Special Note: We're announcing today that Fidelity Investments' senior investment strategist Bruce Johnstone will be a keynote speaker at this year's upcoming AAII Investor Conference. Johnstone was previously ranked as the #1 equity-income fund manager during his tenure as portfolio manager of Fidelity’s Equity-Income Fund. To see Johnstone and the other great speakers we have scheduled, be sure to register before the conference sells out.

How does the founder of the largest mutual fund company allocate his portfolio? John Bogle was asked this very question following a webcast presentation he gave at last week’s Morningstar Investment Conference. Bogle said that he continues to use 50% stock/50% bond allocation. He jokingly described himself as spending half of his time worrying about not having enough exposure to stocks and the other half worrying about having too much exposure to stocks.

He went onto to suggest that a good allocation range for most investors lies somewhere between 70% stocks/30% bonds and 30% stocks/70% bonds. Bogle advised finding an acceptable mix along this range and staying the course with it. His rationale for capping the stock allocation at 70% was that he doesn’t think most investors will be able to withstand the volatility associated with a higher allocation to stocks.

The subject of allocation also came up in two separate meetings I had with representatives of fund companies. (The Morningstar Investment Conference is a mutual fund conference geared primarily toward financial advisers.) Wyatt Lee, the co-portfolio manager of T. Rowe Price’s target-date funds, said he opts for a “through” approach for transitioning from working to retirement. A through approach gradually reduces exposure to stocks heading into and throughout retirement or a period of retirement. Lee uses an approximate 55% stocks/45% bonds allocation at the year retirement is scheduled (the date listed in the target-date fund’s name) and gradually decreases the fund’s allocation to bonds over a period of 30 years in retirement.

Lance Humphrey, the portfolio manager of global multi-assets at USAA Investments, uses a “to” approach instead. This approach allocates to a retirement date, at which point the allocation becomes significantly more conservative. Humphrey targets an allocation of approximately 30% stocks/70% bonds at retirement. He did add that ideally investors should adjust their allocations based on personal needs at and once in retirement.

Another source of disagreement occurred among two members of the same firm. This time the subject was the economy. Rick Rieder, BlackRock’s chief fixed-income officer, told a small group of us in the media room that gross domestic product (GDP)—which is calculated by the Commerce Department’s Bureau of Economic Analysis—is improperly measuring economic growth. He believes that the downward pressure being put on prices by technology and the corresponding growth in goods consumption (particularly recreational goods such as smartphones) is not being properly factored into the headline numbers. Roughly 75 minutes later, BlackRock’s CEO, Larry Fink, told the audience in a general session that his economic assessments differ from Rieder’s. He believes that many people in the U.S are waiting to see how things play out with the new presidential administration. He further argued that the United States’ current demographics makes achieving sustainable 3% economic growth seem “pretty improbable.”

One area where there was agreement was smart beta and so-called risk factors such as value, momentum, yield, volatility, etc. (Morningstar uses the term “strategic beta” instead of “smart beta.”)  Patrick O’Shaughnessy of O’Shaughnessy Asset Management and Wesley Gray of Alpha Architect both cautioned conference attendees to pay attention to what they are actually getting in smart beta funds. O’Shaughnessy said that smart beta funds should have a high level of active share, meaning that their portfolios significantly differ from market-capitalization-weighted indexes. Gray warned that overlaying too many factors gives you essentially the return characteristics of the S&P 500, but at a much higher cost. Gray, who prefers the simplicity of clean exposure to factors, does think an integrated strategy combining different factors could work if properly constructed. O’Shaughnessy cautioned, however, that such an approach should be closely looked at to ensure that the portfolio's return characteristics are different than those of the market.

Finally, a few miscellaneous items of note from the conference. Bogle thinks it will be harder for active managers to outperform in the future, especially if rates of return are lower. He also argued that the growth in mutual fund assets has benefited the fund companies, but not mutual fund investors. Rieder suggested that yield-seeking investors consider including emerging market debt in their portfolios because the interest rates on such bonds are higher and are more likely to come down than go up in the future (creating opportunities for capital gains). Fink described the ability of active managers to outperform as being hindered by the increased flow of information. He also believes the recent outperformance by active managers is more attributable to macro bets than their ability to uncover information others don’t have. USAA has filed paperwork to launch ETFs. These ETFs would be available to all investors, not just USAA members. Finally, Michael Lewis discussed his latest book, “The Undoing Project” (W.W. Norton, 2016), which focuses on Daniel Kahneman and Amos Tversky’s relationship and their groundbreaking work on behavioral economics. (It’s a good read for those of you who are interested in the subject matter.  Movie rights have already been sold, according to Lewis.) When asked by Morningstar director of personal finance Christine Benz if he had plans to write another book about Wall Street, Lewis cautioned that doing so would mean “something bad happened.” Let’s hope his next several books focus on a  different topic.

• Common Investor Mistakes and Other Investing Insights – John Bogle discussed what he thinks are the biggest mistakes investors make.
  
• Determining Your Allocation at Retirement – Guidance on choosing between a “through” and “to” allocation approach as retirement nears.
  

• When You Haven’t Saved Enough for Retirement – Strategies for funding retirement for those who are behind on building their nest eggs.
  
• Model Fund Portfolio: Don’t Fear Real Estate or the Stock Market – Periods of lousy returns will occur; the rewards come for those who invest through them.
  

First-quarter earnings season will revolve to companies with smaller market capitalizations. Even so, there are 41 members of the S&P 500 scheduled to report. They include Dow Jones industrial component Walt Disney (DIS), which will announce its earnings on Tuesday.

The week’s first economic reports will be the Labor Department’s March job openings and labor turnover survey (JOLTS), which will be released on Tuesday. Wednesday will feature April import and export prices. The April Producer Price Index (PPI) will be released on Thursday. Friday will feature the April Consumer Price Index (CPI), April retail sales, March business inventories and the University of Michigan’s preliminary May consumer sentiment survey.

Seven Federal Reserve officials will make public appearances: St. Louis president James Bullard and Cleveland president Loretta Mester on Monday; Dallas president Robert Kaplan on Tuesday; Boston president Eric Rosengren on Tuesday and Wednesday; New York president William Dudley on Thursday; and Chicago president Charles Evans and Philadelphia president Patrick Harker on Friday.

The Treasury Department will auction $24 billion of three-year notes on Tuesday, $23 billion of 10-year notes on Wednesday and $15 billion of 30-year bonds on Thursday.

Pessimism among individual investors about the short-term direction of the stock market is at a three-month low according to the latest AAII Sentiment Survey. Neutral sentiment is higher while optimism is essentially unchanged.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose less than 0.1 percentage point to 38.1%. Optimism is below its historical average of 38.5% for the 15th out of the last 16 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 1.7 percentage points to 32.0%. The rise puts neutral sentiment above its historical average of 31% for the sixth time in seven weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.8 percentage points to 29.9%. Pessimism was last lower on February 8, 2017 (27.7%). The decline puts bearish sentiment below its historical average of 30.5% for the first time in 12 weeks.

Though the NASDAQ continued its ascent into record territory during the survey period (Thursday through Wednesday), the gains were not widespread across all stocks. Plus, though some individual investors view the NASDAQ’s record highs favorably, others say it is not altering their outlook.

The potential impact that President Trump could have on the domestic and global economy remains a cause of uncertainty and/or concern for some, while a reason to be encouraged for others. At the same time, prevailing valuations and the lack of downside volatility have increased concern about the potential for a forthcoming drop in stock prices.

This week’s special question asked AAII members to share their thoughts about the NASDAQ recently rising above the 6,000 level for the first time. One out of four respondents (25%) described the achievement as meaningless or otherwise said that it does not alter their outlook or investment strategy. A nearly equal number of respondents (24%) view the crossing of 6,000 as a positive occurrence for the markets. About 13% expressed a bearish viewpoint, with some describing the NASDAQ’s record highs as evidence that stocks are overvalued. Slightly more than 9% say it’s a sign that technology stocks are doing well, with some of these respondents say they are now favoring the tech sector.

Here’s a sampling of the responses:

• “It is just a number.”
• “These milestones are essentially meaningless, but I’ll take new highs over new lows any day.”
• “Tech stocks are doing quite well.”
• “Given the high valuations in the market currently, a record NASDAQ is just another bearish predictor.”
• “Uptrends have to make new highs; it’s a good sign.”

Bullish: 38.1%, no change
Neutral: 32%, up 1.7 points
Bearish: 29.9%, down 1.8 points


Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%

Fixed-income investments account for the largest percentage of individual investors’ portfolios since last summer, according to the April AAII Asset Allocation Survey. Also, last month equity allocations pulled back from their recent high, while cash balances rebounded.

Stock and stock fund allocations fell 2.3 percentage points to 65.3%. The decline follows what had been a two-year high in March (67.6%). Even with the decline, April marked the 49th consecutive month with equity allocations above their historical average of 60.5%.

Bond and bond fund allocations rebounded by 1.0 percentage points to 18.0%. Fixed-income allocations were last at this level in July 2016. The rise keeps bond and bond fund allocations above their historical average of 16.0% for the 20th out of the past 21 months.

Cash allocations rose 1.3 percentage points to 16.8%. April was the 65th consecutive month that cash allocations were below their historical average of 23.5%.

Yields on the benchmark 10-year Treasury fell last month, boosting the value of fixed-income investments. At the same time, optimism about the short-term direction of the stock market in our weekly Sentiment Survey was below 30% for most of April. (Bullish sentiment did rebound strongly last week, however.)

Many individual investors find themselves choosing between high valuations for stocks and low interest rates for bonds and cash savings. At the same time, much focus remains on Washington and how the Trump administration’s policies will affect economic growth.

Last month’s special question asked AAII members to describe the impact that the Federal Reserve’s rate hikes are having on their asset allocation decisions. Half of all respondents (50%) said that the rate hikes have had no impact on their allocation decisions. Several of these respondents view the hikes as either having already been priced in or too small in size to have an impact. An additional 8% of respondents said that the rate hikes have had just a minimal impact on their allocation decisions. Ten percent boosted their bond allocation, with a particular focus on short-duration bonds. Another 6% of respondents are maintaining their bond allocation. Approximately 8% have either reduced their bond allocation or are avoiding bonds.

Here is a sampling of the responses:

• “I’m staying away from bond funds of any meaningful duration.”
• “No reaction. Already baked into the market sentiment.”
• “Not much impact. Did move a bit from cash to short-term Treasuries.”
• “None. The Fed has not moved enough to have a significant impact.”
• “At this time, no impact at all.” 

• Stocks and stock funds: 65.3%, down 2.3 percentage points
• Bonds and bond funds: 18.0%, up 1.0 percentage points
• Cash: 16.8%, up 1.3 percentage points

• Stocks: 34.3%, up 6.2 percentage points
• Stock Funds: 31.0%, down 8.5 percentage points
• Bonds: 5.6%, up 0.8 percentage points
• Bond Funds: 12.4%, up 0.2 percentage points

Take the Asset Allocation Survey.

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