Bogleheads® Conference 2011 - Panel of Experts I Part 2
00:00:00.000 | "This is primarily for Bill Bernstein, but anyone can reply.
00:00:11.540 | Market swings over the last year or three seem to be atypically wild, but that wild
00:00:16.780 | appearance could just be recency bias or lack of historical perspective.
00:00:22.820 | How would you compare recent volatility to the noise from the past?"
00:00:26.100 | "I think Alan just basically answered that question."
00:00:30.220 | "Well you can answer it one of two ways, you can use Alan's approach which is a good approach,
00:00:36.060 | but I would point out that the implied volatility of the S&P 500 reached about 85% during the
00:00:45.940 | teeth of the crisis.
00:00:46.940 | We didn't have the VIX back in 1929 and during the 1930s, but you can estimate what it would
00:00:55.260 | have been about the same thing, if you just take the 30 day trailing volatility of the
00:01:01.500 | Dow Jones Industrial Average back then, it correlates pretty well with that.
00:01:06.620 | So I think we saw an extraordinary event, the question is will we see that going forward
00:01:13.420 | again, will we see that anytime soon, and I'd give it a pretty good chance, the Europeans
00:01:20.820 | are doing their best to precipitate a global financial crisis, and keep plenty of cash,
00:01:29.540 | you'll be able to pick up stocks cheap at some point in time."
00:01:35.220 | "This question is from Gauter Lee, who is here, "Is low cost broad market index investing
00:01:42.940 | here to stay?
00:01:43.940 | Do any of the panel members see any possible threats to its continued availability?
00:01:49.460 | Will it evolve, and if so, how?"
00:01:54.260 | Alan?"
00:01:55.260 | "I think it's here to stay, greed versus common sense, I love the data that Jack showed yesterday,
00:02:07.780 | that 100% of the cash flow for the last several years was into index funds, and yes, there
00:02:13.860 | are ugly things like the brochures, triple lever, inverse index fund, but that garners
00:02:19.660 | a tiny bit of the assets compared to the broad, diversified, total US, total international,
00:02:26.020 | total bond fund.
00:02:27.020 | So I think it's here to stay, I think what Jack Fogle, whether he invented it, or is
00:02:32.180 | just the person that took the idea to the public and made it popular, and allowed me
00:02:38.020 | to do what I'm doing now, having a lot of fun, it's here to stay."
00:02:43.340 | "I'm sorry Bill, I forgot that that was directed to you."
00:02:46.580 | "Oh, I'm sorry."
00:02:47.580 | "No, that's okay."
00:02:48.580 | "That was my fault."
00:02:49.580 | "No, I mean, I agree with that completely, and you know, at the level of retail finance,
00:02:55.780 | at the level of the advisory service and the brokerage industry, the people in the brokerage
00:03:03.540 | industry are just scared spitless, they're a jumping ship, and the model that is picking
00:03:09.140 | up all the business is Rick's model, which is low cost, and people are trying to, it's
00:03:20.100 | just hilarious watching these brokers trying to rebrand themselves as Rick and Mary.
00:03:25.140 | So I see it snowballing, and I certainly don't see it ever slowing down."
00:03:29.140 | "Yeah, I've seen a lot of people coming into the advisor business who used to be brokers
00:03:36.420 | and used to sell products and used to sell insurance and whatever, and are now doing
00:03:41.060 | low cost indexing, and they're trying to do it where they're the tactical asset allocator,
00:03:48.900 | so they're buying all these beta-type products, which are basically spiders and VTI, and they're
00:03:54.900 | trying to do tactical asset allocation to add value, which they can't do, but that's
00:03:58.900 | a different story, it justifies the fee I guess, but there's this huge shift, I don't
00:04:02.700 | know if you've been reading the papers about all the amount of money that's leaving American
00:04:06.180 | funds.
00:04:07.180 | American funds has been the leader in the brokerage industry for decades on gathering
00:04:15.140 | assets, all the way through the 1990s, but they're active managed, they're actively managed
00:04:20.420 | funds, even though they're really closeted tax funds, and you're seeing very large withdrawals
00:04:26.020 | from American funds, and you're saying where is this money going?
00:04:28.980 | Well it's going into index products, particularly ETS, because the advisors who were directing
00:04:34.300 | money into American funds are now taking their clients' money out of American funds and putting
00:04:38.860 | them in index funds like SPY, VTI, and so forth, predominantly low cost stuff, but some
00:04:47.660 | of it's going into the alternative junk that's being created.
00:04:52.580 | So there's a huge shift, it's going that way, and Jack's slides show it all, I mean, indexing
00:04:56.860 | is continuing to grow, and it's not going to reverse.
00:05:03.100 | How these products are creating these newfangled index funds that Jack talked about, as active
00:05:09.460 | management moves closer to indexing, indexing looks a whole lot more like active management,
00:05:14.020 | but Allen was right, they're not gathering much assets.
00:05:17.260 | I mean, indexing itself, vanguard type indexing that we all believe in and that we all do,
00:05:23.780 | grows organically, it grows by word of mouth.
00:05:26.420 | We tell other people about this, they look at it and they say, "Yes, I've become a believer."
00:05:30.820 | They put their money in, so it's a very grassroots effort.
00:05:33.540 | All that other stuff, like what Rob Arnott, and I like Rob, don't get me wrong, I think
00:05:37.420 | he's got a unique product with his rapid indexes, but all that alternative stuff has to be sold.
00:05:43.020 | It's sold to you.
00:05:44.180 | You don't organically buy it, and that's the difference between the organic growth of vanguard
00:05:50.100 | and low cost indexing that we all do, and all this other stuff that's being called indexing
00:05:55.380 | that's being thrown upon us, it has to be sold to you, and quite frankly, when you look
00:05:59.180 | at the numbers, and Morningstar has all the numbers, and Scott Burns took my index strategy
00:06:04.660 | box methodology that I created a few years ago, and dropped all these different index
00:06:08.860 | products in there, and looked at what's collecting assets and what isn't, and what is collecting
00:06:12.820 | assets are vanguard total stock market, are S&P 500, vanguard total bond, those types
00:06:19.020 | of funds are gathering the assets.
00:06:20.860 | All this other stuff out here is competing, but it's not really gathering assets.
00:06:24.820 | And Christine?
00:06:25.820 | - Well, yeah, Rick, I very much share the concern about advisors serving as technical
00:06:30.660 | asset allocators.
00:06:31.660 | I think consumers sort of looked at their advisors and said, "Okay, there's only so
00:06:35.420 | much I want to pay," and advisors looked at that and said, "Well, okay, we'll squeeze
00:06:40.780 | out the active fund management fee so I can take more for myself, and I'll use these very
00:06:45.860 | low cost products to technically asset allocate."
00:06:49.460 | Our data certainly point to the ability of anyone, whether retail investors, advisors,
00:06:55.340 | or institutions' ability to make tactical decisions like that correctly over the long
00:07:01.420 | term.
00:07:02.420 | We point to their chances of doing so as being very low.
00:07:05.220 | A colleague of mine has been collecting data on funds that he has hand categorized as being
00:07:11.740 | tactical historically, and I was telling Rick about this yesterday, and I think it dovetails
00:07:16.780 | maybe with your data, Ed, or maybe not, he found that the tactical asset allocators had
00:07:23.020 | beaten the risk-adjusted profile Vanguard balanced index, just 6% of those tactical
00:07:30.100 | asset allocators had done so, which to us really casts into question the ability of
00:07:35.860 | anyone to make those tactical calls correctly on an ongoing basis.
00:07:43.260 | And fully 25% of the tactical asset allocators had actually gone away, the funds had merged,
00:07:48.620 | have been liquidated, which, generally speaking, means that they probably weren't very good.
00:07:54.020 | Well, since I've got both Christine and Alan on the same panel, I'll ask the both of you
00:08:01.820 | about using fund flows.
00:08:02.820 | I know how you feel about it, I'm not unsympathetic to that point of view, and Morningstar for
00:08:09.820 | years used to have a fund flow indicator and strategy, and you gave up on it, and I don't
00:08:15.740 | know why you did.
00:08:16.740 | I think my colleague Russ Kinnell is still doing some version of the Unloved Funds Study,
00:08:22.000 | some of you may have been familiar with it, it's called Unloved Funds, so we would look
00:08:28.500 | at the fund categories, the three fund categories that had been the biggest asset losers over
00:08:34.500 | the previous year, and the idea was that you would buy all three categories, I think they
00:08:39.100 | back-tested it and found that you'd have to buy all three to have any record of success
00:08:43.460 | with it.
00:08:44.460 | But what we found was that those Unloved Fund categories did strongly outperform the market,
00:08:50.820 | and certainly outperformed the Loved categories, those that had gotten big inflows in the previous
00:08:57.780 | year, so I do think that there's something to watching fund flows, although sometimes
00:09:02.980 | they kind of make me scratch my head, recently, for example, there have been great inflows
00:09:07.660 | in emerging markets, and I'm not sure what's going on there, so sometimes it doesn't sync
00:09:13.500 | up, but I think in general it's not a bad contrarian indicator.
00:09:17.060 | I think it tells you about the future of emerging markets, which I think that the Unloved Funds
00:09:22.700 | is what we all do when we do annual rebalancing, when we do annual rebalancing we are rebalancing
00:09:27.940 | out of the Loved Funds and we're rebalancing into the Unloved stuff, so I mean we're all
00:09:31.940 | doing it if you just do an annual naive rebalancing.
00:09:35.580 | I can't predict what the market does in the next year, but I can tell you if it goes down
00:09:39.780 | people will be taking funds, taking their money out of equity funds, if it goes up they'll
00:09:44.620 | be putting it in.
00:09:45.940 | I shared with Bill, and I presented to Vanguard a couple of days ago some ideas and back testing
00:09:53.900 | how changing the allocation between total stock, total international, and total bond
00:09:59.660 | would have done on the buy and hold annual 1231 rebalancing are going in the opposite
00:10:05.980 | direction of fund flows, and between buy and hold and the fund flows there was about a
00:10:13.100 | 1.4% annualized difference, and it did not work every year, and during the years, end
00:10:20.300 | of 2002 to 2007, five years when stocks went up, US stocks doubled, international stocks
00:10:26.620 | tripled, funds flowed in, and it continued to go up until obviously it didn't in 2008.
00:10:33.720 | So fear and greed, the instincts that helped us survive really comes into play and damages
00:10:42.660 | us in the stock market.
00:10:43.660 | Yeah, I think that the things that Alan and Rick and Christina talked about are all just
00:10:51.020 | different ways of skinning the same cat, which is when I see an asset class in index that's
00:10:56.940 | fallen 30%, 50%, 70%, I start licking my chops.
00:11:01.420 | Fund flows tell me pretty much the same thing, and so does when I tell someone who's a layperson
00:11:09.340 | that I like a particular asset class, they look at me and they say, "Are you crazy?"
00:11:13.900 | That's also a good sign, and they're all telling me the same thing.
00:11:21.300 | Okay, the next question is from Bob90245.
00:11:25.940 | Recent threads on the forum question why stocks valuations really matter.
00:11:30.380 | If we have properly assessed our need, ability, and willingness to take stock market risk
00:11:36.180 | based on our age and circumstances and setting our equity fixed split, shouldn't we stay
00:11:42.540 | the course, not change the equity fixed split, and not worry about valuations?
00:11:47.860 | I think if you're young, that's true.
00:11:53.500 | I think if you're getting close to retirement, you really want to look at what your number
00:11:58.180 | is.
00:11:59.180 | In other words, how much are you shooting for?
00:12:00.180 | You're shooting for $2 million.
00:12:01.180 | That's what you're shooting for.
00:12:02.180 | And you catch a bull market like you did in the early 90s, mid-1990s, older than the 1990s.
00:12:08.180 | You catch a bull market, your expected rate of return on equities is 8%, and it was 16%
00:12:17.260 | a year.
00:12:18.260 | So you look at things as, "Well, if I need to get a 6% compounded return on my money,
00:12:25.020 | I'm here at $1 million, I'm going to be adding a little bit of money, seven years from now,
00:12:29.460 | six years from now I should be at $2 million."
00:12:30.460 | And all of a sudden, after three years, you find yourself at $1.9 million.
00:12:35.460 | Okay, well that's because the valuations of stocks went up.
00:12:38.540 | I think at that point, it's a legitimate thing to do, is to say, "I'm almost there, I can
00:12:44.760 | coast in to $2 million.
00:12:46.980 | I've made a lot of unexpected gains in my portfolio, so I'm going to lower my asset
00:12:53.100 | allocation."
00:12:54.100 | And you're really lowering your asset allocation because the valuations of securities went
00:12:57.860 | from 14 PE up to 20 PE, and that's really why you're doing it.
00:13:02.020 | You didn't expect this unexpected jump in equities to occur, which funded your retirement.
00:13:08.120 | So a reduction in risk at that point, because you're almost there, makes sense.
00:13:12.060 | But if you're young, I think you just ride out the wave.
00:13:15.060 | I mean, basically what you're saying is that when you've won the game, you've stopped playing,
00:13:21.660 | which is just a different way of saying that.
00:13:25.940 | And I agree, the young person should maintain a fairly constant aggressive allocation, because
00:13:34.860 | they're constantly adding money.
00:13:35.860 | And there are very few things in finance that are sure-buyer, but if you save continuously
00:13:44.240 | a large amount of money between the time you're 20 and the time you're 15, at some point you're
00:13:48.940 | going to buy a lot of stock very cheaply, and you're going to make out like a bandit.
00:13:52.580 | Why would you want to screw up that by building around with your equity allocation?
00:13:59.460 | I think that's what the reference is to, is that should people switch and change their
00:14:05.220 | asset allocation on an ongoing basis when equities hit the PE ratio or the PE10, it's
00:14:15.060 | a certain number.
00:14:17.700 | Some people claim that a magical bell will ring, and now it's time to go from 75% equities
00:14:24.180 | to 25%, and then another bell will ring when PE10 hits another number, and now you jump
00:14:31.340 | back in.
00:14:32.340 | All of those experts that can do that have demonstrated that they haven't been terribly
00:14:36.060 | effective at that.
00:14:37.060 | They spend a lot more time, I think, than most of us and most of the people on the forum
00:14:41.660 | worrying about that.
00:14:42.660 | From a behavior perspective, I think you're just setting yourself up for trouble if you're
00:14:45.780 | trying to do that.
00:14:46.780 | I think it's much better to look at, are you reaching your target financially and things
00:14:50.380 | like that, and not worry about some of the underlying factors.
00:14:53.900 | I don't like to analyze a lot of these factors like these guys do, I just try and keep investing
00:14:59.220 | a little bit simple and recognize that for me a lot of it's very behavioral, and if I
00:15:02.980 | start worrying about a lot of that kind of stuff, I'm probably going to get down the
00:15:05.780 | wrong path, and it's best just to keep looking at the total market funds and not worry about
00:15:11.380 | so much what all the individual components are underneath it.
00:15:14.260 | The funny part is, is even the people that espouse that constant changing all have different
00:15:20.300 | numbers.
00:15:21.300 | Some say 8 is the magic point, some say 14, some say 16.
00:15:25.300 | It would be nice if a bell rang and it really worked, but the bottom line is, is that even
00:15:30.660 | the people who espouse that can't agree on what the magic number is.
00:15:34.500 | Well, the number keeps changing.
00:15:35.500 | I want to tell a quick story, if you don't mind.
00:15:37.500 | It used to be all the way from the 1800s all the way through till the early 1960s, basically,
00:15:44.700 | that when the dividend on stocks fell below the yield on the 10-year bond, then you sell
00:15:53.300 | stocks and you buy bonds, and when the dividend on the S&P basically rose above the 10-year
00:16:01.980 | treasury, you sell treasuries and you buy stocks, that was the market timing system,
00:16:07.540 | and that worked wonderfully from 1870 through 1960, roughly, '65, but then what happened
00:16:16.660 | was because of changes in advances, if you will, in corporate structure and cost of capital
00:16:22.900 | and a lot of PhD-type work coming into this, they said, "You know what, it's better if
00:16:27.100 | we use those dividends that we're paying out and then keep them internally, it's the cheapest
00:16:32.260 | form of capital that we can have to expand the company, let's use them rather than going
00:16:37.100 | on borrowing money or issuing more stocks," so they changed the capital structure, and
00:16:40.860 | then the dividend yield started to fall because companies started changing their structure,
00:16:44.660 | and a lot of companies cut out their dividend, so all of a sudden, they said, "Okay, well,
00:16:48.860 | instead of it being above 10-year treasury, buy stocks below your 10-year treasury, we're
00:16:54.780 | going to put a range in of when dividend yields are below 5%, excuse me, when dividend yields
00:17:07.260 | were at 5%," because they had dropped now, "buy stocks, and when they went to 3%, you're
00:17:12.140 | going to sell stocks," so that was now the new range, 5 to 3, and that lasted for a while
00:17:18.020 | until dividend yields went below 3% and stayed there for years, and then that didn't work
00:17:24.420 | anymore.
00:17:25.420 | So the next thing that I think we heard about was, well, let's move ahead a bit, the Fed
00:17:29.820 | model.
00:17:30.820 | You remember the Fed model?
00:17:31.820 | All you that have been investing for more than 10 years, which basically says that the
00:17:35.780 | yield on the 10-year treasury inverted, and that should be the P/E of the market, so that
00:17:42.100 | when the 5-year treasuries are yielding 5%, 10-year treasuries yielding 5%, the P/E of
00:17:50.540 | the market should be 20, so if the P/E of the market is above 20 when treasuries at
00:17:55.500 | 5%, then you should sell stocks, and when the P/E goes below 20, you should buy stocks.
00:18:01.820 | Okay, the P/E, 10-year treasuries right now are at 2%, okay, so you take 2 and you divide
00:18:07.340 | it into 100, and what should the P/E of the stock market be?
00:18:10.340 | 50.
00:18:11.340 | We're currently at 12, man, is this a flaming buy or what?
00:18:16.180 | I mean, so all these models keep changing, so the question is not so much coming up with
00:18:20.300 | a model, it's which one's going to work in the future, we have no idea, so it doesn't,
00:18:24.300 | you can't do anything with this.
00:18:26.420 | I think the one wrinkle that I might add is that, you know, instead of changing your overall
00:18:33.980 | stock allocation, I don't think there's anything wrong with, in that stock allocation, making
00:18:38.740 | some minor adjustments, for example, in the 1990s, you know, I think that anyone with
00:18:46.120 | a pulse, or earlier, the late 1980s, anyone with a pulse would have realized that maybe
00:18:51.660 | they wanted to own more U.S. stocks than Japanese stocks because of the enormous gap in valuation.
00:18:57.780 | Similarly, in the late 1990s, you know, large-cap U.S. stocks, large-cap developed market stocks
00:19:06.100 | were pretty darn rich, and, you know, that didn't mean that you should have sold off
00:19:11.660 | all of your stocks, but what I think a reasonable person would have done is said, "Gosh, you
00:19:18.100 | know, REITs are yielding 9%, maybe I should own a little bit more of those, gold stocks
00:19:25.040 | have been beaten down, small stocks, value stocks have been horribly beaten down, maybe
00:19:30.300 | I want to own a little bit more of those," but of course, you know, then again, if you're
00:19:34.740 | a total stock market person, you know, you want to keep things simple, so maybe you don't
00:19:38.100 | want to do that, but if you're a slicer and a dicer, I think it does present some opportunities,
00:19:44.100 | and then, of course, you know, in the late 1990s, you could have looked at ILONs, and
00:19:49.100 | you'd be a brilliant call, so, you know, I think that there is some fiddling around the
00:19:55.100 | edges that I think is profitable to help you, you know, avoid the real train wrecks.
00:20:01.100 | It strikes me that a discipline rebalancing program would get you in the same general
00:20:05.100 | ballpark as sort of the market timing type strategies would, with a little more discipline,
00:20:11.100 | perhaps.
00:20:13.100 | I can predict the past with uncanny accuracy, but I am smart enough to realize that I don't
00:20:21.100 | know when markets are over or under value, and if I knew, I wouldn't tell you I'm not
00:20:26.100 | that nice a guy.
00:20:30.100 | Next question is from Karen Bennett.
00:20:33.100 | Karen?
00:20:36.100 | She asks, "What do you see as the ideal amount of inflation-protected securities one should
00:20:41.100 | have in their account, taking into account key variables such as age, size of the nest
00:20:47.100 | egg, current interest rates, et cetera, and why?
00:20:51.100 | What do you see as the best vehicle for this investment?
00:20:54.100 | Vanguard fund?
00:20:55.100 | Actual bonds?"
00:20:56.100 | I'm trying to see the range of responses from experts to help target an appropriate amount
00:21:01.100 | for our portfolio.
00:21:04.100 | I think we addressed the amount in another question, so can I address whether to have
00:21:09.100 | just bonds or the fund?
00:21:12.100 | Okay, I'm going to disagree with Bill Bernstein.
00:21:15.100 | I mean, I don't want to have to invest in individual bonds.
00:21:18.100 | I don't want to have to reinvest the interest that comes in.
00:21:21.100 | Just give me the Vanguard tips fund and I'm happy.
00:21:29.100 | And I rarely ever disagree with Bill, but I'd like to point out one thing that in your
00:21:35.100 | comments with Jack, you indicated that you talked about the risk of tips and how they
00:21:43.100 | behaved recently, but you said that you wanted to hold tips and not the bond fund.
00:21:51.100 | But what you neglected to mention is that if you needed the money in the time period
00:21:58.100 | where you're going to sell the bond fund, you're going to sell the tips too, so you're
00:22:02.100 | in the same boat.
00:22:04.100 | They were just as volatile as the individual tips if you needed the money at that time.
00:22:09.100 | Yeah, I guess the point is that you should have an emergency fund for that.
00:22:15.100 | In other words, the tips ladder, which I would recommend, are for your expected needs.
00:22:22.100 | Okay, your unexpected needs you have to handle another way.
00:22:31.100 | Okay, this question is actually from the forum, and the question is for all the panelists.
00:22:41.100 | By the way, this guy is from BT, this forum member.
00:22:46.100 | He asks, "What is your opinion of single premium immediate annuities as a way to reduce
00:22:51.100 | uncertainty on a safe spending level during retirement?
00:22:55.100 | Can you offer any guidelines on what portion of one's invested assets should be converted
00:23:00.100 | to an annuity?
00:23:02.100 | At what age should they be bought?
00:23:03.100 | What factors should influence my decision?"
00:23:08.100 | I think I need to go visit him personally before I can make a decision.
00:23:14.100 | Free consultation.
00:23:16.100 | Just pay the travel expenses.
00:23:19.100 | I think that the single premium immediate annuity is the only annuity that I think that
00:23:26.100 | Boglehead is in agreement that is something that can really play an important part in
00:23:34.100 | investors' overall planning.
00:23:38.100 | In terms of how much, I think that for a lot of people the amount is going to vary, but
00:23:44.100 | it would be enough that would go along with Social Security in giving them a guarantee
00:23:52.100 | along with Social Security and any pension they have that would guarantee that their
00:23:56.100 | expenses are paid.
00:23:59.100 | In terms of how much to do it and when to do it, I think that's an individual decision,
00:24:05.100 | but the longer you wait, the higher the payout is going to be, so if you can afford to wait
00:24:09.100 | longer, I would never, this is my personal opinion, I would never put more than 50% of
00:24:17.100 | my assets in an annuity.
00:24:20.100 | Remember, the annuity is unlike a variable annuity which is walled off and if the insurance
00:24:26.100 | company goes under, you're going to be made whole.
00:24:29.100 | With a single premium immediate annuity, it's mixed in with the assets of the company.
00:24:35.100 | It's subject to their creditors and if the business goes under, people call it insurance,
00:24:45.100 | but it really isn't insurance, state insurance.
00:24:47.100 | It's not really a guarantee.
00:24:49.100 | All they do is go to other insurance companies and assess them to try to make you whole,
00:24:53.100 | but in the meantime, you're not necessarily getting checks and there's a lot of disruption
00:24:58.100 | and insurance companies do go out of business because you're betting on that insurance company
00:25:03.100 | being around for maybe 30 years or so, so if you're going to buy more than $100,000,
00:25:09.100 | which is normally the, in many states, that's the maximum that's guaranteed, you would want
00:25:14.100 | to do it from multiple companies and you might want to do it at multiple times, too.
00:25:20.100 | - Yeah, I was going to say that, Mel.
00:25:22.100 | I think a ladder strategy with single premium immediate annuities is a great idea to help
00:25:27.100 | mitigate the risk of sinking a lot of money into a very low payout environment and also
00:25:33.100 | to help diversify across multiple insurers.
00:25:38.100 | One topic I think has been kind of underdiscussed in the realm of single premium immediate annuities
00:25:44.100 | is what they call the insurance industry adverse selection, so you have people with a lot of
00:25:50.100 | longevity on their side purchasing their things and I think what insurers are experiencing
00:25:56.100 | is they've got a lot of folks who are living longer than their actuarial tables might have
00:26:02.100 | suggested, so that's another thing to think about that could depress payouts for the foreseeable
00:26:08.100 | future from these types of products.
00:26:13.100 | - I think it can make sense at age, I agree with Larry Sweatrow, at age 70 that the life
00:26:19.100 | credits, the insurance against living a very long life become larger than the costs you
00:26:25.100 | might pay if you're going through an extra intermediary.
00:26:28.100 | Do not forget, not only is there default risk from the insurance company, but there's interest
00:26:34.100 | rate risk.
00:26:36.100 | If we do hit, and this is not a prediction, but if we do hit hyperinflation, then that
00:26:41.100 | payout becomes worth less and less each year, and yes, you can buy inflation protected,
00:26:46.100 | but that drastically lowers the payment.
00:26:50.100 | - Yeah, and furthermore, the inflation protection you get with most SPI, inflation adjusted
00:26:55.100 | SPI is more as a cap on them.
00:26:58.100 | The best work that's been done in the area has been done by, I think by Moshe Malevsky,
00:27:03.100 | who has looked at a very sophisticated variance sort of statistical approach, and the results
00:27:12.100 | are very intuitive, it comes up, they're very intuitively appealing, which is you split
00:27:16.100 | your money among stocks and bonds, and some SPIAs, you should certainly buy at least two
00:27:24.100 | or three companies, and maybe some tips, and he puts variable annuities in there as well,
00:27:33.100 | so don't bet the farm on anything.
00:27:36.100 | And again, I'm sounding like a broken record, but unless you think you're going to be pushing
00:27:41.100 | the daisies any time soon, the SPIA that everyone should buy is the delay in Social Security
00:27:48.100 | until seven.
00:27:53.100 | - Okay, I have to preface this by saying this was written in May, this question was posted
00:27:57.100 | on the forum in May.
00:28:00.100 | Does the success of PIMCO's total return bond--
00:28:03.100 | (laughter)
00:28:08.100 | Does the scientific question the desirability and effectiveness of indexing for bond funds?
00:28:13.100 | - The question answers itself.
00:28:15.100 | (laughter)
00:28:19.100 | - Don't know if this question will be timely when the reunion occurs, but here in September
00:28:24.100 | there's been much news about Greece, a possible default there, and whether the euro will survive.
00:28:31.100 | Has these additional risks to European stocks altered your thinking about diversifying equity
00:28:36.100 | asset classes globally?
00:28:39.100 | I think that would be a good question for the advisors.
00:28:42.100 | - I think the answer is no.
00:28:44.100 | I mean, I think there's always different kinds of uncertainty.
00:28:46.100 | If you look back over history, I mean, it just varies from decade to decade, year to year,
00:28:50.100 | and this just happens to be the topic of the day, but I think that historically diversification
00:28:54.100 | has been a good idea and continues to be an excellent idea.
00:29:00.100 | - India, China, Brazil are growth countries.
00:29:04.100 | Western Europe are value companies.
00:29:06.100 | What typically does better in the long run, value or growth?
00:29:11.100 | Value.
00:29:12.100 | - Which has more risk, yeah.
00:29:14.100 | - I have very specific and firm recommendations in the event of a Greek default, expulsion
00:29:20.100 | from the euro zone, collapse of the Greek economy, and a return to the drachma, which
00:29:24.100 | is you should visit Greece.
00:29:26.100 | (laughter)
00:29:29.100 | - I just came back from Greece, as a matter of fact.
00:29:32.100 | - I'll be back on my way back from Fiji.
00:29:34.100 | (laughter)
00:29:39.100 | - Yeah, it was a funny story.
00:29:41.100 | We were right down where the American embassy was in Greece about three weeks ago, and we're
00:29:45.100 | on this little tour where there were about eight of us, and we went to this nice museum
00:29:51.100 | and went upstairs, and they had a lunch area there, so we had lunch, and the guide that
00:29:56.100 | we were with, it was a National Geographic tour, which is wonderful, by the way, the
00:30:00.100 | guide that we were with said, "That's the vice president of Greece."
00:30:06.100 | I mean, it was from me to Ed, the vice president of Greece, and so he was eating lunch at the
00:30:12.100 | table next to us, and now we can say, I can say, I had lunch with the vice president of
00:30:19.100 | Greece, and he didn't indicate that they were going to default.
00:30:24.100 | (laughter)
00:30:25.100 | - All of that is true.
00:30:27.100 | (laughter)
00:30:31.100 | - I don't know, I mean, as Alan said, the value stocks generally outperform the growth
00:30:37.100 | stocks, but they have more risk, and here's a perfect example, at least it's more perceived
00:30:40.100 | risk, and 20% of our GDP comes from Europe, so we have some risk, and if they collapse
00:30:48.100 | in Europe because Greece collapses, which they might default, don't get me wrong, but
00:30:53.100 | all of this talk that's going on with the IMF and with the G20 right now, ECB and so
00:30:59.100 | forth, is all about how to backstop that default, much like the TARP program that we had, is
00:31:04.100 | what is going on over there, only it's going to backstop a country, and they will put in
00:31:11.100 | measures to backstop the country, and this is the reason why we're seeing a rally in
00:31:15.100 | European markets right now, it's why we're seeing a rally, why we saw a big decline in
00:31:19.100 | U.S. stocks because of what was going on over there, and why we're seeing a rally right
00:31:23.100 | now is because they're beginning to come up with resolutions to what they're going to
00:31:27.100 | do.
00:31:28.100 | Is it a kick-can-down-the-road scenario?
00:31:30.100 | Could be.
00:31:31.100 | These austerity measures are tough, but I have to tell you one thing about paying in
00:31:35.100 | Greece, by the way, we were right there at the Parliament building for several days,
00:31:39.100 | and about 3 to 15, okay, police come out, put the barriers up, protesters over there
00:31:46.100 | are all lined up behind the other barriers, take those barriers down, austerity is a terrible
00:31:52.100 | number, okay, 3.30, you know, whistle blows, they all break up, go back to work, that's
00:32:02.100 | not what we see on television, but that's the way it is over there, and once in a while,
00:32:07.100 | and every particular day you'll get maybe three or four rowdies that start throwing
00:32:11.100 | rocks, and if you actually look at those pictures on television or in the newspaper, you'll
00:32:15.100 | see that the rowdies like this with their heads covered, and the police there, but look
00:32:20.100 | at the people in the background, they're all tourists with cameras, they understand over
00:32:27.100 | there that they have to cut back, they understand that they're going to get higher taxes, they
00:32:31.100 | understand there are going to be layoffs, I mean, something like 30% of the people over
00:32:34.100 | there work for the government, they understand this has to happen, and there's no other choice,
00:32:38.100 | they get it.
00:32:39.100 | They don't like it, but they get it, and you know what, we don't even see that in this
00:32:43.100 | country, I mean, occupied Wall Street, right?
00:32:46.100 | I mean, we're beginning to see a little bit of the same type of protesting here.
00:32:49.100 | It's actually a sign that there's progress being made, quite frankly, I look at it in
00:32:53.100 | a different way.
00:32:54.100 | So, I'm optimistic that they'll get their situation resolved, I'm optimistic that, you
00:32:59.100 | know, Europe will eventually rebound, and I'm optimistic that if you keep your same
00:33:02.100 | asset allocation and do a rebalancing, of course I always look at Europe-Pacific, and
00:33:07.100 | I do equal Europe, equal Pacific, as opposed to swinging with the ET back and forth, that
00:33:13.100 | you're going to do fine.
00:33:16.100 | By the way, I did my international on Total International, which last February completed
00:33:21.100 | a new index, which not only includes emerging markets, developed countries, and Canada,
00:33:27.100 | but small cap companies as well.
00:33:30.100 | I don't overweight or underweight any country.
00:33:32.100 | [End of Audio]
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