I’ve posted Podcast #133 to the “RobCasts” section of the site. It’s called The Flat-Earth Society Still Believes in Passive Investing.
There was a time when everyone knew that the earth was flat. Why? Because everyone knew it. Everyone knows today that Passive Investing works for the same reason — because everyone knows it. The trouble with following an investing strategy that only works because everyone knows it works is that there is no longer any reason to believe it will work once everyone learns that it doesn’t work. Truly effective investing strategies work because they make sense and because the historical stock-return data shows that they work in the real world.
Rob,
Stock market risk was lowest in Year 2000 since future returns were likely to be low.
This makes you think about the meaning of “risk,” does it not?
The Efficient Market Hypothesis thrives on literary gobbly-gook.
Have fun.
John Walter Russell
I believe that the biggest problem that we have in developing a consensus that Passive Investing can never work is the fact that the “idea” is so transparently dumb (to those who see the errors in it — I mean no offense to the many smart people who bought into the idea during the huge bull). When trying to persuade people to abandon an idea, it helps to be able to suggest a face-saving way for them to explain to themselves and others why for a time they bought into it. There is no face-saving way to justify having once believed in Passive Investing. It’s obviously so that valuations affect long-term returns.
What’s really going on is that people are pretending (without knowing it) to believe for intellectual reasons when the real appeal of Passive Investing is 100 percent emotional. It’s just the latest and greatest Get Rich Quick scheme of them all. Humans have long been inclined to give in to temptations to believe in Get Rich Quick investing schemes (I know this in part because I myself was guilty of believing in Passive Investing myself for a time). What has made Passive Investing so powerfully dangerous an idea is the combination of the pure emotion at the core of the idea with the many layers of intellectual trappings that are used to rationalize a belief in it. The Passive Investing Model puts the intellect in the service of the darkest investing emotions.
The good news is that it’s always darkest before the dawn. I have hopes that by concocting the greatest Get Rich Quick scheme of all time we have found the way to inoculate ourselves from falling for such schemes for a long, long time to come. I believe that we may be on the verge of the Golden Age of Middle-Class Investing (if we can first survive the one more crash needed to bring the Passive Investing Era to an end).
Rob
Hi, guys,
John wrote:
“Stock market risk was lowest in Year 2000 since future returns were likely to be low.”
Was the risk actually low or was the *perception* of risk low, which perception thus fed the investor inflows from “Irrational Exuberance” right on to 2000?
Clearly, the actual risk was different than the perceived one.
Arty
Thanks for stopping by, Arty.
John was being sarcastic. He was quoting the views put forward by Larry Swedroe at the Vanguard Diehards board. Larry acknowledges that valuations affect long-term returns. So I asked him once why stocks would have appeal at a time when their likely long-term return was so low. He said (citing the Passive Investing rulebook) that, since returns were so low, the riskiness of stocks at the time must have been very, very low. Larry was arguing that in 2000 stocks were far, far, far less risky than Treasury Inflation-Protected Securities (TIPS), an asset class that comes with a government guaranty attached.
Larry is not dumb. Larry is super smart. That’s just the problem. If you start with an insane premise, and you possess great intellectual power, you will be able to take that insane premise to all sorts of incredibly dangerous places. The premise of Passive Investing (that valuations do not affect long-term returns) is insane. So, the smarter our investing “experts” are, the more financial damage they cause.
We need to get off the Passive Investing Death Train.
Rob
“…Larry acknowledges that valuations affect long-term returns. So I asked him once why stocks would have appeal at a time when their likely long-term return was so low. He said (citing the Passive Investing rulebook) that, since returns were so low, the riskiness of stocks at the time must have been very, very low. Larry was arguing that in 2000 stocks were far, far, far less risky than Treasury Inflation-Protected Securities (TIPS), an asset class that comes with a government guaranty attached.”
Hi, Rob,
That surprises me. It is Larry who has made the distinction between pereceived and actual risks (and, of course, Shiller). And I believe he was out of Growth stocks by the late 90s. And I know for sure he thought the valuations were too high.
Liked your most recent CASH podcast a lot. Of course, there is such marketing pressure to abandon cash (ravages of inflation, etc.) that many get mauled yet more by the bears as valuations get ignored all the more due to inflationary concerns. And it is a major reason why many are permanently over-invested in equities. Nuts…
Arty
That surprises me.
Here’s the thread, Arty:
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=188720
If you can make sense out of what Larry is saying, I would be grateful if you would help me to better understand his logic. I fully agree that he appreciates the importance of valuations more than most. But some of the justifications he offers for failing to warn middle-class investors of the dangers of Passive Investing do not add up for me.
I think that he is trying to defend the indefensible. If valuations affect long-term returns, the odds that investing passively could ever work for the long-term investor are precisely zero. No?
Rob
Rob wrote:
“If valuations affect long-term returns, the odds that investing passively could ever work for the long-term investor are precisely zero. No?”
Hi, Rob,
Well, that depends on how informed the investor is. As you recall from our earlier discussions where I provided precise data, one can do quite well with set-and-forget allocations—providing there is sufficient quantity of fixed income at ALL times, and investor conviction in the plan—”Plan A”, that is! If one holds 30-40% of tilted, or even non-tilted, equities, and the rest in either ST Treasuries or TIPS (as yields allow), one did quite well from 1972-2008; they suffered very little in the downturns due to low beta exposure and the “flight to quality” boosted their AAA bond returns (especially true in the last 2 bear markets).
BUT
This means making less in bull markets. The problem is most people don’t do that and hold far more equity than they should, or switch stretegies to chase returns (you know all this…). That way they did well in up years but then lost most of it in the brutal bears where they capitulated—and sold low.
The other way is to shift allocation, as you suggest with VII. And if that works, it too usually means making less in bull markets as valuations soar! So, there is a trade-off always and the emphasis is on survival—not losing. (what rational else is there, really, in wealth acquisition?) And these compromise sensibilities comprise truly rational investing, as I see it.
I’ll read over the link you sent. It’s pretty long. But Larry has personally corrected me on the difference between “perceived risk” and “risk”. Shiller too speaks of this.
*My* overall impression is that Larry does pay attention to equity valuations, but views *timing* valuations in equities as a slippery slope—unless they are at extremes like late ’90s. Conversely, he seems to believe that TIPS yields can be more easily timed due to a far more tightly-bounded, “natural range” (between 1-4%, say) and moves his fixed income (almost always TIPS) in different maturities mostly depending on these Yields, and a few other issues.
Larry seems fairly accessible to podcasts and interviews. I first heard about him on Fundadvice. I think it would be a great interview for you to get him. And the “live” interchange would probably clear up a lot of issues and make it current. Even a Q&A interchange could work to similar effect.
Arty
Larry has personally corrected me on the difference between “perceived risk” and “risk”. Shiller too speaks of this.
That’s extremely important. I applaud him for that.
I agree with you that making the distinction between perceived risk and real risk is huge.
Rob
I think it would be a great interview for you to get him.
I agree. I would love to do that.
But Larry and I could be talking things over on a daily basis at Bogleheads.org if he made it plain that he wanted the ban on honest posting on valuations questions that applies there to be lifted and pronto. He has not done this.
I am certainly not anti-Larry. I am more pro-Larry than I am anti-Larry, I think Larry has a lot to offer. But I get the feeling that he believes that there are certain things that he cannot say and remain on the in with certain Passive Investing dogmatists. I think he does not alway say things as clearly as he understands them.
One example is with safe withdrawal rates. Larry made a great statement. He said that the Old School studies are “Garbage-In, Garbage-Out” research. That’s wonderful. But he hasn’t done anything to get the studies corrected. I think that’s part of the job. Millions of people are going to suffer busted retirements because of the demonstrably false claims made in these studies. I think we owe it to our fellow community members to try to protect them from this sort of thing.
I actually think that’s an issue with lots of people, not just with Larry. In InvestoWorld, the idea seem to be to never say that anyone else got something wrong, no matter how dangerous what the person is saying is to investors. I think we have failed to correct lots of errors for many years now because of our reluctance to apply even minimal standards to the “research” that many “experts” point to when justifying their investment claims. My view is that this is something that has to change if we are to get out of this economic crisis and win back middle-class confidence in the stock market and in the “experts.” I think this sort of clubbiness and disregard for the investor who is making use of the investing advice is a big problem.
I agree that Larry has made a good number of positive contributions, however. I’ve enjoyed the conversations I’ve had with him. I think he’s a smart guy and a good guy.
Rob
He said (citing the Passive Investing rulebook) that, since returns were so low, the riskiness of stocks at the time must have been very, very low. Larry was arguing that in 2000 stocks were far, far, far less risky than Treasury Inflation-Protected Securities (TIPS), an asset class that comes with a government guaranty attached.
I read through the thread that you linked to and I don’t see Larry making any such comments. There are over 200 replies so maybe I missed something. Could you give me an example of what you are referring to.
I did find this comment from Larry “When stocks are low that reflects high perception of risk”
This was in Larry’s reply 12-05-2006, 7:11 PM | PostID #2290207. This agrees with the point Arty was making earlier about perception of risk.
I did find this comment from Larry “When stocks are low that reflects high perception of risk”
And he says that the opposite is also so — when stock prices are high, the perception of risk is low.
That’s what makes Rational Investing the opposite of Passive Investing.
When the risk of owning stocks is super-high, Passive leads people to believe that it is super-low. When the risk of owning stocks is super-low, Passive leads people to believe that it is super-high. Passive always encourages investors to do the opposite of what leads to good long-term returns.
This is because Passive is rooted in emotion.
Rational is the opposite. Rational encourages investors to invest realistically because Rational is rooted in the historical data. The historical data doesn’t know anything about smear campaigns or death threats or any of this other junk. The historical data is objective. It does not engage in spin because it wants to avoid the breaking of social taboos. It just tells the story as it is.
Bogle revolutionized investing by rooting his strategies in the historical data. This is why you hear this claim that other investing advisors are offering “financial porn” but Bogle is not. That’s almost so.
What makes it not so is that Bogle failed to change his strategies when the scientific evidence changed, when we learned that the Efficient Market Theory is nonsense and that valuations really do affect long-term returns (just as common sense tells us they must). Had Bogle reformed his advice in response to what we learned from the academic research from 1981 forward, we would have no problem today.
But it turns out that Bogle is another one of those darn humans, you know? He has that same problem saying the three magic words that we have seen a good number of others experience. He hasn’t corrected his advice in the 28 years since we learned that valuations affect long-term returns.
The job today is to help Bogle and all the others learn how to say the three magic words. Then its over. It’s downhill sledding after that. There is no intellectual problem here (the intellectual problem was resolved in 1981). The problem today is 100 percent emotional. It’s the difficulty that many human feel in saying the three magic words.
Rob
Rob,
I finally read through that long thread. There were some very good posts made, but the first half of the discussion (7 pages or so) was far better than the back end, as is often the case. The best written posts by you, and Larry and, also some by John Craig, were very well expressed.
I found Larry’s points familiar, especially the one on perceptions of risk, as Evidence Based Investing mentioned, above.
The valuations nuances are interesting and complex. They would take a lot more discussion. Larry clearly uses valuations, in several ways, and mentions how he uses/used them. Indeed, he likely uses them more frequently than a typical “Bogle-inspired” investor would do. There was much said, so let me see if I have this right at least on these points:
Larry uses valuations to estimate returns **when putting a plan together**. This, interestingly, is what I think you would do–look at valuations and make a plan (comittment to equities) based on that valuation level.
Larry would also **change allocation** (change the plan) after a big and lengthy runup since the *need to take risk* would now be lower (that makes sense as the investor’s need for risk-taking changes he should re-evalaute). On this point, even if you agreed with the need for risk-taking to alter, you differ somewhat, as you would alter based on significant changes in valuations *along the way*. My take is that this *when to change* is the weird place between your two views, and I would understand why you’d be surprised that Larry would not think similarly as you since he also *changes*, though he says for different reasons.
Larry also changed out of Large Growth (very high valuations in Growth) into Value (low valuations asset class). That is something that surprised me, and I’d never recommend, personally, but does seem a one-time event…maybe. (Even Bogle makes alterations at “extremes” but Bogle does not recommend differentiating between Growth and Value.) My guess is that this value/growth swap or tilt holds no appeal to you whatsoever.
Larry mentioned someplace (maybe not in that thread) that low valuations (say PE/10 or lower) mean higher expected returns. This has been true. Consequently, one can allocate less to equities (when at low valuations) to achieve the same goal as if the valuations were higher (say PE/15 or so); this being true, since one would *expect* a runup from the very lows, indeed, maybe a lengthy runup.
The problem (I’m guessing here, so please be patient) that many would have is the reverse inference of this assumption: that being, high valuations require a higher allocation—greater risk/gambling to match the *equivalent* goal. Here, even he would say things get slippery, but he does say it. I certainly would not do this (I’d do something—anything—else including work more hours, etc.) But the logic that applies to the one would seem also to apply to the other. It’s just that I would not do it with the high valuation scenario due to significantly greater Beta risk, and greater Beta risk at high valuations. But is that how you understand his argument?
Arty
Rob,
One more point.
Based on Taylor’s comments, I did some data work and was surprised to find the following outcomes:
If an investor had committed to an allocation at “Irrational Exuberance”, say 1996, and held through 2008, his returns with a 100% TSM allocation would be 5.8%. I was surprised because that investment went through two rough bear markets.
At the very least this shows that one should always have something in the equities—assuming one still needs to take risk at all.
Total Bond returned almost the same at 5.7%. That said, I still think a healthy allocation to quality fixed income is essential.
I think buy-and-hold (with occassional reevaluation of need to take risk) is the more practical approach for most because it is simpler and removes, or limits, valuation guesstimations. You and Larry are not most investors; you are much more informed and care about the subject more than I think most would want to care about it (so I am told by a number of people!), though perhaps more should care about it—a fault of our education system, in part.
But if buy-and-hold is a reasonable approach, and it can be, then the only way **I** would recommend it is to always have lots of fixed income, as I described in earlier discussions, and which data has shown to work, and with far few “wild rides” that test an investor’s “capitulation-risk level,” as some might say. That is, a smoother ride is kinder on the emotions. And emotions matter a lot, which I think, we all agree.
Arty
But is that how you understand his argument?
It appears to me that you are describing Larry’s argument properly, Arty. I personally am not able to make sense out of Larry’s argument.
My view is that the investor should compare the long-term return available from stocks with the long-term return available from the super-safe asset classes. When the long-term return from stocks is not higher, I think it makes sense to go with a lower stock allocation. Why take on the risk of stocks if you are receiving no compensation for doing so?
Rob
his returns with a 100% TSM allocation would be 5.8%.
Is this a real return or a nominal return?
I have seen comparisons of investors who were in stocks vs. investors who were in CDs during that time-period and the CD investors come out ahead. CDs did not provide a real return that high. So I find these numbers confusing.
I think buy-and-hold (with occassional reevaluation of need to take risk) is the more practical approach for most because it is simpler and removes, or limits, valuation guesstimations.
I am grateful to you for sharing your thoughts, Arty. We disagree strongly on this one. I think buy-and-hold is is far, far, far more complicated than Rational Investing (paying attention to price).
Middle-class investors buy thousands of things. They look at price when buying every single thing they buy except for stocks. I believe that this crazy practice is the cause of just about all the confusion and emotional insecurity that millions feel about stock investing. When you take price into consideration, stock investing is easy to understand. Stocks work like everything else. They offer a great deal at some prices, a good deal at some prices, and a horrible deal at some prices. What’s even a tiny bit complicated about that?
All of the confusion and emotional turmoil comes about because “experts” bully people into investing passively and that defies common sense and makes people anxious about their decisions. Then they go to enormous effort to rationalize decisions that cannot be justified logically.
Please don’t fee that you need to agree with me. You do not help us if you do not share your sincere views. I feel obliged to present my sincere views too, however. I see the conventional approach to buy-and-hold (the Passive approach) as the enemy of the middle-class investor. I would say that the less attention you want to pay to stocks, the less you should be willing to go with a Passive approach. Passive i death for the typical middle-class investor.
People are going through a trauma today. No one would be feeling any of this anxiety if we we had all made the proper allocation shifts when we needed to make them. And there would be no economic crisis if we had all made those allocation shifts. My view is that investing passively is like driving a car without brakes — not a good idea for anyone.
Rob
the only way **I** would recommend it is to always have lots of fixed income
You can avoid the devastating losses usually associated with buy-and-hold by going with a low stock allocation at all times. But that reduces your return and delays your retirement. I feel that the way to go is to invest less heavily in stocks when the risk is insanely high and more heavily when the risk is low.
That seems to me the best of all worlds. You get the high returns generally associated with stock investing without having to endure the bone-crushing losses always experienced by Passive Investors.
Rob
“If an investor had committed to an allocation at “Irrational Exuberance”, say 1996, and held through 2008, his returns with a 100% TSM allocation would be 5.8%. I was surprised because that investment went through two rough bear markets.”
Rob,
This was *nominal* return. I am still surprised because an investor would have bought high–at the very moment Irrational Exuberance was sounded. I had expected a large loss.
Of course, I do not recommend such an allocation–ever.
——
While I agree people do indeed care about the price of most things, it does not follow that they necessarily want to spend time scrutinizing market valuations. In fact, many seem simply disinterested in their 401k statements until they see a big loss. I was recently looking at some research on that, which differs from DIY investors who tend to hurt themselves by selling low and buying high. Of course, no matter the approach, better education on proper investing principles is clearly warranted. And valuations should be part of that education.
I disagree that equity allocation shifts are *necessary* (unless one wishes to take more or less equity risk). There are any number of buy-and-hold (set-and-forget) “passive” approaches that would have provided a positive investing experience (relatively smooth ride) and also achieved very good returns. These are statistical facts, easily researched in backtests (some of which I provided). BUT I say this with the important asset allocation provisos detailed here:
http://arichlife.passionsaving.com/2009/07/14/the-smart-investor-must-be-willing-to-make-much-less-in-boom-cycles/
Here’s another example of a buy-and-hold allocation: Take a 40% equity allocation split between large cap, and small cap value, and internationally diversified the same. Have the fixed income as 60% Intermediate Treasuries. Since 1972 here’s what that portfolio did:
Cost-adjusted gross return 10.63% (nominal returns)
Standard Deviation 8.89%
Worst loss: 2008 -8.36%
And in the last Bear Market:
2002 +2.66%
2001 +2.31%
Isn’t that a very nice return for risk taken. Most importantly, it accomplished that with a pretty smooth ride. Just one stellar year (1985: 30.26%) , but it had a great emotional journey that helped greatly to manage one’s capitulation-risk.
Now, your preference is to shift allocations in response to valuations. There is a cleanliness to that notion, and more data may yet show it to be a clearly superior method. But it does require greater interest, skill, and/or good guesses, and greater knowledge (specific education, not intellect) than many presently possess, and greater attention and more judgments to be made over time—because it must.
You and I and Larry and some posters might want to study the information that informs such decisions, and take that time, but I doubt most people do. Then again, that might be part of the education problem, but even so, I believe it represents most people—at present.
I don’t say there is one right approach here. And, as I described, your VII and what I claim is sensible buy-and-hold, both share the common feature of making potentially less in “boom cycles,” when valuations are higher. But one can still earn good returns over time with a sensible buy-and-hold approach.
Arty
Rob,
I’d like to see a statistical example posted that showed how an investor—using the information available at that time—shifted allocations in response to valuations.
It might cover the last 30-40 years. It could use just the S&P 500 with different % commitments. It would require a formulaic model, of course, responding with pre-determined commitments to various PE 10 levels (known at that time).
But you could explain that the formula/model represents just one implementation of the VII strategy, and that actual commitment would vary per investor. I don’t think this would take long to do. I do think that such an example would be helpful for people to understand your VII.
Arty
I had expected a large loss.
It is a large loss in a long-term sense, Arty.
When you can get a better return from a super-safe asset class, you want to be in the super-safe asset class. It is true that the difference might only be a small amount in the short term. But the compounding returns phenomenon is going to cause that differential to grow and grow and grow over time. At the end of 30 years, the Valuation-Informed Investor is going to be far ahead.
Think about what Bogle says about limiting costs. You might see a 2 percent reduction in fees by going with an index fund rather than a managed fund. Some react by saying that 2 percent is not a big deal. But Bogle insists that it is. He is right. The reason why is compounding.
John Walter Russell presented research at his site a few days ago showing that the increased return obtained by the Valuation-Informed Indexer is about 2 percent per year. Some are going to say “oh, it’s only 2 percent, what’s the big deal?” Getting a 2 percent better return every year of your investing lifetime is a big deal. It adds up, It compounds.
Valuation-Informed Indexing is the opposite of most “schemes” you hear about in the investing realm. With most, the appeal is emotional. What strikes the emotions as a big deal are big numbers: “We will teach you how to crush the market!” What works in the real world is slow, steady progress. Investing rationally (taking valuations into consideration when setting your stock allocation) gives you an edge every year of your investing life. Each year’s gains might be small. But the long-term effect is breathtaking.
The best way to experience this for yourself is to run tests on the Scenario Surfer. When you do that, you can see with your own eyes how a few rational choices make all the difference in the world over the long run. Valuation-Informed Indexing is not a dramatic strategy. But it is amazingly effective for those with the patience to let it work its magic.
Rob
While I agree people do indeed care about the price of most things, it does not follow that they necessarily want to spend time scrutinizing market valuations.
There is no need for any investor to do this.
Once a consensus is reached that Passive Investing is the most dangerous investing idea ever let loose on the world, the media will be reporting the numbers generated by The Stock-Return Predictor (and a thousand other similar calculators) on a daily basis. You will turn on your radio and the woman will say “The Dow went up another 100 points today, bringing the most likely long-term return for stock down to a horrible 1.5 percent real. Yuck!” People will get the idea.
The numbers generated by The Stock-Return Predictor are the price tag of the stocks we buy. To buy stocks without looking at that calculator is like buying a car without ever once asking the price. It is insane.
There is only one reason why every single investor in the world does not check the likely return on stocks before putting money on the table. The reason is that it offends the Passive Investing advocates for us to do this. Passive Investing is pure dogmatism, pure mindlessness. All Passive Investing advocates view knowledge about how to invest effectively as a threat. That’s what needs to change.
Once Passive is overturned, there is no problem. We will all just share what we know and the media will report to us what we need to know. It will all be as simple as can be. When the likely return on stocks drops so low that they are not worth investing in, most investors will naturally sell. That will bring the price down to reasonable levels again. There will be no more stock crashes. There will be no more economic crises caused by stock crashes. There will be no more wasteful stimulus bills enacted to deal with economic crises caused by stock crashes.
It is the insane idea that you don’t need to take valuations into consideration when buying stocks that causes all the trouble. Get rid of Passive Investing and you get rid of 80 percent of the trouble that humans have ever experienced with stocks. Passive Investing is the enemy of the middle-class investor (I question whether it is even a good thing for The Stock-Selling Industry).
Rob
There are any number of buy-and-hold (set-and-forget) “passive” approaches that would have provided a positive investing experience (relatively smooth ride) and also achieved very good returns.
You gave some examples of these in an earlier thread, Arty. I think the examples you gave made sense. But these strategies seem to me to be far more complicated than Valuation-Informed Indexing.
For the average investor, we need to keep things simple. It’s hard for me to imagine a message more simple than “you need to buy stocks in the same way you buy everything else — you need to look at price.”
The ONLY complication that I am aware of is the stress and confusion that has been generated by the massive promotion of the Passive idea by The Stock-Selling Industry. Take that away and everything is clear and plain and good and simple and effective. Stocks are great at some prices, good at some prices and horrible at some prices. Easy peasey.
Rob
But you could explain that the formula/model represents just one implementation of the VII strategy, and that actual commitment would vary per investor.
We’ve got something better available right now, Arty — The Investor’s Scenario Surfer. This calculator lets each investor make her own choices (no formulas needed!) and see how they work out over the course of a 30-year returns sequence.
If she doesn’t feel that just one scenario is sufficiently representative of the possibilities she is likely to face in the real world, she can run a second scenario and then a third and a fourth. If she really wants to nail things down, she can then move to The Investment Strategy Tester and see how the strategy she favors performs compared to a rebalancing strategy in 1,000 tests!
It is better to use a calculator and enter your own choices as to allocations than for some Guru to presume for you what choices you “should” enter and then tell you how those particular choices (and only those particular choices) would work out. I don’t believe in Gurus. There is no Guru that can give right answers for each and every one of us. I prefer calculators because calculators take the power away from the Gurus and put it in the hands of the middle-class investors trying to figure this stuff out. I see the calculators as tools of empowerment.
Rob
It might cover the last 30-40 years.
I’ll break down and give you one crude illustration of how the concept of Valuation-informed Indexing works.
From 1975 through 1995, both Passives and VIIs could go with a high stock allocation. Say 70 percent.
From 1996 through 2008, prices were insane. Passives stuck with 70 percent. VIIs dropped to 20 percent.
From September 2008 forward, both are at 70 percent again.
The Valuation-Informed Indexers are ahead. And the Passives can never catch up because the VIIs and the Passives are now at the same stock allocation and thus are going to obtain the same results from this point forward. The edge obtained by investing rationally (taking valuations into consideration) is going to grow and grow and grow over time as compounding works its magic. The VIIs are going to be able to retire many years sooner.
Here is a link to a graphic that shows that VII has ALWAYS beat buy-and-hold (the commentary says that buy-and-hold is ahead for the period from the 1990s forward but this was prepared prior to the crash and thus this is no longer so):
http://www.financialwebring.org/forum/viewtopic.php?t=106998
Valuation-Informed Indexing ALWAYS is better on a risk-adjusted basis. It is not even possible for the human mind to imagine a scenario in which it would be a bad idea to take price into consideration. Can you imagine a situation in which it would be a bad idea to ask about the price of a car you were buying before you signed the papers? The idea is INSANE. Passive Investing is INSANE.
I need to state it strongly to get the essential point across. Many people seem to think that there must be something to this Passive Investing nonsense because there are so many “experts” who have endorsed it. No! They made a MISTAKE. They jumped to some hasty conclusions when they were looking at some data. Everything that we have been told about investing for the past 30 years is the result of this huge MISTAKE (it wouldn’t have become so huge had we only corrected it when we first learned about the error — that was in 1981.
Humans make mistakes. That’s not a biggie. The biggie has been the unwillingness to correct the mistake. The unwillingness to correct the mistake is killing us. The unwillingness to correct the mistake has made intelligent discourse on how to invest effectively impossible. The unwillingness to correct the mistake is in the process of sending the entire U.S. economy over a cliff.
Holy moly!
Rob
I don’t think this would take long to do.
It wouldn’t take long to do, Arty. The question is — Would it make any difference?
There is now a mountain of evidence that valuations affect long-term returns. There has never been a sliver of evidence that they do not. What is it we are trying to show?
People “believe” in Passive Investing for emotional reasons. There has never been any basis in logic for it. Logical presentations do not influence the emotions. It just doesn’t work that way.
The one thing that has been a big help has been the price crash. That affected people emotionally. The historical data indicates that another stock crash is likely sometime over the next few years. I believe that the next stock crash will be the final nail in the coffin of Passive Investing.
If we experience another crash, we are going to have to rebuild our economic system in the aftermath. Those who are concerned about the future of our country should be working today to provide people with the materials they will need to learn how to invest rationally when enough open up to the idea for us to be able to overcome the destructive efforts of the Goons.
If we survive that crash, things will be looking very, very good indeed on a going-forward basis (we have 30 years of wonderful research on the realities of stock investing that we have not been permitted to discuss because it would hurt the feelings of the “experts” for us to do so). But surviving that crash is not going to be an easy business. Another 50 percent drop in stock prices is going to put millions of middle-class investors in serious pain. My focus is on developing materials to help us survive that transition.
Rob
Arty said: “There are any number of buy-and-hold (set-and-forget) “passive” approaches that would have provided a positive investing experience (relatively smooth ride) and also achieved very good returns.”
Rob said: “You gave some examples of these in an earlier thread, Arty. I think the examples you gave made sense. But these strategies seem to me to be far more complicated than Valuation-Informed Indexing.”
Rob,
My example (I did not invent it, of course), is not complicated and in fact very simple. With VII are using a minimum of 2 funds always (at least 1 stock fund and 1 bond or MM or CD holding area for the non-stocks). My method avoids the common trap of using far too much weight in equities as is typical with many B+H approaches.
1. I use perhaps 3-4 funds to implement the strategy (which *includes* the bond fund for the portion not invested in stocks.)
2. Mine are all INDEX FUNDS (as yours are), so the cost to me is low as possible. If using ETFs, all I pay is a no-load ER of around .15. Super cheap, so my implementation is not more expensive.
3. I would be diversified internationally (as almost any investor should be) and receive higher expected returns and greater diversification than using just the S&P 500. I never had to look at valuations. (Of course, VII could do that too.)
4. Basically, I set this allocation *once* and rebalance maybe every year or two. That is damned simple, and arguably simpler than having to alter valuations periodically (like Norbert’s implementation in the other post)! But both approaches are “simple,” and I think most people would agree on that.
And I received excellent returns over the period we studied (say, 1972-2008).
There are many irrational ways to invest. But there are several rational approaches too. I say choose one flavor among the rational approaches that speaks to the individual’s personality. Individual emotions and preferences matter bigtime. This is described very clearly in a post by “Treetops” in the link you provided above.
Arty
Rob wrote: “Here is a link to a graphic that shows that VII has ALWAYS beat buy-and-hold:”
http://www.financialwebring.org/forum/viewtopic.php?t=106998
Rob,
I saw this Norbert post last year (his “exploration,” as he says). In this OP, Norbert freely admits that he still counsels a “buy-and-hold” approach. As described later (page 2) he does not recommend the Scenario Surfer. I agree with him and much prefer the VII approach taken by Norbert, which chart seems to impress you since you posted it. I thought Norbert provided a fair algorithm, and he and I both agreed that was needed.
Still, I thought it an interesting exploration into VII of the sort I was asking about earlier. Norbert used a 60/40 comparison for the benchmark which is fair.
Norbert uses more allocation “steps” (every 3 integers in PE/10 means a 10% equity allocation shift) than I would, and I would never be 100% out of or into equities.
Norbert’s VII allocations are more aggressive than I prefer (and probably lots more than Shiller would prefer; for example, 70% at PE 14), based on his comments in interviews, but that is just individual risk/flavor.
My opinion is that 60/40 gets hurt too much in bear markets and tests investor resolve more than I would like. But 60/40 is a common benchmark, and Norbert’s was a fair implementation, and you must start someplace. Norbert also mentioned the problem with “tracking error [regret]” but I accept that with my portfolio and VII.
Norbert made an interesting post. I wonder if he ever did more work on this.
Arty
My sense is that our difference is one of semantics.
You are saying that “buy-and-hold” can work. And you’re giving an example of a strategy that can fairly be described as “buy-and-hold” and that can properly be described as Rational. I of course agree that that particular strategy can work.
But I don’t feel at all comfortable in saying that “buy-and-hold” can work in general because most people hear the phrase “buy-and-hold” and think of the sorts of strategies that have been advocated by Passive Investing advocates in recent decades. I see Passive as the opposite of Rational. So I obviously cannot endorse something that is properly characterized as Passive.
I believe that the strategy you are describing is more Rational than it is Passive. It does not call for allocation changes. In that sense it is “Passive.” But there is no dogmatism inherent in this strategy. There is none of this stuff where the people following it would need to become enraged if anyone tried to tell them what the historical data says. So they are able to look at things reasonably and admit mistakes and make changes when needed and so on. All of that is characteristic of the Rational model and not the Passive model.
What I feel you are really doing is recommending a nominally Passive strategy for Rational reasons. When you’re doing something Passive for Rational reasons, it can work. But I view a strategy of being Passive for Rational reasons as more Rational than Passive. I can see merit in the strategy. But I would be disinclined to call it “Buy-and-Hold” because that term comes with a lot of unfortunate baggage at this point.
One way I try to get around this in some of my posts is to refer to some strategies as representing “The New Buy-and-Hold.” The New Buy-and-Hold is long-term investing without all of the craziness that has become characteristic of advocacy of the Passive concept in recent years.
Rob
Norbert freely admits that he still counsels a “buy-and-hold” approach. As described later (page 2) he does not recommend the Scenario Surfer. I agree with him and much prefer the VII approach taken by Norbert, which chart seems to impress you since you posted it. I thought Norbert provided a fair algorithm, and he and I both agreed that was needed.
I have puzzled and puzzled and puzzled over this and have never been able to make even the tiniest bit of sense out of what Norbert was up to when he put forward that thread-starter.
Norbert has a long history as one of the most viciously abusive posters we have ever seen at our boards. And he includes a good bit of trash talk in the thread-starter. That part lines up.
But the graphics and the commentary on them are terrific, some of the best material we have even seen in seven years of discussion. We all owe him a debt for that, in my assessment.
The material he put forward obviously excited lots of people. So they asked lots of questions. That so enraged him that he supported a move to block further discussions, move the thread to a section of the site where few would see it and ultimately to impose a ban on further honest posting on valuations.
Huh?
I simply cannot make sense of this behavior. If he is trying to block honest posting, why create the great graphic and commentary and then share it with people? If he is trying to help people learn, why the trash talk and support for the ban on honest posting?
My guess is that this was the Goons’ way of trying to work out some sort of “deal” with me. I would be happy to let them know whether I could go along with a deal if I could figure out what the terms are. But I was not able to figure them out in this case (presuming that that really is what was going on).
My guess as to the terms is that they want me to agree to post dishonestly on safe withdrawal rates; my sense is that that has always been the big sticking point. My sense is that the reason why they are not willing to just come out and describe the terms is that even the Goons appreciate that insisting that we all post dishonestly forevermore on the numbers that people use to plan their retirements is just flat-out bonkersville. So they beat around the bush hoping that I will put forward some sort of suggestion that I think the Old School studies are okay.
As if that would work! Is there anyone who would believe me if I started saying today that I think the Old School SWR studies are analytically valid? I think it’s fair to say that the train left the station re that one about seven years ago.
Norbert posts at the Goon Central board and I asked him once what was up with that thread-starter. He refused to say.
I view this as one of the strangest incidents in a saga chock full of strange incidents.
Rob
Norbert made an interesting post. I wonder if he ever did more work on this.
My guess is that he has done more work behind closed doors.
But he hasn’t posted it for fear of the embarrassment he would suffer in being required by logical consistency to ban himself from the board he owns. That always looks funny.
Rob
Rob wrote: “You are saying that “buy-and-hold” can work. And you’re giving an example of a strategy that can fairly be described as “buy-and-hold” and that can properly be described as Rational. I of course agree that that particular strategy can work.
But I don’t feel at all comfortable in saying that “buy-and-hold” can work in general because most people hear the phrase “buy-and-hold” and think of the sorts of strategies that have been advocated by Passive Investing advocates in recent decades. I see Passive as the opposite of Rational. So I obviously cannot endorse something that is properly characterized as Passive.”
Rob,
Exactly. I am talking about a specific approach to buy-and-hold, that some might label, “conservative”. It is “passive” in the sense that that I don’t alter the components. It is “rational,” because it respects what can happen in investing, especially from an emotional viewpoint.
I agree that many published discussions of traditional buy-and-hold (passive), plus general “bullish talk” in the media, etc., have led to implementations (asset allocations and strategies) that, in my opinion, are less likely to succeed than what I now advocate. They are less likely to succeed because many investors will bail-out on them (either wholly, or switch strategies and performance chase—all at the wrong time) when the bear hits them hard.
With “my” approach, the bear does not do that hence, so, at least in a behavioral sense, I stand a better chance of surviving. I must say that I arrived at this understanding largely through Larry’s conversations on asset allocation, which recognize the behavioral problems.
So yeah, I suppose this is the “new buy and hold,” though the strategy could have been employed at any time by a wise investor. In truth, marketing hoopla has worked against such wisdom, and will do so again.
But I like that you draw the distinction between the two Buy-and-Hold (passive) approaches. I think doing so strengthens your overall position, whether you chose to use buy-and-hold or VII
Arty
I must say that I arrived at this understanding largely through Larry’s conversations on asset allocation, which recognize the behavioral problems.
Thanks for saying that,. Arty. I have criticized Larry from time to time. I am happy to see someone presenting the other side of the story in compelling fashion.
Rob
Rob,
I hear you about the “goons” and banning “honest posting.” You speak of this often, If that is happening, it is a problem.
But I suppose I never experienced this and still see posts on Bogleheads that discuss valuations, sometimes extensively and with vigor. Larry has been part of some of those discussions as he uses valuations with equities *and* fixed income. In fact, I recall one post that said something like: “Hocus was right”. That post was not deleted, as I know I read it.
Providing one is not being abusive (however determined by the Mods), I see no reason to ban posts.
As to Norbert, he seemed quite confident in his explications, so perhaps he just lost interest (felt he had answered his own “exploration”) or made posts I (we) have not yet seen.
Arty
I suppose I never experienced this and still see posts on Bogleheads that discuss valuations, sometimes extensively and with vigor.
You experience it every day, Arty.
When these discussions of valuations appear (and you are absolutely right that there is good stuff in them), you do not hear the voice of Microlepsis or Retired at 48 or John Walter Russell or Rob Bennett or JohnDCraig. So you have no way of knowing how those discussions would be going if the “leaders” of the board were open to the idea of permitting honest posting by those who know enough about valuation questions to post effectively on them and who possess enough courage to do so.
And the scores of posters there who have not been banned even though they possess a strong understanding of valuations do not share all that they know. They have witnessed the Smear Campaigns. They have witnessed the bannings. They know that there are lines that they cannot cross so they share a little of what they know and hold a whole lot back for fear of what the “leaders” will do to them if they “cross” them.
To ban posters solely because they are highly informed and popular and make points that you are not able to respond to effectively is an act of intimidation. Intimidation and learning experiences do not go together. When the “leaders” of a board ban posters solely because they have posted honestly and effectively, the integrity of the board discussions from that point forward are compromised in a very serious way.
There’s lots of good stuff posted at Bogleheads.org. I link to it here frequently. But I believe that all who have gained from the discussions held there owe it to the community that congregates there to do what they can to help the board with its biggest problem — the ban on honest posting on valuations. I will alway be happy to help build that community. I will never betray my many friends there by failing to speak up in strong language in opposition to the ban on honest posting. A board community that has given up its integrity has given up something of considerable importance, in my assessment.
My blog entry for today is the text of an e-mail that I sent to John Bogle yesterday asking for his help with this matter.
Rob
I recall one post that said something like: “Hocus was right”. That post was not deleted, as I know I read it.
I saw that.
The post was not deleted. But neither was the ban on honest posting reversed.
I was proven to be right about safe withdrawal rates when John Walter Russell posted his first sensitivity test. That was on Day Six of the discussions. That was May 18, 2002.
How many community members have suffered busted retirements because those studies were not corrected when we first learned of the errors in them? The number is in the many thousands. And the Boglehead.org board to this day does not permit community members to warn people about the errors in the Old School retirement studies and about the failure of the authors to correct those studies for over seven years since the errors in them became public knowledge.
I want no part of an effort to deceive people about safe withdrawal rates or to intimidate people into not posting honestly on safe withdrawal rates. Many of the people in the various board communities are friends of mine. A busted retirement is a serious life setback.
Rob
Providing one is not being abusive (however determined by the Mods), I see no reason to ban posts.
The first six words and the last six words make perfect sense.
The middle five words are sick (no personal dig intended, Arty, but this needs to be said).
Slavery was banned in the United States a long time ago.
We have had thousands of people express a desire that honest posting on safe withdrawal rates and other valuation-related topics be permitted on our boards. And you say here that moderators are justified in running vicious Smear Campaigns against long-time, popular community members solely because they dared to “cross” them by posting honestly on a retirement-planning question? To agree to post dishonestly solely because a board moderator demands it of you is to become an intellectual slave to that particular thug.
Not this boy. Find someone else. No can do. I can’t go for that.
I will not post dishonestly on safe withdrawal rates. I urge all other community members to refuse to do so. Agreeing to post dishonestly is a lose/lose/lose/lose/lose/ Even the thugs who demand this lose when we go along (it is obvious from the behavior of many of the Goons that they would like to be able to think of themselves as people of integrity once again).
I am not a slave to Mel Lindauer and I am not a slave to John Greaney and I did not spend years of my life building these boards so that my friends in these communities could become slaves to them.
Any moderator who makes it the price of admission to an investing discussion board that community members agree to post dishonestly on the numbers that his fellow community members use to plan their retirement is not fit to moderate that community and should be removed by the community at large.
You are wrong, Arty. It’s not a close call.
Rob
As to Norbert, he seemed quite confident in his explications, so perhaps he just lost interest (felt he had answered his own “exploration”) or made posts I (we) have not yet seen.
He continues to post abusively at the Goon Central board. If he has lost interest, it is only in the substantive side of things and not in the ugliness that has been employed to destroy so many of our board communities.
My thought is that we should encourage the Goons when we see them take positive steps and discourage them when we see them slide deeper into the muck. Had the entire board community stood up to Norbert when they first saw him post abusively, my guess is that that would have been the last time we would have seen such behavior from him. He is responsible for his own acts. But I think it is fair to say that the rest of us let him down big time by our tolerance for his trash talk.
I like to think that I have been an exception. I have asked Norbert to put a lid on the sewage on numerous occasions (including in the particular thread that is the focus of our discussion here).
Rob
Rob,
I meant posts or things that are clearly entirely irrelevant to the board’s topic or spam or clear advertising that a good moderator should have some ability to stop. Surely there must be some rational control of relevancy. That is what I meant.
I’m not talking about banning *relevant* (investing) content in the sense we have discussed it. And if that has occurred, it is wrong.
Arty
if that has occurred, it is wrong.
We obviously need to organize a group of community members to go to the various boards that have imposed a ban and insist that it be reversed. The first step to doing that is to present the case in as clear and effective a way possible so that all community members are convinced beyond any reasonable doubt that action is required.
Here is a link to the e-mail that I sent to my congressman (Rep. Frank Wolf) setting forth the basic facts of the Campaign of Terror led by Mel Lindauer against the indexing community and by John Greaney against the Retire Early community:
http://www.passionsaving.com/internet-harassment.html
Here is an article containing 101 snippets of community members expressing a desire that honest posting be permitted:
http://www.passionsaving.com/investing-discussion-boards.html
Is there anything else that you can think of that I could provide that would give you and all others the certainty you need to feel comfortable taking action to protect the community from the internet predators that have been doing it such harm for seven years now? My goal has been to present enough material to make the case 100 percent solid to any halfway reasonable person without pushing it so hard that it becomes annoying or obnoxious.
Rob