Bill Bernstein: Take Risk Off The Table

November 26, 2013

It takes guts to trim equity exposure when the going is so good.


It’s all but impossible to get a stalwart passive investor like Bill Bernstein to engage in the tradition of sharing his best idea for the upcoming year, but that doesn’t mean he won’t serve up kernels of wisdom along the way.

Bernstein laid out sensible advice when he visited recently with IndexUniverse Managing Editor Olly Ludwig: The former neurologist and author of several books on investing said that after five years of rising stock prices that has lifted the S&P 500 Index into record territory, it makes sense to trim equity allocations in preparation for a rainy day.


IndexUniverse: Can I coax you into talking about investment strategies for the next year?

Bernstein: No, I don’t label my ideas with calendar years. All that I see happening is what we’ve been talking about for the past few years, which is that the Fed is pumping liquidity into the system. The Fed is aiming this garden hose at a bucket that’s 20 yards away, which is the economy. It’s getting some water in the bucket, but it’s getting a whole lot more water on the surrounding pavement. And the surrounding pavement is risky assets.

IU: So what’s the distinction between getting the water in the bucket versus on the pavement?

Bernstein: The water in the bucket is protecting people who are out of work and trying to keep them from begging on the streets and from going bankrupt because they can’t pay their medical expenses.

IU: Regarding the Fed’s presence, and trying to get water into the bucket, are you worried about some kind of an inflationary episode taking shape?

Bernstein: I would have worried about that four or five years ago. But banks are deleveraging and people are deleveraging. Banks are shrinking their loan portfolios. Banks aren’t lending money to people who don’t have jobs the way they used to seven years ago. They stopped writing mortgages for $750,000 to Las Vegas waitresses who were making $18,000 a year. And what will happen is that cycle will reverse. People will start becoming euphoric again.

IU: So you’re just watching it; it’s going in slow motion. What should investors do given the rise in “risky assets,” as you put it?

Bernstein: You want to at least keep your asset allocations stable. That means that you’ve sold a bit for the past two years—just slowly raising cash.

And if you’re like me, you like leaning even more against the wind, so that when you see valuations like this, you want your equity allocation to be less than it was two years ago. So if you were 55 percent/45 percent two years ago, maybe today you want to be 45 percent/55 percent or at least 50/50. Believe me, this is not rocket science.




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