Ludwig: Some of these country picks you’ve talked about—Canada, Australia—sound like sublimated China stories. They’re commodity economies fueling growth in places like China.
Stein: Yes, and I have some China too. I also had Russia. But I got out of Russia because the political situation in Russia seems like it’s reverting back to dictatorship. I didn’t want to be involved in that.
Ludwig: And how does China differ from that?
Stein: China doesn’t make any bones about it being a dictatorship, whereas Russia pretends to be something else. When you buy China, you know you’re getting something that’s run by a Communist dictatorship. Russia claims to be something else that it’s not.
Ludwig: What about India?
Stein: That is something that I have completely missed the boat on, except for the fact that I have some very large-scale, very widely diversified, less-developed country ETFs. So that would include India. I should have more India. I just did not see India becoming the powerhouse it has become. That was a mistake.
Ludwig: I’m guessing it’s not too late.
Stein: I don’t think it’s too late either, and I’m glad you brought that up, because my next call will probably be to my broker to send me some data on India.
Ludwig: How much of an allocation do you think is appropriate for the emerging markets?
Stein: I wouldn’t allocate more than 15 or 20 percent at most—not because they’re not great and that the growth isn’t there, but because there’s political instability throughout the region. But if you’re 80, you should probably just be in cash or in short-term bonds.
Ludwig: What are some of the biggest mistakes investors make?
Stein: I think the biggest mistake you can make —unless you are one of the most skillful of stock picker investors like Warren E. Buffett—is to think you are going to outperform the indexes. For the enormous mass of investors, just going with the indexes is the way to go.
Ludwig: When you look at Buffett closely, he’s a buy-and-hold investor, and that’s one of the tenets of passive investing.
Stein: Yes, and by this point, he runs an index fund. He has so many different companies that he owns or owns very large parts of.
Ludwig: Any other big mistakes investors make?
Stein: Well, one of the mistakes I’ve made is having been too sanguine about the market itself and not diversified enough into alternative investments, of which the most spectacular is cash. If it’s cash in a CD or if it’s cash in a money market fund from one of the big brokerages, it cannot lose its value. It’s a very smart alternative investment, and I wish I had had more of it.
The desirable amount of cash is at least 15 percent—at any age, and would get to be closer to 25 percent as you pass 60. And I think these allocations should be constant, no matter what the state of the U.S. economy.
Ludwig: That flies in the face of brokerage industry orthodoxy that equities are better than cash or bonds to achieve returns over the long term that beat inflation.
Stein: Well, we haven’t had much inflation lately, but if we do, and you have bonds, especially medium- or long-term bonds, you’ll really get creamed. I’m an old guy, and I can remember the days of the double-digit inflation in the ’70s and early ’80s when bonds were just getting murdered day after day. Every day, the bond market floor would be littered with the dead and dying.