 Expert cattle farmers come on their own dime, they don't get comp, they pay just less than a second as you do, and one little perk that I don't really allow them is to tell us what's exciting, what's going on in their neck of the woods or in what they're doing. So we're going to go down to the table and Christine, anything exciting going on in Morningstar that you'd like to tell a crowd about or do you have any books in the works? No books for me. I would say one concept that I've been excited about, the more I've talked to Morningstar.com users about it, is this idea of bucketed portfolios in retirement. I've done a couple of model portfolios recently, and the concept is that you set aside liquid assets to fund near term cash needs, intermediate term assets to fund intermediate term needs, and then we have the rest of the portfolio stocks, and for a lot of people the end portfolio ends up looking a lot like what they would have had in the first place if they were just using a balanced approach, but the bucketing concept I think helps people visualize what an retirement portfolio should look like, so I think it's helpful from that standpoint. So I've been working on that, interviewing a lot of great people at Vanguard yesterday and a lot of great people from this conference yesterday morning, so those videos will roll out on our website over the next month or so. You should keep your eyes peeled for that. And then personally I'm going on a six week sabbatical starting next week, and so I'm excited about that, going to spend some time in Argentina and spend some time with family and projects and so forth. So it's a nice perk that we have at Morningstar and I'll be taking advantage of it soon. And Bill, are you ventured into a new field of electronic publishing? Yeah, I feel some help from Mike, but what I'm really doing is traveling to Bermuda this winter and expecting my first grandchild, and sure I'm doing some writing, I'm always doing some writing. But I've got a new booklet coming out on alternatives, but if you listen carefully, especially if you listen to the interview coming out on the Morningstar site, you don't need to buy it. Alright, I've got Bill Ernstein B at one thing. I already have a great first grandchild, but yeah, I'm starting a new book, and it's something I wrote about on a new forum that I thought needs to be expanded on, and other than that I'm just working on my blog, and things are good. No new projects in the work for me, I just wrapped one up to book on social security planning. I heard from a lot of you about it. We already downloaded it, some of you have read it already. That's about it, really, just working on the blog. But I will have to say that I downloaded Mike's. Mike's does a whole series of books, and a hundred pages or less. And his latest one was the Social Security, and a hundred pages or less. I downloaded it and read it, and let me tell you, Mike took a complicated, very complicated subject, and made it very simple. And as an author, I can tell you that it's very difficult to do, and a great job. Thank you very much. I've started writing for AARP Magazine, and I think that is incredibly important, because no one gets abused more than seniors. I think if I had a pipe dream, and it's probably just a pipe dream, to harness Bill, and work on a social media game, that would actually teach the right thing about being a competitor to the stock market game, which teaches gambling and speculation. And, of course, his sponsor, Mike Gissu, and Irwin's family. Barney, that is something that I would love to do. What he really goes for a living is to do his best off the financial service. I'm good at what I do. You know, I'm embarrassed to say that my handicap has gone up about two or three strokes over the last year, but there's a good reason for that, which I won't get into. Four foot puss. Yeah, four foot puss. You know, I'm kind of doing more of the same. I do have the second copy house book in the work, so I've been saying that for the last two or three years. I guess he's not here, but he's been a big advocate of the global heads out of Wiley. But basically what I'm doing is continuing to spend a lot of time at Soundmark, putting in systems and structures to continue to accentuate the global head philosophy with the folks we can up with. I really respect your getting under the skin of the financial industry because they need to have someone kind of prodding them. Again, the need is just phenomenal. And as I said before, I would encourage all of you to continue to share the philosophy with others. A lot of people ask, well gosh, how do I best articulate or share it, and why doesn't a person embrace it like I do? What I have found is that people need to hear the philosophy about 20 or 30 times before they get it. That's been my experience. Did anybody read the bubble inside about what happened on Jeopardy a couple of weeks ago? What happened? Stand up and tell us what happened. They gave them the answer. Who gave them the answer? Warren Buffett. The answer is, what is a low cost investment that mimics an S&P 500 blah blah blah? They spelled it out clearly and not one person could answer index funds. Index funds is just like second nature, but to the average intelligent investor it's like they don't know what an index fund is. So you have to continue to articulate it time and time again, keep it simple. Again, a lot of people have a profoundly positive impact on people's lives. So Mel said that because you wound up this part with me, I get to ask a question. So the question for the panelists is when you're working with folks, how do you define risk? When you're working with clients, this whole thing of risk and standard deviation and blah blah blah. How do you articulate risk to a human being? Not reaching your financial goals. Bill, Mike, Christine. I tend to talk about it differently whether I'm talking with somebody who's in the accumulation stage or the distribution stage. In the accumulation stage, I'm mostly talking about just uncertainty of returns, volatility, probability of a poor police going to go down by X amount, things of that nature. The percentage of spending goals that go on that, for instance. Sometimes that's expressed as probability of running out of money. Probability of running out of money doesn't cover it because sometimes it's different if you run out of money in the 20th year of retirement as opposed to the 25th year of retirement. So there are other metrics, but it depends who I'm talking to. Yeah, we deal with that problem by not accepting clients who don't understand what a standard deviation is. I don't have a 7.5. I like Rick and Mike's definition and I do think that risk tolerance has been given way too much play in terms of investors' financial decision-making. In a lot of ways, I feel like it's saying, okay, you're going to give your emotions free rein to help determine this financial plan and I think that's a terrible idea. So I like risk framed in the realm of risk capacity. How much risk can you actually withstand without altering the goals that you would set up for yourself? Well, I always try to... Instead of working in percentages, I try to work in dollars because I think people understand dollars a lot more than percentages. So if someone has a every main dollar portfolio and they're going to go 50-50, they got 250 in equities and I ask if they can stand 5,000 dollars. Not can you afford to lose 50% and when you put it in dollars, people go, oh my god, no! That's what they really need to do to get to their own comfort level, which is when they get to that sleep night and that's the proper asset allocation for them. What is your answer? Well, my answer is a compilation of everyone. I really like what Mel said, so somebody's got a million dollar portfolio, they've got 50% in stocks. We look them in the eye and say, hey, you're 50%, you're half a million dollar portfolio is going to drop 25 to 40% and that is what how much? I can't do the math. It's going to quarter a million dollars maybe. So we say your portfolio will drop 200,000 dollars in the next four years. How do you feel about that? And it puts it in terms that they can understand. But what's more important, I love Charles Ellis' description of risk. In his book, what's his book? Winning the Losers Game or something like that? He says, risk is the chance that you will not have the money to pay a bill when it comes due. I just love that. You can talk about risk in center deviation but I love Charles Ellis' definition of risk. If you can show people that, yeah, interest rates are at 1%, you're not getting anything from income investments but you can show them that even in a decline of 20 to 40% they're still going to be able to pay their bills for the next 10 years. They think, oh, you know what, it doesn't matter what the stock market does over the next two years. I mean, that's the concept that I try to continually get across when I talk to any kind of audience from retail investors all the way up to people at the university level is to tell them that the real definition of risk is not standard deviation or volatility and I make a point by showing two slides. One is the typical sort of, you know, that you pick off the internet from private traders, you know, you've all seen the pictures of the guys in the suit standing next to mom and it's looking like they just have their own and it's squeezed and then that's not risk, all right, because those guys will still be wearing $2,000 suits the next day they will still be wearing the suits the next day. The real, in the next slide that I show is a picture of the guy pushing a shopping cart under an underpass in the rain. I say that's risk. I tend to think about it as standard deviation probabilities, but I explain it to my clients in the likelihood that they'll live under a bridge. I try to make it as emotional as possible. I tell them, I can ask them the question how they would feel if their portfolio lost 30%, but I explain that I can't really simulate the pain they'd be feeling without coming across the table and kicking them and they've got it at these times. Even though it happened not too long before our memories are very short. Can I just add one more thing to this element of risk? So from my perspective as a citizen, but fully imaginable, the risk to a client is not maintaining their investment plan. That's the risk. Because if they can stick with the investment plan, probability that they're going to reach their financial goals is quite high. So the real risk is not having a plan, and then if you do have a plan, not maintaining the plan. And then a while with the standard deviation, you might have lost your portfolio oils into this idea that you're going to do the wrong thing for a long time, and that's the risk that we face as advisors to individuals. Hey Robert, from Longby, stand up and tell us what the leading edge analysis of risk is. Stand up! We're very brave in a bull market. But the real risk tolerance, you find it in a bear market. And so what you're talking about is methodology to realize exactly what your risk tolerance is, and that's what you say it is. Because usually there are two different things. Did you get your question answered? Okay, I found out that I had mentioned something and people asked me to explain it. I thought that most people know about it, but apparently not. When I mentioned I-bonds and the ability to get 10,000 per person, but then I mentioned that there was a backdoor to get paper I-bonds of $5,000 if you overpaid your tax return as a part of your tax or all of your tax return. And the way it works is you have to intentionally overpay your tax of $5,000. When you follow your tax return you can elect to have your entire return or party return I-bonds, issued in I-bonds and any surplus will fill in your bank. You could split it any way you want. But to get the $5,000 in I-bonds you have to overpay your taxes and some people do it by additional withdrawing and some people do it by estimated tax. But the bottom line is you overpay your tax and you can get your $5,000 up to $5,000. As opposed to the individual I-bonds where it's $5,000 or $10,000 for social security with couples you can only get $5,000. I wouldn't guarantee that this is going to go on. It's been in place. They honored it last year and they have no there's nothing out that they killed it for this year. But eventually their objective obviously is to give it a paper on so I would expect at some point in the future that's not going to be an option. But at least that's the way it works pay your taxes and they'll let the paperwork be a part of your refund part of all of your refund and start the $5,000. So let's get on to another question here's a question for Rick Perry Rick, you wrote a blog on the three keys to investment success philosophy, strategy, and discipline. Can you expand on these ideas? Three keys to investment success. Sounds like a book. But anyway Okay, here is thinking a lot about the philosophy of what we do as a group and then what we do on the board and that's where all this came from because we have had some severe discussions about things that don't matter much but we really can get into the minutiae. And so in stepping back and all I'm saying hey wait a minute we're all bogal heads. We're all sitting in this room. So at the very first level I started thinking we all in this room and everyone who is a member of the board and a lot of other people are not have the same philosophy. We had a list of the ten beliefs and I didn't even know that list existed but we all have the same philosophy there are perhaps 200 people in this room and I would say that there are probably 200 different strategies for implementing that philosophy. Eye bonds, municipal bonds, lateral CDs so at the strategy level we all have different ideas of how we want to implement the philosophy. And you know what I can't say that my idea is any better than kids idea. Kids idea out there because we won't know that until 20 years down the road. We had the best strategy. So strategy can differ on the board and most of the arguments that we have on the board are not about philosophy at all. They're about strategy and sometimes very minutiae strategy whether we should have gold or whether we should have commodities or whether we should have ideal bonds or whether we should do the voting model or whatever. So the second level point that I try to bring up on the board once in a while is not enough to confuse new people who are coming onto the board or people who are just getting started is don't confuse strategy with philosophy. Don't confuse strategy. This is a discussion about this we all agree on that. Now the last part of the three keys to investment success is once you have the philosophy once you have your strategy for whatever it is you think you need the last part is discipline. And we do talk a lot about discipline. We were talking earlier about and I said the risk is not being your financial objective it's a discipline. So now we have discussions about how to maintain discipline you can use some sort of rebalancing methodology on your birthday you can hire an advisor you can use a like strategy fund of some sort I mean that's that maintains the discipline of the strategy which fits the philosophy if you don't have the discipline if the discipline starts to break down the strategy breaks down and if the strategy starts breaking down now you're susceptible to the next Merrill Lynch guy that calls you on the phone which means the philosophy can also start to break down. So it goes down this way and then you have to maintain the discipline or it starts corroding back up the other way and that's what my old idea is about. What we do was that insightful? A question for Bill Schulteis from Sunny says the Kofi House Portfolio received a lot of attention and popularity during the last decade part of which is at least due to the outperformance of small value and other tilts over the market or SMB500 if reversal to the mean happens can the Kofi House Portfolio and the Kofi House underperform how can we keep the Kofi House message popular? Wow that's a great question Sunny and you know I think I would have liked to say that I planted that question because it encompasses a lot of what is discussed on the board first I would I think it's important for me to share with anyone who wants to listen to that in the book I said that the simplest best approach is like a three fund portfolio total domestic, total international total bond. I said if you want to fine tune an already good thing here's a way to do it and that was kind of I started articulating that Kofi House philosophy of my weekly column in 2000 and it just kind of took on a life of its own. You know Paul Farrell went up on the lazy portfolios and I have consistently said that there are as Rick was saying there's countless different ways to build a passive portfolio you can do it with actively managed funds but you know it was a stroke of luck that from 2000 to 2010 value in small and international outperformed large cap stocks so the question is what is the purpose of diversification in these different components of the market I loved what Joel Dixon said last night about that whole issue and what he said is is that basically he does not want to have I mean clearly over a 10 year period these different components of the market can perform dissimilar to each other and pace in point 2000 to 2010 last night Joel Dixon said you know he doesn't want to be in that underperforming sector over the next 10 years and that's kind of the way that I look at it myself if I'm going to buy a total stock market index fund what's important is that I stay the course and I accept the fact that from 2000 to 2010 it's going to underperform if I have a more diversified portfolio that's tilted away from a total stock market fund and small and value and international outperformed the S&P 500 which it very well may do I think it has over the last three or four years you know the important thing is to stay the course and not to chase performance when these different components of the market underperform each other because as Rick was saying it's the philosophy that counts and if you can't adhere to the philosophy everything else breaks down and so the philosophy in my opinion is to embrace a low-cost portfolio that broadly represents where you're at in your life and then what it does is it allows you to focus on your financial planning issues which for 99% of the people including me is I need to save more than a span does that answer your question son? can you tell us the subtitle to your book? how to build well, ignore Wall Street and get on with your life I think that's more important than the portfolio yeah and you know I have to say that in connecting with everyone here where's Molly Molly are you here? you know here's a woman that ran her what, her first marathon went how old were you? 65 years old she's involved with an entity and a program that I have been involved with and where's Bill Davidson? stand up Bill is he here? he's not here he's involved also, she's involved with hospice to me the biggest well I don't want to get into that but you know she gives her the authority to know that she's doing the right thing her portfolio so she can pursue other things in her life and you know I travel all across the nation not to talk about strategy but to connect with people who are really getting on with their lives it's so inspirational my ad is up to all of you for coming here where's Kelvin all the way from Taiwan? he left what's that? so thanks Mike for bringing that up just to add a tag to all of that if you've invested in any of the kinds of portfolios that we recommend from the coffee house portfolio through the tilt of the portfolios that Rick and I recommend you've been through hell in that for the past several years and you know it's hard I suppose we couldn't see times that are really worse than that but you probably have at least a time to step with it we could probably fill 10 rooms like this with enthusiasts like Harry Brownport which is one quarter of gold long bonds stocks and bills and these are people who've had nothing but pizza and beer for the past 15 years and there are a lot of enthusiasts Harry Brown enthusiasts out there and they're going to you know get there in the next 5 or 10 years I'm pretty sure it will be really interesting to see what happens to that crew anyway I like Harry Brownport I think it's a valid way to manage assets and in the long term it's not for me and probably not for any of the people in this room but but those are the people I'm really worried about I'm not a fan either of Harry Brown but again it falls into the local head philosophy because there's a passive strategy and you're already losing low cost index funds I'm not a fan of it either but again it gets down to our individual preference okay we had a question on somebody asked me to elaborate on this Taylor's three fund portfolio which I think was mentioned by several people Total Stock, Total Bond and Total International Taylor later revised it when tips came out to add tips the question was first of all can you explain to a lay person and would you add that to the Total Bond portfolio with Total Bond to be part of your upon allocation well tips are just inflation adjusted bonds they promise an after inflation return rather than a nominal or before inflation return and as far as whether I would add them to a portfolio I think it depends on personal circumstances specifically how exposed are you to inflation retirees tend to have more inflation risk than somebody whose overall economic well being is primarily dependent upon a job young people who most of their economic well being is just their future earnings which hopefully will keep up with inflation and that's different from if you have a financial portfolio and you really are facing inflation risk and I think that's when tips become significantly more helpful I'm going to I'm just going to clarify that tips are a hedge against unanticipated inflation because the inflation rate is already embedded into all asset classes including Treasury bonds not bills the Fed is manipulating things a little bit but it's already embedded in stock prices real estate rents all of this stuff so what they are are a hedge against an unanticipated jump in the inflation rate and it has to be a jump because inflation goes into deflation and you're actually going to do worse with tips than you are with the nominal trade just to pick up on Mike's comments I know sometimes people are looking for guidelines about how much to invest in tips and I completely agree that it's very individual specific I talked to John Amorex at Vanguard about this issue we were talking about their target date products specifically and those products do not include tips until one reaches roughly the age of 50 and that with the work that my colleagues at Ibbitson which is under the morning star umbrella do where they really don't add tips to the portfolio for people who are very much in accumulation mode but do start to add them in for people approaching retirement Ibbitson's recommended allocations to tips as a percentage of the fixed income portfolio typically run in the neighborhood of 20-30% of the bond portfolio in tips and I think John Amorex told me yesterday that the target date funds include about 20% of their overall allocations in tips so those are just some guidelines I think most of us I don't know might agree that tips aren't particularly attractive at this juncture and so I would say if you're building a tips position my best guidance would be to do so gradually over a period of years rather than adding a lot right now I'm not wildly enthusiastic about tips accumulation phase portfolio but where I think that the most useful is immunizing your future within the expenses so a person for example who is 68 years old might purchase what I call a full bode it's like full monte except that it's tips instead of the absence of clothes what a full bode is is a ladder of tips that each and every year that immunizes you out to about 100 obviously will have to go up in the first 10 years because there's no 40 year tips and then roll that over in 10 years and buy the 30 year tips and that absolutely immunizes all of your real living expenses if you save 40 times your living expenses which I suspect more than a few people they're not particularly attractive right now but it's something you can keep an eye out for the full bode which you can build part of it it's a very useful thing it takes place basically I like tips I own tips and Bill will be interested to see you back me up on this I'll confess I'm a bit of an active investor when it comes to tips tips are the safest investment around you have treasury back no inflation risk in 2008 when Mark stocks tanked people shouldn't run to tips but instead they were yielding well over three and a half percent it was a very good investment that it's much less good now in my opinion with CPIU minus what about 27, 28 percent I was very attractive to tips when they talked out over 4 percent back in the early late 1990s I'm not terribly enthusiastic about it you've got a negative yield on the curve all the way after about 20 years it's pretty ridiculous people need to understand that it's a negative real yield as opposed to a nominal yield that you get on the record and people look at don't understand that their CD which is yielding 0.5 as a built-in negative real return of maybe 2 percent or something so they compare and think the CD is better when in fact the real return on a negative value on our tip is still better than the negative real return that they're going to get over see what Alan is referring to is something that Mary Sweater has explicitly written out which is buying buying low and selling high you were heard about that except I will admit to falling off the global lagging in that report as well it's a fun game to play but that game is long since over maybe we'll start again May I ask a question of tips go ahead it was announced it had a short fund for tips though would you address the advantages of a short fund versus a long fund well one thing and I'd like to ask Bill or anybody on the panel you know tips have the longer tips that had significant price appreciation and so my question is if rates go up you know are you going to see some significant price decline now I realize I still have the unexpected inflation built in but I think that you still got the issue of Rick why don't you answer that you got some significant short term principle yeah it depends on why interest rates went up if interest rates went up with real rates of return inflation expectations remain low but interest rates go up but inflation didn't go up but interest rates went up that's a real rate of return that's a risk to tips if inflation goes up and interest rates go up then that's not a risk to tips but there's another risk of tips which I think you overshadowed is even that which really didn't get revealed until the crisis which is there's a third risk which is liquidity risk from 07 to late 08 the long tips was that the 3032 tips which have 24 year maturity and it declined by almost 25% so that means 30 year tips a similar event would be about 30% in principle value so it's a peculiar asset class it's absolutely riskless in a real sense in real terms when held to the truth which is how you really want to be using them but if you can on them for short term liquidity then good luck with that that's where the short term tips comes in to answer your question short term tips have far less of this price volatility so it's a instead of using the ban guard short ban index ban is sort of a cash position because you want to get some yield out of it while you're waiting to spend that money over the next 2 or 3 years use short term tips like it would protect you from an unanticipated general inflation and it's just an alternative to not quite a money market but a short term fund the announcement had said that the expected maturity for the fund is somewhere around 2.7 years of 8.5 which is what the current tips fund has so it's got to be about 1.3 as a responsive price to movements and real interest rates so that's the reduced risk but of course drawback is that you're just learning lower returns because they're short term bonds ok the next question is when we're up from modest is modest here modest asks what is your view pro and con of stable value funds in 401k plans what role should they play in portfolio? I put a post on this actually on both heads just a couple weeks ago had people, one of the people look at an article by Scott Simon who was a very talented attorney in California who also is a fiduciary attorney and he also has a money management company out there if you go on that mobile heads you look that up this post will come in it's got looked under the hood as other people have I respect a lot of work and it really depends on what's under the hood who are you dealing with who are these insurance contracts that are being put into this stable value fund who issued them it sure sounds good but every time something sounds good they usually run into the quarter right have you done articles on stable value? sorry Alan I haven't written about them but I agree it's what's under the hood the US government's risk savings plan has a G fund which is essentially a stable value that pays almost as much as the bond and I've tried to get somebody from the government to hire me for one day I mean one dollar and fire me because I would love to be in it but there's reason why some are paying higher rates in that the company in the 401k or 43b in the insurance company signed a long return contract when rates are higher but I tell clients that are in the stable value fund that are in insurance contracts that there is default risk and I suspect others may argue with me that most insurance companies would have gone under in 2008 without the government bail out stable value funds not the 25.2 or a company called Invesco are you all familiar with that do they have a fairly good reputation in terms of stable value fund management I'm not familiar with their products except for the fact that they don't power share would you observe the Stony Stare for the audience I said would you observe the Stony Stare for the panel they're active managers right yes I believe so I don't know do they own AIM yes they do there's always a trust factor I don't think of Invesco and AIM is one of the good guys I would say is a general statement one thing I've noticed just anecdotally is that the stable value yields have come down quite a bit over the past year or two and I guess I get a little nervous when I see people looking at things that maybe will yield 3% versus just hungering down if it's money that you truly need to keep safe is that yield pickup really worth the risk and maybe if you have an awful lot of money it is but I think that people really should be mindful of anything that's promising and appreciably higher yield or even a modestly higher yield than true cash right now I mean there is the auto-free lunch out there the Tia Craft for example has a very traditional fund which is basically a money market that if you got into or years ago still yields you 3% and you can add more money to and I've looked under the hood of that pretty darn good fund it's got fairly stock solid but what you're doing with that fund of course there's somebody who's paying for that are the people who are on the variable annuity side of that same fund and we're stuck in it for years and so they can maintain the maturity and if you have an IRA you don't have that constraint but it's a special situation but if you qualify for Tia Craft I think you can still get 3% in 3 quarters that would be the last I've looked we have a question from Steven enter I can answer your name correct all the way in the back he says what allocation and disbursement strategy would you recommend for a retiree who has no heirs and would like to come as close as possible to deplete his assets without eventually depleting it I'd like to it seems clear to me that that's part of Canada for single premium needy annuity it needs to be inflation adjusted though because think of it it's an annuity with the duration for the rest of your life so if we do get hyperinflation your spending power is going to go down and if you take the inflation adjusted that's an extra insurance premium and that drastically lowers the amount you're going to be paid and then there's default risk all if you're going to put a big portfolio you have to realize that states have limits on the guarantee that they it's not guaranteed by the states but it's a state guarantee program and each state has different limits I think the majority are around 200, 300,000 100,000 usually but 300,000 total I think in some states but anyway you would have to check the state that you live in to make sure that you have the proper number and some people would suggest that you don't buy all of that from the same insurance company so that you spread your risk around for the insurance company going on while the guarantee I understand the guarantee's work is similar to the FDIC the bank fails they try to get the other insurance company to pick up the slack and the other insurance companies apparently pay into it but the bottom line is that you might not get your check from the company from an insurance company that goes belly up or has a problem so you want to spread your risk around for the insurance company and there is also security check one thing that's possible and I think some of the others might have also recommended this the self-unwinding for the first 5,000, 15 years and then a smaller most of an annuity in a 7,000, 5,000, 8,000, 8,000, 8,000, 8,000, 8,000, 8,000, 5,000 for the last part where you get the mortality credit and you pull the money away you delay it by the can I go to a 10,000 foot level on this question because it's actually an interesting question to think about it the question was what time I have I might get but I want to pay the mortuary and then die the check to the mortuary is supposed to balance okay but here's the point the point is that from the 10,000 foot level that's his situation so what asset allocation what strategy should he use in his portfolio what withdrawal strategy should he have what's the amount of money he has given social security and everything else that he's got coming in to accomplish what he wants to accomplish it's going to be very different than somebody who has 4 kids and wants each one of them to inherit an inflation-adjusted basis all the assets you have today the withdrawal rate is going to be different so sometimes we'll get into the minutia about what's the 4% withdrawal rate be optimal withdrawal rate and we argue back and forth forever on this for him might be 6% for somebody who's got who's 60 years old and has 4 kids and they want every time to go to their 4 kids might be 3% so each one is very specific and the inheritance question is really going to determine a lot not only about asset allocation but also withdrawal strategy I mean clearly I think the most applicable strategy here is the George Raft strategy you remember George Raft was the actor who spent $10 million on women booze and gambling and the rest of it he wasted I think the theme of the recommendation is a unique situation no errors and it wants to spend it all it's not unusual oh no, I'm saying it's unique to him and it's not it's not so unique in that for the vast majority of people investors there to maintain any semblance of a standard of living they're going to have to spend their assets now over time and the important thing is to again establish a financial plan that allows you to visually see how you can spend it down at a rate that makes sense and then readjust it every year based on inflation, based on what happens in the markets based on the biggest question mark of all in retirement is that what is your healthcare cost? there's one more thing I want to throw out there which we haven't heard yet and that is reverse mortgage for your situation, you have a home reverse mortgage might be the thing you want to do so we haven't talked about reverse mortgages you have talked about it here as part of this financial plan one other quick mention to back up to the annuity discussion Mel, you mentioned the idea of buying an annuity at a risk I think there's another good reason to think about maybe laddering annuities which is the current interest rate environment so single premium immediate annuities are quite low by historical standards right now due to the current interest rate environment so even though it would be more cumbersome than buying just a single immediate annuity and letting it ride I think it does make sense to spread out the purchases over a period of time to potentially obtain a range of interest rate environments on the topic of buying annuities if you're looking to stay within the state guarantee association limits it's important to note not only that the limit varies by state but the applicable rules vary by state so for instance some states will back you up they'll make you all in the event that the annuity defaults if you live in that state when it defaults other states their guarantee applies if you purchased the annuity when you lived in that state so for instance if you currently live in a state that has a $300,000 limit and you're considering moving to another state in retirement this is something you'll want to think about because you don't want to move to a state with a $100,000 limit necessarily there obviously are factors involved in moving a place of living but you'd want to pay attention to those rules and see if it's going to expose you to an additional level of prejudice Bill didn't you write that there's a systemic issue in the insurance industry the state guarantee would be a little more than a speed bump that was the word I used yes and then I have a pet peeve and everyone does this including last night you know you can earn 7% income on an annuity why would you therefore want to buy a 1.7% total bond but I've compared apples to oranges most of the return on the single premium immediate annuity is your return of principal it's even better principal it's the principal the people who died before you there's a non-mobile question from mobile it is gold coins or gold ETF oh no coins absolutely gold coins I mean look Armageddon comes is anybody going to want to buy your share of GLB if you can trade it if the markets are even open now you're going to have those gold coins sitting in your safe next to your shotgun I'll play straight man here more seriously Craig Rowland he wrote a wonderful book on the permanent portfolio he's got about 70 agents it's just fascinating to read about why are you buying gold okay are you buying attached inflation well then buy GLD buy a gold miner I would even say buy a just a natural resources fund like the energy fund alright in spite of Jack's comments I think it's next to the fund I might bring that fund out you know if on the other hand you're worried about breakdown of social water then you know probably can go to an animal or a better bet and if you're really concerned about the entire breakdown of society then you want to put gold in a fall in New Zealand or Switzerland he tells you exactly how to do it it's absolutely fascinating stuff seriously and then the only problem of course is getting out and finding a way out of the country it seems every financial expert is saying to get out of bond funds this year I don't say to buy individual bonds instead bonds I'll just extend that okay well what do bond funds hold individual bonds alright so what's the purpose of getting out of bond funds to go into individual bonds I can see doing a bond ladder if you have liabilities that have stepped out over 10 years so you're going to build a 10 year ladder of tips no problem you've got liabilities going out over 5 years you want to buy a 5 year CD ladder let's say college savings you have children going to college you want to buy used by zero coupon bonds for my children so I knew exactly what I had coming through every year for them to go to college that's a good reason to buy bonds you're retired and you're going to be retired for 20 years 25 years the duration of your liabilities are the duration of your liabilities the duration of an intermediate term bond fund is about 5 years now the next year or a year from now the duration of your liabilities doesn't come to 4 years it stays at 5 years so what I'm saying is with an intermediate term bond fund, municipal fund, total bond market the duration of your liabilities and the duration of your bond assets are about the same if you buy individual bonds it complicates that I'm not a fan of doing it let me take a poll Bill do you think people should get out of bond funds no not what depends no but Alan probably has something to say about savings I think it's very important that people have an understanding of what can happen to bond funds in a rising interest rate environment and to basically stay the course a Vanguard has an excellent piece on the importance of staying the course if you have an intermediate bond fund when the price begins to drop it's wonderful we show it to every client who has an intermediate term bond fund because we're drilling in the importance of not getting out of it when the net asset value starts to drop to stay there to capture the higher returns down the road so you're prepared for it when interest rates do go up it's just going to be the outflow of bond funds dollars out of bond funds when interest rates go up it's just going to be off the charts there are any number of phrases that you hear from time to time that they all fall into the same category which is the old 60-40 portfolio doesn't work anymore indexing doesn't work anymore the traditional portfolio doesn't work anymore and don't buy a bond fund anymore they all say exactly the same thing which is hold on to your bond I would just like to add one thing to Bill's comment the 60-40 portfolio doesn't work a week and a half ago there was a great article in the New York Times about endowment funds face hard landing and somebody did research on all these endowment funds and the conclusion that he came to was that a 60-40 60-40 portfolio is darn hard to beat and I posted it on my website and he emailed me he has a great article I'm there actually what? I wrote a piece for the Wall Street Journal told me to return the blog about a month and a half ago I quoted Bill Bernstein in it but I walked through the simple map of owning a bond versus a bond fund and addressed the myth that if you own a bond and hold it to maturity it's just an illusion that you eliminated interest rate risk I don't think there was a method to my madness there's also, by the way, cash drag and buying into people's bonds because people buy into people's bond interest coming in, what do you do with it if you're not spending it, it sits there in the money market going zero percent interest and do you have enough money when you go out and buy another bond it actually cracks down that was brilliant and infighted thank you very much there was a method coming from you that eats up again there was a method to my madness in holding the panel because the question says it seems every financial expert is saying to get out of bond funds we have a panel of experts here who said don't so every financial expert is not saying to get out of bond funds that's the answer that I would be taking out of that we have one final question here and I think it's the answer should be fairly obvious but do you think it's reasonable to assume that no one can accurately predict how any asset class will perform for any length of time in the future yes no and the reason why I disagree with that is obviously the question the way that people use to try to answer that isn't the short term but in the long term I think you can look at valuations and make a probabilistic statement that stocks or yield are selling for 35 time journeys I think their future returns are way lower than what they're selling at 10 times but that doesn't tell you what to do tomorrow well let me make sure you have that whole plan that says for any time yeah I would say for any period that's less than 15 or 20 years what is the question again is it reasonable to assume that no one can accurately predict how any asset class will perform for any is it reasonable to predict that no one can is it reasonable to assume assume no one can predict basically the any asset class will perform for any length of time would that be one day into infinity I don't know I think maybe a better way to rephrase that question is maybe you can't predict it but what assumptions do you use in your financial planning process and for that I think going back to what Bill Bernstein said and a Vanguard allude to last night you know the best predictor of interest rates or fixed income is what they're yielding now I think and on the equity side what you know Bill was saying was that and I think everyone's saying you know maybe use 6 to 8% based on current valuations dividend being a little bit less and use that as a starting point in your financial planning process realizing that you may be off 20 years from now and start making adjustments you make adjustments along the way based on those assumptions can I answer the question now that I have clarification I've made predictions out 30 years I've made predictions out 10 years they remind expectations of return I don't think that they should be used 30 year out the expected returns of asset classes are based on inherent risks of the asset class of the asset class relative to each other so in very safe asset classes like short-term tips I'm going to give you a very low return because it's the safest in every aspect but as you go out further and further you start taking more and more risk the riskiness of the asset class volatility if you look at part of that should you wouldn't invest in equities if they weren't riskier and you wouldn't invest in equities if you weren't expecting a higher return because they're risky so you can make predictions very longer and that stock should outperform bonds bonds should outperform cash these are the types of predictions you can make I don't know how accurate you can make them but I think you can make them about 30 years zero proof on transfer say again you know exactly what it was thank you RSE well at this time I'd like to thank everyone for attending I have a few announcements to make it's correct conditions I want to remind everyone that the video will be available that Rich is making it will be available online in the segments is that correct Rich? and Peter Rich or I will make a post on the forum when they are available so we're largely to that after it's all done are we going to do a DVD this year or are we just going to go online everything will be online this year so if you want to have more of the DVD at this time I'd like to recognize the people who really make this event that work I've got an all-star team and believe me couldn't pull it off without them there's a million and one details that go on and putting this event on we actually we're over a year we're already starting to plan next year's event so I would like to call up my all-star staff Ed Rager, Patty Rager, Paul and Kevin Turner they did something you still had to worry about whether people were going to be executed or not you had to follow up but with these people here when I delegate I just cross it off the list because these people are great you know it's going to be done we started a tradition last year trying to get pens out that matched the gift that we gave to Jack this year we gave Jack an Independence Hall and we have the matching pens that go in an Independence Hall and I'd like more to give the one to each of the staff organizations that form very few of them need an even fewer of them flourish like the Bogo heads in particular it's done due to not only hard work but leadership and they have capable, not capable exceptional people that make it all happen and the spouses put up with the insanity to make it all happen but the glue that holds the flourishing groups together is due to leaders that you want to follow and in our organization we have one of those leaders that's here up on the podium Mel gives his talent and all of his energy to keep this going so I think we should all give a thank you to my fellow Marine of Melon Lady Geeks Sue, every year who work the registration tables and do a lot of other chores would all the volunteers please stand up and take a deep breath