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me and my money

William Bernstein is a retired neurologist who educated himself about investing in the early 1990s. As anyone with scientific training would do, he surveyed the scholarly literature, collected data and built models. Thinking his findings would be of benefit to others, he wrote a book called The Intelligent Asset Allocator (2000), followed by The Four Pillars of Investing (2002) and several other books. His writings can also be found at

The Globe and Mail recently interviewed Mr. Bernstein about his investment portfolio.

Can you tell us which strategies have been most helpful to your portfolio?

The strategies I've adopted are pretty simple. One is to minimize costs and time demands by investing in index funds that passively track the market. The annual management fees charged by some providers are less than 0.2 per cent, and the work required to manage such a portfolio of index funds can be just a few hours a year.

Costs matter. For example, $100,000 invested at 6 per cent annually for 25 years grows to $430,000 but with a 2-per-cent annual fee, it grows to only $260,000 – nearly 40 per cent less.

What other strategies do you use?

Another strategy I follow is staying the course with a relatively fixed-asset allocation to keep my risk level close to my target. This calls for adherence to a rebalancing regime – buying stocks during downturns and selling during upswings to return to my target allocation. Rebalancing can also be done by directing new money into underperforming assets.

This is simple to do, but not easy. It’s hard to sell stocks when they are rising and everyone is bullish. Coping with downturns is even more difficult: Many investors capitulate to the gloom and sell – then miss the rebound.

Staying invested requires a certain frame of mind, one that doesn’t get caught up in crowd psychology. It also helps to have a detailed and well-rehearsed plan for what to do when the market plunges or soars. As history shows, this plan should include rebalancing – buying stocks when storm clouds gather and cutting back when blues skies seem limitless.

Can you give us more details on your rebalancing approach?

I use threshold rebalancing, where an asset is rebalanced whenever its allocation drifts a certain percentage away from target. This approach catches market peaks and valleys better than rebalancing according to dates on the calendar. But the latter does have the advantage of simplicity and takes only minutes to execute, so would still be suitable for many investors.

Different thresholds are used for the various asset classes because of differences in volatility. Take emerging markets: They fluctuate more than developed markets, so their bands are set wider. You don’t want to rebalance too often or transaction costs will get high. In taxable accounts, rebalancing every two to three years is okay.

I use geometric thresholds. To explain, recall that if a stock declines by 20 per cent, it takes a 25-per-cent increase to bring it back to the same price. So, if the lower boundary for an asset allocation is 20 percentage points, the upper boundary should be 25 percentage points.

Your focus is on building retirement portfolios – how do you minimize risks such as inflation and outliving your retirement funds?

Save as much as you can. And accumulate capital at least 20 to 25 times expected retirement expenses that are not covered by income from pensions and government programs. If you reach this amount close to retirement, you’ve won the game and should take risk off the table by increasing your holdings of riskless assets.

A good riskless asset, in my opinion, is inflation-protected government bonds – called Treasury Inflation Protected Securities [TIPS] in the U.S. [and real return bonds in Canada]. Now that their real rates are close to 1 per cent on the shorter terms, I’m starting to load up. I’ll begin buying the longer maturities as their rates go higher.

When I buy inflation-protected bonds, I stagger their maturities so that they come due at intervals and match liabilities in retirement. Savings not needed for retirement expenses are invested in a risk portfolio, made up of stocks. It can be used to create a legacy or spend on luxuries.

What’s the most important advice you could offer to investors?

Save as much as you can. When I look at family and friends, those with comfortable retirements are the ones who saved well, not necessarily those who invested well.

Also, learn financial history. The folks who didn’t get snookered by the internet bubble in the early 2000s were usually familiar with past episodes of market euphoria and how they turned out. Some of the better known manias were the 1630s tulip-bulb craze in Holland and the 1720s South Sea Bubble in England. Look them up if you haven’t heard of them.

This interview has been edited and condensed.

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