a session with the experts, and the moderator for this year's Q&A with the experts is my good friend and BOCADS conference team member, Ed Rager. Ed Rager is a fairly executive human resources from Mobile Oil Corporation in 1996. He discovered the BOCADS in 2001, and he and his wife Patty attended their first BOCADS conference in Denver in May 2004.

They've been active in the BOCADS ever since that time, and they were the local area coordinators for our Washington, D.C. BOCADS conference. They live in Northern Virginia, and started the Washington, D.C. local area chapter, BOCADS chapter. Ed has a B.S. in business and a M.A. in organizational development. Please welcome Ed to the stage.

I'm certainly glad. I was certainly glad that Mel had lunch at his last year. That was my first opportunity to get up here, and so this year I'm honored to be hosting this portion of the program. I've got some questions that have come from the attendees here today, so I'm going to give those first crack.

There are no particular order and no priority here. They're just the way they fall on my desk. Before I do that, I want to introduce the members of the panel. To my left is Rick Perry. He's founder and managing partner of the low-cost investment management portfolio solutions. He's the author of six investment-related books, a Forbes.com columnist, and a Wall Street Journal expert contributor.

Please welcome Rick Perry. Next to Rick is Bill Bernstein, who was here at the prior session. He's founder of Fish and Frontier Advisors, author of several successful titles on finance and economic history. Please provide a real welcome to a Bocad's favorite, Bill Bernstein. Next to him is Alan Roth, who's founder of RothLogic.

He's an author and AALP columnist. Please welcome Alan Roth. And last but not least, is a Colorado Medicine CPA and the author of the blog Oblivious Investor. He's authored a number of very successful digital books. Please welcome Mike Biden. And Mike, by the way, he wants everyone to know, one of three days a year he wears a tie.

Okay, the first question here, this is from Bob Roman. The question is, for investors who can deal with the liquidity issues, what do you think about using private equity for a 10-20% component of a diversified investment portfolio? And that's open to the group. Who's running the private equity? When it gets to private equity, the biggest consideration, if you're going to do that, is who is running the fund and the credibility of the people that are running the fund.

And do you know them personally? Although, I think people who've already made up personally, that didn't work out so well. But I think if you have enough money and you wanted to put some money in private equity, that if things work out well for you, you might get the same return as a small cap value index fund.

Or you could just buy a small cap value index fund. You know, I consider private equity to be any private investment that I make, and that's not an efficient market. But when you think of a private equity fund, the market may not be purely efficient, but the typical model is 2 in 20, meaning it's a 2% expense ratio and 20% of the upside.

And I've never seen any manager compelling enough that I would invest. Alan, would you explain what you mean by the market being efficient or not? In a purely efficient market, you know, one can't add any value. And I think that there are enough people looking whether Exxon, Apple, Walmart are under or overvalued.

But in a private deal, you know, buying an investment condo is, in my opinion, a private equity deal. There aren't thousands of people looking at it. Markets are efficient, not perfectly efficient. You know, public equity markets aren't perfectly efficient. Okay, next question. This is for Dr. Bernstein. I have been value averaging for the last nine years.

It seems like this technique is fully adopted. I'm feeling a bit lonely. What are your current thoughts on value averaging, and that's from Patrick Jeller. Well, value averaging is basically nothing more and nothing less than a combination of dollar cost averaging and rebalancing. Okay, so I think it's slightly advantaged with respect to dollar cost averaging, as long as you have the liquidity to execute it when it tells you to buy a whole lot of stock when the market is down.

Value averaging has done pretty well over the past nine years because you don't have to buy through the 08, 09, 010, or 011 market. So you've got a fairly good price. That's about the best case scenario. The worst case scenario for value averaging and dollar cost averaging is just a gradually rising market.

It is almost all the time inferior to lump sum investing. But the trick is that most people don't have that option. Continuously, they don't have this enormous sum of money they only acquire through periodic saving. So, you know, for someone who is periodically saving, who has a 401(k) plan, I think it's a fine technique for deploying your assets.

Okay, the next question is from Phil Evensack. Is it a myth that international funds need active management because local knowledge is needed for the markets, that it's not needed for the U.S.? Yes. There's no evidence to support that. That is what we hear when active managers outperform on the international side.

Because normally active managers outperform when the market itself does poorly relative to other markets. So internationally it's done poorly relative to the U.S., and international managers seem to have outperformed. But the fact is that the data over the long term doesn't show that active management in international outperforms the correct benchmark.

And I think that what we have here in many ways is we have the wrong benchmark being used, like the EFI, for example. Which is not a great, it was okay when it was developed, but not really a great benchmark for active management. Probably a better benchmark for active management is a total international index, XUS.

So we'd have emerging markets in there, we'd have Canada in there, which is not in the EFI index. So I think that one of the problems is that active managers will try to measure their performance against a bad benchmark. And when you actually use one that covers the entire world, XUS, you find out that it just doesn't unfold that way in the numbers.

I wish Christine were here. But if you look at Morningstar on the Vanguard Total International, whether it's the ETF or mutual fund, you'll see that over the last five years it's performed below average. And how can indexing be below average? Well the answer, I did a little research, I'm going to write about it, Vanguard did this research for me.

And what they showed is that the average international fund had a much lower exposure to emerging markets. And emerging markets over the last five years have been a drag. I mean, you could go a lot longer and come to the conclusion that anyone who makes that statement should be put on a big sandwich board that says, "I haven't looked at the data, I haven't even logged on to Morningstar." The argument for active investing internationally is that the markets might be less efficient, so there are more opportunities to find stocks that are undervalued, or get out of stocks that are overvalued, things of that nature.

And so there we're talking about the efficient market hypothesis, but Jack always talks about the costs matters hypothesis, which is that the higher the costs are of a group. So active managers, by definition, active funds are going to have a higher average cost than passive funds. So by definition, after expenses, on average they're going to perform worse.

That's the cost matters hypothesis, and it applies just as well to international as it does to U.S., just like bonds, just like everything else. Active will be passive when subtraction no longer works. We don't even need all references. I was at an ETF conference in Chicago, in fact it was a Morningstar ETF conference a couple of weeks ago, and Goldman Sachs announced their new series of actively managed ETFs that follow active beta.

We've heard of smart beta, enhanced beta, blah, blah, blah. Now we have active. So it's all this factor-based investing, and we can get into factor-based investing questions if we have them, but here was the thing about the Goldman Sachs funds, nine basis points. What they said was they wanted to take pricing off the table on the active versus passive debate, and they were bringing these active funds, and they are active funds, down to indexing levels, so that they can show that their strategies actually outperform on a net basis.

So we will see. I mean, you know, if that's the new thing now, active management is going to cost less than or equal to indexing, and all things being equal, that should level the playing field. It doesn't make active managers outperform, because it's still a zero-sum game. Rick, if Goldman Sachs is willing to earn nine basis points, don't their profits completely disappear?

No, because they are such good products that the value of these shares are going to explode, and people are going to pile billions of dollars in. Oh. Goldman Sachs only cares about their clients. And I'm trademarking Brilliant Beta, which is smarter than Smart Beta. Okay, the next question. This is from Mel Turner.

Assume that money is not needed for limiting expenses and can remain invested for this question. Are there any strategies for receiving required minimum distribution? Is it best the first of the year, end of the year, monthly? Sure. The longer you wait, the better, as long as you don't forget.

Generally speaking, the longer you can keep your money in a tax-advantaged account, the better it is. That's the gist of it. We'll leave it at that. That would be my answer. There are pros and cons, but a QLAC, Qualifying Longevity Annuity Contract, is a way to get up to $125,000 out of your IRA and into a deferred product, and you're essentially buying longevity insurance.

It comes with a cost, and it has some problems with it, but that's one idea. It won't stop you from having to take RMDs. It will just make your RMDs somewhat smaller. This is exactly what Aaron was getting at, saying that it has drawbacks, is that a QLAC can be a way to minimize your RMDs, or rather, reduce them.

But it only makes sense if you want to buy a deferred annuity in the first place. It doesn't make sense purely as a tax planning tool, if you have no use for a deferred annuity. Now, I talked with Mel about this, and I think he has the right answer, and that is that when you need the money, you take it.

Because if you need it for, as Mel was saying, to pay taxes in April, well, you take it in March. If you need it for, as he was saying, Christmas presents in December, well, you take it in November. But don't forget to take it. Like Mike said, you're really going to be in trouble.

So, I think from a tax perspective, whether you take it early in the year, or later in the year, or you take it every single month, it ends up being de minimis. Would you agree with that, Mike? Yes. Yeah, not one of the most important factors in a tax plan.

Yeah, so you just take it when it's best for you to get that cash flow. That would be fine. You don't ever want to take taxes away from me. But it would seem to me you could almost make the opposite argument, that on average, the return on the stock market is positive.

So if you take it on the first of the year, on average, you'll be taking less out at the ordinary income rate, and you're getting that growth for the ensuing year at the long-term capital gains rate. So you could make the opposite argument. I could make an opposite argument to that.

The matter is, it depends what you do with the money. Because if you take it out at the beginning of the year, you could put it into an account, just an equity account, and it grows after tax. Or, well until you have to make a tax payment, a quarterly tax payment, you'd have to start.

So, you know, it depends what you do with the money. If you spend it, you're right. If you invest it, the opposite might actually happen. Sorry, I'm going to stick with taking it at the end of the year. If you're making the argument that taking it out at the beginning of the year you can, then invest it in a taxable account, and equities have tax-advantaged characteristics in a taxable account.

Well then, why just take out your R&D? Why not take out everything or a lot? Why not take out the top of your tax bracket and just do that every year? But we don't talk about doing that. And that's because the growth, while it's in the account, is tax-free.

Even if it's a tax-deferred account, you're not paying tax on the growth along the way. And that's an unusual distinction, but that's why tax-deferred investing makes sense in the first place, really. I'm sticking with Mike, and that is really de minimis. It doesn't matter much. It's not one of the top thousand things in investing that I worry about.

I know it's a perfect example of Taylor's favorite quote. There are many approaches to that. So the next question is from Paul Stratton. Please explain the Global Bin Volatility Fund. It appears to be a global dividend growth fund with currency hedging. Is this a Vanguard fund? I haven't studied it, so I'm going to pass it.

Have you studied this one? No. I'm certainly not an expert on it. I've looked at the Vanguard fund. It's done fairly well. I spoke to John Emmerich yesterday over at Vanguard. I think there's some good logic to it. But whenever so many firms are launching the same type of fund, and money flows into what has been hot, I worry about it.

I'm not a fan of it. I always worry, who are my fellow shareholders? Are they smart money, or are they dumb money? And I think what is happening increasingly is that smart data is feeding the dumb money. Okay, the next question is from Karen Bennett. This is for everyone, if you care to share it.

Two part question. What is your personal asset allocation, and why? What drives that allocation? And the second part is, do you take special security precautions with your financial accounts, i.e. unique passwords, frequency of changing passwords? Well, my asset allocation is 80% equity, 20% fixed income. And the fixed income portion is more of an emergency fund.

And it's mostly invested in the Vanguard Total Stock Market ETF. Actually, sorry Jack. It's only because I'm at a brokerage firm, so I have to use ETFs as opposed to open-debt funds, because it's more costly to trade open-debt funds. Even Apple shares at a mutual fund company than ETFs.

It's the same thing, only you buy it cheaper using ETFs as a commission. But anyway, so as Jack was saying, it's an operational issue. And then the Vanguard Total International. I also have a DFA, a small value fund. But, you know, I'm going to get a military pension. So I'm going to get my social security and so forth, and my wife will get social security.

So pretty much my expenses when I retire will be covered by my military pension, social security. And I won't have to withdraw much money from my retirement account, so I can be more aggressive. So it depends on what else you have. You can't just look at the asset allocation.

I would agree with that. I mean, I'm 40/60, because the 60 is what I'll need to retire with a very generous margin of error. The 40% really isn't my money. I'm just renting it. And, you know, I'm a big believer, as you all know, that when you've won the game, you stop playing.

Also, my fort is pretty darn aggressive. It's, you know, more closer to, I guess, what is referred to locally as a liability portfolio. Which I'm not as enthusiastic about as I was 10 or 20 years ago, but I still think it's not a bad idea. I'm 45/55. Of my 45, 30 percentage points are in U.S.

and, sorry, Jack, 15% international. My core holdings, I've made mistakes, including my first S&P 500 index fund was a dry-fist index fund. And of my 55% fixed income, I have an incredibly tiny pension. Roughly 70 percentage points are in CDs and the 30% in bond funds, of which Total Bond and Inflation Protective would be the cores.

And then I've recently started playing with a little bit of brokered CDs buying on the secondary market, where a couple weeks ago you could get a 3.2% return on a CD that had maybe 3.75 years remaining. I was just talking about Taylor's favorite quote, "There are many roads to Dublin." I always like his other favorite quote, which is "The Majesty of Simplicity." My portfolio is 100% Vanguard Life Strategy Growth Fund.

That's it. Oh, and the other question about security. I just try to use a complex password. And I use two-factor authentication, so no one can log into my account without my phone. And he would know, because he's under 50. Can you teach me how to do that? You live 10 miles from me now.

Okay, now these questions are coming from questions submitted on the copen.org. So the first question for the panelists is, "Vanguard introduced Total International Taxable Bond Funds, ETFs, which are currency hedged. How do hedged international bonds fit into a retirement portfolio?" I would say not at all. Because, as Jack's pointed out, the yields are very low.

But basically, a hedged sovereign fixed-income bond, foreign-income bond, it goes almost identically to a U.S. bond. So you've got higher expenses, it's pretty much the same performance, the diversification you get out of it is minimal, why even bother? I'm incredibly agnostic about it. If you look at the four asset classes, U.S.

stocks, international stocks, U.S. bonds, international bonds, it's the single largest asset class, so there's an argument to hold some of it. But when you look at the total fees for hedging, and I strongly believe if you're going to own international bonds, they ought to be hedged to the U.S.

dollar if you live here in the U.S., not so for stocks, but for bonds. So if you look at the extra fees, it's done incredibly well. Its yields, I believe, are down to 0.99%. I think Frank Kinnery looked at that yesterday when we were talking. So I don't think it's going to make or break out of that portfolio.

So I would say agnostic, but the fees at 0.25%, including the hedging, are much more expensive than a total bond. One other fast thing, which is that it's very small to do. I mean, they were hedging bonds as part of some of their life cycle funds. That's not a reason not to own them.

That's not a reason not to own them. In other words, I would still own the life cycle funds or the entire retirement funds, in spite of the fact that they've had international bonds. It's just not that much of a drag. I mean, he did agree with it, though. Yeah, that's what I have in my own portfolio.

If I was using a DIY allocation, frankly, I probably would not have included international bonds. But I'm using a life strategy fund. Vanguard put them in there. It doesn't really bother me. I'm okay with that. I'm going to be incredibly cynical. I think that Vanguard put the international bond funding in the life strategy funds because they needed to fund that fund.

That's the point. I'm with Bill, by the way, and the rest of the panel. I don't think we do need international bonds. I don't own them. I never did. I've done the research. It's in my book. I don't see a purpose. It doesn't do anything for the portfolio. And it does cost more with the hedging overlap than U.S.

bonds. So, I'm not. Again, if you do it because you believe in it, fine. I mean, it's so de minimis again. Whether you have it or don't have it, it's fine. But I don't see a purpose. Okay, the next question is short and sweet. REITs, are they still an effective diversifier?

Short-term, no. They're a risky asset. And, you know, when the bad stuff hits the ventilating system, all the risky assets go down. REITs will do that, too. In the long run, I think they do provide some diversification. They've gotten to make a little cheaper. I think their yields are up somewhere in the 4% now.

So, they're not a bad asset class in terms of valuation. They're not great. But, you know, you hold them for periods like, you know, 2000 to 2005. They got nailed in 2002 over that five-year period. Their return was much higher than the S&P 500. It's the true advantage of the asset classes.

They don't help you at all in terms of risk. Reduction in the short-term and the long-term, they can be a real value. I think, I own REITs, and often I recommend them. I mean, REITs did very well during the dot-com bubble. Not so well, obviously, during the real estate bubble.

You know, a total stock index fund owns REITs. So, therefore, am I over-weighting it? The answer is, relative to the stock market, yes. But, most real estate is not owned by the public market. So, you know, I have some REITs, and I rebalance when they've done well. I'm selling when they haven't done well.

I'm buying. I wrote an article a couple of years ago called "The Total Economy Portfolio." "The Total Economy Portfolio." And it got published in Forbes and a few other places. And what I did was I took corporate income and rent. You're looking at GDP data. And I said, "Where does the economy earn money?" How is money earned in the economy?

And I stripped out individual pay and so forth. And tried to come up with what an asset allocation of the economy would be. As opposed to the industries and the asset allocation of the industries that make up the stock market. Because the stock market is made up of corporate board decisions.

They decide whether they're going to capitalize using stocks or debt or private equity. And so those are corporate board decisions. And then the investors decide what the valuation of those are. So there's a lot of industries out there that traditionally are not capitalized using equity. They're traditionally capitalized using private equity or using debt.

And real estate is certainly one of them. So when you look at the total economy and you say, "If I created an asset allocation of industries based on the economy as opposed to the stock market," then you would actually have an allocation of about 10% to a REIT index fund.

And that's one argument for it. So if you want your portfolio to look more like the economy than the stock market, then you might add more REITs. And also what Bill says, in the long term, the correlation between REITs and the stock market fluctuates. Sometimes it's high, sometimes it's low.

And the correlation between REITs and the returns from bonds or interest rates, also the correlations fluctuate. Sometimes it's positive, sometimes it's negative. So there's a diversification benefit to having a slice in REITs. And you could add, I figured this out one time as I just wrote an article about it a couple of months ago.

I don't know, maybe it was a year ago. I'm losing perspective these days. Add about 10 to 15 basis points long-term return to your portfolio by having a 10% slice in a REIT index fund. A low-cost REIT equity index fund. REIT index for commercial equity. Because there are mortgage REITs, there are hybrids, and then there are equity REITs.

Vanguard's REIT is all equity REITs. And so I agree with Bill that there is a long-term benefit to it. There's also a benefit to it if you are looking at your portfolio based on what the economy is as opposed to what the stock market is. So I'm in agreement.

Avoid private REITs, except for the ones I need to sell. Oh yeah, no. I think I read an article today that four more Wall Street firms now are being gone after by the SEC for selling private REITs. I mean, that's a bad market. Yeah, I mean, I get one finance journal out of purely European interest.

And that's Investment News. It's filled with gods of $3,000 shoots and no-necks. And the guy who was on their front cover for doing deals just about every single week for the past year was a guy named Nick Schultz. Who will surely be wearing an orange T-shirt. Who gave me a lot of private real estate news.

Thank you, Nick. This is Investment News, so thank you. Next question is for Mike Piper. What do you see as the likelihood of Social Security means testing being adopted? Does the potential for means testing change planning strategies? For example, if current recipients are unlikely to be subject to any such rules, is that a factor to consider if you decide to defer payment until age 70?

Wow, a lot going on there. The likelihood of some sort of means testing, it's already, you can make an argument that it's means tested in a variety of ways, including the way it's taxed right now. So additional means testing certainly doesn't seem out of the question. How that should play a role in planning strategies is a tricky question because there would be a lot of ways to means test Social Security.

A lot of different ways. We could just change the way it's taxed to further means tested. We could change the calculation of benefits in the first place, the endpoint formula, if you're familiar with that. Sounds like the person who asked the question is likely familiar with it. To make it so that the higher your income was over the course of your career, the less benefits you get.

In which case, that wouldn't really change the planning strategy. But there's a lot of ways that it could be implemented that would change the planning strategy. So really, given that we don't know what's going to happen and we don't know what means testing would look like, much less whether it necessarily will happen, I wouldn't make it a major factor in your planning right now.

I would agree with that. This is the kind of statement that only a registered debtor would make. The good news is that if you don't need the money, it's probably not going to matter if it gets mean tested. If you do need the money, you're not going to be affected.

Next question. I'm curious if the panelists have any specific advice for long-term travelers, e.g. six weeks or longer. It used to be selling may go away, but with the availability of around-the-clock, around-the-globe internet access, is there anything one still should do? Don't take your own time with the cell phone.

Make sure your passport is up to date. I also have to tell you, there's a little card that you can get now, which I have in my wallet. I don't know if you've seen this or not, but I'll pull it out. Yeah, here it is. It's a little card.

If you fly into Canada, this is no good. You can't get on a plane with this, which I found out when I was trying to fly into Canada about three months ago to go to a conference. I ended up having to fly to Detroit and drive into Canada because this card is no good if you're going into Canada.

If you're flying, you can take a boat. You can walk. You can take a car. It's called a passport card. When I got my passport, I signed up for this because I said, "Well, I'm in Detroit a lot, and I need to go to Canada once in a while so I can just use this." I happened to be at the airport, and I was flying to Canada from Kansas City somewhere, or wherever it was.

They said, "Okay, we need your passport." I said, "Oh, I pulled out this proud card. Hey, here you go." They said, "No, not going to work. You need a passport." I said, "Well, what are you talking about?" They said, "Well, look on the back, and it has to say, 'This is good for...' It talks about all the different ways in which you can get in." I must be looking at the wrong thing, but the airplane was not.

You can't land in Canada with this, but you can get in any other way. I'm just warning you, if you don't go to Canada, don't use this card. Okay. What about the panel's view on factor investing? At what level of increased speed does factor investing become no longer a value-added to portfolio performance?

That's a great question. Anybody have an answer? Just heard a couple of attendees ask, "What is factor investing?" You have the whole market, the entire U.S. total stock market. Within the market, you can start dividing out groups like small cap versus large cap, value versus growth. Then you can start comparing the risk and return of small versus large, value versus growth.

You find out that historically, value has outperformed growth. Now, why has it outperformed growth is a different story. I'll get to that, and maybe Bill can talk about it, because he knows and I don't. I'll leave you up for that one. You say, "Well, if value outperforms growth, then if I put value in my portfolio, then I should outperform the market." Historically, that has been correct.

The premium by which it outperforms the market is called a risk premium, because the idea, which Bill will explain, is that being in value stocks is actually more risky than being in growth stocks. As strange as that sounds, but that's the bottom of French for leap. Therefore, you should get paid more if you're in value stocks than being in growth stocks.

The difference is a risk premium for being in value. Now, if you have the total market, and you're going to take a value tilt, if you will, you're going to put some in value. The question is, what is the extra return that you should get from that value exposure over the market?

Then, how much of this factor, this risk factor, should you add to your beta of a total market portfolio? That's really the question. Because, is that risk premium that you get from value going to be high enough going forward to pay the extra fee that you have to pay to be in value?

Because value investing is always more expensive than beta, because beta is basically almost free. So, go ahead, Bill. Alright, I'll try and give you a non-stock version, which is that there's a value factor, which is about 5%, which sounds really great. It's pretty much everywhere you look, every country, every time, period.

That's the bottom of my tracker, which is value minus growth. For starters, it's a long-short portfolio. The best of all the worlds, you're going to get about half of that, which is 2.5%. That's nobody else knows about. Because nobody else knew about it, you know, farm to French, farm to French, heard about it.

And so, what is it now that everybody, and his dog, Jack, Jack Blackfoot, is last year, is investing in? It's going to be less than 2.5%. That's what it's been historically, the marginal market. And I think it's going to be less, whether it's zero, whether it's 1%. It's certainly not going to be much lower than 1%.

Why is it there? Well, I think it's a two-part story. As Rick said, this is the best part of it, which is that value just doesn't do poorly in various states of the world. It does even worse. So, '29 to '32, '07 to '09, value stocks did much worse than the market.

65% down versus 55%, that doesn't sound terrible. But it's the difference between being left with 35 cents or 35 cents on the dollar at the bottom. People do overpay for bread stocks, and they probably always will. So, I'm not as enthusiastic about it as I used to be. That gets to the lower portfolio, which is basically all small value convertible data.

So, you get a 30-70 portfolio, but the 30 is all small value. And that's basically equal to the market return, the S&P 500 return, over the past 30 or 40 years. It's not going to go that well moving forward for two reasons. Number one is because that 70% value put in there was five-year bonds, five-year attrition.

It's no big investments in those, not even in DFA. And it's not going to do that well moving forward. And then the other reason is because, you know, the value didn't even meet what it used to be. I just wrote a profile on Dimensional Fudge Advisors, DFA. And their core two factors, they have more factors now with not only value, but small cap.

And, you know, DFA is one of the good guys. I just don't think their bank aren't good. When I asked them the question, "Do they think the premium from small cap in value is a free lunch or compensation for taking on more risk?" They quickly replied, "Compensation for taking on more risk." So, my question to them was, "If you were going to have, let's say, a 60-40 portfolio, of the DFA small cap value tilt, wouldn't it be more efficient to buy a market cap tilt of equivalent risk of, let's say, 65-35?

You'd have far lower, you'd have the same amount of risk, far lower cost, and much greater tax efficiency." They didn't answer that question. There's a thing called factor crowding. Google it. Google it. Factor crowding. And what it simply means is there's so much money going into these strategies now.

It's going to diminish, as Bill was saying, diminish the returns. And you have this premium now that needs to be spread around many more people. I was at an ETF conference a few weeks ago in Chicago. And Ben Johnson, the head of their ETF research, put up a slide that showed that 31% of all money going into ETFs right now are going into these factor funds.

That's billions of dollars a year going into factor funds. It's going to dilute the returns. And so, as Bill was saying, I don't know what the returns of being in a value fund going forward is. But I'm guessing maybe if you put 20 or 30% of your portfolio in value, or small cap value even, to try to get a little bump, more, you might end up making 25 or 30 basis points extra return in your portfolio over the long term.

Or you may not. And I really don't know what the answer is. That's what I meant when I said the smart payments meaning the dumb money. What is going to happen is the people who were sold these funds by the Morgan Stanley Broder are going to be calling up that Broder, yelling and screaming "sell" during the next market app.

And this asset class, because of that, will probably have a significant negative premium, which will set the model for high risk-based returns in the future. The smart rate is out of that year. In five years. Five years. I admit I'm fairly cynical about the entire concept. A couple of decades ago, when Jack and Rick were some of the first people writing about passive investing, it was counter-cultural, almost.

Most people weren't doing it. These days, the conventional wisdom is that passive investing is the way to go. Passive investing beats active. That's the conventional wisdom. So if you're launching a new fund, you need to get on that bandwagon. You need to be able to say, "Oh, it's a passive fund." But unfortunately, you can't make a lot of money by trying to be vanguard of the low-cost, low-cost, boring index fund game.

They're so good at it, but it's just not a way to make money. So you need to come up with something that sounds like it's passive, but can still make you some good money. And I really get the impression that that's a large part of what's going on over the last several years with the explosion of smart beta and other similarly made funds.

So I'm going to steal a joke that you'll hear Joel Dixon say tonight. And when he says it, everybody goes, "Ah, we've heard that before." But it came from Joel, so he gave me the credit for it. He said he went to a Halloween party last week. And I know this because I was on a panel with Joel a couple of weeks ago.

He said he went to a Halloween party last week, and all of the active fund managers came up dressed as index funds. I thought it was great. So when he says it tonight, just go ahead and laugh. Okay, this is a question for Alan Roth. We always discuss the stock fund mix for planning for retirement.

Will that, for short, provide, say, 10 to 15 years in a taxable account? Money that you can grow a few years before retirement. I'm sorry, could you repeat that? He's asking what would be a good mix for stock funds for a shorter period than for planning for retirement. I don't know how to answer that.

I think you have to look at your entire life and pick an asset allocation that maximizes the probability that you're not going to run out of money. I think people are chasing income, which is a mistake, the same mistake that people made back in 2008, 2009. But I don't look at, here's a pot of money that you're going to need for 10 years, here's a pot of money for 20 years, etc.

It does kind of help mentally to, you know, one bucket of money that I'm not going to run out, and you can put that in CDs with these zero withdrawal penalties. But I used to think that picking the right asset allocation was the most important decision. I've changed my mind.

Sticking to whatever you pick is even more important. I mean, the way of putting that would simply be to say, you could be saving a lot of money when your kids are in college. Okay, next question. Do buy-and-hold investors of funds like the Vanguard Total Bond Market Index, that is to say, investment-grade core bond funds, need to worry about the emerging issues of bond liquidity and possible runs on mutual funds?

And then he goes on to say, these concerns seem to be real, are leading the SEC to propose exit fees and/or swing pricing for bond funds. No, Vanguard has to make a market, they have to come up with their NAV of a bond fund every single night. And those who want to get out will get out at the NAV, and those who want to buy will buy at the NAV.

So there's no liquidity problem for Vanguard Total Bond Market holders. Now, within the fund itself, are there going to be individual liquidity issues for some bonds? Individual bonds within that fund, perhaps, but you don't have to worry about that. Vanguard, by charter, have to make a market at the end of the day.

They have to come up with their NAV, which is a fair split between the buyers and sellers, and come up with a price on which you're going to sell your shares and somebody else is going to buy. And you don't have to worry about not having that. I'd be a little worried, not so much on a total bond fund, but a jump bond fund, where some of the bonds are very illiquid, can have large spreads.

A bond fund is trade-grade, investment-grade. The spreads are typically fairly small, so if there were a panic, Vanguard could probably sell this bond at a relatively thin margin. I actually was a little more worried about the PIMCO total return, because they're in everything from investment-grade to junk, and then as people build with the divorce with Bill Gross and Dan DePerformance, I actually thought that Dan DePerformance would be a little larger than it has been.

Although I do believe over the last year it's underperformed total bonds. The other issue is municipal bonds. The median municipal bond trades less than once per year. So at the trading level, there is an issue. Those of us who help the Vanguard uni-bonds funds, at a borderline rate through a crisis, saw that liquidity problem for a significant amount of money falls.

It had nothing to do with the intrinsic creditworthiness of the issuers. For Vanguard's uni-bonds spread, I've seen it was 10.25%, and the client, believe it or not, was an attorney with the SEC. Okay, this is a question for Rick and Alan. With current devaluation and increasing public debt across all countries, is it still safe to have all the investable assets in dollars, safe to invest everything in U.S.

companies? The question is primarily about currency impact on assets due to increasing deficit and each country trying to lower the rates. Race to the bottom question. I'm going to answer part of it, I'll let Alan take the rest. I've known that from Bill, by the way, from being up here many, many years.

And Bill's saying, "I think Rick would do it." But I think that this gives me a chance to talk a little bit about China here. One thing we forget about China is that it's a communist country. And there's one thing I learned by being in the military during the Cold War is that communist countries lie.

So we don't really know how bad things are in China right now. I heard estimates that their actual GDP might be at least 2% below what they're saying it is. Well, that affects all the other emerging markets around China, who supply China. And we're seeing some issues. I believe that we are getting ready for another round of sovereign debt default in emerging markets, which happens once in a while, at least I believe.

I'm not sure how this fits into the questions per se, but we were talking about single-country credit risk. So I think that that is the risk in the marketplace right now. Maybe I have a question. What was the question again? Maybe you can just pick up from there. That's a pretty easy question.

I wish the U.S. government and other governments weren't doing such deficit spending. And I blame it on the Republicans, Democrats, Independents, and all the rest. With that said, I'm not going to put everything in gold guns. So I don't know where else to invest. I believe in a diversified global portfolio.

I would invest in stocks in other planets if I knew how to do that, and the cost would be so low. And I don't know the solution. I've never predicted anything right in my life in politics. But I hope there will be some fiscal responsibility. That's all I can say.

So eventually, now you swallow the things that you predict. All the things that are obvious now, that's what history teaches us. And since you can't predict the future, you should diversify. Okay, this is sort of in the same vein. This is general foreign investing. For a long-term investor, if foreign investment could be held and nominated in the native currency as opposed to the individual's home currency, would it be desirable to do so?

I think we answered that. I think I'm carrying the question correctly that in equities, I would not do a currency hedge. But if I were to do bonds, which I don't, then I would currency hedge. Not the additional currency volatility that comes from owning international stocks, because it may not be correlated with the US stock market.

And if there is a collapse of the dollar, let's say, you're going to get the return of that foreign currency. It's not a prediction that I know one currency is going to do better. It's just an extra form of diversification. Volatility that's not correlated is a good thing. I mean, there's good quantitative work that suggests that your currency exposure should be equal.

Your portfolio should be equal to your stock, your foreign stock exposure. And a default way of doing that, the way we almost all do it, is we own the international stock index funds that we own. They're not hedged, alright? And then our domestic bonds are hedged. Our foreign bonds, they're hedged, too.

Now, if you think about it, there's no reason why you couldn't do it the opposite way around. If you have 20% of your portfolio that was in international stocks, you could hedge all of that and know 20% international bonds that aren't hedged. Because the dollars in your, the yen and the euros in your portfolio, the English pounds in your portfolio, don't know that there were stocks or bonds when you look at your portfolio at the end of the day.

But that's logistically much more difficult to do. So we all do it the way we do it by default, which is these big international index funds that are non-hedged, and we hopefully aren't investing in unhedged international bonds. Okay, what's your guidance about buying municipal bonds versus CDs in taxable accounts?

I mean, the CDs obviously are better off than the tax-deferred accounts, but you don't want to own munis in your tax-deferred account. In my own view, I think I've said this before, some of you are newer, but munis represent about 10% of the investment-grade bond market. I wouldn't go more than, let's say, 2, 2.5x.

And my big concern is with $2-3 trillion of unfunded pension liabilities, and that's assuming 7.5% returns for the pensions themselves. If Jack is right that stocks are in 4% and bonds are in 3% in 10 years, with all the baby boomers retiring and there's pension and health care liabilities being paid out, there could be stress on the munis market, so I wouldn't overweight it.

And I am not Nereidith Whitney. I don't look like Nereidith Whitney. I am very concerned with Nereidith Whitney. And a follow-up question for that is, what risk should I be aware of when firing Vanguard's intermediate-term tax-exempt bonds and investment shares? Liquidity risk in a crisis. So make sure that you're not depending on that money completely, which is why Allen recommends having it not be the lion's share of your taxable portfolio.

You're going to need that money sooner or later, and you don't want to have to take a haircut when you take it out. So you want to own some CDs and some treasures. I'd say take risks with stocks and with your bonds, mostly to be backed by the U.S.

government. I like the Vanguard Intermediate-Term Municipal Bond Fund, and we use it all the time. It's broadly diversified and high quality. And we tell people that this is your long-term investment portfolio, so if you need liquidity, you're probably better off taking a little bit of money and putting it into a Vanguard short-term municipal bond fund or a CD or putting it in the bank.

So other than just macro-municipal risk, which by the way, municipal bonds are different than corporate bonds. Corporations can go out of business. States can't really go out of business. Cities can't really go out of business, although we're in Detroit. The credit quality rating of municipalities as they drop below investment grade is sold out of that portfolio.

So a very, very extremely low probability that something that's investment grade in say a Vanguard municipal bond fund is going to just default the next day. And again, you're talking about cities here, where they restructure. A city just can't go out of business. It's a little different with even ratings, let's say, of a city school district.

If it's a single A rating, it's going to be a little different than a single A rating of a corporate bond, because a corporation can go out of business. Whereas a school district can't go out of business. They can restructure debt. Yes, they can restructure debt. So a business, if you have stocks, if you have bonds, you've got 5 cents.

That's a corporation. It's not a municipality. No, no, it's exactly right. You're going in the right direction. Only a very small percent of municipalities default. It's not credit risk. It's temporary liquidity risk. And you should have other means for that. In other words, if you're doing an intermediate term municipal bond fund, that's more long term.

So if you need immediate liquidity, you really should have an emergency fund to cover your six months or a year's worth of living expenses. And that could be in something else. There weren't tens of millions of baby boomers retiring. And I'm not saying it's going to happen. I'm saying that if stocks don't have a great next decade, if Jack Vogel is right on that, there could be some systemic stress.

And there are leverages. They can raise taxes and people can move. In some states, it depends on the law, they can renegotiate what those liabilities to their employees are. They can have employees increase contributions. But I wouldn't want to be the politician running on a platform that I want to increase taxes and decrease services.

Even for an investor who is 100% taxable, I would limit your exposure to community unions to no more than 40 or 50% of your bond portfolio. And remember, if you live in a high-tax state, you can buy treasuries. You don't have to pay state income tax on the income.

Interest income from treasuries. Okay, the next question is, "Is there an obsession in our culture with the number as opposed to a guaranteed yearly income such as Social Security, pension, or new banking? If so, why?" Well, you know, you've got to buy the guaranteed stream of income doesn't come for free.

You've got to buy it. And to buy that, you need a number. So it's not one or the other. It's you need both. Now, you can make a point, it's a very good point, that you do have a certain amount of risk between the time you acquire a number and the time you buy that stream.

You know, you can defer debility, or you can defer Social Security. But that's the risk. It's almost impossible to avoid. I think part of the reason there's such a focus on it is simply because our retirement system is overwhelmingly defined contribution plans these days, which you look at your statement and it doesn't tell you how much income that translates into.

It just tells you how much money is sitting there. I do think it's a mistake to focus on that so much. And clearly, I'm always thinking about Social Security, clearly that's one of the reasons why people are reluctant to spend out their portfolio to delay Social Security, even in cases when it's an overwhelmingly good deal to do so, is because they've focused on this number for so long and watched it go up and up and up, and now the idea of watching it go down, even if what you're getting is an incredibly safe, very good deal of an income stream, they're still reluctant to do it.

The paradigm that I like to use to display that is imagine two, you know, two 65-year-old retiree twins. One who's got $50,000 of annual income, pensions that was quoted, that was inflation adjusted, the other has a million-dollar-a-month sum. All right, they're actually equivalent. All right, but who do you think is going to run out of money first?

Who do you think is going to sleep better when he or she is 78 years old? You know, for whatever reason, everyone in this room is programmed to live below their means and build up a nest egg. And we're different than a lot of other people. And doing so leads us to focus, we've spent our whole life building up that nest egg, we can't spend it down.

So if you concentrate too much on income, and of course, you know, lots of, you know, brilliant funds like the Schwab UltraShort, you know, safe alternative to a bond fund, zero volatility, just a free lunch until it lost half of its value, you know, we keep making these same mistakes again.

So I would focus more on what a safe spin-down rate is. And I think if you play a perfect game, you know, a portfolio of somewhere close to 50/50, a perfect gain is 3.5%, increasing with inflation, which of course you'd have to do to keep your standard of living the same.

But income is the biggest threat to people's retirement plans, and we are not efficient learners. The same mistakes that we made in 2008, where the average bond fund lost 8%, many bond funds lost 50%, total bond fund gained 5.2%, we're making again. So Alan, have you figured out how to have prosperous retirement, but then have your fuel expense check bounce?

Yes, but it involves suicide, didn't it? Okay, that just got improved. You can't top that one. Let's give the panel a hand.