Bogleheads® Conference 2014 - Panel of Experts I
00:00:00.000 | [no audio]
00:00:08.000 | Well, Mel asked me if I would moderate this panel today.
00:00:13.000 | And I've been waiting to do this for years.
00:00:17.000 | [laughter]
00:00:19.000 | And what I'm trying to do is to get the audience to support me.
00:00:25.000 | So maybe I'll get to do this again sometime.
00:00:28.000 | [applause]
00:00:34.000 | Jack Vogel on my left ruined my surprise.
00:00:40.000 | I'm introducing the new panel, and Jack is the surprise panelist.
00:00:47.000 | [laughter]
00:00:49.000 | But he ruined my surprise.
00:00:51.000 | As we know, Queen Laura wasn't able to be here.
00:00:55.000 | And Jack volunteered to.
00:00:58.000 | [laughter]
00:01:01.000 | Okay, we co-opted Jack into the program for her as a surprise guest.
00:01:06.000 | Let me introduce the panelists.
00:01:10.000 | We've got Gus Sautter.
00:01:14.000 | We know him from this morning, so please welcome Gus again.
00:01:18.000 | [applause]
00:01:24.000 | Next we have Neil Bernstein.
00:01:27.000 | He's the founder of Efficient Frontier Advisors
00:01:30.000 | and author of several successful titles.
00:01:33.000 | [applause]
00:01:39.000 | And Mel Vanthour, our next panelist,
00:01:42.000 | is one of the founders of the Vogelhead community.
00:01:45.000 | He's an author at Forbes.com columns,
00:01:48.000 | so please welcome the Prince of the Vogelheads.
00:01:51.000 | [applause]
00:01:57.000 | So we've got a number of questions that came from both participants here
00:02:02.000 | and from the website itself.
00:02:06.000 | So I think I'll start with a question from Dr. Bernstein from the Finance Club.
00:02:15.000 | And the question is, "How should we apply a principle in your book,
00:02:21.000 | 'The Ages of an Investor', to funding a 529 plan for college expenses?
00:02:27.000 | On one hand, it's investing a stream of contributions,
00:02:31.000 | which argues for a more aggressive allocation.
00:02:34.000 | On the other hand, it seems a good candidate for liability matching
00:02:39.000 | with fixed income investments."
00:02:42.000 | And I think that a 529 is pretty clearly a liability matching portfolio situation.
00:02:51.000 | It's got a time horizon that's at most, you know, 15, 16, 17 years.
00:02:57.000 | And its median age is going to be--
00:03:01.000 | or its median duration is going to be around, you know, 7 or 8 years.
00:03:05.000 | That's not stock territory. That's bond territory.
00:03:09.000 | So, you know, most 529 providers, or at least many of them,
00:03:14.000 | offer a glide path that reflects that.
00:03:17.000 | It starts at maybe, you know, 70% or 80% stock very rapidly,
00:03:21.000 | goes down from there to almost no stock in 5 years.
00:03:27.000 | And I think that's appropriate.
00:03:29.000 | You're certainly not in a deep risk sort of situation.
00:03:32.000 | You're in a shallow risk situation.
00:03:36.000 | This is a question for the panel from Dan.
00:03:40.000 | "Please compare the following two investment portfolios,
00:03:45.000 | the total stock market index admiral shares
00:03:48.000 | combined with the total international index admiral shares,
00:03:52.000 | compared to a portfolio of total index equity fund,
00:03:58.000 | total bond, and a money market or other cash fund."
00:04:05.000 | Anyone?
00:04:10.000 | Total international index.
00:04:14.000 | The question--see if I can be clear on this.
00:04:16.000 | The question is whether you want your diversification out of either the stock--
00:04:19.000 | the international stocks on the one hand or the bonds on the other.
00:04:22.000 | Is that the nature of it?
00:04:23.000 | I think that's the nature of the question.
00:04:25.000 | Well, then why didn't you write it that way?
00:04:29.000 | Maybe I didn't read it.
00:04:36.000 | I was trying to compare the total U.S. and the international
00:04:41.000 | as compared to the total index equity fund, total bond, and a money market.
00:04:48.000 | I think that's probably total global.
00:04:51.000 | The concept of investing--
00:05:00.000 | I think the concept is would you invest in total global,
00:05:06.000 | which has domestic and international in it,
00:05:08.000 | or would you invest in the pieces separately?
00:05:11.000 | Would you invest in total stock market plus total international?
00:05:17.000 | Personally, I believe the latter.
00:05:21.000 | Total global has an asset allocation of roughly 55% international, 45% U.S.,
00:05:28.000 | and I believe that every investor should have a home country bias,
00:05:33.000 | and that's why I think you should invest in the two pieces.
00:05:36.000 | I personally think 30% is about the right level of international investment.
00:05:40.000 | The reason I say that you should have a home country bias
00:05:43.000 | is because basically you say you would invest in order to,
00:05:47.000 | at some point in time, consume,
00:05:49.000 | and most of your consumption is going to be at home,
00:05:52.000 | so most of your investment should be tied to home.
00:05:54.000 | To give you an example, in Australia,
00:05:56.000 | over the first ten years of this century,
00:05:59.000 | the Australian stock market did much better than the world stock market.
00:06:02.000 | It was up about 7% a year.
00:06:03.000 | The world market was about flat.
00:06:05.000 | At the same time, the Australian economy did better
00:06:07.000 | because it was a very resource-based economy,
00:06:09.000 | and China was creating all the resources.
00:06:12.000 | What we saw was the economy moved forward quite dramatically.
00:06:15.000 | Prices escalated dramatically in Australia.
00:06:18.000 | Sydney is the third most expensive city in the world.
00:06:21.000 | Melbourne is the fourth most expensive city in the world.
00:06:23.000 | If you had invested in a global equity portfolio as an Australian,
00:06:28.000 | you would have had about 3% of your money invested in Australia,
00:06:31.000 | so your global equity portfolio would have provided about a 0% return
00:06:35.000 | instead of a 7% return you would have gotten in an Australian portfolio.
00:06:38.000 | Now, I think an Australian should have some international investment,
00:06:42.000 | but to only have 3% invested domestically would be way out of whack.
00:06:46.000 | I personally feel comfortable with a 30% international allocation
00:06:51.000 | than a 55% international allocation.
00:06:53.000 | I would agree with that completely,
00:06:56.000 | and I have a question for you, Gus, though,
00:06:58.000 | which is that the total world fund, the portfolio,
00:07:01.000 | is a good deal more expensive, at least in value-added terms,
00:07:05.000 | than the components are.
00:07:08.000 | Why exactly is that?
00:07:11.000 | If you look at the way the economics work in Vanguard,
00:07:15.000 | each fund has to pay a certain amount to keep Vanguard running.
00:07:19.000 | Each fund has a certain percentage of ownership of Vanguard,
00:07:22.000 | and then it has its own variable costs as well.
00:07:25.000 | Those variable costs are somewhat...
00:07:29.000 | There are some economies of scale as the fund gets larger,
00:07:33.000 | and the fixed costs that the fund bears
00:07:36.000 | become somewhat cheaper on a per-asset basis as the fund gets larger.
00:07:42.000 | So it's really a question of the size of the fund.
00:07:44.000 | What you see is that as funds get larger,
00:07:47.000 | the expense ratios go down.
00:07:48.000 | As Vanguard has gotten larger,
00:07:50.000 | the overall expense ratio has gone down.
00:07:52.000 | So it's really reflecting the costs of running the fund.
00:07:56.000 | The smaller fund is more expensive.
00:07:59.000 | Anybody else?
00:08:03.000 | Okay.
00:08:04.000 | This is for Jack from Stephen Ander.
00:08:07.000 | I'm a retiree.
00:08:09.000 | I live partly off my portfolio.
00:08:11.000 | Currently, my bond allocation is entirely to Vanguard's total bond market index.
00:08:16.000 | In light of future interest rate increases,
00:08:19.000 | should I change this allocation?
00:08:21.000 | Perhaps I should diversify into a short-term bond fund question,
00:08:25.000 | or should I just leave it alone?
00:08:29.000 | Okay.
00:08:30.000 | I'll answer that in just one second,
00:08:32.000 | because I do want to just take advantage of just this moment.
00:08:35.000 | After this session is over, I won't see any of you again.
00:08:38.000 | Until next year, God willing.
00:08:40.000 | I just want to thank you all for being such wonderful people.
00:08:43.000 | I enjoyed the book signings.
00:08:44.000 | I enjoyed the photography.
00:08:46.000 | I enjoyed the selfies.
00:08:48.000 | [laughter]
00:08:52.000 | I talked for so long yesterday about why anybody would want me on this panel today.
00:08:56.000 | I have absolutely no idea.
00:08:59.000 | But I'm here because I was asked to.
00:09:01.000 | I didn't sort of get involved here.
00:09:03.000 | So just thank you all for everything, is the first thing I want to say.
00:09:06.000 | The second thing I want to say is I've done all these book signings,
00:09:09.000 | and now I would like someone to do one for me.
00:09:11.000 | So I'm going to pass that down to Bill Bernstein.
00:09:14.000 | [laughter]
00:09:15.000 | I have three copies of that book in my office,
00:09:17.000 | and none of them are signed.
00:09:19.000 | Please write a nice message to me, will you?
00:09:22.000 | [laughter]
00:09:24.000 | No pressure at all.
00:09:26.000 | [laughter]
00:09:28.000 | Do you have a copy of what you were going to say, Jack?
00:09:30.000 | People ask me, but I know.
00:09:32.000 | [laughter]
00:09:33.000 | And then I've also signed two books for the inestimable Gus Sauter,
00:09:39.000 | because he won the year to get two latest global diatribes,
00:09:43.000 | one of which includes my version of the history of the index fund.
00:09:47.000 | [laughter]
00:09:49.000 | [applause]
00:09:57.000 | Every fact we have is the same.
00:09:59.000 | Every name we have, I name all those different--
00:10:02.000 | McLaughlin, who I knew, myself, Jack Treanor, the whole bunch of them,
00:10:07.000 | and Paul Samuelson, who was not on his list, who was the key,
00:10:11.000 | who started the first index fund.
00:10:13.000 | And I explained why that difference is there between the quantitative school,
00:10:17.000 | so for all those computer-worrying guys, who got nowhere, finally,
00:10:23.000 | and had to change their work, their Samsonite fund.
00:10:26.000 | You knew an S&P fund after we had started ours.
00:10:30.000 | So I'm not saying they borrowed it out.
00:10:33.000 | I don't think they borrowed anything like that.
00:10:35.000 | They actually got religion after we had to read it,
00:10:38.000 | so we could divide them into pre-religion and post-religion states.
00:10:42.000 | [laughter]
00:10:44.000 | And that's all described there, so enjoy them, Gus.
00:10:46.000 | [laughter]
00:10:49.000 | I marked the relevant pages.
00:10:51.000 | [laughter and applause]
00:10:56.000 | Back to the question.
00:10:58.000 | [laughter]
00:11:01.000 | Now back to the question.
00:11:03.000 | [laughter]
00:11:05.000 | In the face of low interest rates.
00:11:08.000 | There's an awful lot of timing that goes on.
00:11:11.000 | You're going to get in, bond prices are going up and down.
00:11:14.000 | And my view is that the intelligent investor doesn't pay any attention to that.
00:11:18.000 | The intelligent investor realizes when he buys a bond fund,
00:11:21.000 | this is a broad generalization,
00:11:23.000 | he's entered into a 10-year contract.
00:11:25.000 | Whether it's a 10-year bond or a longer bond,
00:11:28.000 | it's not going to look that much different.
00:11:30.000 | And that is a contract to get today's interest rate for 10 years.
00:11:34.000 | It's not very complicated.
00:11:36.000 | So do you want to have bonds today, which will--
00:11:38.000 | I guess the 10-year treasuries are around 2.2, 2.24.
00:11:44.000 | Anybody want to correct that?
00:11:47.000 | 2.24% today, I'll let you see if I can get away with it at that point.
00:11:51.000 | And the long treasury is probably around 3.25 at this point.
00:11:56.000 | And so if you want a longer, higher return,
00:11:59.000 | almost dramatically higher return, you want the long treasury.
00:12:03.000 | But it will be all over the place.
00:12:05.000 | And I don't think most people can tolerate long-term volatility.
00:12:09.000 | There's this idea of a thing called duration,
00:12:12.000 | which is very simple no matter how people try to make it.
00:12:15.000 | And that is how much for the price of a bond.
00:12:18.000 | Duration is the number of times of price movement you get for each 1% interest rate.
00:12:25.000 | So the treasury probably has--a long-term treasury probably has a duration of 17,
00:12:30.000 | something like that.
00:12:31.000 | So if interest rates go up 1%, you will get to have 17% preordained.
00:12:37.000 | That's for the moment.
00:12:38.000 | And you'll make that up to have higher yields later on for the summer.
00:12:43.000 | So I don't like the long-term bond too much.
00:12:45.000 | So you can do intermediate, and then you have a choice in intermediate
00:12:49.000 | between the treasury in round numbers, 10-year treasury at 2.25,
00:12:55.000 | something in that range.
00:12:57.000 | And the corporate in that range is probably about 2.90, very close to 3%,
00:13:01.000 | so you can get the higher return on the corporate.
00:13:04.000 | So how you want to deal with this is a combination of mathematics,
00:13:10.000 | tolerance for volatility,
00:13:12.000 | and your ability not to get bothered by these upheavals in the market.
00:13:16.000 | These are behavioral decisions, not rules-based decisions.
00:13:20.000 | And I worry a lot about rules-based decisions
00:13:22.000 | because rules don't apply to all people equally for all different individuals.
00:13:27.000 | And so I'd say be very wary of anyone who gives you a rule-based kind of idea.
00:13:34.000 | There's also this about the balance function of the bond index
00:13:38.000 | or your interest in the bond market,
00:13:40.000 | and that is this allocation between stocks and bonds for years
00:13:45.000 | is based on the notion that the yield on stocks has been around 2%
00:13:51.000 | for 20 years, I guess, maybe more than that.
00:13:53.000 | It got all the way down to 1% in 1999, early 2000.
00:13:58.000 | And the yield on bonds during that period was mostly about 6%,
00:14:01.000 | three times as high.
00:14:03.000 | Today, the yield on a bond portfolio is probably 3% corporate-government mix.
00:14:10.000 | I'll use that as a random number.
00:14:12.000 | The yield on a stock portfolio is 2%, and that's not much of a difference.
00:14:16.000 | And if you don't want to go along, it's probably 2 against 2.5.
00:14:20.000 | So you just have to make your judgment how badly do you need the income.
00:14:24.000 | That's where the corporate bond index comes in,
00:14:26.000 | the intermediate-term bond index comes in.
00:14:29.000 | And I don't really have any rules for that,
00:14:31.000 | but those are the things you want to think about--
00:14:33.000 | 10-year contract, the volatility and your tolerance for it,
00:14:37.000 | and the apparent mere certainty of getting a higher return the longer you go
00:14:42.000 | with a much higher risk.
00:14:45.000 | One of the things I loved about my job at Vanguard
00:14:48.000 | is that we use a lot of financial theory that I've studied
00:14:51.000 | and then try to figure out how to apply that from a practical standpoint.
00:14:55.000 | So if you think of how we come up with the concept of an asset allocation,
00:15:01.000 | it's think of the traditional efficient frontier
00:15:04.000 | and then where your utility curve is tangent to the efficient frontier
00:15:09.000 | in terms of your asset allocation.
00:15:11.000 | Well, the interesting thing is the efficient frontier is going to shift
00:15:16.000 | if you have lower expected returns for bonds, as we do now,
00:15:21.000 | and that would mean that the utility curve is going to intersect
00:15:25.000 | or be tangent at a different place on the efficient frontier,
00:15:31.000 | and that would imply a different asset allocation.
00:15:34.000 | But if you expect lower bond returns,
00:15:38.000 | shouldn't you expect lower equity returns?
00:15:40.000 | Stocks and bonds compete for capital,
00:15:43.000 | and if we're in an environment where bonds are providing very low returns,
00:15:48.000 | then shouldn't stock prices be bid up to the point where
00:15:51.000 | future expected returns are correspondingly low for equities?
00:15:57.000 | And if you believe that's the case,
00:15:59.000 | so instead of getting 10% a year from equities,
00:16:02.000 | let's say we're going to get 8% a year from equities or maybe even 7%.
00:16:07.000 | Then you have to redraw your efficient frontier
00:16:10.000 | and find out where it's tangent to your utility curve,
00:16:14.000 | and maybe not coincidentally, it's the same asset allocation.
00:16:19.000 | So I think you have to also think that each one of these asset classes
00:16:25.000 | provides something in your portfolio.
00:16:28.000 | Equities are going to give you, hopefully, the biggest return,
00:16:31.000 | and bonds are there to moderate the volatility
00:16:34.000 | and still provide you with some rate of return.
00:16:36.000 | I think that role is still the same in this environment.
00:16:39.000 | We just have to realize that our expected returns are probably lower at this point.
00:16:47.000 | Okay, here's a question for the panel from Tracy Denton.
00:16:51.000 | How often should a portfolio be rebalanced?
00:16:55.000 | One or two times a year?
00:16:57.000 | Should the state of the current market have any impact on the frequency?
00:17:08.000 | I favor bands as opposed to timing.
00:17:14.000 | I think that--is this working?
00:17:20.000 | I favor expansion bands as opposed to a specific time.
00:17:27.000 | I know everybody's got their own method.
00:17:29.000 | They do it on the birthday, they do it on the first of the year,
00:17:32.000 | they do it around Christmas time, but personally I prefer--I know Jack's--
00:17:36.000 | I think Jack doesn't favor rebalancing at all.
00:17:40.000 | Is that correct?
00:17:41.000 | Well, it's probably a reasonable reading of what I said.
00:17:46.000 | Let me say what I think is the facts on it.
00:17:48.000 | Number one, rebalancing costs you a lot of money over the long term
00:17:53.000 | because you're selling your higher-yielding asset in favor of lower-yielding asset.
00:17:57.000 | You're reducing your stocks, which have an upward curve.
00:18:01.000 | It's steeper than the return on bonds.
00:18:03.000 | So you should be going to any kind of rebalancing, realizing that.
00:18:07.000 | That's the economic or financial impact of it.
00:18:11.000 | If you want to make sure that you're reasonably conservative,
00:18:15.000 | you scare a little bit easily as I do,
00:18:18.000 | and you want a decent-sized bond position,
00:18:21.000 | and you probably do want to rebalance,
00:18:23.000 | I would say never, never, never use a decimal point in your calculation.
00:18:29.000 | I mean, maybe if you want to be 60/40 and you get over 65/35,
00:18:37.000 | you might think about rebalancing, or even 70,
00:18:40.000 | because it's really much more important what's in the portfolio,
00:18:46.000 | what you're paying for--this is for investors generally--
00:18:49.000 | and those factors are every bit as important as rebalancing.
00:18:53.000 | So I think we tend to overdo rebalancing.
00:18:55.000 | We had a budget--Michael and I had a budget, and maybe Kevin and I--
00:18:59.000 | a bunch of 25-year studies showing that rebalancing pays off,
00:19:03.000 | I think, about half the time, just about what you would expect,
00:19:07.000 | holding a return constant of 60% or so.
00:19:11.000 | So I think it's a little bit overdone, and maybe even a lot overdone,
00:19:16.000 | and has given some idea of magic that doesn't exist anywhere in the field of investing.
00:19:23.000 | There is no magic here.
00:19:25.000 | Sometimes things go for you, sometimes times go against you.
00:19:29.000 | So I think you do want to be a little cautious.
00:19:31.000 | If you have a 50/50 target, and you get to 80/20,
00:19:35.000 | you should have cut back something, maybe when you got to 60 or 70.
00:19:40.000 | But it's not a guarantee of better performance or anything else.
00:19:45.000 | It's a guarantee, I think, that what I like about keeping a solid bond position
00:19:51.000 | is it keeps you from the behavioral issues involved,
00:19:55.000 | and the kind of markets we've had in the last few weeks.
00:19:58.000 | The last few weeks have been so funny, because every day,
00:20:02.000 | every odd number of days, you wake up thinking, "Gee, I wish I had more in stocks,"
00:20:06.000 | and every even number of days, you wake up and say, "I wish I had more in bonds."
00:20:10.000 | And that's not going to get you anywhere.
00:20:12.000 | Just leave it alone to the extent you can.
00:20:16.000 | My understanding is the target date funds at Vanguard rebalance on a daily basis.
00:20:23.000 | Can you confirm that or straighten us out on that?
00:20:26.000 | What we do is take the cash flow into the funds
00:20:30.000 | and re-target it towards the allocation that it's supposed to be at any given point in time.
00:20:36.000 | They're really risk-based.
00:20:38.000 | At a certain age, we want you to have a certain level of risk,
00:20:42.000 | which implies a certain asset allocation.
00:20:45.000 | And if it does wander away, if we have cash in the portfolio that day,
00:20:50.000 | we're going to put it wherever we happen to like.
00:20:53.000 | So it's seldom that we would actually sell out of a position and rebalance in one other,
00:21:02.000 | except in extreme market movements.
00:21:05.000 | So if 2008, 2009, we actually will rebalance it.
00:21:11.000 | And actually something like Balanced Index rebalances every day.
00:21:15.000 | Not necessarily that it's a great strategy,
00:21:17.000 | but you have cash flows coming in every day,
00:21:20.000 | and you're offering a fund that is a 60/40, 60 stock, 40 bond portfolio index,
00:21:26.000 | and you don't want it to get to 61,
00:21:28.000 | because that may be too much for the person that's coming in that day.
00:21:31.000 | It's a kind of a consistency with objectives strategy,
00:21:36.000 | rather than a personal investment decision.
00:21:39.000 | Bill?
00:21:41.000 | I was just going to say, we do use bands so that we're not overdoing it.
00:21:46.000 | You were going to make a comment, I thought.
00:21:48.000 | No, I was just going to make a wisecrack.
00:21:51.000 | One of the ways you can tell, in response to what Jack says,
00:21:54.000 | one of the ways you can tell the financial economists have a sense of humor
00:21:58.000 | is they do use decimal points.
00:22:00.000 | [laughter]
00:22:04.000 | All right, the next question is for the panel.
00:22:07.000 | It says, "Look into your crystal ball.
00:22:10.000 | The massive baby boom generation moves into retirement.
00:22:14.000 | What are the macro effects on the markets, pressures on portfolios, et cetera?"
00:22:23.000 | I'll take a nice extreme position, nothing.
00:22:25.000 | [laughter]
00:22:27.000 | The reason for that is, none of us can guess exactly how this will work,
00:22:32.000 | but stocks have a certain intrinsic value.
00:22:35.000 | If a lot of people are buying stocks at, let's say, an arbitrary actual value of 100,
00:22:41.000 | a whole lot of people are selling them.
00:22:43.000 | Someone will be selling stocks as they go into retirement, presumably,
00:22:48.000 | but there will be other people buying them.
00:22:50.000 | I don't know how you measure which demand is larger or which is smaller,
00:22:53.000 | but it should not, theoretically, in the long run,
00:22:57.000 | what drives stock prices and values is the dividend yield plus the subsequent earnings growth.
00:23:03.000 | If you adhere to that, and it is absolutely the case over 100 years,
00:23:08.000 | an awful lot of shorter periods within that, that determines the market return.
00:23:12.000 | It doesn't care whether old people own it, even people my age, or young people own it.
00:23:18.000 | I'd say, essentially, nothing.
00:23:21.000 | Did I make myself clear?
00:23:23.000 | [laughter]
00:23:26.000 | I like to look at things in the broadest possible historical perspective.
00:23:31.000 | 5,000 years ago, nobody retired.
00:23:34.000 | You worked until you died.
00:23:36.000 | But if you wanted to invest for retirement, it would take you about 15 minutes
00:23:40.000 | because returns were very, very high, and you didn't live for very long after you retired.
00:23:46.000 | Now, the first retirement contracts, if you will, were something called corotes,
00:23:50.000 | which were a Dutch instrument.
00:23:52.000 | You would pay what amounted to about a year's worth of your salary
00:23:57.000 | for a very basic food shelf for the rest of your life.
00:24:01.000 | That's pretty darn cheap.
00:24:04.000 | And I view retirement as a supply-driven commodity like anything else.
00:24:10.000 | So if you want to visit, you know, Venice or New York or San Francisco,
00:24:16.000 | so does everybody else in the world.
00:24:18.000 | The demand for that is very high.
00:24:21.000 | And that's why those places are so very expensive.
00:24:25.000 | Well, retirement is getting to be the Venice and New York and London of the modern world.
00:24:31.000 | Everybody wants to retire now at age 55.
00:24:34.000 | Consequently, doing that is going to be very expensive.
00:24:36.000 | We've already commented on the fact that portfolio returns going forward are going to be very low.
00:24:41.000 | People are living longer and longer.
00:24:45.000 | And if you think about it, you know, someone works from 25 to 55 and then dies at 85,
00:24:53.000 | and if the demographic curve is flat, that means that for every retired person,
00:24:59.000 | there's one working person.
00:25:01.000 | That doesn't work very well.
00:25:04.000 | So I take a somewhat more pessimistic point of view, and I guess Jack does.
00:25:09.000 | I guess I look at it more globally.
00:25:15.000 | It's hard to imagine that we would have a certain expected return for equities in the U.S.
00:25:20.000 | and a very different expected return in Korea or some developing nation,
00:25:29.000 | especially the way the world is becoming much more global in nature.
00:25:34.000 | So capital is increasingly able to move around the world,
00:25:39.000 | and so I think that the expected returns will somewhat equalize,
00:25:43.000 | given the fact that the risks are somewhat similar.
00:25:46.000 | So I guess I'm a little bit more Jack's kid.
00:25:52.000 | [Laughter]
00:25:55.000 | I'm this one.
00:25:57.000 | [Laughter]
00:26:02.000 | This is for Jack from T. Wilcox.
00:26:05.000 | Which bond fund would you use for a three-fund portfolio?
00:26:10.000 | Which bond fund would you use for a three-fund portfolio?
00:26:16.000 | Well, I made my position clear about the fact that I'm disturbed by the composition of the bond index itself,
00:26:23.000 | and I think it's just too heavy in governments to consider.
00:26:28.000 | We talked about this yesterday with the charts.
00:26:30.000 | Too heavy in governments, too heavy in foreign ownerships,
00:26:34.000 | too heavy in federal ownerships to represent a bond portfolio of a typical American investor,
00:26:39.000 | which would be investors' holdings, insurance companies' holdings, pension fund holdings and things of that nature.
00:26:45.000 | And I think a reasonable bond position would be highly arbitrary, but not 70%, but maybe 30 or 35%.
00:26:54.000 | And that's probably, if you look at all the bond funds out there together, as I mentioned yesterday,
00:26:58.000 | that's probably about where the competition is as well as where the U.S. market is.
00:27:03.000 | So I think we should have a much better bond index.
00:27:08.000 | And nobody at Vanguard, I don't know, I think Gus felt aggrieved with me when I brought this up three years ago.
00:27:15.000 | And I stopped bringing it up.
00:27:18.000 | You don't want to beat your head against the wall.
00:27:21.000 | I've got too many issues to worry about other than that one.
00:27:24.000 | But what I suggest instead of that is why not have heavier money, say, as the working hypothesis had,
00:27:32.000 | half of it in the total bond market portfolio and half of it in the corporate bond intermediate-term portfolio.
00:27:40.000 | The corporate bond intermediate-term portfolio is the intermediate,
00:27:45.000 | but so is the total bond market intermediate.
00:27:47.000 | In other words, the long and short pretty much balance themselves out when you go about the same duration.
00:27:52.000 | So you can do that without any change in risk exposure of the credit
00:27:56.000 | and improve your return by probably a half to three quarters of a percentage point a year.
00:28:00.000 | So these are stingy markets where we should have a much bigger edge, we think, or I think we do,
00:28:06.000 | because the competition has more corporates and therefore higher yields.
00:28:09.000 | And they come at just about matching our bond market fund with lower costs and lower yields.
00:28:14.000 | So I think we're a little out of the mainstream, a lot out of the mainstream.
00:28:18.000 | And my choice would be the intermediate-term corporate.
00:28:21.000 | I also tried, and I think Gus did agree with me on this,
00:28:25.000 | to have them form an intermediate corporate bond index fund.
00:28:30.000 | A corporate bond index fund would have a correlation with the intermediate-term bond index of about 99.
00:28:37.000 | So why don't we just use either?
00:28:39.000 | I think a corporate bond index fund is easy to explain.
00:28:42.000 | That's a big part of our job on the phones in our literature.
00:28:46.000 | And an intermediate-term bond index begins with the fact that first our poor rep on the phone has to deal with
00:28:52.000 | why would you choose the intermediate-term index?
00:28:55.000 | It's a whole conversation that has nothing to do, in my opinion, with sound investment practices.
00:29:01.000 | So give it the simple route. It's always been my position.
00:29:04.000 | Make it easy to explain. Make the structure simple.
00:29:08.000 | And so that's my choice to answer the question in four words that I should have, as usual.
00:29:17.000 | This next one is a question from Mel.
00:29:19.000 | Could I ask Gus, what do you think about the corporate bond market index fund?
00:29:24.000 | Representative? Unrepresentative?
00:29:26.000 | Well, by definition, it is representative.
00:29:29.000 | I mean, it really is the market itself.
00:29:33.000 | Do I believe that it should be so heavily weighted in treasuries?
00:29:37.000 | You know, with corporates, if you look at corporates,
00:29:41.000 | the extra return or the excess return from corporates is somewhat correlated with equities.
00:29:47.000 | So you're getting a little bit of an equity-like kicker in the corporates
00:29:52.000 | that you can get anyways in your equity exposure.
00:29:56.000 | So I guess I still do think the total bond market is an appropriate investment vehicle.
00:30:03.000 | I did agree with Jack several years ago when he was talking about doing a total corporate index fund
00:30:12.000 | for people who do want to avoid corporates.
00:30:15.000 | I still think the total bond market is a rational investment.
00:30:22.000 | Okay, this is a question from Mel.
00:30:24.000 | Given today's situation, what are your thoughts on the current high bond offerings?
00:30:31.000 | Well, when we compare them to the good old days when you could get the 3.4, 3.3, 3.6 fixed rate
00:30:41.000 | and you could buy $30,000 worth of personal security paper and $30,000 in electronic bonds,
00:30:52.000 | we say that things are pretty sad.
00:30:56.000 | On the other hand, when we look at the fact that they are tax deferred for up to 30 years,
00:31:04.000 | they're risk-free, they're adjusted for inflation, and you compare them to any other risk-free investment
00:31:12.000 | that's available today, despite the good old days being gone,
00:31:18.000 | I think they're still a good investment compared to other options that are available.
00:31:27.000 | It would be nice if we were to return to the good old days,
00:31:30.000 | to face the facts that we have to compare them to what's available in CDs and money markets
00:31:37.000 | and things like--excuse me, I'm losing my voice--
00:31:41.000 | so that I think that they're still a good investment for people who are comfortable
00:31:46.000 | buying them strictly online.
00:31:50.000 | The next one is a question to the panel from Greg Brice.
00:31:55.000 | Recently, Paul Merriman spoke on what's wrong with Vanguard.
00:32:00.000 | He believes Vanguard should tilt more towards small-cap and small-cap value
00:32:05.000 | within Vanguard's total stock market fund.
00:32:09.000 | I would like to hear the panel's feeling on this statement, both pros and cons.
00:32:14.000 | This is similar to what DFA funds do.
00:32:20.000 | I've got a really strong opinion on that one.
00:32:24.000 | The total stock market is the total stock market.
00:32:29.000 | To put that argument up there, the zero-sum game and the negative-sum game,
00:32:32.000 | that applies to the total stock market.
00:32:34.000 | It does apply to overweighting certain segments of the market.
00:32:36.000 | If you want to overweight those segments in your own portfolio,
00:32:40.000 | Vanguard does provide small-cap value funds, small-cap blends, small-cap growth.
00:32:45.000 | For people who do want to take that bet, they can do it,
00:32:48.000 | but it wouldn't make any sense whatsoever to put it inside of the total stock market.
00:32:52.000 | It begs the question, is that bet worth taking?
00:32:57.000 | I alluded to it earlier that I'm not terribly wild about that bet
00:33:02.000 | because it's based on empirical work and the theory was developed afterwards.
00:33:06.000 | People said, "Well, I think you're getting extra return because you take extra risk."
00:33:11.000 | I would ask the question, "What risk are you compensated for?"
00:33:15.000 | In other words, think of the original capital asset pricing model.
00:33:18.000 | We talked about systematic risk and non-systematic risk.
00:33:22.000 | If you were compensated for taking systematic risk, which is market risk,
00:33:26.000 | and you were not compensated for taking non-systematic risk,
00:33:29.000 | non-systematic risk was risk associated with each individual stock.
00:33:32.000 | That could be diversified away, so why should society pay you to take that risk?
00:33:36.000 | If you look at the different segments of the market,
00:33:40.000 | just think of the nine Morningstar style boxes,
00:33:44.000 | each one of those is more volatile than the market itself
00:33:50.000 | because they're more narrowly defined.
00:33:53.000 | In a couple of cases, just marginally more volatile.
00:33:56.000 | But if they're more volatile, so they're riskier,
00:33:59.000 | should they have a higher return than the market?
00:34:02.000 | Well, if they did, then why would you own the market?
00:34:04.000 | You just own the pieces of the market.
00:34:06.000 | You put them back together that way.
00:34:07.000 | Well, that doesn't make any sense because they come back together again and they're the market.
00:34:12.000 | I think that this, arguably, from a financial theory standpoint,
00:34:17.000 | would be that it's risk that's not compensated.
00:34:20.000 | It can be diversified away.
00:34:22.000 | There are a lot of people who are arguing behavioral finance aspects,
00:34:25.000 | but for me, I've just had too long not taking Factor Bonds.
00:34:31.000 | Let me just add to that.
00:34:33.000 | I agree with Gus, at least in this case.
00:34:38.000 | I talked to you yesterday about the FAA,
00:34:40.000 | and I simply don't believe--I know what the past data is,
00:34:44.000 | and I know the growth has done in the past.
00:34:47.000 | People use the expression--I'm sorry, value.
00:34:51.000 | Value does better than growth.
00:34:54.000 | I never want to hear that said.
00:34:56.000 | Value has done better than growth in the long-term past.
00:34:59.000 | Not does, but has done, and that's pretty irrelevant to me in the future.
00:35:03.000 | And small cap, the same thing, has done better in the past than large cap.
00:35:07.000 | In these long periods of going back to, I guess, 1928 or '26, something like that,
00:35:13.000 | it's very clear that you can find 20-, 25-year periods where the reverse is true.
00:35:18.000 | So we've got this period-dependent comparison.
00:35:21.000 | It started at a certain point, and it ends at a certain point.
00:35:24.000 | It's all they can do with any comparison you've ever seen is period-dependent.
00:35:29.000 | We've also done a fair amount of work on how the real world works
00:35:34.000 | rather than those calculations out of Chicago work.
00:35:37.000 | And it turns out these things don't work nearly as well if you compare, say,
00:35:41.000 | growth funds, growth mutual funds, with value mutual funds.
00:35:45.000 | And we've done a lot of work on that, and the results are not totally different,
00:35:49.000 | but quite different, and will lead you to no conclusion like that at all.
00:35:53.000 | Also, if you believe that the stock market is a great arbitrageur
00:35:56.000 | between the present and the future, if it is categorically true
00:36:00.000 | that value at small cap are better, why then the prices of value at small cap
00:36:05.000 | will be bid up at the expense of large cap and gross stocks,
00:36:11.000 | which will be bid down.
00:36:13.000 | So I don't see any reason it should hold in the future.
00:36:16.000 | And I also call on the chart I gave you.
00:36:18.000 | I'll reiterate the chart I gave you yesterday.
00:36:20.000 | When you look at all the morning star ratings taken class by class by class,
00:36:25.000 | in fair comparison, our value funds will be compared to DFA's value funds,
00:36:29.000 | value-oriented funds, things of that nature.
00:36:32.000 | We are the highest-ranking investment company complex
00:36:36.000 | in the entire morning star ratings.
00:36:38.000 | We have a 58% positive rating.
00:36:42.000 | We only have 6% Vanguard funds that are in 1 and 2 stars,
00:36:47.000 | and 65% are in 4 and 5 stars.
00:36:51.000 | For a net of 58 is the way I do it.
00:36:54.000 | DFA is 16% 1 and 2, and 48%, their differential is 33%.
00:37:00.000 | And they still rank number 6.
00:37:02.000 | This is good, and I salute them for that.
00:37:04.000 | Probably the main difference between 1 and 6 is they're charging
00:37:08.000 | 45 or 50 basis points a year, and we're charging on average 15.
00:37:13.000 | And so if they want to get up and really get in the competition,
00:37:17.000 | reduce your costs, DFA.
00:37:20.000 | Now!
00:37:22.000 | Let me make the contrary case.
00:37:26.000 | First of all, I think that a more subtle definition of risk is called
00:37:30.000 | risk is more than symbols of volatility.
00:37:33.000 | And the best definition of risk that I know of is Antti Omani's risk,
00:37:38.000 | which basically summarizes bad returns and bad times.
00:37:43.000 | So if you look, for example, at the return of the small value partner
00:37:47.000 | during the most recent financial crisis, you're left with, you know,
00:37:51.000 | a return of -65% top to bottom versus about -55% for the total stock market.
00:37:58.000 | That may not seem like very much, but there's a big difference
00:38:01.000 | between being left with 35 cents and being left with 45 cents.
00:38:05.000 | So I think there's a good theoretical reason why small value stocks
00:38:10.000 | have a higher return.
00:38:13.000 | It's not just that it's period dependent in the United States.
00:38:17.000 | At least the value premium is present in just about every single country
00:38:22.000 | you would want to look at.
00:38:25.000 | 15 out of 16 developed nations, I think, the Fama-French's international study,
00:38:30.000 | and I think 12 out of 16 emerging markets nations.
00:38:35.000 | Now, having said that, the return of any factor, I believe,
00:38:41.000 | is roughly inversely proportional to the number of people chasing it.
00:38:46.000 | And in the current environment, everybody and their dog is chasing
00:38:50.000 | the small value factors.
00:38:53.000 | From DFA to Armand and his crew to, you know, just about everybody else
00:38:59.000 | is pushing their version of smart beta.
00:39:02.000 | So I think that it's a much tougher road to hoe from this point forward,
00:39:09.000 | if you're going to believe in factor-based investing.
00:39:13.000 | With all due respect, neither Benjamin Franklin Bogle or Sugar Bogle
00:39:18.000 | or two dogs are chasing small value stocks.
00:39:22.000 | [laughter]
00:39:24.000 | Maybe not those two dogs, yes.
00:39:27.000 | [laughter]
00:39:29.000 | The next question is for Dr. Bernstein from Ray James.
00:39:33.000 | Is globalization depriving the benefit of diversification across regions?
00:39:42.000 | If so, can this be quantified or predicted reasonably?
00:39:47.000 | Well, yes.
00:39:49.000 | If you look at simple short-term correlation of short-term periods,
00:39:53.000 | daily returns, monthly returns,
00:39:55.000 | we all know that the markets have become more correlated,
00:39:58.000 | and the reason for that is simple.
00:40:00.000 | Vanguard and DFA and ETF providers have made it very easy to get exposure
00:40:06.000 | to these corners of the world, to obscure corners of the world with the push of a key.
00:40:12.000 | And when that happens, correlations will naturally rise.
00:40:16.000 | Having said that, the long-term correlation value is still there.
00:40:22.000 | And all you have to do is look at the returns of various asset classes
00:40:26.000 | between, say, the 10-year period, between 1999 and 2008,
00:40:31.000 | which accounts to all their markets.
00:40:34.000 | And what you see is that the broad U.S. market had a nominal return
00:40:40.000 | of something like minus 20% over that 10-year period,
00:40:44.000 | whereas most other foreign asset classes, particularly emerging markets,
00:40:49.000 | had, in some cases, triple-digit returns.
00:40:53.000 | So there's diversification that you can use.
00:40:58.000 | Next time around, the pattern may be reversed.
00:41:02.000 | I'm a strong believer in the fact that we cannot predict the future,
00:41:05.000 | therefore, we diversify.
00:41:09.000 | I'm a little slow.
00:41:11.000 | I'm still thinking about Bill's last response about factor returns.
00:41:18.000 | And my point was not that there isn't actually more risk in small-cap value
00:41:23.000 | or in small in general.
00:41:25.000 | It's just whether or not you should be compensating for that risk.
00:41:28.000 | In other words, there's more risk investing in a single stock
00:41:32.000 | than any other way you could invest.
00:41:36.000 | But are you compensated extra because you're investing in a single stock?
00:41:40.000 | If it's diversifiable, then you don't get compensated for diversifiable risk.
00:41:44.000 | And should society pay people to take a bet on small-cap value,
00:41:49.000 | the more risky segment of the market, when society itself, in aggregate,
00:41:54.000 | doesn't bear that risk?
00:41:58.000 | Again, I think it depends upon how you define risk.
00:42:03.000 | I define risk as what I feel is my stumbling block since 2009.
00:42:10.000 | And I think based on that measure,
00:42:12.000 | I think that small stocks deserve a higher return because of that higher risk.
00:42:21.000 | I think the next is a three-part question for the panel from Bob and Artie.
00:42:26.000 | I'd be interested to hear the panel's viewpoints
00:42:29.000 | on portfolio construction in retirement
00:42:33.000 | based on three different approaches advocated by members of the panel,
00:42:37.000 | agent bonds or some variant,
00:42:40.000 | the bucket approach based on when the money is needed,
00:42:43.000 | or liability-matching portfolio, why keep playing when you've already won.
00:42:54.000 | Well, I have a question for Bill along those lines.
00:42:59.000 | Bill, in your early book, you showed that an old bond portfolio
00:43:07.000 | is actually riskier than a portfolio with, I think it was between 7% and 12% in equities.
00:43:14.000 | So, if you won the game, basically, you don't invest in equities in theory.
00:43:21.000 | You put it all in safe investments,
00:43:24.000 | and yet it seems to contradict your findings in your early book.
00:43:29.000 | Yeah, I can't be entirely consistent all the time, I suppose.
00:43:35.000 | As Gene Fama likes to say, I can't be right about everything,
00:43:39.000 | at least at the same time.
00:43:42.000 | More seriously, you know,
00:43:45.000 | there's no one approach that is best for everyone.
00:43:50.000 | You have to look at your own personal situation.
00:43:53.000 | I think that in general, the person who has saved up
00:43:56.000 | just 15 or 20 years of residual living expenses,
00:44:00.000 | that is, what they need to live on in addition to their Social Security,
00:44:04.000 | if they're lucky enough to have that,
00:44:06.000 | that's the person who really should have a liability matching portfolio,
00:44:09.000 | which, if not 0% stocks, should be fairly low.
00:44:13.000 | If it was a bad draw early on, let's say even a 30/70 or 50/40 portfolio,
00:44:19.000 | they very well make that person run out of money.
00:44:22.000 | On the other hand, Warren Buffett's widow can invest 100% of her money
00:44:27.000 | in the Vanguard Index Trust 500,
00:44:29.000 | because the dividend yield on that,
00:44:31.000 | even a quarter of the dividend yield will not presumably pay her living expenses.
00:44:35.000 | So if you can tolerate, you know,
00:44:37.000 | if you have 50 or 100 times your residual living expenses in your portfolio,
00:44:43.000 | and you can emotionally tolerate 100% stocks, why not?
00:44:48.000 | You know, an age equals bond is a good shorthand for approximating,
00:44:53.000 | I think, what the middle course is for most people.
00:44:56.000 | It's a matter of personal taste more than anything else.
00:45:01.000 | On the liability matching portfolio, it's a theoretically extremely sound idea,
00:45:07.000 | but today, with interest rates where they are,
00:45:10.000 | funding it is beyond the financial ability of just about every corporation
00:45:14.000 | that has a pension plan. They really can't do it.
00:45:16.000 | They have to put a whole lot more money in,
00:45:19.000 | and that would reduce executive compensation,
00:45:21.000 | it would reduce corporate earnings,
00:45:23.000 | all those things that are totally unacceptable.
00:45:25.000 | It would reduce the price of the stock in the stock market
00:45:29.000 | for all those short-term speculators that are holding it,
00:45:32.000 | and all that notates against just the sheer ability
00:45:37.000 | to have a liability matching portfolio.
00:45:40.000 | And they may want to try it anyway,
00:45:42.000 | and there are all kinds of financial machinations naturally going on out there,
00:45:47.000 | where they sell the liabilities to an insurance company.
00:45:50.000 | I'm not sure exactly how all that works.
00:45:52.000 | People are trying to get around this without putting up any more money,
00:45:55.000 | but they keep a lot of that liability when they sell it off,
00:45:58.000 | and I don't know if anybody really does have to account for that.
00:46:02.000 | So it's very sensitive.
00:46:03.000 | Our corporations are very sensitive to these pension contributions,
00:46:06.000 | and so they try and work their way around it
00:46:08.000 | by assuming higher returns than they will ever get,
00:46:10.000 | even though those plans are underfunded by,
00:46:13.000 | I think the number is $5 trillion is the underfunding
00:46:17.000 | in private and public pension plans in the U.S.,
00:46:21.000 | most of which, I think it's $4 trillion,
00:46:24.000 | is the underfunding of state and local government plans,
00:46:28.000 | public pension plans.
00:46:30.000 | So we have a real mess on our hands,
00:46:32.000 | and, again, the first company or the first municipality goes belly up.
00:46:36.000 | Detroit gave us a good example.
00:46:39.000 | It's going to find they're dealing with a financial situation that is--
00:46:43.000 | it's just untenable.
00:46:45.000 | The system doesn't work,
00:46:47.000 | except if they go out and raise taxes,
00:46:49.000 | and, of course, the taxpayers have to approve that,
00:46:51.000 | and they're not going to approve it.
00:46:53.000 | So there's only so many options you have left.
00:46:56.000 | So it's a complex idea, the idea of liability matching.
00:47:00.000 | It is theoretically--I mean, you could write a book on how perfect it is,
00:47:03.000 | but it just doesn't seem to work.
00:47:08.000 | The next one is a question for Bill Bernstein from Puff Loverson.
00:47:11.000 | For the past three-plus years,
00:47:13.000 | you've advocated holding very short-term bonds,
00:47:16.000 | primarily to treasuries, taking the risk in equities.
00:47:19.000 | Do you still maintain this view?
00:47:21.000 | Well, Paul, you're wrong.
00:47:23.000 | I've been suggesting that for the past seven years, I think.
00:47:26.000 | Well, there's six of them.
00:47:28.000 | [laughter]
00:47:32.000 | You know, I think that in finance, at best, you're going to be right.
00:47:38.000 | 60% or 55% of the time, this falls into the other category.
00:47:45.000 | That said, I'm still comfortable holding relatively short-term bonds.
00:47:52.000 | I'd like to lay it on my face here a little bit.
00:47:59.000 | This is for Mr. Bogle.
00:48:03.000 | What do you recommend for individuals and organizations
00:48:06.000 | who need reliable, predictable income?
00:48:09.000 | A mixture of individual securities, dividend-paying stock,
00:48:12.000 | and bonds, or do you still believe a portfolio of index funds is best?
00:48:17.000 | Well, it seems to me quite clear that depending on income,
00:48:22.000 | it is a long way from irrational to depend on higher-yielding common stocks
00:48:28.000 | as well as bonds.
00:48:29.000 | Of course, don't accept the market return.
00:48:31.000 | The purists will say, "I'm wrong here," which is fine.
00:48:34.000 | But you need the money, and you can probably get out of it.
00:48:37.000 | I'm not sure of the exact yield of the Vanguard high-dividend fund.
00:48:42.000 | I look at it in the paper just about every day,
00:48:45.000 | and it has a return very comparable to the market.
00:48:49.000 | I don't know what the yield is, but I'm going to guess it's about 3%.
00:48:52.000 | And you're going to have a correlation with the market,
00:48:55.000 | probably '96 or '97 with that fund because the big companies in America
00:49:00.000 | that make up the S&P, the total stock market,
00:49:03.000 | are by and large dividend-paying companies,
00:49:06.000 | not necessarily high-dividend-paying companies.
00:49:08.000 | So I think it's a good strategy if you need the income, and most people do.
00:49:12.000 | I think the risks are very small, but I also continue to differentiate.
00:49:18.000 | I think probably a lot of my fellow panel members talk about returns,
00:49:24.000 | and returns are very uncertain, but dividends are quite certain.
00:49:29.000 | It's only been, as I showed you in that chart yesterday,
00:49:31.000 | only been one significant dividend cut in the last, I think it's 1935,
00:49:37.000 | that's what it's been, 80 years,
00:49:40.000 | when the banks all cut their dividends back in 2008.
00:49:43.000 | So dividends are quite reliable, and I look at dividends as being real
00:49:48.000 | and market returns being, to some degree, illusory.
00:49:52.000 | And if you don't believe market returns are illusory,
00:49:54.000 | just check the percentage changes in the market in each of the last eight days.
00:49:59.000 | You know, it's like this. I never said anything quite so crazy in my life,
00:50:02.000 | I've got no trend, and so I like that strategy.
00:50:06.000 | I like a strategy for an investor that needs the income
00:50:09.000 | and understands the risk of a more appropriate bond strategy
00:50:12.000 | than a total bond market strategy.
00:50:15.000 | And there are a lot of investors, perhaps many of you in the room,
00:50:19.000 | maybe most of you in this room, who are in this game for some income,
00:50:22.000 | and I think we ought to make sure we have options that are available,
00:50:26.000 | and we do have it vanguarded through our high-dividend yield fund
00:50:32.000 | and high-dividend fund and our intermediate-term corporate bond fund.
00:50:38.000 | So look at all the options, and I think the incremental risk is small,
00:50:44.000 | so don't do it, maybe, with your hobo portfolio,
00:50:46.000 | but do it with 75% and have the rest, the other 25%,
00:50:49.000 | figure the number out of the air here,
00:50:51.000 | and just come down the middle, totally down the middle, almost down.
00:50:57.000 | The next is a question for the panel from Samuel Moller.
00:51:01.000 | What do you think of Vanguard managed payout fund for a retiree?
00:51:06.000 | How about as a way of simplifying if one's spouse has no interest in investing?
00:51:14.000 | There's only one up left, so you have to use the singular.
00:51:20.000 | I guess I invented those, so I'll--
00:51:23.000 | [laughter]
00:51:27.000 | The funds are designed to try to minimize volatility
00:51:30.000 | and yet provide a reasonable rate of return,
00:51:33.000 | and so we pursue that with a number of different asset classes.
00:51:36.000 | It's more broadly diversified than, say, the target-date funds,
00:51:42.000 | even now using some alternative beta strategies
00:51:45.000 | that we put into development about almost a decade ago now.
00:51:52.000 | Those alternative beta funds have worked out as expected,
00:51:58.000 | but I think that, by and large, the managed payout fund is meeting its objective.
00:52:07.000 | I think we did have too many funds.
00:52:10.000 | We had the 7% fund, and everybody's putting their money in that.
00:52:14.000 | Without the realization that probably you weren't going to get--
00:52:18.000 | your standard volume is going to go down over time,
00:52:21.000 | and everybody said, "Well, if I'm going to take the 5% fund, then I can get a 7% fund."
00:52:26.000 | But the end result is very different.
00:52:30.000 | So I think it's an appropriate investment.
00:52:33.000 | I wouldn't make it my entire investment for my retiree assets,
00:52:36.000 | but, again, the design is to be a balanced approach,
00:52:40.000 | a broadly diversified approach that still provides a reasonable rate of return
00:52:46.000 | and with much lower volatility.
00:52:49.000 | And the volatility has been less.
00:52:51.000 | Volatility is every investor's enemy.
00:52:55.000 | The same return in a volatile portfolio is one that's constant.
00:53:02.000 | I'll give you numbers.
00:53:04.000 | 10% and 10% over two years gets you a 21% return.
00:53:09.000 | Zero and 20 gives you a 20% return.
00:53:11.000 | So you don't want volatility.
00:53:13.000 | So those portfolios were designed to try to address that volatility
00:53:17.000 | and help with higher returns.
00:53:19.000 | Well, Gus, was that designed as an alternative to annuities,
00:53:25.000 | like a SPIA, a single premium immediate annuity?
00:53:30.000 | Yes, except for the fact that it does have more volatility.
00:53:36.000 | I mean, it was designed to be something you can have in retirement,
00:53:43.000 | really count on the amount of income, the income growing over time with inflation,
00:53:48.000 | and hopefully even a little bit on a real basis,
00:53:52.000 | but do it in a very low-cost fashion.
00:53:55.000 | The problem with the annuity is that it's a high cost.
00:53:58.000 | Well, not only that, but you lose the money that was there.
00:54:02.000 | People don't buy annuities. They're sold annuities.
00:54:05.000 | I'm talking about a single premium immediate annuity.
00:54:09.000 | Yeah, well, what I mean, they're sold.
00:54:12.000 | Nobody goes out looking for one.
00:54:14.000 | It's a salesperson who comes to you and sells you one.
00:54:16.000 | Well, I think in this group, single premium immediate annuities
00:54:20.000 | are one of the acceptable options.
00:54:24.000 | Oh, really? That's an interesting piece.
00:54:26.000 | I think a lot of hesitation people have is it's the risk of dying tomorrow,
00:54:31.000 | and you gave up all your principal.
00:54:35.000 | So that's why they're still relatively small.
00:54:39.000 | But when the managed payout funds came out,
00:54:42.000 | I thought that this was a good alternative
00:54:45.000 | for people who could accept the variability in the returns
00:54:50.000 | because they still retain the assets as opposed to a single premium immediate annuity
00:54:55.000 | where they lost the assets.
00:54:58.000 | If I can say something slightly scandalous, perhaps moderately scandalous,
00:55:04.000 | a lot is written about the annuitization puzzle,
00:55:07.000 | which is why more people don't do it.
00:55:09.000 | And Mel's given one good reason, and so is Mr. Sauter.
00:55:15.000 | But what we find when we look at annuitizations,
00:55:20.000 | there are lots of good reasons not to do it.
00:55:22.000 | And it turns out that a lot of the people who write about the annuitization puzzle
00:55:28.000 | receive very large consultant fees from the insurance industry.
00:55:33.000 | No.
00:55:35.000 | [laughter]
00:55:37.000 | Say it in itself.
00:55:39.000 | Yeah, say it in itself.
00:55:43.000 | Okay, here's a question for the panel from Victoria F.
00:55:47.000 | Last April, we were bombarded with the news about high-frequency trading, HFT.
00:55:55.000 | What is your current opinion about HFT and the merits of Vanguard
00:55:59.000 | using HFT-resistant exchanges such as IEX?
00:56:07.000 | I guess that kind of falls on me.
00:56:09.000 | I've actually been somewhat vocal that I think all the uproar about HFT
00:56:15.000 | is that it sells books and actually has had less impact.
00:56:20.000 | It's interesting.
00:56:22.000 | At the end, you have to have some metric to measure the quality of a market.
00:56:27.000 | So what would that metric be?
00:56:29.000 | It would be transaction costs.
00:56:30.000 | I mean, that's really what the fallout is when you're investing.
00:56:35.000 | And if you look at transaction costs 15 years ago,
00:56:38.000 | they were well over 1% to buy the average equity.
00:56:41.000 | Today, it's about 35 basis points.
00:56:44.000 | So transaction costs have absolutely plummeted in the last 15 years.
00:56:48.000 | And there are several reasons why.
00:56:50.000 | There was a very significant change in what's called the border handling rules
00:56:54.000 | in the mid-1990s, 1996, I believe.
00:56:58.000 | And that led to the proliferation of different trading venues.
00:57:02.000 | Prior to that time, there were really only four different places to trade, four or five.
00:57:07.000 | And then all of a sudden, you see this explosion of trading venues.
00:57:11.000 | And I would say that I'm not in favor of that.
00:57:13.000 | I don't like all of the dark pools in all the trading venues.
00:57:18.000 | But they're there, and it would be crazy not to use them.
00:57:22.000 | But that led to the proliferation of exchanges.
00:57:24.000 | Then we had another very significant change, the decimalization in 2002, I think.
00:57:32.000 | That led to a collapse in spreads.
00:57:35.000 | We then had, with this proliferation of exchanges, we ended up with kind of a mess.
00:57:42.000 | The exchanges weren't tied together.
00:57:44.000 | And so the SEC created what's called REG NMS, National Market System.
00:57:48.000 | And that tried to bring all these 52 different trading venues together again.
00:57:54.000 | But they needed some vehicle to do that, and that's what high-frequency traders do.
00:58:00.000 | One function high-frequency traders do, you'll be very familiar with.
00:58:04.000 | They tie the exchange-traded fund prices to the underlying securities,
00:58:09.000 | or futures prices to the underlying securities.
00:58:11.000 | And the prices would wander away if there weren't people arbitraging to keep them close.
00:58:17.000 | So all of this has come together to create an ecosystem.
00:58:22.000 | And it's not an ideal ecosystem, but it has resulted in a dramatic decline in transaction costs.
00:58:29.000 | We live in a much better place today than we did 15 years ago.
00:58:33.000 | Could it be better? Yes, I think it could be better.
00:58:35.000 | I don't like the current market structure.
00:58:38.000 | Interestingly, the issues brought out in Flash Boys really aren't the real problems.
00:58:48.000 | There are some problems with high-frequency trading, but not the ones brought out in that book.
00:58:53.000 | So the SEC is reviewing order types.
00:58:58.000 | And that's really the biggest issue, is order types.
00:59:01.000 | Most institutional traders, and certainly individual traders,
00:59:04.000 | don't know what these order types are that high-frequency traders are using.
00:59:07.000 | If you use those same order types, you're totally immune to high-frequency traders.
00:59:13.000 | So I think there are some issues.
00:59:16.000 | I think they're way overblown in Flash Boys.
00:59:19.000 | We definitely live in a better world today.
00:59:21.000 | And I do worry that if all of a sudden somebody came in and said,
00:59:24.000 | "Get rid of all high-frequency traders," we'd go back to the old world.
00:59:27.000 | And that was not a good place.
00:59:29.000 | Let me expand on that literary dimension,
00:59:33.000 | which is the essence of good nonfiction writing is compelling narratives.
00:59:38.000 | And the narratives that Mr. Lewis had were spectacular.
00:59:44.000 | You know, people cutting straight lines through mountains across the Appalachians,
00:59:48.000 | heroic young financial analysts discovering irregularities in the system.
00:59:55.000 | Never mind the fact that the cost of this to the individual trader who's unaware of them
01:00:01.000 | might be a basis point or two, versus the hundreds or thousands of basis points
01:00:07.000 | that are garnered by a mendacious mutual fund brokerage industry.
01:00:12.000 | That's not a good narrative.
01:00:14.000 | And he pretty much admitted that.
01:00:16.000 | He said, "Yeah, everybody knows that Wall Street is corrupt,
01:00:18.000 | and it's creaming trillions of dollars off from individual investors,
01:00:22.000 | but that just wasn't a good enough story for me.
01:00:24.000 | This was a much more compelling narrative."
01:00:27.000 | Let me just suggest to Gus that you read with great care my editorial from JPM for summer
01:00:36.000 | called "Flash Boy and High-Frequency Trading."
01:00:39.000 | By the time you get through it, Gus, you will think, "Why is he putting my name to your work?"
01:00:44.000 | [laughter]
01:00:47.000 | Or your name to my work, I guess, would be a better formulation.
01:00:51.000 | I totally agree with you.
01:00:54.000 | See, it happens. Once again?
01:00:57.000 | [laughter]
01:01:01.000 | This is a question for the panel from Frugal Investor.
01:01:05.000 | Given that a retiree has ensured a basic survival budget using Social Security
01:01:10.000 | and single premium immediate annuities,
01:01:13.000 | I've been reading with interest various discussions on bubbleheads.org
01:01:17.000 | about a variable withdrawal method.
01:01:20.000 | For those of you who may be familiar with it, what are your opinions about it?
01:01:24.000 | Is it any better or safer than other withdrawal methods, and if so, why?
01:01:32.000 | Well, sure.
01:01:34.000 | A variable flexible withdrawal method that reduces withdrawals when returns are low or negative
01:01:39.000 | is obviously going to have a better survival percentage probability
01:01:43.000 | than one that has a fixed one that doesn't change with portfolio returns.
01:01:48.000 | So the question is, how flexible are you?
01:01:51.000 | If you're very flexible, then by all means, use a variable method.
01:01:55.000 | You're going to increase your chance of retiring successfully.
01:02:00.000 | The only problem is that will come at a cost of reduced consumption.
01:02:04.000 | There's always this trade-off between safety and consumption.
01:02:07.000 | You've got to figure out a way around it.
01:02:12.000 | Anyone else here care to comment?
01:02:15.000 | Well, I think the other threat of a lower-- of a reduced income stream
01:02:20.000 | is also that you have to consider inflation in there.
01:02:23.000 | So when you consider that plus the lower withdrawal, it's kind of a double-header.
01:02:33.000 | Okay, here's a question for the panel from Disaprius.
01:02:37.000 | Dr. Bernstein, Bernstein sometimes cites Rekenthal's rule,
01:02:42.000 | if the bozos know about it, it doesn't work anymore, for all panel members.
01:02:47.000 | In your opinion, is this just one of those amusing platitudes
01:02:51.000 | that sometimes fits and sometimes doesn't?
01:02:54.000 | Or is there actually actionable wisdom in it?
01:03:00.000 | Or is it truth?
01:03:06.000 | I think it's a useful rule at extremes.
01:03:10.000 | And, you know, one of the--
01:03:13.000 | I think most people, if we're going to talk, you know,
01:03:15.000 | financial porn market time in here,
01:03:17.000 | one of the most reliable indicators, in my opinion,
01:03:20.000 | is when all of your neighbors are doing something,
01:03:22.000 | it's generally a good idea that you don't do it.
01:03:25.000 | And when people start arguing with you and getting angry at you
01:03:28.000 | because you disagree with them,
01:03:30.000 | that's an almost certain sign that they're wrong.
01:03:38.000 | Anyone else?
01:03:40.000 | Well, I would just say arbitrage is a very strong phenomenon,
01:03:43.000 | so if everybody does perceive something, they'll arbitrage it away.
01:03:55.000 | Okay, here's a question for the panel from Ray James.
01:03:59.000 | Gold and tail risk, how much would each of you allocate to gold
01:04:03.000 | in a hypothetical portfolio purely for diversification?
01:04:10.000 | Well, if the portfolio has a 25 or 50-year time horizon,
01:04:13.000 | it's ain't that bad, but I would allocate 5% to gold
01:04:17.000 | just in case something awful happens that will help you a little bit.
01:04:21.000 | Other than that, I don't think it should be installed.
01:04:26.000 | Or, alternatively, instead of 5% gold,
01:04:29.000 | you can do 2% precious metals aggregate,
01:04:31.000 | which does effectively the same thing.
01:04:35.000 | You can use up a little smaller portion of your portfolio.
01:04:39.000 | By the way, precious metals aggregate prices have fallen
01:04:43.000 | in the past three years by 70%.
01:04:48.000 | Let me just reiterate for all of you a very simple fact about gold,
01:04:52.000 | precious metals, and any other commodity.
01:04:54.000 | They have no internal rate of return.
01:04:58.000 | I said this yesterday.
01:05:00.000 | Stocks have dividend yields and earnings growth.
01:05:02.000 | Bonds have interest group bonds.
01:05:04.000 | Precious metals, commodities, gold have nothing.
01:05:07.000 | So when you buy that particular security,
01:05:10.000 | you're basically betting you can sell it for more than you pay for it.
01:05:13.000 | And that is exactly the definition of speculation.
01:05:16.000 | So you want to be very careful.
01:05:18.000 | We all know it gets very popular when gold is at 3,000 or wherever it got,
01:05:23.000 | 3,300, I don't know.
01:05:25.000 | And it used to be the big thing in Forbes about 40 years ago.
01:05:28.000 | And then it didn't do well for a long time.
01:05:30.000 | So everybody forgot it.
01:05:31.000 | Remember it after it's done well.
01:05:34.000 | So just keep in mind that if everybody's talking gold,
01:05:37.000 | it's the time to get out.
01:05:39.000 | Now that everybody's talking non-gold,
01:05:41.000 | it's probably the time to get in.
01:05:43.000 | God knows.
01:05:44.000 | So you shouldn't be betting in your portfolio.
01:05:46.000 | Except Ron Paul said, "It could go to infinity."
01:05:50.000 | [laughter]
01:05:54.000 | This is number four that I agree with Jack on.
01:05:57.000 | [laughter]
01:06:00.000 | I have a different perspective in that I was a gold miner from 1982 to 1985.
01:06:06.000 | It took me three years to bankrupt a company that I put together.
01:06:10.000 | And I'm cured now.
01:06:12.000 | [laughter]
01:06:14.000 | I do believe that gold is not an investment.
01:06:16.000 | Gold could be, as Jack said, a catastrophic hedge.
01:06:21.000 | To me, if the world blew up, gold is a catastrophic hedge.
01:06:27.000 | But I don't place a high probability on that.
01:06:31.000 | So I wouldn't put a whole lot of money into gold.
01:06:33.000 | I certainly would not consider it an investment.
01:06:36.000 | And I think that some people consider it an inflation hedge.
01:06:39.000 | But in my portfolio, I have a $120 gold piece that I inherited from my dad.
01:06:45.000 | And I use tips and outbounds for my inflation protection.
01:06:49.000 | That's interesting.
01:06:50.000 | There are two types of inflation.
01:06:52.000 | So there's anticipated inflation and unanticipated inflation.
01:06:56.000 | And gold and other commodities are good inflation hedges with unanticipated inflation.
01:07:03.000 | In fact, they're one of the best, one of the few good ones.
01:07:06.000 | But then, once inflation is anticipated, all of a sudden, equities are probably your best hedge against anticipated inflation.
01:07:14.000 | You know, as far as gold as an investment goes, this is exactly what Rick Ferry has to raise his left hand.
01:07:21.000 | There we go. There's the gold investment you can make.
01:07:24.000 | That's gold investment you can make.
01:07:26.000 | [laughter]
01:07:29.000 | Best investment ever.
01:07:31.000 | [laughter]
01:07:33.000 | There is a very important point here that I don't think anybody but Cliff Asness has talked about.
01:07:40.000 | And he's at this wonderful award, if you can get a hold of this, it's all public, with Paul Kerman,
01:07:45.000 | who says the Fed has stopped inflation.
01:07:48.000 | And Cliff Asness says the Fed has stopped price inflation for the things we buy.
01:07:55.000 | But they have increased the inflation of financial assets.
01:07:58.000 | We've had huge inflation of financial assets due to the very Fed programs
01:08:02.000 | that are holding inflation down on things like the CPI.
01:08:06.000 | So it's not an open and shut case.
01:08:08.000 | And, you know, it's almost like you push something in here because it's whack-a-mole or something,
01:08:14.000 | and it pops up over here.
01:08:16.000 | And that's a very important point to realize, that the Fed, I think, is kidding itself in a lot of ways
01:08:21.000 | by giving themselves the hero's pat on the back.
01:08:24.000 | Always a worrisome thing, except when Gus and I are concerned.
01:08:27.000 | [laughter]
01:08:30.000 | And so you want to think about what's really happening,
01:08:33.000 | and it requires looking at financial assets as well as the normal consumer price,
01:08:37.000 | the basket of consumer goods.
01:08:42.000 | Here's a question for the panel.
01:08:46.000 | What fixed income choice and asset allocation do you advise in the current climate
01:08:51.000 | for individuals that have little or no tax advantage space
01:08:55.000 | and want an only large taxable account?
01:09:04.000 | I mean, you know, you should diversify.
01:09:07.000 | You should have a fair dollop of very safe assets, treasuries, CDs.
01:09:14.000 | Alan Roth will tell you how to do great work with CDs.
01:09:17.000 | I'm listening to the community's writings about that.
01:09:20.000 | And, you know, munis as well.
01:09:23.000 | A mistake that a lot of people make is they put 100% of their fixed income into their single state
01:09:27.000 | and do it to munis in their own state,
01:09:30.000 | which can be a disastrous mistake to make in terms of legal credit.
01:09:38.000 | Or alternatively, just buy the third bottom line.
01:09:42.000 | Let me just say that this is one of those questions where everybody wants the answer.
01:09:48.000 | And there is no answer.
01:09:50.000 | One example here, and I agree with what Bill says.
01:09:52.000 | It depends, first of all, and by far the most importantly, on what your time horizon is.
01:09:56.000 | If you're investing for the next five years, you probably should not be in the stock market.
01:10:01.000 | If you're investing for the next ten years, you should do it moderately.
01:10:04.000 | If you're investing for, as everybody must know, if you're investing for another 75 years,
01:10:09.000 | which our young people are doing today,
01:10:11.000 | you should not only be 100% in the stock market, you should be levered.
01:10:15.000 | You should be wholly levered, and you will double your market returns almost without any question.
01:10:19.000 | And you've got to be ready to stay through all the storms we get.
01:10:23.000 | But all these things depend on so many individual factors.
01:10:27.000 | Time horizon is a big one.
01:10:29.000 | Risk tolerance is a big one.
01:10:31.000 | Dimension of your financial goals.
01:10:34.000 | If you think you need to make more money, try to get more in stock.
01:10:38.000 | Not necessarily always the best idea.
01:10:40.000 | But we're all individuals.
01:10:45.000 | We all have our own behavioral problems.
01:10:47.000 | We all have our own hopes and fears.
01:10:49.000 | And so I think we're heading into a rules-making society as if we're all one, the same individual.
01:10:57.000 | And if anything is true, we have in this room probably 230 totally different individuals,
01:11:03.000 | even husbands and wives.
01:11:05.000 | I devoutly wish that when I was a young man I could have tolerated a 100% or doubly levered portfolio,
01:11:15.000 | but I don't believe there are any sentient beings in this quadrant of the galaxy capable of doing that.
01:11:20.000 | Well, unless you consider having a mortgage on your house.
01:11:26.000 | I mean, you could not have a mortgage on your house, and you'd have less to invest.
01:11:31.000 | If you have a mortgage on your house, you have a mortgage on your house.
01:11:33.000 | And one of the obvious things is tax efficiency and what tax brackets they're in.
01:11:39.000 | I have a friend who sold his business for a very large sum,
01:11:44.000 | and so most of his accounts are in the taxable--most of his assets are taxable.
01:11:49.000 | So in his case, he uses munis to reduce the tax burden,
01:11:54.000 | and he uses things like the whole stock market for his equities because that's a very tax-efficient holding.
01:12:05.000 | Here's a question for the panel about what major trends you have seen in the last 5 to 10 years.
01:12:12.000 | What do you think are here to stay or will grow?
01:12:15.000 | What new products, academic research, or legislation change will have the biggest effects on the gold-bed investment strategy?
01:12:26.000 | First, never use the word "product" in my presence.
01:12:31.000 | We aren't selling products, for God's sake.
01:12:35.000 | Actually, I banned the word when I was running Vanguard.
01:12:37.000 | You had to pay a $5 fine if you used it.
01:12:42.000 | You'd be surprised how the usage went to almost zero.
01:12:45.000 | I just think it's the wrong way to look at it.
01:12:48.000 | It's a great way to look at beer.
01:12:50.000 | It's a great way to look at, I don't know, toothpaste.
01:12:54.000 | It's a great way to look at bread.
01:12:56.000 | God knows what else.
01:12:58.000 | But we're not the product-selling business.
01:13:00.000 | I think we have created too many products in this business, far too many,
01:13:04.000 | because most "products" are created to enrich the provider of the service
01:13:10.000 | and not the consumer of the service.
01:13:13.000 | Wall Street creates products to make money for.
01:13:16.000 | Anybody want to spend a little time guessing who they create these new products for?
01:13:21.000 | To make money for themselves.
01:13:23.000 | I mean, this is not complicated.
01:13:25.000 | So, you can't.
01:13:27.000 | It is, I think, absolutely true that there is no way to improve on the oil market index fund.
01:13:34.000 | None.
01:13:35.000 | You can't.
01:13:36.000 | The only way to beat the market is to have an individual strategy that can win or lose.
01:13:42.000 | But overall, as we've said a thousand times here,
01:13:45.000 | I think you've all gotten the message even before you came all the way here these last couple of days,
01:13:51.000 | it is the universal strategy.
01:13:53.000 | And it cannot be.
01:13:54.000 | It's mathematically correct.
01:13:56.000 | It is a tautology.
01:13:58.000 | And nobody can outdo that.
01:14:00.000 | So, I hope we won't try.
01:14:03.000 | Because whenever you try, you know, I don't much like, I gave actually a height of a boom back in 2007,
01:14:11.000 | talking about financial innovation at the Federal Reserve back in Philadelphia.
01:14:15.000 | I think this is in my book.
01:14:18.000 | Don't count on it, maybe.
01:14:19.000 | One of the two books, probably the latest book.
01:14:22.000 | And I took a great view of innovation in America.
01:14:27.000 | Products, services, all those kind of things.
01:14:30.000 | Technology.
01:14:31.000 | And a very dim view of it today.
01:14:33.000 | And the next thing I knew, the roof had fallen down.
01:14:36.000 | And it all collapsed.
01:14:37.000 | All those great innovations.
01:14:38.000 | All those great derivatives.
01:14:39.000 | All those mortgage-backed securities.
01:14:42.000 | And all those phony, back where they call them,
01:14:46.000 | banks have them in their books.
01:14:48.000 | They said they would guarantee that the principal,
01:14:52.000 | the word, the specialists on the special investment.
01:14:56.000 | And the banks were putting them out as money market good to the clients.
01:15:03.000 | But they weren't money market good because of their asset bank.
01:15:06.000 | And they had to eat a lot of that stuff.
01:15:08.000 | Poor old Chuck Prince at Citibank, who had to keep dancing as long as the music was playing.
01:15:13.000 | I'm sure he'd like to take that one back.
01:15:16.000 | You know, suffered greatly from it.
01:15:18.000 | You know, thinking they had to keep in the flow of the market.
01:15:22.000 | And outdo it, products that they would buy.
01:15:26.000 | And it's all just a charade.
01:15:30.000 | It's a phony business, the financial business.
01:15:33.000 | Because we're all trading with one another.
01:15:35.000 | And, as I mentioned in one of my books,
01:15:41.000 | Boyd Blankfein, Goldman Sachs, and everybody else says,
01:15:44.000 | "The financial business is a great business.
01:15:47.000 | We provide new capital to industry.
01:15:50.000 | We make it possible for innovation, and blah, blah, blah, blah."
01:15:53.000 | And it's true.
01:15:55.000 | And the market produces about $250 billion, I think the number is.
01:16:00.000 | Providing new capital, the classic function of finance.
01:16:03.000 | Boiling the financial system, greasing the wheels of capitalism.
01:16:08.000 | All great.
01:16:10.000 | And compared to that $250 billion,
01:16:12.000 | we trade with one another to the tune of $36 trillion a year.
01:16:16.000 | So, investment accounts for, what is that, six-tenths of one percent
01:16:22.000 | of what we do in the marketplace.
01:16:24.000 | And speculation accounts for 99.4 percent.
01:16:28.000 | Is this a great financial system, or what?
01:16:32.000 | Jack, let me see if I understand what you're saying.
01:16:37.000 | I knew I didn't make it clear enough.
01:16:39.000 | I know a little story about when Jack banned the word "product."
01:16:43.000 | He also banned the word "sales."
01:16:45.000 | And so, Bill McNabb at the time was head of the Institutional Sales Department.
01:16:50.000 | And so, from that day forward, I've been telling him he was head of Purchase Facilitation.
01:16:55.000 | [laughter]
01:17:00.000 | I like it better, but it won't fly.
01:17:04.000 | I am concerned with the development over the last 10 years.
01:17:07.000 | And you might have picked it up on my presentation about the so-called smart beta.
01:17:12.000 | I mean, the one line on there that you saw ETF.com being quoted as anything but market cap weighted.
01:17:19.000 | And, you know, I agree with Jack that the market cap weighting is the one investment
01:17:26.000 | that has that topology proving it as the correct way to invest.
01:17:31.000 | It doesn't mean that other things might not outperform, but we'll know after the fact.
01:17:36.000 | We won't know before the fact.
01:17:39.000 | I mean, you know, what's happened in the past 10 years, I mean, I don't think there's anything new in the world.
01:17:44.000 | The only thing that's new in the world is the history that we haven't read.
01:17:50.000 | Human nature is not going to change.
01:17:52.000 | There's going to be bubbles.
01:17:54.000 | There's going to be panics.
01:17:57.000 | And, you know, puppies will continue to crawl into your lap and fall asleep.
01:18:00.000 | I don't think that there's anything new in the past 10 years in financing.
01:18:05.000 | It doesn't take much confidence in solving this individual investor.
01:18:11.000 | Okay, this will be the last question for this panel.
01:18:14.000 | And this is for Mr. Vogel from John Becker.
01:18:18.000 | I would like to have you ask Mr. Vogel if he's a stickler for periodic portfolio reallocation
01:18:25.000 | or if he'll just believe you should set it up one time and let the market move it all around at will.
01:18:33.000 | I don't mean to accrue a quipcake, but it all depends.
01:18:41.000 | [ Laughter ]
01:18:43.000 | [ Applause ]
01:18:50.000 | [ Silence ]
01:18:55.000 | [BLANK_AUDIO]