The Investor's Manifesto -- A Gem

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The Investor's Manifesto -- A Gem

Postby Taylor Larimore » Tue Oct 27, 2009 3:19 pm

Boglehead Bill Bernstein, PhD, MD, is a highly respected author and advisor. He has been an expert contributor at many of our Boglehead Reunions. Mr. Bogle calls the "Investor's Manifesto" a "grand-slam home run." This is a sample of what's inside:

"The body of knowledge that the individual investor, or even the professional, needs to master is pitifully small."

"Once every decade or so, the wheels come completely off the machinery of the markets."

"Wall Street is littered with the bones of those who know just what to do, but could not bring themselves to do it."

"Two of the most virulent behavioral organisms are overconfidence and an overemphasis on recent history."

"I'll emphasize three main principles: first, to not get too greedy, second, to diversify as widely as possible, and last, to always be wary of the investment industry."

"If rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say 'Bernie Madoff'."

"Very high returns are almost always made by those brave enough to invest when the sky is blackest."

"Investment wisdom begins with the realization that long-term returns are the only ones that matter."

"Investors who can earn an 8 percent annualized return will multiply their wealth tenfold over the course of thirty years."

"Many investors lean heavily on past returns to gauge future ones. This is a mistake."

"Home ownership is not an investment; it's exactly the opposite, a consumption item."

"If you must have a place in the mountains or on the beach, rent, don't buy."

"One of the dumbest things any investor can do is to own stock in the company he works for, since he can lose both his job and portfolio simultaneously."

"No risk matters more to investors than that of running out of assets before they die."

"No asset class has delivered the amount of stomach acid as have REITs, which moved up or down five percent in 45 of the 116 trading days in 2008's last half."

"The goal is not to maximize the chances of getting rich, but rather to minimize the odds of getting poor."

"Trading individual stocks is like playing tennis against an invisible opponent; what the investor doesn't realize is that he's volleying with the Williams sisters."

"Picking mutual fund managers and heeding the advice of market-timing strategists on the basis of prior performance were fool's errands."

"The most spectacular example of luck masquerading as skill was the recent case of William Miller, skipper of the Legg Mason Value Trust."

"When it comes to fund managers and market strategists, this year's hero usually turns into next year's zero."

"Mr. Buffett is not so much a money manager as a businessman."

"Bogle's Folly, the Vanguard 500 Index Fund, eventually became the world's largest mutual fund."

"The only thing that predicts future mutual fund relative returns well is costs; performance comes and goes, but expenses are forever."

"The Morningstar database suffers from so-called 'survivorship bias,' meaning that hundreds of poorly performing funds have disappeared from their fund universe, all of which would have underperformed the index funds."

"For the money manager, it's better to be lucky than smart."

"Over the ten-year period ending December 2008, the Vanguard Short-, Intermediate-, and Long-Term Bond Index funds beat 99, 96, and 92 percent, respectively, of their actively managed peers."

"Over the long haul, the differences in the amount of wealth provided by different stock asset classes can vary enormously, and owning all of them helps minimize your chance of dying poor."

"Never, ever, extrapolate past returns into the future."

"The 'expected return' is simply our best-informed guess; like a night at the casino, the range of possible actual outcomes is large."

"The investor should forget trying to pick stocks and mutual funds or to time the market. The best the investor can do is to maximize returns by minimizing expenses."

"Because we cannot predict the future, we diversify" (Samuelson quote)

"If you cannot defer current consumption, you'll die poor."

"A Wilshire 5000-type total stock market fund essentially owns the stock of all U.S. publicly traded companies, and it's difficult to get more diversified than that."

"A twenty-five year-old who is actively saving for retirement should get down on his knees and pray for a decades-long, brutal bear market so that he can accumulate stocks cheaply."

"Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second."

"The most imporatant asset allocation decisiion is the overall stock/bond mix. Start with the 'age=bond allocation' rule of thumb."

"The beauty of cap weightng is that it is "fire and forget.' No matter what the stock price does, the fund manager does not have to buy or sell."

"The 44/56 U.S./foreign split (Vanguard's World Index) is too foreign-heavy for my tastes."

"If you find that you cannot keep your eyes off the poor performance of individual asset classes, I strongly recommend that you seek the services of a professional advisor so that you can focus your worries on other areas of your life."

"Be highly skeptical of sophisticated 'black box' methods of asset allocation."

"A perfectly simple and serviceable portfolio might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That's it. Done."

"More complex portfolios, particularly those with value and small stock emphasis, may have higher returns, but come at the cost of time and effort."

"Because of fund minimums, complex allocations are suitable only for larger portfolios."

"Equally important to what asset classes you chose are the nuts and bolts of your portfolio locations (taxable or tax-advantaged)."

"Nothing is as likely to destroy your financial future as your own emotions."

"Learn to automatically mistrust simple narrative explanations of complex economic or financial events."

"China as had one of the world's highest economic growth rates, yet between 1993 and 2008 its stock market has lost 3.31 percent per year."

"Nations with the most rapidly growing economics quite often have the lowest stock returns."

"Nothing last forever: more often than not, recent extraordinary economic and financial events tend to reverse."

"In an environment filled with incredibly smart, hard working, and well-informed participants, the smartest trading strategy is not to."

"In almost all cases, the rich would be far better of investing with the hoi polloi in plain-vanilla low-cost index funds."

"Hedge funds disapper faster than taco chips at a Super Bowl party. Of 600 that registered with government in 1996, just one quarter still operated by 2004."

"The reason that 'guru' is such a popular word is because 'charlatan' is so hard to spell."

"Always remember that the more exciting a given stock or asset class is, the more likely it is to be over-owned, overpriced, and destined for low future returns."

"The sooner you turn off CNBDC, get out into the bright sunshine, and take a walk, the sooner you'll feel better about your investments."

"You're not going to impress the crowd at your country club by telling them you own shares of an index fund. Let them laugh; the joke's on them."

"The four most expensive words in the English language are 'This time it's different."

"If you've never been tested before, I strongly urge that you encounter your first bear market conservatively invested."

"Avoid the siren song of hedge funds, private investment pools, and exotic derivative-based strategies. Buy fuddy-duddy low-cost index funds."

"If you want excitement in your life, it's far safer and cheaper to take up sky-diving than to seek it in your investment portfolio."

"The most important investment ability of all is emotional discipline."

"Do not see patterns where there are none. Most of what happens in the financial markets in the short term is random noise."

"The average stock broker services his clients in the same way that Baby Face Nelson serviced banks."

"In the investment industry, honesty is most definitely not the best policy."

"Unlike your doctor, lawyer, or accountant, your broker is not a 'fiduciary': that is, he is under no legal obligation to place your interest above his."

"Don't come anywhere near a stock broker or brokerage firm; sooner rather than later you will get fleeced."

"Do not invest with any mutual fund family that is owned by a publicly traded parent company."

"You are engaged in a life-and-death struggle with the financial services industry. Every dollar in fees, expenses, and spreads you pay them comes directly out of your pocket."

"Most retirees should purchase 'longevity insurance' by postponing Social Security until age 70, and perhaps by adding a commericial immediate fixed annuity as well."

"I have nothing against ETFs, but I do believe that most investors are better served by the more traditional open-end funds."

"Our materialist culture constantly bombards investors with a toxic mix of consumerist claptrap that obliterates the ability to save."

"In general, variable annuities come wrapped in enormous fees and are offered by insurance companies, that as a group constitute some of the worst players in the financial business."

"Rebalance your portfolio approximately once every few years."

"The most important financial bequest to your heirs won't be monetary, but rather the ability to save, invest, and spend prudently."

"The traditional pension plan has been replaced with an investment mess of pottage: poorly designed, overly expensive, and thus miserably performing defined-contribution plans that seem almost consciously designed to fail."

"The most reliable indicator of fraud is the promise of high returns with low risk."

"You should live as modestly as you can, and save as much as you can for as long as you can. Saving 'too much' is not nearly as harmful as saving too little."

"Always remember that investing is not a destination, but rather a journey of discovery and learning. With luck, you've just gotten a good start."

Thank you, Bill.

More Investment Gems
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby MarkNYC » Tue Oct 27, 2009 4:17 pm

Taylor,

I found the book at Barnes and Noble on Saturday and when I finished it Sunday morning I was convinced that Investor's Manifesto will eventually rank near the top of Bogleheads' favorite investment books. Bernstein addresses all the important issues that individual investors should know and understand, and he does so in a writing style that is clear, concise, and convincing. I expected high quality from Bill Bernstein - and he delivered.
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Postby Bob B » Tue Oct 27, 2009 4:18 pm

Taylor,

Thank you for drawing my attention to Mr. Bernstein's new book. It is in stock now at Amazon.

http://www.amazon.com/Investors-Manifesto-Prosperity-Armageddon-Everything/dp/0470505141#noop

Here is an investor's manifesto list recently written by Mr. Knight Kiplinger. It shares some of the same ideals.

http://www.kiplinger.com/magazine/archives/2009/06/knight_kiplinger.html
Regards, | Bob |
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Postby Adrian Nenu » Tue Oct 27, 2009 4:28 pm

"Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second."

".... Start with the 'age=bond allocation' rule of thumb."



Amazing that Bernstein would make such wrong statements and ignore the individual investors' personal circumstances as well as ability to tolerate and recover from losses.

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Postby bhzmark » Tue Oct 27, 2009 5:15 pm

Adrian Nenu wrote:
"Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second."

".... Start with the 'age=bond allocation' rule of thumb."



Amazing that Bernstein would make such wrong statements and ignore the individual investors' personal circumstances as well as ability to tolerate and recover from losses.

Adrian
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In context it is clear that the rules are rules of thumb that are useful starting points for most people.

One could write a financial advice book that said simply "your investment strategy should be based on your personal circumstances", but that wouldn't be very useful to people who were actually seeking helpful rules to consider applying, and perhaps adjusting, for their particular situation.

And if you had to pick one allocation rule to apply to most people, that seems like a pretty good candidate. Don't let the perfect be the enemy of the good.
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Postby TJAJ9 » Tue Oct 27, 2009 5:34 pm

I believe "age in bonds" is appropriate for the majority of people (not everyone). Of course some people have special circumstances and everyone is different, but overall it's a great rule of thumb that is usually more helpful than not.
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Postby spam » Tue Oct 27, 2009 5:37 pm

-this is a duplicate thread-

There is a pretty big one here already viewtopic.php?t=40644

Mr. Bernstein has even posted a few comments there.
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Postby MarkNYC » Tue Oct 27, 2009 7:16 pm

Adrian,

In his book, Bernstein states that "...age is the first factor in determining the overall stock/bond allocation." On pages 74-78 he explains how this rule-of-thumb allocation can be adjusted based on a person's risk tolerance and various other personal circumstances, and he provides useful examples.

Your assertion is simply not true: that his advice on deciding on the allocation "ignore(s) the individual investor's personal circumstances as well as the ability to tolerate and recover from losses".
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Postby wearethefall » Tue Oct 27, 2009 8:20 pm

Adrian Nenu wrote:
"Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second."

".... Start with the 'age=bond allocation' rule of thumb."



Amazing that Bernstein would make such wrong statements and ignore the individual investors' personal circumstances as well as ability to tolerate and recover from losses.

Adrian
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Amazingly he also missed the inverted yield curve indicator. Shame on him, Adrian!
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Postby Triple digit golfer » Tue Oct 27, 2009 8:29 pm

Adrian Nenu wrote:Amazing that Bernstein would make such wrong statements and ignore the individual investors' personal circumstances as well as ability to tolerate and recover from losses.


Yeah, I think I recall something similar...

Oh yeah! I remember now! It's some guy who ignores individual investors' personal circumstances and blindly recommends a 50% maximum equity allocation to all buy and hold investors!
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Postby sschullo » Tue Oct 27, 2009 8:29 pm

"The sooner you turn off CNBDC, get out into the bright sunshine, and take a walk, the sooner you'll feel better about your investments."

Come on Taylor or Bill, no politics! :D

Steve
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Postby traineeinvestor » Tue Oct 27, 2009 8:52 pm

"Unlike your doctor, lawyer, or accountant, your broker is not a 'fiduciary': that is, he is under no legal obligation to place your interest above his."


Some great quotes, but this one surprised me. In Hong Kong every broker has a specific obligation to "act honestly, fairly and in the best interests of its clients and the integrity of the market" (SFC Code of Conduct for Licensed Persons). There are also other more specifc regulations backing this up.

I am amazed to hear that America does not have equivalent regulations.
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Postby Avo » Tue Oct 27, 2009 9:35 pm

"Very high returns are almost always made by those brave enough to invest when the sky is blackest."

Sounds like market timing to me ... :roll:
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Postby Adrian Nenu » Tue Oct 27, 2009 9:39 pm

Amazingly he also missed the inverted yield curve indicator. Shame on him, Adrian!


Very unfortunate given that the IYC is one of the best risk indicators and would have saved many investors from the huge bear market losses during the past decade.

Yeah, I think I recall something similar...

Oh yeah! I remember now! It's some guy who ignores individual investors' personal circumstances and blindly recommends a 50% maximum equity allocation to all buy and hold investors!


The 50% equity cap is designed to save investors from themselves and would have served them well during the two huge bear markets in the last 10 years. Also would have saved them from long periods of low stock returns. Last, the "tolerable loss" part of the rule of thumb is determined by each individual investor instead of some boilerplate rule based on the investor's age.

In his book, Bernstein states that "...age is the first factor in determining the overall stock/bond allocation." On pages 74-78 he explains how this rule-of-thumb allocation can be adjusted based on a person's risk tolerance and various other personal circumstances, and he provides useful examples.


Risk of loss and size of potential loss are what matter, and ability to tolerate it and recover from it. Show me a book author that addresses than, Bernstein included. That's the risk investors should be most concerned about. Vague homilies about asset allocations don't cut it in the real world.

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Postby TJAJ9 » Wed Oct 28, 2009 12:40 am

Avo wrote:"Very high returns are almost always made by those brave enough to invest when the sky is blackest."

Sounds like market timing to me ... :roll:


Not really. It means don't stop investing when the market is going down. Bogleheads keep investing when markets are good or bad. Market timers are more likely to stop buying and/or sell when markets are going down. Market timers usually buy high and sell low, unfortunately.
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Postby DriftingDudeSC » Wed Oct 28, 2009 4:35 am

Taylor,

Thank you for the gems. I will definely buy this book. I especially like the following quote:

"I'll emphasize three main principles: first, to not get too greedy, second, to diversify as widely as possible, and last, to always be wary of the investment industry."

The above quote should be taken to heart for all investors.

Michael
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Postby eucalyptus » Wed Oct 28, 2009 12:17 pm

Hmmmm ....

________

"Very high returns are almost always made by those brave enough to invest when the sky is blackest."

"The investor should forget trying to pick stocks and mutual funds or to time the market. The best the investor can do is to maximize returns by minimizing expenses."
________

"Always remember that the more exciting a given stock or asset class is, the more likely it is to be over-owned, overpriced, and destined for low future returns."

"Many investors lean heavily on past returns to gauge future ones. This is a mistake."
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Re: The Investor's Manifesto -- A Gem

Postby VictoriaF » Wed Oct 28, 2009 11:28 pm

Taylor Larimore wrote:Boglehead Bill Bernstein, PhD, MD, is a highly respected author and advisor. He has been an expert contributor at many of our Boglehead Reunions. Mr. Bogle calls the "Investor's Manifesto" a "grand-slam home run." This is a sample of what's inside:
...
"Do not invest with any mutual fund family that is owned by a publicly traded parent company."
...

Hi Taylor,

Thank you for citing Dr. Bernstein's new book. I am curious about the reasons for the recommendation above. Why would an index fund from a publicly traded company be any different from an index fund from Vanguard or Fidelity -- apart from the expense ratio, which could serve as a more direct criterion.

Thank you,

Victoria
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Re: The Investor's Manifesto -- A Gem

Postby stratton » Thu Oct 29, 2009 2:33 am

VictoriaF wrote:
Taylor Larimore wrote:Boglehead Bill Bernstein, PhD, MD, is a highly respected author and advisor. He has been an expert contributor at many of our Boglehead Reunions. Mr. Bogle calls the "Investor's Manifesto" a "grand-slam home run." This is a sample of what's inside:
...
"Do not invest with any mutual fund family that is owned by a publicly traded parent company."
...

Hi Taylor,

Thank you for citing Dr. Bernstein's new book. I am curious about the reasons for the recommendation above. Why would an index fund from a publicly traded company be any different from an index fund from Vanguard or Fidelity -- apart from the expense ratio, which could serve as a more direct criterion.

With a publicly traded company management is more aligned with shareholders than with investors. There is pressure for short term returns to increase the stock value so they need more "income" from the ER. They can do this by taking risks in the funds to increase returns and attract more assets to manage getting them more ER income. The obvious problem is with something like bond funds where they can get bit by subprime they were using to juice returns.

Paul
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Avoid publicly held companies

Postby Taylor Larimore » Thu Oct 29, 2009 10:25 am


Thank you for citing Dr. Bernstein's new book. I am curious about the reasons for the recommendation above. Why would an index fund from a publicly traded company be any different from an index fund from Vanguard or Fidelity -- apart from the expense ratio, which could serve as a more direct criterion.

Thank you,

Victoria


Hi Victoria:

Dr. Bernstein devotes an entire chapter titled, Muggers and Worse, to the financial industry's greed and necessity of making stockholder profits. Of course, index funds are less susceptible to this, but they are not immune as this excerpt from "Motley Crew" describes:


Watch carefully what some companies are selling as "index funds." The real point of investing in index funds is not to try to pick the "hot" index (or the "cold" index before it gets hot). Putting your money into an index fund -- any index fund -- can deliver great results to the long-term shareholder, because index funds keep costs so low -- or at least they should keep costs low. The Vanguard 500 Index Fund has annual costs (the expense ratio) of roughly 0.18%. Most index shares have similar expense ratios. That means that when you put your money into the Vanguard 500 Index or an index share, about 99.82% of that money keeps working for you.


Full-price brokerage Morgan Stanley Dean Witter, on the other hand, runs an S&P 500 index fund (buying the exact same stocks as Vanguard's fund) with annual costs of 1.5% -- nearly eight times as much! When Morgan Stanley sells you an index fund, it essentially says, "You should be happy with only 98.5% of your money still in your pocket every year. We deserve the other 1.5% for doing such a great job." Just say "no thanks" to that.


And it can get even worse. Many banks offer index funds with high expense ratios and sales loads! The Wells Fargo S&P 500 Fund, for instance, has a 0.71% annual expense ratio and a 5.75% upfront sales load. They expect you to pay someone to sell you a fund with an expense ratio four times that of their competition that is guaranteed not to perform as well. When you buy an index fund with a 5.75% load, that's 5.75% of your money gone right there! And then Wells Fargo has the audacity to take 0.71% every year thereafter!


http://www.fool.com/seminars/sharebuilder/index.htm?sid=0008&lid=400&pid=0000

Dr. Bernstein provides a Table taken from one of Mr. Bogle's speeches in which Jack listed the past performance (using star ratings) of the 18 largest mutual fund companies. Vanguard (mutual), DFA (Private) and TIAA-CREF (non-profit) were 1, 2, and 3 at the top. 9 publicly traded companies were all at the bottom.
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Postby KarlJ » Thu Oct 29, 2009 1:36 pm

Hi Taylor,

Thanks for compiling the gems. These gem lists are a very valuable resource to quickly access the highlights of a significant investment book, especially if one has not found the time yet to read the entire text.

I thought the following Investor’s Manifesto gems were highly interesting:

"Home ownership is not an investment; it's exactly the opposite, a consumption item."

"If you must have a place in the mountains or on the beach, rent, don't buy."

"No asset class has delivered the amount of stomach acid as have REITs, which moved up or down five percent in 45 of the 116 trading days in 2008's last half."



Not counting home ownership as a real estate investment is something that appears to be a consensus among highly respected investment experts, including William Bernstein. The advice of not purchasing a vacation home might be a tad late for many that got catch up in the vacation home frenzy of a few years ago, but it is valuable advice nevertheless. Finally volatility of REITs makes me question whether including this asset class in an asset allocation is a good idea for a conservative investor.
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Re: The Investor's Manifesto -- A Gem

Postby CyberBob » Thu Oct 29, 2009 1:55 pm

"The 44/56 U.S./foreign split (Vanguard's World Index) is too foreign-heavy for my tastes."

Dr. Bernstein's implication here seems to be that your international allocation should not exceed your domestic allocation. Okay, great, that sounds like an excellent allocation guideline.
However, his comment about "too foreign-heavy" also makes it clear that he's a U.S.-based investor. Is he suggesting a domestic allocation > international allocation guideline only for U.S. investors, or for investors in every country?

Bob
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Why less than a foreign world equity allocation ?

Postby Taylor Larimore » Thu Oct 29, 2009 2:20 pm

CyberBob wrote:
"The 44/56 U.S./foreign split (Vanguard's World Index) is too foreign-heavy for my tastes."

Dr. Bernstein's implication here seems to be that your international allocation should not exceed your domestic allocation. Okay, great, that sounds like an excellent allocation guideline.
However, his comment about "too foreign-heavy" also makes it clear that he's a U.S.-based investor. Is he suggesting a domestic allocation > international allocation guideline only for U.S. investors, or for investors in every country?

Bob


Hi Bob:

This is a more complete quote which will help answer your question:

"You can purchase this index in a single vehicle from Vanguard: The Total World Stock Index Fund. I do not recommend it, however. The 44/56 United States/foreign split of this fund, and its underlying index, is too foreign-heavy for my taste for three reasons:

First, unless you are living abroad, you are going to be spending mainly dollars in retirement, and the foreign stocks will expose you to the risk of depreciation of the euro, yen, pound, and other foreign currencies.

Second, not only are foregn stocks riskier than U.S. stocks, they are also more expensive to own. It costs more to transact abroad and many foreign governments tax stock dividends; although you can recover this cost in a taxable account through the foreign tax credit on your U.S. tax return, you cannot do so in a retirement account.

Last, the fund's fees are higher than they need to be, uncharacteristic of a Vanguard offering. At a 0.50 percent expense ratio plus a 0.25 percent purchase fee, an investor can buy its components--the United States and international stock markets--much more cheaply."
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Re: Why less than a foreign world equity allocation ?

Postby CyberBob » Thu Oct 29, 2009 2:39 pm

Taylor Larimore wrote:Hi Bob:

This is a more complete quote which will help answer your question:

...First, unless you are living abroad, you are going to be spending mainly dollars in retirement, and the foreign stocks will expose you to the risk of depreciation of the euro, yen, pound, and other foreign currencies...

I guess that part about currency risks would apply to anyone, anywhere, so apparently the domestic allocation > international allocation is universal?

Bob
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Postby VictoriaF » Thu Oct 29, 2009 4:20 pm

Paul and Taylor,

Thank you for your responses about the perils of funds offered by publicly traded companies. I am also now realizing that I should not take Dr. Bernstein literally when he says that this book is "lighter" than The Four Pillars of Investing, or that all Bogleheads' books carry pretty much the same message. There is a lot to learn from Investor's Manifesto.

Victoria
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Postby stratton » Thu Oct 29, 2009 7:17 pm

VictoriaF wrote:Paul and Taylor,

Thank you for your responses about the perils of funds offered by publicly traded companies. I am also now realizing that I should not take Dr. Bernstein literally when he says that this book is "lighter" than The Four Pillars of Investing, or that all Bogleheads' books carry pretty much the same message. There is a lot to learn from Investor's Manifesto.

He has a habit of hiding very revealing single sentences in paragraphs. In addition this book is 6 to 10 years newer than his other ones so the more recent prospective is interesting.

Paul
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Postby Call_Me_Op » Thu Oct 29, 2009 8:43 pm

"A perfectly simple and serviceable portfolio might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That's it. Done."

............................................

Hmmmm.....I suppose the above is better than 40% US Total Stock Market; 20% Total Foreign Market, 40% Total Bond Market......for some strange reason.
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Postby Fletch » Thu Oct 29, 2009 8:48 pm

Excellent book; I could not put it down. I read it all today and expect that I'll reread another time or two. I have added it to my "Boglehead" library.

Fletch
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Postby Blues » Thu Oct 29, 2009 9:14 pm

I'd be curious to hear if or how the message is different from that in Four Pillars...
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Postby Mel Lindauer » Thu Oct 29, 2009 9:36 pm

Call_Me_Op wrote:"A perfectly simple and serviceable portfolio might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That's it. Done."

............................................

Hmmmm.....I suppose the above is better than 40% US Total Stock Market; 20% Total Foreign Market, 40% Total Bond Market......for some strange reason.


It's really rather simple. Bill recommends holding 30% of your equities in foreign. 30% of a balanced portfolio of 60% equities is 18%.
Best Regards - Mel | | Semper Fi
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Postby Skbosma » Thu Oct 29, 2009 11:04 pm

I just got the book today and quickly skimmed it. Good read. FYI, I have his previous books. I didn't learn anything new in this book (versus the previous books.) But maybe I missed something, will read again. From the title "Investor's Manifesto - Preparing for Prosperity, Armageddon and Everything In Between" I thought he might touch upon some of the Harry Browne ideas - building a portfolio to withstand different economic environments. However, from an asset allocation POV what I read was similar to the Intelligent Asset Allocator and Four Pillars.
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Postby fundtalk » Fri Oct 30, 2009 9:07 am

42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market.


Sounds like a good plan for prosperity, but is that really the portfolio you'd want for Armageddon?
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Postby CyberBob » Fri Oct 30, 2009 11:18 am

Mel Lindauer wrote:It's really rather simple. Bill recommends holding 30% of your equities in foreign. 30% of a balanced portfolio of 60% equities is 18%.

I'm still curious as to what he means by 'foreign'. Does he simply mean non-domestic (depending on where you live), or does he mean non-US? If you live in, say, the U.K., is 70% U.K. / 30% everyone else still the recommended allocation?

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Foreign = International ?

Postby Taylor Larimore » Fri Oct 30, 2009 11:33 am

CyberBob wrote:
Mel Lindauer wrote:It's really rather simple. Bill recommends holding 30% of your equities in foreign. 30% of a balanced portfolio of 60% equities is 18%.

I'm still curious as to what he means by 'foreign'. Does he simply mean non-domestic (depending on where you live), or does he mean non-US? If you live in, say, the U.K., is 70% U.K. / 30% everyone else still the recommended allocation?

Bob


Hi Bob:

An the book's Index, Bill uses "foreign" several times but "international" is not to be found.

I'm guessing, but I suspect Bill means "non-domestic (depending on where you live)."
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby allsop » Fri Oct 30, 2009 1:06 pm

CyberBob wrote:
Mel Lindauer wrote:It's really rather simple. Bill recommends holding 30% of your equities in foreign. 30% of a balanced portfolio of 60% equities is 18%.

I'm still curious as to what he means by 'foreign'. Does he simply mean non-domestic (depending on where you live), or does he mean non-US? If you live in, say, the U.K., is 70% U.K. / 30% everyone else still the recommended allocation?

Bob


My interpretation is that the recommended allocation is for the US based investors.
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Re: The Investor's Manifesto -- A Gem

Postby Roy » Sat Oct 31, 2009 10:18 am

"Never, ever, extrapolate past returns into the future."

"The most imporatant asset allocation decisiion is the overall stock/bond mix. Start with the 'age=bond allocation' rule of thumb."


On what is "age in bonds" based other than past returns? Is there an underlying past-returns-looking assumption that stocks will outperform bonds, as seems to be the case with the "age in bonds" formula? If not, why are young folks carrying far more stocks than bonds, if not for the past-looking equity risk premium?

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Re: The Investor's Manifesto -- A Gem

Postby Derek Tinnin » Sat Oct 31, 2009 12:45 pm

Roy wrote:"Never, ever, extrapolate past returns into the future."

"The most imporatant asset allocation decisiion is the overall stock/bond mix. Start with the 'age=bond allocation' rule of thumb."


On what is "age in bonds" based other than past returns? Is there an underlying past-returns-looking assumption that stocks will outperform bonds, as seems to be the case with the "age in bonds" formula? If not, why are young folks carrying far more stocks than bonds, if not for the past-looking equity risk premium?

Roy


Regardless of past data, we have reasons grounded in economic logic that the equity premium will always exist. Bonds and stocks are by no means risk equivalents.

The age in bonds rule has more to do with human capital relative to investment capital. Young people, in general, have much higher human capital (which tends to be "bond-like") than investment capital. Their future earnings/savings are much higher than their current investments/savings and they have the ability to adjust to stock market setbacks with that savings and earnings capacity. To offset the bond-like human capital, they can take on more equity risk with their investment capital.

For older investors, it's usually the exact opposite. Human capital eventually becomes low relative to investment capital.

In the book, risk tolerance is used to modify the age in bonds rule. If you have a "very high" tolerance of risk, the book mentions adjusting the amount in bonds by up to 20%, such as a 40 yr old going with 80/20 instead of 60/40...

Age in bonds is a pretty good starting point. Adjust it by your personal risk tolerance, human capital, and actual need to take risk and that's about as reasonably close as you're going to get to the "right" allocation.
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Re: The Investor's Manifesto -- A Gem

Postby Roy » Sat Oct 31, 2009 3:16 pm

Derek Tinnin wrote:Regardless of past data, we have reasons grounded in economic logic that the equity premium will always exist. Bonds and stocks are by no means risk equivalents.


Hi, Derek,

I agree, except that the past can indeed provide some information on which to base decisions. It's just that it should never be the sole reason, in my view. In addition, Bogle himself has suggested alterations in allocation based on current valuations, which can only be comparative to prior periods, and he has frequently, rightly, pointed to past returns of stocks in general. So the past does matter.

The Equity Risk Premium is real, both from a historical viewpoint and economic grounding. More is "promised" when more risk is taken, But without the past to demonstrate the validity of that "logical" grounding, there would be few investors now willing to purchase riskier equities. The past matters, even as the future may change.

What other economically logical reasons do you feel suggest stocks should outperform bonds? And would those reasons also apply to other risk premia (say, small and value stocks)?

Roy
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Re: The Investor's Manifesto -- A Gem

Postby Derek Tinnin » Sat Oct 31, 2009 4:07 pm

Roy wrote:What other economically logical reasons do you feel suggest stocks should outperform bonds? And would those reasons also apply to other risk premia (say, small and value stocks)?Roy


As mentioned in the book and many times elsewhere, the main reasons a risk premium should be demanded by holders of equity include the increased probability of loss, difficulty in estimating future profits, and residual nature of equity ownership (bondholders get paid before shareholders). To assume there is no equity risk premium is to assume markets ignore these factors. Of course there are no guarantees, that's why it's called risk.

Small and value are riskier than large and growth. To assume they are priced without reqard to risk is to assume a startup venture with a shaky balance sheet has the same cost of capital as Wal-mart...Of course there should be risk premium differences from one company to the next. That's the primary function of prices - to distinguish one risk from another.

Can risk premiums shrink and expand? Sure they can, but they don't disappear forever, at least not in a capitalistic market system.
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Re: The Investor's Manifesto -- A Gem

Postby Roy » Sat Oct 31, 2009 5:50 pm

Derek Tinnin wrote:"As mentioned in the book and many times elsewhere, the main reasons a risk premium should be demanded by holders of equity include the increased probability of loss, difficulty in estimating future profits, and residual nature of equity ownership (bondholders get paid before shareholders). To assume there is no equity risk premium is to assume markets ignore these factors. Of course there are no guarantees, that's why it's called risk."

Can risk premiums shrink and expand? Sure they can, but they don't disappear forever, at least not in a capitalistic market system.


Yeah, Derek, those common facts are basically what constitutes the ERP, along with liquidity and other "risks". *I'm* not assuming otherwise, just asking, regarding statements made about the past. I was wondering what other than that you might have been suggesting.

I agree there is a ERP, and it has clearly existed for a long time, and will likely be one going forward, as well as premia for small and value.

If the ERP had not been paid in the past, it would not likely find many adherents today. My main point was that the past data should be a consideration and not something to be ignored as it can inform present decisions. So we need to be careful when talking about the past not to dismiss its value, which misunderstandings may occur with various "gems" or statements about the past, torn from context or not.

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Re: The Investor's Manifesto -- A Gem

Postby Derek Tinnin » Sat Oct 31, 2009 6:35 pm

Roy wrote:
Derek Tinnin wrote:"As mentioned in the book and many times elsewhere, the main reasons a risk premium should be demanded by holders of equity include the increased probability of loss, difficulty in estimating future profits, and residual nature of equity ownership (bondholders get paid before shareholders). To assume there is no equity risk premium is to assume markets ignore these factors. Of course there are no guarantees, that's why it's called risk."

Can risk premiums shrink and expand? Sure they can, but they don't disappear forever, at least not in a capitalistic market system.


Yeah, Derek, those common facts are basically what constitutes the ERP, along with liquidity and other "risks". *I'm* not assuming otherwise, just asking, regarding statements made about the past. I was wondering what other than that you might have been suggesting.

I agree there is a ERP, and it has clearly existed for a long time, and will likely be one going forward, as well as premia for small and value.

If the ERP had not been paid in the past, it would not likely find many adherents today. My main point was that the past data should be a consideration and not something to be ignored as it can inform present decisions. So we need to be careful when talking about the past not to dismiss its value, which misunderstandings may occur with various "gems" or statements about the past, torn from context or not.

Roy


The past is interesting, but in principle, I would rather encourage behavior grounded in an understanding of how markets work and basic economic principles. That's a much firmer foundation that fosters greater discipline and confidence than the shifting sands of historic patterns.
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Re: The Investor's Manifesto -- A Gem

Postby CyberBob » Sun Nov 01, 2009 1:29 pm

"A perfectly simple and serviceable portfolio might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That's it. Done."

Well Dr. B definitely isn't a Zvi Bodie clone :D Anyone else find it interesting that TIPS aren't on the list here as an essential asset class?

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Postby DriftingDudeSC » Sun Nov 01, 2009 4:31 pm

Yes cyberbob. I think Mr. Bogle doesn't recommended either but I could be wrong.
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Postby Richard123 » Mon Nov 02, 2009 5:43 am

Blues wrote:I'd be curious to hear if or how the message is different from that in Four Pillars...


The main differences are the 3-fund portfolio Taylor has advocated for years. There are several books (Solin, Roth) etc. all advocating Taylor's total market approach.

The big difference in Manifesto is Bernstein's changed position in the Total Bond Market fund. In 4 Pillers, he panned it and emphasized short-term bonds. I think there is a realization that short-term bond fund returns won't hack it for retirees

Also, you can add subclasses i.e. small value, REIT, however there is no guarentee they will out-perform. They are bets, which may or may not pan out in our lifetimes.
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Postby Mikko » Fri Nov 06, 2009 7:20 pm

I've read several of Dr. Berstein's books in the past and I read the first two chapters of this book on-line several weeks ago. I liked the first two chapters and plan to buy it, but I have a question regarding the title of the book.

I believe that I recall the title of Dr. Bernstein's previous book, The Intelligent Asset Allocator, was a play on Benjamin Graham's, The Intelligent Investor: A Book of Practical Counsel. I've read both of these books.

Now, The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between, seems to be reminiscent of the book, The Communist Manifesto.

Is this a coincidence, intentional, or a play on another book I am not familiar with? I have not read the Communist Manifesto, but from what I do know of it, I do not think the content or philosophy would be similar to Dr. Bernstein's current book.

If this is a play on The Communist Manifesto, otherwise known as Manifesto of the Communist Party, is the reference an attempt to be disparaging, tongue in cheek, or to honor the previous book?
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Postby inve$t0r » Tue Nov 17, 2009 12:44 pm

..."Do not invest with any mutual fund family that is owned by a publicly traded parent company."


Are there any mutual funds that are member-owned just like a Credit Union?
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Postby tetractys » Tue Nov 17, 2009 1:18 pm

inve$t0r wrote:Are there any mutual funds that are member-owned just like a Credit Union?

Vanguard is investor owned.

Mel Lindauer wrote:
Call_Me_Op wrote:"A perfectly simple and serviceable portfolio might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That's it. Done."

............................................

Hmmmm.....I suppose the above is better than 40% US Total Stock Market; 20% Total Foreign Market, 40% Total Bond Market......for some strange reason.


It's really rather simple. Bill recommends holding 30% of your equities in foreign. 30% of a balanced portfolio of 60% equities is 18%.

For practical purposes, 30% is not that different than 1/3. Using percents seems more popular than using fractions these days, maybe because more math is done on keypads and less in the brain. -- Tet
Last edited by tetractys on Tue Nov 17, 2009 1:23 pm, edited 1 time in total.
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Postby VictoriaF » Tue Nov 17, 2009 1:20 pm

Mikko wrote:I've read several of Dr. Berstein's books in the past and I read the first two chapters of this book on-line several weeks ago. I liked the first two chapters and plan to buy it, but I have a question regarding the title of the book.

I believe that I recall the title of Dr. Bernstein's previous book, The Intelligent Asset Allocator, was a play on Benjamin Graham's, The Intelligent Investor: A Book of Practical Counsel. I've read both of these books.

Now, The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between, seems to be reminiscent of the book, The Communist Manifesto.

Is this a coincidence, intentional, or a play on another book I am not familiar with? I have not read the Communist Manifesto, but from what I do know of it, I do not think the content or philosophy would be similar to Dr. Bernstein's current book.

If this is a play on The Communist Manifesto, otherwise known as Manifesto of the Communist Party, is the reference an attempt to be disparaging, tongue in cheek, or to honor the previous book?

You started an entire thread with this very question and received many responses. Why to dwell on this?

There is a thread about Larry possibly leaving this Forum after being needled on the things he wrote. Do you want Bill to leave it, too?

Victoria
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Warning from Moderator

Postby Mel Lindauer » Tue Nov 17, 2009 2:26 pm

If you have something to say about the content of Bill's book, have at it. However, I'm getting sick and tired of reading comments about the book title's "hidden" meaning. Any more posts like that will be deleted.
Best Regards - Mel | | Semper Fi
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Postby inve$t0r » Tue Nov 17, 2009 2:43 pm

tetractys wrote:
inve$t0r wrote:Are there any mutual funds that are member-owned just like a Credit Union?

Vanguard is investor owned.



Doesn't ownership imply control?

Do we control VG management in any way?



PS: Are there any other mutual funds besides VG that are investor-owned?


.
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