Page 31 - Investment Advisor - October 2021

In addition, Bogle contended that cap stocks tended to outperform
“investors make a big mistake by large-cap stocks.
thinking too much of the value of So Siegel says don’t just chase
the account and not enough about growth stocks that have prices that
the monthly income [including have been going up quickly. They
Social Security] they want to get.” might not be paying out dividends.
What’s your take on that? In the long run, you may be bet-
Some investors are overly focused ter off with a stock at a relatively
on the price they’re paying but lower price that has better pros-
lose sight of why they’re investing. pects for dividend payments and
If investing for retirement, what therefore return.
you really care about is the income
that’s going to be derived. In your book, Siegel says the ideal
portfolio should have an equity
Bogle said also that in retirement, holding of 50% in world index
there isn’t a real need to rebalance funds — 30% U.S.-based, 20%
major asset allocation classes. non-U.S.-based — and to allocate
“Regular rebalancing isn’t terrible the remaining 50% to strategies
but not necessary” was his way of that will enhance the return. Please
thinking. Comment? “Bogle’s [general] elaborate on the latter.
Again, there are conflicting per- For example, be aware of emerging
spectives on the whole notion of perspective was: Let it industries that may have enhanced
rebalancing, and I think the verdict ride and perhaps not growth opportunities at a particular
is out on that. point in time, like real estate invest-
If there’s more of a momentum be as regimented about ment trusts [REITs] or certain sec-
trend in a long bull run in equi- tors, perhaps [pharma or consumer
ties, say, then by not rebalancing, rebalancing according staples, for example].
you’d be better off. Bogle’s [general] to a [specified time
perspective was: Let it ride and Siegel is firm about avoiding “hot
perhaps not be as regimented about frame].” stocks” and IPOs. Why steer clear
rebalancing according to a [speci- of IPOs?
fied time frame]. The literature shows that the typi-
cal pattern is a bump in the IPO’s stock price on the first day —
Jeremy Siegel, the Wharton finance professor who wrote even to the tune of 10% to 15%. However, after that one-day
“Stocks for the Long Run,” recommends that at least one- bump, over the next three to five years, IPOs typically tend
third of an equity portfolio should be invested in international to underperform the market, though, clearly, some stocks run
stocks. What’s his rationale? counter to that, like Google.
Research shows that [regardless of] the proportion of equi-
ties the country you live in might represent relative to the Charley Ellis, the renowned investment strategy consultant, is
world portfolio, people tend to be overinvested in domestic author of the classic “Winning the Loser’s Game.” What does
equities — that’s known as home-country bias — regardless of he say about constructing the perfect portfolio?
where they live. In the 1970s, he saw that individual investors often tried to
The U.S. might now be roughly in the 50% range in terms of outperform but ended up shooting themselves in the foot.
the market cap of U.S. stocks as a proportion of world stocks. He was the first person well known inside the industry to
Siegel is trying to nudge people away from this home-coun- advocate for passive investing even before the index fund was
try bias to include at least a third of international equities. available as a retail product.

He argued to “tilt the portfolio toward value stocks that have In aspiring for the perfect portfolio, he says, “Don’t invest
low P/E ratios or higher dividend yields.” What’s the advantage? in commodities, as prices can fluctuate wildly; and if
That goes back to the work of [University of Chicago profes- you’re a long-term investor, don’t own domestic bonds in a
sors] Eugene Fama and Kenneth French about price vs. value. low-interest-rate environment.”
Fama and French found that value stocks tended — over the So, his thinking is more along the lines of Bogle in terms of the
long run, decades — to outperform growth stocks. And small- narrower approach with asset classes and domestic bonds.

OCTOBER 2021 INVESTMENT ADVISOR 29