross: Sure, in 1987, I left the Air Force, joined a little company that was well known at the time, by the time of EF Hutton. For 34 years, I stayed with EF Hutton and successor firms. I left Morgan Stanley at the end of 2020, went off on my own as financial advisor and, because I became an independent financial advisor, I could actually write a book. So, I began it in the summer of 2021 and guess what, we’re getting published now. So, fairly exciting time for me right now.

Drew Appelbaum: So, why was now the time to share your story? You’ve been in the industry for such a long time, was there something really inspiring out there for you? Did you have an “aha moment” or did you just feel like it was time to tell the story and tell the world of what you’ve learned?

Mike Ross: Well, there was two things, Drew. The first one was, I’m 63. I don’t have successor to my business and a book seemed to me a very thorough way to describe how we work, so that if there are kindred souls out there that read the book and they want to join us, we are open to people joining us right now. And I’m sure as the years go by, relationships like that will become fruitful and I can pass on the legacy to someone else. That was the first reason. 

Drew Appelbaum: Yeah.

Mike Ross: The second reason was, as the subtitle notes, confessions of a portfolio management maverick. What we do in our practice is a little disliked, a little bit questioned by the traditional financial planning and certainly the big bank world. I could have never written this when I was working for a big bank because it’s critical in some cases at the big bank. So those are really the two main reasons.

Breakthrough Theory

Drew Appelbaum: Now again, you’ve been in the industry for so long, you’ve seen so many things, but when you sat down to write the book — and maybe when you dug deeper to some of the topics — when you decided what you really wanted to expand your thoughts on, did you have any major breakthroughs or some new learnings along your writing journey?

Mike Ross: Well, yes, funny you ask that. I had a certain theory. My theory was that since really, the middle of my career, all these markets around the world move in sync with one another. The traditional view of diversification is that you diversify by — if you’re a US investor — by adding stocks in Europe or in Asia or something like that.

Drew Appelbaum: Right.

Mike Ross: But as the years went by, I noticed that they all moved at the same time. So I literally hired a young man from Columbia University who just completed a masters in financial engineering to do all the computations, to see if that premise was correct. And lo and behold, it was correct. So hence the term, the false hope of global diversification. That was really an epiphany for me.

Drew Appelbaum: Now, when you started to write the book, you mentioned earlier you want likeminded professionals but was there anyone else you had in mind that you’re writing this book for?

Mike Ross: Well, the focus of the book is young financial advisors but it will never surprise me if, especially when I focus it that much, regular potential clients might read it and again, because we do things in such a nontraditional fashion, that they may embrace the normal individual investor, family, corporation, nonprofit that we work with right now may read the book, despite it being focused on young financial advisors, and they may decide to work with us just because we’re very explicit about what we do and other, let’s just say, investment firms are far more opaque about their approach.

Drew Appelbaum: Now, you start off the book by giving — we touched on earlier — that the modern portfolio theory, a nice little beatdown if you will. So if you could just set the foundation here, what exactly is the modern portfolio theory and why exactly do you consider it a waste of time and money?

Mike Ross: Well, so I’m going to walk back the second part of that, but modern portfolio theory was established in the 1950s, before I was born, and the premise was that the way to reduce your risk while the same time achieving meaningful gains was to have a wide array of common stock around the world.

Now again, this was in the 1950s. Lots and lots of things have changed since then and yet, when you show up with a big bang financial advisor, when you go to the traditional financial planner, what do they lay out for you? This plan of diversifying globally that just doesn’t apply anymore. Your one is way better off just buying US companies and then, having other kinds of assets. 

So, my larger point is that we’ve only thought so many things that we were doing in the 1950s, let’s rethink the investment approach of the 1950s and say, it’s probably outdated. That’s one of the main messages is, let’s take another look at this and look at it in this increasingly ever-connected global world of investing and let’s keep the assets in the United States, for the most part.

Drew Appelbaum: You also broke down the difference between a professional who could bring down your overall tax exposure, way more than you would be paying or saving in fees for some advisors. So what tax benefits or other strategies can a really good advisor bring to a portfolio?

Mike Ross: So, as I said, I wrote this book in 2021, we went through the editing process throughout the first half of 2022. Little did I realize that by the time the book came out, we would be in as tough a stock market as we are in right now. So let me cite a couple of clear examples. Clear example number one is, if you’re not paying attention to where you have unrealized losses in your taxable portfolio, you’re giving up enormous benefits in terms of capital gains, losses being washed against gains.

Piling onto that, if what you own is a bunch of mutual funds, you have no control over when those funds declare their capital gains or dividends, you are a victim of what they do. You can take control of that if you own the stock yourself. Let’s not leave it to some portfolio manager who knows nothing about your situation to make decisions on your taxes.

Finally, if you have IRA assets that have gone down, I mean, the joke between ‘08 and ‘10 was 401(k)s has turned into 201(k)s. But if your IRA assets have gone down in value and if it fits from a taxable perspective, now’s a great time, in July of 2022, to think through the idea of doing a Roth conversion and taking advantage of the situation like that.

In contrast, what the overall investing community flails financial advisors on is clipping that 1 percent or one half a percent fee on their advice and to me, addressing the tax issue was way, way more important than that 1 percent fee or half a percent fee or even one and a half percent fee that financial advisors are charging the clients. 

Individual Stocks vs. Mutual Funds or ETFs

Drew Appelbaum: Why are you so much of a passionate believer in individual stocks instead of mutual funds or ETFs? I think a lot of people consider those safe places but you kind of go elsewhere.

Mike Ross: All right, let’s put ourselves in the situation today.

Drew Appelbaum: Okay.

Mike Ross: You’re an individual investor, you own a collection of US companies. Let’s just arbitrarily say you own Microsoft, Proctor & Gamble, Danaher or Merck, three or four or five well-known US companies, and then your advisor suggested you get international diversification, so you buy an ETF that has in it only stocks in China or only stocks that are banks in Europe or only stocks that are global strong governance. Something like that, something that I would describe as a gimmicky thing.

Now, the market drops by 20 percent and you need cash because you’re scared that it’s going to drop another 20 percent. Drew, what are you going to sell? You’re not going to sell Proctor & Gamble and Microsoft; you’re going to sell this esoteric ETF or this unknown opaque mutual fund. You’re going to sell it at the bottom and you’re not going to touch it again.

So my attitude is, there’s something in behavioral finance called familiarity bias, which is considered a bad thing, you only buy things that you’re familiar with. My attitude is, if you’re a financial adviser, use that familiarity bias to your strength. Own a collection of US companies and that client of yours isn’t going to get nearly as anxious about things because they own Costco, you know, they own Amazon. 

They’re not going to get nearly as concerned about things and they’re going to stay in the game. The most damaging thing clients typically do is sell at the bottom, and it’s happening again. Right now, that’s happening again because they look at the news and they say, “The world’s in bad shape. I’m not going to dwell on what people are saying right now” and they’ll sell things and they’re going to regret it in six months or two years, they’re just going to regret it.

Drew Appelbaum: I like when you brought up the case for buying these American stocks, that American companies are scrutinized more and they’re well-regulated. Are there any other reasons why you should stick to the American market? 

Mike Ross: So a few years ago, I did a study. I had a software program that allowed me to look at where US companies got their sales, where they sold to customers. What I discovered was that about, changes with every company and in every year, about 40 percent of US company’s sales, with some exceptions, are in Asia or they’re in Europe or they’re in South America. 

So, my premise is let those companies spend a ton of time and spend a lot of resources finding the markets that they should be selling their products in, let them do it. Don’t rely on 30 minutes of research on your favorite international fund and you do it. Let them do it, that’s kind of a key issue there. 

Drew Appelbaum: Also for this new class of retail investors, it’s been blowing up in the last few years. Is there a different strategy for them, and what are your suggestions for their style of investing? 

Mike Ross: My senses, so let me go off on a tangent that I didn’t cover in the book, but it is timely now. In the last two months, you’ve seen major, very expensive stocks, I won’t mention names, do enormous splits. 10 for one, 20 for one. These are companies that we all respect and that are household names. Why did they do those splits? 

They did those splits because while the S&P 500 is market cap-weighted, it is weighted by the size of the company, and they all qualify the Dow Jones average, which is commonly known as the gold standard, for US companies is arithmetically developed. So the stock price matters. These very important US companies that are used throughout the world wanted to become candidates for the Dow Jones average. 

So, if I am a young person starting out, I don’t believe I have money right now to invest in common stock, I may focus on just daresay an ETF of the Dow Jones average over the S&P 500, until I can get to the point where I can own individual stocks, and that could take a while, depending on the size of the portfolio. 

Drew Appelbaum: Then you bring up a chapter of risk management and you breakdown some flawed approaches that you observed throughout your career. You have mentioned a few already but are there any other that you want to talk about that are still kind of being used today and you kind of wonder why? 

Mike Ross: So, I would say the one-dimensional investor, so in many, many cases you run into people who want to have good long-term returns, but they leave an enormous portion of their net worth in cash. To me, they’re working against themselves. Now, my point is that is not to say you pile all your money in common stock because that is certainly not what I do and that is not what I advocate to clients. 

But look to some of the other asset classes, one of which I talk about in one of the chapters I talk about them, private equity and private credit, and if you wanted to discuss that a little bit today, I am happy to, but my point is leaving too much cash. My other point is that, that by definition leads to over-concentration in a few different areas, and we’re living through that over-concentration right now. 

Those people who over-concentrated in the areas that are suffering right now and, I won’t go into details of that, in both cases, both with too much cash and too much over-concentration, I think people are being hurt by that. 

Drew Appelbaum: Towards the end of the book you say that being a financial advisor, you can improve lives and improve society at the same time. It’s not just all about dollars and cents, so how can a financial advisor actually do that? 

Mike Ross: This is a great career. This is a very well-paid career. Those of us who have stayed in it a long time through good years and bad have done very well for ourselves. That lends itself to the ability to participate both financially and personally in one’s local areas with one’s schools, there is a ton of different ways that, as you think through where you’ve been helped along the way, in some ways that’s what this book is about. 

Where you’ve been helped along the way, you can provide benefits to others, but it is a great career field and, as a consequence, there is plenty of ways to add value both to clients as well as the society doing it. 

Drew Appelbaum: When someone picks up the book, they make their way through it, halfway, the end of the book, is there anything that any impact that you hope that the book will have on a reader or any immediate steps that they’ll take? 

Mike Ross: So, I would say I am being very iconoclastic in the book and if all one does, I mean, we all should be doing this with all of our basic assumptions of life, is every once in a while, take a step back and say, “All right, I have developed this habits or this particular approach for these reasons, do they still exist? Is this still the appropriate premise?” And really, the idea of both the title and the subtitle was, as the years went by, like everybody else even today, I was fed this narrative of, “You got to invest internationally.” 

“You got to invest in small caps, you got to do this.” And so question those premises. If all people do out of the book is question their premises, I think I have achieved something. Naturally, I would hope a small subset of those reading the book perhaps want to work with us and you know, I am not looking for that to be an enormous number. I am looking for a few people, and the ability of that book to lay out how we work becomes my best approach to communications. 

Drew Appelbaum: Now, you have a companion website for the book. Would you mind telling us what the address of the website is and then what readers and listeners can expect to find there? 

Mike Ross: So the website clearly will evolve because that’s what websites have to do. For right now, the URL, designated for the website is www.falsehopeglobaldiversification.com. Prior to the launch of the book and probably into the launch of the book, we are offering anyone who goes there to get a little booklet that we’ve created for free that is called The Five Best Practices for Managing Discretionary Portfolios. 

So, if you sign up for the website, we’ll send you that gift right away. What I expect to see as the website evolves over the coming days and weeks is I’ll include different passages, I’ll perhaps update the blog with current thinking on things. Don’t expect this to be some market-sensitive thing. There is plenty of others who love doing, “This is what the market is going to do” I am not going to do that kind of stuff. 

Markets are amazingly predictable. Yes, I said predictable, but what I will hope to do is provide concepts that are in the book to discuss a few of the things we do. So, it will be a growing evolving thing. Right now, my focus is on getting the book out but I will supplement the website with other types of things and you know, there will be speaking engagements that I will be willing to do. 

I am already booked for one right now but I will intend to do some speaking engagements and that’s where you’d find the ability to sign up for me speaking at an event. 

Drew Appelbaum: Nice. Well Mike, we just touched on the surface of the book here. There is so much more inside but just putting this book out there, aiming to help educate folks on proper financial planning and advising is no small feat. So congratulations on having your book published.

Mike Ross: Thank you very much. It’s been a fun process. 

Drew Appelbaum: This has been a pleasure. I’m excited for people to check out the book. Everyone, the book is called, The False Hope of Global Diversification, and you could find it on Amazon. Mike, besides checking out the book, besides checking out your website, is there anywhere else where people can connect with you? 

Mike Ross: Sure, you can go to my LinkedIn page, either my personal one, Michael Ross or the book LinkedIn webpage. You can contact me via the website and you know, I am pretty easy to find. If you just Google my name, you will find my business website too. Any of those ways will work. 

Drew Appelbaum: Perfect. Well Mike, thank you so much for spending some time with us today and best of luck with your new book. 

Mike Ross: Thank you very much, I appreciate it.