Bogleheads® Conference 2023 - Bogleheads 2023 Investing Experts Panel

00:00:00.000 | [APPLAUSE]

00:00:07.500 | We have a large and distinguished panel,

00:00:10.740 | individuals who have worn many hats as financial advisors,

00:00:15.340 | educators, authors, medical professionals.

00:00:19.860 | I'm going to be very brief about the introductions

00:00:22.460 | so that we can get into the meat of our discussion.

00:00:25.220 | I encourage you to look at everybody's bios

00:00:28.860 | on the Bogle Center website and go on to their websites.

00:00:32.220 | There's so much wonderful material.

00:00:34.740 | Many of you already heard Rick Ferry, Paul Merriman, Dana

00:00:39.600 | Anspach, and Jim Dolley speak yesterday as part

00:00:42.900 | of Bogleheads University.

00:00:45.620 | Today, joining them is Bill Bernstein,

00:00:49.260 | who we know as a neurologist by training,

00:00:52.060 | co-founder of Efficient Frontier Advisors,

00:00:55.340 | author of several books, also a Bogle Center board member,

00:01:00.380 | and my former colleague, Jonathan Clements,

00:01:02.580 | longtime personal finance columnist at The Wall Street

00:01:05.900 | Journal, and more recently, founder and editor

00:01:09.180 | of the Humble Dollar website.

00:01:12.180 | So we're going to talk about a bunch of investing topics,

00:01:14.860 | try and cover a lot of territory.

00:01:17.540 | If you have questions, Mike Piper will be gathering them.

00:01:21.340 | So Mike, could you stand up if you're in the room?

00:01:25.620 | Back there.

00:01:26.880 | So feel free to bring your question over to Mike,

00:01:30.540 | and we'll save some time at the end to discuss those.

00:01:35.740 | So I think we're going to start with the climate interest

00:01:38.380 | rates over the last couple of years.

00:01:41.340 | Total bond market returns were negative in 2021 and last year,

00:01:46.900 | and so far this year by a bit.

00:01:50.020 | The indications lately are that rates may be higher for longer.

00:01:54.420 | And I'm wondering, for the panelists, how that has

00:01:57.540 | changed-- if it has changed-- how

00:01:59.140 | it has affected your thinking about fixed income exposure,

00:02:03.540 | maturities, types of bonds to hold.

00:02:06.300 | And I'm going to ask Bill to start us off on that.

00:02:09.980 | Thank you for not asking me where I think interest rates

00:02:12.140 | are headed, because there are only three kinds of people

00:02:16.500 | there-- the ones who don't know, the ones who

00:02:18.740 | don't know they don't know, and then, finally,

00:02:21.060 | the ones who know they don't know but whose jobs

00:02:23.740 | and whose paycheck--

00:02:25.460 | it depends upon appearing to know.

00:02:27.460 | And they're the most dangerous ones.

00:02:31.100 | I think it really depends upon where

00:02:32.580 | you are in your life cycle.

00:02:36.220 | If you are saving for retirement and you're accumulating,

00:02:40.980 | you really shouldn't have that much in the way of bonds.

00:02:43.300 | You should have as much stocks as you can tolerate.

00:02:45.660 | And your bonds should be short, nominal bonds

00:02:49.380 | of the safest available.

00:02:50.700 | They should be treasuries, basically.

00:02:53.420 | If you're an older person who is in the decumulation phase,

00:02:58.180 | you are now faced with what may be

00:03:00.220 | one of the great bargains of a lifetime, which

00:03:02.860 | is the ability to defuse your real living

00:03:05.420 | expenses at a high real rate.

00:03:08.260 | Tips are now yielding about roughly 2.4%

00:03:12.020 | across the yield curve.

00:03:13.380 | So let's say you're approaching geyserhood.

00:03:16.420 | You're 60, 70 years old.

00:03:19.500 | And you can buy a ladder that goes all the way out

00:03:23.300 | 30 years, which is almost certainly

00:03:24.980 | going to be beyond even the most optimistic life expectancies

00:03:29.100 | that most of you are going to have.

00:03:30.980 | And you can guarantee a real consumption at multiple points

00:03:36.820 | out to 30 years.

00:03:38.460 | You can do it with a fund.

00:03:39.540 | You can do it by buying individual tips.

00:03:41.780 | And I think that this is an enormous opportunity.

00:03:45.140 | I don't like long-term bonds.

00:03:46.940 | I make an exception for tips, because there you

00:03:49.940 | don't have to worry about inflation inflating

00:03:52.460 | the value away.

00:03:54.620 | So would you advise people to put all

00:03:57.820 | of their fixed income exposure-- someone

00:03:59.740 | who is at that laddering point, heading into retirement--

00:04:02.300 | would you go all tips?

00:04:03.640 | It depends upon their burn rate.

00:04:05.020 | If you're a kind of person who's got a very low burn

00:04:07.740 | rate, or a zero burn rate, but certainly a 1% or a 2% burn

00:04:10.980 | rate, it really doesn't matter what's in your portfolio.

00:04:13.540 | You're going to do fine.

00:04:15.580 | And you don't really need that tips ladder out there.

00:04:20.100 | But if you're burning 4% or 5% or 6%,

00:04:23.460 | I think a healthy dollop of tips would be worthwhile.

00:04:26.500 | I personally don't need them in my own personal portfolio.

00:04:29.700 | But I really like having them there.

00:04:31.540 | I've got now a nice dollop of them.

00:04:33.980 | When I need to go to bed at night, I don't count sheep.

00:04:37.400 | I count my tips.

00:04:38.380 | [LAUGHTER]

00:04:43.260 | Dana, I know in your portfolios you don't use tips.

00:04:47.860 | You use nominal bonds.

00:04:50.700 | As you're doing your planning, has the current interest rate

00:04:54.560 | environment changed what you're doing with clients?

00:04:58.540 | Not fundamentally.

00:04:59.700 | I really like what Rick said yesterday

00:05:01.540 | about philosophy versus strategy.

00:05:03.740 | So it hasn't changed our philosophy.

00:05:06.380 | There are a few strategic decisions.

00:05:08.900 | The biggest impact it has had is on managing short-term cash.

00:05:13.140 | So two years ago, it made no sense

00:05:16.180 | to spend a lot of time managing cash

00:05:18.020 | to get an extra 0 basis point.

00:05:21.700 | But now, if you have someone taking $10,000 a month out

00:05:26.020 | and you need to hold about $100,000

00:05:28.260 | of very liquid assets to meet that monthly withdrawal,

00:05:32.220 | it does make sense to manage that cash

00:05:34.220 | by managing short-term treasuries and the money

00:05:36.620 | market.

00:05:37.580 | So that's the biggest impact it has had.

00:05:39.980 | It has also had the impact of us extending our bond ladders.

00:05:46.420 | People are more willing to do that.

00:05:48.820 | You can lock in 5% yields.

00:05:51.940 | Two years ago, no one was excited about locking in 2%

00:05:55.300 | yields.

00:05:56.100 | And so it has changed behavior and willingness of people

00:05:59.500 | to say, yeah, I do want to build up my bond ladder.

00:06:02.820 | I do want to do more of that.

00:06:04.260 | But philosophically, no, it hasn't changed our approach.

00:06:08.820 | Other people who are doing things in the fixed income

00:06:12.620 | area we want to talk about while we're in this space?

00:06:15.100 | I just think it's dramatically better than fixed income.

00:06:23.900 | And nobody wants it now, right?

00:06:25.780 | At the end of the price, nobody wants it.

00:06:27.500 | And yet, it's a much better deal than you

00:06:30.060 | could get two years ago.

00:06:31.460 | So the other thing is it's made me much more patient

00:06:34.660 | to have a little bit of money, system, cash.

00:06:36.500 | You know, the cash track is really a thing.

00:06:38.620 | I mean, if your money system, the way that you invest it,

00:06:41.100 | now to make 5%, I want to be 100%.

00:06:43.380 | And that doesn't hurt nearly as much as when

00:06:45.180 | it was only making 1%.

00:06:47.860 | And Jim, while you have the microphone,

00:06:49.580 | so let's talk about--

00:06:51.940 | tips, obviously, are such a great way

00:06:54.140 | to hedge against inflation.

00:06:56.860 | I'm interested in how much you worry

00:07:00.780 | about inflation, and are there instruments besides tips

00:07:05.020 | you look to hedge inflation longer term?

00:07:09.260 | I'm incredibly worried about inflation.

00:07:10.860 | You know, Bill has talked about the four horsemen, you know,

00:07:13.660 | that really are serious dangers to a portfolio.

00:07:16.300 | And the most common one of those is inflation.

00:07:18.420 | So any time you build a portfolio,

00:07:20.540 | whether it's designed for inflation or not,

00:07:22.380 | you should be thinking about inflation.

00:07:23.980 | You need to beat inflation.

00:07:25.100 | It's the enemy's chief-- or the investor's chief enemy.

00:07:28.540 | And so-- but trying to hedge inflation in the short run

00:07:32.420 | is really hard.

00:07:33.740 | In the long run, it's not that hard.

00:07:35.300 | You've got good tools.

00:07:36.380 | You've got tips.

00:07:37.860 | You've got I-bonds on the fixed side.

00:07:39.820 | You've got stocks and real estate

00:07:41.540 | and those sorts of things on the equity side.

00:07:44.700 | And in the long run, I don't think

00:07:47.300 | it's necessarily all that difficult for an investor

00:07:49.940 | to design a portfolio that's going

00:07:52.020 | to keep up with inflation.

00:07:53.260 | But I think a lot of people were surprised in the last two

00:07:55.340 | or three years when inflation came up how hard it

00:07:57.820 | was to kind of stick with it in the short term.

00:08:01.340 | And I think a lot of people were surprised when maybe tips

00:08:04.180 | didn't do that so well, when real rates went up.

00:08:07.180 | And of course, when rates go up, the value of a bond goes down.

00:08:10.980 | And I think that surprised a lot of people

00:08:12.740 | that expected when inflation showed up,

00:08:14.380 | unexpected inflation showed up, that their tips would somehow

00:08:17.460 | protect them.

00:08:18.140 | And they didn't feel like they did that very much,

00:08:20.380 | I don't think, for most of us in 2022.

00:08:23.300 | Well, I think we always get those reminders of how

00:08:25.700 | incredibly complicated bonds are in general.

00:08:29.380 | And TIP certainly adds a whole additional dimension to that.

00:08:34.980 | When you're thinking about hedging against inflation

00:08:38.940 | long term, what should be the asset classes

00:08:42.060 | that I should focus on most?

00:08:43.620 | Anyone?

00:08:48.540 | Well, historically, we would look to stocks to be the best.

00:08:54.820 | But to the extent that we use fixed income--

00:08:57.580 | and we don't manage money, and we don't give advice

00:09:00.700 | to individuals.

00:09:01.700 | But to the extent that we use fixed income,

00:09:04.380 | we're always short to intermediate, never long.

00:09:07.060 | I think that's what Bill said.

00:09:10.180 | And so I think those are-- we don't look to gold,

00:09:14.220 | for example, or commodities, but basically

00:09:17.820 | have a balanced portfolio of the big, the small, the value,

00:09:21.380 | and the growth, and the US, and the international,

00:09:23.620 | and the REITs, and the emerging markets.

00:09:26.020 | And in there, you're going to have some combination that

00:09:29.980 | is likely to be a kind of an all-weather portfolio.

00:09:34.540 | At least that's what one hopes.

00:09:38.100 | Other thoughts on the mix?

00:09:39.500 | Jonathan?

00:09:40.740 | So inflation is less of a concern

00:09:42.780 | if you're still in the workforce.

00:09:44.860 | Prices rise, so should your salary.

00:09:47.300 | It's a much bigger issue for retirees.

00:09:49.300 | And the greatest defense for anybody

00:09:51.260 | who's retired against inflation is to delay Social Security.

00:09:54.980 | I mean, it's the best inflation-indexed annuity

00:09:57.300 | out there.

00:09:58.820 | If you can afford to, and your health is decent,

00:10:02.140 | or the health of your spouse is decent,

00:10:04.900 | delaying Social Security at age 70

00:10:07.240 | is, I believe, probably the smartest financial move

00:10:10.940 | any retiree can make.

00:10:12.340 | And because of recent inflation, it looks even smarter.

00:10:18.540 | A thought on inflation, in terms of how it impacts retirees,

00:10:22.220 | it impacts different demographic segments differently.

00:10:26.740 | And so we talk about the go-go years, the slow-go years,

00:10:31.540 | and the no-go years in retirement.

00:10:33.420 | And we offer inflation raises to our clients.

00:10:36.540 | And I would say 60% to 70% of them turn them down and say,

00:10:41.280 | no, what I'm getting covers my expenses,

00:10:44.380 | even with the recent price increases that we've seen.

00:10:47.900 | Now, for people that are in the lower demographic,

00:10:51.380 | they're spending less than $100,000 a year,

00:10:53.420 | basic increases in gas and food prices

00:10:56.180 | are going to have a much bigger bite into their budget

00:10:58.940 | than people in some of the demographic sectors

00:11:01.700 | where they're spending more.

00:11:03.060 | So we definitely see that in real life.

00:11:04.980 | And we see that as people get into those slow-go years,

00:11:08.540 | they're spending naturally declines.

00:11:11.200 | And so inflation is real.

00:11:14.900 | It's there, but it's not impacting them, perhaps

00:11:17.980 | the same as someone that's still actively out there traveling

00:11:22.380 | and buying furniture and paying for their kids

00:11:26.620 | and all of those types of things.

00:11:28.380 | So looking at the US stock market, one of the trends

00:11:35.020 | that we see is increased concentration.

00:11:38.300 | A lot of the markets return this year

00:11:40.340 | has come from what people refer to

00:11:43.060 | as the magnificent seven tech and tech-adjacent stocks,

00:11:47.380 | which recently represented about 30% of the value of the S&P

00:11:51.300 | 500.

00:11:52.860 | So I'm wondering, does that concentration

00:11:55.780 | change the way you feel about using market-weighted indexes

00:12:00.540 | like the total stock market return or the S&P 500

00:12:05.580 | in portfolios?

00:12:06.820 | Rick?

00:12:09.380 | Oh, this is loud.

00:12:10.980 | So no, because if money came out of the mega-cap eight, which

00:12:16.900 | is the magnificent seven plus one,

00:12:21.220 | it's probably not going to leave the stock market.

00:12:24.380 | So the fact that it might come out of those large-cap stocks

00:12:27.540 | and get dispersed among the mid-cap and small-cap stocks

00:12:31.300 | keeps the same money in the market.

00:12:34.500 | Therefore, if you have a total stock market index fund,

00:12:37.540 | you shouldn't see any effect.

00:12:39.420 | The only issue would be if the money came out

00:12:41.340 | of those magnificent seven or mega-cap eight

00:12:45.460 | and just left the market totally.

00:12:47.180 | Yes, then you would have an impact.

00:12:48.700 | But I think that the people who are in stocks

00:12:52.380 | tend to stay in stocks.

00:12:53.660 | So we just get the dispersion of that money

00:12:56.740 | would be sent across the rest of the spectrum of stocks

00:12:59.660 | into a total stock market investor.

00:13:01.380 | It's the same amount of money, same value of the market.

00:13:03.860 | So it won't make any difference, in my view.

00:13:08.780 | So if you've been writing about this stuff for four decades,

00:13:11.620 | which I have, you start to see the same stories over and over

00:13:15.460 | again.

00:13:16.580 | And when people talk about the concentration in the stock

00:13:19.900 | market, this is a story that can be written every year.

00:13:23.740 | It's a simple mathematical phenomenon known as skewness.

00:13:27.740 | The most a stock loses 100%, but its potential gain is infinite.

00:13:32.620 | And almost every year, the stock market

00:13:35.520 | is driven higher by a minority of stocks

00:13:38.420 | that have fabulous gains.

00:13:41.020 | Those, of course, are the stocks that catch people's attention.

00:13:43.860 | Those are the stocks that make it into the headlines.

00:13:46.660 | Those are the stocks that cause people to give up indexing

00:13:50.460 | and go and try their hand at picking hot stocks

00:13:53.500 | in the same way they try their hand at trying

00:13:56.540 | to pick hot lottery tickets.

00:13:58.420 | And it normally has the same unhappy ending.

00:14:01.860 | Don't be put off by all these conversations

00:14:05.100 | about how concentrated the indexes are in certain stocks

00:14:08.460 | and how the market has been driven by a minority of stocks.

00:14:12.100 | It has always been ever so, and it will always be ever so.

00:14:16.380 | And it's because of this notion of skewness.

00:14:18.860 | Yeah, it's an interesting exercise

00:14:21.260 | just to go back 50, 60, 70 years into 10-year intervals,

00:14:25.700 | look at what the megacaps of the era were.

00:14:29.020 | 1970s, what were they?

00:14:30.460 | They were oil stocks.

00:14:31.780 | If you put all your money into oil stocks in the '70s,

00:14:34.500 | you didn't do so well.

00:14:36.380 | 1980s, it was IBM.

00:14:39.140 | Investing a lot of your money in IBM in the '80s

00:14:41.380 | wasn't such a great idea either.

00:14:43.380 | And it just rolls forth decade by decade by decade.

00:14:46.340 | It's probably one of the worst bets you can make

00:14:48.900 | is buying Decile One and only holding Decile One largest cap

00:14:52.900 | stocks.

00:14:55.900 | I think Jonathan has this line about the look

00:14:59.060 | at the person in the mirror in the morning

00:15:01.620 | is your biggest enemy.

00:15:04.580 | And I find that the big decision is, what am I today?

00:15:11.260 | Am I still a buying holder, or am I market timer?

00:15:14.860 | And in theory, we all believe that we've

00:15:16.980 | got to find the one that's going to serve us best.

00:15:19.980 | But there's something that throws us off along the way,

00:15:23.300 | and we start to change the nature of how

00:15:25.340 | we approach the decision making.

00:15:27.980 | And the minute you get into this pattern,

00:15:32.180 | I think you're at risk of chasing either a fad

00:15:37.220 | or been hot recently, and it feels

00:15:40.660 | like there's going to be more of that,

00:15:42.620 | so you want to do something about it.

00:15:44.820 | I really have tried to encourage people,

00:15:47.420 | figure out how much in stocks, how much in bonds,

00:15:49.740 | diversify, with or not without small cap value, by the way.

00:15:57.620 | And just be happy.

00:16:01.180 | When we go beyond that, we tend to do more harm.

00:16:06.180 | By the way, Paul, you missed your cue

00:16:07.860 | in the question about inflation, because small cap value

00:16:10.580 | stocks are a marvelous hedge against inflation,

00:16:13.460 | better than the broad stock market.

00:16:14.900 | So one of the things-- we talk about buy and hold,

00:16:27.460 | but it's hard, because you feel periodically

00:16:30.580 | that, oh, maybe I should do something different.

00:16:33.860 | I thought it was really interesting in the session

00:16:36.300 | that Jim did as part of Fogelhead's 101 yesterday.

00:16:40.300 | He talked about reasonable portfolios versus

00:16:43.780 | unreasonable portfolios.

00:16:45.220 | But the reasonable portfolios are what?

00:16:47.180 | 28 of them you listed?

00:16:52.100 | I mean, I could have listed a lot more than 28.

00:16:53.980 | I've got a blog post with 200 of them.

00:16:55.820 | The point is there's hundreds of them.

00:16:57.980 | So I think a question for us, then,

00:17:01.580 | is when I look at all the possible reasonable

00:17:04.700 | portfolios-- and that reasonable portfolio could

00:17:07.620 | be a single, all-in-one fund, or it could be 15

00:17:12.860 | or more individual funds--

00:17:15.500 | what do you think is the number of funds that potentially

00:17:21.660 | makes sense for someone to be able to stay the course?

00:17:27.580 | As far as the number of asset classes in a portfolio,

00:17:30.460 | I look at three as kind of about the minimum.

00:17:33.380 | I think there's real benefits in going up to about seven,

00:17:36.740 | maybe very minor benefits in going as high as 10.

00:17:39.740 | Beyond that, you're playing with your money.

00:17:42.740 | Those are asset classes which may or may not

00:17:45.620 | require separate mutual funds, or ETFs, right?

00:17:48.740 | Yeah, the beautiful thing about indexing

00:17:50.440 | is you only need one fund for the asset class.

00:17:52.940 | So I am perfectly content to let Jerry

00:17:55.100 | manage all of my US stocks.

00:17:58.300 | Every day, he goes to work with a team of 25 people

00:18:00.820 | and works very hard to manage my money, and I appreciate that.

00:18:05.820 | And he's managing a lot of my money, but he does it very well.

00:18:09.500 | And that's all the exposure I feel

00:18:11.060 | like I need to that particular asset class.

00:18:13.340 | Now, if you are in more actively managed stuff,

00:18:16.060 | you've got to have more holdings, for sure,

00:18:18.340 | because you need to diversify and manage your risk.

00:18:20.500 | So Jim, what are the six or seven asset classes

00:18:22.460 | that you look to?

00:18:25.460 | Well, I think that's not necessarily something

00:18:28.820 | anybody else needs to model, right?

00:18:31.100 | I think having multiple asset classes

00:18:33.340 | is a wise thing in a portfolio.

00:18:35.140 | Does everyone have to have the same asset classes?

00:18:37.180 | No.

00:18:38.060 | Some good asset classes I think people really ought to consider--

00:18:41.500 | US stocks, international stocks, nominal bonds,

00:18:44.980 | inflation-indexed bonds.

00:18:46.740 | I'm a fan of small-value stocks, along with Bill and Paul.

00:18:51.500 | I am a fan of real estate.

00:18:53.820 | So there's six.

00:18:54.780 | And I think when people are getting into six and seven,

00:18:57.040 | they're probably looking at those sorts of asset classes.

00:19:00.100 | But there's plenty of others out there.

00:19:01.980 | There's 20 or 30 asset classes, and it's

00:19:04.260 | OK to include some of those.

00:19:05.980 | You don't need all of them, though.

00:19:08.540 | You know, a lot of you probably weren't here last year,

00:19:12.660 | but Mike Piper said something that

00:19:14.340 | was very profound last year, which

00:19:15.900 | is the sorts of things that we all obsess about.

00:19:18.940 | You know, how much small value?

00:19:20.180 | How much REITs?

00:19:20.820 | God, do I want to own precious metals equities?

00:19:22.980 | Do I want to own one fund, or five funds, or eight funds?

00:19:27.140 | That's a piddling significance.

00:19:28.900 | What is really important is, do you have disability insurance?

00:19:31.620 | Do you have good life insurance when you're young?

00:19:35.500 | Are you giving enough money away to your kids

00:19:37.820 | and your grandkids?

00:19:39.800 | Those are the really important questions.

00:19:41.700 | The most important thing about the complexity

00:19:43.620 | of any portfolio is not what it looks like,

00:19:46.100 | but can you stick with it?

00:19:47.780 | That is far more important than whether you own one asset

00:19:50.620 | class or 12.

00:19:52.860 | And so given that that is the challenge,

00:19:55.100 | and I think it's a challenge we all face personally,

00:19:57.460 | even if you say, I'm going to stick with it,

00:19:59.780 | there are times that suddenly that feels hard.

00:20:03.940 | What advice would you give to people

00:20:06.500 | in how they construct their portfolios

00:20:08.660 | or how they live their lives to help them stay the course?

00:20:12.420 | Yeah.

00:20:13.700 | A suboptimal portfolio that you can stick with

00:20:17.580 | is better than an optimal portfolio of one

00:20:19.700 | you can't execute.

00:20:20.940 | It's just that simple.

00:20:21.940 | So pick something that you can stick with it.

00:20:23.900 | So you can stick with a simpler portfolio

00:20:30.980 | a lot easier than a complex portfolio.

00:20:34.580 | And John Bogle said this a long time ago.

00:20:37.140 | And I brought it up yesterday in one of my slides.

00:20:41.220 | If you're just a market investor and you're

00:20:44.020 | investing in the total stock market and the market goes

00:20:47.380 | down, you know your portfolio is down.

00:20:50.620 | And most people can accept that.

00:20:53.580 | If you're doing a slice and dice portfolio, which--

00:21:00.000 | [LAUGHTER]

00:21:04.500 | And it's going down, or it's not keeping up with the market,

00:21:07.380 | so many concerns you.

00:21:08.900 | More.

00:21:09.660 | And maybe you're more apt to make changes,

00:21:11.620 | more apt to capitulate on that strategy.

00:21:13.780 | So I think the simpler you make your portfolio, the better.

00:21:18.780 | I think that it is a matter of having the right portfolio.

00:21:23.840 | But the problem that I've found over the years

00:21:27.260 | is most people have not actually identified

00:21:30.780 | not just the potential return-- now that's the easy part--

00:21:34.260 | but making sure they know what building loss

00:21:38.140 | factor there's going to be in that portfolio.

00:21:40.540 | And if you're going to find a portfolio you're

00:21:42.640 | going to stick with, it isn't going

00:21:44.140 | to be because of the upside, generally.

00:21:46.140 | It's going to be because of the downside.

00:21:48.780 | And the industry oftentimes will ask,

00:21:51.660 | are you willing to lose 20% of your money?

00:21:55.460 | Well, if you are, it's OK to be in the stock market.

00:21:58.740 | What they should be saying is, are you

00:22:00.700 | willing to lose half of your money?

00:22:03.780 | Then if you are, you should be in the stock market.

00:22:06.220 | And if you're not, you've got to put enough fixed income

00:22:08.940 | into the portfolio to bring the potential loss down

00:22:12.340 | to where you are willing to say, yes, I'm willing to do that.

00:22:16.460 | Then I think you can stay the course.

00:22:19.420 | But you've got to somehow get there.

00:22:21.460 | We call it education.

00:22:23.420 | Sort of at a related note, Bill, this year

00:22:29.820 | the second edition of your Four Pillars of Investing book

00:22:34.060 | was published.

00:22:35.500 | Could you tell us a little bit about the way

00:22:38.300 | you're thinking about investing has

00:22:40.700 | changed since the initial edition, which

00:22:42.980 | was, what, 20 years ago?

00:22:44.300 | Yeah, two ways.

00:22:46.580 | I was very impressed with a quote from a man

00:22:49.100 | by the name of Robert Kaplan, who's

00:22:50.540 | a historian, who said that half of everything is geography,

00:22:55.220 | and the other half is Shakespeare.

00:22:57.340 | And I realized that that pertains almost precisely

00:23:00.740 | analogously to investing, which is that half of it

00:23:03.940 | is mathematics, but the other half is Shakespeare.

00:23:07.260 | And the answer to investing better and better

00:23:11.300 | is not more and more math.

00:23:12.540 | And there are a lot of people on the Bogleheads forum,

00:23:14.820 | I think, who believe that, unfortunately.

00:23:18.780 | It's, can you handle the vicissitudes of the marketing

00:23:21.900 | of your own psychology?

00:23:23.420 | So long-term capital management, most brilliant mathematicians

00:23:26.620 | out there planted their faces because they

00:23:28.760 | didn't understand enough about market history

00:23:30.940 | and their own psychology.

00:23:32.500 | They didn't realize that every 10 years or so,

00:23:36.780 | the wheels come off the machine.

00:23:38.900 | And by the way, their model was only based on four years

00:23:41.260 | of data, so that was another little mistake that they made.

00:23:45.420 | So it's the importance of the psychology,

00:23:47.500 | and I tend to de-emphasize the importance of the math.

00:23:51.860 | I think if you can get within a factor of two

00:23:56.620 | on anything in investing, you're probably

00:23:58.380 | doing very, very well.

00:24:00.620 | I'm reminded of the joke that says,

00:24:02.060 | how do you know the financial economists have

00:24:04.620 | a sense of humor?

00:24:05.300 | It's because they use decimal points.

00:24:07.100 | So that's the first thing.

00:24:10.060 | And the other thing that I've realized over the years

00:24:12.380 | is the importance of liquid assets.

00:24:14.380 | You've got to be able to sleep through the worst of times.

00:24:16.820 | How well you do in the long term depends

00:24:19.340 | upon how you react in the worst 2% of times, all right?

00:24:23.480 | And that's because that's when you're

00:24:25.060 | most likely to interrupt the magic of compounding

00:24:28.260 | and disobey Charlie Munger's first rule of compounding,

00:24:32.340 | which is to never interrupt it.

00:24:35.020 | There is a reason why Warren Buffett holds

00:24:37.260 | 20% of Berkshire in T-bills, because he can sleep at night.

00:24:41.940 | Or when the 300-year flood hits his insurance companies,

00:24:44.940 | he'll survive, and no one else will.

00:24:47.580 | You have to have that same sort of outlook as well.

00:24:51.180 | So those are the two basic things that changed.

00:24:54.820 | One of the situations where we come up

00:24:58.620 | against that question of balancing finance, mathematics,

00:25:02.420 | and emotions is when someone has a lump sum, a windfall of money

00:25:08.380 | that they might invest in the stock market.

00:25:11.220 | So Paul, could you talk to how you approached that question

00:25:15.700 | when you're talking to someone about,

00:25:17.580 | do I put my pile of money into the stock market tomorrow,

00:25:21.300 | or do I dollar cost in over time?

00:25:25.660 | Well, it's been 10 years since I've had to do that for people.

00:25:28.500 | But when I did, first thing we have to figure out

00:25:32.980 | is who we think they are in terms

00:25:35.660 | of their emotions of being able to actually put it

00:25:39.660 | all in at one time.

00:25:41.220 | The industry, of course, says that you're

00:25:42.980 | best off to get everything to work immediately.

00:25:46.020 | But of course, that's the industry

00:25:47.400 | that wants us to invest through them, basically.

00:25:50.300 | And immediately, for most people,

00:25:53.300 | is actually probably not the best way.

00:25:57.140 | Because there is some probability

00:25:59.380 | that the next thing that's going to happen

00:26:01.580 | is the market's going to go down,

00:26:03.780 | and this is not what they were prepared to go through

00:26:06.380 | with all of that money.

00:26:08.140 | Whereas if you dollar cost average it in,

00:26:11.240 | and it is a form of diversification, dollar cost

00:26:16.540 | averaging.

00:26:17.780 | And as somebody recently said, any time you diversify,

00:26:23.700 | you're settling for second best, in a sense.

00:26:26.660 | And so dollar cost averaging is something

00:26:29.340 | where you are likely settling for a second best,

00:26:32.420 | but it's something that you should be able to do.

00:26:35.420 | Or if-- and I found it's worked often

00:26:38.460 | with a client that couldn't trust either way.

00:26:42.660 | Half of it buy and hold, immediately put it to work.

00:26:45.340 | The other half, you dollar cost average in.

00:26:48.620 | And in a sense, you've got the best of both worlds.

00:26:51.580 | I guess, in a way, you can't do wrong except for one thing.

00:26:55.700 | At the end of the dollar cost averaging, or the lump sum,

00:26:59.420 | the market can still go down.

00:27:01.540 | So you never outrun the market if you're

00:27:05.860 | worried about it going down.

00:27:09.580 | So I have immense respect for Paul,

00:27:13.980 | but I disagree with him on this point.

00:27:15.900 | I think dollar cost averaging is for wimps.

00:27:19.060 | Because of what Paul just said at the end.

00:27:21.100 | At the end of this dollar cost averaging period,

00:27:23.500 | whether it's in three months, or six months, or a year,

00:27:25.900 | guess what?

00:27:27.020 | The whole portfolio is exposed to the market.

00:27:30.220 | And if you're not OK with that, what that indicates to me,

00:27:33.980 | maybe your asset allocation is too aggressive for you.

00:27:37.380 | And you ought to dial it back until you

00:27:39.580 | are willing to lump sum this new money into your asset

00:27:43.420 | allocation.

00:27:45.380 | And so I don't see a big role for dollar cost averaging.

00:27:48.660 | I think it's a psychological crutch.

00:27:51.260 | The historical record is that you

00:27:53.060 | will do worse most of the time.

00:27:55.100 | Not all of the time, of course.

00:27:56.580 | But because the market goes up most of the time,

00:27:59.020 | most of those additional investments

00:28:00.580 | you make over the next few months

00:28:01.980 | are going to be at higher prices.

00:28:03.540 | And you're getting a worse deal.

00:28:04.820 | So I think you really need-- if you're really

00:28:07.660 | having trouble putting a lump sum in,

00:28:09.300 | you ought to look more carefully at your overall asset

00:28:11.620 | allocation, because eventually, you're

00:28:13.380 | going to be lump summed in.

00:28:14.540 | I think you're wrong, Jim.

00:28:19.300 | I'm older than you are.

00:28:26.380 | And I am willing to take second best.

00:28:34.620 | That's why I have bonds in my portfolio.

00:28:37.540 | So it's just another defensive strategy.

00:28:40.140 | In fact, probably the expert on this

00:28:42.020 | is Jonathan Clements, since he speaks

00:28:44.820 | to the emotional side of this process.

00:28:47.580 | I'm curious what side you come down on.

00:28:49.620 | Thanks, Paul.

00:28:56.500 | Yeah, I think it's very hard to get somebody

00:29:03.740 | to put a lump sum into the stock market based

00:29:08.780 | with the possibility that the market is going

00:29:12.460 | to drop dramatically tomorrow.

00:29:14.460 | But I think before we say, yes, you should lump sum it,

00:29:17.380 | or yes, you should dollar cost average, what people need to do

00:29:20.540 | is step back and say, how important

00:29:22.780 | is this sum of money compared to what I already have

00:29:27.460 | and what I will need in the future?

00:29:29.740 | So if grandma dies, and you've already

00:29:32.820 | got a $2 million portfolio, and she leaves you $100,000,

00:29:37.180 | invest it right away.

00:29:38.580 | $100,000 compared to the $2 million you already have,

00:29:41.660 | not a big deal.

00:29:43.220 | If you have $100,000 and grandma leaves you $2 million,

00:29:47.900 | it's a much tougher decision.

00:29:49.780 | And I can understand why somebody might actually

00:29:52.860 | listen to Paul and put it in more slowly.

00:29:55.500 | Jim is absolutely right that dollar cost averaging

00:30:04.740 | is for wimps.

00:30:05.380 | The trouble is that most of us are wimps.

00:30:07.140 | All right?

00:30:07.620 | All right, I'll throw my $0.02 in.

00:30:16.020 | So investing in the market is painful,

00:30:17.860 | because you know as soon as you invest, it's going to go down.

00:30:20.440 | You know that's going to happen, right?

00:30:23.180 | So you either rip the big Band-Aid off one time

00:30:27.420 | and do it Jim's way, and you're done.

00:30:29.340 | You're in, and that's it.

00:30:30.980 | You're done.

00:30:31.580 | Or you have to rip multiple Band-Aids off

00:30:34.820 | over a long period of time.

00:30:37.980 | And a lot of people might rip one, or two, or three off,

00:30:41.140 | but they never get to ripping the fourth one off.

00:30:43.420 | They start looking at the markets.

00:30:45.060 | They start coming up with reasons

00:30:46.420 | not to do that dollar cost average, that third or fourth

00:30:49.660 | one, or so forth.

00:30:50.460 | And a lot of times, at least if it's-- it doesn't get done.

00:30:55.220 | So ripping the Band-Aid off one time

00:30:58.500 | and getting it done Jim's method,

00:31:00.620 | I find actually gets the money invested.

00:31:03.380 | And dollar cost averaging often doesn't get the money invested,

00:31:07.500 | because you have to make the decision to hit the button

00:31:11.900 | to invest the money multiple times,

00:31:14.500 | and your mind is playing all kinds of tricks on you

00:31:16.780 | during that period of time.

00:31:17.940 | Unless, of course, you have a fantastic money manager

00:31:20.220 | like Paul managing your money, and then you

00:31:22.560 | don't have to worry about that.

00:31:23.860 | Because he'll do it for you without any pain whatsoever.

00:31:27.140 | Not anymore.

00:31:27.980 | So I think that was just great.

00:31:31.300 | This was just totally encapsulated

00:31:34.260 | the interplay of the math and the emotions of investing

00:31:39.500 | that we all struggle with.

00:31:40.620 | So I'm going to thank all six of you for that.

00:31:43.500 | We're going to try and move on.

00:31:45.460 | But I will just also just remind you, if you have any questions,

00:31:49.980 | please give them to Mike Piper.

00:31:51.740 | I think in about another five minutes,

00:31:53.820 | we'll try and move on to questions.

00:31:55.380 | So we'll still have 10 minutes to do questions.

00:31:59.420 | Coming back to-- coming to a classic bogleheads question,

00:32:03.420 | looking at US versus international stocks,

00:32:08.180 | over the trailing year, total international and total US

00:32:12.980 | stocks are just about neck and neck.

00:32:15.380 | And I point that out because that's the exception.

00:32:18.340 | Because over so many other trailing periods, year

00:32:21.900 | to date, three years, five years, 10 years, 15 years,

00:32:25.860 | US stocks have done so much better than international.

00:32:30.140 | So the question is, I'm wondering

00:32:32.820 | about what your views are on international diversification.

00:32:37.100 | Should I bother?

00:32:39.020 | The flip side of that is, so if I've

00:32:40.620 | had international stocks as part of my portfolio forever,

00:32:43.860 | do I stay the course?

00:32:45.020 | Or gosh, should I maybe change my mind

00:32:47.180 | and get rid of that now?

00:32:49.100 | Jonathan, you want to start us off on that one?

00:32:51.020 | Let me kick this party off.

00:32:52.420 | It's the end of the year.

00:32:56.220 | You're looking back.

00:32:57.980 | Your home market has been the most fabulous performer,

00:33:03.180 | not just for the past year, not for the past decade,

00:33:07.380 | but for multiple decades.

00:33:09.260 | It is the hottest market in the world.

00:33:12.620 | Why in the world would you possibly invest abroad?

00:33:18.860 | This, of course, was what Japanese investors

00:33:21.340 | were faced with at year end 1989.

00:33:25.020 | And those who suffered from home bias

00:33:27.580 | are still sitting with portfolios

00:33:30.420 | that are underwater more than three decades later.

00:33:35.020 | That is why I invest internationally.

00:33:37.740 | Because unlike the rest of you who

00:33:40.340 | think that US is the only place to invest,

00:33:42.860 | I do not have a crystal ball.

00:33:44.740 | I do not know what will happen in the decades ahead.

00:33:47.820 | But I know that if I am globally diversified,

00:33:51.300 | the sort of hit that has been suffered by Japanese investors

00:33:54.940 | will not happen to me.

00:33:57.340 | Yeah, here's the rub, which is that there's

00:34:01.580 | no question that the US economy and the earnings of US

00:34:05.140 | corporations are growing faster than that

00:34:07.540 | in the rest of the developed world.

00:34:09.780 | The problem is that if you put $1 million into US stocks,

00:34:14.660 | you are getting perhaps $30,000 or $35,000 worth of earnings.

00:34:19.100 | If you put them into ex-US stocks, foreign stocks,

00:34:22.980 | you're getting twice that.

00:34:24.060 | You're getting $70,000.

00:34:26.100 | And I think it's a pretty good bet that that $35,000 you're

00:34:29.620 | going to get in US stocks and earnings

00:34:32.300 | is not going to grow fast enough to overtake the $70,000 you're

00:34:37.620 | going to get from foreign stocks.

00:34:39.980 | You see the same thing with dividend yields as well.

00:34:42.500 | And that's the math.

00:34:44.820 | The Shakespeare is the Kahneman-Tversky availability

00:34:48.780 | heuristic, which is we always look backward

00:34:51.380 | at the last decade.

00:34:52.580 | And we say, why have I invested in this dog of an asset class?

00:34:56.820 | I'm done with it.

00:34:57.620 | I don't want to face it anymore.

00:34:59.220 | I'm going to sell it and only invest in US stocks.

00:35:01.980 | And three times out of four, that's a big mistake.

00:35:05.940 | Dana?

00:35:07.460 | I will say the all-weather portfolio

00:35:10.260 | that I talked about yesterday that held up better

00:35:13.060 | under the worst case scenarios did have a higher allocation

00:35:16.500 | to small cap value and international

00:35:19.300 | than perhaps a traditional portfolio would.

00:35:23.260 | I think it's also interesting that we so often

00:35:27.620 | look at the combination of US and international.

00:35:31.940 | And once we have those, we're diversified.

00:35:34.740 | Oftentimes, it's viewed as if you own the total market

00:35:37.540 | indexes in the US and the international.

00:35:40.220 | You're diversified.

00:35:43.420 | In reality, historically, we expect certain kinds

00:35:47.820 | of returns, I think, from large cap blend stocks.

00:35:52.020 | And we expect different kinds of returns

00:35:54.300 | from small or value stocks.

00:35:56.300 | So it may be that what we should be talking about, I think--

00:36:02.500 | what we should be talking about is not

00:36:04.180 | should we about international versus US--

00:36:08.260 | that maybe a better diversifier is the small in the value,

00:36:14.220 | even if some of those end up being international.

00:36:17.740 | That all can work.

00:36:19.140 | But that diversification is a more true diversification

00:36:24.700 | than getting large cap US blend and international large cap

00:36:30.780 | blend.

00:36:31.860 | And I think it will do more for the investor than being--

00:36:36.500 | you'll do better with the small and the value

00:36:39.500 | and the big blend in the US.

00:36:42.380 | You don't need international.

00:36:43.820 | International may give you some lower volatility

00:36:48.860 | because of the diversification of--

00:36:54.620 | this is a word I can't remember anymore, I'm sorry--

00:36:57.660 | but that-- well, I'm going to stop right there.

00:37:03.940 | I understand what you're saying, Paul.

00:37:05.520 | I've got to call the home.

00:37:06.600 | Look, first of all, you get three different types

00:37:11.520 | of diversification with international.

00:37:13.300 | You get more stock because I think

00:37:16.060 | the international markets have--

00:37:17.940 | the Vanguard International Fund, Total International

00:37:20.140 | has something like 4,000.

00:37:22.780 | I mean, Jerry, you can correct me if I'm wrong,

00:37:24.700 | but 4,000 some odd names.

00:37:26.460 | So you're getting more diversification

00:37:28.460 | because you're getting more companies in there.

00:37:30.660 | But the second thing you're getting

00:37:32.080 | is you look at those companies, the industry

00:37:35.060 | groups of international stocks are

00:37:37.740 | quite a bit different than the industry groups of US stocks.

00:37:40.380 | A lot less technology, a lot more brick and mortar

00:37:43.060 | companies, value companies, if you will, to Paul's point.

00:37:47.540 | So you get that more industry diversification, a more

00:37:50.620 | global industry diversification.

00:37:52.780 | So that's the second type of diversification.

00:37:54.940 | And third, you get currency diversification.

00:37:57.960 | I mean, the dollar has been very strong.

00:37:59.620 | We've benefited from that as US investors.

00:38:01.820 | I don't know how long that's going to last,

00:38:03.660 | but if the dollar does start going down

00:38:06.860 | relative to international currencies,

00:38:09.300 | you've got currency diversification.

00:38:11.100 | So you're getting more stock, you're

00:38:13.420 | getting more industry, broader industry diversification

00:38:17.840 | with international, and you're getting currency diversification.

00:38:20.420 | So I think that's a good bet to have 30% to 40%

00:38:25.020 | of your portfolio in international stocks.

00:38:28.820 | Mike, if you get a chance and want to bring up our audience

00:38:32.240 | questions, we'll try and do some of those.

00:38:49.420 | First question is, given recent bond performance,

00:38:52.620 | could you discuss the pros and cons of investing and holding

00:38:57.440 | actual bonds, individual bonds, like US treasuries

00:39:00.740 | versus bond funds?

00:39:01.940 | I will say, I mentioned this to Karen yesterday.

00:39:10.580 | One question I got quite a bit yesterday, just one on one,

00:39:13.700 | was should I sell my bond funds right now?

00:39:16.420 | And it came back to a conversation

00:39:18.600 | earlier here of discipline and what does it

00:39:21.220 | take to stick with your strategy.

00:39:23.180 | I think you really need to know why you own what you own.

00:39:26.660 | So if you own bond funds and you're

00:39:28.460 | rebalancing to an allocation, you

00:39:30.300 | should have a rebalancing frequency.

00:39:32.700 | And that's what you do.

00:39:33.860 | And you don't deviate from that strategy.

00:39:36.420 | And one of the most important things

00:39:37.900 | is sticking with a strategy over time.

00:39:41.520 | In our practice, we prefer individual bonds

00:39:44.180 | because we're using them to meet a specific liability

00:39:47.500 | in the future.

00:39:48.540 | We have planned out what cash flows someone needs.

00:39:51.660 | That bond makes a perfect choice.

00:39:53.460 | We know when it matures exactly what we're going to get.

00:39:56.380 | So I think you really have to decide what your investment

00:39:59.540 | approach is going to be.

00:40:01.780 | And once you decide that, that's going to lead you

00:40:04.460 | to the right choice for you.

00:40:07.780 | I agree completely with Dana that a ladder

00:40:11.500 | of individual bonds is superior in the sense

00:40:14.220 | that you can match liabilities and expenses.

00:40:16.100 | You can't do that easily with a bond fund.

00:40:19.620 | It's really a matter of convenience.

00:40:21.180 | It's really a pain that took us to put together a bond ladder.

00:40:23.780 | It's easy to buy a bond fund.

00:40:27.420 | And the way I look at it, ETF versus open-end, close-end,

00:40:31.060 | do you own the individual treasuries

00:40:33.100 | if that's what you're going to be owning?

00:40:34.780 | You're going to get a Reuben sandwich.

00:40:36.300 | It doesn't matter whether it's wrapped in yellow paper,

00:40:38.600 | or green paper, or red paper.

00:40:39.980 | At the end of the day, it really doesn't matter that much.

00:40:42.440 | It's really a matter of convenience and psychology

00:40:45.140 | before anything else.

00:40:48.380 | I think it's important to point out

00:40:50.060 | there's a difference between trying

00:40:51.540 | to buy treasuries individually versus a treasury fund

00:40:55.860 | and trying to buy individual corporate bonds versus

00:40:58.460 | a corporate fund.

00:40:59.380 | I think there's a real diversification need there

00:41:01.500 | when you get into corporate bonds.

00:41:03.500 | And to not quite as much of an extent,

00:41:05.780 | also muni bonds, that it's worth using a fund for those.

00:41:08.920 | But I think you've got an option when

00:41:10.460 | it comes to nominal treasuries and TIPS.

00:41:13.100 | [END PLAYBACK]

00:41:15.400 | Thank you.

00:41:17.780 | One question we had, I'll probably

00:41:20.720 | address this to Jonathan, since you

00:41:22.300 | talked about the value of waiting

00:41:25.180 | to collect Social Security.

00:41:28.300 | If I could collect my Social Security earlier

00:41:31.100 | and invest all those dollars, why wouldn't I do that?

00:41:36.740 | There are various questions that make my head explode.

00:41:39.020 | [LAUGHTER]

00:41:41.780 | One of them, and I won't go back to it, but one of them

00:41:44.220 | is the bond fund versus individual bond question.

00:41:48.460 | So much nonsense said about that.

00:41:50.420 | Similarly, why don't I take my Social Security

00:41:53.020 | early and invest it?

00:41:54.060 | Well, yeah, if you take your Social Security early

00:41:56.980 | and you invest it in stocks, yes, you're

00:41:59.960 | taking on more risk, but yes, you should do better.

00:42:02.340 | But it's an apples to oranges comparison.

00:42:05.740 | You're comparing a government guaranteed flow of money

00:42:10.260 | to investing in the stock market.

00:42:12.420 | If you take more risk, yes, you should earn higher returns.

00:42:16.260 | But if you compare taking Social Security early and going out

00:42:20.300 | and buying bonds or bond funds, no.

00:42:24.940 | Obviously, it's not going to be sensible.

00:42:26.980 | Most people in retirement are going

00:42:29.020 | to want a stream of income they get every month,

00:42:33.060 | and preferably an income stream that is indexed to inflation

00:42:37.180 | and is at least partially tax-free.

00:42:39.540 | And that is what Social Security will deliver.

00:42:42.260 | We also know from the research that retirees

00:42:44.940 | who have predictable income from a pension,

00:42:48.340 | from Social Security, from an immediate fixed annuity,

00:42:51.420 | tend to be happier.

00:42:53.100 | Frankly, when people claim that they're

00:42:55.020 | going to take Social Security early

00:42:57.460 | and invest it in the markets, if you dig beneath the surface,

00:43:00.900 | what you tend to find out is they have already

00:43:03.100 | claimed Social Security early, and now they're

00:43:05.880 | trying to justify what they've already done.

00:43:07.740 | [LAUGHTER]

00:43:10.220 | Moving on to a different question,

00:43:15.260 | if I have a certain percentage of my portfolio

00:43:19.100 | that I want in bonds, and I don't

00:43:21.740 | have any more space in my tax-deferred accounts,

00:43:24.740 | would you recommend buying munis in my taxable brokerage

00:43:28.220 | account?

00:43:29.780 | How do I decide if munis are right for me?

00:43:34.860 | I think that's exactly how you decide

00:43:36.460 | whether munis are right for you.

00:43:38.060 | I used to have a portfolio that was all sheltered.

00:43:40.940 | Now I have a portfolio that's almost all taxable.

00:43:43.140 | That's just the way my financial life has gone.

00:43:45.620 | And so my bonds are now mostly in taxable.

00:43:49.540 | And because I'm in a high tax bracket, that means muni bonds.

00:43:52.820 | And so I think we're forced by our circumstances

00:43:57.060 | to invest in muni bonds.

00:43:58.580 | I just can't put everything into a tax-protected account.

00:44:01.780 | It's too small of a percentage of my portfolio.

00:44:03.820 | So something's got to go into taxable.

00:44:05.920 | And if it's going to go into taxable and is bonds for me,

00:44:08.380 | that means muni bonds.

00:44:11.820 | In terms of deciding if you should have munis,

00:44:14.100 | you look at the taxable equivalent yield.

00:44:16.740 | So what would you have to earn on your muni after taxes

00:44:19.940 | to make it equivalent to a taxable bond?

00:44:24.300 | Thank you.

00:44:27.220 | Going to like this one.

00:44:28.300 | Are index funds a bubble?

00:44:30.420 | We'll let the panel address that.

00:44:31.820 | [LAUGHTER]

00:44:36.280 | No.

00:44:36.780 | [LAUGHTER]

00:44:39.640 | They've done very well, though.

00:44:43.080 | No.

00:44:44.000 | Index funds a bubble?

00:44:45.260 | Is that what the question was, you said?

00:44:47.000 | No.

00:44:49.500 | No.

00:44:50.000 | [LAUGHTER]

00:44:51.920 | I think it's important to realize that, yes, US

00:44:55.280 | stocks have done great over the last decade.

00:44:58.320 | But I've got a lot of index funds

00:44:59.920 | that haven't necessarily done that great

00:45:02.640 | over the last decade.

00:45:03.520 | Those are index funds, too.

00:45:04.680 | So I wouldn't say that because it's an index fund,

00:45:07.080 | it's a bubble.

00:45:08.200 | I mean, the index fund is just matching the market.

00:45:11.320 | That's it.

00:45:11.880 | Whatever that market may be.

00:45:14.280 | And just to add to Jim's point, if you

00:45:17.200 | have a cap-weighted index fund, every stock that it owns,

00:45:22.400 | individual investors actually manage their portfolio

00:45:25.880 | own in exactly the same percentages

00:45:28.520 | if you look at them collectively.

00:45:30.000 | So if index funds are a bubble, then so

00:45:34.040 | are all active investors invested in those stocks.

00:45:37.360 | Yeah, there's a whole list of really stupid things

00:45:39.760 | that active managers say about index funds.

00:45:43.080 | And I think that's number two or three on the list.

00:45:47.080 | It's pretty high up on the list.

00:45:49.560 | OK.

00:45:51.520 | I wanted to ask you, looking out at the landscape of investment

00:45:55.880 | products and services at Vanguard and at other firms,

00:45:59.840 | I'm wondering, are there developments of note

00:46:03.320 | that you think could be beneficial or handy

00:46:06.520 | for investors or things you're seeing

00:46:09.280 | that you're particularly concerned about these days?

00:46:12.040 | Are you asking about products that should be available that

00:46:18.040 | are not?

00:46:18.920 | It could be.

00:46:19.420 | It could be that.

00:46:20.120 | Or it could be things that are available.

00:46:22.560 | Well, I'll make a pitch, and I've

00:46:23.880 | been doing this for a long time, for balance ETFs

00:46:27.320 | that we can put in taxable accounts, where

00:46:31.040 | the tax efficiency of the ETF would be--

00:46:35.160 | using that to create redemption baskets within the ETF

00:46:38.360 | would be a real benefit in a balanced portfolio.

00:46:44.640 | So you could buy one fund.

00:46:46.280 | You could buy a balanced index fund in your taxable account

00:46:49.320 | that has municipals in it, no capital gain distributions,

00:46:53.120 | fairly low dividend distributions.

00:46:55.400 | I think that would be beneficial.

00:46:56.800 | But it's not out there.

00:46:59.480 | I mean, Alan Roth isn't up here right now,

00:47:01.280 | but I'll put in a plug-in for his favorite idea,

00:47:04.160 | or what I think is his favorite idea, which

00:47:06.000 | is, if you take the current TIPS yield of, let's say, 2.4%,

00:47:11.160 | and you amortize that over 30 years into a sinking fund

00:47:14.920 | so that you get an inflation-adjusted real income

00:47:18.240 | every year for 30 years-- you basically

00:47:20.200 | are making a ladder-- then you have about a 4.8% burn

00:47:24.080 | rate out of that.

00:47:25.160 | A real burn rate of 4.8% every year goes up by inflation.

00:47:29.400 | And it would really be nice if some large index fund

00:47:33.200 | provider would provide a fund like that, dated to 2053, 2043,

00:47:40.800 | and so forth, that would yield that amortized real interest

00:47:46.520 | payment over the lifetime of it.

00:47:48.760 | It would have a fixed duration.

00:47:51.120 | But there are some fixed duration TIPS funds, ETFs now,

00:47:55.240 | right?

00:47:55.840 | Yes, but they're constantly rolling.

00:47:57.840 | There's some brand new ones that basically

00:47:59.600 | function as individual TIPS.

00:48:00.960 | They're basically one-year TIPS, which

00:48:02.720 | don't make a lot of sense to me, because you might as well

00:48:05.140 | just buy the darn TIP for that year.

00:48:07.960 | One product-- it's not necessarily new,

00:48:10.520 | but it addresses the concern that Jim brought up

00:48:13.440 | in terms of, when you're buying individual bonds,

00:48:15.800 | it can be very safe to buy Treasury bills or agency bonds

00:48:18.560 | or CDs.

00:48:19.160 | But when you get into corporates,

00:48:20.680 | now you're taking on some risk.

00:48:22.320 | So there are packages of bonds.

00:48:24.240 | It's called bullet shares.

00:48:25.600 | It's basically an ETF.

00:48:26.920 | It's a package of bonds.

00:48:28.000 | They all mature about the same time.

00:48:30.520 | And so I think products like that

00:48:32.080 | can be a good hybrid that allows you to create somewhat

00:48:35.160 | of a bond ladder, but still getting diversification

00:48:39.080 | if you were going to go into corporates.

00:48:42.720 | If I could have one wish out of Vanguard,

00:48:46.120 | it would be that they would fix it

00:48:48.480 | so we can buy ETFs other than Vanguard with partial shares.

00:48:53.920 | I think that'll change the life of a lot of investors

00:48:57.040 | who don't have a lot of money.

00:49:00.000 | OK, I think we have run out of time.

00:49:02.560 | I want to thank an incredible panel--

00:49:05.440 | Bill Bernstein, Rick Ferry, Paul Merriman, Dana Anspach,

00:49:10.600 | Jonathan Clemens, Jim Dolley.

00:49:12.640 | It's been great to hear all your observations, your disagreements.

00:49:16.640 | Thank you.

00:49:18.440 | [APPLAUSE]

00:49:21.800 | [SIDE CONVERSATION]

00:49:25.400 | Thanks.

00:49:27.760 | [SIDE CONVERSATION]

00:49:31.120 | [BLANK_AUDIO]

Bogleheads® Conference 2023 - Bogleheads 2023 Investing Experts Panel

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