"This is primarily for Bill Bernstein, but anyone can reply. Market swings over the last year or three seem to be atypically wild, but that wild appearance could just be recency bias or lack of historical perspective. How would you compare recent volatility to the noise from the past?" "I think Alan just basically answered that question." "Well you can answer it one of two ways, you can use Alan's approach which is a good approach, but I would point out that the implied volatility of the S&P 500 reached about 85% during the teeth of the crisis.

We didn't have the VIX back in 1929 and during the 1930s, but you can estimate what it would have been about the same thing, if you just take the 30 day trailing volatility of the Dow Jones Industrial Average back then, it correlates pretty well with that. So I think we saw an extraordinary event, the question is will we see that going forward again, will we see that anytime soon, and I'd give it a pretty good chance, the Europeans are doing their best to precipitate a global financial crisis, and keep plenty of cash, you'll be able to pick up stocks cheap at some point in time." "This question is from Gauter Lee, who is here, "Is low cost broad market index investing here to stay?

Do any of the panel members see any possible threats to its continued availability? Will it evolve, and if so, how?" Alan?" "I think it's here to stay, greed versus common sense, I love the data that Jack showed yesterday, that 100% of the cash flow for the last several years was into index funds, and yes, there are ugly things like the brochures, triple lever, inverse index fund, but that garners a tiny bit of the assets compared to the broad, diversified, total US, total international, total bond fund.

So I think it's here to stay, I think what Jack Fogle, whether he invented it, or is just the person that took the idea to the public and made it popular, and allowed me to do what I'm doing now, having a lot of fun, it's here to stay." "I'm sorry Bill, I forgot that that was directed to you." "Oh, I'm sorry." "No, that's okay." "That was my fault." "No, I mean, I agree with that completely, and you know, at the level of retail finance, at the level of the advisory service and the brokerage industry, the people in the brokerage industry are just scared spitless, they're a jumping ship, and the model that is picking up all the business is Rick's model, which is low cost, and people are trying to, it's just hilarious watching these brokers trying to rebrand themselves as Rick and Mary.

So I see it snowballing, and I certainly don't see it ever slowing down." "Yeah, I've seen a lot of people coming into the advisor business who used to be brokers and used to sell products and used to sell insurance and whatever, and are now doing low cost indexing, and they're trying to do it where they're the tactical asset allocator, so they're buying all these beta-type products, which are basically spiders and VTI, and they're trying to do tactical asset allocation to add value, which they can't do, but that's a different story, it justifies the fee I guess, but there's this huge shift, I don't know if you've been reading the papers about all the amount of money that's leaving American funds.

American funds has been the leader in the brokerage industry for decades on gathering assets, all the way through the 1990s, but they're active managed, they're actively managed funds, even though they're really closeted tax funds, and you're seeing very large withdrawals from American funds, and you're saying where is this money going?

Well it's going into index products, particularly ETS, because the advisors who were directing money into American funds are now taking their clients' money out of American funds and putting them in index funds like SPY, VTI, and so forth, predominantly low cost stuff, but some of it's going into the alternative junk that's being created.

So there's a huge shift, it's going that way, and Jack's slides show it all, I mean, indexing is continuing to grow, and it's not going to reverse. How these products are creating these newfangled index funds that Jack talked about, as active management moves closer to indexing, indexing looks a whole lot more like active management, but Allen was right, they're not gathering much assets.

I mean, indexing itself, vanguard type indexing that we all believe in and that we all do, grows organically, it grows by word of mouth. We tell other people about this, they look at it and they say, "Yes, I've become a believer." They put their money in, so it's a very grassroots effort.

All that other stuff, like what Rob Arnott, and I like Rob, don't get me wrong, I think he's got a unique product with his rapid indexes, but all that alternative stuff has to be sold. It's sold to you. You don't organically buy it, and that's the difference between the organic growth of vanguard and low cost indexing that we all do, and all this other stuff that's being called indexing that's being thrown upon us, it has to be sold to you, and quite frankly, when you look at the numbers, and Morningstar has all the numbers, and Scott Burns took my index strategy box methodology that I created a few years ago, and dropped all these different index products in there, and looked at what's collecting assets and what isn't, and what is collecting assets are vanguard total stock market, are S&P 500, vanguard total bond, those types of funds are gathering the assets.

All this other stuff out here is competing, but it's not really gathering assets. And Christine? - Well, yeah, Rick, I very much share the concern about advisors serving as technical asset allocators. I think consumers sort of looked at their advisors and said, "Okay, there's only so much I want to pay," and advisors looked at that and said, "Well, okay, we'll squeeze out the active fund management fee so I can take more for myself, and I'll use these very low cost products to technically asset allocate." Our data certainly point to the ability of anyone, whether retail investors, advisors, or institutions' ability to make tactical decisions like that correctly over the long term.

We point to their chances of doing so as being very low. A colleague of mine has been collecting data on funds that he has hand categorized as being tactical historically, and I was telling Rick about this yesterday, and I think it dovetails maybe with your data, Ed, or maybe not, he found that the tactical asset allocators had beaten the risk-adjusted profile Vanguard balanced index, just 6% of those tactical asset allocators had done so, which to us really casts into question the ability of anyone to make those tactical calls correctly on an ongoing basis.

And fully 25% of the tactical asset allocators had actually gone away, the funds had merged, have been liquidated, which, generally speaking, means that they probably weren't very good. Well, since I've got both Christine and Alan on the same panel, I'll ask the both of you about using fund flows.

I know how you feel about it, I'm not unsympathetic to that point of view, and Morningstar for years used to have a fund flow indicator and strategy, and you gave up on it, and I don't know why you did. I think my colleague Russ Kinnell is still doing some version of the Unloved Funds Study, some of you may have been familiar with it, it's called Unloved Funds, so we would look at the fund categories, the three fund categories that had been the biggest asset losers over the previous year, and the idea was that you would buy all three categories, I think they back-tested it and found that you'd have to buy all three to have any record of success with it.

But what we found was that those Unloved Fund categories did strongly outperform the market, and certainly outperformed the Loved categories, those that had gotten big inflows in the previous year, so I do think that there's something to watching fund flows, although sometimes they kind of make me scratch my head, recently, for example, there have been great inflows in emerging markets, and I'm not sure what's going on there, so sometimes it doesn't sync up, but I think in general it's not a bad contrarian indicator.

I think it tells you about the future of emerging markets, which I think that the Unloved Funds is what we all do when we do annual rebalancing, when we do annual rebalancing we are rebalancing out of the Loved Funds and we're rebalancing into the Unloved stuff, so I mean we're all doing it if you just do an annual naive rebalancing.

I can't predict what the market does in the next year, but I can tell you if it goes down people will be taking funds, taking their money out of equity funds, if it goes up they'll be putting it in. I shared with Bill, and I presented to Vanguard a couple of days ago some ideas and back testing how changing the allocation between total stock, total international, and total bond would have done on the buy and hold annual 1231 rebalancing are going in the opposite direction of fund flows, and between buy and hold and the fund flows there was about a 1.4% annualized difference, and it did not work every year, and during the years, end of 2002 to 2007, five years when stocks went up, US stocks doubled, international stocks tripled, funds flowed in, and it continued to go up until obviously it didn't in 2008.

So fear and greed, the instincts that helped us survive really comes into play and damages us in the stock market. Yeah, I think that the things that Alan and Rick and Christina talked about are all just different ways of skinning the same cat, which is when I see an asset class in index that's fallen 30%, 50%, 70%, I start licking my chops.

Fund flows tell me pretty much the same thing, and so does when I tell someone who's a layperson that I like a particular asset class, they look at me and they say, "Are you crazy?" That's also a good sign, and they're all telling me the same thing. Okay, the next question is from Bob90245.

Recent threads on the forum question why stocks valuations really matter. If we have properly assessed our need, ability, and willingness to take stock market risk based on our age and circumstances and setting our equity fixed split, shouldn't we stay the course, not change the equity fixed split, and not worry about valuations?

I think if you're young, that's true. I think if you're getting close to retirement, you really want to look at what your number is. In other words, how much are you shooting for? You're shooting for $2 million. That's what you're shooting for. And you catch a bull market like you did in the early 90s, mid-1990s, older than the 1990s.

You catch a bull market, your expected rate of return on equities is 8%, and it was 16% a year. So you look at things as, "Well, if I need to get a 6% compounded return on my money, I'm here at $1 million, I'm going to be adding a little bit of money, seven years from now, six years from now I should be at $2 million." And all of a sudden, after three years, you find yourself at $1.9 million.

Okay, well that's because the valuations of stocks went up. I think at that point, it's a legitimate thing to do, is to say, "I'm almost there, I can coast in to $2 million. I've made a lot of unexpected gains in my portfolio, so I'm going to lower my asset allocation." And you're really lowering your asset allocation because the valuations of securities went from 14 PE up to 20 PE, and that's really why you're doing it.

You didn't expect this unexpected jump in equities to occur, which funded your retirement. So a reduction in risk at that point, because you're almost there, makes sense. But if you're young, I think you just ride out the wave. I mean, basically what you're saying is that when you've won the game, you've stopped playing, which is just a different way of saying that.

And I agree, the young person should maintain a fairly constant aggressive allocation, because they're constantly adding money. And there are very few things in finance that are sure-buyer, but if you save continuously a large amount of money between the time you're 20 and the time you're 15, at some point you're going to buy a lot of stock very cheaply, and you're going to make out like a bandit.

Why would you want to screw up that by building around with your equity allocation? I think that's what the reference is to, is that should people switch and change their asset allocation on an ongoing basis when equities hit the PE ratio or the PE10, it's a certain number. Some people claim that a magical bell will ring, and now it's time to go from 75% equities to 25%, and then another bell will ring when PE10 hits another number, and now you jump back in.

All of those experts that can do that have demonstrated that they haven't been terribly effective at that. They spend a lot more time, I think, than most of us and most of the people on the forum worrying about that. From a behavior perspective, I think you're just setting yourself up for trouble if you're trying to do that.

I think it's much better to look at, are you reaching your target financially and things like that, and not worry about some of the underlying factors. I don't like to analyze a lot of these factors like these guys do, I just try and keep investing a little bit simple and recognize that for me a lot of it's very behavioral, and if I start worrying about a lot of that kind of stuff, I'm probably going to get down the wrong path, and it's best just to keep looking at the total market funds and not worry about so much what all the individual components are underneath it.

The funny part is, is even the people that espouse that constant changing all have different numbers. Some say 8 is the magic point, some say 14, some say 16. It would be nice if a bell rang and it really worked, but the bottom line is, is that even the people who espouse that can't agree on what the magic number is.

Well, the number keeps changing. I want to tell a quick story, if you don't mind. It used to be all the way from the 1800s all the way through till the early 1960s, basically, that when the dividend on stocks fell below the yield on the 10-year bond, then you sell stocks and you buy bonds, and when the dividend on the S&P basically rose above the 10-year treasury, you sell treasuries and you buy stocks, that was the market timing system, and that worked wonderfully from 1870 through 1960, roughly, '65, but then what happened was because of changes in advances, if you will, in corporate structure and cost of capital and a lot of PhD-type work coming into this, they said, "You know what, it's better if we use those dividends that we're paying out and then keep them internally, it's the cheapest form of capital that we can have to expand the company, let's use them rather than going on borrowing money or issuing more stocks," so they changed the capital structure, and then the dividend yield started to fall because companies started changing their structure, and a lot of companies cut out their dividend, so all of a sudden, they said, "Okay, well, instead of it being above 10-year treasury, buy stocks below your 10-year treasury, we're going to put a range in of when dividend yields are below 5%, excuse me, when dividend yields were at 5%," because they had dropped now, "buy stocks, and when they went to 3%, you're going to sell stocks," so that was now the new range, 5 to 3, and that lasted for a while until dividend yields went below 3% and stayed there for years, and then that didn't work anymore.

So the next thing that I think we heard about was, well, let's move ahead a bit, the Fed model. You remember the Fed model? All you that have been investing for more than 10 years, which basically says that the yield on the 10-year treasury inverted, and that should be the P/E of the market, so that when the 5-year treasuries are yielding 5%, 10-year treasuries yielding 5%, the P/E of the market should be 20, so if the P/E of the market is above 20 when treasuries at 5%, then you should sell stocks, and when the P/E goes below 20, you should buy stocks.

Okay, the P/E, 10-year treasuries right now are at 2%, okay, so you take 2 and you divide it into 100, and what should the P/E of the stock market be? 50. We're currently at 12, man, is this a flaming buy or what? I mean, so all these models keep changing, so the question is not so much coming up with a model, it's which one's going to work in the future, we have no idea, so it doesn't, you can't do anything with this.

I think the one wrinkle that I might add is that, you know, instead of changing your overall stock allocation, I don't think there's anything wrong with, in that stock allocation, making some minor adjustments, for example, in the 1990s, you know, I think that anyone with a pulse, or earlier, the late 1980s, anyone with a pulse would have realized that maybe they wanted to own more U.S.

stocks than Japanese stocks because of the enormous gap in valuation. Similarly, in the late 1990s, you know, large-cap U.S. stocks, large-cap developed market stocks were pretty darn rich, and, you know, that didn't mean that you should have sold off all of your stocks, but what I think a reasonable person would have done is said, "Gosh, you know, REITs are yielding 9%, maybe I should own a little bit more of those, gold stocks have been beaten down, small stocks, value stocks have been horribly beaten down, maybe I want to own a little bit more of those," but of course, you know, then again, if you're a total stock market person, you know, you want to keep things simple, so maybe you don't want to do that, but if you're a slicer and a dicer, I think it does present some opportunities, and then, of course, you know, in the late 1990s, you could have looked at ILONs, and you'd be a brilliant call, so, you know, I think that there is some fiddling around the edges that I think is profitable to help you, you know, avoid the real train wrecks.

It strikes me that a discipline rebalancing program would get you in the same general ballpark as sort of the market timing type strategies would, with a little more discipline, perhaps. I can predict the past with uncanny accuracy, but I am smart enough to realize that I don't know when markets are over or under value, and if I knew, I wouldn't tell you I'm not that nice a guy.

Next question is from Karen Bennett. Karen? She asks, "What do you see as the ideal amount of inflation-protected securities one should have in their account, taking into account key variables such as age, size of the nest egg, current interest rates, et cetera, and why? What do you see as the best vehicle for this investment?

Vanguard fund? Actual bonds?" I'm trying to see the range of responses from experts to help target an appropriate amount for our portfolio. I think we addressed the amount in another question, so can I address whether to have just bonds or the fund? Okay, I'm going to disagree with Bill Bernstein.

I mean, I don't want to have to invest in individual bonds. I don't want to have to reinvest the interest that comes in. Just give me the Vanguard tips fund and I'm happy. And I rarely ever disagree with Bill, but I'd like to point out one thing that in your comments with Jack, you indicated that you talked about the risk of tips and how they behaved recently, but you said that you wanted to hold tips and not the bond fund.

But what you neglected to mention is that if you needed the money in the time period where you're going to sell the bond fund, you're going to sell the tips too, so you're in the same boat. They were just as volatile as the individual tips if you needed the money at that time.

Yeah, I guess the point is that you should have an emergency fund for that. In other words, the tips ladder, which I would recommend, are for your expected needs. Okay, your unexpected needs you have to handle another way. Okay, this question is actually from the forum, and the question is for all the panelists.

By the way, this guy is from BT, this forum member. He asks, "What is your opinion of single premium immediate annuities as a way to reduce uncertainty on a safe spending level during retirement? Can you offer any guidelines on what portion of one's invested assets should be converted to an annuity?

At what age should they be bought? What factors should influence my decision?" I think I need to go visit him personally before I can make a decision. Free consultation. Just pay the travel expenses. I think that the single premium immediate annuity is the only annuity that I think that Boglehead is in agreement that is something that can really play an important part in investors' overall planning.

In terms of how much, I think that for a lot of people the amount is going to vary, but it would be enough that would go along with Social Security in giving them a guarantee along with Social Security and any pension they have that would guarantee that their expenses are paid.

In terms of how much to do it and when to do it, I think that's an individual decision, but the longer you wait, the higher the payout is going to be, so if you can afford to wait longer, I would never, this is my personal opinion, I would never put more than 50% of my assets in an annuity.

Remember, the annuity is unlike a variable annuity which is walled off and if the insurance company goes under, you're going to be made whole. With a single premium immediate annuity, it's mixed in with the assets of the company. It's subject to their creditors and if the business goes under, people call it insurance, but it really isn't insurance, state insurance.

It's not really a guarantee. All they do is go to other insurance companies and assess them to try to make you whole, but in the meantime, you're not necessarily getting checks and there's a lot of disruption and insurance companies do go out of business because you're betting on that insurance company being around for maybe 30 years or so, so if you're going to buy more than $100,000, which is normally the, in many states, that's the maximum that's guaranteed, you would want to do it from multiple companies and you might want to do it at multiple times, too.

- Yeah, I was going to say that, Mel. I think a ladder strategy with single premium immediate annuities is a great idea to help mitigate the risk of sinking a lot of money into a very low payout environment and also to help diversify across multiple insurers. One topic I think has been kind of underdiscussed in the realm of single premium immediate annuities is what they call the insurance industry adverse selection, so you have people with a lot of longevity on their side purchasing their things and I think what insurers are experiencing is they've got a lot of folks who are living longer than their actuarial tables might have suggested, so that's another thing to think about that could depress payouts for the foreseeable future from these types of products.

- I think it can make sense at age, I agree with Larry Sweatrow, at age 70 that the life credits, the insurance against living a very long life become larger than the costs you might pay if you're going through an extra intermediary. Do not forget, not only is there default risk from the insurance company, but there's interest rate risk.

If we do hit, and this is not a prediction, but if we do hit hyperinflation, then that payout becomes worth less and less each year, and yes, you can buy inflation protected, but that drastically lowers the payment. - Yeah, and furthermore, the inflation protection you get with most SPI, inflation adjusted SPI is more as a cap on them.

The best work that's been done in the area has been done by, I think by Moshe Malevsky, who has looked at a very sophisticated variance sort of statistical approach, and the results are very intuitive, it comes up, they're very intuitively appealing, which is you split your money among stocks and bonds, and some SPIAs, you should certainly buy at least two or three companies, and maybe some tips, and he puts variable annuities in there as well, so don't bet the farm on anything.

And again, I'm sounding like a broken record, but unless you think you're going to be pushing the daisies any time soon, the SPIA that everyone should buy is the delay in Social Security until seven. - Okay, I have to preface this by saying this was written in May, this question was posted on the forum in May.

Does the success of PIMCO's total return bond-- (laughter) Does the scientific question the desirability and effectiveness of indexing for bond funds? - The question answers itself. (laughter) - Don't know if this question will be timely when the reunion occurs, but here in September there's been much news about Greece, a possible default there, and whether the euro will survive.

Has these additional risks to European stocks altered your thinking about diversifying equity asset classes globally? I think that would be a good question for the advisors. - I think the answer is no. I mean, I think there's always different kinds of uncertainty. If you look back over history, I mean, it just varies from decade to decade, year to year, and this just happens to be the topic of the day, but I think that historically diversification has been a good idea and continues to be an excellent idea.

- India, China, Brazil are growth countries. Western Europe are value companies. What typically does better in the long run, value or growth? Value. - Which has more risk, yeah. - I have very specific and firm recommendations in the event of a Greek default, expulsion from the euro zone, collapse of the Greek economy, and a return to the drachma, which is you should visit Greece.

(laughter) - I just came back from Greece, as a matter of fact. - I'll be back on my way back from Fiji. (laughter) - Yeah, it was a funny story. We were right down where the American embassy was in Greece about three weeks ago, and we're on this little tour where there were about eight of us, and we went to this nice museum and went upstairs, and they had a lunch area there, so we had lunch, and the guide that we were with, it was a National Geographic tour, which is wonderful, by the way, the guide that we were with said, "That's the vice president of Greece." I mean, it was from me to Ed, the vice president of Greece, and so he was eating lunch at the table next to us, and now we can say, I can say, I had lunch with the vice president of Greece, and he didn't indicate that they were going to default.

(laughter) - All of that is true. (laughter) - I don't know, I mean, as Alan said, the value stocks generally outperform the growth stocks, but they have more risk, and here's a perfect example, at least it's more perceived risk, and 20% of our GDP comes from Europe, so we have some risk, and if they collapse in Europe because Greece collapses, which they might default, don't get me wrong, but all of this talk that's going on with the IMF and with the G20 right now, ECB and so forth, is all about how to backstop that default, much like the TARP program that we had, is what is going on over there, only it's going to backstop a country, and they will put in measures to backstop the country, and this is the reason why we're seeing a rally in European markets right now, it's why we're seeing a rally, why we saw a big decline in U.S.

stocks because of what was going on over there, and why we're seeing a rally right now is because they're beginning to come up with resolutions to what they're going to do. Is it a kick-can-down-the-road scenario? Could be. These austerity measures are tough, but I have to tell you one thing about paying in Greece, by the way, we were right there at the Parliament building for several days, and about 3 to 15, okay, police come out, put the barriers up, protesters over there are all lined up behind the other barriers, take those barriers down, austerity is a terrible number, okay, 3.30, you know, whistle blows, they all break up, go back to work, that's not what we see on television, but that's the way it is over there, and once in a while, and every particular day you'll get maybe three or four rowdies that start throwing rocks, and if you actually look at those pictures on television or in the newspaper, you'll see that the rowdies like this with their heads covered, and the police there, but look at the people in the background, they're all tourists with cameras, they understand over there that they have to cut back, they understand that they're going to get higher taxes, they understand there are going to be layoffs, I mean, something like 30% of the people over there work for the government, they understand this has to happen, and there's no other choice, they get it.

They don't like it, but they get it, and you know what, we don't even see that in this country, I mean, occupied Wall Street, right? I mean, we're beginning to see a little bit of the same type of protesting here. It's actually a sign that there's progress being made, quite frankly, I look at it in a different way.

So, I'm optimistic that they'll get their situation resolved, I'm optimistic that, you know, Europe will eventually rebound, and I'm optimistic that if you keep your same asset allocation and do a rebalancing, of course I always look at Europe-Pacific, and I do equal Europe, equal Pacific, as opposed to swinging with the ET back and forth, that you're going to do fine.

By the way, I did my international on Total International, which last February completed a new index, which not only includes emerging markets, developed countries, and Canada, but small cap companies as well. I don't overweight or underweight any country. Transcription by CastingWords � �