 Well, Mel asked me if I would moderate this panel today, and I've been waiting to do this for years. And what I'm trying to do is to get the audience to support me. So maybe I'll get to do this again sometime. Jack Boko on my left ruined my surprise. I'm introducing the new panel, and Jack is a surprise panelist. But he ruined my surprise. As we know, Queen Bar wasn't able to be here. And Jack volunteered to... Okay, we co-opted Jack into our surprise guest. Let me introduce the panelist. We've got Gus Sotter. We know him from this morning, so please welcome Gus again. Next we have Neil Bernstein. He's the founder of a Fish and Frontier Advisors and author of several successful titles. And Mel, our next panelist is one of the founders of the local head community. He's an author at orbs.com columns, so please welcome the prince of the local heads. So we've got a number of questions that came from both participants here and from the website itself. So I think I'll start with a question from Dr. Bernstein from the Finance Club. And the question is, how should we apply a principle in your book, The Ages of Investor, to funding a 529 plan for college expenses? On one hand, it's investing a stream of contributions, which argues for a more aggressive allocation. On the other hand, it seems a good candidate for liability matching with fixed income investments. And I think that a 529 is pretty clearly a liability matching portfolio situation. It's got a time horizon that's at most, you know, 15, 16, 17 years. And its median age is going to be, its median duration is going to be around, you know, seven or eight years. That's not stock territory. That's bottom territory. So, you know, most 529 providers, or at least many of them, offer a glide path that reflects that. It starts at maybe, you know, 70 or 80% stock very rapidly, goes down from there to almost no stock in five years. And I think that's, that's appropriate. You're certainly not going to deep risk a certain situation and go to a shelf risk situation. This is a question for the panel from Dan. Please compare the following two investment portfolios. The total stock market index admiral shares combined with the total international index admiral shares. Compared to a portfolio of total index equity fund, total bond, any money market or other cash fund. Anyone? What international index? A question to see if I can be clear on this with the question of whether you want your diversification out of the stock, in the international stocks on the one hand or in the bonds on the other, is that the nature of it? I think that's the nature of the question. But why didn't you write it that way? Why didn't you write it that way? Maybe I did this for reason of the part. And we're trying to compare the total U.S. and the international as compared to the total index equity fund, total bond, and the money market. So I think that's probably total global. So the concept of investing on a portfolio. So I think the concept is would you invest in total global, which has domestic and international? Or would you invest in the pieces separately? Would you invest in total stock market plus total international? And personally I believe the lack. Total global has an asset allocation of roughly 55% international, 45% U.S. And I believe that every investor should have a home country bias. And that's why I think you should invest in the two pieces. I personally think 30% is about the right level of international investment. The reason I say that you should have a home country bias is because basically you say you would invest in order to at some point in time consume. And most of your consumption is going to be at home, so most of your investment should be tied to home. And give an example in Australia, over the first ten years of this century, the Australian stock market is much better than the world stock market. It was up about 7% a year, the world market was about flat. At the same time the Australian economy did better because it was a very resource based economy and China was a new world of resources. So what we saw was the economy moved forward quite dramatically. The crisis escalated dramatically in Australia. Sydney is the third most expensive city in the world. Melbourne is the fourth most expensive city in the world. If you had invested in a global equity portfolio as an Australian, you would have had about 3% of your money invested in Australia. So your global equity portfolio would have provided about a 0% return instead of a 7% return. You would have gotten an Australian portfolio. Now I think an Australian should have some international investment, but they only have 3% of investment domestically being way out back in England. I personally feel comfortable with the 3% international allocation that they feel is high. I would agree with that lately. And I have a question for you guys though, which is that the total world fund, the portfolio, is a good deal more expensive. At least in band by terms, than the components are. And why exactly is that? If you look at the way the economics work in vanguard, each fund has to pay a certain amount to keep the vanguard running. Each fund has a certain percentage ownership of the vanguard. And then it has its own variable costs as well. Those variable costs are somewhat, there are some economies of scale as the fund gets larger. And the fixed costs that the fund bears become somewhat cheaper on a per asset basis as the fund gets larger. So it's really a question of the size of the fund. What you see is as funds get larger, the expense ratios go down. As vanguard has gotten larger, the overall expense ratio of the fund has gone down. So it's really reflecting the costs of the fund, the smaller funds, the more expensive it is. Anybody else? This is for Jack from Steven Andrew. I'm a retiree. I live part of the offline portfolio. Currently my bond allocation is entirely at the vanguard's total bond market index. In light of future interest rate increases, should I change this allocation? Perhaps I should diversify into a short-term bond fund question. Or should I just leave it alone? I'll answer that in just one second. Just this moment. After the session is over, I want to see any of you again. Until next year, God willing. And I just want to thank you all for being such wonderful people. I enjoyed your signings. I enjoyed the photography. I enjoyed the selfies. I talked for so long yesterday that why anybody would want me on this panel today? I have absolutely no idea. And when I'm here, because I was asked to, I didn't sort of get involved here. So just thank you all for everything. The first thing I want to say. The second thing I want to say is I've done all these book signings. And now I would like someone to do one for me. So I'm going to pass that down to Bill Bernstein. I have to be copies of that book in my office. I'm not ever signed. So please write a nice message to me. No pressure at all. I'll be able to hear what you want him to say, Jack. He lets me, but I don't know. And then I also signed two books for the inescapable Gus Sutter. Because he wanted to hear it again. Two latest diatoms. One of which includes my version of the history of the Index Fund. Every fact we have is the same. Every name we have, I name all those. That's the microphone I knew myself. Jack Trainor, the whole bunch of them. And Paul Sandel said he was not on his list. He was the key to starting the first Index Fund. And I explained why that difference is there between the quantitative school, so global, and the duty of worrying guys who got nowhere, finally, and had to change their sense of life fund into an S&P fund after we had started arts. So I don't know what I'm saying. They borrowed it. I don't want anybody borrowing anything like that. But they actually got religion after we had to read it so we could divide them into free religion and post-religion stage. And that's all described. And so enjoy then, Gus. I marked the relevant pages. Now back to the play. That's what we do. Bond point of videos in the face of low interest rates. There's an awful lot of timing that goes along the mark. I can get in. Bond prices are going up from there. The value is that the intelligent investor doesn't pay any attention to that. The intelligent investor realized when he buys a bond fund is a broad generalization. He's entered into a 10-year contract. Whether it's a 10-year bond or a longer bond, it's not going to look that much different. And that is a contract to get today's interest rate. For 10 years, it's not very complicated. So do you want to have bonds today which will, I guess the 10-year treasury is around 2.2, 2.24, anybody want to correct that? 0.24% today. I'll just see if I can get away with that one point. And the long treasury is probably around three to four, right at that this morning. And so if you want a longer buyer return, almost dramatically buyer return, you want the long treasury. But it will be all over the place. And I don't think most people can tolerate the long-term volatility. There's this idea of, in quote, duration, which is very simple, no matter how people try to make it. And that is how much for the price of a bond. The duration is the number of times of price movement you get for each 1% interest rate. So the long-term treasury probably has a duration of 17, something like that. So if interest rates go up 1%, it will go down 17% pre-order. That's for the moment. And you'll make that up. You'll have a higher use later on for the summer. So I don't like the long-term one much. So you can do intermediate, and then you have a choice in intermediate between the treasury and the round numbers, 10-year treasury at two to one quarter. It's something in that range. And the corporate in that range is probably about 2.90%, very close to 3%. So you can get the higher return on the corporate. So how you want to deal with this is a combination of mathematics, tolerance for volatility, and your ability not to get bothered by these up-evils in the market. These are behavioral decisions, not rules-based decisions. And I worry a lot about rules-based decisions because rules don't apply to all people equally for all different individuals. And so I'd say if you very wary of anyone, it gives you a rule-based kind of idea. There's also this about the balanced function of the bond index where they're interested in the bond market. And that is this allocation between stocks and bonds for years was based on the notion that the yield on stocks has been around 2% for 20 years, I guess maybe more than that. Got all the way down to 1% in 1999, early 2000. And the yield on bonds during that period was mostly about 6%, three times as high. Today, the yield on a bond portfolio is probably 3% corporate government mixed. You've had a random number. The yield in the stock portfolio is 2%, and that's not much of a difference. And if you don't want to go along, it's probably 2 against 2 and a half. So you just have to make your judgment how badly you need the income. That's where the corporate bond index comes in. The intermediate term bond index comes in. And I don't really have any rules for that, but those are the things you want to think about. Ten-year contract, the volatility of your tolerance for it, and the apparent near certainty of getting a higher risk over the longer you go, much higher risk. One of the things I loved about my job at Vanguard was I got to use a lot of financial theory that I've studied and then try to figure out how to apply that to a practical standpoint. So if you think of how we come up with the concept of an asset allocation, it's the traditional efficient frontier and then where the utility curve is tangent to the efficient frontier and then the terminal asset allocation. The interesting thing is the efficient frontier is going to shift if you have lower expected returns for bonds, as we do now, and that would mean that the utility curve is going to intersect at a different place on the efficient frontier, and that would imply a different asset allocation. But if you expect lower bond returns, shouldn't you expect lower equity returns? Stocks and bonds compete for capital, and if we're in an environment where bonds are providing very low returns, then shouldn't stock prices be bid up to the point where future expected returns are correspondingly low for equities? And if you believe that's the case, so instead of getting 10% a year from equities, let's say we're going to get 8% a year from equities or maybe even 7%. Then you have to redraw your efficient frontier and find out where the tangent to your utility curve and maybe not coincidentally, it's the same asset allocation. So I think you have to also think that each one of these asset classes provides something in your portfolio. Equities are going to give you, hopefully, the biggest return in bonds in there to moderate the volatility and still provide you with summary of return. I think that role is still the same in this environment. We just have to realize that our expected returns are probably lower at this point in time. Okay, here's a question for the panel from Tracy Denton. How often should a portfolio be rebalanced one or two times a year? Should the state of the current market have any impact on the frequency or timing? I favor bands as opposed to... I favor expansion bands as opposed to a specific time. I know everybody's got their own method. They do it on a birthday, they do it on a first of the year, they do it on a Christmas time. Personally, I prefer... I know Jack's... I think Jack doesn't favor rebalancing at all. Is that correct? Well, it's probably a reasonable reading to what I said, let me say what I think. Excellent. Number one, rebalancing costs you a lot of money over a long term. Because you're selling your higher-yielding asset in favor of a lower-yielding asset, you're producing your stocks which have an upward curve, steeper than what you're on bonds. So you should be going to any kind of rebalancing, realizing that. That's the economic or financial impact of it. If you want to make sure that you're reasonably conservative, you scare a little bit easily as I do, and you want a decent-sized bond position, and you probably do want to rebalance, I would say, never, never, never use a decimal point in your calculation. I mean, just, you know, maybe if you want to be 60, 40, and you get to over 65, 35, you might think about rebalancing, or even 70, because it's really, it's much more important what's in the portfolio, what you're paying for, this is for your investment generally. And well, those factors are very good as important to rebalance. So I think we tend to overdo rebalancing. We did a budget, like a budget, like when I did a budget, maybe Kevin and I, a bunch of 25-year studies, showing a rebalancing pays off. I think about half the time, just about what you would expect. You know, holding and holding is a return constant of 60%. So I think it's a little bit overdone, and maybe even a lot overdone, and it's given some idea of magic. It doesn't exist anywhere in the field of investing. There is no magic here. Sometimes things go for you, sometimes times go against you. And so I think you do want to be a little cautious when you do a 50-50 target, and you get to 80-20, you should have cut back something. Maybe when you got to 60 or 70, but it's not any guarantee if the portfolio is running out. It's a guarantee, I think, and what I like about keeping a solid bottom position is it keeps you from the behavioral issues involved in the kind of markets that we've had in the last few weeks. The next few weeks has been so funny, because every odd number of day you wake up and thinking, gee, I wish I'd had more in stocks, and every even number of days you wake up and say, I wish I had more in bonds. And that's not going to get you anywhere. Just leave it alone at least, since you can. Well, my understanding is the target date funds at Vanguard rebalance on a daily basis can you confirm that or straighten this out on that? What we do is take the cash flow into the funds and rebalance, retarget it towards the allocation it's supposed to be at any given point in time. They're really risk-based, and at a certain age we want you to have a certain level of risk which implies a certain asset allocation, and if it does wander away and we have cash in the portfolio that day, we're going to put it wherever we like, so it's seldom that we would actually sell out of a position and rebalance in one other except in extreme market movements. So if, you know, 2008-2009 you actually want to rebalance it. And actually something like Balanced Index rebalances every day. Not necessarily, it's a great strategy, but you have cash flows coming in every day, and you're offering a fund that's a 60-40, 60 stock, 40 bond with Balanced Index. And you don't want to get to 61 because that may be too much for the person that's coming in that day. It's a kind of consistency with objective strategy rather than a personal investment to see. Bill. I was just going to say, we do use bands so that we're not overdoing it. Bill, you were going to make a comment at the top. No, I was just kind of a wise crack. One of the ways you can tell in response to what Jack says, one of the ways you can tell financial economists have a sense of humor is they do these decimal lines. The next question is for the panel. It says, look into your first of all the massive baby boom generation moves into retirement. What are the macro effects on the markets, pressures on portfolios and so on? I thought I was going to guess exactly how this would work. But stocks have a certain intrinsic value and if a whole lot of people are buying stocks at, let's say, an arbitrary actual value of 100 a whole lot of people are selling them and so someone will be selling stocks as they go into retirement personally, but there will be other people buying them and I don't know how you measure which demand is larger, which is smaller but it should not theoretically in the long run it drives stock prices and values because the dividend yield plus the subsequent earnings growth and so if you would hear to that and it is absolutely the case over 100 years an awful lot of shorter periods within that that determines the market return and it doesn't care whether all people on it, even people my age or young people on it so I'd say essentially nothing. Did I make myself clear? I like to look at things in the broadest possible historical respect 5,000 years ago nobody retired alright, you worked until you died, but if you wanted to invest for retirement, it would take you about 15 minutes because returns were very, very high and you didn't live for very long after you retired now the first retirement contracts were something called Coroties which were a Dutch instrument and you would pay what amounted to about a year's worth of your salary for very basic food and shelter for the rest of your life that's pretty darn cheap and I view retirement as a supply driven commodity like anything else so if you want to visit Venice or New York or San Francisco so does everybody else in the world the demand for that is very high and that's why those places are so very expensive while retirement is getting to be the Venice and New York and London of the modern world everybody wants to retire now at age 55, consequently doing that is going to be very expensive we've already commented on the fact that portfolio returns going forward are going to be very loud people are living longer and longer and if you think about it someone works from 25 to 55 and then dies into 85 and if the demographic curve is flat that means that for every retired person there is one working person that doesn't work very well so I'll take a somewhat more pessimistic point of view I guess Jack does I guess I look at it more globally that it's hard to imagine that we would have a certain expected return for equities in the U.S. a very different type of return in Korea or some developing nation especially the way the world is becoming much more global in nature so capital is increasingly able to move around the world and so I think that the expected returns will somewhat equalize given the fact that the risks are somewhat similar I guess I'm a little bit more Jack's cute you're all on this one this is for Jack from T Willcox which bond fund would you use for a three fund portfolio which which bond fund would you use for a three fund portfolio well I made my position clear about the fact that I'm discerned by the composition of the bond index itself and I think it's just too heavy in governments considering we talked about this yesterday with those charts too heavy in governments too heavy in foreign ownership too heavy in federal ownership to represent a bond portfolio of a typical American investor which would be investor lowlings insurance companies lowlings things of that nature and I think of a reasonable bond position being as highly arbitrary but not 70% but maybe 30 or 35% and that's probably if you look at all the bond funds out there together as I mentioned yesterday that's probably about where the competition is as well as where the US market is so I think we should have a much better bond index and nobody vanguard out of that I think Gus felt that grieve with me when I brought this up three years ago and I stopped breaking it up you know you don't want to beat your head against the hope I've got too many issues to worry about other than that one but what I suggest instead of that is why not have half your money say as the working-on bond says half of it in the total bond market portfolio and half of it in the corporate bond intermediate term portfolio is the intermediate but so is the total bond market intermediate in the long and short pretty much balance themselves out with that same duration so you can do that without any change at risk exposure other than credit and improve your return by probably a half to three quarters of a percent of the point but here in these days in stingy markets where we should have a much bigger edge we vanguard than we do because the competition has more corporates it's just about matching our bond market with lower costs and lower yields so I think we're a little out of the mainstream and my choice would be intermediate term corporate I also tried and I think Gus did agree with me on this and had informed an intermediate corporate bond index fund corporate bond index fund would have a correlation with the intermediate term bond index of about 99 we just use either I think corporate bond index fund is easy to explain that's a big part of our job on the bones of our literature and an intermediate term bond index begins with a fact that first our poor rep on the bone has to deal with why would you choose the intermediate term index it's a whole conversation that has nothing to do my opinion was sound investment practices so give the simple root it's always been my position make it easy to explain make the structure simple and so that's my choice to answer the question as warm words as I should have as usual this next one is a question from Mel could I ask Gus what do you think about the corporate bond index fund representative or representative well my definition it is representative it really is the market itself do I believe it should be so heavily weighted in treasuries you know with corporates do you look at corporates the extra return or the excess return from corporates is somewhat correlated with equities so you're getting a little bit of an equity like kicker in the corporates that you can get anyways in your equity exposure so I guess I still do think the total bond market is an appropriate investment vehicle I did agree with Jack several years ago when he was talking about doing the total corporate index fund for people who do want to work with corporates I still think the total bond market is a rational investment okay this is a question from Mel given today's situation what are your thoughts on the current high bond offerings well when we compare them to the good old days when you could get the 343336 fixed rate and you could buy $30,000 worth personal security paper and $30,000 in electronic bonds we say that things are pretty sad on the other hand when we look at the fact that they are taxed a burden for about 30 years they're risk free they're adjusted for inflation and you compare them to any other risk free investment that's available today despite the good old days being gone I think they're still a good investment compared to other options that are available it would be nicer when we return to the good old days to face the fact that we have to compare them to what's available in CDs and money markets and things like I'm just going to be able to lose my voice so I think that there's still a good investment that people who are comfortable buying strictly online the next one is a question from the panel from Greg Bryce recently Paul Merriman spoke on what's wrong with Vanguard is Vanguard should tilt more towards small cap and small cap value within Vanguard's total stock market fund I would like to take the panel's feeling on this statement both pros and cons this is similar to what DFA funds do really it's called opinion on that one and the total stock market is the total stock market put that argument up there the zero sum game the negative sum game applies to the total stock market does apply to overweaving certain segments of the market if you want to overweave those segments in your own portfolio Vanguard does provide small cap value for them, small cap blend, small cap growth so for people who do want to take that bet they can do it but it wouldn't make any sense whatsoever including inside of the total stock market and the next question is that bet worth taking you know I alluded to it earlier it's not terribly wild about that because it's based on empirical work and that the theory was developed afterwards and people said I think you're getting extra return because you take extra risk and I would ask the question what risks are you compensated for in other words think of the original capital asset pricing model I talked about systematic risk and non-systematic risk you're compensated for taking systematic risk which is market risk which is risk associated with each individual stock that can be diversified away so why should society pay to take that risk if you look at these the different segments of the market just think of the nine morning stock style boxes each one of those is more volatile than the market itself because they're more narrowly defined in a couple of cases they're marginally more volatile but if they're more volatile so they're riskier should they have a higher return to the market well if they did then why would you own the market you just own the pieces of the market you put it back together that way well that doesn't make any sense because they come back together again and they're in the market so I think that this arguably from a financial theory standpoint would be that it's risk that's not compensated it can be diversified away from the answer aspects but for me I'm just not too volatile I take the fact about it let me just add to that I agree with Gus at least in this case and I talked to yesterday about the FAA and I simply don't believe you know I know what the past date is and I know the growth has done in the past people use the expression I'm sorry value value does better than growth I never want to hear that value has done better than growth in the long term as does but has done and that's pretty relevant to me in the future and small cap the same thing has done better in the past than large cap in these long periods of going back to I guess 1928 or 1926 something like that it's very clear that you can find 20-25 year periods where the reverse is true so we've got this period dependent comparison and it starts at a certain point and ends at a certain point it's all I can do with any comparison you've ever seen is period dependent we've also done a fair amount of work on how the real world works rather than those calculations out of Chicago work and it turns out these things don't work nearly as well if you compare say at growth funds growth mutual funds with value mutual funds and we've done a lot of work on that so it's quite different and will lead you to no conclusion like that at all and also if you believe that the stock market is a great arbitrage between the present and the future even if it's categorically true the value in small cap are better the prices of the value in small cap will be bid up and the expense of of that large cap and growth stocks which will be bid down so I don't see any reason it should hold in the future and I also call when you look at all the morning star ratings say class by class by class fair to Paris I mean our value funds will be compared to BFA's value funds I think to that nature we're the highest ranking investment company complex in the entire morning star ratings we have a 50% 58% positive rating we only have 6% demand guard funds 1 in 2 stars and 65% are in 4 in 5 stars out of 58th the way I do it and BFA is 16% 1 in 2 and 48% their differential is 33% and they still ranked number 6 this is good and I salute them for that probably the main difference between 1 and 6 is they're charging 45 or 50 basis points a year and we're charging on average 15 so if they want to get up and really get in the competition reduce your cost BFA now let me make the contrary in your case first of all I think that a more subtle definition of risk is called for a risk is more than simple volatility and the best definition of risk that I know is anti-monet risk which is basically summarized as bad returns and bad times so if you look for example in the return of the small value corner during the most recent financial crisis you were left with a return of minus 65% top to bottom versus about minus 55% for internal stock market that may not seem like very much but there's a big difference between being left with 35 cents and being left with 45 cents so I think that small there's a good theoretical reason why small value stocks have a higher return it's not just that it's purely dependent in the United States at least the value between what is present in just about every single country we would want to look at 15 out of 16 developed nations I think the French international study and I think 12 out of 16 emerging markets nations now having said that the return of any factor I believe is roughly the proportion of the number of people chasing that and in the current environment everybody in their dog is chasing the small value factors from DFA to our mountainous crew to just about everybody else is pushing their version of smart beta so I think that it's a much tougher road to hope from this point forward than we believe it is other respect other Benjamin Franklin Bogo or two dogs are chasing small value stocks even not those two dogs the next question is for Dr. Bernstein from Ray James is globalization deprived is globalization depriving the benefit of diversification across regions if so can this be quantified and predicted reasonably well yes if you look at simple short term periods daily returns, monthly returns we all know that the markets have become more correlated the reason for that is simple van barred and DFA and DFA providers to get exposure to these corners of the world to obscure corners of the world with the push of a key and when that happens correlations will naturally rise having said that the long term correlation value is still there all you have to do is look at the returns of various asset classes between say the 10 year period between 1999 and 2008 which comes to all their markets and what you see is that the broad US market had a nominal return of something like minus 20% over that 10 year period whereas most other foreign asset classes in particularly emerging markets had in some cases triple digit returns so there is diversification that you commute to not you know that's time around of course but you know I'm a strong believer in the fact that we cannot predict the future therefor diversify I'm a little slow I'm still thinking about those last response a lot of factor returns and my point was not that there isn't actually more risk in small cap value or in small in general it's just whether you should be compensated for that risk in a single stock than any other where you could invest but are you compensated extra because you're investing in a single stock if it's diversifiable then you don't be compensated for diversifiable risk and should society pay people to take a bet on small cap value the more risky segment of the market when society itself in aggregate doesn't bear that risk again I think you define risk I define risk as what I feel in my stomach in 2006-2005 and I think based on that measure I think that small stocks deserve a higher return than what I would use Okay the next is a three part question for the panel from Bob and Artie I'd be interested to hear the panel's few points on portfolio construction in retirement based on three different approaches advocated by members of the panel age in bonds or some variant the bucket approach based on when the money is needed or liability matching portfolio why keep playing when you're going in wine? Well I have a question for Bill along those lines Bill in your early book showed that an old bond portfolio was actually riskier than a portfolio with I think it was between 7 and 12% inequities so if you won the game basically if you don't invest in equities in theory it always saved investments and yet it seems to contradict your findings in your early book I can't be entirely consistent all the time on this which you found like I said I can't be right about everything at least at the same time more seriously there's no one approach that is best for anyone you have to look at your own personal situation I think that in general a person who has saved up just 15 or 20 years of residual living expenses that is what they need to live on in addition to social security and prevention if they're lucky enough to have that that person really should have a liability matching portfolio which if not 0% stocks should be fairly low it was a bad draw early on let's say even a 30, 70 or 50 40 portfolio we very well make that person run out of money on the other hand Warren Buffett's way can invest 100% of the money to invest 500 because the dividend yield not even a quarter of the dividend will not be presumably paid or living expenses so you can tolerate if you have 50 or 100 times your residual living expenses in your portfolio and you can emotionally tolerate 100% stocks why not an age equals bond it's a good shorthand it's a matter of personal taste more than anything else on the liability matching portfolio it's a theoretically extremely sound idea but today with interest rates where they are funding it is beyond the financial ability of just of every corporation that has a pension plan they really can't do it and that's put a lot more money in and that would reduce executive compensation it would reduce corporate earnings all those things that are totally unacceptable it would reduce the price of the stock in the stock market for all those short term speculators that are holding it and well that notates against just the sheer ability to have a liability matching portfolio and they may want to try it anyway and there are all kinds of financial machinations naturally going on out there where they sell the liabilities to an insurance company I'm not sure exactly how all that works people are trying to get around this without putting up any more money but they keep a lot of that liability when they sell it off and if anybody really knows how to account for that so it's very sensitive our corporation is very sensitive to these pension contributions and so they try to work their way around by assuming higher returns and that will never get even though those plans are underfunded by I think the number is $5 trillion is the underfunding in private and public pension plans most of which I think it's four-treated is the underfunding of state and local government plans public pension plans so we have a real mess on our hands and in the first company or the first municipality goes belly up Detroit gave us an example he's going to find they're dealing with a financial situation it's just on an untenable system doesn't work and of course the taxpayers have to approve that and they're not going to approve it so there's only so many options you have left so it's a complex idea the idea of liability matching theoretically you could write a book I'm not perfect at this but it just doesn't seem to work the next one is a question from Bill Bernstein from Pup Loverson for the past three plus years you've advocated holding very short-term bonds primarily in the Treasury do you maintain this view? Paul you're wrong I've been suggesting that for the past seven years there's six of them I think that in finance best you're going to be right 60 or 55% of the time this falls into the other the other category that said I'm still comfortable with a relatively short-term bond likely I would lay on my base here a little bit this is for Mr. Vogel what do you recommend for individuals and organizations who need reliable predictable income? a mixture of individual securities dividend paying stock preferred stock in bonds or do you still believe a portfolio index funds is best? it seems to me quite clear that you're depending on income it is a long way from irrational to depend on higher yielding and common stocks as well as bonds where it's don't accept the market return and the purists will say I'm wrong here which is fine but you need the money and you can probably get out of I'm not sure the exact yield of the Vanguard high dividend fund I look out of the paper just about every day and it has a return very comfortable with the market I know what the yield is but I guess it's about 3% and you're going to have a correlation with the market probably 96 or 97 with that fund because the big companies in America the stock market are by and large dividend paying and a company that's done this really high dividend paying so I think it's a good strategy if you need the income and most people do I think the risks are very small and I also continue to differentiate I think probably a lot of our fellow panel talk about returns and returns are very uncertain but dividends are quite certain there's only been I showed you in that chart yesterday only one significant dividend cut in the last I think it's 1935 that's what it is 80 years and with the banks will cut their dividends back in 2008 and so dividends are quite reliable and I look at dividends as being real and market returns being to some degree illusory and if you don't believe market returns or illusory just check the percentage changes in the market these are the last 8 days you know it's like this I never said I ain't quite so crazy I might end up a friend and so I like that strategy I like a strategy for a investor that needs the income and understands the risk the whole bottom line strategy the whole bottom line strategy and there's a lot of investors perhaps many of you in the room maybe most of you in this room we're in this game for some income and I think we ought to make sure we have options that are available and we do have a band garden through our high dividend yield fund and our high dividend fund and our intermediate term for the bottom line and I think the incremental risk is small so don't do it maybe with your whole portfolio but do it with 75% I've already read the other 25% number out of the air here I can just come down the middle totally down the middle the next is a question from the panel from Sandio Mahler what do you think of Vanguard managed payout fund for a retiree how about a way how about as a way of simplifying it that the spouse has no interest in investing there's only one option you have to use the singular I guess I invented those so I'll... the funds are designed to try to minimize volatility and yet provide reasonable rate of return and so we pursue that with a number of different asset classes it's more broadly diversified than say target-date funds even now using some alternative beta strategies we've put into development about almost a decade ago now and those alternative beta funds have worked out as expected but I think that by and large managed payout funds are fund is meeting its objective I think we did have too many funds you know we had the 7% fund everybody was putting the money in that without the realization that probably you weren't going to get your standard of volume is going to go down over time and everybody said well I'm going to take the 5% fund and I can get 7% fund but the end result is very different so I think it's an appropriate investment I wouldn't make it my entire investment but again the design is to be balanced approach, broadly diversified approach to still provide a reasonable rate of return and with much lower volatility and the volatility has been less volatility is every investor's enemy I mean the same return in a volatile portfolio is one that's constant I'll give you numbers 10% and 10% over 2 years gets you a 21% return 0 and 20% gets you a 20% return so you don't want volatility so those portfolios were designed to try to what Gus was that designed as an alternative to annuities like a spea, a single premium immediate annuity yes this stuff for the fact that it does have more more volatility I mean it was designed to be you know something you can have in retirement really count on the amount of income the income growing over time with inflation and hopefully even a little bit on a real basis but and doing it in a very low cost fashion the problem with the annuity is it's a high cost annuity is the money people don't buy annuities if they're sold in annuities I'm talking about a single premium immediate annuity they're sold nobody goes out looking for one it's a sales person who comes to you and sells you one well I think in this group a single premium immediate annuities are one of the acceptable options for both of them I think a lot of hesitation what this patient people have is it's the risk of dying tomorrow exactly so that's why they're still relatively small but when the managed payout funds came out I thought this was a good alternative for people who could accept the variability in the returns because they still retain the assets as opposed to a single premium that means they know where they lost the assets you know if I can say something slightly scandalous a lot is written about annuity, annuidization puzzle which is why more people don't do it and Mel's given one good reason so it's so it's Mr. Slaughter but what we find when we look at annuidizations for lots of good reasons not to do it happens after a lot of the people who write about the annuidization puzzle receive very large consultant fees from the insurance industry no say it itself say it itself okay here's a question for the panel from Victoria have in March to April we were bombarded with the news about high frequency training high frequency trading HFT what is your current opinion about HFT and the merits of Vanguard using HFT resistant exchanges such as IEX I guess that kind of falls on me I've actually been somewhat vocal that I think all the uproar about HFT sells books and actually has had less impact but at the end you have to have some metric to measure the quality of the market so what would that metric be would be transaction costs that's really what the fallout is when you're investing and if you look at transaction costs 15 years ago they were well over 1% to buy the average equity today it's about 35 basis points so transaction costs absolutely plummeted in the last 15 years there's several reasons why there was a very significant change in what's called the border handling rules in the mid 1990s 1996 I believe and that led to the proliferation of different trading venues prior to that time there were really only 4 different places to trade in 405 and then all of a sudden you see this explosion of trading venues and I would say that I'm not in favor of that I don't like all of the dark rules all of the trading venues but they're there to be crazy not to use them but that led to the proliferation of exchanges then we had another very significant change the decimalization in the 2002 I think that led to a collapse in the spreads we then had with this proliferation of exchanges we ended up with kind of a mess the exchanges weren't tied together what's called REGNMS National Market System and that tried to bring all these 52 different trading venues together again but they needed some vehicle to do that and that's what tradeers do one function I think tradeers do would be very familiar with they tie the exchange traded fund prices to the underlying securities or futures prices to the underlying securities the prices were one or away if there weren't people arbitraging to keep them close so all of this has come together to create an ecosystem and it's not an ideal ecosystem but it has resulted in a dramatic decline in transaction costs we live in a much better place today than we did 15 years ago could it be better yes I think it could be better I don't like the current market structure interestingly the issues brought on in flash boys really aren't the real problems there are some problems in high frequency trading but not the ones brought on in that book so the SEC is reviewing order types and that's really the biggest issue is order types so most institutional traders and certainly individual traders don't know what these order types are that high frequency traders are using you're totally immune to high frequency traders so I think there are some issues I think they're way overblown in flash boys we definitely live in a better world today and I do worry that if all of a sudden somebody came in and said I think we're all high frequency traders we'd go back to the old world and that was not a good point let me expand on that in a literary dimension which is the essence of good compelling narratives and the narratives that Mr. Lewis had were spectacular people cutting straight lines through mountains across the Appalachians heroic young financial analysts discovering regularities in the system never mind the fact that the cost of this to individual traders unaware of them might be a basis point or two hundreds or thousands of basis points that are garnered by a mendacious and mutual fund brokerage industry that's not a good narrative and he pretty much admitted that he said yeah everybody knows that Wall Street is corrupt and it's creaming trillions of billions of dollars off from individual investors but that just wasn't a good enough story for me this was a much more compelling narrative let me just suggest to Gus that you read in great care editorial from JPM for Summer or Flash Boy the time you get through it Gus you will think why is he putting my name to your work or your name to my work I guess would be a better formulation see it happen once again yeah this is a question for the panel from Frugal Investor given that a retiree has insured a basic survival budget using social security and single premium meeting annuities I've been reading with interest various discussions on both heads.org about a variable withdrawal method for those of you who may be familiar with it what are your opinions about it is it any better or safer than other withdrawal methods and if so why sure a variable flexible withdrawal method that reduces withdrawals when returns are low or negative is obviously going to have a better survival percentage probability than one that has a fixed one that doesn't change with portfolio returns so the question is how flexible are you if you're very flexible then by all means use a variable method you're going to increase your chance of a retiree successfully dealing with problems that will come at a cost of reduced consumption so there's always this trade off between safety and consumption we've got to figure out anyone else here can you comment? I think the other thread of a lower reduced income stream is also that you have a considered inflation in there so when you consider that plus the lower withdrawal it's kind of a double head okay here's a question for the panel from Dysaprius first stage sometimes cites recital rule if the bozos know about it it doesn't work anymore for all panel members in your opinion is this just one of those amusing platitudes that sometimes fits and sometimes doesn't or is there actually actionable wisdom in it there is no universal truth I think it's a useful rule extreme and one of the if I may talk more in market timing here one of the most reliable indicators in my opinion is when all of your neighbors are doing something it's generally a good idea that you don't do it and when people start arguing with you and getting angry at you because you disagree with them that's an almost certain sign that they're wrong anyone else? I would just say arbitrage is a very strong phenomenon so if everybody does perceive something in an arbitrage way okay here's a question for the panel from Ray James gold and tail risk how much would each of you allocate to gold in a hypothetical portfolio purely for diversification your time horizon is about 5% of the gold just in case something else other than that I don't think that you would really consider 5% of the gold you can do 2% precious metals which does effectively the same thing you can use a smaller portion of your portfolio by the way precious metals have the same prices of gold and past leaders by 70% let me just reiterate a very simple fact about gold and precious metals in any other commodity they have no internal rate of return I said this yesterday stocks had given any yield to earnings growth bonds of interest to bonds precious metals in commodities gold have nothing so when you buy that particular security you're basically betting you can sell it for what you pay for and that is exactly the definition of speculation so you want to be very careful we all know it gets very popular when gold is at 3,000 3,300 I don't know and it used to be the big thing in fours about 40 years ago and it didn't do well for a long time so everybody forgot it so just keep in mind that if everybody is talking gold it's time to get out now that everybody is talking non gold it's probably the time to get in God knows but it's a bet and you shouldn't be betting in your portfolio except Ron Paul said it could go to infinity this is number four I agree with Jack on that I have a different perspective in that I was a gold miner from 1982 to 1985 it took me three years to make up a company that I put together and I'm cured now I do believe that gold is not an investment gold could be as Jack said a catastrophic hedge to me if the world blew up gold is your catastrophic hedge but I don't place a high probability on that side of all the money in the world I certainly would not consider that I think that some people consider it an inflation hedge but in my portfolio I have a $120 gold piece that I inherited from my dad and I use tips and op-ons for my inflation protection it's interesting there are two types of inflation so there's anticipated inflation and unanticipated inflation and gold and other commodities are good inflation hedges with unanticipated inflation in fact one of the best we're the few good ones but then once inflation is anticipated all of a sudden equities are probably your best hedge against anticipated inflation you know as far as gold is an investment so we have to raise this left hand there we go there's the best in gold investment you can make there is a very important point here that I don't think anybody of Cliff Asnes has talked about and he's with this wonderful war if you can get ahold of this it's all public with Paul Krugman and Cliff Asnes said the Fed has stopped price inflation for the things we buy but they have increased the inflation of financial assets we've had huge inflation due to the very Fed programs that are holding inflation down on things like the CPI so it's not an open and shut case and it's almost like you push something in here because it's whack-a-mole or something that's up over here and that's a very important point to realize the Fed I think is kidding itself in a lot of ways by giving themselves the heroes pat in the back always worries and things except when Gus and I are concerned and so you want to think about what's really happening and they require moving into financial assets as well as their normal price best in consumer goods I use a question for the panel what fixed income choice and asset allocation do you advise in the current climate for individuals that have little or no tax advantage face and want an only large taxable account I mean, you know, you should diversify you should have a fair call of very safe assets Treasuries CDs Alan Block CDs and that as well a mistake that a lot of people make is they put 100% of their fixed income into their single state into their own state which can be a disastrous mistake to make in terms of credit or alternatively is divided into a bottom line let me just say this is one of those questions that everybody wants to answer and there is no answer one example here, and I agree with what Bill says it depends first of all by far the most importantly what your time horizon is if you're investing for the next 5 years you probably should not be in the stock market if you're investing for the next 10 years you should do it moderately if you're investing for, as everybody must know if you're investing for another 75 years which our young people are doing today you should not only be 100% in the stock market you should be levered and you should be wholly levered and you will double your market returns almost without any question and you got to be ready to stay through all the stores we get but all these things depend on so many individual factors time horizon, the big one risk tolerance is the big one the dimension of your financial goals if you think you need to make more money try to do it in one stock not necessarily always the best idea but we're all individuals we all have our own behavioral problems we all have our own hopes and fears and so I think I think we're ending over rules making society I say for all one, the same individual and if anything is true we have in this room probably 230 totally different individuals even husbands and wives I do not wish that when I was a young man I could have tolerated a 100% or double levered portfolio but I don't believe there are any sentient beings in this corner in the galaxy who are doing that unless you consider unless you consider having more in each other's house you could not have more in each other's house and you have less to invest you think more in each other's house and one of the obvious things is tax efficiency and what tax brackets therein I have a friend who sold his business for a very large sum and so most of his accounts are in the tax most of his assets are taxable so in his case he uses munis to reduce the tax burden and he uses things like total stock market for his equities because that's a very tax efficient holding Here's a question for the panel about what major trends you have seen in the last 5 to 10 years do you think they're here to stay or grow what new products academic research or legislation change will have the biggest effects on the total bed investment strategy? First never use the word product in my presence we aren't selling products for God's sake and I actually had to ban the word when I was running Bandard and he had to pay a $5 fine of use that's a big surprise I'm using munis it's almost zero I just think it's a long way to look at it's a great way to look at beer, it's a great way to look at I don't know toothpaste, it's a great way to look at bread God knows what else but we're not the product selling business I think we have created too many products in this business far too many because most products quote are created with a rich provider of the service and not the consumer of the service Wall Street creates products to make money for anybody want to spend a little time guessing who they create these new products for to make money for themselves I mean this is not complicated so you can't it is absolutely true that there is no way to improve if you won't market it next month you can the only way to beat the market is to have an individual strategy that can win or lose but overall, as we said a thousand times here, if you've all gotten the message even before you came all the way here these last couple of days it is the universal strategy and it cannot be it's mathematically correct it is a tautology and nobody can outdo that so I hope we won't try because whenever you try you know, I don't much like I gave actually the height of it boom, back in 2007 talking about financial innovation had the better reserve back in Philadelphia I think this is in my book don't count on it maybe one of the two books the latest book and I took a great view of innovation in America in products, services all those kind of things and a very dim view of it today and the next thing I knew the roof had fallen down all those great innovations all those great derivatives all those mortgage backed securities all those phony back where they called Gus and Max having their books they said they would guarantee the principle the word special special investment and the banks putting them out as money market good to the clients but they weren't money market good because of their asset bank and they had to eat a lot of that stuff poor old Chuck Pritz city bank who had to keep dancing as long as the music was playing I'm sure he'd like to take that one back suffered greatly from it thinking they had to keep in the flow of the market keep trying to outdo it products that people would buy and it's all it's a phony business the financial business because we're all trading one another and as I mentioned in one of my books we blank find Goldman Sachs and everybody else says financial business is a great business we provide new capital to the industry we make it possible for innovation and it's true and the market produces about 250 billion I think the number is providing new capital the classic function of finance financial system the recent wheels of capitalism all great compared to that 250 billion we trade with one another the tune of 36 trillion dollars a year so investment accounts for what is that? 6-10s of 1% of what we do in the marketplace and speculation 99.4% is this a great financial system or what? Jeff let me see if I understand what you were saying I knew I didn't make it I know a little story about Jack being the word product he also being the word sales so building now was head of the institutional sales department and it's like from that day forward I've been telling a gorgeous facilitation I like it better than I want to fly I am concerned with the development over the last 10 years you might have picked it up on my presentation about the so called smart beta I mean the one line on there that you saw etf.com being quoted as anything like market cap weight and I agree with Jack but the market cap weighting is the one is the one investment that has that topology improving it as the correct way to invest doesn't mean that other things might not outperform but we'll know after the fact we won't know before the fact what's happened in the past 10 years I don't know if it's anything new in the world it's new in the world it's the history that we have that we haven't read that we've changed there's many bubbles there's many panics and probably he's willing to need to pull it to your lap to fall asleep I don't think it has anything to do with the past 10 years and financing it's an individual investor okay this will be the last question for this panel and this is for Mr. Bogle from John Becker I would like to have you ask Mr. Bogle if he is a stick with periodic portfolio reallocation or if he is just still just believes you should set it up one time and let the market move it all around it will I don't need to approve it but it all depends