JUST PLAIN TALK: Bill Bernstein, Buz, and investment bubbles

Buz Livingston
Buz Livingston

For 15 years, Bill Bernstein was a neurologist in Coos Bay, Oregon, before switching careers to finance and writing. Over the summer, I finished his new book, "The Delusions of Crowds: Why People Go Mad in Groups," which is more history than finance. But, in a way, it addresses finance in that people do the wrong thing, like investing in whatever is hot.

Do yourself a favor and get his last pure financial book, "Rational Expectations: Asset Allocation for Investing Adults." He argues there are three types of investors: Group 1, probably the largest, doesn't have a coherent strategy and owns a haphazard mix of mutual funds and stocks. They often sell in market downturns and buy near peaks. Group 2 is more sophisticated, kind of, and buys the dips unless things get terrible, then they end up in Group 1. Finally, Group 3 has a strategy appropriate for their goals, time horizon, and risk tolerance. They also understand it is essential to have enough "patience, cash, and courage" because you need all three to succeed.

When queried about market bubbles last spring, Bill responded, "Bubbles are the inevitable outcome of human nature." Like apes, we imitate. When stock euphoria soars, it reaches critical mass and spreads. But, unlike our cousins, we tell stories. So we prefer narratives over facts; bubbles follow.

Instead of sky-high market valuations, Bernstein's bigger worry is low interest rates because that's what's driving stock prices. Eventually, rates will rise, and stocks will likely suffer. As a result, he believes returns for the next 50 years will be lower; they have to be. The historical equity risk premium for stocks is four to five percent. With bonds, essentially at zero, do the math. He points out, and it's essential to realize for the next decade, stock returns could be as high as 15% or zero like the S&P 500 was from 2000-2009. A decade is too short of a timeframe to be meaningful. Foreign stocks may outperform, too, but nothing is written in stone.

He also points out the most considerable risk for retirees is living too long. Assuming good health for both spouses, the best way to offset that risk is to delay Social Security for as long as possible. Single premium immediate annuities are another way to ensure you don't outlive your money but stay away from complex products.

Recently, there was a lot of chattering about the unsuitability of target-date funds. Granted, someone's age shouldn't determine their asset allocation. But target-date funds, designed to become less aggressive at retirement and beyond, are super-simple; just shovel the money in. Regardless of your age, simplicity can't be overstated. Asset allocation funds, with aggressive, moderate, or conservative allocations, offer an easy-to-maintain investment strategy, too.

Today's high asset valuations hurt younger investors. They won't have the decades of high returns that boomers have seen. Plus, they don't have the assets built up compared with boomers. "The millennials are going to come for baby boomers with pitchforks," Bill said quote him, so there it is.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.