William Bernstein speaks!

Indexfundfan points to an article drawn from a recent e-mail interview with William Bernstein.  Bernstein's  book, the Four Pillars of Investing, is what I use as my investing b*ble.  I will talk about it more later in this blog.

This is classic:

"I recommend a passive approach," he said the other day in an e-mail exchange. "That is, I do not believe that there's such a thing as skill in security selection, and I favour vehicles that transact as little as possible."

But the writer trumps up Bernstein's abilities a bit with this quote:

His "no-brainer" portfolio of indexed funds regularly beats the market by a wide margin. Why? "Because it's well-diversified, biased towards small and value stocks and passive."

The statement that Bernstein "beats the market" makes him sound like an active manager and is at odds with his own philosophy.  Bernstein's strategy is to rely strictly on index funds in order to earn the market return with the least extraneous costs.  The bias towards small, value is a result of splitting the market and recognizing the unique risk/return characteristics of each segment.

A more complex quote:

"I recommend very few adjustments in allocation - very small changes opposite very large changes in valuation. For example, if the market rises or falls by a factor of two over a short period, you might consider lowering or raising your equity allocation, by a few per cent."

Here, Bernstein is almost certainly talking about "dynamic asset allocation," a more a sophisticated tool that I don't think he'd recommend for beginning investors.

Read more in the book.