Well, Mel asked me if I would moderate this panel today. And I've been waiting to do this for years. And what I'm trying to do is to get the audience to support me. So maybe I'll get to do this again sometime. Jack Vogel on my left ruined my surprise.

I'm introducing the new panel, and Jack is the surprise panelist. But he ruined my surprise. As we know, Queen Laura wasn't able to be here. And Jack volunteered to. Okay, we co-opted Jack into the program for her as a surprise guest. Let me introduce the panelists. We've got Gus Sautter.

We know him from this morning, so please welcome Gus again. Next we have Neil Bernstein. He's the founder of Efficient Frontier Advisors and author of several successful titles. And Mel Vanthour, our next panelist, is one of the founders of the Vogelhead community. He's an author at Forbes.com columns, so please welcome the Prince of the Vogelheads.

So we've got a number of questions that came from both participants here and from the website itself. So I think I'll start with a question from Dr. Bernstein from the Finance Club. And the question is, "How should we apply a principle in your book, 'The Ages of an Investor', to funding a 529 plan for college expenses?

On one hand, it's investing a stream of contributions, which argues for a more aggressive allocation. On the other hand, it seems a good candidate for liability matching with fixed income investments." And I think that a 529 is pretty clearly a liability matching portfolio situation. It's got a time horizon that's at most, you know, 15, 16, 17 years.

And its median age is going to be-- or its median duration is going to be around, you know, 7 or 8 years. That's not stock territory. That's bond territory. So, you know, most 529 providers, or at least many of them, offer a glide path that reflects that. It starts at maybe, you know, 70% or 80% stock very rapidly, goes down from there to almost no stock in 5 years.

And I think that's appropriate. You're certainly not in a deep risk sort of situation. You're in a shallow risk situation. This is a question for the panel from Dan. "Please compare the following two investment portfolios, the total stock market index admiral shares combined with the total international index admiral shares, compared to a portfolio of total index equity fund, total bond, and a money market or other cash fund." Anyone?

Total international index. The question--see if I can be clear on this. The question is whether you want your diversification out of either the stock-- the international stocks on the one hand or the bonds on the other. Is that the nature of it? I think that's the nature of the question.

Well, then why didn't you write it that way? Maybe I didn't read it. I was trying to compare the total U.S. and the international as compared to the total index equity fund, total bond, and a money market. I think that's probably total global. The concept of investing-- I think the concept is would you invest in total global, which has domestic and international in it, or would you invest in the pieces separately?

Would you invest in total stock market plus total international? Personally, I believe the latter. Total global has an asset allocation of roughly 55% international, 45% U.S., and I believe that every investor should have a home country bias, and that's why I think you should invest in the two pieces.

I personally think 30% is about the right level of international investment. The reason I say that you should have a home country bias is because basically you say you would invest in order to, at some point in time, consume, and most of your consumption is going to be at home, so most of your investment should be tied to home.

To give you an example, in Australia, over the first ten years of this century, the Australian stock market did much better than the world stock market. It was up about 7% a year. The world market was about flat. At the same time, the Australian economy did better because it was a very resource-based economy, and China was creating all the resources.

What we saw was the economy moved forward quite dramatically. Prices escalated dramatically in Australia. Sydney is the third most expensive city in the world. Melbourne is the fourth most expensive city in the world. If you had invested in a global equity portfolio as an Australian, you would have had about 3% of your money invested in Australia, so your global equity portfolio would have provided about a 0% return instead of a 7% return you would have gotten in an Australian portfolio.

Now, I think an Australian should have some international investment, but to only have 3% invested domestically would be way out of whack. I personally feel comfortable with a 30% international allocation than a 55% international allocation. I would agree with that completely, and I have a question for you, Gus, though, which is that the total world fund, the portfolio, is a good deal more expensive, at least in value-added terms, than the components are.

Why exactly is that? If you look at the way the economics work in Vanguard, each fund has to pay a certain amount to keep Vanguard running. Each fund has a certain percentage of ownership of Vanguard, and then it has its own variable costs as well. Those variable costs are somewhat...

There are some economies of scale as the fund gets larger, and the fixed costs that the fund bears become somewhat cheaper on a per-asset basis as the fund gets larger. So it's really a question of the size of the fund. What you see is that as funds get larger, the expense ratios go down.

As Vanguard has gotten larger, the overall expense ratio has gone down. So it's really reflecting the costs of running the fund. The smaller fund is more expensive. Anybody else? Okay. This is for Jack from Stephen Ander. I'm a retiree. I live partly off my portfolio. Currently, my bond allocation is entirely to Vanguard's total bond market index.

In light of future interest rate increases, should I change this allocation? Perhaps I should diversify into a short-term bond fund question, or should I just leave it alone? Okay. I'll answer that in just one second, because I do want to just take advantage of just this moment. After this session is over, I won't see any of you again.

Until next year, God willing. I just want to thank you all for being such wonderful people. I enjoyed the book signings. I enjoyed the photography. I enjoyed the selfies. I talked for so long yesterday about why anybody would want me on this panel today. I have absolutely no idea.

But I'm here because I was asked to. I didn't sort of get involved here. So just thank you all for everything, is the first thing I want to say. The second thing I want to say is I've done all these book signings, and now I would like someone to do one for me.

So I'm going to pass that down to Bill Bernstein. I have three copies of that book in my office, and none of them are signed. Please write a nice message to me, will you? No pressure at all. Do you have a copy of what you were going to say, Jack?

People ask me, but I know. And then I've also signed two books for the inestimable Gus Sauter, because he won the year to get two latest global diatribes, one of which includes my version of the history of the index fund. Every fact we have is the same. Every name we have, I name all those different-- McLaughlin, who I knew, myself, Jack Treanor, the whole bunch of them, and Paul Samuelson, who was not on his list, who was the key, who started the first index fund.

And I explained why that difference is there between the quantitative school, so for all those computer-worrying guys, who got nowhere, finally, and had to change their work, their Samsonite fund. You knew an S&P fund after we had started ours. So I'm not saying they borrowed it out. I don't think they borrowed anything like that.

They actually got religion after we had to read it, so we could divide them into pre-religion and post-religion states. And that's all described there, so enjoy them, Gus. I marked the relevant pages. Back to the question. Now back to the question. In the face of low interest rates. There's an awful lot of timing that goes on.

You're going to get in, bond prices are going up and down. And my view is that the intelligent investor doesn't pay any attention to that. The intelligent investor realizes when he buys a bond fund, this is a broad generalization, he's entered into a 10-year contract. Whether it's a 10-year bond or a longer bond, it's not going to look that much different.

And that is a contract to get today's interest rate for 10 years. It's not very complicated. So do you want to have bonds today, which will-- I guess the 10-year treasuries are around 2.2, 2.24. Anybody want to correct that? 2.24% today, I'll let you see if I can get away with it at that point.

And the long treasury is probably around 3.25 at this point. And so if you want a longer, higher return, almost dramatically higher return, you want the long treasury. But it will be all over the place. And I don't think most people can tolerate long-term volatility. There's this idea of a thing called duration, which is very simple no matter how people try to make it.

And that is how much for the price of a bond. Duration is the number of times of price movement you get for each 1% interest rate. So the treasury probably has--a long-term treasury probably has a duration of 17, something like that. So if interest rates go up 1%, you will get to have 17% preordained.

That's for the moment. And you'll make that up to have higher yields later on for the summer. So I don't like the long-term bond too much. So you can do intermediate, and then you have a choice in intermediate between the treasury in round numbers, 10-year treasury at 2.25, something in that range.

And the corporate in that range is probably about 2.90, very close to 3%, so you can get the higher return on the corporate. So how you want to deal with this is a combination of mathematics, tolerance for volatility, and your ability not to get bothered by these upheavals in the market.

These are behavioral decisions, not rules-based decisions. And I worry a lot about rules-based decisions because rules don't apply to all people equally for all different individuals. And so I'd say be very wary of anyone who gives you a rule-based kind of idea. There's also this about the balance function of the bond index or your interest in the bond market, and that is this allocation between stocks and bonds for years is based on the notion that the yield on stocks has been around 2% for 20 years, I guess, maybe more than that.

It got all the way down to 1% in 1999, early 2000. And the yield on bonds during that period was mostly about 6%, three times as high. Today, the yield on a bond portfolio is probably 3% corporate-government mix. I'll use that as a random number. The yield on a stock portfolio is 2%, and that's not much of a difference.

And if you don't want to go along, it's probably 2 against 2.5. So you just have to make your judgment how badly do you need the income. That's where the corporate bond index comes in, the intermediate-term bond index comes in. And I don't really have any rules for that, but those are the things you want to think about-- 10-year contract, the volatility and your tolerance for it, and the apparent mere certainty of getting a higher return the longer you go with a much higher risk.

One of the things I loved about my job at Vanguard is that we use a lot of financial theory that I've studied and then try to figure out how to apply that from a practical standpoint. So if you think of how we come up with the concept of an asset allocation, it's think of the traditional efficient frontier and then where your utility curve is tangent to the efficient frontier in terms of your asset allocation.

Well, the interesting thing is the efficient frontier is going to shift if you have lower expected returns for bonds, as we do now, and that would mean that the utility curve is going to intersect or be tangent at a different place on the efficient frontier, and that would imply a different asset allocation.

But if you expect lower bond returns, shouldn't you expect lower equity returns? Stocks and bonds compete for capital, and if we're in an environment where bonds are providing very low returns, then shouldn't stock prices be bid up to the point where future expected returns are correspondingly low for equities?

And if you believe that's the case, so instead of getting 10% a year from equities, let's say we're going to get 8% a year from equities or maybe even 7%. Then you have to redraw your efficient frontier and find out where it's tangent to your utility curve, and maybe not coincidentally, it's the same asset allocation.

So I think you have to also think that each one of these asset classes provides something in your portfolio. Equities are going to give you, hopefully, the biggest return, and bonds are there to moderate the volatility and still provide you with some rate of return. I think that role is still the same in this environment.

We just have to realize that our expected returns are probably lower at this point. Okay, here's a question for the panel from Tracy Denton. How often should a portfolio be rebalanced? One or two times a year? Should the state of the current market have any impact on the frequency?

I favor bands as opposed to timing. I think that--is this working? I favor expansion bands as opposed to a specific time. I know everybody's got their own method. They do it on the birthday, they do it on the first of the year, they do it around Christmas time, but personally I prefer--I know Jack's-- I think Jack doesn't favor rebalancing at all.

Is that correct? Well, it's probably a reasonable reading of what I said. Let me say what I think is the facts on it. Number one, rebalancing costs you a lot of money over the long term because you're selling your higher-yielding asset in favor of lower-yielding asset. You're reducing your stocks, which have an upward curve.

It's steeper than the return on bonds. So you should be going to any kind of rebalancing, realizing that. That's the economic or financial impact of it. If you want to make sure that you're reasonably conservative, you scare a little bit easily as I do, and you want a decent-sized bond position, and you probably do want to rebalance, I would say never, never, never use a decimal point in your calculation.

I mean, maybe if you want to be 60/40 and you get over 65/35, you might think about rebalancing, or even 70, because it's really much more important what's in the portfolio, what you're paying for--this is for investors generally-- and those factors are every bit as important as rebalancing. So I think we tend to overdo rebalancing.

We had a budget--Michael and I had a budget, and maybe Kevin and I-- a bunch of 25-year studies showing that rebalancing pays off, I think, about half the time, just about what you would expect, holding a return constant of 60% or so. So I think it's a little bit overdone, and maybe even a lot overdone, and has given some idea of magic that doesn't exist anywhere in the field of investing.

There is no magic here. Sometimes things go for you, sometimes times go against you. So I think you do want to be a little cautious. If you have a 50/50 target, and you get to 80/20, you should have cut back something, maybe when you got to 60 or 70.

But it's not a guarantee of better performance or anything else. It's a guarantee, I think, that what I like about keeping a solid bond position is it keeps you from the behavioral issues involved, and the kind of markets we've had in the last few weeks. The last few weeks have been so funny, because every day, every odd number of days, you wake up thinking, "Gee, I wish I had more in stocks," and every even number of days, you wake up and say, "I wish I had more in bonds." And that's not going to get you anywhere.

Just leave it alone to the extent you can. My understanding is the target date funds at Vanguard rebalance on a daily basis. Can you confirm that or straighten us out on that? What we do is take the cash flow into the funds and re-target it towards the allocation that it's supposed to be at any given point in time.

They're really risk-based. At a certain age, we want you to have a certain level of risk, which implies a certain asset allocation. And if it does wander away, if we have cash in the portfolio that day, we're going to put it wherever we happen to like. So it's seldom that we would actually sell out of a position and rebalance in one other, except in extreme market movements.

So if 2008, 2009, we actually will rebalance it. And actually something like Balanced Index rebalances every day. Not necessarily that it's a great strategy, but you have cash flows coming in every day, and you're offering a fund that is a 60/40, 60 stock, 40 bond portfolio index, and you don't want it to get to 61, because that may be too much for the person that's coming in that day.

It's a kind of a consistency with objectives strategy, rather than a personal investment decision. Bill? I was just going to say, we do use bands so that we're not overdoing it. You were going to make a comment, I thought. No, I was just going to make a wisecrack. One of the ways you can tell, in response to what Jack says, one of the ways you can tell the financial economists have a sense of humor is they do use decimal points.

All right, the next question is for the panel. It says, "Look into your crystal ball. The massive baby boom generation moves into retirement. What are the macro effects on the markets, pressures on portfolios, et cetera?" I'll take a nice extreme position, nothing. The reason for that is, none of us can guess exactly how this will work, but stocks have a certain intrinsic value.

If a lot of people are buying stocks at, let's say, an arbitrary actual value of 100, a whole lot of people are selling them. Someone will be selling stocks as they go into retirement, presumably, but there will be other people buying them. I don't know how you measure which demand is larger or which is smaller, but it should not, theoretically, in the long run, what drives stock prices and values is the dividend yield plus the subsequent earnings growth.

If you adhere to that, and it is absolutely the case over 100 years, an awful lot of shorter periods within that, that determines the market return. It doesn't care whether old people own it, even people my age, or young people own it. I'd say, essentially, nothing. Did I make myself clear?

I like to look at things in the broadest possible historical perspective. 5,000 years ago, nobody retired. You worked until you died. But if you wanted to invest for retirement, it would take you about 15 minutes because returns were very, very high, and you didn't live for very long after you retired.

Now, the first retirement contracts, if you will, were something called corotes, which were a Dutch instrument. You would pay what amounted to about a year's worth of your salary for a very basic food shelf for the rest of your life. That's pretty darn cheap. And I view retirement as a supply-driven commodity like anything else.

So if you want to visit, you know, Venice or New York or San Francisco, so does everybody else in the world. The demand for that is very high. And that's why those places are so very expensive. Well, retirement is getting to be the Venice and New York and London of the modern world.

Everybody wants to retire now at age 55. Consequently, doing that is going to be very expensive. We've already commented on the fact that portfolio returns going forward are going to be very low. People are living longer and longer. And if you think about it, you know, someone works from 25 to 55 and then dies at 85, and if the demographic curve is flat, that means that for every retired person, there's one working person.

That doesn't work very well. So I take a somewhat more pessimistic point of view, and I guess Jack does. I guess I look at it more globally. It's hard to imagine that we would have a certain expected return for equities in the U.S. and a very different expected return in Korea or some developing nation, especially the way the world is becoming much more global in nature.

So capital is increasingly able to move around the world, and so I think that the expected returns will somewhat equalize, given the fact that the risks are somewhat similar. So I guess I'm a little bit more Jack's kid. I'm this one. This is for Jack from T. Wilcox. Which bond fund would you use for a three-fund portfolio?

Which bond fund would you use for a three-fund portfolio? Well, I made my position clear about the fact that I'm disturbed by the composition of the bond index itself, and I think it's just too heavy in governments to consider. We talked about this yesterday with the charts. Too heavy in governments, too heavy in foreign ownerships, too heavy in federal ownerships to represent a bond portfolio of a typical American investor, which would be investors' holdings, insurance companies' holdings, pension fund holdings and things of that nature.

And I think a reasonable bond position would be highly arbitrary, but not 70%, but maybe 30 or 35%. And that's probably, if you look at all the bond funds out there together, as I mentioned yesterday, that's probably about where the competition is as well as where the U.S. market is.

So I think we should have a much better bond index. And nobody at Vanguard, I don't know, I think Gus felt aggrieved with me when I brought this up three years ago. And I stopped bringing it up. You don't want to beat your head against the wall. I've got too many issues to worry about other than that one.

But what I suggest instead of that is why not have heavier money, say, as the working hypothesis had, half of it in the total bond market portfolio and half of it in the corporate bond intermediate-term portfolio. The corporate bond intermediate-term portfolio is the intermediate, but so is the total bond market intermediate.

In other words, the long and short pretty much balance themselves out when you go about the same duration. So you can do that without any change in risk exposure of the credit and improve your return by probably a half to three quarters of a percentage point a year. So these are stingy markets where we should have a much bigger edge, we think, or I think we do, because the competition has more corporates and therefore higher yields.

And they come at just about matching our bond market fund with lower costs and lower yields. So I think we're a little out of the mainstream, a lot out of the mainstream. And my choice would be the intermediate-term corporate. I also tried, and I think Gus did agree with me on this, to have them form an intermediate corporate bond index fund.

A corporate bond index fund would have a correlation with the intermediate-term bond index of about 99. So why don't we just use either? I think a corporate bond index fund is easy to explain. That's a big part of our job on the phones in our literature. And an intermediate-term bond index begins with the fact that first our poor rep on the phone has to deal with why would you choose the intermediate-term index?

It's a whole conversation that has nothing to do, in my opinion, with sound investment practices. So give it the simple route. It's always been my position. Make it easy to explain. Make the structure simple. And so that's my choice to answer the question in four words that I should have, as usual.

This next one is a question from Mel. Could I ask Gus, what do you think about the corporate bond market index fund? Representative? Unrepresentative? Well, by definition, it is representative. I mean, it really is the market itself. Do I believe that it should be so heavily weighted in treasuries?

You know, with corporates, if you look at corporates, the extra return or the excess return from corporates is somewhat correlated with equities. So you're getting a little bit of an equity-like kicker in the corporates that you can get anyways in your equity exposure. So I guess I still do think the total bond market is an appropriate investment vehicle.

I did agree with Jack several years ago when he was talking about doing a total corporate index fund for people who do want to avoid corporates. I still think the total bond market is a rational investment. Okay, this is a question from Mel. Given today's situation, what are your thoughts on the current high bond offerings?

Well, when we compare them to the good old days when you could get the 3.4, 3.3, 3.6 fixed rate and you could buy $30,000 worth of personal security paper and $30,000 in electronic bonds, we say that things are pretty sad. On the other hand, when we look at the fact that they are tax deferred for up to 30 years, they're risk-free, they're adjusted for inflation, and you compare them to any other risk-free investment that's available today, despite the good old days being gone, I think they're still a good investment compared to other options that are available.

It would be nice if we were to return to the good old days, to face the facts that we have to compare them to what's available in CDs and money markets and things like--excuse me, I'm losing my voice-- so that I think that they're still a good investment for people who are comfortable buying them strictly online.

The next one is a question to the panel from Greg Brice. Recently, Paul Merriman spoke on what's wrong with Vanguard. He believes Vanguard should tilt more towards small-cap and small-cap value within Vanguard's total stock market fund. I would like to hear the panel's feeling on this statement, both pros and cons.

This is similar to what DFA funds do. I've got a really strong opinion on that one. The total stock market is the total stock market. To put that argument up there, the zero-sum game and the negative-sum game, that applies to the total stock market. It does apply to overweighting certain segments of the market.

If you want to overweight those segments in your own portfolio, Vanguard does provide small-cap value funds, small-cap blends, small-cap growth. For people who do want to take that bet, they can do it, but it wouldn't make any sense whatsoever to put it inside of the total stock market. It begs the question, is that bet worth taking?

I alluded to it earlier that I'm not terribly wild about that bet because it's based on empirical work and the theory was developed afterwards. People said, "Well, I think you're getting extra return because you take extra risk." I would ask the question, "What risk are you compensated for?" In other words, think of the original capital asset pricing model.

We talked about systematic risk and non-systematic risk. If you were compensated for taking systematic risk, which is market risk, and you were not compensated for taking non-systematic risk, non-systematic risk was risk associated with each individual stock. That could be diversified away, so why should society pay you to take that risk?

If you look at the different segments of the market, just think of the nine Morningstar style boxes, each one of those is more volatile than the market itself because they're more narrowly defined. In a couple of cases, just marginally more volatile. But if they're more volatile, so they're riskier, should they have a higher return than the market?

Well, if they did, then why would you own the market? You just own the pieces of the market. You put them back together that way. Well, that doesn't make any sense because they come back together again and they're the market. I think that this, arguably, from a financial theory standpoint, would be that it's risk that's not compensated.

It can be diversified away. There are a lot of people who are arguing behavioral finance aspects, but for me, I've just had too long not taking Factor Bonds. Let me just add to that. I agree with Gus, at least in this case. I talked to you yesterday about the FAA, and I simply don't believe--I know what the past data is, and I know the growth has done in the past.

People use the expression--I'm sorry, value. Value does better than growth. I never want to hear that said. Value has done better than growth in the long-term past. Not does, but has done, and that's pretty irrelevant to me in the future. And small cap, the same thing, has done better in the past than large cap.

In these long periods of going back to, I guess, 1928 or '26, something like that, it's very clear that you can find 20-, 25-year periods where the reverse is true. So we've got this period-dependent comparison. It started at a certain point, and it ends at a certain point. It's all they can do with any comparison you've ever seen is period-dependent.

We've also done a fair amount of work on how the real world works rather than those calculations out of Chicago work. And it turns out these things don't work nearly as well if you compare, say, growth funds, growth mutual funds, with value mutual funds. And we've done a lot of work on that, and the results are not totally different, but quite different, and will lead you to no conclusion like that at all.

Also, if you believe that the stock market is a great arbitrageur between the present and the future, if it is categorically true that value at small cap are better, why then the prices of value at small cap will be bid up at the expense of large cap and gross stocks, which will be bid down.

So I don't see any reason it should hold in the future. And I also call on the chart I gave you. I'll reiterate the chart I gave you yesterday. When you look at all the morning star ratings taken class by class by class, in fair comparison, our value funds will be compared to DFA's value funds, value-oriented funds, things of that nature.

We are the highest-ranking investment company complex in the entire morning star ratings. We have a 58% positive rating. We only have 6% Vanguard funds that are in 1 and 2 stars, and 65% are in 4 and 5 stars. For a net of 58 is the way I do it.

DFA is 16% 1 and 2, and 48%, their differential is 33%. And they still rank number 6. This is good, and I salute them for that. Probably the main difference between 1 and 6 is they're charging 45 or 50 basis points a year, and we're charging on average 15.

And so if they want to get up and really get in the competition, reduce your costs, DFA. Now! Let me make the contrary case. First of all, I think that a more subtle definition of risk is called risk is more than symbols of volatility. And the best definition of risk that I know of is Antti Omani's risk, which basically summarizes bad returns and bad times.

So if you look, for example, at the return of the small value partner during the most recent financial crisis, you're left with, you know, a return of -65% top to bottom versus about -55% for the total stock market. That may not seem like very much, but there's a big difference between being left with 35 cents and being left with 45 cents.

So I think there's a good theoretical reason why small value stocks have a higher return. It's not just that it's period dependent in the United States. At least the value premium is present in just about every single country you would want to look at. 15 out of 16 developed nations, I think, the Fama-French's international study, and I think 12 out of 16 emerging markets nations.

Now, having said that, the return of any factor, I believe, is roughly inversely proportional to the number of people chasing it. And in the current environment, everybody and their dog is chasing the small value factors. From DFA to Armand and his crew to, you know, just about everybody else is pushing their version of smart beta.

So I think that it's a much tougher road to hoe from this point forward, if you're going to believe in factor-based investing. With all due respect, neither Benjamin Franklin Bogle or Sugar Bogle or two dogs are chasing small value stocks. Maybe not those two dogs, yes. The next question is for Dr.

Bernstein from Ray James. Is globalization depriving the benefit of diversification across regions? If so, can this be quantified or predicted reasonably? Well, yes. If you look at simple short-term correlation of short-term periods, daily returns, monthly returns, we all know that the markets have become more correlated, and the reason for that is simple.

Vanguard and DFA and ETF providers have made it very easy to get exposure to these corners of the world, to obscure corners of the world with the push of a key. And when that happens, correlations will naturally rise. Having said that, the long-term correlation value is still there. And all you have to do is look at the returns of various asset classes between, say, the 10-year period, between 1999 and 2008, which accounts to all their markets.

And what you see is that the broad U.S. market had a nominal return of something like minus 20% over that 10-year period, whereas most other foreign asset classes, particularly emerging markets, had, in some cases, triple-digit returns. So there's diversification that you can use. Next time around, the pattern may be reversed.

I'm a strong believer in the fact that we cannot predict the future, therefore, we diversify. I'm a little slow. I'm still thinking about Bill's last response about factor returns. And my point was not that there isn't actually more risk in small-cap value or in small in general. It's just whether or not you should be compensating for that risk.

In other words, there's more risk investing in a single stock than any other way you could invest. But are you compensated extra because you're investing in a single stock? If it's diversifiable, then you don't get compensated for diversifiable risk. And should society pay people to take a bet on small-cap value, the more risky segment of the market, when society itself, in aggregate, doesn't bear that risk?

Again, I think it depends upon how you define risk. I define risk as what I feel is my stumbling block since 2009. And I think based on that measure, I think that small stocks deserve a higher return because of that higher risk. I think the next is a three-part question for the panel from Bob and Artie.

I'd be interested to hear the panel's viewpoints on portfolio construction in retirement based on three different approaches advocated by members of the panel, agent bonds or some variant, the bucket approach based on when the money is needed, or liability-matching portfolio, why keep playing when you've already won. Well, I have a question for Bill along those lines.

Bill, in your early book, you showed that an old bond portfolio is actually riskier than a portfolio with, I think it was between 7% and 12% in equities. So, if you won the game, basically, you don't invest in equities in theory. You put it all in safe investments, and yet it seems to contradict your findings in your early book.

Yeah, I can't be entirely consistent all the time, I suppose. As Gene Fama likes to say, I can't be right about everything, at least at the same time. More seriously, you know, there's no one approach that is best for everyone. You have to look at your own personal situation.

I think that in general, the person who has saved up just 15 or 20 years of residual living expenses, that is, what they need to live on in addition to their Social Security, if they're lucky enough to have that, that's the person who really should have a liability matching portfolio, which, if not 0% stocks, should be fairly low.

If it was a bad draw early on, let's say even a 30/70 or 50/40 portfolio, they very well make that person run out of money. On the other hand, Warren Buffett's widow can invest 100% of her money in the Vanguard Index Trust 500, because the dividend yield on that, even a quarter of the dividend yield will not presumably pay her living expenses.

So if you can tolerate, you know, if you have 50 or 100 times your residual living expenses in your portfolio, and you can emotionally tolerate 100% stocks, why not? You know, an age equals bond is a good shorthand for approximating, I think, what the middle course is for most people.

It's a matter of personal taste more than anything else. On the liability matching portfolio, it's a theoretically extremely sound idea, but today, with interest rates where they are, funding it is beyond the financial ability of just about every corporation that has a pension plan. They really can't do it.

They have to put a whole lot more money in, and that would reduce executive compensation, it would reduce corporate earnings, all those things that are totally unacceptable. It would reduce the price of the stock in the stock market for all those short-term speculators that are holding it, and all that notates against just the sheer ability to have a liability matching portfolio.

And they may want to try it anyway, and there are all kinds of financial machinations naturally going on out there, where they sell the liabilities to an insurance company. I'm not sure exactly how all that works. People are trying to get around this without putting up any more money, but they keep a lot of that liability when they sell it off, and I don't know if anybody really does have to account for that.

So it's very sensitive. Our corporations are very sensitive to these pension contributions, and so they try and work their way around it by assuming higher returns than they will ever get, even though those plans are underfunded by, I think the number is $5 trillion is the underfunding in private and public pension plans in the U.S., most of which, I think it's $4 trillion, is the underfunding of state and local government plans, public pension plans.

So we have a real mess on our hands, and, again, the first company or the first municipality goes belly up. Detroit gave us a good example. It's going to find they're dealing with a financial situation that is-- it's just untenable. The system doesn't work, except if they go out and raise taxes, and, of course, the taxpayers have to approve that, and they're not going to approve it.

So there's only so many options you have left. So it's a complex idea, the idea of liability matching. It is theoretically--I mean, you could write a book on how perfect it is, but it just doesn't seem to work. The next one is a question for Bill Bernstein from Puff Loverson.

For the past three-plus years, you've advocated holding very short-term bonds, primarily to treasuries, taking the risk in equities. Do you still maintain this view? Well, Paul, you're wrong. I've been suggesting that for the past seven years, I think. Well, there's six of them. You know, I think that in finance, at best, you're going to be right.

60% or 55% of the time, this falls into the other category. That said, I'm still comfortable holding relatively short-term bonds. I'd like to lay it on my face here a little bit. This is for Mr. Bogle. What do you recommend for individuals and organizations who need reliable, predictable income?

A mixture of individual securities, dividend-paying stock, and bonds, or do you still believe a portfolio of index funds is best? Well, it seems to me quite clear that depending on income, it is a long way from irrational to depend on higher-yielding common stocks as well as bonds. Of course, don't accept the market return.

The purists will say, "I'm wrong here," which is fine. But you need the money, and you can probably get out of it. I'm not sure of the exact yield of the Vanguard high-dividend fund. I look at it in the paper just about every day, and it has a return very comparable to the market.

I don't know what the yield is, but I'm going to guess it's about 3%. And you're going to have a correlation with the market, probably '96 or '97 with that fund because the big companies in America that make up the S&P, the total stock market, are by and large dividend-paying companies, not necessarily high-dividend-paying companies.

So I think it's a good strategy if you need the income, and most people do. I think the risks are very small, but I also continue to differentiate. I think probably a lot of my fellow panel members talk about returns, and returns are very uncertain, but dividends are quite certain.

It's only been, as I showed you in that chart yesterday, only been one significant dividend cut in the last, I think it's 1935, that's what it's been, 80 years, when the banks all cut their dividends back in 2008. So dividends are quite reliable, and I look at dividends as being real and market returns being, to some degree, illusory.

And if you don't believe market returns are illusory, just check the percentage changes in the market in each of the last eight days. You know, it's like this. I never said anything quite so crazy in my life, I've got no trend, and so I like that strategy. I like a strategy for an investor that needs the income and understands the risk of a more appropriate bond strategy than a total bond market strategy.

And there are a lot of investors, perhaps many of you in the room, maybe most of you in this room, who are in this game for some income, and I think we ought to make sure we have options that are available, and we do have it vanguarded through our high-dividend yield fund and high-dividend fund and our intermediate-term corporate bond fund.

So look at all the options, and I think the incremental risk is small, so don't do it, maybe, with your hobo portfolio, but do it with 75% and have the rest, the other 25%, figure the number out of the air here, and just come down the middle, totally down the middle, almost down.

The next is a question for the panel from Samuel Moller. What do you think of Vanguard managed payout fund for a retiree? How about as a way of simplifying if one's spouse has no interest in investing? There's only one up left, so you have to use the singular. I guess I invented those, so I'll-- The funds are designed to try to minimize volatility and yet provide a reasonable rate of return, and so we pursue that with a number of different asset classes.

It's more broadly diversified than, say, the target-date funds, even now using some alternative beta strategies that we put into development about almost a decade ago now. Those alternative beta funds have worked out as expected, but I think that, by and large, the managed payout fund is meeting its objective.

I think we did have too many funds. We had the 7% fund, and everybody's putting their money in that. Without the realization that probably you weren't going to get-- your standard volume is going to go down over time, and everybody said, "Well, if I'm going to take the 5% fund, then I can get a 7% fund." But the end result is very different.

So I think it's an appropriate investment. I wouldn't make it my entire investment for my retiree assets, but, again, the design is to be a balanced approach, a broadly diversified approach that still provides a reasonable rate of return and with much lower volatility. And the volatility has been less.

Volatility is every investor's enemy. The same return in a volatile portfolio is one that's constant. I'll give you numbers. 10% and 10% over two years gets you a 21% return. Zero and 20 gives you a 20% return. So you don't want volatility. So those portfolios were designed to try to address that volatility and help with higher returns.

Well, Gus, was that designed as an alternative to annuities, like a SPIA, a single premium immediate annuity? Yes, except for the fact that it does have more volatility. I mean, it was designed to be something you can have in retirement, really count on the amount of income, the income growing over time with inflation, and hopefully even a little bit on a real basis, but do it in a very low-cost fashion.

The problem with the annuity is that it's a high cost. Well, not only that, but you lose the money that was there. People don't buy annuities. They're sold annuities. I'm talking about a single premium immediate annuity. Yeah, well, what I mean, they're sold. Nobody goes out looking for one.

It's a salesperson who comes to you and sells you one. Well, I think in this group, single premium immediate annuities are one of the acceptable options. Oh, really? That's an interesting piece. I think a lot of hesitation people have is it's the risk of dying tomorrow, and you gave up all your principal.

So that's why they're still relatively small. But when the managed payout funds came out, I thought that this was a good alternative for people who could accept the variability in the returns because they still retain the assets as opposed to a single premium immediate annuity where they lost the assets.

If I can say something slightly scandalous, perhaps moderately scandalous, a lot is written about the annuitization puzzle, which is why more people don't do it. And Mel's given one good reason, and so is Mr. Sauter. But what we find when we look at annuitizations, there are lots of good reasons not to do it.

And it turns out that a lot of the people who write about the annuitization puzzle receive very large consultant fees from the insurance industry. No. Say it in itself. Yeah, say it in itself. Okay, here's a question for the panel from Victoria F. Last April, we were bombarded with the news about high-frequency trading, HFT.

What is your current opinion about HFT and the merits of Vanguard using HFT-resistant exchanges such as IEX? I guess that kind of falls on me. I've actually been somewhat vocal that I think all the uproar about HFT is that it sells books and actually has had less impact. It's interesting.

At the end, you have to have some metric to measure the quality of a market. So what would that metric be? It would be transaction costs. I mean, that's really what the fallout is when you're investing. And if you look at transaction costs 15 years ago, they were well over 1% to buy the average equity.

Today, it's about 35 basis points. So transaction costs have absolutely plummeted in the last 15 years. And there are several reasons why. There was a very significant change in what's called the border handling rules in the mid-1990s, 1996, I believe. And that led to the proliferation of different trading venues.

Prior to that time, there were really only four different places to trade, four or five. And then all of a sudden, you see this explosion of trading venues. And I would say that I'm not in favor of that. I don't like all of the dark pools in all the trading venues.

But they're there, and it would be crazy not to use them. But that led to the proliferation of exchanges. Then we had another very significant change, the decimalization in 2002, I think. That led to a collapse in spreads. We then had, with this proliferation of exchanges, we ended up with kind of a mess.

The exchanges weren't tied together. And so the SEC created what's called REG NMS, National Market System. And that tried to bring all these 52 different trading venues together again. But they needed some vehicle to do that, and that's what high-frequency traders do. One function high-frequency traders do, you'll be very familiar with.

They tie the exchange-traded fund prices to the underlying securities, or futures prices to the underlying securities. And the prices would wander away if there weren't people arbitraging to keep them close. So all of this has come together to create an ecosystem. And it's not an ideal ecosystem, but it has resulted in a dramatic decline in transaction costs.

We live in a much better place today than we did 15 years ago. Could it be better? Yes, I think it could be better. I don't like the current market structure. Interestingly, the issues brought out in Flash Boys really aren't the real problems. There are some problems with high-frequency trading, but not the ones brought out in that book.

So the SEC is reviewing order types. And that's really the biggest issue, is order types. Most institutional traders, and certainly individual traders, don't know what these order types are that high-frequency traders are using. If you use those same order types, you're totally immune to high-frequency traders. So I think there are some issues.

I think they're way overblown in Flash Boys. We definitely live in a better world today. And I do worry that if all of a sudden somebody came in and said, "Get rid of all high-frequency traders," we'd go back to the old world. And that was not a good place.

Let me expand on that literary dimension, which is the essence of good nonfiction writing is compelling narratives. And the narratives that Mr. Lewis had were spectacular. You know, people cutting straight lines through mountains across the Appalachians, heroic young financial analysts discovering irregularities in the system. Never mind the fact that the cost of this to the individual trader who's unaware of them might be a basis point or two, versus the hundreds or thousands of basis points that are garnered by a mendacious mutual fund brokerage industry.

That's not a good narrative. And he pretty much admitted that. He said, "Yeah, everybody knows that Wall Street is corrupt, and it's creaming trillions of dollars off from individual investors, but that just wasn't a good enough story for me. This was a much more compelling narrative." Let me just suggest to Gus that you read with great care my editorial from JPM for summer called "Flash Boy and High-Frequency Trading." By the time you get through it, Gus, you will think, "Why is he putting my name to your work?" Or your name to my work, I guess, would be a better formulation.

I totally agree with you. See, it happens. Once again? This is a question for the panel from Frugal Investor. Given that a retiree has ensured a basic survival budget using Social Security and single premium immediate annuities, I've been reading with interest various discussions on bubbleheads.org about a variable withdrawal method.

For those of you who may be familiar with it, what are your opinions about it? Is it any better or safer than other withdrawal methods, and if so, why? Well, sure. A variable flexible withdrawal method that reduces withdrawals when returns are low or negative is obviously going to have a better survival percentage probability than one that has a fixed one that doesn't change with portfolio returns.

So the question is, how flexible are you? If you're very flexible, then by all means, use a variable method. You're going to increase your chance of retiring successfully. The only problem is that will come at a cost of reduced consumption. There's always this trade-off between safety and consumption. You've got to figure out a way around it.

Anyone else here care to comment? Well, I think the other threat of a lower-- of a reduced income stream is also that you have to consider inflation in there. So when you consider that plus the lower withdrawal, it's kind of a double-header. Okay, here's a question for the panel from Disaprius.

Dr. Bernstein, Bernstein sometimes cites Rekenthal's rule, if the bozos know about it, it doesn't work anymore, for all panel members. In your opinion, is this just one of those amusing platitudes that sometimes fits and sometimes doesn't? Or is there actually actionable wisdom in it? Or is it truth? I think it's a useful rule at extremes.

And, you know, one of the-- I think most people, if we're going to talk, you know, financial porn market time in here, one of the most reliable indicators, in my opinion, is when all of your neighbors are doing something, it's generally a good idea that you don't do it.

And when people start arguing with you and getting angry at you because you disagree with them, that's an almost certain sign that they're wrong. Anyone else? Well, I would just say arbitrage is a very strong phenomenon, so if everybody does perceive something, they'll arbitrage it away. Okay, here's a question for the panel from Ray James.

Gold and tail risk, how much would each of you allocate to gold in a hypothetical portfolio purely for diversification? Well, if the portfolio has a 25 or 50-year time horizon, it's ain't that bad, but I would allocate 5% to gold just in case something awful happens that will help you a little bit.

Other than that, I don't think it should be installed. Or, alternatively, instead of 5% gold, you can do 2% precious metals aggregate, which does effectively the same thing. You can use up a little smaller portion of your portfolio. By the way, precious metals aggregate prices have fallen in the past three years by 70%.

Let me just reiterate for all of you a very simple fact about gold, precious metals, and any other commodity. They have no internal rate of return. I said this yesterday. Stocks have dividend yields and earnings growth. Bonds have interest group bonds. Precious metals, commodities, gold have nothing. So when you buy that particular security, you're basically betting you can sell it for more than you pay for it.

And that is exactly the definition of speculation. So you want to be very careful. We all know it gets very popular when gold is at 3,000 or wherever it got, 3,300, I don't know. And it used to be the big thing in Forbes about 40 years ago. And then it didn't do well for a long time.

So everybody forgot it. Remember it after it's done well. So just keep in mind that if everybody's talking gold, it's the time to get out. Now that everybody's talking non-gold, it's probably the time to get in. God knows. So you shouldn't be betting in your portfolio. Except Ron Paul said, "It could go to infinity." This is number four that I agree with Jack on.

I have a different perspective in that I was a gold miner from 1982 to 1985. It took me three years to bankrupt a company that I put together. And I'm cured now. I do believe that gold is not an investment. Gold could be, as Jack said, a catastrophic hedge.

To me, if the world blew up, gold is a catastrophic hedge. But I don't place a high probability on that. So I wouldn't put a whole lot of money into gold. I certainly would not consider it an investment. And I think that some people consider it an inflation hedge.

But in my portfolio, I have a $120 gold piece that I inherited from my dad. And I use tips and outbounds for my inflation protection. That's interesting. There are two types of inflation. So there's anticipated inflation and unanticipated inflation. And gold and other commodities are good inflation hedges with unanticipated inflation.

In fact, they're one of the best, one of the few good ones. But then, once inflation is anticipated, all of a sudden, equities are probably your best hedge against anticipated inflation. You know, as far as gold as an investment goes, this is exactly what Rick Ferry has to raise his left hand.

There we go. There's the gold investment you can make. That's gold investment you can make. Best investment ever. There is a very important point here that I don't think anybody but Cliff Asness has talked about. And he's at this wonderful award, if you can get a hold of this, it's all public, with Paul Kerman, who says the Fed has stopped inflation.

And Cliff Asness says the Fed has stopped price inflation for the things we buy. But they have increased the inflation of financial assets. We've had huge inflation of financial assets due to the very Fed programs that are holding inflation down on things like the CPI. So it's not an open and shut case.

And, you know, it's almost like you push something in here because it's whack-a-mole or something, and it pops up over here. And that's a very important point to realize, that the Fed, I think, is kidding itself in a lot of ways by giving themselves the hero's pat on the back.

Always a worrisome thing, except when Gus and I are concerned. And so you want to think about what's really happening, and it requires looking at financial assets as well as the normal consumer price, the basket of consumer goods. Here's a question for the panel. What fixed income choice and asset allocation do you advise in the current climate for individuals that have little or no tax advantage space and want an only large taxable account?

I mean, you know, you should diversify. You should have a fair dollop of very safe assets, treasuries, CDs. Alan Roth will tell you how to do great work with CDs. I'm listening to the community's writings about that. And, you know, munis as well. A mistake that a lot of people make is they put 100% of their fixed income into their single state and do it to munis in their own state, which can be a disastrous mistake to make in terms of legal credit.

Or alternatively, just buy the third bottom line. Let me just say that this is one of those questions where everybody wants the answer. And there is no answer. One example here, and I agree with what Bill says. It depends, first of all, and by far the most importantly, on what your time horizon is.

If you're investing for the next five years, you probably should not be in the stock market. If you're investing for the next ten years, you should do it moderately. If you're investing for, as everybody must know, if you're investing for another 75 years, which our young people are doing today, you should not only be 100% in the stock market, you should be levered.

You should be wholly levered, and you will double your market returns almost without any question. And you've got to be ready to stay through all the storms we get. But all these things depend on so many individual factors. Time horizon is a big one. Risk tolerance is a big one.

Dimension of your financial goals. If you think you need to make more money, try to get more in stock. Not necessarily always the best idea. But we're all individuals. We all have our own behavioral problems. We all have our own hopes and fears. And so I think we're heading into a rules-making society as if we're all one, the same individual.

And if anything is true, we have in this room probably 230 totally different individuals, even husbands and wives. I devoutly wish that when I was a young man I could have tolerated a 100% or doubly levered portfolio, but I don't believe there are any sentient beings in this quadrant of the galaxy capable of doing that.

Well, unless you consider having a mortgage on your house. I mean, you could not have a mortgage on your house, and you'd have less to invest. If you have a mortgage on your house, you have a mortgage on your house. And one of the obvious things is tax efficiency and what tax brackets they're in.

I have a friend who sold his business for a very large sum, and so most of his accounts are in the taxable--most of his assets are taxable. So in his case, he uses munis to reduce the tax burden, and he uses things like the whole stock market for his equities because that's a very tax-efficient holding.

Here's a question for the panel about what major trends you have seen in the last 5 to 10 years. What do you think are here to stay or will grow? What new products, academic research, or legislation change will have the biggest effects on the gold-bed investment strategy? First, never use the word "product" in my presence.

We aren't selling products, for God's sake. Actually, I banned the word when I was running Vanguard. You had to pay a $5 fine if you used it. You'd be surprised how the usage went to almost zero. I just think it's the wrong way to look at it. It's a great way to look at beer.

It's a great way to look at, I don't know, toothpaste. It's a great way to look at bread. God knows what else. But we're not the product-selling business. I think we have created too many products in this business, far too many, because most "products" are created to enrich the provider of the service and not the consumer of the service.

Wall Street creates products to make money for. Anybody want to spend a little time guessing who they create these new products for? To make money for themselves. I mean, this is not complicated. So, you can't. It is, I think, absolutely true that there is no way to improve on the oil market index fund.

None. You can't. The only way to beat the market is to have an individual strategy that can win or lose. But overall, as we've said a thousand times here, I think you've all gotten the message even before you came all the way here these last couple of days, it is the universal strategy.

And it cannot be. It's mathematically correct. It is a tautology. And nobody can outdo that. So, I hope we won't try. Because whenever you try, you know, I don't much like, I gave actually a height of a boom back in 2007, talking about financial innovation at the Federal Reserve back in Philadelphia.

I think this is in my book. Don't count on it, maybe. One of the two books, probably the latest book. And I took a great view of innovation in America. Products, services, all those kind of things. Technology. And a very dim view of it today. And the next thing I knew, the roof had fallen down.

And it all collapsed. All those great innovations. All those great derivatives. All those mortgage-backed securities. And all those phony, back where they call them, banks have them in their books. They said they would guarantee that the principal, the word, the specialists on the special investment. And the banks were putting them out as money market good to the clients.

But they weren't money market good because of their asset bank. And they had to eat a lot of that stuff. Poor old Chuck Prince at Citibank, who had to keep dancing as long as the music was playing. I'm sure he'd like to take that one back. You know, suffered greatly from it.

You know, thinking they had to keep in the flow of the market. And outdo it, products that they would buy. And it's all just a charade. It's a phony business, the financial business. Because we're all trading with one another. And, as I mentioned in one of my books, Boyd Blankfein, Goldman Sachs, and everybody else says, "The financial business is a great business.

We provide new capital to industry. We make it possible for innovation, and blah, blah, blah, blah." And it's true. And the market produces about $250 billion, I think the number is. Providing new capital, the classic function of finance. Boiling the financial system, greasing the wheels of capitalism. All great.

And compared to that $250 billion, we trade with one another to the tune of $36 trillion a year. So, investment accounts for, what is that, six-tenths of one percent of what we do in the marketplace. And speculation accounts for 99.4 percent. Is this a great financial system, or what?

Jack, let me see if I understand what you're saying. I knew I didn't make it clear enough. I know a little story about when Jack banned the word "product." He also banned the word "sales." And so, Bill McNabb at the time was head of the Institutional Sales Department. And so, from that day forward, I've been telling him he was head of Purchase Facilitation.

I like it better, but it won't fly. I am concerned with the development over the last 10 years. And you might have picked it up on my presentation about the so-called smart beta. I mean, the one line on there that you saw ETF.com being quoted as anything but market cap weighted.

And, you know, I agree with Jack that the market cap weighting is the one investment that has that topology proving it as the correct way to invest. It doesn't mean that other things might not outperform, but we'll know after the fact. We won't know before the fact. I mean, you know, what's happened in the past 10 years, I mean, I don't think there's anything new in the world.

The only thing that's new in the world is the history that we haven't read. Human nature is not going to change. There's going to be bubbles. There's going to be panics. And, you know, puppies will continue to crawl into your lap and fall asleep. I don't think that there's anything new in the past 10 years in financing.

It doesn't take much confidence in solving this individual investor. Okay, this will be the last question for this panel. And this is for Mr. Vogel from John Becker. I would like to have you ask Mr. Vogel if he's a stickler for periodic portfolio reallocation or if he'll just believe you should set it up one time and let the market move it all around at will.

I don't mean to accrue a quipcake, but it all depends.