William Bernstein on Meb Faber's podcast

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William Bernstein on Meb Faber's podcast

Post by bzargarcia » Wed Jul 05, 2017 12:55 pm

I haven't listened yet, but Bill Bernstein is a guest on Meb Faber's podcast.

http://mebfaber.com/2017/07/05/episode- ... ent-going/

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Re: William Bernstein on Meb Faber's podcast

Post by goblue100 » Wed Jul 05, 2017 3:02 pm

Thanks for the link. It was worth the time spent listening to it. Some of it will be old hat to Bogleheads, but I still found it interesting.
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Re: William Bernstein on Meb Faber's podcast

Post by iceport » Wed Jul 05, 2017 11:03 pm

Thanks for the link. It was an interesting interview, using Bill's If You Can for an outline of the first half or three quarters of the talk.

I was somewhat surprised to hear Bill Bernstein's take on how to know if we're in a bubble. He acknowledges that valuations are very high right now by historical standards, but he questions how representative historic conditions are to today's world.

So rather than attempt to identify a bubble with economic metrics, he thinks it's feasible to use sociological criteria, suggesting you simply look around and observe behavior. This was not a passing notion, but a well developed concept with four criteria that point to a bubble:

— Everybody, especially the inexperienced investor, is talking about making a killing in stocks, e.g. tech stocks in the 1990s.
— People are quitting their jobs to day trade.
— Any expression of skepticism about the promise of the market is met with vehement opposition.
— You start seeing extreme predictions of (high) market returns.

Even though a crash can happen any time, we are seeing none of these four behaviors, indicating that we're probably not in the midst of a bubble, despite the high valuations.
"Discipline matters more than allocation.” ─William Bernstein

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Re: William Bernstein on Meb Faber's podcast

Post by azanon » Thu Jul 06, 2017 2:29 pm

iceport wrote:....So rather than attempt to identify a bubble with economic metrics, he thinks it's feasible to use sociological criteria, suggesting you simply look around and observe behavior. This was not a passing notion, but a well developed concept with four criteria that point to a bubble:........
Maybe he has the right idea, but just chose the wrong 4 criteria. For example, I see at least one "Why not 100% stocks" post on the first page here, and am seeing that pretty frequently now. Let's have a nice, deep crash or bear market, and see if any of those posts still show up. :mrgreen:

If someone was bored, they could check the same time every day, and count how many of those threads are on the front page, and plot it over time. It might end up giving us a very reliable contrarian indicator. :mrgreen:

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Re: William Bernstein on Meb Faber's podcast

Post by RadAudit » Thu Jul 06, 2017 2:33 pm

iceport wrote:— Any expression of skepticism about the promise of the market is met with vehement opposition.
Yep, Bill's been reading postings on this forum for sure. :wink:
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Re: William Bernstein on Meb Faber's podcast

Post by iceport » Thu Jul 06, 2017 2:54 pm

azanon wrote:
iceport wrote:....So rather than attempt to identify a bubble with economic metrics, he thinks it's feasible to use sociological criteria, suggesting you simply look around and observe behavior. This was not a passing notion, but a well developed concept with four criteria that point to a bubble:........
Maybe he has the right idea, but just chose the wrong 4 criteria.
I tend to agree, and actually intended to mention that. The markers for the next bubble will probably be different, if only deceptively so.

But his overall assessment of current widespread investor sentiment still seems generally accurate to me.
"Discipline matters more than allocation.” ─William Bernstein

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Re: William Bernstein on Meb Faber's podcast

Post by Bill Bernstein » Thu Jul 06, 2017 3:25 pm

Hi All:
I do like anzon's "why not 100% stocks" criteria. i've thought about it, but don't consider it quite strong enough. more telling was the motley fool's chant from the tech bubble, which went something like "every penny you don't invest in stocks will hurt you," as i recall.

But anzon is certainly right, those posts are certainly indicative of a market that's been headed north for a long enough time that people have forgotten just how bad 100% stocks feels when the music stops.

b

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Re: William Bernstein on Meb Faber's podcast

Post by indexonlyplease » Thu Jul 06, 2017 6:22 pm

I just listen to the podcast and it was great. On the podcast Bill reminds me about everything we talk about here. 3 fund portfolio, Target Dated Fund or Lifestyle Fund.

Just keeping it simple will work.

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Re: William Bernstein on Meb Faber's podcast

Post by azanon » Thu Jul 06, 2017 6:45 pm

Yes it was great, and I highly recommend. I listened to it earlier today while on lunch break. I'm a fan of both Meb and Bill's.

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Re: William Bernstein on Meb Faber's podcast

Post by baw703916 » Thu Jul 06, 2017 7:09 pm

OTOH, the "U.S. Market in Freefall" thread now seems to be pretty close to the longest on the site.

I think real estate in my neck of the woods is much more likely to be in a bubble than the stock market (unless you believe there can't be a real estate bubble in Seattle because it's still cheaper than Vancouver and San Francisco).

Back to equities--we're due for a recession and/or a bear market, and both will inevitably happen sooner or later. But not every recession is like 2008 and not every bear market involves a 50% drop in equities.
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Re: William Bernstein on Meb Faber's podcast

Post by Top99% » Thu Jul 06, 2017 9:01 pm

baw703916 wrote:OTOH, the "U.S. Market in Freefall" thread now seems to be pretty close to the longest on the site.

I think real estate in my neck of the woods is much more likely to be in a bubble than the stock market (unless you believe there can't be a real estate bubble in Seattle because it's still cheaper than Vancouver and San Francisco).

Back to equities--we're due for a recession and/or a bear market, and both will inevitably happen sooner or later. But not every recession is like 2008 and not every bear market involves a 50% drop in equities.
The fact that the current bull market in US equities is closing in on the record for the longest does make me wonder... If something can't go on forever it will stop. I just hope we don't go through 1970s style stagflation because my portfolio isn't really setup to deal with that too well and I am not willing to shift to an allocation that would help with stagflation. But, other than trimming my expected returns and withdrawal rates I am staying the course. My crystal ball is filled with sand.
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Re: William Bernstein on Meb Faber's podcast

Post by Bill Bernstein » Thu Jul 06, 2017 9:37 pm

I should add that 3 months back I visited Toronto, which has a real estate market that looks a lot like the US in 2006. I gave a talk there which included my bubble criteria, and with each of the four points, I could see lots of audience nodding and laughing.

Bill

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Re: William Bernstein on Meb Faber's podcast

Post by whodidntante » Fri Jul 07, 2017 6:21 am

I still see a great deal of skepticism about the market. It hasn't drawn in the greedy but clueless like the tech bubble did. And some long time investors are nervous that if might sink. Skepticism is usually a good thing, because it means there is money outside the market that could still come in. But the next crash won't look like the last one.

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Re: William Bernstein on Meb Faber's podcast

Post by harvestbook » Fri Jul 07, 2017 7:53 am

I've been hearing the "market is due for a correction and/or crash" ever since I've started paying attention. And the instant we have a down week or so, like lately, the financial sites all instantly veer into bearish headlines for the click revenue. So it starts to "feel" like we're in a bear downturn or that the apocalypse is just around the corner.

Of course it's different this time, yet the same. With the expansion and recovery coming in such a trickle, who is to say it can't go on like this for another twenty years before the debt cycle ends and we have a that recession that was hyped as overdue. If you consider 2013 the actual start of the bull market (and conveniently forget major dips and time corrections since then), we look extremely early in the business cycle. Some experts seem to be constantly bearish and bullish at the same time.

In other words, it's just another day in the markets. I always go back to Warren Buffet's line about how when he made his first investments, the US was at war, and it looked like the US was losing the war to Japan. And all that turned out okay, at least for investing.
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Re: William Bernstein on Meb Faber's podcast

Post by goingup » Fri Jul 07, 2017 10:22 am

Thanks for posting. It's a great hour of listening.

Around minute 37-38 Bill talks about the value of using Lifecycle or Target funds for investors. He suggests saving 15-20% of salary and not to even look at statements. Using a 3-fund portfolio is a bit more complex. Since you should keep track of it you may get in trouble because (and here's the fun quote) "an asset allocation is like a wet bar of soap--the more frequently you touch it, the more rapidly it disappears".

Asked about Robo investing, Bill said it's generally a good idea. Hands-off investing is all to the good, he said. Better yet is a Lifecycle fund--pretty much the same thing.

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Re: William Bernstein on Meb Faber's podcast

Post by goblue100 » Fri Jul 07, 2017 11:29 am

Bill Bernstein wrote:Hi All:
I do like anzon's "why not 100% stocks" criteria. i've thought about it, but don't consider it quite strong enough. more telling was the motley fool's chant from the tech bubble, which went something like "every penny you don't invest in stocks will hurt you," as i recall.

But anzon is certainly right, those posts are certainly indicative of a market that's been headed north for a long enough time that people have forgotten just how bad 100% stocks feels when the music stops.

b
We need a +- count on "100% stocks" vs "Should I still buy index funds now at such a high price before an impending recession " threads. Right now they seem to be fairly equal.
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Re: William Bernstein on Meb Faber's podcast

Post by Small Law Survivor » Sat Jul 08, 2017 10:01 am

W. Bernstein advocates not having money in stocks that you need for the next 10-15 years. (can't find the exact spot where he says this, but this is my memory - might have been a straight "15 years", and I am adding the "10").

Wow - this is a long time, and very few retirees can afford to have 15 years of living expenses in bonds/cash and have anything left over for stocks.

Any comments/observations on this? My personal rule has been at least 5 years, but not I'm thinking that is too conservative.

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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Sat Jul 08, 2017 10:07 am

Small Law Survivor wrote:W. Bernstein advocates not having money in stocks that you need for the next 10-15 years. (can't find the exact spot where he says this, but this is my memory - might have been a straight "15 years", and I am adding the "10").

Wow - this is a long time, and very few retirees can afford to have 15 years of living expenses in bonds/cash and have anything left over for stocks.

Any comments/observations on this? My personal rule has been at least 5 years, but not I'm thinking that is too conservative.
I really object to characterizing withdrawing small amounts continuously from a portfolio of stocks and bonds as being "need the money within fifteen years." You are correct that it leads to the Bernstein recommendation that one first amass 25 years of spending in bonds and then put the rest in stocks. It was 25, by the way, so I don't know how it is down to 15 now. A person can read Bernstein and other advocates of the Liability Matching Portfolio approach and decide if the idea makes sense to his own circumstance.

Coming away from podcasts and interviews with this "sound-bite" investing advice is just really terrible in my opinion. I don't know if the fault is in the speakers or in the interviewers or in listeners for doing this.

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Re: William Bernstein on Meb Faber's podcast

Post by Johnnie » Sat Jul 08, 2017 10:45 am

Bill Bernstein wrote:Hi All:
I do like anzon's "why not 100% stocks" criteria. i've thought about it, but don't consider it quite strong enough. more telling was the motley fool's chant from the tech bubble, which went something like "every penny you don't invest in stocks will hurt you," as i recall.

But anzon is certainly right, those posts are certainly indicative of a market that's been headed north for a long enough time that people have forgotten just how bad 100% stocks feels when the music stops.

b
I often get the impression the "100% stock threads" tend to be posted by younger investors, or others who haven't been mugged by Mr. Market very much yet. IOW, it's an indicator of something but maybe not the thing we're interested in here.

Those of who have suffered through those semi-regular muggings over many decades probably skip the "consideration" step and go right to eye-rolling when we see those threads.
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Re: William Bernstein on Meb Faber's podcast

Post by Valuethinker » Sun Jul 09, 2017 8:47 am

baw703916 wrote:OTOH, the "U.S. Market in Freefall" thread now seems to be pretty close to the longest on the site.

I think real estate in my neck of the woods is much more likely to be in a bubble than the stock market (unless you believe there can't be a real estate bubble in Seattle because it's still cheaper than Vancouver and San Francisco).

Back to equities--we're due for a recession and/or a bear market, and both will inevitably happen sooner or later. But not every recession is like 2008 and not every bear market involves a 50% drop in equities.

If you have the Vancouver spillover I pity you. mother Jones did a good piece on it, it has destroyed Vancouver as a city.

My sense fwiw is Seattle still has real companies like Amazon and Msft that are doing well and fuelling local housing market.

Beware though, that was probably Vancouver 15 years ago. These things happen fast.

Yes 're bear market and 're recession. Jim Chanos (famous short seller Kynikos Associates) gave an interview recently pointing out as much.

Big risks still seem geopolitical. And Canadian housing real estate. Ticks every bubble box I know of (Vancouver and Toronto).

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Re: William Bernstein on Meb Faber's podcast

Post by midareff » Sun Jul 09, 2017 9:42 am

Small Law Survivor wrote:W. Bernstein advocates not having money in stocks that you need for the next 10-15 years. (can't find the exact spot where he says this, but this is my memory - might have been a straight "15 years", and I am adding the "10").

Wow - this is a long time, and very few retirees can afford to have 15 years of living expenses in bonds/cash and have anything left over for stocks.

Any comments/observations on this? My personal rule has been at least 5 years, but not I'm thinking that is too conservative.

Of course you aren't talking about the retiree's that planned properly are you? ... you may have the recommended time span wrong as well.

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Re: William Bernstein on Meb Faber's podcast

Post by CyberBob » Sun Jul 09, 2017 10:07 am

Small Law Survivor wrote:W. Bernstein advocates not having money in stocks that you need for the next 10-15 years. (can't find the exact spot where he says this, but this is my memory - might have been a straight "15 years", and I am adding the "10").

Wow - this is a long time, and very few retirees can afford to have 15 years of living expenses in bonds/cash and have anything left over for stocks.

Any comments/observations on this? My personal rule has been at least 5 years, but not I'm thinking that is too conservative.
In Bernstein's Shallow/Deep Risk work he mentions that "any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds)..."

Specifically,

1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses
2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years.

viewtopic.php?f=10&t=120512

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Re: William Bernstein on Meb Faber's podcast

Post by Small Law Survivor » Sun Jul 09, 2017 10:41 am

You are correct that it leads to the Bernstein recommendation that one first amass 25 years of spending in bonds and then put the rest in stocks. It was 25, by the way, so I don't know how it is down to 15 now. A person can read Bernstein and other advocates of the Liability Matching Portfolio approach and decide if the idea makes sense to his own circumstance.
Yes, he does say 10-15 years at the 14 minute mark in this interview.

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Re: William Bernstein on Meb Faber's podcast

Post by Dandy » Sun Jul 09, 2017 11:07 am

As I recall Dr. Bernstein recommended for those who have enough to have 20-25 years worth of residual expenses ($ needed to supplement other income to fund a year's retirement living expenses) in "safe" (my word?) products e.g. individual TIPS, short term bond funds especially Treasury ones, CDs etc. And the rest you could invest anyway you want -- even 100% stocks.

That is a major hurdle for most retirees but those who feel they have enough (and I would add a bit more as a margin) it makes a lot of sense to and for me. It changed the nature of my fixed income to about 2/3's "safe". No problem since like many my fixed income, especially in retirement, is for safety and stability and have the lion's share of risk on the equity side. Sleep well and have less fear that my non investment savvy spouse/heirs will be "stuck" with a too aggressive portfolio.

For those who don't feel they have enough I believe even 10-15 years can be beneficial especially if they use a withdrawal approach of tapping their equity holdings for some or all of their needs when equities do well.

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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Sun Jul 09, 2017 11:08 am

Well, one can do some math. If you start with a 4% rule, which is 25x spending, make it a little more conservative at 30x, and then adopt a completely neutral 50/50 asset allocation you hold 15x in bonds. So at that point there is nothing to see here. The only question is would the investor adopt some kind of tricky strategy of spending from bonds first or go with a conventional portfolio approach of just rebalancing all the way through.

Now if you decide to save 25x in bonds, you have to ask yourself what is your asset allocation and how much on top of that is in stocks. If you are still at 50/50 then you have saved 50x expenses. If you are at 30x your are 83% bonds. In all conventional models that is a very bad idea. The point is that in conventional data all bonds does not support a 4% withdrawal rate.

But there is another wrinkle to this. Most often that 15x-25x is not of total expenses buy rather of the expenses you "absolutely have to support." So now you spread that out and in the end it is hard to see whether there is really anything new about all of this finagling around. Certainly there isn't at 15x. At 25x I think there are some real problems unless this is just advice to work longer, save more, and live on less, a lot less than maybe needed.

Another factor is that in real life people have other sources of income, such as SS, pensions, and even purchased annuities. The recommendation to put that 25x in bonds rather than to consider the position in annuitized income streams first is a little too simplistic. But, of course, this whole discussion does suffer from the "sound bite" syndrome.

The place I lose connection with the Bernstein comment is that the "absolutely have to support" thing is so ambiguous as to be meaningless. I can't find any specific amount of money in my expenditures that meets this criterion. Obviously people need to eat, to maintain shelter, etc., but while those needs are "absolute" the cost associated with them is quite flexible. On the other side of coin, there are lots of things to spend money on that really aren't all that optional in terms of how I want to live. To imply that I can't "blow" some money on good seats at the orchestra or support certain charities because the expense is "discretionary" is not really now my world works. Besides that, things happen and for good reason money goes out that was not planned but was hardly an option.

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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Sun Jul 09, 2017 11:11 am

Dandy wrote:As I recall Dr. Bernstein recommended for those who have enough to have 20-25 years worth of residual expenses ($ needed to supplement other income to fund a year's retirement living expenses) in "safe" (my word?) products e.g. individual TIPS, short term bond funds especially Treasury ones, CDs etc. And the rest you could invest anyway you want -- even 100% stocks.
People who really have "enough" don't have a problem that needs solving other than to figure out what to do with all that money. Whether the answer to that is nothing as in stick it in CDs and leave it there for 30 years or start thinking about how someone else could benefit from inheritances or giving is up to the individual. Most of us are not so disconnected from the world that if we do have money we just stick it away in CDs and forget about it.

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Re: William Bernstein on Meb Faber's podcast

Post by Dandy » Sun Jul 09, 2017 12:46 pm

People who really have "enough" don't have a problem that needs solving other than to figure out what to do with all that money
Not necessarily true. Having "enough" doesn't mean you know how to invest it -- I'm sure you have seen a lot of sports and Hollywood stars that made much more than enough and lost all or most of it. Some with more than enough could easily be led into a very aggressive portfolio than could change their status to not nearly enough. In retirement with much of human capital lost that could be a disaster.

Some with more than enough can worry excessively about their investments and panic when the equity market plunges. People who "have enough" are often the targets of shady investment types that look for someone with decent investment assets to manage for them - especially non investment savvy widowed spouses.

So those who have more than enough are surely blessed usually by a combination of good financial management and luck. But, some of them would do well to secure their retirement funding needs "safely" and then decide how to invest the rest as opposed to making an educated guess as to what top down allocation and sub allocations are safe enough. Let there be a 50% equity plunge, a lengthy recovery or 4 or 5 years and the retiree making substantial yearly withdrawals and I think you would find plenty of those who have enough now might wish they had at least considered a "safer" retirement funding approach. Unfortunately, there are no do overs.

I agree no retirement investment plan, allocation or withdrawal plan is absolutely safe. A person with more than enough that has a moderate allocation will likely do fine and may end up with higher assets. The Dr. Bernstein approach I feel is a good bit safer way to secure your retirement funding (as opposed to accumulating the most assets).

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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Sun Jul 09, 2017 2:37 pm

Dandy wrote:
People who really have "enough" don't have a problem that needs solving other than to figure out what to do with all that money
Not necessarily true. Having "enough" doesn't mean you know how to invest it -- I'm sure you have seen a lot of sports and Hollywood stars that made much more than enough and lost all or most of it. Some with more than enough could easily be led into a very aggressive portfolio than could change their status to not nearly enough. In retirement with much of human capital lost that could be a disaster.

Some with more than enough can worry excessively about their investments and panic when the equity market plunges. People who "have enough" are often the targets of shady investment types that look for someone with decent investment assets to manage for them - especially non investment savvy widowed spouses.

So those who have more than enough are surely blessed usually by a combination of good financial management and luck. But, some of them would do well to secure their retirement funding needs "safely" and then decide how to invest the rest as opposed to making an educated guess as to what top down allocation and sub allocations are safe enough. Let there be a 50% equity plunge, a lengthy recovery or 4 or 5 years and the retiree making substantial yearly withdrawals and I think you would find plenty of those who have enough now might wish they had at least considered a "safer" retirement funding approach. Unfortunately, there are no do overs.

I agree no retirement investment plan, allocation or withdrawal plan is absolutely safe. A person with more than enough that has a moderate allocation will likely do fine and may end up with higher assets. The Dr. Bernstein approach I feel is a good bit safer way to secure your retirement funding (as opposed to accumulating the most assets).
I can't see where there is any new news in any of this. I know 100% stocks is something of a fad in some postings from younger or middle ages investors on this forum, but I haven't the impression that is coming from people who are at their number on the verge of retirement planning to keep their feet on the risk gas pedal full out. If there is a fad on the forum applied to near retirees in recent years it has been ultra cautious SWR estimates, doom and gloom over returns, panic over miniscule losses in all the bonds everyone wants to own, a steady drumbeat of reasons to own CDs, a slow groundswell against SPIAs, but in contradiction a fairly strong collective agreement that delaying SS probably makes sense for a lot of people. TIPS ladders seemed to have a lot of discussion but we don't see that as much anymore. There was once a stronger presence once of MIlevsky, DeMuth, and I am thinking I need another name in there on the annuity side.

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Re: William Bernstein on Meb Faber's podcast

Post by Bill Bernstein » Sun Jul 09, 2017 3:51 pm

As a few have posted above, it's hard to nail everything down in an "in the moment" podcast.

The one thing I could have been a little more careful with is to clarify "expenses" as residual expenses, i.e., after Social Security and fixed pensions.

In both "Ages of the Investor" and "Rational Expectations" I make clear that there's not a lot to choose between an inflation-adjusted fixed annuity and a TIPS ladder--both have pros and cons.

The one thing I do make clear is that before you purchase either you first spend down your retirement accounts for living expenses before age 70, so you can max out your Social Security--at least if you're healthy or married. That's the best "annuity" money can buy, and will also lower your residual expenses so you can hold a higher stock percentage.

I also, though, can't help but wonder how recent high equity returns have flavored this thread. Had it taken place in 2009, far fewer folks would have taken umbrage at holding a large amount of fixed income assets.

Best,

Bill

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Re: William Bernstein on Meb Faber's podcast

Post by baw703916 » Sun Jul 09, 2017 6:34 pm

Thanks for giving your thoughts, Bill!
Bill Bernstein wrote: I also, though, can't help but wonder how recent high equity returns have flavored this thread. Had it taken place in 2009, far fewer folks would have taken umbrage at holding a large amount of fixed income assets.
As I remember it, in 2009 there were a lot of threads on the board trying to dissuade people from panic selling and going to 100% cash "until things get better". Bonds were often seen as waaay too risky, especially if they contained the words "mortgage-backed". :) Overreaction, positive or negative, does seem to be a human trait... I think you are right that currently there is a lot of optimism, which is a necessary prerequisite for a bubble.
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Re: William Bernstein on Meb Faber's podcast

Post by asif408 » Sun Jul 09, 2017 9:41 pm

Bill Bernstein wrote:I also, though, can't help but wonder how recent high equity returns have flavored this thread. Had it taken place in 2009, far fewer folks would have taken umbrage at holding a large amount of fixed income assets.
Bill,

I found the podcast very interesting, especially the part about bubbles. Have you given any thought to using sociological criteria to spot opportunities as well? You mentioned in your short book "Skating Where the Puck Was..." that when a risky asset class has fallen out of favor it will tend to have high expected returns, and its correlation with other asset may be low, because it is owned by "stronger hands". On the other hand, when a risky asset class is over owned by weak hands, it will have both low expected returns and high correlation. Just wondering if you had any thoughts on ways to use sociological factors to identify when an asset class has fallen out of favor.

For example, I've looked at correlations among funds and sentiment about various stock markets here. I've noticed that beginning in 2016 correlations between US equities and some of the more beaten down sectors (such as energy, PME, and emerging markets stocks) have fallen pretty significantly, back to levels not seen since the early 2000s. Who knows if that will continue, but I find it interesting that the performance of these parts of the market have diverged from the US market since 2011, yet the correlations have only fallen significantly in the last year or two. I've also noticed a very negative sentiment in foreign stocks in the last year or two on the forums here, with posts titled something like "why bother with foreign stocks" or "Jack Bogle and Warren Buffett say don't invest overseas". The last very bullish post I can find about foreign stocks was a "Should I go 100% emerging markets" in 2011, ironically around the peak of emerging markets performance.

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Re: William Bernstein on Meb Faber's podcast

Post by Bill Bernstein » Sun Jul 09, 2017 11:09 pm

Well, sure, you simply invert the criteria for panics, except for the last one (extreme predictions) which stays the same, except with the opposite sign.

I did write about the weak/strong hands high/low correlation phenomena in "Skating Where the Puck Was."

The beauty of the two theories is that they are both nontestable hypotheses, since bubbles and panics are so rare. :wink:

Bill

caliguy1
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Re: William Bernstein on Meb Faber's podcast

Post by caliguy1 » Tue Jul 11, 2017 12:12 pm

Bill,

I thought about your 10-15 year in super safe bonds/CDs/cash suggestion and I generally agreed but then I talked to my friend who is worth around $20M with $19.5M in his net worth all in real estate. He keeps as little cash around as possible because he said it's capital that is not working for him. I told him I have 40% of my assets in super safe fixed income and cash and he thought I was crazy. So I asked him how he could sleep at night if a 2008 came along again and he said he doesn't care, he will hold onto all his real estate until he dies (or 1031 exchanges it into somewhere else if he finds a better oppt) and gets several hundred thousand in income every year and even in 2008 people still need a place to live. He said if 2008 comes along again he'd just buy more real estate with home equity lines on his existing properties.

If you have sufficient income from the risky investments, as long as you have a long enough time horizon, doesn't that obviate the need to have 10-15 year super safe bonds/CDs/cash? If the income is highly dependent on a strong economy then that could be more of a problem. But if I'm not mistaken a US stock index fund (and international index fund as well) still produced dividends even during 2008/2009. And Morgan Stanley, Schwab, etc. from my understanding will let you borrow against your portfolio so you don't need to sell stocks during a recession.

Thanks.

bjames310
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Re: William Bernstein on Meb Faber's podcast

Post by bjames310 » Tue Jul 11, 2017 1:10 pm

Did anyone listen to his podcast with Steve Sjuggerud? Started out good, but then I felt like it was a pitch to invest in Chinese companies that sounded too good to be true.

Dandy
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Re: William Bernstein on Meb Faber's podcast

Post by Dandy » Tue Jul 11, 2017 1:57 pm

If you have sufficient income from the risky investments, as long as you have a long enough time horizon, doesn't that obviate the need to have 10-15 year super safe bonds/CDs/cash? If the income is highly dependent on a strong economy then that could be more of a problem. But if I'm not mistaken a US stock index fund (and international index fund as well) still produced dividends even during 2008/2009. And Morgan Stanley, Schwab, etc. from my understanding will let you borrow against your portfolio so you don't need to sell stocks during a recession.
I'm not Bill. But do you think Bill was addressing people who had 20 million? Even so what would 10-15 require? (actually Dr. Bernstein recommended 20-25 years of residual income in "safe" fixed income). What would that mean to you friend with 20 million? What percent of his/her portfolio?

You mentioned Morgan Stanley - I worked there in 2008 and watched their stock which once was at 120 or so split 2 for 1 and then rose to about 120 again only to drop to 8. Lots of fellow workers had way too much money in company stock -- and paid a heavy price. Morgan Stanley was on the verge of going under until a Japanese bank bailed them out. I wouldn't depend on borrowing against stocks, especially in a crash like situation as your safety net.


In retirement you can choose to fully fund your retirement with 20-25 years of 'safe" fixed income or you can take more risk if you want to try to maximize your assets. A lot depends on your asset level, your other income, your withdrawal rate and your risk tolerance. The concept of if you have won the game -- stop playing can really make sense in retirement. Like in football if time is running out and you are ahead --taking a knee and winning is better than trying for a TD and getting a turnover.

Bill Bernstein
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Re: William Bernstein on Meb Faber's podcast

Post by Bill Bernstein » Tue Jul 11, 2017 3:28 pm

Callguy1 raises a very good point: Yes, if you can live off your stock dividends with a bit of safety margin, then you can own 100% equity. To do that with domestic stocks, you need your burn rate to be less than 1.5%, or if you're burning the 2% domestic dividend, you then need about a 5-10% cash cushion to skate through a long period of depressed dividends. (In '08-09, dividends temporarily fell by about a quarter, and in '29-32, by about half.)

So to do that, you need to have saved up at least 70 years residual living expenses *and* be in the upper few percentiles of actual risk tolerance (and not merely professed risk tolerance).

How many folks do you know who meet both those criteria?

Bill

lazyday
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Re: William Bernstein on Meb Faber's podcast

Post by lazyday » Tue Jul 11, 2017 4:50 pm

Bill Bernstein wrote:... if you can live off your stock dividends with a bit of safety margin ....
NiceUnparticularMan had some interesting thoughts on spending a portion of earnings instead of a portion of dividends, starting here: viewtopic.php?f=10&t=217081&start=200#p3344407
NiceUnparticularMan wrote:As an aside, this is part of why in my personal planning, I try to set this up so I never actually have to sell shares except to the extent they are reflecting present earnings (in the form of retained earnings or buy backs).
What I am trying to do is avoid selling any of my ownership of actual real assets, and instead only take out earnings (to the extent I want to take out anything at all).

If all earnings were paid as dividends that would be easy--just never sell shares at all. However, earnings are sometimes retained or used for buy-backs instead. So to take out your earnings in those cases, you have to sell some shares. But, you aren't actually selling real assets when you do that (at least to a pretty close approximation), meaning you should be able to take out the earnings and end up with as many assets as you had before the retention or buy-back.

And then if you never sell ownership of your actual real assets, you don't have to worry about how they are currently priced.

Another way to put this is stocks have two price components at any given time: a price put on the company's assets, and a price for their actual earnings at that time, to the extent they have not paid them out yet. The first price component is typically way larger than the second, and can also vary quite a bit over time. The second component is typically much smaller, and usually priced pretty straightforwardly (you can see this in the typical drop after a stock pays a dividend, or the increase after they do a buy back). Of course if a company reinvests earnings, that becomes new assets that enters into the first component. But usually if you sell a few shares right away, you can take that right back out before those new assets have much time to get re-valued (of course if they just keep their retained earnings in a cash account, that is quite easy).

So if you can manage to do this, you can pretty much ignore valuation changes of the company's assets (except to the extent you are reinvesting, but unless you are trying to market time, then that just is what it is). The problem, of course, is that there can be periods of disappointing earnings, in which case there might not be enough in earnings to satisfy your income targets. For such periods, it might be a good idea to have a reserve of funds you can draw down instead, planning to replenish it in better times for earnings.
The theory would be you want to make an appropriate sale as soon as: (a) the earnings have been realized, and (b) you know what is going to happen to them (dividend, buy back, or retention). But I have zero interest in actually tracking this on a company by company level. So you can instead just keep rough track of the overall dividend payout ratio of your portfolio, and periodically sell shares to get out the additional earnings you want, and I think that will be good enough (technically you will be selling too much of some companies and too little of others, but who cares? Your index/mutual fund managers are going to keep moving you back to your desired mix anyway).

In fact, even if there is some massive devaluation event between the time the earnings are retained and reinvested and when you sell those few shares, say as much as a year later, at most you are getting the devaluation on one year's worth of earnings--and only for the ones retained and reinvested. In the greater scheme, this should be no big deal as long as you do have a cushion for spending. Indeed, probably sometimes you will get lucky too, and it will probably all balance out, more or less, in the end.
[on dilution]
I think in practice this means you should in fact not take out ALL the earnings but reinvest at least some percentage

treypar
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Re: William Bernstein on Meb Faber's podcast

Post by treypar » Tue Jul 11, 2017 5:49 pm

Based upon Bill's advice, for a retired person following the Liability Matched Portfolio, what is the appropriate us stock/ international stock percentages for the balance to be invested in stocks..

caliguy1
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Re: William Bernstein on Meb Faber's podcast

Post by caliguy1 » Tue Jul 11, 2017 7:06 pm

lazyday wrote:
Bill Bernstein wrote:... if you can live off your stock dividends with a bit of safety margin ....
NiceUnparticularMan had some interesting thoughts on spending a portion of earnings instead of a portion of dividends, starting here: viewtopic.php?f=10&t=217081&start=200#p3344407
NiceUnparticularMan wrote:As an aside, this is part of why in my personal planning, I try to set this up so I never actually have to sell shares except to the extent they are reflecting present earnings (in the form of retained earnings or buy backs).
What I am trying to do is avoid selling any of my ownership of actual real assets, and instead only take out earnings (to the extent I want to take out anything at all).

If all earnings were paid as dividends that would be easy--just never sell shares at all. However, earnings are sometimes retained or used for buy-backs instead. So to take out your earnings in those cases, you have to sell some shares. But, you aren't actually selling real assets when you do that (at least to a pretty close approximation), meaning you should be able to take out the earnings and end up with as many assets as you had before the retention or buy-back.

And then if you never sell ownership of your actual real assets, you don't have to worry about how they are currently priced.

Another way to put this is stocks have two price components at any given time: a price put on the company's assets, and a price for their actual earnings at that time, to the extent they have not paid them out yet. The first price component is typically way larger than the second, and can also vary quite a bit over time. The second component is typically much smaller, and usually priced pretty straightforwardly (you can see this in the typical drop after a stock pays a dividend, or the increase after they do a buy back). Of course if a company reinvests earnings, that becomes new assets that enters into the first component. But usually if you sell a few shares right away, you can take that right back out before those new assets have much time to get re-valued (of course if they just keep their retained earnings in a cash account, that is quite easy).

So if you can manage to do this, you can pretty much ignore valuation changes of the company's assets (except to the extent you are reinvesting, but unless you are trying to market time, then that just is what it is). The problem, of course, is that there can be periods of disappointing earnings, in which case there might not be enough in earnings to satisfy your income targets. For such periods, it might be a good idea to have a reserve of funds you can draw down instead, planning to replenish it in better times for earnings.
The theory would be you want to make an appropriate sale as soon as: (a) the earnings have been realized, and (b) you know what is going to happen to them (dividend, buy back, or retention). But I have zero interest in actually tracking this on a company by company level. So you can instead just keep rough track of the overall dividend payout ratio of your portfolio, and periodically sell shares to get out the additional earnings you want, and I think that will be good enough (technically you will be selling too much of some companies and too little of others, but who cares? Your index/mutual fund managers are going to keep moving you back to your desired mix anyway).

In fact, even if there is some massive devaluation event between the time the earnings are retained and reinvested and when you sell those few shares, say as much as a year later, at most you are getting the devaluation on one year's worth of earnings--and only for the ones retained and reinvested. In the greater scheme, this should be no big deal as long as you do have a cushion for spending. Indeed, probably sometimes you will get lucky too, and it will probably all balance out, more or less, in the end.
[on dilution]
I think in practice this means you should in fact not take out ALL the earnings but reinvest at least some percentage
Great points. If that's the case then, to Bill's point, instead of living off of 1.5%-2% for a 100% stock portfolio, theoretically you could live off of whatever the earnings yield is with some added buffer..say that is 4%, then add a 5-10% cash buffer for the 2008 type event (so actually it's more like 90-95% equities). Then I would think that that is actually not crazy for a lot of people. Say you had a $5M portfolio, out of which $4.5M was in equities and $500k was in cash, you could live off of $180k/year (before taxes). But of course you'd have to be very risk tolerant, which is a small % of people. Meb Faber suggested having a fund that penalizes you for selling within X years (e.g. 30 years) to make people behave. Real estate on the other hand is a lot harder to sell than selling stock so maybe that's one of the reasons it works better for my friend..it's a lot harder to panic sell.

I did not understand Bill's point about 70 years of residual living expenses..why would you need that much?

lazyday
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Re: William Bernstein on Meb Faber's podcast

Post by lazyday » Tue Jul 11, 2017 8:17 pm

caliguy1 wrote:If that's the case then, to Bill's point, instead of living off of 1.5%-2% for a 100% stock portfolio, theoretically you could live off of whatever the earnings yield is with some added buffer..say that is 4%, then add a 5-10% cash buffer for the 2008 type event (so actually it's more like 90-95% equities).
In my opinion that's much too aggressive. For example it ignores stock dilution. I think if you take a "spend earnings" framework for how you think about your portfolio survival in retirement, then you need to be very conservative.

Here's another quote from the linked discussion:
NiceUnparticularMan wrote:Yeah, I'm not really a believer in dividend-based investing. These days maybe 1/3rd of earnings get paid out in terms of dividends, give or take, over broader indices. You can try to fight that with all sorts of strategies to increase your average dividend payout ratio, but that is likely to work only partially at best, distort your holdings considerably, and still be subject to changes of policy.

Rather than fighting it, I'd rather just take out the remainder of my desired earnings through selling a few shares.
Maybe with today's low payout ratios, a "spend dividends" strategy that looks to the great depression as a worst case is too conservative. So instead of spending 1/2 our dividends we might spend 3/4, which in US amounts to the 1.5% Bill Bernstein mentions above. Or as Nice wrote, with payout ratios changing over time, maybe we could look to earnings to try to form our plan. I don't think we should use a spend-earnings plan to further increase the withdrawal rate though, I just see it as another way to approach the problem.

In case anyone wants to follow that old discussion: it was just between NiceUnparticularMan and I, so you could search our names starting with the link above if you really want to see every post on it. It ends on the next page.

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Lancelot
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Re: William Bernstein on Meb Faber's podcast

Post by Lancelot » Tue Jul 11, 2017 8:30 pm

Bill Bernstein wrote: But anzon is certainly right, those posts are certainly indicative of a market that's been headed north for a long enough time that people have forgotten just how bad 100% stocks feels when the music stops.

b
More so depending on one's age. A 25 year old should be delighted that his/her 100% stock portfolio tanked 50% do to a market correction/crash. I doubt many 70 year olds would feel the same way :)
No Where for Very Long...

snarlyjack
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Re: William Bernstein on Meb Faber's podcast

Post by snarlyjack » Tue Jul 11, 2017 9:06 pm

Here is a interesting article/short video from
Professor Jeremy Siegal. Article about 1 year old.

"Were In The First Inning Of Dividend Paying Stocks"
For assorted different reasons...cd's & bonds just don't have the yield...
Were going back to the 1950's & 1960's where people bought stocks for income,
according to Professor Jeremy Siegal.

Enjoy...

http://www.cnbc.com/2016/05/25/siegel-w ... tocks.html

sid hartha
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Re: William Bernstein on Meb Faber's podcast

Post by sid hartha » Wed Jul 12, 2017 8:07 am

Listening now, it's great thanks for posting.

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randomizer
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Re: William Bernstein on Meb Faber's podcast

Post by randomizer » Wed Jul 12, 2017 5:58 pm

Top99% wrote: The fact that the current bull market in US equities is closing in on the record for the longest does make me wonder... If something can't go on forever it will stop. I just hope we don't go through 1970s style stagflation because my portfolio isn't really setup to deal with that too well and I am not willing to shift to an allocation that would help with stagflation.
Why not, if that's the thing that worries you?
75:25 AA / Expected retirement: 2097

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Top99%
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Re: William Bernstein on Meb Faber's podcast

Post by Top99% » Thu Jul 13, 2017 7:31 am

randomizer wrote:
Top99% wrote: The fact that the current bull market in US equities is closing in on the record for the longest does make me wonder... If something can't go on forever it will stop. I just hope we don't go through 1970s style stagflation because my portfolio isn't really setup to deal with that too well and I am not willing to shift to an allocation that would help with stagflation.
Why not, if that's the thing that worries you?
As far as I can tell gold was the only asset class that did well in that scenario. Based on the performance data I have looked at I am not sold on gold. So, I would rather just use our ability to drastically cut expenses to ride out a stagflation scenario if it occurs again. As for whether I think stagflation is worth worrying about, the forum rules on speculation limit what I can say about that. But, to me it seems like there is plenty of supply of pretty much everything.
Adapt or perish

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Re: William Bernstein on Meb Faber's podcast

Post by Blueskies123 » Thu Jul 13, 2017 10:11 am

I listened to the podcast the day it came out but did not have a chance to listen to the last 10 minutes, which I just listened to yesterday. He had one interesting point at the end. He said your house should not be considered part of your portfolio. He said if you sell it you have to rent or buy something else and that housing has earned only 1% after inflation.
This has been my experience, I bought my home for 280,000 twenty two years ago and put about 100K in improvements over the years and probably a similar amount in taxes, insurance, and up keep. I would have been much better off renting and putting all the money in the stock market. Of course the last 22 years is a very short period of time and if I had done the same in the 70's and 80's it might be a completely calculation. I also get a good deal of satisfaction owning a nice home in nice quiet neighborhood.
I know a few people hit the jack pot by purchasing a home for a song in 60's on a golf course in Palo Alto but for the vast majority of people a 1% return is not much and they should not consider it as part of their portfolio as far a FIRE calculations go.
At the very end of the podcast I was disappointed to here W.B. was getting out of the financial writing business and moving into becoming more of a author wring fiction.

dbr
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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Thu Jul 13, 2017 10:54 am

Blueskies123 wrote:I listened to the podcast the day it came out but did not have a chance to listen to the last 10 minutes, which I just listened to yesterday. He had one interesting point at the end. He said your house should not be considered part of your portfolio. He said if you sell it you have to rent or buy something else and that housing has earned only 1% after inflation.
What does the fact that if you sell your house you now have to pay rent (and you stop paying maintenance, property taxes, and some insurance) have to do with why your house should not be part of your portfolio? Also, there are plenty of assets people hold that earn less than 1% real, so what does that have to do with it. I hate it when they utter these sound bites that make no sense at all. I wonder what question he was trying to address.

PS I don't include my house as part of my portfolio for what I think are some good reasons. Also one scenario that might be in a plan is selling a house with a change to the size of the portfolio together with a change in what expenses have to be supported.

MIretired
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Re: William Bernstein on Meb Faber's podcast

Post by MIretired » Thu Jul 13, 2017 11:16 am

dbr wrote:
Blueskies123 wrote:I listened to the podcast the day it came out but did not have a chance to listen to the last 10 minutes, which I just listened to yesterday. He had one interesting point at the end. He said your house should not be considered part of your portfolio. He said if you sell it you have to rent or buy something else and that housing has earned only 1% after inflation.
What does the fact that if you sell your house you now have to pay rent (and you stop paying maintenance, property taxes, and some insurance) have to do with why your house should not be part of your portfolio? Also, there are plenty of assets people hold that earn less than 1% real, so what does that have to do with it. I hate it when they utter these sound bites that make no sense at all. I wonder what question he was trying to address.

PS I don't include my house as part of my portfolio for what I think are some good reasons. Also one scenario that might be in a plan is selling a house with a change to the size of the portfolio together with a change in what expenses have to be supported.
Ya know. I've thought of Bernstein's position on house as an investment--he says it isn't. He calls it a cost. I follow his reasoning like it is really an item on the annual income/expense statement, and not on the asset/liability ledger. No different than renting is.
You have to live somewhere. If you sell your house, you'll have to pay rent. Advantage of owning is, after 30 yrs., the mort. drops to 0. But, now you have an equity value which is worth a certain amount of rent payments. You have one or the other. For normal people, it's always so. --This applies for primary residence.
But, I don't think he means the lifetime cost of owning a home is necessarily equal to the cost of lifetime renting.

dbr
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Re: William Bernstein on Meb Faber's podcast

Post by dbr » Thu Jul 13, 2017 11:33 am

MIpreRetirey wrote:
dbr wrote:
Blueskies123 wrote:I listened to the podcast the day it came out but did not have a chance to listen to the last 10 minutes, which I just listened to yesterday. He had one interesting point at the end. He said your house should not be considered part of your portfolio. He said if you sell it you have to rent or buy something else and that housing has earned only 1% after inflation.
What does the fact that if you sell your house you now have to pay rent (and you stop paying maintenance, property taxes, and some insurance) have to do with why your house should not be part of your portfolio? Also, there are plenty of assets people hold that earn less than 1% real, so what does that have to do with it. I hate it when they utter these sound bites that make no sense at all. I wonder what question he was trying to address.

PS I don't include my house as part of my portfolio for what I think are some good reasons. Also one scenario that might be in a plan is selling a house with a change to the size of the portfolio together with a change in what expenses have to be supported.
Ya know. I've thought of Bernstein's position on house as an investment--he says it isn't. He calls it a cost. I follow his reasoning like it is really an item on the annual income/expense statement, and not on the asset/liability ledger. No different than renting is.
You have to live somewhere. If you sell your house, you'll have to pay rent. Advantage of owning is, after 30 yrs., the mort. drops to 0. But, now you have an equity value which is worth a certain amount of rent payments. You have one or the other. For normal people, it's always so. --This applies for primary residence.
But, I don't think he means the lifetime cost of owning a home is necessarily equal to the cost of lifetime renting.
Nobody knows what someone might mean about a house not being an investment or shouldn't be in the portfolio. The fact that owning a house includes costs has nothing to do with whether or not something is or isn't an investment or is or isn't as asset. Of course there are expenses associated with owning a house. Nobody thinks otherwise. There are expenses associated with investing as well. Stuff like this just drives me crazy. If you credit the value of imputed rent the "expense ratio" on my house is significantly negative. But again this is a discussion rather than a sentence.

MIretired
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Re: William Bernstein on Meb Faber's podcast

Post by MIretired » Thu Jul 13, 2017 12:12 pm

^^
Yep. Well, technically, sure, anything that has value is technically an asset.
More of a philosophy/method of whether to include it as an asset/liability instead of just a cost of living.
I don't think it's really crazy to say a primary residence is not an "investment", I think is what Bill Bernstein actually said --I'm corrected on that.

I don't include it as an asset in fungible net worth, really. Just a possible option opener for reverse mortgage, or downsizing, or switching to becoming a renter for the lower maintenance aspect. It's only part of my net worth for my estate value.

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