Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

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Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Rick Ferri » Thu Sep 05, 2019 4:45 pm

.
Dr. Bill Bernstein is my guest this month on the "Bogleheads on Investing" podcast.

Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Dr. William (Bill) Bernstein is a medical doctor, author, investment adviser, and financial historian. His research is in the field of modern portfolio theory and economic history. Bill has published extensively on investing and finance. His first book, The Intelligent Asset Allocator, makes the case for broad diversification in a passive portfolio, as does his second book, The Four Pillars of Investing. Bill's economic history books include The Birth of Plenty, is a history of the world's standard of living, and A Splendid Exchange: How Trade Shaped the World, a history of world trade.

Bill holds a Ph.D. in chemistry and an M.D.; he practiced neurology until retiring from the field in the 1990s and became a full-time researcher, investment adviser, and author.

We always learn something new from this walking encyclopedia!

Enjoy!

Rick Ferri
Your Host
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Ki_poorrichard » Thu Sep 05, 2019 5:12 pm

Finally a podcast that’s actually good and interesting! Really worth your time. Please continue the great work Rick. Brilliant as always.

Dr. Bill Bernstein is one of best minds if not the best in investing. His insights are simply illuminating. Thank you for the amazing interview!

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by packer16 » Thu Sep 05, 2019 8:55 pm

Thanks for a great podcast Rick & asking the question about expected returns. Although true, I was a little disappointed with Bill's statistical response to the equity return question. I thought Bill may have some insight given his studies in financial history but maybe he saw no connection to the financial history he has studied. The parallels to 19th Century Britain where we had falling interest rates for 85 years (post Napoleonic Wars), no world wars and many technological advances being utilized in a free market world would be interesting.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Rick Ferri » Fri Sep 06, 2019 5:44 am

Thanks for the responses!
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Horton » Fri Sep 06, 2019 8:10 am

All the talk about bonds and keeping duration short, yet not one mention of liability matching?
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by columbia » Fri Sep 06, 2019 8:43 am

I appreciated his candor on trade.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by columbia » Fri Sep 06, 2019 9:44 am

re:discussion on bonds in the current environment

I’m wondering why the discussion didn’t turn to TIPS, when the topic of treasuries not beating inflation came up.

Also: was glad to hear his thoughts on long bonds

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Horton » Fri Sep 06, 2019 10:43 am

columbia wrote:
Fri Sep 06, 2019 9:44 am
Also: was glad to hear his thoughts on long bonds
These thoughts yield a lot of questions, in my opinion, since Bernstein wrote an entire book on the topic of building TIPS ladders (“Liability Matching Portfolios”) to cover expected spending in retirement, which would naturally require the purchase of long bonds.

Has Bernstein abandoned this approach in favor short bonds? If so, what happens if the Fed lowers short term rates and long term rates continue to fall? Retirees are exposed to both interest rate and reinvestment risk using short term bonds. Is it worth retirees “betting” that rates will rise rather than taking these risks off the table?
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Rick Ferri » Fri Sep 06, 2019 5:07 pm

columbia wrote:
Fri Sep 06, 2019 9:44 am
re:discussion on bonds in the current environment

I’m wondering why the discussion didn’t turn to TIPS, when the topic of treasuries not beating inflation came up.
Next time.

:beer
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by nedsaid » Fri Sep 06, 2019 5:14 pm

Hi Rick, thank you for doing these podcasts. I have listened to three of them now and have enjoyed them all. By the way, you have an excellent broadcast voice. The LA Dodgers had an opening when Vin Scully retired, you could have had a second career as the Voice of the Dodgers.
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Mountain Doc » Fri Sep 06, 2019 5:32 pm

9-5 Suited wrote:
Thu Aug 29, 2019 9:35 pm
The free space on the bingo card is if he mentions he “quickly realized he lives in a country without a functioning social welfare system” in the first five minutes of the podcast :)
4:02... Bingo! :D

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by sergeant » Fri Sep 06, 2019 6:12 pm

I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by dcb » Fri Sep 06, 2019 6:34 pm

sergeant wrote:
Fri Sep 06, 2019 6:12 pm
I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
Have no idea what LTT, SV, SC, MC investments are.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by mindboggling » Fri Sep 06, 2019 7:41 pm

I'm generally not a podcast guy...but I enjoyed it. How do some people get so smart?
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Artsdoctor » Fri Sep 06, 2019 7:58 pm

Very very nice interview. You both seemed generally happy to be talking to one another.

(However, it was way too short . . . ) :D

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by columbia » Fri Sep 06, 2019 8:05 pm

Rick Ferri wrote:
Fri Sep 06, 2019 5:07 pm
columbia wrote:
Fri Sep 06, 2019 9:44 am
re:discussion on bonds in the current environment

I’m wondering why the discussion didn’t turn to TIPS, when the topic of treasuries not beating inflation came up.
Next time.

:beer
Two hours, next time. 😀

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by 9-5 Suited » Fri Sep 06, 2019 10:11 pm

Mountain Doc wrote:
Fri Sep 06, 2019 5:32 pm
9-5 Suited wrote:
Thu Aug 29, 2019 9:35 pm
The free space on the bingo card is if he mentions he “quickly realized he lives in a country without a functioning social welfare system” in the first five minutes of the podcast :)
4:02... Bingo! :D
Ha! Thanks for reporting back the findings. Cheers.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by abuss368 » Fri Sep 06, 2019 10:57 pm

Thanks for doing the podcasts Rick!
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by abuss368 » Fri Sep 06, 2019 11:02 pm

Rick - would love for you to get David Swensen on a podcast!

I attended a lecture of his years ago and learned so much.
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by whodidntante » Fri Sep 06, 2019 11:22 pm

sergeant wrote:
Fri Sep 06, 2019 6:12 pm
I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
Intellectually, I understand the LTT hook and it seems the prevailing opinion is that the bond bull market will continue. But 30-year term risk for a 2% yield is a bet I'll leave to other investors. And good luck to them.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by spdoublebass » Sat Sep 07, 2019 10:56 am

Huge fan of the podcast Mr. Ferri. For me it's the only podcast I can listen to the episodes more than once and still enjoy them.

To the other listeners....
When Dr. Bernstein says to go short with bonds, do you think he is talking specifically to people in or approaching retirement?

I am 30+ years away from retirement and hold 10% in bonds. I would assume that in the accumulation phase you'd still want an IT duration bond fund (or some even argue LT). Or did he really mean everyone should shorten?

I know people have been saying to shorten up for a while now, and IT has been just fine. I was just curious who he was addressing.
Thanks
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by whodidntante » Sat Sep 07, 2019 11:51 am

spdoublebass wrote:
Sat Sep 07, 2019 10:56 am
To the other listeners....
When Dr. Bernstein says to go short with bonds, do you think he is talking specifically to people in or approaching retirement?
I'll post the wrong answer because Bogleheads love to correct errors. :happy

Bill Bernstein is an advocate of keeping fixed-income duration short and does so himself. It's not based on market conditions or on your age or the fact that you are considering taking a permanent vacation soon.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Bill Bernstein » Sat Sep 07, 2019 12:01 pm

Hi All:

If you got the impression I enjoyed talking to Rick, you're right! Rick is funny, smart, and unfailingly cheerful.

I have the same problem with bond duration for a liability matching portfolio now that I did in Ages of the Investor: yes, ideally one should have as an absolute worst-case backstop a TIPS ladder extending out the full 30 years. But now, as when I wrote Ages several years ago, the TIPS yield curve is downright depressing, and I'm willing to take the reinvestment risk of short-term fixed income securities. In the worst case scenario, if the TIPS yield curve stays this way for decades, it will be because the bond market is not worried about inflation, in which case short nominal bonds should retain their spending power.

Over the past several years since Ages first came out, there have been a few TIPS buying opportunities, and I'd be very surprised if they didn't pop up in the future.

Bill

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Mel Lindauer » Sat Sep 07, 2019 5:28 pm

Another outstanding podcast, Rick and Bill.

Thanks for sharing your thoughts and wisdom with the Bogjeheads, Bill.

See you at the Confetence next month.
Best Regards - Mel | | Semper Fi

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by sergeant » Sat Sep 07, 2019 5:54 pm

dcb wrote:
Fri Sep 06, 2019 6:34 pm
sergeant wrote:
Fri Sep 06, 2019 6:12 pm
I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
Have no idea what LTT, SV, SC, MC investments are.
LTT are long term treasuries, SV is stable value, SC is small cap, and MC is mid cap.
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by assetalloc » Sun Sep 08, 2019 10:19 am

Rick Ferri wrote:
Thu Sep 05, 2019 4:45 pm
.
Dr. Bill Bernstein is my guest this month on the "Bogleheads on Investing" podcast.

Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Dr. William (Bill) Bernstein is a medical doctor, author, investment adviser, and financial historian. His research is in the field of modern portfolio theory and economic history. Bill has published extensively on investing and finance. His first book, The Intelligent Asset Allocator, makes the case for broad diversification in a passive portfolio, as does his second book, The Four Pillars of Investing. Bill's economic history books include The Birth of Plenty, is a history of the world's standard of living, and A Splendid Exchange: How Trade Shaped the World, a history of world trade.

Bill holds a Ph.D. in chemistry and an M.D.; he practiced neurology until retiring from the field in the 1990s and became a full-time researcher, investment adviser, and author.

We always learn something new from this walking encyclopedia!

Enjoy!

Rick Ferri
Your Host
Great podcast as usual. I enjoy listening to these every month.

Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by 305pelusa » Sun Sep 08, 2019 10:47 am

assetalloc wrote:
Sun Sep 08, 2019 10:19 am

Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.
I've seen this confusion on this forum a lot, typically with comments like "nobody knows nothing". I think it comes from a misunderstanding as to what "expectation" means in probability.

The expected value of a die is 3.5. Interestingly, you will never get a 3.5 out of a die. But it's still the expected value.

Rick is not predicting. Rick is claiming an expectation. If his expectation does not get realized, it might still have been the correct expectation. Similarly, if his expectation does occur, it doesn't mean it was correct. You might think the expected value of a die is 6 and you roll a 6; it doesn't mean that the expected value is a 6.

So do not treat Rick's comment as a prediction. It's an expectation. You can do many things in portfolio construction with expectations but if you think one of those is a prediction, then you're mistaken, not Rick.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by nedsaid » Sun Sep 08, 2019 12:21 pm

Bill Bernstein wrote:
Sat Sep 07, 2019 12:01 pm
Hi All:

If you got the impression I enjoyed talking to Rick, you're right! Rick is funny, smart, and unfailingly cheerful.

I have the same problem with bond duration for a liability matching portfolio now that I did in Ages of the Investor: yes, ideally one should have as an absolute worst-case backstop a TIPS ladder extending out the full 30 years. But now, as when I wrote Ages several years ago, the TIPS yield curve is downright depressing, and I'm willing to take the reinvestment risk of short-term fixed income securities. In the worst case scenario, if the TIPS yield curve stays this way for decades, it will be because the bond market is not worried about inflation, in which case short nominal bonds should retain their spending power.

Over the past several years since Ages first came out, there have been a few TIPS buying opportunities, and I'd be very surprised if they didn't pop up in the future.

Bill
Hi Bill:

I greatly appreciate your comments on TIPS. In another thread, someone asked a question regarding the timing of TIPS purchases. I referred the poster to a recent Larry Swedroe article and a TIPS thread started by Grok87. Back in July, both seemed to think TIPS were cheap. I linked Larry's article and Grok's thread to my post and I took Larry's methodology and updated the numbers from Larry's article. It seemed to me that the 5 year TIPS still looked cheap by Larry's method but I wondered about the real yield on TIPS falling from 0.30% to 0.04% from July to September. At such low real yields, the case for the 5 year TIPS seemed pretty mild, even though future expected inflation was still above Larry's breakeven inflation rate.

I got into an argument with a frequent poster, and pretty much I said that valuations mattered and at some point that asset classes can get so expensive that they aren't worth buying. He countered saying that markets are efficient and that bonds are always fairly priced.

Your comments above fall into the valuation matters camp. How do you estimate TIPS valuation? Looking at real yields? Looking at the TIPS yield curve? Comparing forecasted inflation against a breakeven inflation rate? If you would take time to comment, it would be greatly appreciated.
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by TimeRunner » Sun Sep 08, 2019 1:53 pm

Just listened to Episode 013. Excellent, and it was great to hear so many of the Bogleheads' questions presented and answered. Thanks Rick! :beer
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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Elysium » Sun Sep 08, 2019 6:23 pm

sergeant wrote:
Fri Sep 06, 2019 6:12 pm
I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
Most of those arguments are based on recency bias combined with performance chasing. Do not fall into that trap. If you plug-in data for LTT , ITT, and US Market into PV you can get as far as 1978 and see that up to the mid 80's being in LTT were a drag to the portfolio as ITT outperformed. However, during most periods since mid 80's LTT has delivered better performance than ITT. We know the reason for that is lower inflation and a Treasury bull market fueled by declining rates. We also know that periods from late 70's through early 80's were high inflationary years with aggressive rate increases to fight inflation/ This led to LTT falling behind.

Current arguments for going long is based on the long bull market combined with low expectation for inflation which TIPS is also indicating with their low rates / high premiums. It is basically a speculation that inflation will remain low and rates will continue to either decline or not go up by very much. It is possible, but what happens usually is that the market throws a curve ball at investors expectations and speculations, then present a cycle that we have not experienced before, thereby shifting the models we relied up on. Case in point is the shifting dynamics in stock market led by mega cap US stocks since the 2009 recovery that no one saw coming.

There is also behavioral aspects about this. It is very easy to hold LTT when it is doing well or only relatively poorly in a small band, but then long term bonds starts serious declines, investments like EDV get killed, and you have no idea the new market dynamics that you are in will last how long or where it will take you. Then it will test your conviction and ability to stick with an asset that has seriously declined in value, and if combined also with a stock decline you have no safe haven.

IT or ST bonds may not look the best in back tested data during the greatest bull market for long bonds, but they do the job you want from nominal bonds, and they are most likely better to hold when there is a bond market decline which will happen just when you think it is unlikely.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Rick Ferri » Sun Sep 08, 2019 9:53 pm

assetalloc wrote:
Sun Sep 08, 2019 10:19 am
Great podcast as usual. I enjoy listening to these every month.

Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.
This was an estimated return of intermediate-term bonds, not long-term bonds.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Elysium » Mon Sep 09, 2019 10:23 am

assetalloc wrote:
Sun Sep 08, 2019 10:19 am
Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.
This is not the correct way to look at long term returns, you have to factor in the maturity which is for a 2009 bond will be around 2039 if holding individual security and look at average maturity if looking at bond fund which is in case of Vanguard LTT around 24 years I think.

Given that, you would expect a 2009 30 YR Treasury bond to return exactly that, what you are showing 10 years since 2009 is irrelevant because first you don't know all the interest rate variations that can happen during the course of your investment timeline, second you aren't investing for 10 years and you do not know what future returns will be. The best predictor of future returns is the current yield, so you should expect about 3% from it around 2039, or around 2033 for a bond fund like Vanguard.

How do we know this? just look at historical chart for 30 YR yields: https://www.macrotrends.net/2521/30-yea ... ical Chart

Rate for 30 year was at 8% in 1987, and the returns from LTT was exactly about that, and even for a bond fund starting in 1987 you would see the returns matched about the same as the starting rates, see here: https://www.portfoliovisualizer.com/bac ... 0&total3=0

The best predictor today then is the current yield on 30 YR which stands at barely 2%. You can expect a 30 YR LTT to return exactly that if held to maturity in 2049, or if you buy the Vanguard LTT fund then you can expect about same if you hold to 2043 or so, give or take a few years. Between then and now, the returns could be anywhere depending on how the rates fluctuate, which we have no control over.

This is the point people looking at historical data are missing. There is no way you are going back in a time machine and getting that 8% yield and subsequent returns from either an individual bond or a bond fund. I doubt anyone likes the idea of 2% returns from Long term bonds held for next 20+ years.

Some people are talking about LTT as a hedge against stock market declines, and that is a whole entire discussion, where you have to ask question the price of that insurance is worth it since you expect more positive return years from equities than negative, so it's not entirely worth it, unless someone is speculating.

Again, while I am not Rick or an expert at this, the long term returns of LTT bonds/funds can be figured by looking at current yield and that historical chart, it's not promising.

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Artsdoctor » Mon Sep 09, 2019 1:21 pm

whodidntante wrote:
Fri Sep 06, 2019 11:22 pm
sergeant wrote:
Fri Sep 06, 2019 6:12 pm
I listened to the entire podcast and enjoyed it. I have always kept my FI in the totally safe area of SV funds, MM, CD's, and short duration bonds. Lately I have been wavering as the LTT folks have a good argument for being long. Bill has me back in my original mindset. I will take my chances with the equity side of my portfolio where I tilt toward SC, MC, and international.

His take on trade wars is a bit scary. I agree with him.
Intellectually, I understand the LTT hook and it seems the prevailing opinion is that the bond bull market will continue. But 30-year term risk for a 2% yield is a bet I'll leave to other investors. And good luck to them.
I really would find it hard to imagine that individual investors are buying (nominal) 30-year bonds. At least I hope they're not . . .

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Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by assetalloc » Mon Sep 09, 2019 10:17 pm

Elysium wrote:
Mon Sep 09, 2019 10:23 am
assetalloc wrote:
Sun Sep 08, 2019 10:19 am
Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.
This is not the correct way to look at long term returns, you have to factor in the maturity which is for a 2009 bond will be around 2039 if holding individual security and look at average maturity if looking at bond fund which is in case of Vanguard LTT around 24 years I think.

Given that, you would expect a 2009 30 YR Treasury bond to return exactly that, what you are showing 10 years since 2009 is irrelevant because first you don't know all the interest rate variations that can happen during the course of your investment timeline, second you aren't investing for 10 years and you do not know what future returns will be. The best predictor of future returns is the current yield, so you should expect about 3% from it around 2039, or around 2033 for a bond fund like Vanguard.

How do we know this? just look at historical chart for 30 YR yields: https://www.macrotrends.net/2521/30-yea ... ical Chart

Rate for 30 year was at 8% in 1987, and the returns from LTT was exactly about that, and even for a bond fund starting in 1987 you would see the returns matched about the same as the starting rates, see here: https://www.portfoliovisualizer.com/bac ... 0&total3=0

The best predictor today then is the current yield on 30 YR which stands at barely 2%. You can expect a 30 YR LTT to return exactly that if held to maturity in 2049, or if you buy the Vanguard LTT fund then you can expect about same if you hold to 2043 or so, give or take a few years. Between then and now, the returns could be anywhere depending on how the rates fluctuate, which we have no control over.

This is the point people looking at historical data are missing. There is no way you are going back in a time machine and getting that 8% yield and subsequent returns from either an individual bond or a bond fund. I doubt anyone likes the idea of 2% returns from Long term bonds held for next 20+ years.

Some people are talking about LTT as a hedge against stock market declines, and that is a whole entire discussion, where you have to ask question the price of that insurance is worth it since you expect more positive return years from equities than negative, so it's not entirely worth it, unless someone is speculating.

Again, while I am not Rick or an expert at this, the long term returns of LTT bonds/funds can be figured by looking at current yield and that historical chart, it's not promising.
OK, thanks for pointing out how to use the yield = future returns argument.

The purpose of bonds is to reduce volatility in the portfolio. I wonder if "inverse funds" will compete better with bonds, as expected returns for both are dismal.

assetalloc
Posts: 58
Joined: Tue Nov 13, 2018 8:45 pm

Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by assetalloc » Mon Sep 09, 2019 10:27 pm

assetalloc wrote:
Mon Sep 09, 2019 10:17 pm
Elysium wrote:
Mon Sep 09, 2019 10:23 am
assetalloc wrote:
Sun Sep 08, 2019 10:19 am
Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.

How do we know this? just look at historical chart for 30 YR yields: https://www.macrotrends.net/2521/30-yea ... ical Chart

Rate for 30 year was at 8% in 1987, and the returns from LTT was exactly about that, and even for a bond fund starting in 1987 you would see the returns matched about the same as the starting rates, see here: https://www.portfoliovisualizer.com/bac ... 0&total3=0
Just looking at the charts at PV, sometimes I think, Are stocks even worth investing in? From January 1987- December 2011, a 100% bond investor would have produced almost the same returns as a 100% stock investor. That's 24 years of low volatility with Max drawdown of only 12% for bonds vs. 50%+ for s&p

https://www.portfoliovisualizer.com/bac ... total3=100

Elysium
Posts: 1620
Joined: Mon Apr 02, 2007 6:22 pm

Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by Elysium » Mon Sep 09, 2019 10:43 pm

assetalloc wrote:
Mon Sep 09, 2019 10:27 pm
assetalloc wrote:
Mon Sep 09, 2019 10:17 pm
Elysium wrote:
Mon Sep 09, 2019 10:23 am
assetalloc wrote:
Sun Sep 08, 2019 10:19 am
Rick projected future returns of bonds as around 2.5% based on current yields. But I ran quick backtest and found Long term treasuries rates were approx 3% in 2009. Yet TLT returned 7%+ to investors over these 10 years. Predicting future returns to design portfolios seems like totally random planning done that planners charge customers for.

How do we know this? just look at historical chart for 30 YR yields: https://www.macrotrends.net/2521/30-yea ... ical Chart

Rate for 30 year was at 8% in 1987, and the returns from LTT was exactly about that, and even for a bond fund starting in 1987 you would see the returns matched about the same as the starting rates, see here: https://www.portfoliovisualizer.com/bac ... 0&total3=0
Just looking at the charts at PV, sometimes I think, Are stocks even worth investing in? From January 1987- December 2011, a 100% bond investor would have produced almost the same returns as a 100% stock investor. That's 24 years of low volatility with Max drawdown of only 12% for bonds vs. 50%+ for s&p

https://www.portfoliovisualizer.com/bac ... total3=100
I am not sure what you are point out here, because it shows S&P 500 with returns over 9% annualized and that would more than double your portfolio value over that period, it will get you closer to your goals comfortably. If you are actually referring to the high returns from LT Treasury, again we have to go back to the starting point when 30 Year Yield was 8% for most of 80's and early 90's and has been on a steady decline since then.

Current yields are at 2% and that is what you get for lending your money for 30 years. We cannot go back and get the juicy 8% yields. That said, there is a theory floating that yields could get negative, and it is just happening in Europe/Japan already, it is not inconceivable that may happen here too causing LT Treasury prices to continue rising. However, that is all speculation, the best we can do is pick up a reasonable term risk.

lazyday
Posts: 3394
Joined: Wed Mar 14, 2007 10:27 pm

Re: Episode 013: Bogleheads on Investing - guest Dr. Bill Bernstein, host Rick Ferri

Post by lazyday » Tue Sep 10, 2019 5:19 am

assetalloc wrote:
Mon Sep 09, 2019 10:27 pm
Just looking at the charts at PV, sometimes I think, Are stocks even worth investing in? From January 1987- December 2011, a 100% bond investor would have produced almost the same returns as a 100% stock investor.
In the podcast, I didn’t quite catch it but I think Bill said something like “long term bonds are a great way to improve prior performance”.

We can use simple backtesting to buy high and sell low. When an asset (or a portfolio that uses it) looks great in backtesting, it may be because the asset has become expensive. Or an asset like ex-US equity that looks terrible in a backtest might simply have become cheap.

We might do better if we run many backtests over different time periods, and where it makes sense, using different geographic regions and/or different asset classes. But there still may be a risk of finding an asset that looks good partly because it is expensive today.

I am impressed how little it seems a retiree would have been harmed by long term treasuries several decades ago. (See the top left of the image.) But arguments for LTT also usually include recent decades of performance, and those arguments might depend on the prolonged bond bull we’ve experienced, with long bonds now at record low yield.

Personally, I like the idea of including a tiny allocation of long term treasuries in an equity-heavy portfolio. But this might be a terrible time to switch to that allocation.

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