17
Morningstar FundInvestor
November
2013
I don’t look for speculative return, which is, will that
P/E go way up or way down? I can’t imagine it going
way up. I think it is unlikely it will go way down.
It will probably not impose a big burden on that basi-
cally fundamental earnings or investment earnings,
investment return.
Seven percent is pretty good. You double your money
in a decade. Think about this for a minute: That’s
not a very high real return. By the time this decade is
over, we’ll probably be around a
2%
inflation rate,
if we are lucky. Maybe all hell is going to break loose,
with all this purchasing by the Fed of the securities.
But [assuming
2%
inflation], that would be a
5%
real
return, and that’s about a point lower than the
long-term norm. Fine, the long-term norm has never
been guaranteed.
Bonds, I have kind of mixed emotions. I’d say, first,
you have to have some bonds in your portfolio—if
only for your peace of mind. It is probably not a good
idea, not a good idea investmentwise, to have a
bond position, because we know pretty much what
those returns will be. Now that interest rates have
come back up a little bit from their unbelievable lows,
set probably six months ago, maybe that
10
-year
Treasury bill has gone from
1
.
5%
or
1
.
6%
to pretty
close to
3
.
0%
. That’s a big improvement in the future
return on a bond. But you have to accept that lower
[bond] return, and maybe a corporate/government
mix of bonds can give you a
3%
return. That will grow
by, say,
40%
over the next
10
years.
So, those are suppositions. They are estimates.
They’re what I call reasonable expectations. So, the
bonds are there to protect you from bad behavior—
bad investor behavior—because when the market
goes down
20%
or
30%
or
40%
, which is ... I won’t
say it’s certain, but highly likely in the next
10
years.
The markets do these things. They go up too high
and then they come back. So, it protects you from
making a bad investment mistake and panicking
when stocks go down, and you’re all in stocks. So,
it’s a behavioral thing more than anything else.
I’d stick with what I call the tried-and-true:
60%
to
65%
in equities and
40%
or
35%
in bonds, but with
some consideration given to your age. If you’re older,
more on the bonds side, and if you’re younger, much
more on the stock side.
Benz:
Investors who are using a strategic asset-allo-
cation plan and doing that rebalancing—if they are
looking at their asset allocation right now, it probably
calls for doing some rebalancing into bonds. Would
you say: Just do it, just go ahead and buy bonds at
this juncture, even though the prospects, as you say,
aren’t that exciting?
Bogle:
I am in a small minority on the idea of rebal-
ancing. I don’t think you need to do it. The data bear
me out, because the higher-yielding asset is going to
be stocks over the long term. That’s the way the
capital markets work—not in every
10
-year period, or
even for that matter every
25
-year period. But the
higher-returning asset you’re getting rid of to go into
a lower-returning asset, so it dampens your returns,
and the differences turn out to be, if you look at
25
-
year periods, very, very small. And sometimes
rebalancing improves your returns. Sometimes it
makes them worse.
Benz:
It helps on the volatility front, generally, when
you look at the data.
Bogle:
Yes. There is a comfort level for an investor,
and a feeling of he’s kind of protected, as much
as you can be protected in these volatile days. So it’s
a behavioral problem. Anybody that feels they
should rebalance, I think they should rebalance. I
wouldn’t tell them not to. But I’d say, do it in a
little more sensible way than it’s done.
I wouldn’t have some formula: Oh my God, I’ve gone
from
60%
to
61%
. I better get back to
60%
.
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Contact Christine Benz at
