Bernstein new book: Rational Expectations

[gcgang]

What Has Time Taught Bill Bernstein?

Above is John Rekenthalers review of Bernsteins new book.

Funny when he says those with the least empathy make the best investors.

 

[MBAustin]

Thanks for the link. Based on the review, I'm not sure there's enough new stuff in there to make it worth the time or $$. Perhaps someone else here will read the book and weigh in.

 

[FedExCourier]

I have just about finished the book. He goes through one's investing career and encourages diversifying, taking risk and sticking with it. For retirees, he has gone completely low risk for residual living expenses ( the $$ one needs after pension, SS and other periodic benefits) x years in retirement. In other words, he encourages taking the entire amount off the table (living expenses x years in retirement) and investing in an inflation-adjusted annuity, TIPS ladders, CDs and plain vanilla Treasuries. Anything over that amount can be invested into your risk portfolio. So, the basic gist to me was to stop playing and go home?! Of course, this investment portfolio carries risk too. What if there is high inflation, I outlive my imaginary number of retirement years....
Has anyone else read his book and if so, what conclusions did you come too?

 

[GTFan]

I haven't read the book, but retiring at 51 and having 30-35 years left (hopefully), there's no way I'm dumping all my expenses into TIPS, CDs, bonds etc. That has to be an over-generalization or I'm missing something. I'd much rather have a short-term stash (2-3 years) and have the rest in the usual 60/40 allocation or whatever you're comfortable with. Simplified bucket approach if you will, and the short-term is less than 10% of the port for me.

I just have a really hard time with any approach that advocates exiting the market (in large part), but I guess if you're determined to spend every last dime it might work. Problem is that you don't know how long it really has to last.

 

[audreyh1]

I have just about finished the book. He goes through one's investing career and encourages diversifying, taking risk and sticking with it. For retirees, he has gone completely low risk for residual living expenses ( the $$ one needs after pension, SS and other periodic benefits) x years in retirement. In other words, he encourages taking the entire amount off the table (living expenses x years in retirement) and investing in an inflation-adjusted annuity, TIPS ladders, CDs and plain vanilla Treasuries. Anything over that amount can be invested into your risk portfolio. So, the basic gist to me was to stop playing and go home?! Of course, this investment portfolio carries risk too. What if there is high inflation, I outlive my imaginary number of retirement years....
Has anyone else read his book and if so, what conclusions did you come too?

He did change to this tune strongly after 2008. He had a lot of clients who sold out at the bottom and were to afraid to get back in, so they suffered a double whammy and really stuck with no way to recover. For people who are likely to sell out at the bottom, clearly his new approach would be better. They might have to work longer to amass more funds, but that might be the better choice.

Work by Pfau and Kitces shows that someone can start with 30% equities at retirement, and gradually increase equity exposure over a long period of time, up to 70% equities, and actually do a little bit better in terms of portfolio survival than someone who tries to maintain a strict 40/60 or 60/40 ratio over the same 3 decades. This approach was also shown to be superior to purchasing an annuity.

So one can do a compromise and start out retirement with a low equity exposure (but I can't imagine 0).

It's perhaps another way of saying - if you have only your key expenses at retirement covered by cash and cash equivalents and treasuries, you don't have enough to retire. If you have enough to put another 30% in equities - now you can retire and reasonably expect to keep up with inflation and enjoy a AS LONG AS you follow a glide path of spending down your "safe" investments and letting your equity % gradually increase over a long time period. Also the year or two before retiring you would need to change your allocation to this new, lower equity one.

 

[FedExCourier]

I haven't read the book, but retiring at 51 and having 30-35 years left (hopefully), there's no way I'm dumping all my expenses into TIPS, CDs, bonds etc. That has to be an over-generalization or I'm missing something. I'd much rather have a short-term stash (2-3 years) and have the rest in the usual 60/40 allocation or whatever you're comfortable with. Simplified bucket approach if you will, and the short-term is less than 10% of the port for me.

I just have a really hard time with any approach that advocates exiting the market (in large part), but I guess if you're determined to spend every last dime it might work. Problem is that you don't know how long it really has to last.

I was a bit surprised at Bernstein's approach too! My mouth literally flew open. However, as I was reading this chapter I realized that I have planned my portfolio with this similar plan in mind. My first 6 years in retirement is totally off the table then SS kicks in with my pension. SS and pension will pay for all basic living expenses and my 401k will be my play and luxuries money. But there is more to the book than just this one conclusion and it is good info for those investing.

 

[daylatedollarshort]

I was a bit surprised at Bernstein's approach too! My mouth literally flew open. However, as I was reading this chapter I realized that I have planned my portfolio with this similar plan in mind. My first 6 years in retirement is totally off the table then SS kicks in with my pension. SS and pension will pay for all basic living expenses and my 401k will be my play and luxuries money. But there is more to the book than just this one conclusion and it is good info for those investing.

We are working towards a similar plan. We realized a few years ago we had a lot of superfluous expenses we could cut and not impact our basic lifestyle, so the plan is to get our post-college, retirement expenses less than SS + pensions. This leaves the portfolio income and the hobby job income for savings or extras.

 

[Katsmeow]

It's perhaps another way of saying - if you have only your key expenses at retirement covered by cash and cash equivalents and treasuries, you don't have enough to retire. If you have enough to put another 30% in equities - now you can retire and reasonably expect to keep up with inflation and enjoy a AS LONG AS you follow a glide path of spending down your "safe" investments and letting your equity % gradually increase over a long time period. Also the year or two before retiring you would need to change your allocation to this new, lower equity one.

I guess that depends on how you define key expenses. When I look at where I expect our portfolio to be 3 years from now -- once kids are out of college, then between the portfolio and SS for DH and I (DH is already taking SS, I will be eligible for it then but may not take at then), we get 100% on Firecalc with a 50/50 asset allocation.

If I put that portfolio at 0% equities then Firecalc gives me a 71% chance of portfolio survival!

So, yes, I would agree that if we wanted to put all of our portfolio in fixed income then we don't have enough.

But, at the same time, I don't really see a reason to put all the portfolio in fixed income when we get 100% with a 50/50 asset allocation. We might drop down the percentage a bit. We get 99% with a 30/70 asset allocation (30% to equities).

But, then there is also the issue of "key expenses" The desired spending includes more than key expenses. If push came to shove, I'm sure we could live on our combined SS. And, really about half of the desired spending above combined SS is discretionary. If I look at only putting the half that is "key" into fixed income...then that works out to pretty much the 50/50 allocation that I was planning....

 

[gerntz]

Funny when he says those with the least empathy make the best investors.

I'd equate least empathy with least emotional. Net, makes total sense to me.

 

[traineeinvestor]

I haven't read the book, but retiring at 51 and having 30-35 years left (hopefully), there's no way I'm dumping all my expenses into TIPS, CDs, bonds etc. That has to be an over-generalization or I'm missing something. I'd much rather have a short-term stash (2-3 years) and have the rest in the usual 60/40 allocation or whatever you're comfortable with. Simplified bucket approach if you will, and the short-term is less than 10% of the port for me.

I just have a really hard time with any approach that advocates exiting the market (in large part), but I guess if you're determined to spend every last dime it might work. Problem is that you don't know how long it really has to last.

Ditto.

I FIREd last year with me at age 48 and Mrs Traineeinvestor a few years younger. With a potential 50 + years of retirement to be funded, I worry about inflation far more than I worry about market risk. Enough cash or near cash to cover 2-3 years of living expenses and the rest in risk assets like real estate and equities.

Putting most of our nest egg into assets which offer no growth and have yields below the rate of inflation (about 4% where I live) for any length of time strikes me as a terrible way to manage our finances.

 

[gcgang]

http://mebfaber.com/2014/07/29/112-year-holding-period-not-enough/

IMHO, Above helps give background why Bernstein is so conservative for retired folks who need to draw on their assets.

If you only have 2-3 years expenses, history shows every major market has had a three year period with losses of at least 50%. You'd hate to use up your cash reserves and then have to sell while you're down 50%.

While I agree keeping high cash means lousy returns, keeping inadequate cash risks going back to work.


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[traineeinvestor]

112 Year Holding Period Not Enough – Meb Faber Research – Stock Market and Investing Blog

IMHO, Above helps give background why Bernstein is so conservative for retired folks who need to draw on their assets.

If you only have 2-3 years expenses, history shows every major market has had a three year period with losses of at least 50%. You'd hate to use up your cash reserves and then have to sell while you're down 50%.

While I agree keeping high cash means lousy returns, keeping inadequate cash risks going back to work.


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I'd agree with this in situations where the retiree has no income coming in. But where the retiree is receiving dividends, rents, interest payments or other income streams which meet all or at least a meaningful part of his/her living expenses then 2-3 years worth of expenses in cash/near cash is IMHO a sufficiently large buffer to avoid forced or panicked asset sales at low prices.

 

[clifp]

I have just about finished the book. He goes through one's investing career and encourages diversifying, taking risk and sticking with it. For retirees, he has gone completely low risk for residual living expenses ( the $$ one needs after pension, SS and other periodic benefits) x years in retirement. In other words, he encourages taking the entire amount off the table (living expenses x years in retirement) and investing in an inflation-adjusted annuity, TIPS ladders, CDs and plain vanilla Treasuries. Anything over that amount can be invested into your risk portfolio. So, the basic gist to me was to stop playing and go home?! Of course, this investment portfolio carries risk too. What if there is high inflation, I outlive my imaginary number of retirement years....
Has anyone else read his book and if so, what conclusions did you come too?

I started reading it while on vacation. LYBM tip, if you have Amazon prime, and a Kindle you can borrow it for free from the Kindle lending library.

I've read all of Bernstein's latest books, so I somewhat agree that there isn't a lot of new info so far. But I'll post a mini review when I'm done.

 

[eta2020]

In other words, he encourages taking the entire amount off the table (living expenses x years in retirement) and investing in an inflation-adjusted annuity, TIPS ladders, CDs and plain vanilla Treasuries. Anything over that amount can be invested into your risk portfolio. So, the basic gist to me was to stop playing and go home?! Of course, this investment portfolio carries risk too. What if there is high inflation, I outlive my imaginary number of retirement years....
Has anyone else read his book and if so, what conclusions did you come too?

That is quite opposite of Charles Schwab "You're Fifty-Now What" who tells you keep at least 50% in stocks all your life.

Well when I look at cnnfn.com I see article talking about 15 year secular bull market right after article about crash is coming soon

 

[photoguy]

But, at the same time, I don't really see a reason to put all the portfolio in fixed income when we get 100% with a 50/50 asset allocation. We might drop down the percentage a bit. We get 99% with a 30/70 asset allocation (30% to equities).

I don't necessarily agree with Berstein's approach (and certainly wouldn't pursue it myself) but 100% in Firecalc from a mixed equity portfolio is not as sure a thing as say a 100% success rate from inflation adjusted bonds (for the time-frame planned).

I think another reason that Bernstein likes the 20-25 years of fixed income is that his clients have sold out at market bottoms. But I think the ER board is unusual in that most here have the knowledge and temperment to be the 1 in 1000 people who can successfully invest on their own.

Ditto.

I FIREd last year with me at age 48 and Mrs Traineeinvestor a few years younger. With a potential 50 + years of retirement to be funded, I worry about inflation far more than I worry about market risk. Enough cash or near cash to cover 2-3 years of living expenses and the rest in risk assets like real estate and equities.

Putting most of our nest egg into assets which offer no growth and have yields below the rate of inflation (about 4% where I live) for any length of time strikes me as a terrible way to manage our finances.

I haven't read this book yet, but in other articles Bernstein argues that short term bonds should follow inflation and TIPs would obviously do so as well. I suppose one can get inflation adjusted annuities. Bernstein is US centric so maybe this (short bonds tracking inflation) doesn't happen where you are?

 

[pb4uski]

Sorry but I'm not drinking the take a bunch of money off the table and invest in TIPs and CDs kool-aid.

 

[REWahoo]

For anyone who weathered 2008/09 without panicking and selling out at or near the bottom, I see no need to change strategies.

 

[Midpack]

As a Bernstein fan, I've been [-]a little[/-] very surprised at some of his statements/writings since 2008. It seems for many years he professed an approach much like Bogle (Four Pillar etc.) and then decided after his 2008 experience with his own clients that far too few people actually had the discipline to trust the Bogle philosophy when times got tough. But I'll have to read the book...

And his clients were all very high net worth folks ($25MM min) who could probably afford to set aside a larger chunk in cash equivalents than the 99%.

 

[Midpack]

For anyone who weathered 2008/09 without panicking and selling out at or near the bottom, I see no need to change strategies.

I wish I knew what percentage of investors 'stayed the course' vs those who panicked? I gather Bernstein was surprised at how small a group the former was, especially among his own client/investor 'discilples.'

 

[aim-high]

Sorry but I'm not drinking the take a bunch of money off the table and invest in TIPs and CDs kool-aid.

If I remember correctly . . . based on reading some comments from WB on the Bogleheads forum, I don't think he advocates doing so either in this current low interest rate environment.

It may be appropriate when interest rates are higher, but not now.

 

[EastWest Gal]

I haven't read the book, but retiring at 51 and having 30-35 years left (hopefully), there's no way I'm dumping all my expenses into TIPS, CDs, bonds etc. That has to be an over-generalization or I'm missing something. I'd much rather have a short-term stash (2-3 years) and have the rest in the usual 60/40 allocation or whatever you're comfortable with. Simplified bucket approach if you will, and the short-term is less than 10% of the port for me.

I just have a really hard time with any approach that advocates exiting the market (in large part), but I guess if you're determined to spend every last dime it might work. Problem is that you don't know how long it really has to last.

I agree. We've weathered 2008-9 and other ups and downs. Equities are still the best way to increase the value of the portfolio. Leaving the market entirely doesn't make much sense.


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[gayl]

I couldn't stomach that. I don't understand bonds so I'm:

65% CORE: EFTs, 1 flexible income mutual fund (long term)

15% in CDs paying 3.5% (long term)

15% EXPLORE : dividend paying individual stocks (mid term)

5% SPEC: short term buy writes

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[galeno]

Bernstein manages other peoples' money. He was incredibly surprised regarding how many of his clients did the opposite of what they're supposed to do (i.e. buy low and sell high by rebalance into declining equities) thus his new philosophy.

We've been thru 3 nasty bear markets in our 31 years of investing and made money each time by doing what one is supposed to do when financial markets crash.

 

[truenorth418]

Bernstein manages other peoples' money. He was incredibly surprised regarding how many of his clients did the opposite of what they're supposed to do (i.e. buy low and sell high by rebalance into declining equities)

Assuming people were paying him to manage their money, I would assume his responsibilities included providing historical market perspective and setting expectations. Basically talking them off the ledge in 2008-09. Someone as intelligent and well-regarded as Bernstein couldn't convince his clients to stay in the market through the crash and subsequent +200% bull market? That doesn't sound right.

 

[pb4uski]

Assuming people were paying him to manage their money, I would assume his responsibilities included providing historical market perspective and setting expectations. Basically talking them off the ledge in 2008-09. Someone as intelligent and well-regarded as Bernstein couldn't convince his clients to stay in the market through the crash and subsequent +200% bull market? That doesn't sound right.

You can lead a horse to water, but you can't make him drink.