Live Financial Wisdom from Bogleheads VIII - Day One

Oct. 1

6:30 Fireside chat with William Bernstein

Bill shared some of the lessons he learned from the 2008 market crash.

1. Bubbles can be very large. We blew bubbles everywhere. Previously, bubbles had been somewhat limited. Last year, however, the credit markets caused massive bubbles in nearly every asset class. On the other hand, bank runs are not new, and that's what happened in the credit markets last year.

2. Stable financial markets beget instability. The confidence we build in our financial system fosters confidence in building more liquidity, and that inherently makes the system unstable. Manias, panic attacks, and crashes happen, on average, about every ten years. And the reason they continue to chronically happen is due to the parts of our brains (the nucleus Accumbens and the Amygdala ) that drive us to repeat these mistakes. By the way, Bill is a neurologist.

3. Treasuries are an insurance policy and provide two things when the market goes south.

· Pay for living expenses.

· Allow some cash for rebalancing.

4. Active bond managers suck. Active bond funds including Vanguard did some dumb things.

5:00 Rick Ferri on risk

In a fascinating discussion with Rick Ferri, author and founder of Portfolio Solutions, I asked him what his biggest learning experience was over the past year. He responded that it was the importance of the investor to understand risk.

"Everyone is brave in bull markets," Rick stated. Some people, however, reached their limit at the bottom of the bear and abandoned their allocation strategy. He noted how destructive risk profile questionnaires can be and we chatted about the risk of taking a risk profile questionnaire.

According to Rick, the return of a portfolio that has a 50 percent equity and 50 percent bond allocation will perform almost as well as one that is in 60 percent equities. But portfolios that don't stay consistently allocated will badly lag if investors try to reallocate at all the wrong times. Thus, it's better to allocate a little more conservatively and stick with the plan.

4:00 Interveiw with Mel Lindaur

I sat down with Mel Lindaur, one of the Bogleheads Forum Leaders and asked him for three things he would want to pass on to investors. Here they are:

1. Investing isn't rocket science. Anyone can learn to do it. Investing shouldn't be complex.
2. Bogleheads are about simplicity. It's easy to talk about investing using jargon and complex calculations. All of this, however, can be put in terms that are simple to understand.
3. The Bogleheads forum and the book, The Bogleheads' Guide to Retirement Planning, are written by many people who have nothing to gain and do it out of generosity to help others. It is a single source of understandable information. Even the royalties from the book, will be donated to the National Constitution Center.

Next on the agenda at 6:30 p.m. is a fireside chat with William Bernstein.

11:30 a.m. - Jack Bogle calls in:
Mr. Bogle talked about his crusade to reform the financial industry. He stated that despite the fact that every reform he had hoped for ten years ago had failed, he was not giving up the fight.

When asked about the state of the economy, Mr. Bogle noted that we are in a deeply troubled economy but that did not translate to the stock market. At one point, the market had lost nearly half of its market cap, yet the economy did not shrink by 50 percent. The market is at "reasonable" valuations now - not necessarily cheap. He admitted that he is still uneasy about the stock market and, therefore, a little more conservatively invested.

Mr. Bogle announced that a brief for a case he submitted will be heard by the Supreme Court next month, Jones vs. Harris, and could very well shake up the mutual fund industry.

9:00 A.M.
The big buzz was the just published book - The Bogleheads' Guide to Financial Planning. This is an amazing book and a must read! How do I know? I had the good fortune of reading a draft and you'll see my name in the "additional praise" page of the book. If you are more concerned about securing your own retirement, rather than your adviser's, pick up a copy.

Sep 30 - Evening Discussion with William Bernstein.
A bonus right from the start. Had a great conversation with one of the smartest (and nicest) guys I know - Bill Bernstein. We discussed investor emotional mistakes such as dollar weighted returns lagging time weighted. Or in other words, the tendency investors have to invest in things after they've gone up, which is exactly the wrong time to do it.

The question was posed that if retail investors time things wrong, who benefits from this, as it must be a zero-sum game? Is it the institutional investors, the hedge funds, or perhaps the company insiders, as Bill suggested? The bottom line is that Bill noted investors consistently chase performance and would benefit far more by going in the opposite direction of the herd.