Bogleheads® Conference 2012 - Panel of Experts II

00:00:00.000 | [BLANK_AUDIO]

00:00:08.340 | Expert panel members come on their own dime, they don't get comped,

00:00:13.220 | they pay just like the zinc as you do.

00:00:16.100 | And one little perk that I normally allow them is to tell us what's exciting,

00:00:24.300 | what's going on in their neck of the woods or in what they're doing.

00:00:29.420 | So we're going to go down to the table and Christine,

00:00:33.380 | anything exciting going on in Morningstar that you'd like to tell the crowd about?

00:00:38.060 | Or do you have any books in the works?

00:00:40.500 | >> No books for me.

00:00:42.260 | I would say one concept that I've been excited about,

00:00:45.540 | the more I've talked to Morningstar.com users about it,

00:00:48.380 | is this idea of bucketed portfolios in retirement.

00:00:51.380 | I've done a couple model portfolios recently.

00:00:54.860 | And the concept is that you set aside liquid assets to fund near term cash needs,

00:00:59.780 | intermediate term assets to fund intermediate term needs.

00:01:03.180 | And then we have the rest of the portfolio stocks.

00:01:05.620 | And for a lot of people, the end portfolio ends up looking a lot like what

00:01:10.060 | they would have had in the first place if they were just using a balanced approach.

00:01:13.140 | But the bucketing concept, I think,

00:01:14.980 | helps people visualize what an end retirement portfolio should look like.

00:01:19.300 | So I think it's helpful from that standpoint.

00:01:21.860 | So I've been working on that, interviewing a lot of great people at Vanguard yesterday,

00:01:28.180 | and a lot of great people from this conference yesterday morning.

00:01:31.060 | So those videos will roll out on our website over the next month or so.

00:01:34.860 | You should keep your eyes peeled for that.

00:01:37.220 | And then personally, I'm going on a six week sabbatical starting next week.

00:01:42.460 | And so I'm excited about that, going to spend some time in Argentina and

00:01:47.420 | spend some time with family and projects and so forth.

00:01:50.140 | So it's a nice perk that we have at Morningstar, and

00:01:52.300 | I'll be taking advantage of it soon.

00:01:54.340 | >> And Bill, I know you ventured into a new field, electronic publishing.

00:01:59.460 | >> Yeah, with some help from Mike.

00:02:01.660 | But what I'm really doing is traveling to Burma this winter and

00:02:06.380 | expecting my first grandchild.

00:02:08.020 | And sure, I'm doing some writing, I'm always doing some writing.

00:02:11.260 | But I've got a new book that's coming out, I'm on alternatives.

00:02:14.300 | But if you listen carefully, especially if you listen to the interview,

00:02:17.300 | you're coming out of the Morningstar site, you don't need to buy it.

00:02:20.380 | >> [LAUGH]

00:02:26.380 | >> All right, I got Bill Bernstein, B, and one thing, I already have a grandson.

00:02:31.900 | >> [APPLAUSE]

00:02:34.060 | >> Nine years ago,

00:02:35.020 | never in my life have I been able to say that.

00:02:37.380 | >> [LAUGH]

00:02:39.280 | >> But that's been great, yeah,

00:02:40.780 | first grandchild.

00:02:41.780 | But yeah, I'm starting a new book.

00:02:44.580 | And it's something I wrote about on the forum that I thought needs to be

00:02:49.740 | expanded on, and other than that, I'm just working on my blog.

00:02:54.380 | And things are good.

00:02:58.140 | >> No new projects in the work for me, I just wrapped one up.

00:03:01.060 | It's a book on social security planning.

00:03:03.700 | Heard from a lot of you about that.

00:03:05.420 | We already downloaded it, some of you have read it already.

00:03:08.540 | That's about it, really, just working on the blog.

00:03:11.980 | >> But I will have to say that I downloaded Mike's.

00:03:16.100 | Mike does a whole series of books in 100 pages or less.

00:03:20.780 | And his latest one was the Social Security in 100 pages or less.

00:03:25.300 | I downloaded it and read it, and let me tell you,

00:03:29.220 | Mike took a very complicated subject and made it very simple.

00:03:35.780 | And as an author, I can tell you that it's very difficult to do, and great job.

00:03:41.940 | Thank you very much.

00:03:43.180 | >> [APPLAUSE]

00:03:51.060 | >> I don't have a whole lot more bandwidth.

00:03:54.180 | I've started writing for AARP Magazine, and I think that is incredibly important,

00:03:58.420 | because no one gets abused more than seniors.

00:04:03.100 | I think if I had a pipe dream, and it's probably just a pipe dream,

00:04:06.780 | is to harness Bill and work on a social media game that would actually

00:04:15.340 | teach the right thing about being a competitor to the stock market game,

00:04:19.260 | which teaches gambling and speculation.

00:04:21.380 | And of course, it's sponsored by, guess who, Merrill Lynch, Morgan Stanley Smith.

00:04:27.940 | Barney, that is something that I would love to do.

00:04:32.860 | >> What he really does for a living is to do his best to piss off

00:04:36.540 | the financial services industry.

00:04:38.380 | >> [LAUGH]

00:04:39.660 | >> And I'm good at what I do.

00:04:40.900 | >> [LAUGH]

00:04:42.780 | >> [APPLAUSE]

00:04:50.380 | >> Well, what am I doing?

00:04:53.100 | >> How's your golf game?

00:04:54.260 | >> Gosh, I'm embarrassed to say that my handicap has gone up about two or

00:04:58.420 | three strokes over the last year, but there's a good reason for that,

00:05:00.940 | which I won't get into.

00:05:02.180 | >> Four foot putts.

00:05:03.140 | >> Yeah, four foot putts.

00:05:04.500 | >> [LAUGH]

00:05:06.660 | >> I'm kinda doing more of the same.

00:05:08.620 | I do have the second copy house book in the works.

00:05:12.540 | I've been saying that for the last two or three years.

00:05:14.700 | Where's Bill Faloon?

00:05:15.980 | Bill Faloon, would you stand up please?

00:05:18.660 | I guess he's not here, but he's been a big advocate of the Global Heads to John Wiley.

00:05:24.220 | But basically what I'm doing is continuing to spend a lot of time at

00:05:31.100 | SoundMark putting in systems and structures to continue to

00:05:35.900 | accentuate the Global Head philosophy with the folks we connect with.

00:05:42.540 | I really, Alan, I respect you're getting under the skin of the financial industry

00:05:47.140 | because they need to have someone kind of prodding them.

00:05:50.980 | And again, the need is just phenomenal.

00:05:57.980 | And as I said before, I would encourage all of you to continue to

00:06:03.140 | share the philosophy with others.

00:06:05.140 | A lot of people ask, well gosh, how do I best articulate or share it?

00:06:09.940 | Why doesn't a person embrace it like I do?

00:06:12.660 | And what I have found is that people need to hear the philosophy

00:06:18.740 | about 20 or 30 times before they get it.

00:06:22.540 | That's been my experience.

00:06:24.900 | >> Did anybody read the Global Head site about what happened on Jeopardy a couple

00:06:29.460 | weeks ago?

00:06:31.180 | What happened?

00:06:33.540 | Stand up and tell us what happened.

00:06:35.740 | >> Well, they couldn't, they gave them the answer and then-

00:06:38.480 | >> Who gave them the answer?

00:06:40.140 | >> Warren.

00:06:41.180 | >> Warren Buffett.

00:06:42.140 | >> Yeah, Warren Buffett gave the answer and

00:06:44.260 | they couldn't come up with the index funds to get a proper response.

00:06:47.860 | I have no idea what the answer was, so you've got a few questions.

00:06:51.220 | >> The question is, when does the index start?

00:06:53.420 | >> Okay. >> Yeah, the answer is,

00:06:55.380 | what is a low-cost investment that mimics an S&P 500, blah, blah, blah, or

00:07:00.500 | something, isn't that what the answer was?

00:07:02.100 | >> Yeah, and they spelled it out pretty clearly.

00:07:03.340 | >> They spelled it out clearly, and not one person could answer index funds.

00:07:08.580 | And just index funds is just like second nature, but

00:07:11.340 | to the average intelligent investor, it's like, they don't know what an index fund

00:07:15.180 | is, so you have to continue to articulate it time and time again, keep it simple.

00:07:19.700 | Again, Lock the Yank Network, profoundly positive impact on people's lives.

00:07:23.460 | So Mel said that because you wound up this part with me,

00:07:25.860 | I get to ask a question.

00:07:27.780 | So the question for the panelists is, when you're working with folks,

00:07:32.580 | how do you define risk?

00:07:33.980 | When you're working with clients, this whole thing of risk and

00:07:41.940 | standard deviation, and blah, blah, blah, how do you articulate risk to a human being?

00:07:48.460 | Am I reaching your financial goals?

00:07:49.860 | >> [INAUDIBLE] >> Bill, Mike, Christine?

00:07:54.860 | >> I tend to talk about it differently whether I'm talking with somebody who's

00:07:59.100 | in the accumulation stage or the distribution stage.

00:08:01.260 | In the accumulation stage, I'm mostly talking about just uncertainty of returns,

00:08:06.940 | volatility, probability of the portfolio is going to go down by x amount,

00:08:11.100 | things of that nature.

00:08:12.340 | In the distribution stage, we're talking about percentage of spending goals that go

00:08:17.380 | unmet, for instance.

00:08:18.740 | Sometimes that's expressed as probability of running out of money.

00:08:21.860 | Sometimes it's, probability of running out of money doesn't cover it,

00:08:26.300 | because sometimes it's different if you run out of money in the fifth year

00:08:28.820 | of retirement, as opposed to the 25th year of retirement.

00:08:31.420 | So there are other metrics, but it depends who I'm talking to, I think.

00:08:34.660 | >> Yeah, we deal with that problem by not accepting clients who don't understand

00:08:38.700 | what a standard deviation is.

00:08:40.100 | >> [LAUGH] >> That's why he has three clients and

00:08:44.540 | they all have $75,000.

00:08:46.140 | >> [LAUGH] >> I like Rick and

00:08:49.580 | Mike's definition, and I do think that risk tolerance has been given way too

00:08:54.780 | much play in terms of investors' financial decision making.

00:08:58.740 | In a lot of ways, I feel like it's saying, okay, you're going to give your emotions

00:09:02.460 | free reign to help determine this financial plan.

00:09:06.660 | And I think that's a terrible idea.

00:09:08.300 | So I like risk framed in the realm of risk capacity.

00:09:13.620 | How much risk can you actually withstand without altering

00:09:18.340 | the goals that you had set out for yourself?

00:09:23.220 | >> Instead of working in percentages, I try to work in dollars.

00:09:27.220 | Because I think people understand dollars a lot more than percentages.

00:09:30.900 | So if someone has a half a million dollar portfolio and

00:09:34.860 | they're gonna go 50/50, they got 250 in equities.

00:09:39.420 | And I ask if they can stand to lose 125,000, not can you afford to lose 50%.

00:09:46.340 | And when you put it in dollars, people go, my god, no.

00:09:49.780 | >> [LAUGH] >> That's what they really need to do to

00:09:53.100 | get to their own comfort level, which is when they get to that sleep night, and

00:09:57.900 | that's the proper asset allocation for them.

00:09:59.940 | >> Well, what is your answer?

00:10:03.300 | >> Well, my answer is a compilation of everyone.

00:10:05.420 | I really like what Mel said.

00:10:06.620 | So if somebody's got a million dollar portfolio, they've got 50% in bonds and

00:10:10.100 | 50% in stocks, we look them in the eye and say, hey, you're 50%,

00:10:14.180 | your half a million dollar portfolio is gonna drop 25 to 40%.

00:10:19.260 | And that is what, how much?

00:10:20.660 | I can't do the math, but I feel it's gonna, quarter of a million dollars, maybe?

00:10:24.140 | So we say your portfolio will drop $200,000 in the next four years.

00:10:28.780 | How you feel about that?

00:10:30.540 | And it puts it in terms that they can understand.

00:10:33.460 | And but what's more important, I love Charles Ellis' description of risk.

00:10:40.540 | In his book, what's his book, Winning the Loser's Game, or something like that?

00:10:44.780 | He says, risk is the chance that you will not have the money

00:10:49.900 | to pay a bill when it comes due, and I just love that.

00:10:55.740 | You can talk about risk and standard deviation, but

00:10:58.380 | I love Charles Ellis' definition of risk.

00:11:00.460 | And if you can show people that, yeah, interest rates are at 1%,

00:11:04.220 | you're not getting anything on your fixed income investments.

00:11:07.140 | But if you can show them that even in a decline of 20 to 40%,

00:11:11.460 | they're still gonna be able to pay their bills for the next ten years.

00:11:15.580 | They think, you know what,

00:11:16.780 | it doesn't matter what the stock market does over the next two years.

00:11:19.340 | >> Yeah, I mean, that's the concept that I try to continually get across when I

00:11:24.580 | talk to any kind of audience, from retail investors all the way up to people

00:11:31.740 | at the university level, is to tell them that the real definition of risk is not

00:11:36.900 | standard deviation or volatility, and I make a point by showing two slides.

00:11:42.180 | One is the typical sort of thing you pick off the Internet from crybaby traders.

00:11:46.340 | >> [LAUGH] >> You've all seen the pictures and

00:11:49.020 | the thots in suits standing next to monitors looking like they've just had

00:11:52.500 | their donut squeezed. >> [LAUGH]

00:11:54.820 | >> And then that's not risk, all right?

00:11:57.420 | Cuz those guys will still be wearing $2,000 suits the next day,

00:12:00.460 | they will still be dining at the Russian tea house the next day.

00:12:03.900 | The real, then the next slide that I show is a picture of a guy pushing

00:12:08.140 | a shopping cart under an underpass in the rain, I say that's risk.

00:12:11.940 | >> I tend to think about it in standard deviation probabilities, but

00:12:18.180 | I explain it to my clients in the likelihood that they'll live under a bridge.

00:12:23.740 | I try to make it as emotional as possible.

00:12:26.300 | I tell them, I can ask them the question how they would feel if their portfolio

00:12:30.180 | lost 30%, but I explain that I can't really simulate the pain they'd be feeling

00:12:35.500 | without coming across the table and kicking them in the gut a few times.

00:12:40.100 | Even though it happened not too long ago, our memories are very short.

00:12:43.220 | >> Can I just add one more thing to this element of risk?

00:12:47.260 | So from my perspective as a portfolio manager,

00:12:52.860 | the risk to a client is not maintaining their investment plan.

00:13:01.340 | That's the risk.

00:13:02.780 | Because if they can stick with the investment plan,

00:13:05.220 | the probability that they're gonna reach their financial goals is quite high.

00:13:09.940 | So the real risk is not having a plan, and

00:13:13.940 | then if they do have a plan, not maintaining the plan.

00:13:16.980 | And then a lot of people with standard deviation,

00:13:19.660 | the amount of money that you might have lost in your portfolio all boils into

00:13:24.220 | this idea that you're gonna do the wrong thing at the wrong time.

00:13:27.340 | And that's the risk that we face as advisors to individuals.

00:13:34.260 | >> Hey, Robert from Long Beach, stand up and

00:13:36.300 | tell us what the leading edge analysis of risk is.

00:13:39.260 | >> [LAUGH] >> This is untested theory.

00:13:43.140 | >> Stand up.

00:13:45.060 | >> [INAUDIBLE]

00:13:55.060 | >> That's interesting.

00:14:18.500 | >> We're all very brave in a bull market.

00:14:20.580 | >> [LAUGH] >> But your real risk tolerance,

00:14:24.220 | you find it in a bear market.

00:14:26.940 | And so it's what you're talking about is methodologies to realize exactly what

00:14:32.340 | your risk tolerance really is, not what you say it is.

00:14:35.380 | Because usually there are two different things.

00:14:39.380 | >> Did you get your question answered?

00:14:43.900 | Okay, I found out that I had mentioned something, and

00:14:47.780 | people asked me to explain it.

00:14:49.420 | I thought that most people knew about it, but apparently not.

00:14:53.180 | When I mentioned I-bonds and the ability to get 10,000 per person.

00:14:59.480 | But then I mentioned that there was a back door to get paper I-bonds of $5,000

00:15:04.580 | if you overpay your tax return as part of your tax or all of your tax refund.

00:15:09.820 | And the way it works is you have to intentionally overpay your taxes by $5,000.

00:15:17.460 | When you file your tax return, you can elect to have your entire return or

00:15:24.420 | part of your return in I-bonds, issued in I-bonds.

00:15:29.460 | And any surplus would go in your bank.

00:15:34.060 | You can split it any way you want.

00:15:36.100 | But to get the $5,000 in I-bonds, you have to overpay your taxes.

00:15:41.740 | And some people do it by additional withdrawing,

00:15:45.780 | some people do it by estimated tax.

00:15:48.660 | But the bottom line is you overpay your tax, and you can get your $5,000,

00:15:53.980 | up to $5,000, as opposed to the individual I-bonds where it's 5,000 or

00:15:59.460 | 10,000 per Social Security number.

00:16:02.020 | With couples, you still can only get $5,000.

00:16:05.860 | I wouldn't guarantee that this is gonna go on, it's been in place.

00:16:11.340 | They honored it last year, and there's nothing out that they killed it for

00:16:17.420 | this year, but eventually, their objective obviously is to get rid of paper I-bonds.

00:16:23.620 | So I would expect at some point in the future that that's not gonna be an option.

00:16:29.060 | But at least that's the way it works, overpay your taxes, and

00:16:33.500 | fill out the paperwork to get part of your refund, part or

00:16:37.820 | all of your refund, paper I-bonds, up to $5,000.

00:16:42.780 | So let's get on to another question, here's a question for Rick Perry.

00:16:48.100 | Rick, you wrote a blog on the three P's to investment success,

00:16:53.300 | philosophy, strategy, and discipline.

00:16:56.300 | Can you expand on these ideas?

00:17:01.140 | >> Three P's to investment success, sounds like a book, which it will be.

00:17:07.220 | But anyway, okay, here's, I'm thinking a lot about the philosophy

00:17:12.980 | of what we do as a group, and then what we do on the board.

00:17:18.300 | And that's where all this came from.

00:17:20.380 | Cuz we have had some severe discussions about things that don't matter much.

00:17:26.900 | >> [LAUGH] >> We really can get into the minutiae.

00:17:30.060 | And so, in stepping back from it all, I'm saying, hey, wait a minute,

00:17:32.700 | we're all mogul heads.

00:17:34.140 | We're all sitting in this room.

00:17:35.940 | So at the very first level, I started thinking, we all in this room and

00:17:41.620 | everyone who is a member of the board, for the most part, and

00:17:44.440 | a lot of other people who are not, have the same philosophy, do we not?

00:17:48.420 | And we have a list of the ten beliefs, and I didn't even know that list existed.

00:17:52.740 | But we all have the same philosophy.

00:17:54.820 | But there are perhaps 200 people in this room, and I would say that there are

00:17:59.660 | probably 200 different strategies for implementing that philosophy.

00:18:05.860 | High bonds, municipal bonds, lateral CDs.

00:18:09.580 | So at the strategy level,

00:18:12.180 | we all have different ideas of how we want to implement the philosophy.

00:18:16.620 | And you know what?

00:18:17.420 | I can't say that my idea is any better than his idea, his idea.

00:18:22.620 | Anybody's idea out there?

00:18:24.980 | Because we won't know that until 20 years down the road.

00:18:27.620 | We have the best strategy.

00:18:29.140 | So strategy can differ on the board.

00:18:31.860 | And most of the arguments that we have on the board are not about philosophy at all.

00:18:36.380 | They're about strategy, and sometimes very minutiae strategy,

00:18:39.700 | whether we should have gold, or whether we should have commodities, or

00:18:42.100 | whether we should have high-level bonds, or whether we should do the Modi model.

00:18:46.420 | Whatever.

00:18:47.180 | So the second level of this is strategy, and we'll argue about that all day long.

00:18:50.860 | The point that I try to bring up on the board once in a while is in order not to

00:18:54.620 | confuse new people who are coming onto the board, or

00:18:58.820 | people who are just getting started, is don't confuse strategy with philosophy.

00:19:05.460 | Don't confuse strategy.

00:19:08.020 | This is a discussion about this, we all agree on that.

00:19:13.260 | Now the last part of the three keys to investment success is once you have

00:19:16.540 | the philosophy, once you have your strategy, whatever it is you think you need,

00:19:21.100 | the last part is discipline.

00:19:22.660 | And we do talk a lot about discipline.

00:19:24.860 | We were talking earlier about, and I said,

00:19:27.020 | the risk is not meeting your financial objectives, it's a discipline.

00:19:31.580 | So now we have discussions about how to maintain discipline.

00:19:35.060 | You can use some sort of a rebalancing methodology on your birthday.

00:19:39.580 | You can hire an advisor, you can use a life strategy fund of some sort.

00:19:44.620 | I mean, that maintains the discipline of the strategy, which fits the philosophy.

00:19:51.780 | If you don't have the discipline, if the discipline starts to break down,

00:19:56.260 | the strategy breaks down.

00:19:58.140 | And if the strategy starts breaking down, now you're susceptible to the next

00:20:02.980 | Merrill Lynch guy that calls you on the phone,

00:20:05.040 | which means the philosophy can also start to break down.

00:20:08.220 | So it goes down this way, and then you have to maintain the discipline or

00:20:12.460 | it starts corroding back up the other way.

00:20:15.340 | And that's what my whole idea is about what we do.

00:20:18.900 | >> Was that insightful?

00:20:22.640 | >> Yeah.

00:20:23.160 | >> [APPLAUSE]

00:20:32.060 | >> Okay, we have a question for Bill Schultes from Sonny.

00:20:36.220 | He says, the coffeehouse portfolio received a lot of attention and

00:20:40.980 | popularity during the last decade.

00:20:43.940 | Part of which is at least due to the outperformance of small value and

00:20:48.700 | other tilts over the market, or S&P 500.

00:20:52.740 | If reversion to the mean happens, can the coffeehouse portfolio and

00:20:57.380 | the coffeehouse underperform, how can we keep the coffeehouse message popular?

00:21:03.500 | >> Wow, that's a great question, Sonny.

00:21:07.500 | And I think I would have liked to say that I planted that question,

00:21:11.960 | because it encompasses a lot of what is discussed on the board.

00:21:16.420 | First, I think it's important for me to share with anyone who wants to listen.

00:21:22.980 | That in the book, I said that the simplest, best approach is like

00:21:28.220 | a three-fund portfolio, total domestic, total international, total bond.

00:21:32.660 | I said, if you want to fine tune an already good thing, here's a way to do it.

00:21:37.220 | And that was kind of how I started articulating that coffeehouse philosophy

00:21:41.780 | in my weekly column in 2000, and it just kind of took on a life of its own.

00:21:47.100 | Paul Farrell hooked it up on the Lazy Portfolios, and I have consistently said

00:21:51.940 | that there are, as Rick was saying, there's countless different ways to build

00:21:56.420 | a passive portfolio, you can do it with actively managed funds.

00:22:01.020 | But it was a stroke of luck that from 2000 to 2010, value in small and

00:22:07.340 | international outperformed large cap stocks.

00:22:10.900 | So the question is, what is the purpose of diversification in these different

00:22:14.580 | components of the market?

00:22:15.700 | Well, I loved what Joel Dixon said last night about that whole issue.

00:22:21.820 | What he said is that basically, he does not want to have,

00:22:27.340 | I mean, clearly over a ten year period, these different components of the market

00:22:31.460 | can perform dissimilar to each other, and case in point, 2000 to 2010.

00:22:37.540 | Last night, Joel Dixon said, he doesn't want to be in that underperforming sector

00:22:42.820 | over the next ten years, and that's kind of the way that I look at it myself.

00:22:47.220 | If I'm gonna buy a total stock market index fund,

00:22:50.540 | what's important is that I stay the course.

00:22:53.020 | And I accept the fact that from 2000 to 2010, it's gonna underperform.

00:22:59.260 | If I have a more diversified portfolio that's tilted away from a total stock

00:23:03.460 | market fund, and small, and value, and international outperform the S&P 500,

00:23:08.460 | which it very well may do, I think it has over the last three or four years.

00:23:12.460 | The important thing is to stay the course and not to chase performance

00:23:16.580 | when these different components of the market underperform each other.

00:23:20.180 | Because as Rick was saying, it's the philosophy that counts.

00:23:23.700 | And if you can't adhere to the philosophy, everything else breaks down.

00:23:28.540 | And so the philosophy, in my opinion, is to embrace a low-cost portfolio

00:23:34.180 | that broadly represents where you're at in your life.

00:23:37.780 | And then what it does is it allows you to focus on your financial planning issues,

00:23:42.500 | which for 99% of the people, including me, is I need to save more than I spend.

00:23:46.620 | Does that answer your question, Sonny?

00:23:48.940 | >> Can you tell us the subtitle to your book?

00:23:53.220 | >> [LAUGH] How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

00:23:58.780 | >> I think that's more important than the portfolio.

00:24:01.140 | >> Yeah, and you know, I have to say that in connecting with everyone here,

00:24:05.780 | where's Molly?

00:24:07.100 | Molly, are you here?

00:24:08.020 | You know, here's a woman that ran her, what, her first marathon when,

00:24:12.780 | how old were you?

00:24:13.380 | >> 65.

00:24:14.140 | >> 65 years old.

00:24:15.380 | >> [APPLAUSE]

00:24:21.140 | >> She's involved with an entity and

00:24:24.140 | a program that I have been involved with.

00:24:26.900 | And who, where's Bill Davidson?

00:24:28.420 | Stand up, Bill.

00:24:31.020 | Is he here?

00:24:31.860 | He's not here.

00:24:32.780 | He's involved also.

00:24:33.820 | She's involved with hospice.

00:24:36.300 | To me, the biggest, well, I don't wanna get into that.

00:24:38.260 | But, you know, she's, it gives her the authority to know that she's doing

00:24:42.540 | the right thing with her portfolio so she can pursue other things in her life.

00:24:46.180 | And, you know, I travel all across the nation not to talk about strategy but

00:24:50.980 | to connect with people who are really getting on with their lives.

00:24:53.420 | It's so inspirational.

00:24:54.580 | Just, you know, my hat is off to all of you for coming here.

00:24:57.420 | Where's Calvin?

00:24:58.020 | All the way from Taiwan.

00:24:59.100 | He left.

00:25:01.180 | >> [LAUGH]

00:25:04.060 | >> What's that?

00:25:05.460 | >> Not on the plate.

00:25:06.260 | >> [LAUGH]

00:25:08.460 | >> So thanks, Mike, for bringing that up.

00:25:11.260 | >> Yeah, I mean, you know, just to, you know, add a tag to all of that.

00:25:15.140 | You know, if you've invested with any of the kinds of portfolios that we

00:25:17.740 | recommend, the coffee house portfolio, the material portfolios that Rick and

00:25:21.780 | I recommend, you've been through hell and back the past several years.

00:25:26.220 | And you know, you know, it's hard, you know, I suppose we couldn't see times that

00:25:30.580 | are even worse than that, but you probably haven't missed a turn to stick with it.

00:25:35.140 | We could probably fill ten rooms like this with enthusiasts of

00:25:39.100 | the Harry Brown portfolio, which is one quarter gold, long bonds, stocks, and bills.

00:25:45.740 | And, and these are people who've had nothing but pizza and

00:25:49.660 | beer for the past 15 years.

00:25:51.940 | And there are a lot of enthusiasts, Harry Brown enthusiasts out there, and

00:25:58.100 | they're going to get, you know, get their trial by fire in the next five or

00:26:04.260 | ten years, I'm pretty sure.

00:26:05.460 | It'll be very interesting to see what happens to that group.

00:26:07.940 | By the way, I like the Harry Brown portfolio.

00:26:09.620 | I think it's a valid way to manage assets in the long term.

00:26:12.860 | It's not for me and probably not for any of the people in this room.

00:26:18.740 | But, but, but, you know, those are the people I'd really worry about.

00:26:23.700 | >> I'm not a fan either of the Harry Brown, but again,

00:26:26.180 | it falls under the vocal head philosophy because there's a passive strategy.

00:26:29.860 | And they are using low cost index funds.

00:26:32.180 | I'm not a fan of it either, but again, it gets down to our individual preference.

00:26:38.460 | >> Okay, we have a, we had a question on, somebody asked me to elaborate on this.

00:26:44.540 | Taylor's three fund portfolio, which I think was mentioned by several people.

00:26:50.700 | Total stock, total bond, and total international.

00:26:54.660 | Taylor later revised it when TIPS came out to add TIPS.

00:26:59.500 | The question was, first of all, can you explain to a layperson what TIPS are?

00:27:06.460 | And would you add that to the total bond,

00:27:11.420 | the portfolio with total bond to be part of your bond allocation?

00:27:16.820 | >> Well, TIPS are just inflation adjusted bonds.

00:27:20.220 | They promise an after inflation return rather than a nominal or before inflation return.

00:27:26.260 | And as far as whether I would add them to a portfolio,

00:27:29.420 | I think it depends on personal circumstances, specifically how exposed are you to inflation.

00:27:35.500 | Retirees tend to have more inflation risk than somebody whose overall economic

00:27:40.660 | well-being is primarily dependent upon a job.

00:27:43.680 | Young people who, most of their economic well-being is just their future earnings,

00:27:48.220 | which hopefully will keep up with inflation.

00:27:51.020 | And that's different from if you have a financial portfolio and

00:27:54.460 | you really are facing inflation risk.

00:27:56.060 | And I think then that's when TIPS become significantly more helpful.

00:28:00.260 | >> I would, go ahead, please.

00:28:01.900 | >> I'm just gonna clarify that TIPS are a hedge against unanticipated inflation.

00:28:07.780 | Because the inflation rate is already embedded into all the asset classes,

00:28:11.860 | including treasury bonds, not bills, but right now.

00:28:14.780 | I mean, the Fed is manipulating things a little bit in treasuries, but

00:28:18.340 | it's already embedded in stock prices, real estate, rents, all of this stuff.

00:28:22.360 | So what they are are a hedge against an unanticipated jump in the inflation rate.

00:28:27.460 | And it has to be a jump, because if inflation goes into deflation,

00:28:30.860 | then you're actually gonna do worse with TIPS than you are with a nominal trade.

00:28:35.460 | >> Just to pick up on Mike's comments.

00:28:37.220 | I know sometimes people are looking for

00:28:39.060 | guidelines about how much to invest in TIPS.

00:28:41.260 | And I completely agree that it's very individual specific.

00:28:44.100 | I talked to John Amarix at Vanguard about this issue.

00:28:46.700 | We were talking about their target date products specifically.

00:28:49.820 | And those products do not include TIPS until one reaches roughly the age of 50.

00:28:55.940 | And that syncs up with the work that my colleagues at Ibbotson,

00:29:00.620 | which is under the Morningstar umbrella, do.

00:29:02.540 | Where they really don't add TIPS to the portfolio for

00:29:05.380 | people who are very much in accumulation mode.

00:29:08.140 | But do start to add them in for people approaching retirement.

00:29:12.140 | Ibbotson's recommended allocations to TIPS as a percentage of the fixed income

00:29:16.380 | portfolio typically run in the neighborhood of 20 to 30% of the bond

00:29:21.060 | portfolio in TIPS.

00:29:23.420 | And I think John Amarix told me yesterday that the target date funds

00:29:27.180 | include about 20% of their overall allocations in TIPS.

00:29:31.900 | So those are just some guidelines.

00:29:33.580 | I think most of us, I don't know,

00:29:36.060 | might agree that TIPS aren't particularly attractive at this juncture.

00:29:40.460 | And so I would say if you're building a TIPS position,

00:29:43.700 | my best guidance would be to do so gradually over a period of years,

00:29:48.100 | rather than adding a lot right now.

00:29:50.500 | >> I'm not wildly enthusiastic about TIPS in an accumulation phase portfolio.

00:29:55.300 | But where I think they're the most useful is in immunizing your future real

00:29:59.420 | living expenses.

00:30:01.140 | So a person, for example, who is 60 years old might purchase what I call

00:30:06.820 | a full body, it's like full bonty except that it's TIPS,

00:30:12.740 | instead of the absence of clothes.

00:30:14.580 | >> [LAUGH] >> What a full body is,

00:30:18.420 | is a ladder of TIPS in each and every year that immunizes you out to about 100.

00:30:24.700 | Obviously, we'll have to double up in the first ten years because there's no 40

00:30:28.060 | year TIPS, and then we'll let over in ten years and buy the 30 year TIPS.

00:30:32.900 | And that absolutely immunizes all of your real living expenses if you save 40 times

00:30:38.540 | your living expenses, which I suspect more than a few people in this room have done.

00:30:43.820 | They're not particularly attractive right now, but

00:30:45.580 | it's something to keep an eye out for.

00:30:47.260 | And maybe you won't want to build the full body, but you can build part of it.

00:30:52.460 | And it's a very useful thing, it takes the place basically of an amniotic.

00:30:57.300 | >> I like TIPS, I own TIPS, and Bill, be interested to see if you back me up on this.

00:31:03.420 | I'll confess I'm a bit of an active investor when it comes to TIPS.

00:31:08.020 | TIPS are the safest investment around, US Treasury backed, no inflation risk.

00:31:14.820 | In 2008, when market stocks tanked, people shouldn't run to TIPS,

00:31:20.500 | but instead they were yielding well over 3.5%.

00:31:24.220 | It was a very good investment that, it's much less good now,

00:31:30.060 | in my opinion, with CPIU minus, what, about 0.7, 0.8%?

00:31:36.380 | >> I was very attracted to TIPS when they topped out over 4% back in the early,

00:31:41.860 | late 1990s.

00:31:44.260 | I'm not terribly enthusiastic about them right now either.

00:31:48.860 | You've got a negative yield on the curve all the way out to about 20 years.

00:31:53.100 | It's pretty ridiculous.

00:31:54.780 | >> Yeah, but people need to understand that's a negative real yield.

00:31:57.500 | >> Negative real yield, yeah.

00:31:58.980 | >> As opposed to nominal yield that you get on the record.

00:32:01.700 | And people look at, don't understand that their CD,

00:32:06.180 | which is yielding 0.5, has a built-in negative

00:32:10.540 | real return of maybe 2% or something.

00:32:15.380 | So they compare, and think the CD is better, when in fact,

00:32:20.980 | the real return on a negative item, or

00:32:24.560 | tip, is still better than the negative real return that they're gonna get on their CD.

00:32:29.980 | >> What Alan is referring to is something that Larry Sweater has explicitly

00:32:33.580 | written about, which is buying low and selling high, we've all heard about that.

00:32:39.040 | >> [LAUGH] >> And I will admit to falling off

00:32:44.140 | the boat with one wagon in that regard as well.

00:32:47.660 | It's a fun game to play, but that game is long.

00:32:49.620 | It's over, maybe it'll start again.

00:32:53.980 | >> May I ask a question on tips?

00:32:55.720 | >> Say again, please.

00:32:56.380 | >> May I ask a question on tips?

00:32:57.620 | >> Go ahead.

00:32:58.140 | >> Does Banff Yard have a, it was announced they had a short fund for tips now?

00:33:01.620 | >> Yeah, it now exists.

00:33:02.380 | >> Could you address the advantages of short fund versus the long fund?

00:33:06.700 | >> Well, one thing, and I'd like to ask Bill this, or anybody on the panel or

00:33:10.500 | in the audience, is that the tips have,

00:33:14.100 | the longer tips have had significant price appreciation.

00:33:18.100 | And so, my question is, if rates go up,

00:33:21.580 | are you gonna see some significant price decline?

00:33:28.580 | Now, I realize we still have the unexpected inflation built in.

00:33:31.660 | But I think that we've still got the issue of, Rick, why don't you answer that?

00:33:38.140 | You've got some significant short term principal.

00:33:41.940 | >> Yeah, it depends on why interest rates went up.

00:33:45.340 | If interest rates went up, would real rates of return go up?

00:33:51.960 | Meaning that, okay, real rates of return.

00:33:57.140 | Inflation expectations remain low when interest rates go up.

00:34:00.980 | But inflation didn't go up, but interest rates went up.

00:34:04.020 | That's a real rate of return.

00:34:05.780 | That's a risk to tips.

00:34:07.060 | In other words, if inflation goes up and

00:34:10.380 | interest rates go up, then that's not a risk to tips.

00:34:13.980 | But there's another risk of tips, which I think you've overshadowed even that,

00:34:19.820 | which is it really didn't get revealed until the crisis,

00:34:23.180 | which is there's a third risk, which is liquidity risk.

00:34:28.180 | From '07 to late '08, the long tips was, I think,

00:34:32.780 | the 30, 32 tips, which are 24-year maturity, and it declined by almost 25%.

00:34:38.880 | So that means 30-year tips, a similar event would decline by about 30% in principal value.

00:34:46.520 | So it's a peculiar asset class.

00:34:47.960 | It is absolutely riskless in a real sense, in real terms,

00:34:51.720 | when held to maturity, which is how you really wanna be using them, right?

00:34:56.200 | But if you depend on them for short-term liquidity, then good luck with that.

00:35:01.440 | >> That's where the short-term tips comes in to answer your question, okay?

00:35:04.280 | Short-term tips have far less of this price volatility.

00:35:07.120 | So instead of using the Vanguard short-term bond index bond as sort of a cash position,

00:35:14.800 | because you wanna get some yield out of it while you're waiting to spend that money

00:35:18.360 | over the next two or three years, you use short-term tips money.

00:35:22.760 | It would protect you from an unanticipated jump in inflation.

00:35:25.800 | And it's just an alternative to not quite a money market, but a short-term bond fund.

00:35:33.320 | >> The announcement had said that the expected maturity for

00:35:36.280 | the fund is somewhere around 2.7 years instead of 8 and a half,

00:35:40.600 | which is what the current tips fund has.

00:35:43.200 | So it's gonna be about one-third as responsive in price to movements and

00:35:50.440 | real interest rates.

00:35:52.400 | So that's the reduced risk.

00:35:54.280 | The, of course, drawback is that you're just learning lower returns,

00:35:56.800 | cuz they're short-term bonds.

00:35:57.720 | >> Okay, the next question is from Modest.

00:36:05.600 | Is Modest here?

00:36:07.400 | Modest asks, what is your view, pro and con, of stable value funds in 401(k) plans?

00:36:14.640 | What role should they play in a portfolio?

00:36:17.080 | [BLANK_AUDIO]

00:36:21.280 | >> Well, I put a post on this, actually, on both heads just a couple of weeks ago.

00:36:24.840 | And I had people, I wanted people to go read an article by Scott Simon,

00:36:29.400 | who is a very talented attorney out in California, but also is a fiduciary

00:36:34.360 | attorney, and he also has a money management company out there.

00:36:38.560 | If you go on the mobile heads and you look at stable value funds,

00:36:42.080 | you look that up, this post will come in.

00:36:44.320 | What you find is Scott looked under the hood of this, as other people have.

00:36:48.520 | I know Larry Sweco did a lot of work on this as well.

00:36:51.320 | And it really depends on what's under the hood, who you're dealing with.

00:36:57.480 | Who is these insurance contracts that are being put into this stable value fund?

00:37:02.200 | Who issued them?

00:37:03.760 | So, I mean, it sure sounds good, but every time something sounds good and

00:37:08.200 | investing in it, you really need to look under the hood, right?

00:37:11.360 | Have you done articles on stable value?

00:37:13.600 | Larry, I mean, I'm sorry.

00:37:15.160 | >> [LAUGH] >> Alan, I haven't written about them.

00:37:20.960 | But I agree, it's what's under the hood.

00:37:24.400 | The US government's thrift savings plan has a G fund,

00:37:28.000 | which is essentially a stable value that pays almost as much as the bond.

00:37:32.680 | And I've tried to get somebody from the government to hire me for

00:37:36.800 | one day, pay me $1, and fire me, cuz I would love to be in it.

00:37:40.600 | But there's a reason why some are paying higher rates in that the company,

00:37:45.680 | in the 401(k) or 403(b), in the insurance company,

00:37:48.940 | signed a longer term contract when rates are higher.

00:37:51.960 | But I tell clients that are in the stable value fund that are in insurance

00:37:58.040 | contracts that there is default risk.

00:38:01.720 | And I suspect, others may argue with me, that most insurance

00:38:06.600 | companies would have gone under in 2008 without the government being allowed it.

00:38:13.400 | >> On stable value funds, not to put too fine a point to it,

00:38:20.080 | a company called Invesco, are you all familiar with that?

00:38:24.480 | Do they have a fairly good reputation in terms of stable value fund management?

00:38:31.000 | >> Sorry, I'm not familiar with their products.

00:38:34.640 | I mean, except for the fact that they own power shares.

00:38:37.680 | >> Did you observe the stony stare from the audience?

00:38:40.600 | >> [LAUGH] >> I'm sorry?

00:38:42.100 | >> I said, do you observe the stony stare from the panel?

00:38:44.320 | >> [LAUGH] >> They're active managers, right?

00:38:48.460 | >> Yes, I believe so.

00:38:49.680 | >> I don't know. >> Eliminated choice.

00:38:51.680 | >> Do they out aim?

00:38:53.560 | >> Yes, they do.

00:38:54.280 | >> Yeah, there's always a trust factor.

00:38:59.760 | >> I don't think of Invesco and AIM as one of the good guys.

00:39:03.880 | >> I would say as a general statement, one thing I've noticed just anecdotally is

00:39:07.960 | that the stable value yields have come down quite a bit over the past year or two.

00:39:13.280 | And I guess I get a little nervous when I see people looking at things that maybe

00:39:18.120 | will yield 3% versus just hunkering down.

00:39:21.560 | If it's money that you truly need to keep safe,

00:39:24.160 | is that yield pickup really worth the risk?

00:39:27.000 | And maybe if you have an awful lot of money, it is.

00:39:29.440 | But I think that people really should be mindful of anything that's promising and

00:39:34.440 | appreciably higher yield or even a modestly higher yield than true cash right now.

00:39:38.640 | >> I mean, there is the odd free lunch out there.

00:39:44.840 | Tia Cref, for example, has a very, the Tia traditional fund,

00:39:50.280 | which is basically a money market that if you got into it three or

00:39:53.040 | four years ago, still yields you 3%.

00:39:55.160 | You can add more money to it, and I've looked under the hood of that.

00:39:58.520 | It's a pretty darn good fund, it's got fairly solid holdings.

00:40:03.040 | But what you're doing with that fund, of course,

00:40:04.440 | there's somebody who's paying for that.

00:40:05.640 | The person who's paying for that are the people who have on the variable annuity

00:40:09.760 | side of that same fund who were stuck in it for years.

00:40:13.200 | And so they can maintain the maturity.

00:40:15.120 | And if you have an IRA in it, you don't have that constraint.

00:40:19.440 | But it's a special situation, but if you qualify for Tia Cref,

00:40:24.180 | I think you can still get a percentage reward, as that was the last I looked.

00:40:29.960 | >> Okay, we have a question from Steven Enter.

00:40:33.600 | Did I pronounce your name correctly?

00:40:35.120 | All the way in the back.

00:40:36.680 | He says, what allocation and disbursement strategy would you recommend for

00:40:42.520 | a retiree who has no heirs and would like to come as close as

00:40:47.720 | possible to depleting his assets without eventually depleting it?

00:40:52.560 | >> [LAUGH] >> I think the answer seems clear to me,

00:40:57.700 | that that's a perfect candidate for a single premium immediate annuity.

00:41:02.520 | I don't know, anybody else?

00:41:06.380 | >> Yeah, it needs to be inflation adjusted though, because think of it,

00:41:09.500 | it's an annuity with a duration for the rest of your life.

00:41:12.780 | So if we do get hyperinflation, your spending power is gonna go down and down.

00:41:17.820 | And if you take the inflation adjusted, that's an extra insurance premium, and

00:41:22.960 | that drastically lowers the amount you're gonna be paid.

00:41:25.600 | And then there's default risk as well.

00:41:28.440 | >> Yeah, if you're gonna put a big portfolio,

00:41:31.540 | you have to realize that states have limits on the guarantee that they,

00:41:36.960 | it's not guaranteed by the states, but it's a state guarantee program.

00:41:43.280 | And each state has different limits, I think the majority are around 200, 300,000.

00:41:49.620 | >> 100,000.

00:41:50.400 | >> Yeah, 100,000 potentially, but 300,000 total, I think, in some states.

00:41:55.060 | >> Some.

00:41:57.060 | >> But anyway, you would have to check the state that you live in to make sure

00:42:01.340 | that you have the proper number.

00:42:03.780 | And some people would suggest that you

00:42:09.060 | don't buy all of it from the same insurance company.

00:42:12.180 | So you spread your risk around the insurance company going under.

00:42:16.800 | While the guarantee, the way I understand the guarantees work or

00:42:22.280 | is similar to the FDIC, the bank fails, they try to get the other insurance

00:42:28.120 | company to pick up the slack, and the other insurance companies apparently pay into it.

00:42:33.880 | But the bottom line is, is that you might not get your check or

00:42:38.520 | from an insurance company that goes belly up or has a problem.

00:42:43.740 | So you want to spread your risk around as the insurance company does.

00:42:47.980 | >> And delay social security, Jim.

00:42:50.140 | >> One thing I've posted about on this that I think some of the others might have

00:42:53.280 | also recommended is the self-unwinding tip platter for the first 5, 10, 15 years.

00:42:58.020 | And then a smaller amount of annuity at 75, 80, 85, for the last part.

00:43:03.960 | Where you get the mortality credit, it's really an equal reward.

00:43:06.100 | You wait, you delay it, you buy the annuity.

00:43:09.360 | Could I just go to a 10,000 foot level on this question?

00:43:12.480 | Because it's actually an interesting question when you think about it.

00:43:16.920 | The question was, I don't have any hair, so I want to spend every dime I have on

00:43:22.240 | my debt, but I want to pay the mortuary in that dime.

00:43:26.480 | >> No, no, no, the check to the mortuary is supposed to balance it.

00:43:29.060 | >> [LAUGH] >> Use a credit card.

00:43:32.000 | >> [LAUGH] >> Okay, but here's the point.

00:43:37.640 | The point is that from the 10,000 foot level, that's his situation.

00:43:41.920 | So what asset allocation, what strategy should he use in his portfolio?

00:43:46.800 | What withdrawal strategy should he have, given the amount of money he has?

00:43:51.920 | Given social security, everything else that he's got coming in,

00:43:54.360 | to accomplish what he wants to accomplish.

00:43:56.200 | It's gonna be very different than somebody who has four kids and

00:44:00.520 | wants each one of them to inherit, on an inflation adjusted basis,

00:44:04.040 | all the assets you have today.

00:44:05.880 | The withdrawal rate is gonna be different.

00:44:07.320 | So sometimes we'll get into the minutiae about what is the 4% withdrawal rate,

00:44:12.840 | the optimal withdrawal rate, and we argue back and forth forever on this.

00:44:16.840 | And the answer is, for him, it might be 6%.

00:44:20.800 | For somebody who's 60 years old and has four kids and

00:44:25.280 | they want every dime to go to their four kids, it might be 3%.

00:44:28.880 | So each one is very specific.

00:44:31.320 | And the inheritance question is really gonna determine a lot,

00:44:36.720 | not only about asset allocation, but also the withdrawal strategy.

00:44:41.360 | >> Clearly, I think the most applicable strategy here is the George Raft strategy.

00:44:46.240 | You remember George Raft was the actor who said he spent $10 million on

00:44:51.720 | women, booze, and gambling, and the rest of it he wasted.

00:44:54.040 | >> [LAUGH] >> I think the key to the recommendation

00:44:59.760 | is a unique situation, no errors, and wants to spend it all.

00:45:04.500 | And that's pretty- >> Not unusual though, I mean-

00:45:06.640 | >> No, no, I'm saying though,

00:45:08.080 | it's unique to him and it's not so- >> But also it's not so

00:45:12.080 | unique in that for the vast majority of people, investors,

00:45:16.600 | they're, to maintain any semblance of a standard of living,

00:45:20.080 | they're gonna have to spend their assets down over time.

00:45:23.480 | And I feel the important thing is to, again, establish a financial plan

00:45:29.760 | that allows you to visually see how you can spend it down at a rate

00:45:34.640 | that makes sense, and then readjust it every year based on inflation,

00:45:38.960 | based on what happens in the markets.

00:45:41.160 | And also based on the biggest question mark of all in retirement is that is,

00:45:45.840 | what is your health care cost?

00:45:47.600 | >> There's one more thing I wanna throw out there which we haven't heard yet,

00:45:49.600 | and that is reverse mortgage when you're home.

00:45:51.920 | And I think that'll, for your situation,

00:45:54.360 | if you have a home, a reverse mortgage might be the thing you wanna do.

00:45:57.480 | So we haven't talked about reverse mortgages as part of,

00:46:00.360 | you have talked about it, remember, in years past as part of this financial plan.

00:46:04.680 | >> One other quick mention to back up to the annuity discussion.

00:46:08.480 | Mel, you mentioned the idea of buying multiple annuities to spread the insurer

00:46:12.040 | risk.

00:46:12.800 | I think there's another good reason to think about maybe laddering annuities,

00:46:16.280 | which is the current interest rate environment.

00:46:18.000 | So single premium immediate annuities are quite low by historical standards right

00:46:23.480 | now due to the current interest rate environment.

00:46:25.360 | So even though it would be more cumbersome than buying just a single

00:46:28.920 | immediate annuity and letting it ride, I think it does make sense to spread out

00:46:33.440 | the purchases over a period of time to potentially obtain a range of interest

00:46:37.440 | rate environments.

00:46:38.680 | >> On the topic of buying annuities,

00:46:40.800 | if you're looking to stay within the state guarantee association limits,

00:46:45.720 | it's important to note not only that the limit varies by state, but

00:46:49.360 | the applicable rules vary by state.

00:46:51.920 | So for instance, some states will back you up,

00:46:55.360 | they'll make you whole in the event that the annuity defaults.

00:47:00.320 | If you live in that state when it defaults, other states,

00:47:04.160 | their guarantee applies if you purchased the annuity when you lived in that state.

00:47:08.760 | So for instance, if you currently live in a state that has a $300,000 limit and

00:47:14.960 | you're considering moving to another state in retirement,

00:47:18.080 | this is something you'll want to think about.

00:47:19.820 | Because you don't want to move to a state with a $100,000 limit necessarily.

00:47:24.640 | There are obviously factors involved in moving place and living.

00:47:28.440 | But you'd want to pay attention to those rules and

00:47:30.880 | see if it's going to expose you to an additional level of credit risk.

00:47:33.320 | >> Bill, didn't you write that if there's a systemic issue in the insurance

00:47:40.400 | industry, the state guarantee would be a little more than a speed bump?

00:47:44.680 | >> That was the word I used, yes.

00:47:47.160 | >> And then I have a pet peeve, and everyone does this, including last night.

00:47:52.600 | You can earn 7% income on an annuity.

00:47:57.200 | Why would you, therefore, want to buy a 1.7% total bond fund?

00:48:01.640 | I've compared apples to oranges.

00:48:04.680 | Most of the return on the single premium immediate annuity is your return

00:48:09.720 | on principal. >> Well, it's even better than principal.

00:48:16.640 | It's the principal of the people who died before you.

00:48:19.120 | >> [LAUGH]

00:48:25.840 | >> There's a non-mobilized question from

00:48:28.400 | over there, gold coins or gold ETF? >> Gold coins, absolutely.

00:48:32.920 | >> [LAUGH]

00:48:34.920 | >> Gold coins.

00:48:36.320 | I mean, look, if the Armageddon comes,

00:48:40.120 | is anybody going to want to buy your share of the GLD?

00:48:43.360 | >> [LAUGH]

00:48:44.520 | >> If you can trade it,

00:48:45.920 | if the markets are even open, no, you're going to have those gold coins sitting in

00:48:49.120 | your safe next to your shotgun. >> [LAUGH]

00:48:53.520 | >> I'll play the straight man here.

00:48:56.240 | More seriously, Craig Rowland wrote a wonderful book on the permanent portfolio.

00:49:01.160 | He's got about 70 pages.

00:49:02.720 | It's just fascinating to read about why are you buying gold, okay?

00:49:07.320 | Are you buying it to hedge inflation?

00:49:08.920 | Well, then buy GLD, buy a gold miner.

00:49:12.200 | I would even say buy just a natural resources fund, like the Energy Fund,

00:49:16.960 | all right, which is, in spite of Jack's comments, I think it's an excellent fund.

00:49:22.800 | I think they'd find anything by bringing that fund out.

00:49:26.320 | If, on the other hand, you're worried about breakdown of social order,

00:49:31.560 | then probably Canada's an animal hoarder, I would bet.

00:49:36.000 | And if you're really concerned about the entire breakdown of society,

00:49:40.560 | then you want to put gold in a vault in New Zealand or Switzerland, all right?

00:49:46.000 | Which he tells you exactly how to do all this, it's absolutely fascinating stuff.

00:49:49.480 | >> [LAUGH]

00:49:50.920 | >> Seriously.

00:49:53.000 | And then your only problem, of course, is finding a way out of the country.

00:49:56.800 | >> [LAUGH] >> Okay,

00:50:01.360 | here's a comment and a question.

00:50:03.960 | It says it seems every financial expert is saying to get out of bond funds this year.

00:50:09.880 | Some say to buy individual bonds instead.

00:50:12.580 | Bonds.

00:50:13.080 | >> I'll just extend that, okay, well, what do bond funds hold?

00:50:20.000 | >> Exactly. >> Individual bonds.

00:50:23.240 | All right, so what's the purpose of getting out of bond funds,

00:50:26.120 | to go into individual bonds?

00:50:27.400 | I can see doing a bond ladder if you have liabilities that have stepped out over ten

00:50:31.400 | years, so you're going to build a ten year ladder of tips, no problem.

00:50:35.040 | You've got liabilities going out over five years, you want to buy a five year CV ladder,

00:50:39.520 | pick those liabilities.

00:50:40.520 | Let's say college savings, you have children going to college,

00:50:43.400 | you want to buy, I used to buy zero coupon bonds for my children.

00:50:45.840 | So I knew exactly what I had coming due every year for them to go to college.

00:50:49.760 | That's a good reason to buy a bond.

00:50:51.960 | You're retired, and you're going to be retired for 20 years, 25 years.

00:50:57.520 | The liability, I mean, the duration of your liabilities are,

00:51:02.220 | if you add it all up, you do it mathematically,

00:51:05.880 | probably comes out to about five, six years, the duration of your liability.

00:51:10.560 | The duration of an intermediate term bond fund is about five years.

00:51:13.320 | Now, the next year, a year from now,

00:51:15.000 | the duration of your liability doesn't come to four years, it stays at five years.

00:51:18.960 | So what I'm saying is, with an intermediate term bond fund,

00:51:22.000 | municipal bond, total bond market, the duration of your liabilities and

00:51:26.960 | the duration of your bond assets are about the same.

00:51:29.080 | If you buy individual bonds, it complicates that.

00:51:35.680 | And so I'm not a fan of doing that.

00:51:38.280 | >> Well, let me take a vote then.

00:51:40.520 | Bill, do you think that people should get out of bonds by this time?

00:51:44.080 | >> No.

00:51:44.720 | >> Rick?

00:51:45.600 | >> No. >> Well, it depends.

00:51:47.120 | Mike?

00:51:48.640 | >> No, but Alan probably has something to say about speeds.

00:51:50.560 | >> [LAUGH] >> You said what I was going to say.

00:51:54.480 | And- >> Well, I think it's very important that

00:51:59.040 | people have an understanding of what can happen to bond funds

00:52:04.440 | in a rising interest rate environment, and to basically stay the course.

00:52:08.600 | Vanguard has an excellent piece on the importance of staying the course.

00:52:13.560 | If you have an intermediate bond fund, when the price begins to drop,

00:52:17.600 | it's just, it's wonderful.

00:52:18.880 | We show it to every client who has an intermediate term bond fund.

00:52:24.360 | Because we're drilling in them the importance of not getting out of it when

00:52:28.520 | the net asset value starts to drop, but

00:52:32.040 | to stay there to capture the higher returns down the road.

00:52:35.160 | So you're prepared for it when interest rates do go up.

00:52:38.000 | It's just gonna be, the outflow of bond funds, dollars out of bond funds,

00:52:42.520 | when interest rates go up, they're just gonna be off the charts.

00:52:46.440 | >> There are any number of phrases that you hear from time to time,

00:52:50.280 | that they all fall into the same category, which is the old 60/40 portfolio

00:52:53.960 | doesn't work anymore, indexing doesn't work anymore.

00:52:56.440 | The traditional portfolio doesn't work anymore.

00:53:00.560 | And don't buy a bond fund anymore, buy bonds.

00:53:04.480 | They all say exactly the same thing, which is hold on to your wallet.

00:53:08.840 | >> I would just like to add one thing to Bill's comment.

00:53:11.160 | His 60/40 portfolio doesn't work.

00:53:13.400 | A week and a half ago, there was a great article in the New York Times about

00:53:17.620 | endowment funds face hard landing.

00:53:19.840 | And a guy, somebody did research on all these endowment funds.

00:53:22.920 | And the conclusion that he came to is that a 60/40 low cost

00:53:27.840 | index fund portfolio is darn hard to beat.

00:53:31.080 | And I posted it on my website, or you can email me.

00:53:33.160 | It's a great article.

00:53:34.240 | >> I'm a better actor, believe me.

00:53:37.840 | >> What's that?

00:53:38.520 | >> [LAUGH] >> What?

00:53:40.360 | >> I wrote a piece for the Wall Street Journal Total Return blog about a month

00:53:44.340 | and a half ago, I quoted Bill Bernstein in it.

00:53:47.320 | But I walked through the simple math of owning a bond versus a bond fund.

00:53:52.880 | And addressed the myth that if you own a bond and hold it to maturity,

00:53:57.480 | it's just an illusion that you eliminated interest rate risk.

00:54:02.400 | >> All right, well, there was a method to that madness.

00:54:07.080 | >> There's also, by the way, a cash drag on buying individual bonds.

00:54:10.160 | Because people buy individual bond letters, interest coming in,

00:54:13.520 | what do you do with it?

00:54:14.240 | If you're not spending it, it sits there in the money market with 0% interest.

00:54:17.880 | Do you have enough money until a bond comes due where you can go out and

00:54:20.240 | buy another bond?

00:54:21.240 | It actually drags down the yield of the portfolio.

00:54:24.400 | >> That was brilliant and insightful, thank you very much.

00:54:26.440 | >> [LAUGH] >> Well, there was a method.

00:54:29.760 | >> Coming from you, that means something else.

00:54:31.120 | >> [LAUGH] >> There was a method about madness in

00:54:34.520 | holding the account, because the question says,

00:54:37.520 | it seems every financial expert is saying to get out of bond firms.

00:54:42.360 | We have a panel of experts here who said don't.

00:54:46.560 | So every financial expert is not saying to get out of bond firms.

00:54:51.080 | That's the answer that I will be taking out of that.

00:54:55.400 | We have one final question here, and I think the answer should be fairly obvious.

00:55:02.840 | But do you think it's reasonable to assume that no one can accurately predict

00:55:09.120 | how any asset class will perform for any length of time in the future?

00:55:15.160 | Yes.

00:55:16.860 | >> No, and the reason why I disagree with that is obviously the question,

00:55:21.520 | the way that people usually try to answer that is in the short term.

00:55:25.800 | But in the long term, I think you can look at valuations and

00:55:29.480 | make a probabilistic statement, stocks are selling for 35 times earnings.

00:55:34.600 | I think their future returns are going to be lower than when they're selling at 10

00:55:38.400 | times earnings, but that doesn't tell you what to do tomorrow.

00:55:42.600 | >> Well, let me make sure you got that whole thing.

00:55:45.680 | It says for any length of time.

00:55:47.640 | >> Yeah. >> You're picking out particular-

00:55:49.480 | >> Yeah, yeah, for any length, yeah.

00:55:50.760 | In other words, I would say for any period that's less than 15 or

00:55:54.240 | 20 years, you can't do it.

00:55:55.720 | >> Right, okay, so that was the reason I said no, because I don't consider it.

00:56:00.880 | >> Okay, what is the question again, can you read it?

00:56:03.800 | >> Is it reasonable to assume that no one can accurately predict how any asset

00:56:08.840 | class will perform for any length of time in the future?

00:56:12.600 | So that would be short term, medium term, long term.

00:56:15.400 | >> Is it reasonable to predict that no one can accurately predict.

00:56:19.480 | >> Is it reasonable to assume- >> Assume.

00:56:22.720 | >> Assume no one can predict.

00:56:26.160 | >> Basically, any asset class will perform- >> Any asset class.

00:56:30.960 | >> Any length of time, or any length of time would be one day into infinity.

00:56:38.600 | >> I don't know.

00:56:39.520 | >> [LAUGH] >> I think maybe a better way to rephrase

00:56:44.580 | that question is maybe you can't predict it, but

00:56:47.200 | what assumptions do you use in your financial planning process?

00:56:51.000 | And for that, I think going back to what Bill Bernstein said, and

00:56:56.240 | Vanguard alluded to last night, was the best predictor of interest rates or

00:57:00.480 | fixed income is what they're yielding now, I think.

00:57:03.680 | And on the equity side, what Bill was saying was that, and

00:57:08.840 | I think everyone's saying maybe use 6 to 8% based on current valuations,

00:57:14.080 | dividend being a little bit less.

00:57:15.880 | And use that as a starting point in your financial planning process,

00:57:20.480 | realizing that you may be off.

00:57:22.480 | But you don't find out that if you're off 20 years from now and

00:57:25.040 | start making adjustments,

00:57:26.200 | you make adjustments along the way based on those assumptions.

00:57:29.080 | >> Can I answer the question now that I have clarification?

00:57:31.560 | >> Sure, go for it.

00:57:33.040 | >> I made predictions out 30 years, and I have actually sort of made predictions

00:57:37.680 | out 10 years, but if they're my expectations of return,

00:57:42.800 | I don't think that they should be used for,

00:57:47.920 | 30 year out, the expected returns of asset classes are based on

00:57:52.800 | inherent risks of the asset class relative to each other.

00:57:56.480 | So you've already saved asset classes like short term tips are going to give you

00:58:00.260 | a very low return because it's the safest in every aspect.

00:58:03.400 | But as you go out further and further, you start taking more and more risk.

00:58:06.720 | The riskiness of the asset class volatility, if you were part of that,

00:58:11.120 | you wouldn't invest in equities if they weren't riskier.

00:58:16.480 | And if you wouldn't invest in equities,

00:58:19.160 | if you weren't expecting a higher rate of return because they're risky.

00:58:22.680 | So you can make predictions in the very long run that stocks should outperform

00:58:26.920 | bonds, that bonds should outperform cash.

00:58:30.360 | I mean, these are the types of predictions you can make.

00:58:33.840 | I don't know how accurately you can make them, but I think you can make them.

00:58:37.800 | >> How about a 30-year zero coupon [INAUDIBLE]

00:58:41.560 | >> Say again? >> Well, you know exactly what it was.

00:58:43.040 | Exactly, thank you.

00:58:44.080 | >> [INAUDIBLE]

00:58:49.560 | >> Well, at this time I'd like to thank everyone for attending.

00:58:54.120 | I have a few announcements to make, and some recognitions.

00:58:57.840 | I want to remind everyone that the video will be available

00:59:02.880 | that Rich is making, it will be available online in the segments.

00:59:10.280 | Is that correct, Rich?

00:59:11.400 | >> Right.

00:59:11.960 | >> And either Rich or I will make a post on the forum when they are available to

00:59:17.080 | alert you to that.

00:59:17.840 | After it's all done, are we gonna do a DVD this year, or are we just gonna go online?

00:59:24.560 | Everything will be online this year, so you won't even have to order the DVD.

00:59:30.440 | At this time, I'd like to recognize the people who really make this event work.

00:59:38.160 | I've got an all-star team, and believe me, couldn't pull it off without them.

00:59:43.520 | There's a million and one details that go on in putting this event on, and

00:59:49.000 | we actually work for over a year to do it.

00:59:52.840 | We're already starting to plan on next year's event.

00:59:56.480 | So I would like to call up my all-star staff, Ed Rager,

01:00:00.780 | Patty Rager, Paul and Linda Berenson.

01:00:03.520 | >> [APPLAUSE]

01:00:13.520 | >> Mel and Kathy Turner.

01:00:15.800 | >> [APPLAUSE]

01:00:24.680 | >> When I was in the business world,

01:00:27.080 | when I delegated something, you still had to worry about whether people

01:00:32.160 | were gonna be executed or not, you had to follow up.

01:00:34.800 | But with these people here, when I delegate, I just cross off the list,

01:00:38.920 | because these people are great, you know it's gonna be done.

01:00:42.800 | We started a tradition last year of trying to give pins out that matched

01:00:47.000 | the gift that we gave to Jack.

01:00:49.280 | This year, we gave Jack a Independence Hall, and

01:00:54.680 | we have the matching pins that go with Independence Hall.

01:00:57.880 | And I'd like to give one to each of the staff.

01:01:02.520 | >> [APPLAUSE]

01:01:25.720 | >> We have one more important part of

01:01:28.400 | the program, there's a lot of organizations that form.

01:01:32.360 | Very few of them succeed, and even fewer of them flourish,

01:01:36.160 | like the Bogleheads in particular.

01:01:38.080 | It's done due to not only hard work, but leadership.

01:01:43.440 | And they have exceptional people that make it all happen.

01:01:50.280 | And the spouses put up with the insanity to make it all happen.

01:01:53.720 | But the glue that holds the flourishing groups

01:01:59.000 | together is due to leaders that you wanna follow.

01:02:04.000 | And in our organization, we have one of those leaders that's here up on the podium.

01:02:09.400 | Mel gives his talent and all of his energy to keep this going.

01:02:13.480 | So I think we should all give a thank you to my fellow Marine, Mel Lindauer.

01:02:17.760 | >> [APPLAUSE]

01:02:27.760 | >> We have a couple of other people that

01:02:33.480 | we wanna recognize, Lady Geeks, Sue.

01:02:37.080 | >> [APPLAUSE]

01:02:43.440 | >> Is Ed Tower here?

01:02:46.280 | Okay, Ed, who put on the, who worked on the.

01:02:50.780 | >> [APPLAUSE]

01:02:59.780 | >> And I'd also like to say that we

01:03:03.040 | have a group of volunteers every year who man the doors,

01:03:08.880 | work the registration tables, and do a lot of other chores.

01:03:15.040 | Would all the volunteers please stand up and be recognized?

01:03:18.040 | >> [APPLAUSE]

01:03:23.160 | [BLANK_AUDIO]

Bogleheads® Conference 2012 - Panel of Experts II

Chapters