 This is primarily for Bill Bernstein, but anyone can reply. Market swings over the last year or three seem to be atypically wild, but that wild appearance could just be recency bias or lack of historical perspective. How would you compare recent volatility to the noise from the past? I think Allen just basically answered that question. You can answer it one, two ways. You can use Allen's approach, which is a good approach, but I would point out that implied volatility of the S&P 500 reached about 85% during the teeth of the crisis. We didn't have the VIX back in 1929 and during the 1930s, but you can estimate what it would have been about the same thing. If you just take the 30-day trailing volatility of the Dow Jones Industrial Average back then, it correlates pretty well with that. I think we saw an extraordinary event. The question is, will we see that going forward again? Will we ever see that anytime soon? I give it a pretty good chance. The Europeans are doing their best to precipitate a global financial crisis. Keep plenty of cash. You'll be able to pick up stocks cheap at some point. This question is from Gathar Lee, who is here. Is low-cost broad market index investing here to stay? Do any of the panel members see any possible threats to its continued availability? Will it evolve, and if so, how? Allen? I think it's here to stay. Greed versus common sense. I love the data that Jack showed yesterday that 100% of the cash flow for the last several years was into index funds. And yes, there are ugly things like the pro-seers triple leverage inverse index fund, but that garners a tiny bit of the assets compared to the broad, diversified, total U.S., total international, total bond funds. I think it's here to stay. I think what Jack Bogle, whether he invented it or is just the person that took the idea to the public and made it popular and allowed me to do what I'm doing now, having a lot of fun, it's here to stay. I'm sorry, Gilla, I forgot that that was directed to you. Oh, I'm sorry. No, that was my point. No, I mean, I agree with that completely. You know, the level of retail finance, the level of the advisory service in the brokerage industry, the people in the brokerage industry are just scared spitless. They're jumping ship. And the model that is picking up all the business is Rick's model, which is low-cost. Low-cost. Yeah, low-cost. I mean, we're trying to, you know, it's just hilarious watching these brokers trying to rebrand themselves as Rick Ferry. So I see it snowballing. I certainly don't see it ever slowing down. Yeah, I've seen a lot of people coming into the advisor business who used to be brokers and used to sell products and used to sell insurance and whatever, and then now doing low-cost indexing. And they're trying to do it where they're the tactical asset allocator. So they're buying all these beta-type products, which are basically, you know, spiders and VTI. And they're trying to do tactical asset allocation to add value, which they can't do, but that's a different story. It justifies the fee, I guess. But there's this huge shift. I don't know if you've been reading the papers about all the amount of money that's leaving American funds. Now, American funds has been the leader in the brokerage industry for decades on gathering assets all the way through the 1990s. But they're actively managed funds, even though they're really closeted tax funds. And you're seeing very large withdrawals from American funds. You're saying, where is this money going? Well, it's going into indexed products, you know, particularly ETS, because the advisors who were directing money into American funds and are taking their clients' money out of American funds and putting them in index funds like SPY, VTI, and so forth, predominantly low-cost stuff, but some of it's going into the alternative junk that's being created. So there's this huge shift. It's going that way. And Jack's slides show it all. I mean, indexing is continuing to grow, and it's not going to reverse how these products are creating these new fangled index funds that Jack talked about as active manager who's close to indexing, indexing looks a lot more like active management. But Alan was right. They're not gathering much assets. I mean, indexing itself, Vanguard-type indexing that we're all believing and that we all do, grows organically. It grows by word of mouth. We tell other people about this. They look at it, and they say, yes, I became a believer. They put their money. So it's a very grassroots effort. All that other stuff, like what Rob are not, and I like Rob, and don't get me wrong, and I think he's got a unique product with his wrapping indexes. But all that alternative stuff has to be sold. It's sold to you. You don't organically buy it. And that's the difference between the organic growth of Vanguard and low-cost indexing that we all do. And all this other stuff that's being hauled into indexing that's being thrown upon is it has to be sold to you. And quite frankly, when you look at the numbers, and Morningstar has all the numbers, Scott Burns took my index strategy box methodology that I created a few years ago and dropped all these different index products in there and looked at what's collecting assets and what isn't. And what is collecting assets are Vanguard total stock market, or S&P 500, Vanguard total bond. Those types of funds are gathering the assets. All this other stuff out here is competing, but it's not really gathering assets. And Christine, you've been... Well, yeah, Rick, I very much share the concern about advisors serving as technical asset allocators. I think consumers sort of looked at their advisors and said, okay, there's only so much I want to pay. And advisors looked at that and said, well, okay, we'll squeeze out the active fund management fee so I can take more for myself, and I'll use these very low-cost products to technically asset allocate. Our data certainly point to the ability of anyone, whether retail investors, advisors, or institutions, ability to make tactical decisions like that correctly over the long term. We point to their chances of doing so as being very low. A colleague of mine has been collecting data on funds that he has categorized, hand categorized as being tactical historically, and I was telling Rick about this yesterday, and I think it dovetails maybe with your data, or maybe not. He found that the tactical asset allocators had beaten the risk-adjusted profile of Vanguard Balanced Index, just 6% of those tactical asset allocators had done so, which to us really cast into question the ability of anyone to make those tactical calls correctly on an on-doy basis. And fully 25% of the tactical asset allocators had actually gone away. The funds had merged or been liquidated, which generally speaking means that they probably weren't very good. Well, since I've got both Christine and Alan on the same panel, I'll ask the both of you about using on-flows. I know that you deal about it. I'm not unsympathetic to that point of view. And Morningstar, for years, used to have an on-flow inventory strategy, and you gave up on it, and I don't know why you did. I think my colleague Russ Kinnell is still doing some version of the Unloved Fund study that some of you may have been familiar with. It probably does, right? Wasn't it called something like that? It's called Unloved Funds. So we would look at the fund categories, the three fund categories, that had been the biggest asset losers over the previous year. And the idea was that you would buy all three categories. I think they back-tested it and found that you'd have to buy all three to have any record of success with it. But what we found was that those Unloved Fund categories strongly outperformed the market and certainly outperformed the loved categories, those that had gotten big in-flows in the previous year. So I do think that there's something to watching fund flows, although sometimes they kind of make me scratch my head. Recently, for example, there have been great in-flows in emerging markets. And I'm not sure what's going on there. So sometimes it doesn't sync up, but I think in general, it's not a bad contrarian indicator. I think it tells you about the future of voting markets returns. I think that the Unloved Fund is what we all do when we do annual rebalancing. When we do annual rebalancing, we are rebalancing out of the loved funds and we're rebalancing into the Unloved stuff. So we're all doing it if you just do an annual naive rebalancing. I can't predict what the market does in the next year, but I can tell you if it goes down, people will be taking funds, taking their money out of equity funds, if it goes up, they'll be putting it in. I shared with Bill and I presented to Vanguard a couple of days ago some ideas and back-testing how changing the allocation between total stock, total international, and total bond would have done on the buy-and-hold annual 1231 rebalancing or going in the opposite direction of fund flows. Between buy-and-hold and the fund flows, there was about a 1.4% annualized difference and it did not work every year. During the end of 2002 to 2007, five years when stocks went up, U.S. stocks doubled, international stocks tripled, funds flowed in and it continued to go up until obviously it didn't in 2008. So fear and greed, the instincts that helped us survive really comes into play and damages us in the stock market. I think that the things that Alan and Rick and Christina talked about are all just different ways of skinning the same cat, which is when I see an asset class in index that's falling 30%, 50%, 70%, I start looking my chops. Fund flows tell me pretty much the same thing and so does when I tell someone who's a laborer so I like a particular asset class, they look at me and they say, are you crazy? That's also a good sign and they won't tell me the same thing. Okay, the next question is from Bob, 90245. Recent threads on the forum question why stocks, valuations really matter. If we have properly assessed our need, ability, and willingness to take stock market risk based on our age and circumstances in setting our equity fixed split, shouldn't we stay the course, not change the equity fixed split and not worry about valuations? I think if you're young, that's true. I think if you're getting close to retirement, you really want to look at what your number is. In other words, how much are you going to be shooting for? You're shooting for $2 million, that's what you're shooting for. When you catch a bull market, like you did in the early 90s, mid-1990s, old-year-olds, you catch a bull market, your expected rate of return on equity is 8% and it was 16% a year, so you look at things as, well, if I need to get a 6% compound to return on my money, I'm here at $1 million, I'm going to be adding a little bit of money, seven years from now, six years from now, I should be at $2 million, or eight years you're finding yourself at $1.9 million. Well, that's because the valuations of stocks went up. I think at that point, it's a legitimate thing to do, is to say I'm almost there, I can coast in to $2 million. I've made a lot of unexpected gains in my portfolio. So I'm going to lower my asset allocation and you're really lowering your asset allocation because valuations of securities went from 14 PE up to 20 PE, that's really why you're doing it. You didn't expect this unexpected jump in equities to occur which funded your retirement. So a reduction in risk at that point because you're almost there, makes sense. But if you're young, I think you just ride out the wave. Basically what you're saying is that when you won the game, you've stopped playing, which is just a different way of saying that, and I agree, the young person should be fairly, continue fairly constant aggressive allocation because they're constantly adding money, and that's almost a, there are very few things in finance that are sure to buy her, but if you save continuously a large amount of money between the time you're 20 and the time you're 15, it's something that you're going to buy a lot of stock, break cheaply and you're going to make out like a bandit. And why would you want to screw up that by valuing, by building a ran with your direct reallocation? I think that's what the references to is that should people switch and change their asset allocation on an ongoing basis when equities hit the P-E ratio, or the P-E10, it's a certain number. Some people claim that like a magical bell will ring and now it's time to go from 75% equities to 25%. And then another bell will ring when P-E10 hits another number and now you jump back in. All of those experts that can do that have demonstrated that they haven't been terribly effective in that, and they spent a lot more time, I think, than most of us and most of the people on the forum worrying about that from a behavior perspective. I think you're just setting yourself up for trouble if you're trying to do that, and I think it's much better to look at if you're reaching your target financially and things like that and not worried about and sort of some of the underlying factors. I don't like to analyze a lot of these factors like these guys do. I just try and keep sort of investing a little bit simple and recognize that for me, a lot of it is very behavioral, and if I start worrying about a lot of that kind of stuff, I'm probably going to get down the wrong path and it's best just to keep looking at the total market funds and not worry about so much about all the individual components I'm going to need. Yeah, the funny part is is even the people that espouse that constant change all have different numbers. Some say 8 is the magic point, some say 14, some say 16. It would be nice if a bell rang and it really worked, but the bottom line is that even the people who espouse that can't agree on what the magic number is. Well, the number keeps changing. I want to tell a quick story of your mind. It used to be all the way from the 1800s all the way through till the early 1960s basically that when the dividend on stocks fell below the yield on the 10-year bond, then you sell stocks and you buy bonds. And when the dividend on stock and the S&P basically rose above the 10-year treasury, you sell treasuries and you buy stocks, that was the market timing system. That worked wonderfully from 1870 through 1960, roughly 65, but then what happened was because of changes in advances, if you will, in corporate structure and cost of capital and a lot of Ph.D. type were coming into this, they said, you know what, it's better if we use those dividends that we're paying out and keep them internally. It's the cheapest form of capital that we can have to expand the company, let's use them, rather than going on borrowing money or issuing more stocks. They changed capital structure and then the dividend yield started to fall because companies started changing their structure and a lot of companies cut out their dividend. So all of a sudden they said, okay, well instead of it being above 10-year treasury, buy stocks, we're going to put a range in of when dividend yields are up above, up below 5%, excuse me, when dividend yields were at 5%, because they had dropped now, when they went to 3%, you're going to sell stocks. That was now the new range, 5 to 3. And that lasted for a while until dividend yields went below 3%, that stayed there for years and then that didn't work anymore. So the next thing that I think we heard about was, well let's move ahead and review it, the Fed model. You remember the Fed model? All you that have been investing for more than 10 years, which basically says that the yield on the 10-year treasury inverted and that should be the PE of the market. So that when 5-year treasuries are yielding 5%, a 10-year treasury is yielding 5%, the PE of the market should be 20%. So if the PE of the market is above 20%, when treasuries at 5%, then you should sell stocks and when the PE goes below 20%, you should buy stocks. Okay, the PE, 10-year treasuries right now are at 2%. Okay, so you take 2 and you divide it into 100 and what should the PE of the stock market be? 50. We're currently at 12. Man, is this a flaming buy or what? I mean, so all these models keep changing. So the question is not so much, coming up with the models, which one's going to work in the future, we have no idea. So it doesn't, it can't do anything with this. I think the one wrinkle that I might add is that instead of changing your overall stock allocation, I don't think there's anything wrong within that stock allocation, making some minor adjustments. For example, in the 1990s, I think that anyone with pulse or early or the late 1980s, anyone with pulse would have realized that maybe they wanted to own more U.S. stocks than Japanese stocks because of the enormous gap in valuation. Similarly, in the late 1990s, large cap, U.S. stocks, large cap developed market stocks were pretty darn rich and that didn't mean that you should have sold off all of your stocks, but what I think a reasonable person has said when they've got, you know, REITs are yielding 9%. Maybe I should own a little bit more of those gold stocks and small stocks, value stocks have been horribly beaten down. Maybe I want to own a little bit more of those, but of course, you know, then again, it appears to the total stock market person, you know, you want to keep it simple, so maybe you don't want to do that, but if you're a slicer and a slicer, I think that that's presenting some opportunities and of course, you know, the late 1990s you could look at the islands and you're really in awe. So, you know, I think that there are, there's some filling around the edges that I think is as well to help you, you know, avoid the real trade mix. It strikes me that a discipline rebalancing program would get you in the same general ballpark as sort of the market timing type strategies would with a little more discipline perhaps. I can predict the past with uncanny accuracy, but I am smart enough to realize that I don't know when markets are over or undervalued and if I knew, I wouldn't tell you, I'm not that nice a guy. The next question is from Karen Bennett. Karen. She asks, what do you see as the ideal amount of inflation-protected securities one should have in their account, taking into account key variables such as age, size of the nest egg, current interest rates, etc., and why? What do you see as the best vehicle for this investment? Vanguard fund, actual bonds? I'm trying to see the range of responses from experts to help target the appropriate amount for our portfolio. I think we addressed the amount in another question, so can I address whether to have just bonds or the fund? Okay, I've got to disagree with Bill Bernstein. I mean, I don't want to have to invest in individual bonds. I don't want to have to reinvest the interest that comes in. Just give me the banger tips fund and I'm happy. And I've really ever disagreed with Bill, but I'd like to point out one thing that in your comments with Jack, you indicated that you talked about the risk of tips and how they behaved recently, but you said that you wanted to hold tips and not the bond fund. But what you neglected to mention is that if you needed the money in the time period where you're going to sell the bond fund, you're going to sell the tips too, so you're in the same boat. They were just as volatile of the individual tips if you needed the money at that time. Yeah, I guess the point is that you should have an emergency fund for that, no worries. The tips ladder, which I would recommend, are for your expected needs. You're unexpected needs you have to handle another way. Okay, this question is from actually from the forum. And the question is for all the panelists. By the way, this guy is from BT. This forum member, so. He asks, what is your opinion of single premium immediate annuities as a way to reduce uncertainty on a safe spending level during retirement? Can you offer any guidelines on what portion of one's invested assets should be converted to an annuity? At what age should they be bought? What factors should influence my decision? I think I need to go visit him personally before I can make a decision. Reconciliation. Just pay the travel expenses. I think that that, the single premium immediate annuity is the only annuity that I think that the bubble heads in agreement that is something that can really play an important part in investors' overall planning. In terms of how much, a lot of people, the amount is going to vary, but it would be enough that it would go along with social security in giving them a guarantee along with social security in any pension they have that would guarantee that their expenses are paid. In terms of how much to do it and when to do it, I think that's an individual decision, but the longer you wait, the higher the payout is going to be, so if you can afford to wait longer, I would never, this is my personal opinion, I would never put more than 50% of my assets in annuity. Remember, the annuity is unlike a variable annuity which is walled off, and if the insurance company goes under, you're going to be made whole with a single premium immediate annuity, it's mixed in with the assets of the company, it's subject to their creditors and if the business goes out, if it goes under, people call it insurance, but it really isn't insurance, state insurance, it's not really a guarantee, all they do is go to other insurance companies and assess them to try to make you whole, but in the meantime, you're not necessarily getting checks and there's a lot of disruption and insurance companies do run a business because you're betting on that insurance company being around for maybe 30 years or so, so if you're going to buy more than 100,000, normally in many states that's the maximum scaranteed, you would want to do it from multiple companies and you might want to do it at multiple times too. Yeah, I was going to say that Mel, I think a latter strategy with single premium immediate annuities is a great idea to help mitigate the risk of sinking a lot of money into a very low payout environment and also to help diversify across multiple insurers. One topic I think has been kind of under discussed in the realm of single premium immediate annuities is what they call the insurance industry adverse selection, so you have people with a lot of longevity on their side purchasing their things and I think what insurers are experiencing is they've got a lot of folks who are living longer than their actuarial tables might have suggested, so that's another thing to think about that could depress payouts for the foreseeable future from these types of products. I think it can make sense at age, I agree with Larry Swedrone at age 70, but the life credits, the insurance against living a very long life become larger than the costs you might pay through going through an extra intermediary. Do not forget, not only is there default risk from the insurance company, but there's interest rate risk. If we do hit, and this is not a prediction, but if we do hit hyperinflation then that payout becomes worth less and less each year, and yes you can buy inflation protected, but that drastically lowers the payment. And furthermore the inflation protection you get with most SPI inflation and adjusted SPAs is poor as a cap on them. The best work that's been done in the area has been done by I think by Moshe Malewski, who has looked at a very sophisticated they mean variance sort of statistical approach. And the results are very intuitive, he comes up with very intuitively appealing, which is you split your money among stocks and bonds and some SPIAs you should certainly buy at least two or three companies and maybe some tips and he puts very cool annuities in there as well. So don't bet the foreign on anything. And again it's sounding like a broke broken record but unless you think you're going to be pushing up the daisies anytime soon, the SPIA that everyone should buy is the delay in social security until soon. I have to preface this by saying this was written in May. This question was posted on the forum in May. Does the success of PIMCO's total return bond call into the question the desirability and effectiveness of indexing for bond funds? The question answers itself. Don't know if this question will be timely when the reunion occurs but here in September there's been much news about Greece a possible default there and whether the euro will survive. Has these additional risks to European stocks altered your thinking about diversifying equity asset classes globally? I think that would be a good question for the advisor. I think the answer is no. I think there's always different kinds of uncertainty if you look back over history it just varies from decade to decade year to year. This just happens to be the topic of the day but I think that historically diversification has been a good idea and continues to be an excellent idea. India, China, Brazil or growth countries Western Europe or value companies typically does better in the long run value or growth value. I have very specific and firm recommendations in the event of a Greek default expulsion from the eurozone collapse of the Greek economy in a return to the track mark which is you should visit Greece. I just came back from Greece as a matter of fact. I'll be back on my way back from Fiji It's a funny story. We were right down where the American Embassy was in Greece about three weeks ago and we were on this little tour where there were about eight of us and we went to this nice museum and went upstairs and they had a lunch area there so we had lunch and the guide that we were with was a national geographic tour which was wonderful by the way. The guide we were with said that's the Vice President of Greece. For me to head the Vice President of Greece and he was eating lunch at the table next to us and now I can say I had lunch with the Vice President of Greece and he didn't indicate that they were going to default although that is true. As Alan said the value stocks generally outperform the growth stock but they have more risk for example at least it's more perceived risk and 20% of our GDP comes from Europe so we have some risk and if they collapse in Europe because Greece collapses they might default, don't get me wrong but all of this talk that's going on with the IMF and with the G20 right now ECB and so forth is all about how to backstop that default much like the TARP program that we had is what is going on over there and they're going to backstop a country and they will put in measures to backstop the country and I think this is the reason why we're seeing a rally in European markets right now is why we're seeing a rally why was there already a decline in US stocks because of what was going on over there and why we're seeing a rally right now is because they're beginning to come up with resolutions to what they're going to do is it a kick or a can down the road scenario could be these austerity measures are tough one thing about being in Greece by the way we're right there at the parliament building for several days and about 315, okay police come out, put the barriers up protesters over there all lined up behind the other barriers take those barriers down the austerity is a little terrible okay 330, whistle blows they all break up go back to work we see on television that's the way it is over there and once in a while and in every particular day you'll get maybe three or four rowdies that start throwing rocks and if you actually look at those pictures on television or in the newspaper you'll see that the rowdies like this with their heads covered and the police there but look at the people in the background they're all sitting there all tourist with cameras they understand over there that they have to cut back they understand that they're going to get higher taxes they understand that they're going to be light off like 30% of the people over there work for the government they understand that it has to happen and there's no other choice, they get it they don't like it, but they get it and you know what, we're beginning to see that in this country I mean Occupy Wall Street, right? I mean we're beginning to see a little bit of the same type of protest in here it's actually a sign that there's progress being made quite frankly, I look at it in a different way so I'm optimistic that they'll get their situation resolved I'm optimistic that you know you're able to eventually rebound I'm optimistic that if you keep your same asset allocation and do a rebalancing of course I always look at Europe Pacific and I do equal, Europe, equal Pacific as opposed to swinging with the e-feedback and forth that you're going to do fine by the way, I did my international and Total International which last February completed a new index which not only includes emerging markets developed countries and Canada but small cap companies as well I don't overweight or underweight any country