(PUB) Morningstar FundInvestor

November 2013

Morningstar FundInvestor

17

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. 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% . œ Contact Christine Benz at christine.benz@morningstar.com Benz: It helps on the volatility front, generally, when you look at the data.