Bill Bernstein gives free advice to young investors.
Bill Bernstein, the investor/author and ardent proponent of passive investing, has climbed his way to the top of online book sales this year with one of his latest efforts "If You Can" (Free PDF version). It’s a how-to manual he offered online for free that’s aimed at young adults to help them navigate the world of investments.
Packed with Bernstein’s customary take-no-prisoners turns of phrase, it’s really more of a pamphlet than a book. It’s 16 pages of incisive advice—complete with a pithy supplementary reading list—that attempts to cut through the fog of Wall Street marketing and get to the crux of the matter.
And with a passive investor like Bernstein, the crux is all about owning everything there is to own in the investment universe—or nearly everything—for as cheaply as possible. So the asset allocation components laid out in “If You Can” comes down to three funds, all from Vanguard:
- Vanguard Total Stock Market ETF (VTI | A-100)
- Vanguard Total International Stock ETF (VXUS | A-99)
- Vanguard Total Bond Market ETF (BND | A-94)
What’s conspicuously missing from the asset allocation plan is international bonds such as those in the Vanguard Total International Bond ETF (BNDX | B-46). ETF.com Managing Editor Olly Ludwig visited with Bernstein on the phone recently to find out, among other things, why.
ETF.com: What was your motivation for writing “If You Can” and for making it free? It certainly was a nice gesture.
Bernstein: Basically, I wanted to do a good deed and, as usually happens, I completely missed my target. I was aiming at “millennials.” I wanted a 25-year-old with his or her first 401(k) to read this and act accordingly. But the people who have been reading this are mostly the parents and grandparents and aunts and uncles of those 25-year-olds.
ETF.com: So how does that work out?
Bernstein: Well, we’re talking about three groups of people.
The biggest group of people by far is the one that says: “Oh my god, I have a kid, a grandkid or a nephew or a niece who needs to read this, and I’m going to send it to them.”
The second group of people were the ones for whom the booklet validated what they were doing. These are people who’ve saved a lot of money, who have been saving a lot of money and investing fairly competently and derived a modest amount of schadenfreude from reading the book.
The third group of people is those who read it and said: “I’m screwed; I better get on the stick.” That’s probably the smallest group of people.
But I got very little feedback from actual millennials who read the book and said: “This is fantastic, I’m going to do just this!”
ETF.com: Well, most millennials may not be financially literate enough to truly take measure of what you’ve laid out. I would say those are 16 very dense pages you’ve written—and not because your prose in unreadable, but because those are new concepts to the average 25-year-old.
Bernstein: Well, yes. And the other thing that really, really surprised me is that I thought I was just getting the gospel out there about keeping costs down and about the importance of asset allocation.
But no; what really resonated with readers is the simple realization that if they don’t start saving, or if their nieces and nephews don’t start saving large portions of their salaries, they’re going to be eating cat food when they’re 70! It was much more basic than “Jack Bogle 101.”
ETF.com: You’re a trained neurologist, and if anyone knows how the human brain is wired, it’s you. So, given the obvious challenges of getting people to behave now in ways that do justice to their needs three, four, five decades from now, do you think your generous gesture to millennials, your writing “If You Can” was, at the end of the day, a futile gesture?
Bernstein: Well, I think the message will get to them, but it’ll get to them by way of their elders. For example, Cosmopolitan magazine did a long interview with me recently. Cosmopolitan’s demographic is 30-year-old women. They thought this would be of use to their audience.
Now, the trick is that most of the people who run Cosmopolitan are 50-year-old women. So, again, that may be the aunts and the uncles trying to teach the kids something, I don’t know. I think the message will get to millennials, but it will trickle down.
ETF.com: One of the things I found myself thinking is whether saving 15 percent of one’s salary is even possible for many Americans. We all know that real wages haven’t kept pace with inflation since the 1970s. So can a cohort of the population avoid “eating cat food” when they’re 70 by embracing a pared-down version of what you’re recommending, like saving 5 percent instead of 15?
Bernstein: Well, if you save 5 percent of your salary, you will not have a gracious retirement. But if you combine your Social Security and the relatively small IRA you’ll have when you retire, it will probably keep you out of trash dumpsters.
ETF.com: One thing that puzzled me is that among your recommendations, I don’t see an international bond fund as part of the allocation—even one that’s currency-hedged. Why?
Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets. They are what you are defeasing your retirement with; they are what enables you to sleep at night; they are your liquidity for when you lose your job or for when you want to buy cheap equities or the corner lot from your neighbor who got caught in a liquidity squeeze.
And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.
Now, when you have hedged currency risk as opposed to unhedged currency risk in a bond fund, you’ve got a smaller problem, but it’s still a problem. And that’s when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.
Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
ETF.com: So, to take this back to your basic recommendation in “If You Can,” it’s that you don’t need BNDX—which is a currency-hedged international aggregate bond fund, because of negligible diversification and transaction costs? And you’re basically fine with a U.S. aggregate bond fund like BND?
Bernstein: Yes, owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
ETF.com: So, again through the lens of the ETF market, we’re talking about owning VTI for U.S. stocks; VXUS for all non-U.S. stocks and BND, the U.S. aggregate bond ETF?
Bernstein: Exactly. And at the end of the day, it’s important to remember that the name of the game with asset allocation is not the exact asset allocation you have, but sticking to what picked.
ETF.com: Yes, that is what the research about asset allocation tells us—make your bed, and for goodness sake, sleep in it; right?
Bernstein: That’s right—stick to what you pick.