Morningstar - Q2 2021 - 59

you shouldn't expect much more than that on
corporate bonds, with credit spreads as low
as they are right now. We're looking still at a risk
premium of 2.5% to 3% on equities. Equities
are not so expensive that you would not consider
investing a portion of your assets in them.
But the bottom line is that you are getting
a 3% risk premium on top of a nominal risk-free
return of only 1%, or a real return of negative 1%.
There's still a reward, potentially, for taking
risk, but it's not going to be the same nominal

taking additional investment risk to get
a higher yield.
Guyton: Two things to add to that. All equities
don't come with the same valuation concern.
For example, U.S. large-cap growth stocks are very
different than emerging-markets equities or
even large-cap value stocks.

The other thing is that when we talk to retirees
about bond allocation, we point out that
risk is usually described vertically. How high

	
There are going to be rebalancing
opportunities in the coming years.
Jonathan Guyton

reward that investors received historically. That
has large implications on the amount of lifestyle
that you can generate from your investment
portfolio in the future.

Buying Time
Siegel: What I would say is keep going to
work in some fashion, because human capital has
not depreciated, and a small amount of work
can produce as much income as a very large
amount of money.
Finke: That's a great point, and especially
important for younger savers. Because asset prices
are so high, an investment that you make in your
own human capital comparatively is going to have
a far bigger payoff.
Siegel: I'm not even sure you need to invest in your
own human capital. Just using the human capital
you already have, by continuing to work, is a better
way to increase your retirement income than

is the market? How low might it fall? Those
are very vertical terms. But in retirement, the risk
is more horizontal. If you need your equities to
help generate some income and there's a period
of time when they're not helping, you need
to be able to wait that out. That's where the fixed
income comes in. You are literally buying time.
As long as your bonds are the right kind and
behave in the right way, then the question is, how
much time do you want to buy?

you're not likely to move money from fixed income
into something that is just going down 4%
or 5% a day at the final stages of a market panic.
So, how do you play that, if you play it at all?
What I do is I just sit there and watch.
Guyton: When you have those large swings like
you described, you don't have to get everything
right. You just need to do some rebalancing.
Let's not forget, retirees who are taking money out
of their portfolio have a rebalancing opportunity
all the time. It's simply which side of the ledger am
I going to take my withdrawals from right
now? Unfortunately, it means that people have to
be able to act in the ways that you describe
or have an algorithm that acts for them in the
management of their portfolio.
Rekenthaler: Jonathan, you mentioned subasset
classes-large growth versus emerging-markets funds
versus large value. Do I take that to mean that you
don't recommend a buy-the-market approach?

Guyton: Last year, large-cap value indexes were
barely positive for the year, while large-cap growth
indexes were up nearly 40%. There is no way
to leave the value stocks alone and take from the
growth stocks if all you have to sell are shares
of your S&P 500 fund. Breaking a portfolio up into
subasset classes, as you put it, John, allows
you to pick and choose. It's not that important in
the accumulation phase. It is much more important
in the distribution phase.
Finke: But isn't selling your winners just a
countermomentum strategy? Isn't that going to
lose in the long run?
Guyton: We're talking about the sources
of upcoming withdrawals. We're not selling all
the winners.

With that, you would have to think that with
things at the level they are right now, there
are going to be rebalancing opportunities in the
coming years. Some of the things that people
would like to have in their portfolios are going to
become less expensive. We saw perhaps the best
one we'll see for a while in March 2020, but
that doesn't mean there aren't going to be other
ones, as occurred at the end of 2018, for example.

Finke: I do think you can make a very strong
point in the accumulation stage in a nonqualified
account to hold multiple equity investments so
that you can take advantage of tax-loss harvesting
strategies. But market-timing strategies, that's a
tough one. Getting it right is easier said than done.

Siegel: The market will fluctuate, but do you really
know when to get in when the market is down
20%, or in the case of last year, 34%? Behaviorally,

Guyton: It's not so much timing. Let's say that
someone's approach is at the beginning of every
year to decide where the next year's withdrawals

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