ETF.com: Are different “factors” something you mine on an ongoing basis, or are they something of a core holding, as MSCI is pitching them these days?
Bernstein: What you’re really asking is, how do you manage the risk? The answer is, you don’t have a choice. You have to have a long-term strategy that you adhere to. You’re exposing yourself to risks. Risk No. 1 is systemic market risk; risk No. 2 is non-systemic, the extra risk you’re taking. So the question is, how do you manage those two risks?
You don’t manage it by flitting in and out and trying to figure out when it’s going to do well and when it’s not. The way to limit risk is to say: “I’m a 60-40 kind of investor and I’ve got this extra risk in my portfolio, so I’m not going to be 60-40, I’m going to be 55-45 or 52-48.” So you contrive the risk of your strategy by lowering your beta.
ETF.com: It sounds like you’re talking about what I consider the holy grail of investing, which is limiting the variability of your returns, and that means making your plan and sticking to it.
Bernstein: Yes. The way you’re going to get rich is not by investing like Warren Buffett. The way you’re going to get rich is by working hard; not spending a lot of money and saving. The name of the game is not to get rich. The name of the game is to not die poor. And the way you avoid dying poor is just by adhering to your strategy.
ETF.com: Eloquently framed. So are you taking measure of this growing excitement over China A-Shares that cover the mainland market? Access is still rather limited, and quotas are getting hit and some ETFs are trading like closed-end funds at a premium, but there’s this notion that this market is the “bee’s knees.” Any thoughts?
Bernstein: Sure. The question is, who are you on the bus with—the pension actuaries or the soccer hooligans? I think that question answers itself. You’re investing with people who are buying a story; you’re not investing with people who crunch numbers.
ETF.com: So what does that mean; that the smarter money is a little circumspect? And that if China and China A-Shares are part of the risk pie, it’s going to be modest and managed in a very disciplined manner?
Bernstein: Whenever there’s easy money to be made, people will be taken advantage of. A country that doesn’t protect its children from lead-based paint in toys is not a country that’s likely to protect the interest of minority foreign shareholders.
ETF.com: But you’re not averse to allocating some assets to China; it’s just that you’re not buying “the story?”
Bernstein: Well, yes—in general, I think emerging markets should be part of everybody’s portfolio. I think they’re quite reasonably priced—they may be the cheapest part of anybody’s equity portfolio right now.
The only way you can really avoid China is by buying an actively managed fund. You pick the smartest guy and that didn’t work out so well. So you buy an emerging markets index fund, and if you buy an index fund, guess what? You’ll have to own a bit of China; so grin and bear it.
ETF.com: And you may well benefit to some extent, notwithstanding the reservations you have?
Bernstein: Exactly. The lottery tickets may come in, but in general, it’s not a good idea to buy lottery tickets.
