Expert panel members come on their own dime, they don't get comped, they pay just like the zinc as you do. And one little perk that I normally allow them is to tell us what's exciting, what's going on in their neck of the woods or in what they're doing. So we're going to go down to the table and Christine, anything exciting going on in Morningstar that you'd like to tell the crowd about?

Or do you have any books in the works? >> No books for me. I would say one concept that I've been excited about, the more I've talked to Morningstar.com users about it, is this idea of bucketed portfolios in retirement. I've done a couple model portfolios recently. And the concept is that you set aside liquid assets to fund near term cash needs, intermediate term assets to fund intermediate term needs.

And then we have the rest of the portfolio stocks. And for a lot of people, the end portfolio ends up looking a lot like what they would have had in the first place if they were just using a balanced approach. But the bucketing concept, I think, helps people visualize what an end retirement portfolio should look like.

So I think it's helpful from that standpoint. So I've been working on that, interviewing a lot of great people at Vanguard yesterday, and a lot of great people from this conference yesterday morning. So those videos will roll out on our website over the next month or so. You should keep your eyes peeled for that.

And then personally, I'm going on a six week sabbatical starting next week. And so I'm excited about that, going to spend some time in Argentina and spend some time with family and projects and so forth. So it's a nice perk that we have at Morningstar, and I'll be taking advantage of it soon.

>> And Bill, I know you ventured into a new field, electronic publishing. >> Yeah, with some help from Mike. But what I'm really doing is traveling to Burma this winter and expecting my first grandchild. And sure, I'm doing some writing, I'm always doing some writing. But I've got a new book that's coming out, I'm on alternatives.

But if you listen carefully, especially if you listen to the interview, you're coming out of the Morningstar site, you don't need to buy it. >> >> All right, I got Bill Bernstein, B, and one thing, I already have a grandson. >> >> Nine years ago, never in my life have I been able to say that.

>> >> But that's been great, yeah, first grandchild. But yeah, I'm starting a new book. And it's something I wrote about on the forum that I thought needs to be expanded on, and other than that, I'm just working on my blog. And things are good. >> No new projects in the work for me, I just wrapped one up.

It's a book on social security planning. Heard from a lot of you about that. We already downloaded it, some of you have read it already. That's about it, really, just working on the blog. >> But I will have to say that I downloaded Mike's. Mike does a whole series of books in 100 pages or less.

And his latest one was the Social Security in 100 pages or less. I downloaded it and read it, and let me tell you, Mike took a very complicated subject and made it very simple. And as an author, I can tell you that it's very difficult to do, and great job.

Thank you very much. >> >> I don't have a whole lot more bandwidth. I've started writing for AARP Magazine, and I think that is incredibly important, because no one gets abused more than seniors. I think if I had a pipe dream, and it's probably just a pipe dream, is to harness Bill and work on a social media game that would actually teach the right thing about being a competitor to the stock market game, which teaches gambling and speculation.

And of course, it's sponsored by, guess who, Merrill Lynch, Morgan Stanley Smith. Barney, that is something that I would love to do. >> What he really does for a living is to do his best to piss off the financial services industry. >> >> And I'm good at what I do.

>> >> >> Well, what am I doing? >> How's your golf game? >> Gosh, I'm embarrassed to say that my handicap has gone up about two or three strokes over the last year, but there's a good reason for that, which I won't get into. >> Four foot putts. >> Yeah, four foot putts.

>> >> I'm kinda doing more of the same. I do have the second copy house book in the works. I've been saying that for the last two or three years. Where's Bill Faloon? Bill Faloon, would you stand up please? I guess he's not here, but he's been a big advocate of the Global Heads to John Wiley.

But basically what I'm doing is continuing to spend a lot of time at SoundMark putting in systems and structures to continue to accentuate the Global Head philosophy with the folks we connect with. I really, Alan, I respect you're getting under the skin of the financial industry because they need to have someone kind of prodding them.

And again, the need is just phenomenal. And as I said before, I would encourage all of you to continue to share the philosophy with others. A lot of people ask, well gosh, how do I best articulate or share it? Why doesn't a person embrace it like I do? And what I have found is that people need to hear the philosophy about 20 or 30 times before they get it.

That's been my experience. >> Did anybody read the Global Head site about what happened on Jeopardy a couple weeks ago? What happened? Stand up and tell us what happened. >> Well, they couldn't, they gave them the answer and then- >> Who gave them the answer? >> Warren. >> Warren Buffett.

>> Yeah, Warren Buffett gave the answer and they couldn't come up with the index funds to get a proper response. I have no idea what the answer was, so you've got a few questions. >> The question is, when does the index start? >> Okay. >> Yeah, the answer is, what is a low-cost investment that mimics an S&P 500, blah, blah, blah, or something, isn't that what the answer was?

>> Yeah, and they spelled it out pretty clearly. >> They spelled it out clearly, and not one person could answer index funds. And just index funds is just like second nature, but to the average intelligent investor, it's like, they don't know what an index fund is, so you have to continue to articulate it time and time again, keep it simple.

Again, Lock the Yank Network, profoundly positive impact on people's lives. So Mel said that because you wound up this part with me, I get to ask a question. So the question for the panelists is, when you're working with folks, how do you define risk? When you're working with clients, this whole thing of risk and standard deviation, and blah, blah, blah, how do you articulate risk to a human being?

Am I reaching your financial goals? >> >> Bill, Mike, Christine? >> I tend to talk about it differently whether I'm talking with somebody who's in the accumulation stage or the distribution stage. In the accumulation stage, I'm mostly talking about just uncertainty of returns, volatility, probability of the portfolio is going to go down by x amount, things of that nature.

In the distribution stage, we're talking about percentage of spending goals that go unmet, for instance. Sometimes that's expressed as probability of running out of money. Sometimes it's, probability of running out of money doesn't cover it, because sometimes it's different if you run out of money in the fifth year of retirement, as opposed to the 25th year of retirement.

So there are other metrics, but it depends who I'm talking to, I think. >> Yeah, we deal with that problem by not accepting clients who don't understand what a standard deviation is. >> >> That's why he has three clients and they all have $75,000. >> >> I like Rick and Mike's definition, and I do think that risk tolerance has been given way too much play in terms of investors' financial decision making.

In a lot of ways, I feel like it's saying, okay, you're going to give your emotions free reign to help determine this financial plan. And I think that's a terrible idea. So I like risk framed in the realm of risk capacity. How much risk can you actually withstand without altering the goals that you had set out for yourself?

>> Instead of working in percentages, I try to work in dollars. Because I think people understand dollars a lot more than percentages. So if someone has a half a million dollar portfolio and they're gonna go 50/50, they got 250 in equities. And I ask if they can stand to lose 125,000, not can you afford to lose 50%.

And when you put it in dollars, people go, my god, no. >> >> That's what they really need to do to get to their own comfort level, which is when they get to that sleep night, and that's the proper asset allocation for them. >> Well, what is your answer?

>> Well, my answer is a compilation of everyone. I really like what Mel said. So if somebody's got a million dollar portfolio, they've got 50% in bonds and 50% in stocks, we look them in the eye and say, hey, you're 50%, your half a million dollar portfolio is gonna drop 25 to 40%.

And that is what, how much? I can't do the math, but I feel it's gonna, quarter of a million dollars, maybe? So we say your portfolio will drop $200,000 in the next four years. How you feel about that? And it puts it in terms that they can understand. And but what's more important, I love Charles Ellis' description of risk.

In his book, what's his book, Winning the Loser's Game, or something like that? He says, risk is the chance that you will not have the money to pay a bill when it comes due, and I just love that. You can talk about risk and standard deviation, but I love Charles Ellis' definition of risk.

And if you can show people that, yeah, interest rates are at 1%, you're not getting anything on your fixed income investments. But if you can show them that even in a decline of 20 to 40%, they're still gonna be able to pay their bills for the next ten years.

They think, you know what, it doesn't matter what the stock market does over the next two years. >> Yeah, I mean, that's the concept that I try to continually get across when I talk to any kind of audience, from retail investors all the way up to people at the university level, is to tell them that the real definition of risk is not standard deviation or volatility, and I make a point by showing two slides.

One is the typical sort of thing you pick off the Internet from crybaby traders. >> >> You've all seen the pictures and the thots in suits standing next to monitors looking like they've just had their donut squeezed. >> >> And then that's not risk, all right? Cuz those guys will still be wearing $2,000 suits the next day, they will still be dining at the Russian tea house the next day.

The real, then the next slide that I show is a picture of a guy pushing a shopping cart under an underpass in the rain, I say that's risk. >> I tend to think about it in standard deviation probabilities, but I explain it to my clients in the likelihood that they'll live under a bridge.

I try to make it as emotional as possible. I tell them, I can ask them the question how they would feel if their portfolio lost 30%, but I explain that I can't really simulate the pain they'd be feeling without coming across the table and kicking them in the gut a few times.

Even though it happened not too long ago, our memories are very short. >> Can I just add one more thing to this element of risk? So from my perspective as a portfolio manager, the risk to a client is not maintaining their investment plan. That's the risk. Because if they can stick with the investment plan, the probability that they're gonna reach their financial goals is quite high.

So the real risk is not having a plan, and then if they do have a plan, not maintaining the plan. And then a lot of people with standard deviation, the amount of money that you might have lost in your portfolio all boils into this idea that you're gonna do the wrong thing at the wrong time.

And that's the risk that we face as advisors to individuals. >> Hey, Robert from Long Beach, stand up and tell us what the leading edge analysis of risk is. >> >> This is untested theory. >> Stand up. >> >> That's interesting. >> We're all very brave in a bull market.

>> >> But your real risk tolerance, you find it in a bear market. And so it's what you're talking about is methodologies to realize exactly what your risk tolerance really is, not what you say it is. Because usually there are two different things. >> Did you get your question answered?

Okay, I found out that I had mentioned something, and people asked me to explain it. I thought that most people knew about it, but apparently not. When I mentioned I-bonds and the ability to get 10,000 per person. But then I mentioned that there was a back door to get paper I-bonds of $5,000 if you overpay your tax return as part of your tax or all of your tax refund.

And the way it works is you have to intentionally overpay your taxes by $5,000. When you file your tax return, you can elect to have your entire return or part of your return in I-bonds, issued in I-bonds. And any surplus would go in your bank. You can split it any way you want.

But to get the $5,000 in I-bonds, you have to overpay your taxes. And some people do it by additional withdrawing, some people do it by estimated tax. But the bottom line is you overpay your tax, and you can get your $5,000, up to $5,000, as opposed to the individual I-bonds where it's 5,000 or 10,000 per Social Security number.

With couples, you still can only get $5,000. I wouldn't guarantee that this is gonna go on, it's been in place. They honored it last year, and there's nothing out that they killed it for this year, but eventually, their objective obviously is to get rid of paper I-bonds. So I would expect at some point in the future that that's not gonna be an option.

But at least that's the way it works, overpay your taxes, and fill out the paperwork to get part of your refund, part or all of your refund, paper I-bonds, up to $5,000. So let's get on to another question, here's a question for Rick Perry. Rick, you wrote a blog on the three P's to investment success, philosophy, strategy, and discipline.

Can you expand on these ideas? >> Three P's to investment success, sounds like a book, which it will be. But anyway, okay, here's, I'm thinking a lot about the philosophy of what we do as a group, and then what we do on the board. And that's where all this came from.

Cuz we have had some severe discussions about things that don't matter much. >> >> We really can get into the minutiae. And so, in stepping back from it all, I'm saying, hey, wait a minute, we're all mogul heads. We're all sitting in this room. So at the very first level, I started thinking, we all in this room and everyone who is a member of the board, for the most part, and a lot of other people who are not, have the same philosophy, do we not?

And we have a list of the ten beliefs, and I didn't even know that list existed. But we all have the same philosophy. But there are perhaps 200 people in this room, and I would say that there are probably 200 different strategies for implementing that philosophy. High bonds, municipal bonds, lateral CDs.

So at the strategy level, we all have different ideas of how we want to implement the philosophy. And you know what? I can't say that my idea is any better than his idea, his idea. Anybody's idea out there? Because we won't know that until 20 years down the road.

We have the best strategy. So strategy can differ on the board. And most of the arguments that we have on the board are not about philosophy at all. They're about strategy, and sometimes very minutiae strategy, whether we should have gold, or whether we should have commodities, or whether we should have high-level bonds, or whether we should do the Modi model.

Whatever. So the second level of this is strategy, and we'll argue about that all day long. The point that I try to bring up on the board once in a while is in order not to confuse new people who are coming onto the board, or people who are just getting started, is don't confuse strategy with philosophy.

Don't confuse strategy. This is a discussion about this, we all agree on that. Now the last part of the three keys to investment success is once you have the philosophy, once you have your strategy, whatever it is you think you need, the last part is discipline. And we do talk a lot about discipline.

We were talking earlier about, and I said, the risk is not meeting your financial objectives, it's a discipline. So now we have discussions about how to maintain discipline. You can use some sort of a rebalancing methodology on your birthday. You can hire an advisor, you can use a life strategy fund of some sort.

I mean, that maintains the discipline of the strategy, which fits the philosophy. If you don't have the discipline, if the discipline starts to break down, the strategy breaks down. And if the strategy starts breaking down, now you're susceptible to the next Merrill Lynch guy that calls you on the phone, which means the philosophy can also start to break down.

So it goes down this way, and then you have to maintain the discipline or it starts corroding back up the other way. And that's what my whole idea is about what we do. >> Was that insightful? >> Yeah. >> >> Okay, we have a question for Bill Schultes from Sonny.

He says, the coffeehouse portfolio received a lot of attention and popularity during the last decade. Part of which is at least due to the outperformance of small value and other tilts over the market, or S&P 500. If reversion to the mean happens, can the coffeehouse portfolio and the coffeehouse underperform, how can we keep the coffeehouse message popular?

>> Wow, that's a great question, Sonny. And I think I would have liked to say that I planted that question, because it encompasses a lot of what is discussed on the board. First, I think it's important for me to share with anyone who wants to listen. That in the book, I said that the simplest, best approach is like a three-fund portfolio, total domestic, total international, total bond.

I said, if you want to fine tune an already good thing, here's a way to do it. And that was kind of how I started articulating that coffeehouse philosophy in my weekly column in 2000, and it just kind of took on a life of its own. Paul Farrell hooked it up on the Lazy Portfolios, and I have consistently said that there are, as Rick was saying, there's countless different ways to build a passive portfolio, you can do it with actively managed funds.

But it was a stroke of luck that from 2000 to 2010, value in small and international outperformed large cap stocks. So the question is, what is the purpose of diversification in these different components of the market? Well, I loved what Joel Dixon said last night about that whole issue.

What he said is that basically, he does not want to have, I mean, clearly over a ten year period, these different components of the market can perform dissimilar to each other, and case in point, 2000 to 2010. Last night, Joel Dixon said, he doesn't want to be in that underperforming sector over the next ten years, and that's kind of the way that I look at it myself.

If I'm gonna buy a total stock market index fund, what's important is that I stay the course. And I accept the fact that from 2000 to 2010, it's gonna underperform. If I have a more diversified portfolio that's tilted away from a total stock market fund, and small, and value, and international outperform the S&P 500, which it very well may do, I think it has over the last three or four years.

The important thing is to stay the course and not to chase performance when these different components of the market underperform each other. Because as Rick was saying, it's the philosophy that counts. And if you can't adhere to the philosophy, everything else breaks down. And so the philosophy, in my opinion, is to embrace a low-cost portfolio that broadly represents where you're at in your life.

And then what it does is it allows you to focus on your financial planning issues, which for 99% of the people, including me, is I need to save more than I spend. Does that answer your question, Sonny? >> Can you tell us the subtitle to your book? >> How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

>> I think that's more important than the portfolio. >> Yeah, and you know, I have to say that in connecting with everyone here, where's Molly? Molly, are you here? You know, here's a woman that ran her, what, her first marathon when, how old were you? >> 65. >> 65 years old.

>> >> She's involved with an entity and a program that I have been involved with. And who, where's Bill Davidson? Stand up, Bill. Is he here? He's not here. He's involved also. She's involved with hospice. To me, the biggest, well, I don't wanna get into that. But, you know, she's, it gives her the authority to know that she's doing the right thing with her portfolio so she can pursue other things in her life.

And, you know, I travel all across the nation not to talk about strategy but to connect with people who are really getting on with their lives. It's so inspirational. Just, you know, my hat is off to all of you for coming here. Where's Calvin? All the way from Taiwan.

He left. >> >> What's that? >> Not on the plate. >> >> So thanks, Mike, for bringing that up. >> Yeah, I mean, you know, just to, you know, add a tag to all of that. You know, if you've invested with any of the kinds of portfolios that we recommend, the coffee house portfolio, the material portfolios that Rick and I recommend, you've been through hell and back the past several years.

And you know, you know, it's hard, you know, I suppose we couldn't see times that are even worse than that, but you probably haven't missed a turn to stick with it. We could probably fill ten rooms like this with enthusiasts of the Harry Brown portfolio, which is one quarter gold, long bonds, stocks, and bills.

And, and these are people who've had nothing but pizza and beer for the past 15 years. And there are a lot of enthusiasts, Harry Brown enthusiasts out there, and they're going to get, you know, get their trial by fire in the next five or ten years, I'm pretty sure.

It'll be very interesting to see what happens to that group. By the way, I like the Harry Brown portfolio. I think it's a valid way to manage assets in the long term. It's not for me and probably not for any of the people in this room. But, but, but, you know, those are the people I'd really worry about.

>> I'm not a fan either of the Harry Brown, but again, it falls under the vocal head philosophy because there's a passive strategy. And they are using low cost index funds. I'm not a fan of it either, but again, it gets down to our individual preference. >> Okay, we have a, we had a question on, somebody asked me to elaborate on this.

Taylor's three fund portfolio, which I think was mentioned by several people. Total stock, total bond, and total international. Taylor later revised it when TIPS came out to add TIPS. The question was, first of all, can you explain to a layperson what TIPS are? And would you add that to the total bond, the portfolio with total bond to be part of your bond allocation?

>> Well, TIPS are just inflation adjusted bonds. They promise an after inflation return rather than a nominal or before inflation return. And as far as whether I would add them to a portfolio, I think it depends on personal circumstances, specifically how exposed are you to inflation. Retirees tend to have more inflation risk than somebody whose overall economic well-being is primarily dependent upon a job.

Young people who, most of their economic well-being is just their future earnings, which hopefully will keep up with inflation. And that's different from if you have a financial portfolio and you really are facing inflation risk. And I think then that's when TIPS become significantly more helpful. >> I would, go ahead, please.

>> I'm just gonna clarify that TIPS are a hedge against unanticipated inflation. Because the inflation rate is already embedded into all the asset classes, including treasury bonds, not bills, but right now. I mean, the Fed is manipulating things a little bit in treasuries, but it's already embedded in stock prices, real estate, rents, all of this stuff.

So what they are are a hedge against an unanticipated jump in the inflation rate. And it has to be a jump, because if inflation goes into deflation, then you're actually gonna do worse with TIPS than you are with a nominal trade. >> Just to pick up on Mike's comments.

I know sometimes people are looking for guidelines about how much to invest in TIPS. And I completely agree that it's very individual specific. I talked to John Amarix at Vanguard about this issue. We were talking about their target date products specifically. And those products do not include TIPS until one reaches roughly the age of 50.

And that syncs up with the work that my colleagues at Ibbotson, which is under the Morningstar umbrella, do. Where they really don't add TIPS to the portfolio for people who are very much in accumulation mode. But do start to add them in for people approaching retirement. Ibbotson's recommended allocations to TIPS as a percentage of the fixed income portfolio typically run in the neighborhood of 20 to 30% of the bond portfolio in TIPS.

And I think John Amarix told me yesterday that the target date funds include about 20% of their overall allocations in TIPS. So those are just some guidelines. I think most of us, I don't know, might agree that TIPS aren't particularly attractive at this juncture. And so I would say if you're building a TIPS position, my best guidance would be to do so gradually over a period of years, rather than adding a lot right now.

>> I'm not wildly enthusiastic about TIPS in an accumulation phase portfolio. But where I think they're the most useful is in immunizing your future real living expenses. So a person, for example, who is 60 years old might purchase what I call a full body, it's like full bonty except that it's TIPS, instead of the absence of clothes.

>> >> What a full body is, is a ladder of TIPS in each and every year that immunizes you out to about 100. Obviously, we'll have to double up in the first ten years because there's no 40 year TIPS, and then we'll let over in ten years and buy the 30 year TIPS.

And that absolutely immunizes all of your real living expenses if you save 40 times your living expenses, which I suspect more than a few people in this room have done. They're not particularly attractive right now, but it's something to keep an eye out for. And maybe you won't want to build the full body, but you can build part of it.

And it's a very useful thing, it takes the place basically of an amniotic. >> I like TIPS, I own TIPS, and Bill, be interested to see if you back me up on this. I'll confess I'm a bit of an active investor when it comes to TIPS. TIPS are the safest investment around, US Treasury backed, no inflation risk.

In 2008, when market stocks tanked, people shouldn't run to TIPS, but instead they were yielding well over 3.5%. It was a very good investment that, it's much less good now, in my opinion, with CPIU minus, what, about 0.7, 0.8%? >> I was very attracted to TIPS when they topped out over 4% back in the early, late 1990s.

I'm not terribly enthusiastic about them right now either. You've got a negative yield on the curve all the way out to about 20 years. It's pretty ridiculous. >> Yeah, but people need to understand that's a negative real yield. >> Negative real yield, yeah. >> As opposed to nominal yield that you get on the record.

And people look at, don't understand that their CD, which is yielding 0.5, has a built-in negative real return of maybe 2% or something. So they compare, and think the CD is better, when in fact, the real return on a negative item, or tip, is still better than the negative real return that they're gonna get on their CD.

>> What Alan is referring to is something that Larry Sweater has explicitly written about, which is buying low and selling high, we've all heard about that. >> >> And I will admit to falling off the boat with one wagon in that regard as well. It's a fun game to play, but that game is long.

It's over, maybe it'll start again. >> May I ask a question on tips? >> Say again, please. >> May I ask a question on tips? >> Go ahead. >> Does Banff Yard have a, it was announced they had a short fund for tips now? >> Yeah, it now exists.

>> Could you address the advantages of short fund versus the long fund? >> Well, one thing, and I'd like to ask Bill this, or anybody on the panel or in the audience, is that the tips have, the longer tips have had significant price appreciation. And so, my question is, if rates go up, are you gonna see some significant price decline?

Now, I realize we still have the unexpected inflation built in. But I think that we've still got the issue of, Rick, why don't you answer that? You've got some significant short term principal. >> Yeah, it depends on why interest rates went up. If interest rates went up, would real rates of return go up?

Meaning that, okay, real rates of return. Inflation expectations remain low when interest rates go up. But inflation didn't go up, but interest rates went up. That's a real rate of return. That's a risk to tips. In other words, if inflation goes up and interest rates go up, then that's not a risk to tips.

But there's another risk of tips, which I think you've overshadowed even that, which is it really didn't get revealed until the crisis, which is there's a third risk, which is liquidity risk. From '07 to late '08, the long tips was, I think, the 30, 32 tips, which are 24-year maturity, and it declined by almost 25%.

So that means 30-year tips, a similar event would decline by about 30% in principal value. So it's a peculiar asset class. It is absolutely riskless in a real sense, in real terms, when held to maturity, which is how you really wanna be using them, right? But if you depend on them for short-term liquidity, then good luck with that.

>> That's where the short-term tips comes in to answer your question, okay? Short-term tips have far less of this price volatility. So instead of using the Vanguard short-term bond index bond as sort of a cash position, because you wanna get some yield out of it while you're waiting to spend that money over the next two or three years, you use short-term tips money.

It would protect you from an unanticipated jump in inflation. And it's just an alternative to not quite a money market, but a short-term bond fund. >> The announcement had said that the expected maturity for the fund is somewhere around 2.7 years instead of 8 and a half, which is what the current tips fund has.

So it's gonna be about one-third as responsive in price to movements and real interest rates. So that's the reduced risk. The, of course, drawback is that you're just learning lower returns, cuz they're short-term bonds. >> Okay, the next question is from Modest. Is Modest here? Modest asks, what is your view, pro and con, of stable value funds in 401(k) plans?

What role should they play in a portfolio? >> Well, I put a post on this, actually, on both heads just a couple of weeks ago. And I had people, I wanted people to go read an article by Scott Simon, who is a very talented attorney out in California, but also is a fiduciary attorney, and he also has a money management company out there.

If you go on the mobile heads and you look at stable value funds, you look that up, this post will come in. What you find is Scott looked under the hood of this, as other people have. I know Larry Sweco did a lot of work on this as well.

And it really depends on what's under the hood, who you're dealing with. Who is these insurance contracts that are being put into this stable value fund? Who issued them? So, I mean, it sure sounds good, but every time something sounds good and investing in it, you really need to look under the hood, right?

Have you done articles on stable value? Larry, I mean, I'm sorry. >> >> Alan, I haven't written about them. But I agree, it's what's under the hood. The US government's thrift savings plan has a G fund, which is essentially a stable value that pays almost as much as the bond.

And I've tried to get somebody from the government to hire me for one day, pay me $1, and fire me, cuz I would love to be in it. But there's a reason why some are paying higher rates in that the company, in the 401(k) or 403(b), in the insurance company, signed a longer term contract when rates are higher.

But I tell clients that are in the stable value fund that are in insurance contracts that there is default risk. And I suspect, others may argue with me, that most insurance companies would have gone under in 2008 without the government being allowed it. >> On stable value funds, not to put too fine a point to it, a company called Invesco, are you all familiar with that?

Do they have a fairly good reputation in terms of stable value fund management? >> Sorry, I'm not familiar with their products. I mean, except for the fact that they own power shares. >> Did you observe the stony stare from the audience? >> >> I'm sorry? >> I said, do you observe the stony stare from the panel?

>> >> They're active managers, right? >> Yes, I believe so. >> I don't know. >> Eliminated choice. >> Do they out aim? >> Yes, they do. >> Yeah, there's always a trust factor. >> I don't think of Invesco and AIM as one of the good guys. >> I would say as a general statement, one thing I've noticed just anecdotally is that the stable value yields have come down quite a bit over the past year or two.

And I guess I get a little nervous when I see people looking at things that maybe will yield 3% versus just hunkering down. If it's money that you truly need to keep safe, is that yield pickup really worth the risk? And maybe if you have an awful lot of money, it is.

But I think that people really should be mindful of anything that's promising and appreciably higher yield or even a modestly higher yield than true cash right now. >> I mean, there is the odd free lunch out there. Tia Cref, for example, has a very, the Tia traditional fund, which is basically a money market that if you got into it three or four years ago, still yields you 3%.

You can add more money to it, and I've looked under the hood of that. It's a pretty darn good fund, it's got fairly solid holdings. But what you're doing with that fund, of course, there's somebody who's paying for that. The person who's paying for that are the people who have on the variable annuity side of that same fund who were stuck in it for years.

And so they can maintain the maturity. And if you have an IRA in it, you don't have that constraint. But it's a special situation, but if you qualify for Tia Cref, I think you can still get a percentage reward, as that was the last I looked. >> Okay, we have a question from Steven Enter.

Did I pronounce your name correctly? All the way in the back. He says, what allocation and disbursement strategy would you recommend for a retiree who has no heirs and would like to come as close as possible to depleting his assets without eventually depleting it? >> >> I think the answer seems clear to me, that that's a perfect candidate for a single premium immediate annuity.

I don't know, anybody else? >> Yeah, it needs to be inflation adjusted though, because think of it, it's an annuity with a duration for the rest of your life. So if we do get hyperinflation, your spending power is gonna go down and down. And if you take the inflation adjusted, that's an extra insurance premium, and that drastically lowers the amount you're gonna be paid.

And then there's default risk as well. >> Yeah, if you're gonna put a big portfolio, you have to realize that states have limits on the guarantee that they, it's not guaranteed by the states, but it's a state guarantee program. And each state has different limits, I think the majority are around 200, 300,000.

>> 100,000. >> Yeah, 100,000 potentially, but 300,000 total, I think, in some states. >> Some. >> But anyway, you would have to check the state that you live in to make sure that you have the proper number. And some people would suggest that you don't buy all of it from the same insurance company.

So you spread your risk around the insurance company going under. While the guarantee, the way I understand the guarantees work or is similar to the FDIC, the bank fails, they try to get the other insurance company to pick up the slack, and the other insurance companies apparently pay into it.

But the bottom line is, is that you might not get your check or from an insurance company that goes belly up or has a problem. So you want to spread your risk around as the insurance company does. >> And delay social security, Jim. >> One thing I've posted about on this that I think some of the others might have also recommended is the self-unwinding tip platter for the first 5, 10, 15 years.

And then a smaller amount of annuity at 75, 80, 85, for the last part. Where you get the mortality credit, it's really an equal reward. You wait, you delay it, you buy the annuity. Could I just go to a 10,000 foot level on this question? Because it's actually an interesting question when you think about it.

The question was, I don't have any hair, so I want to spend every dime I have on my debt, but I want to pay the mortuary in that dime. >> No, no, no, the check to the mortuary is supposed to balance it. >> >> Use a credit card. >> >> Okay, but here's the point.

The point is that from the 10,000 foot level, that's his situation. So what asset allocation, what strategy should he use in his portfolio? What withdrawal strategy should he have, given the amount of money he has? Given social security, everything else that he's got coming in, to accomplish what he wants to accomplish.

It's gonna be very different than somebody who has four kids and wants each one of them to inherit, on an inflation adjusted basis, all the assets you have today. The withdrawal rate is gonna be different. So sometimes we'll get into the minutiae about what is the 4% withdrawal rate, the optimal withdrawal rate, and we argue back and forth forever on this.

And the answer is, for him, it might be 6%. For somebody who's 60 years old and has four kids and they want every dime to go to their four kids, it might be 3%. So each one is very specific. And the inheritance question is really gonna determine a lot, not only about asset allocation, but also the withdrawal strategy.

>> Clearly, I think the most applicable strategy here is the George Raft strategy. You remember George Raft was the actor who said he spent $10 million on women, booze, and gambling, and the rest of it he wasted. >> >> I think the key to the recommendation is a unique situation, no errors, and wants to spend it all.

And that's pretty- >> Not unusual though, I mean- >> No, no, I'm saying though, it's unique to him and it's not so- >> But also it's not so unique in that for the vast majority of people, investors, they're, to maintain any semblance of a standard of living, they're gonna have to spend their assets down over time.

And I feel the important thing is to, again, establish a financial plan that allows you to visually see how you can spend it down at a rate that makes sense, and then readjust it every year based on inflation, based on what happens in the markets. And also based on the biggest question mark of all in retirement is that is, what is your health care cost?

>> There's one more thing I wanna throw out there which we haven't heard yet, and that is reverse mortgage when you're home. And I think that'll, for your situation, if you have a home, a reverse mortgage might be the thing you wanna do. So we haven't talked about reverse mortgages as part of, you have talked about it, remember, in years past as part of this financial plan.

>> One other quick mention to back up to the annuity discussion. Mel, you mentioned the idea of buying multiple annuities to spread the insurer risk. I think there's another good reason to think about maybe laddering annuities, which is the current interest rate environment. So single premium immediate annuities are quite low by historical standards right now due to the current interest rate environment.

So even though it would be more cumbersome than buying just a single immediate annuity and letting it ride, I think it does make sense to spread out the purchases over a period of time to potentially obtain a range of interest rate environments. >> On the topic of buying annuities, if you're looking to stay within the state guarantee association limits, it's important to note not only that the limit varies by state, but the applicable rules vary by state.

So for instance, some states will back you up, they'll make you whole in the event that the annuity defaults. If you live in that state when it defaults, other states, their guarantee applies if you purchased the annuity when you lived in that state. So for instance, if you currently live in a state that has a $300,000 limit and you're considering moving to another state in retirement, this is something you'll want to think about.

Because you don't want to move to a state with a $100,000 limit necessarily. There are obviously factors involved in moving place and living. But you'd want to pay attention to those rules and see if it's going to expose you to an additional level of credit risk. >> Bill, didn't you write that if there's a systemic issue in the insurance industry, the state guarantee would be a little more than a speed bump?

>> That was the word I used, yes. >> And then I have a pet peeve, and everyone does this, including last night. You can earn 7% income on an annuity. Why would you, therefore, want to buy a 1.7% total bond fund? I've compared apples to oranges. Most of the return on the single premium immediate annuity is your return on principal.

>> Well, it's even better than principal. It's the principal of the people who died before you. >> >> There's a non-mobilized question from over there, gold coins or gold ETF? >> Gold coins, absolutely. >> >> Gold coins. I mean, look, if the Armageddon comes, is anybody going to want to buy your share of the GLD?

>> >> If you can trade it, if the markets are even open, no, you're going to have those gold coins sitting in your safe next to your shotgun. >> >> I'll play the straight man here. More seriously, Craig Rowland wrote a wonderful book on the permanent portfolio. He's got about 70 pages.

It's just fascinating to read about why are you buying gold, okay? Are you buying it to hedge inflation? Well, then buy GLD, buy a gold miner. I would even say buy just a natural resources fund, like the Energy Fund, all right, which is, in spite of Jack's comments, I think it's an excellent fund.

I think they'd find anything by bringing that fund out. If, on the other hand, you're worried about breakdown of social order, then probably Canada's an animal hoarder, I would bet. And if you're really concerned about the entire breakdown of society, then you want to put gold in a vault in New Zealand or Switzerland, all right?

Which he tells you exactly how to do all this, it's absolutely fascinating stuff. >> >> Seriously. And then your only problem, of course, is finding a way out of the country. >> >> Okay, here's a comment and a question. It says it seems every financial expert is saying to get out of bond funds this year.

Some say to buy individual bonds instead. Bonds. >> I'll just extend that, okay, well, what do bond funds hold? >> Exactly. >> Individual bonds. All right, so what's the purpose of getting out of bond funds, to go into individual bonds? I can see doing a bond ladder if you have liabilities that have stepped out over ten years, so you're going to build a ten year ladder of tips, no problem.

You've got liabilities going out over five years, you want to buy a five year CV ladder, pick those liabilities. Let's say college savings, you have children going to college, you want to buy, I used to buy zero coupon bonds for my children. So I knew exactly what I had coming due every year for them to go to college.

That's a good reason to buy a bond. You're retired, and you're going to be retired for 20 years, 25 years. The liability, I mean, the duration of your liabilities are, if you add it all up, you do it mathematically, probably comes out to about five, six years, the duration of your liability.

The duration of an intermediate term bond fund is about five years. Now, the next year, a year from now, the duration of your liability doesn't come to four years, it stays at five years. So what I'm saying is, with an intermediate term bond fund, municipal bond, total bond market, the duration of your liabilities and the duration of your bond assets are about the same.

If you buy individual bonds, it complicates that. And so I'm not a fan of doing that. >> Well, let me take a vote then. Bill, do you think that people should get out of bonds by this time? >> No. >> Rick? >> No. >> Well, it depends. Mike? >> No, but Alan probably has something to say about speeds.

>> >> You said what I was going to say. And- >> Well, I think it's very important that people have an understanding of what can happen to bond funds in a rising interest rate environment, and to basically stay the course. Vanguard has an excellent piece on the importance of staying the course.

If you have an intermediate bond fund, when the price begins to drop, it's just, it's wonderful. We show it to every client who has an intermediate term bond fund. Because we're drilling in them the importance of not getting out of it when the net asset value starts to drop, but to stay there to capture the higher returns down the road.

So you're prepared for it when interest rates do go up. It's just gonna be, the outflow of bond funds, dollars out of bond funds, when interest rates go up, they're just gonna be off the charts. >> There are any number of phrases that you hear from time to time, that they all fall into the same category, which is the old 60/40 portfolio doesn't work anymore, indexing doesn't work anymore.

The traditional portfolio doesn't work anymore. And don't buy a bond fund anymore, buy bonds. They all say exactly the same thing, which is hold on to your wallet. >> I would just like to add one thing to Bill's comment. His 60/40 portfolio doesn't work. A week and a half ago, there was a great article in the New York Times about endowment funds face hard landing.

And a guy, somebody did research on all these endowment funds. And the conclusion that he came to is that a 60/40 low cost index fund portfolio is darn hard to beat. And I posted it on my website, or you can email me. It's a great article. >> I'm a better actor, believe me.

>> What's that? >> >> What? >> I wrote a piece for the Wall Street Journal Total Return blog about a month and a half ago, I quoted Bill Bernstein in it. But I walked through the simple math of owning a bond versus a bond fund. And addressed the myth that if you own a bond and hold it to maturity, it's just an illusion that you eliminated interest rate risk.

>> All right, well, there was a method to that madness. >> There's also, by the way, a cash drag on buying individual bonds. Because people buy individual bond letters, interest coming in, what do you do with it? If you're not spending it, it sits there in the money market with 0% interest.

Do you have enough money until a bond comes due where you can go out and buy another bond? It actually drags down the yield of the portfolio. >> That was brilliant and insightful, thank you very much. >> >> Well, there was a method. >> Coming from you, that means something else.

>> >> There was a method about madness in holding the account, because the question says, it seems every financial expert is saying to get out of bond firms. We have a panel of experts here who said don't. So every financial expert is not saying to get out of bond firms.

That's the answer that I will be taking out of that. We have one final question here, and I think the answer should be fairly obvious. But do you think it's reasonable to assume that no one can accurately predict how any asset class will perform for any length of time in the future?

Yes. >> No, and the reason why I disagree with that is obviously the question, the way that people usually try to answer that is in the short term. But in the long term, I think you can look at valuations and make a probabilistic statement, stocks are selling for 35 times earnings.

I think their future returns are going to be lower than when they're selling at 10 times earnings, but that doesn't tell you what to do tomorrow. >> Well, let me make sure you got that whole thing. It says for any length of time. >> Yeah. >> You're picking out particular- >> Yeah, yeah, for any length, yeah.

In other words, I would say for any period that's less than 15 or 20 years, you can't do it. >> Right, okay, so that was the reason I said no, because I don't consider it. >> Okay, what is the question again, can you read it? >> Is it reasonable to assume that no one can accurately predict how any asset class will perform for any length of time in the future?

So that would be short term, medium term, long term. >> Is it reasonable to predict that no one can accurately predict. >> Is it reasonable to assume- >> Assume. >> Assume no one can predict. >> Basically, any asset class will perform- >> Any asset class. >> Any length of time, or any length of time would be one day into infinity.

>> I don't know. >> >> I think maybe a better way to rephrase that question is maybe you can't predict it, but what assumptions do you use in your financial planning process? And for that, I think going back to what Bill Bernstein said, and Vanguard alluded to last night, was the best predictor of interest rates or fixed income is what they're yielding now, I think.

And on the equity side, what Bill was saying was that, and I think everyone's saying maybe use 6 to 8% based on current valuations, dividend being a little bit less. And use that as a starting point in your financial planning process, realizing that you may be off. But you don't find out that if you're off 20 years from now and start making adjustments, you make adjustments along the way based on those assumptions.

>> Can I answer the question now that I have clarification? >> Sure, go for it. >> I made predictions out 30 years, and I have actually sort of made predictions out 10 years, but if they're my expectations of return, I don't think that they should be used for, 30 year out, the expected returns of asset classes are based on inherent risks of the asset class relative to each other.

So you've already saved asset classes like short term tips are going to give you a very low return because it's the safest in every aspect. But as you go out further and further, you start taking more and more risk. The riskiness of the asset class volatility, if you were part of that, you wouldn't invest in equities if they weren't riskier.

And if you wouldn't invest in equities, if you weren't expecting a higher rate of return because they're risky. So you can make predictions in the very long run that stocks should outperform bonds, that bonds should outperform cash. I mean, these are the types of predictions you can make. I don't know how accurately you can make them, but I think you can make them.

>> How about a 30-year zero coupon >> Say again? >> Well, you know exactly what it was. Exactly, thank you. >> >> Well, at this time I'd like to thank everyone for attending. I have a few announcements to make, and some recognitions. I want to remind everyone that the video will be available that Rich is making, it will be available online in the segments.

Is that correct, Rich? >> Right. >> And either Rich or I will make a post on the forum when they are available to alert you to that. After it's all done, are we gonna do a DVD this year, or are we just gonna go online? Everything will be online this year, so you won't even have to order the DVD.

At this time, I'd like to recognize the people who really make this event work. I've got an all-star team, and believe me, couldn't pull it off without them. There's a million and one details that go on in putting this event on, and we actually work for over a year to do it.

We're already starting to plan on next year's event. So I would like to call up my all-star staff, Ed Rager, Patty Rager, Paul and Linda Berenson. >> >> Mel and Kathy Turner. >> >> When I was in the business world, when I delegated something, you still had to worry about whether people were gonna be executed or not, you had to follow up.

But with these people here, when I delegate, I just cross off the list, because these people are great, you know it's gonna be done. We started a tradition last year of trying to give pins out that matched the gift that we gave to Jack. This year, we gave Jack a Independence Hall, and we have the matching pins that go with Independence Hall.

And I'd like to give one to each of the staff. >> >> We have one more important part of the program, there's a lot of organizations that form. Very few of them succeed, and even fewer of them flourish, like the Bogleheads in particular. It's done due to not only hard work, but leadership.

And they have exceptional people that make it all happen. And the spouses put up with the insanity to make it all happen. But the glue that holds the flourishing groups together is due to leaders that you wanna follow. And in our organization, we have one of those leaders that's here up on the podium.

Mel gives his talent and all of his energy to keep this going. So I think we should all give a thank you to my fellow Marine, Mel Lindauer. >> >> We have a couple of other people that we wanna recognize, Lady Geeks, Sue. >> >> Is Ed Tower here?

Okay, Ed, who put on the, who worked on the. >> >> And I'd also like to say that we have a group of volunteers every year who man the doors, work the registration tables, and do a lot of other chores. Would all the volunteers please stand up and be recognized?

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