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Posted by on Mar 11, 2015 in ETF Strategist, Investment Perspective

Great Advice From Bill Bernstein

By Roger Nusbaum, AdvisorShares ETF Strategist

Investing/indexing legend Bill Bernstein was interviewed by and had a couple of great nuggets that are useful for any type of investor and helpful for advisors’ communication with their clients.

First one:

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.

This is about the idea of risk and volatility budgeting; how much of each you intend to take. Whether on your own or with an advisor, there is some thought given at the outset about how much equity exposure to have, and how much volatility and risk you can handle. As time goes on you will rebalance based on some sort of interval or portfolio analysis.

This is one spot where emotion can come into play. People begin to believe they can actually tolerate more equity risk and volatility exposure after a long stretch where the market has done well, which leads to adding more exposure and buying high. This leads to another emotion: fear. Invariably, the “realization” that they can tolerate more equity risk and volatility exposure comes close to a high, which obviously magnifies their personal drawdown during a market decline.

Investing, at all points in the cycle, is about patience. Whatever asset allocation and investment strategy you chose, whether on your own or with an advisor, came with no emotion. It was the product of a well-reasoned conversation and process. Occasionally, an allocation strategy plan needs to be amended, like if you’re terrified all the way up (some people are, it’s ok). And obviously for certain life events there will be changes, but that is different than watching the market skyrocket and saying to yourself, or your advisor, why don’t I have more equity exposure?

The other one to discuss:

…I think net of expenses, you’re going to be very lucky to get 2 percent over the next 20 years… and the only way to get more return is by taking more risk. Good luck with that.

This is about proper expectations. Where he has made a prediction, the outcome is obviously unknowable today. If the market has some disappointing annualized rate of return over the next 20 years, which is possible, it is important to remember a couple of things. It is not likely that anyone will average 10% returns in a 2% world, which places an emphasis on savings and living below your means, which is a point he makes in the first quote.

The other point, and I think this is more important because it doesn’t get mentioned very often, is that whatever the annualized return over the next 20 years, it will not be linear. There will be great years, terrible years and flat years. Since the peak in 2000, the S&P 500 has averaged 4.6% per year. That 4.6% certainly does not belie what has happened over that period.