William J. Bernstein on Future Market Returns

[intercst]

This month's Motley Fool "Rule Your Retirement" newsletter has an interview with William Bernstein and they asked him about one of YKW's oft misquoted ideas from his book "The Four Pillars".

TMF: In The Four Pillars of Investing, you suggest that "the returns of stocks and bonds will be similar over the coming decades." Do you still believe that?

WB: Since I wrote it [in 2002], bond yields have come down a bit — they came down quite a lot until rebounding since the beginning of this year. So it seems that expected stock returns are now a tad higher than bond returns.

</snip>

Doesn't lend too much support for the notion of a 100% fixed income retirement portfolio.

If you want to read the rest of the interview you'll have to subscribe.

http://www.fool.com/shop/newsletters/13/index.htm?source=irredtads455086

intercst

 

[haha]

TMF: In The Four Pillars of Investing, you suggest that "the returns of stocks and bonds will be similar over the coming decades." Do you still believe that?

WB: Since I wrote it [in 2002], bond yields have come down a bit — they came down quite a lot until rebounding since the beginning of this year. So it seems that expected stock returns are now a tad higher than bond returns.

</snip>

Doesn't lend too much support for the notion of a 100% fixed income retirement portfolio.

With all due respect to your eminence as moderator of this board and a pioneer of the SWR concept, I think that if one really expects stock returns to be "a tad higher" than bonds(your quote), then considering the expected greater volatility of stocks, a very good case might be made for a 100% fixed portfolio. This is even truer given the existence of long term inflation adjusted instruments in the US.

I am not trying to make that case, only pointing out that it would not be unreasonable to do so.

Mikey

 

[Cut-Throat]

With all due respect to your eminence as moderator of this board and a pioneer of the SWR concept, I think that if one really expects stock returns to be "a tad higher" than bonds(your quote), then considering the expected greater volatility of stocks, a very good case might be made for a 100% fixed portfolio. This is even truer given the existence of long term inflation adjusted instruments in the US.

I am not trying to make that case, only pointing out that it would not be unreasonable to do so.

Mikey

I think as investors, it would be unreasonable to be 100% invested in anything! - Diversification is such a key corner stone, that it would be foolish to do otherwise.

 

[John Galt]

Cut-Throat got me thinking. Even though if you take away my real estate I am basically 100% in
"fixed income", and even though I feel extremely
safe in my current cash flow, with a "no
equities" approach, I feel diversified with some
corporate bonds, high yield bond fund, some
government issue, etc. As confident as I am, "all
your eggs in one basket" is clearly a bad idea.

BTW Cut-Throat, John Wayne made some classic westerns. Maybe you missed them

JOhn Galt

 

[cute fuzzy bunny]

It was exactly the comments that returns will be similar, with stocks being perhaps a scoche higher, that had me ease off the stock a little and go with a wider variety of bonds. I mean, why take the risk without the reward?

However, I think the intent here was a subtle provocation of our favorite troll. Just cant stop poking it with a stick apparently...

 

[Cut-Throat]

It was exactly the comments that returns will be similar, with stocks being perhaps a scoche higher, that had me ease off the stock a little and go with a wider variety of bonds.

TH,

You've got to get the emotion out of it. You are gonna drive yourself nuts! - Get your plan, stick with come hell or high water. Listen to ole Unclemick!

 

[cute fuzzy bunny]

Completely unemotional. Where you gettin' that?

Every expert I see says stocks will return 3-4% 'real' returns after taxes and inflation over the next 10 years. By the way, they said that just before the market ran up 25-45%...or pretty much the entire decades gains if you trust their opinions. I can get 3.5%+ in california intermediate muni's and over 4% in long munis.

Its clear people have piled into equities as the last bastion of being able to make money, pushing their valuations in some cases as high as they were in the late 90's...excepting the 'internet company' stupidity.

Hmm, riskier, overvalued, everybody is overinvested in them with more money on the sidelines waiting to push the valuations even higher at some point, with expected short to mid term returns being likely no better than comparitively risk free fixed income instruments.

Sorry, I cant look blindly at a historical calculator and say "well, the returns just MUST be as good as they have been". Especially when history shows that valuations like we have now are usually followed by particularly unpleasant periods.

Data mining the last 20 years of stock index funds looks pretty good. I can data mine other periods when they looked plain awful.

But as I am right now, i'm almost 50/50 stock/bond if you figure in my IRA. Jut looking at the taxable piece i'm still around 35/65.

That 'conservative' mix is up 20k in the last 2 weeks and will pay me out about $6k in dividends at the end of this quarter.

I'm so emotional, I might break into fits of giggling

 

[Cut-Throat]

Completely unemotional. Where you gettin' that?

Hey TH, if you're happy I'm happy - I thought you were complaining.

When I read that you were adjusting your portfoilo because of comments and then Selling off your Vanguard Fund this Spring because of Interest rates and then buying back in. etc. etc. I know that would drive me nuts, and I don't do that **** anymore.

Like Unclemick my most brilliant moves have been to do nothing!

I looked myself in the mirror and said 'Yes you are my worst enemy'

 

[cute fuzzy bunny]

Nah, I just slid out of intermediate bonds into shorter ones for a while. Which turned out to be a complete waste of time as the prices didnt budge much when the rate hikes kicked in.

I guess unless the rate hikes are unexpected, making any moves is a waste of time.

Lesson learned.

My more recent moves I was telegraphing back in January. I said when stocks looked a little cheaper I'd move more from bonds and more into value stocks. They did get a little cheaper, I moved some Wellesley into Wellington, and i've been rewarded in the short term with a little run up.

However, I cant buy into the full autopilot method. Had I done that, I'd still be working. I think you have to do at least a few Buffett moves in your investing career when valuations look too frickin high (like they did in '99) or when they look cheap (like the end of 2002).

And yep, I'm one happy camper. Look at my icon!

 

[Cut-Throat]

However, I cant buy into the full autopilot method.

I have because I like Fishing, Traveling, not fretting too much.

Not knocking your approach, just glad to have found one that fits into my fly fishing, traveling lifestyle. And if anything goes wrong I can blame Bernstein and I'm free and clear!

 

[Jarhead*]

TH,

You've got to get the emotion out of it. You are gonna drive yourself nuts! - Get your plan, stick with come hell or high water. Listen to ole Unclemick!

Cutthroat: I enjoy Unclemick's easy LA attitude also.

He dollar cost averaged during a tough period of time, 1966=1982, and then followed the wave of the best stock and bond returns for the following 18 years that we likely will ever see in our lifetime.
What to do now? I haven't really made up my mind yet, but, with the stock and bond market at their current price levels, this is a much different atomosphere than Unclemick was in when he started his programs.
By the way, I have only not made up my mind yet in regards to my children, and what to advise them to do.
I have made up my mind for myself. (Stay short).
With all markets as high as they are, (stocks, bonds, real estate), in my opinon, the challenge for the next 5 to 10 years will be to keep your principal in tact.
I personally, at this time, see no percentage in investing
further capital in equities or bonds at these levels.
Regards, Jarhead. (This should signal the largest run-up of stocks and bonds history has, or will ever have).
But i won't be participating

 

[cute fuzzy bunny]

Since I just put more money into equities, they should drop like a rock. Perhaps our two efforts (yours to make the market skyrocket and mine to make it drop) will counteract each other

One other thing I forgot to mention that had me making moves...a new working wife added to the mix.

Given that her income more than pays the bills, I could afford to look longer out and get more aggressive. But I still didnt do much more than slide the stock/bond bar a half dozen percentage points towards stocks and get a little riskier on the bond selection.

 

[Cut-Throat]

What to do now? I haven't really made up my mind yet, but, with the stock and bond market at their current price levels, this is a much different atomosphere than Unclemick was in when he started his programs.

I have no clue either, but I don't have to anymore.

No one at the Fly shops I go to are interested in stocks anymore. As Long as it stays that way I can sleep peacefully. (They were all interested in 1999 and that gave me the creeps - There was more talk about Intel and Dell than there was about Mayfly Hatches)

 

[John Galt]

Hey Cut-Throat, I know little about flies (other
than house flies, fly balls, etc.). Does anyone use the
Royal Coachman anymore? This was a popular fly many years ago.

John Galt

 

[farmerEd]

I can get 3.5%+ in california intermediate muni's and over 4% in long munis.

OK, I know nothing about bond investing...I'll admit it, but WHY would anyone invest in either of those two things you mentioned, at those rates, when you can get FDIC insured CD's paying more than that today?

Edit: OK, maybe because its tax free? being Er'ed I usually don't have to pay any taxes anymore so I don't usually factor that in at first...

 

[Jarhead*]

Since I just put more money into equities, they should drop like a rock.  Perhaps our two efforts (yours to make the market skyrocket and mine to make it drop) will counteract each other

One other thing I forgot to mention that had me making moves...a new working wife added to the mix

TH: Also, you're still a young pup. (6 dog years old).
You best get off this site, and start painting before you lose the momentum
I'd help you paint, but I have a bad back.
Regards, Jarhead

 

[Cut-Throat]

Hey Cut-Throat, I know little about flies (other
than house flies, fly balls, etc.).  Does anyone use the
Royal Coachman anymore?  This was a popular fly many years ago.

John Galt

John,

The Royal Coachman is still a poular fly. It does not imitate any particular fly, but is considered a Propecting Fly - Used when there is not a hatch.

An updated version called the Royal Wulff is more popular because it has stiffer hackle and Bushy wings and flots better in Riffles.

 

[cute fuzzy bunny]

OK, I know nothing about bond investing...I'll admit it, but WHY would anyone invest in either of those two things you mentioned, at those rates, when you can get FDIC insured CD's paying more than that today?

Edit: OK, maybe because its tax free? being Er'ed I usually don't have to pay any taxes anymore so I don't usually factor that in at first...

Yuperdoodle. No taxes. And they behave differently from other bonds with regards to interest rates and whatnot.

I used to be able to model my taxes to zero status. Now that I've got a working wife generating w-2 income, one of my objectives is to keep as much of her money as possible. We're putting as much of her money into her pretax retirement plans as possible and I'm moving some of my fixed income to state specific munis.

Jarhead - I'm waiting a while until it cools down a bit. I cant run the paint sprayer with the a/c on in the house and I'll have to wear coveralls, a hat and a respirator while i'm running it. Methinks when I can get 60 degrees is when I'm gonna paint. Thats my excuse and I'm stickin' with it!

 

[JOhn Galt]

I bought Freddie Mac notes paying 5% for 5 years
mainly because I figured (at the time) it was about 1%
better than a bank CD and just as safe. But it's a 30 year deal with a periodic interest rate jump (callable)
and if rates soar the NAV will fall. But my checks keep
coming and I will be dead before it matures.

BTW, a local bank has been offering a 4% CD for
11 months. That looked like a good deal to me.
Alas, I could not take advantage of it.

John Galt

 

[hocus]

Doesn't lend too much support for the notion of a 100% fixed income retirement portfolio.

Intercst has been knocking down the strawman of "a 100 percent fixed-income retirement portfolio" since August 27, 2002, the day I put up my "What Bernstein Says" post. Bernstein says that the methodology used in the intercst SWR study is "highly misleading" because it makes no adjustment for changes in valuation levels. Bernstein does not advocate a 100 percent fixed-income portfolio.

 

[cute fuzzy bunny]

Well congratulations. You poked it with a stick and just like in the movies...

 

[johnblake]

OK, I know nothing about bond investing...I'll admit it, but WHY would anyone invest in either of those two things you mentioned, at those rates, when you can get FDIC insured CD's paying more than that today?

1. Tax efficiency

Assuming 9% CA tax rate, and 27% fed tax rate and 4.5% CD yeild, effective yeild is
4.5 * .9 * .73 = 2.9%

2. Liquidity
I don't know what the penality is for 'cashing' a CD early.

 

[cute fuzzy bunny]

Re: William J. Bernstein on Future Market Returns:

CD's have different 'penalties' depending on the issuer.

My credit union says:

3 to 23-month terms 30 days' dividend
24 to 35-month terms 90 days' dividend
36 to 60-month terms 180 days' dividend

Which is good. I've seen a few others like ING's which ask for half the interest paid to date returned.

The trick with CD's though is to not buy one big one but to buy a lot of smaller ones so if you do have to cash one out, you only take the interest hit on that one.

 

[bobbee25]

Any rules of thumb on inflation versus various returns ?
I tried various calculations and if am in good shape with:
a 5% return and 2.7% inflation
or 6% return and 3.5 % inflation, etc
I read that the fed tries to keep 10year treasuries at 2% above inflation, where bonds are usually 1 or 2% higher, and stocks a little higher than bonds.
Where I am coming from is that inflation seems to be in the 2.5 range this year and as a conservative investor I am drawing a little over 5% return. So if inflation creeps up do returns follow suit in a reasonable proportion, or do I need to save for a few more years before pulling the plug ?
Are my values reasonable, conservative or risky ?

 

[John Galt]

My "rule of thumb" is to keep it out of the chainsaw

John Galt