Rick Ferri, the founder of the investment firm Portfolio Solutions, is about as ardent an advocate of passive investing as you’ll ever find, right up there with Burton Malkiel, John Bogle, Bill Bernstein and Larry Swedroe.

When IndexUniverse Managing Editor Olly Ludwig caught up with Ferri in a recent visit on the telephone, Ferri shared his optimism about the U.S. economy, reminded investors why “buy-and-hold” investing doesn’t make sense without rebalancing and explained why he says “no thank you” to corporate bond ETFs.

Ludwig: First of all, what your overall take is on the pullback and the volatility? How do you see this, in a general sense?

Ferri: Well, money is certainly coming to the U.S., only a lot of it is going into Treasury bonds. So it’s not as though the people have any fear of the dollar. But there’s this question of softness that people are expecting due to European problems, and the belief is that there will be some effect because 20 percent of the S&P 500’s revenues come from Europe. I've heard our GDP could be affected by anything from a quarter of a percent to maybe half a percent with Europe in recession. The question becomes, How long does it last?

Ludwig: What’s the outlier here—that Spain ends up being too big to save?

Ferri: It’s hard enough trying to figure out what the U.S. economy is going to do, let alone what Spain or Italy is going to do. Given the amount of money that's coming to the U.S. and going into Treasury bonds, some of that will eventually find its way back into equities. The fact is that U.S. equities are yielding 2.1 percent and the 10-year Treasury note has been as low as 1.5 percent. There used to be an old saying that says when stocks are yielding more than 10-year Treasurys, buy stocks. And when stocks are yielding less than 10-year Treasurys, buy bonds.

You'd have to go back many decades to get to a point where U.S. stocks were yielding higher than 10-year Treasurys, but here we are. So, in the long term, over a 10-year period, if the price of stocks doesn't go anywhere, you're still better off being in stock just because the dividend cash flow alone is better.

It’s a coin toss as far as what's going to happen in the short term. I have really no idea, but I believe that the U.S. economy is in pretty good shape, and the equity market will continue its upward trend. We are the island in the rough sea that is fairly solid, and I think we’re going to come through OK. The United States is going to lead the rest of the market out of recession. And we are leading; it’s just a very, very slow process.

Ludwig: How about if Israel attacks Iran?

Ferri: As a military person, I don’t see that as a possibility. But if it did happen, that would of course be a negative. It’s hard enough to invest based on what we know, let alone what we don’t know, coming down the road.

Ludwig: As it relates to the November election, while the Democrats and Republicans can quibble about how to approach the fiscal situation, the debt ceiling does have to be raised, yes?

Ferri: It's already written into law that the debt ceiling is a done deal. It’s a procedural issue. So it’s politicking at its best over a nonissue. The debt ceiling has to be raised and we need the money available to function. So that's not an issue.

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