Peter Bernstein passed away several years ago, early in the financial crisis. An interview of him by Kate Welling in 2003, just before the March stock market low, outlined many of the problems investors have now had for the past decade. I recently rediscovered the interview and find it relevant to the issue I've been grappling with, namely how to model a portfolio to generate decent returns in volatile and uncertain times and during mandated retirement drawdowns.
As Bernstein gently pointed out, investing for the long run is fine if you are either adding money regularly or not withdrawing any. He was talking about pension funds or charitable trusts and endowments, but the the problem faced by retired people, and everyone living off their income, is the very same. Most long term investment returns come from the complete re-investment of all dividends and interest. But if you must remove dividends and income and even some capital for spending, as sometimes also happens to pensions and charitable or educational endowments, your portfolio gains are less and your volatility is higher, since you may be selling assets as markets decline as well as when they rise.
Bernstein's plea to portfolio allocators was not to be too rigid in following formulas such as the rule of 60% stocks and 40% bonds. In fact he was very dubious that stocks would give decent returns at all for a decade or longer. Even though bond yields then were low (they are lower now) he thought bonds could and would probably do better, and they did.
In the interview he also makes the now famous case for alternative investments and also for adjusting portfolios either by fairly frequent re-balancing or "even" market timing. In the interview he didn't spend much time on market timing or on re-balancing except to say that they nail down shorter term gains and are therefore a mechanistic models for increasing portfolio payoffs in uncertain and volatile times.
Bernstein also recommended giving portfolio managers greater lattitude on asset sector selection and on individual issue selection. He was not a fan of rigid reliance on stock or other indexes, especially in uncertain and risky times. Tracking index averages is far less productive than following the best managers you can find and can afford. My view is that the careful study of mutual fund returns over time can give us very talented managers at annual costs that are quite reasonable.
This all impinges upon my recent decision to stop doing my own micro-management and also to start a more mechanistic method for allocation and profit taking. Bernstein's 2003 thoughts are thus grist for my small personal mill. I am working my way into a multi-asset portfolio in the spirit of Harry Browne but run by proven productive managers I have chosen rather than by index committee formulas. Gold is the only exception since it is only gold if it's real gold and not a paper index of gold.
As with most Bernstein ideas, this interview's ideas are very thoughtful but also quite subtle. They can easily blow by people are are rigidly committed to other approaches. But at this time his suggestions make very great sense to me. The interview is fairly short and definitely a good read of the thoughts of an older and very wise veteran of money management. Sometimes the best ideas are presented softly.
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