William Bernstein: Be Open To New Factor Tilts

July 02, 2013

In the hurly-burly of a transition to a post-Fed world, stay focused on timeless asset allocation discipline and on truly new ideas in the realm of factor-based investing, Bill Bernstein says.


The transition toward a world of higher—and more historically normal—interest rates seems to have reared its head in the past several weeks following Federal Reserve Chairman Ben Bernanke’s comments that the U.S. central bank may well begin “tapering” its latest bond-buying program, investor, former neurologist and author William Bernstein says.

But in the confusing, sometimes emotionally reactive tumult that is accompanying this shift to a world no longer dependent on the Fed’s economic life support, Bernstein told IndexUniverse.com Managing Editor Olly Ludwig that it’s crucial for investors to remain loyal to time-tested rules about asset allocation discipline.

William Bernstein—whose latest book “Masters of the Word: How Media Shaped History from the Alphabet to the Internet” strays ably and incisively from the many well-crafted books on passive investing he is known for—also stressed that investors ought to stay open to what’s truly new and significant, such as the emergence of factor-based approaches to investment, including profitability and momentum.


IndexUniverse.com: Whatever’s going on in the market, you might finally be right—four years later!

Bernstein: That’s right—better late than never! Fortunately, I wasn’t invested in a risk-parity portfolio before this.

IU.com: You’ve got to be pleased you’re not in some kind of scramble right now. This dislocation in the market seems a bit surprising. Whatever this mean reversion is, it seems like it’s possibly taking shape.

Bernstein: Oh yes. The analogy that I like—it’s not original to me, but it’s one that I like very much—is that the Fed has basically been holding a basketball under water for the past four years. And we know what historical interest rates look like. When the Fed lets go of that basketball, it should not be surprising that it moves in an upward direction.

IU.com: What strikes me is that there appears to be a lot of surprise, and I’m not sure what to make of that.

Bernstein: Never underestimate the power of financial amnesia. That is a charitable way of putting it, or some people are historically illiterate. Bond markets do crash from time to time.



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