I recently received an e-mail from Coleen saying:
“I have recently begun researching/learning about investing. I was hooked on the idea of index investing, but something inside me made me wonder…”too good to be true?” and “What’s the downside?”. I happened onto your site and “Value-Informed Indexing” seems to make sense. Here’s my question..I was looking into 3 index funds from Vanguard (an international, a total stock market and a bond index fund) and I’m wondering if “Value-Informed Indexing” could be applied within these 3? Basically investing heavily in the international and total stock market funds now and when they go up to transfer a percentage over to the bond fund? Am I understanding or would I need to be in something other than the bond index funds? Also, I was wondering how you are doing today and if you have posted since the market turned in the past few months?”
Set forth below is the text of my response:
Thanks for visiting the site and thanks for writing.
For my thoughts on the market crash, please click on the “A Rich Life” button at the left side of each page of the site. That’s where my blog is located. I’ve been posting every business day. My focus in recent months has been on recording podcasts. So you could also click on the “Robcasts” section and just listen to whatever titles seem of interest. I’ve commented extensively on the price crash in the first 50 podcasts.
I believe that what you are asking is — what should I be invested in as the alternative to stocks at times when stock prices are too high? The conventional recommendation is to go with bonds as the alternative to stocks. My preference is for Treasury Inflation-Protected Securities (TIPS) purchased at times when they are providing a solid long-term return. But I see this as being a judgment call. A case can be made for bonds in some circumstances. To work through the points pro and con TIPS or bonds would take an entire article (I’ll put that on my list for the future).
The analysis is — which option best counters stocks? I like TIPS better because what I am trying to counter is the unpredictability of stocks (TIPS are the most predictable asset class I can think of). However, I haven’t worked this particular question hard enough to have a strong opinion. I tentatively prefer TIPS as my stock counter. But I can see circumstances in which bonds might make sense. It might also be possible to use both as counters.
You’ve asked an interesting question that we have not explored in much depth. You might want to direct your question to John Walter Russell as well. John is my partner in development of the calculators. His site is www.Early-Retirement-Planning-Insights.com. He has a Letters to the Editor section. I know he would be glad to take on your question and I would like to hear what he says about it. My guess is that he might have a better informed take on this particular question tham I am able to offer. You’d be helping other community members by asking him about it as I am sure that there are others who are also wondering about this.
Welcome to the Financial Freedom Community!
Note: I subsequently recorded Podcast #79, What Should You Be Investing In When You Aren’t Investing in Stocks?