Buy-and-Hold Is Dead — These Studies Prove It!

I’ve posted (in two parts) an article entitled Buy-and-Hold Is Dead — These Studies Prove It! to the Valuation-Informed Indexing section of the site.

Juicy Excerpt: Buy-and-hold is dead. The Stock-Selling Industry has made millions promoting it. But buy-and-hold investing cannot survive the wealth of academic research showing that long-term timing always works.

The Stock-Selling Industry has long promoted the dangerous idea that it is okay for investors to stick to a single stock allocation at all price levels by pointing to academic research showing that short-term timing (changing your stock allocation with the expectation of seeing a benefit for doing so within six months or a year) never works. However, the same historical data that shows that short-term timing never works also shows that long-term timing (changing your stock allocation in response to big price swings with the understanding that doing so may not yield benefits for five years or even as long as ten years) always works. Thus, it is every bit as accurate a statement to say that “timing always works” as it is to say that “timing never works.” Which statement holds depends on what form of timing it is that you are employing.

Set forth below are links to 20 stock valuation studies either showing directly that long-term timing works or showing that valuations affect long-term returns and thereby suggesting that long-term timing must work (if valuations affect long-term returns, it obviously does not make sense to go with the same stock allocation at dramatically different valuation levels).

Comments

  1. DRiP Guy says

    From your own first source:

    “Conclusion

    In this situation a broad judgment of our position in history, of the uniqueness of recent technological advances and investment patterns, and of the state of market psychology assumes more than usual importance in judging the outlook for the stock market.

    There is no purely statistical method to resolve finally whether the data indicate that we have entered a new era, invalidating old relations, or whether we are still in a regime where ratios will revert to old levels.”

  2. Rob says

    I think that’s a good point, Drip Guy.

    I gain confidence in Shiller’s work when I hear him say something like that.

    Rob

  3. DRiP Guy says

    Your second source claims:

    ” I reconcile my findings with the literature that finds poor power in long-horizon return forecasts, and with the literature that notes the poor out-of-sample R2 of return-forecasting regressions. ”

    It is questionable whether Cochrane achieved his goal; especially since he claims an additional 30 years data that moved the ‘power’ of the test only barely was actually significant. To me, the most important fact in his paper is the title itself — he is hoping to use the ABSENCE of a supposed return to historical PE10 type ratios to be evidence that they *must*…. eventually. We shall certainly see, but even if they do, in the interim, I think you will find index investors who had the fortitude to invest early and often, and stay the course, letting the power of compounding, dollar cost averaging, and diversification work their inexorable wonder, still made out quite well relative to the risk free alternatives, or worse, to not investing at all, and continuing to consume with those dollars not invested.

  4. DRiP Guy says

    “Study” #3 I shall not mention at all at this time, in deference to recent events, but I think you already well-know my take.

  5. DRiP Guy says

    Study #4 :

    “Our argument will show that, barring unprecedented economic growth or unprecedented growth in earnings as a percentage of the economy, real stock returns will probably be roughly 2-4%, similar to bonds.”

    Rather than exhaustively test their conclusions and findings, let’s just take this one as if it were proven — equities will likely NOT dramatically outpace commercial paper on a going forward basis, at least for some significant period. I would merely reply that this has happened often in history, although it’s true that the ‘stock rabid’ tend to forget this, but I would assert that buy and hold indexers, who generally espouse a good mix of stocks and bonds, would still do well to hedge their bets for all of the following: returns, volatility and lack of (or negative) correlation in the types.

    Rob, “running for the hills” for a few decades, just based on PE10, is folly. It is now, it always has been. These papers do NOT prove, or assert otherwise. They merely point out interesting and potentially useful facts, data, and anomalies, NONE of which, IMHO, either alone or collectively, make the case that a person can now somehow time the market and jump into and out of stocks with a hope to miss the down times and gain on the boon times.

    You would do well to eat your fruits, nuts, vegetables, proteins, and perhaps even a little desert if you want the best chance of a well balanced diet.

  6. Rob says

    I think you will find index investors who had the fortitude to invest early and often, and stay the course, letting the power of compounding, dollar cost averaging, and diversification work their inexorable wonder, still made out quite well relative to the risk free alternatives

    Not if you do the math, Drip Guy.

    We have been to a P/E10 level of 25 four times in U.S. history. The average price drop on those four occasions was 68 percent real. That’s a wipeout according to any reasonable take.

    The idea that it is possible for Passive Investing to work for the long-term investor is the most dangerous idea that has ever been advanced in the history of personal finance.

    My sincere take.

    Rob

  7. DRiP Guy says

    “Study” #5:

    “Abstract:
    A bull market, and the incentives of those who make their living from bull markets, can create its own form of logic. This book explores some of the stories that encourage the purchase or retention of stocks or mutual funds and the logic behind these stories. Some of these stories are honest attempts to explain new phenomenon, and may or may not prove true going forward. Some seem to be unintended falsehoods that come from an incomplete or lazy application of economic reasoning. Finally, some seem less well intended. The stories, and the logical analyses behind them, generally originate with Wall Street (both sell side and buy side), sometimes riding the coattails of academia, and are often readily absorbed by investors engaged in wishful thinking. Such wishful thinking has led to a stock market, and the growth/tech sector of the market in particular, that is priced so expensively that even very long-term investors will probably end up disappointed, perhaps greatly so. ”

    Again, rather than debug and take exception to his approach, analysis or conclusions, I would simply say “So what?” People who read this decade-old work (as were most of your cited papers) in 2000 probably needed to hear that those who EXCESSIVELY focused on TECH stocks were likely to be disappointed, because there had been an obvious ‘bubble’. Well, Duh. This actually goes to the point of supporting buy and hold indexing, versus sector selection or rotation, or trying to pick individual stocks, etc. Again, the philosophy of Bogle — to take the entire market, and to mix that with a healthy mix of bonds, is not even close to indicted by this or the other papers cited.

    Once again, Rob, you have gathered the fruits of others labors, and misconstrued and or misapplied them. I could go through the rest of the papers, but I’ll just cut to the chase and say — To the title of this entry:

    “Buy and hold is dead and these studies prove it!!!!”

    I reply: “Hardly.”

  8. Rob says

    “Study” #3 I shall not mention at all at this time, in deference to recent events, but I think you already well-know my take.

    I do.

    It is a repulsive take.

    You degraded yourself by your participation in the Campaign of Terror against the Retire Early and Indexing discussion-board communities, Drip Guy. Those who out of fear of you and the other Goons failed to speak up against the threats of physical violence against community members who “dared” to post honestly degraded themselves by their silence in the face of such tactics.

    I oppose the Campaign of Terror. I support the right of every community member to post his or her sincere views. I applaud the published rules that purport to protect this important right. I encourage our board communities to insist (not ask!) that the site owners of the various boards and blogs honor their promises to us by enforcing the published rules in reasonable ways.

    The economic crisis has done harm to millions of fine people. All who have benefitted from our economic and political systems should be willing to do what the can to protect the American way of life from further damage by the marketing campaigns of The Stock Selling Industry and from the abusive tactics of the Passive Investing dogmatics who staked their life savings on a belief in the marketing slogans that were employed to part them from their hard-earned money.

    Rob

  9. Rob says

    buy and hold indexers, who generally espouse a good mix of stocks and bonds, would still do well to hedge their bets for all of the following: returns, volatility and lack of (or negative) correlation in the types

    Rational Investing is all about a hedging of one’s bets, Drip Guy. We are of course in 100 percent agreement re that one.

    Where we disagree is where you say that Passive Indexers “generally espouse a good mix of stocks and bonds.” Huh? Passive Investors do not change their stock allocations when prices go to insanely dangerous levels. The stock allocation is the thing they are passive about.

    Rob

  10. DRiP Guy says

    “repulsive…You degraded yourself…Campaign of Terror… you and the other Goons… threats of physical violence…”

    Rob, I consider that the most abusive post I have ever read on the internet, and was totally unprovoked, off thrad topic, and uncalled for, especially in relation to what you were replying to. You, sir are a liar, a hypocrite, and a sick puppy, and shall never reap the benefit of my posting here again.

    Good day.

    DRiP Guy

  11. Rob says

    Rob, “running for the hills” for a few decades, just based on PE10, is folly.

    Putting most of one’s retirement money in the asset class offering the better long-term return is not folly. Drip Guy. it is Rational Investing.

    Putting your retirement money at grave risk of suffering a 68 percent loss of value because of your “belief” in a marketing slogan advanced by the very industry that makes money from persuading you to make this choice is folly.

    It is understandable folly. It has been known for many years that humans are more influenced by the repetition of a message than they are by the logic or lack thereof in the message. So I don’t say that you are foolish, just that you are human. But I do say that the idea that there could ever be an alternate universe in which we could all sprinkle pixie dust in the air in the hope that at last it might all turn out different from how it has ever turned out before and that that might make a difference and for the first time in history Passive Investing might provide good long-term results is indeed folly.

    There is a reason why the historical data says what it says, Drip Guy. It says what it says because it is a logical impossibility for it to say anything else. The price you pay for an asset affects the value proposition you obtain from it. Stocks are not ever going to become the sole exception to the rule, even if the Stock Selling Industry spends billions on its marketing campaigns. No marketing campaign can ever change the ABCs of investing. The fundamental rules apply as time goes by.

    Rob

  12. Rob says

    Again, the philosophy of Bogle — to take the entire market, and to mix that with a healthy mix of bonds, is not even close to indicted by this or the other papers cited.

    We disagree.

    The studies show that valuations affect long-term returns.

    If valuations affect the result, investors should be changing their stock allocations in response to changes in valuations.

    Bogle says that this is not necessary. Bogle has said that Passive Investing can work. Yet the entire historical record says that this is not so.

    I don’t believe that Passive Investing even works for The Stock Selling Industry in the long run. If the reckless promotion of Passive Investing for 30 years after the academic research showed that the chances of it working in the real world are precisely zero causes a second great depression, how well do you think the Stock Selling Industry is going to be doing then?

    We all have a stake in protecting our economic and political system from further damage, in my assessment. That includes Bogle. That includes the entire Stock-Selling Industry.

    Rob

  13. Rob says

    A link to support MY conclusion

    Thanks for supplying the link, Drip Guy.

    That permits community members to hear the other side of the story.

    Rob

  14. Rob says

    I consider that the most abusive post I have ever read on the internet, and was totally unprovoked, off thrad topic, and uncalled for, especially in relation to what you were replying to. You, sir are a liar, a hypocrite, and a sick puppy, and shall never reap the benefit of my posting here again.

    You have put forward thousands of posts in “defense” of Mel Lindauer and John Greaney and their Campaign of Terror against the Indexing and Retire Early discussion-board communities, Drip Guy.

    Here is a link to a thread at which numerous community members express gratitude for the wonderful work that John Walter Russell did for our communities (without receiving one dime of compensation) for over seven years:

    http://socialize.morningstar.com/NewSocialize/forums/p/247592/2726741.aspx#2726741

    Here is a link to the sewage put forward at the site owned by John Greaney to destroy the reputation of the finest human being who ever elected to put a post to our boards:

    http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?board=JWRMANIA

    You have put your name to many posts “defending” Greaney and Lindauer, Drip Guy.

    When you first put forward a post “defending” the tactics employed by Greaney and Lindauer to destroy our board communities, you sacrificed your personal integrity. Personal integrity matters. I can help you with the investing questions. I can urge you to take the steps you need to take to recover your personal integrity. But in an ultimate sense that is an inside job. It is not something that Rob Bennett or any other community member can do for you.

    Hate is Not a Sound Long-Term Investing Strategy, Drip Guy.

    I’m sure of it!

    Rob

  15. Rob says

    You, sir are a liar, a hypocrite, and a sick puppy, and shall never reap the benefit of my posting here again.

    It saddens me that you will not be posting here again. Drip Guy. I have enjoyed and benefitted from a number of your posts.

    However, I offer no apology for coming to the defense of my fellow community members when they come under attack. All of the saving and investing material presented at this site is the work product of thousands of community members coming together and sharing their sincere views for the consideration of others. I owe something to those people. The very least that I owe them is to put forward a few words in their defense when their names are dragged through the mud.

    Again, I oppose the Campaign of Terror led by Mel Lindauer and John Greaney against our board communities. I think it says something about the confidence they hold in their “ideas” that they feel a need to resort to these sorts of tactics to “defend” them. I offer the hand of friendship to all who support the communities and what they stand for. I offer the back of my hand to all who promise to follow the posting rules of the various sites and who then in practice fail to do so.

    We will miss your contributions, Drip Guy. But we will solider on all the same. When the contributions come with a demand that we sacrifice our personal integrity attached, the price is too high. The Retire Early and indexing discussion-board communities don’t need the business that bad, my old friend.

    Rob

  16. RJL says

    Rob….

    I have been following your work with great curiosity since you arrived on the Morningstar boards a few years back.

    Can you please tell me what exactly is the error you found in the “Old School” safe withdrawal rate studies? Please be specific. I ask this in all sincerity since I haven’t been able to figure out exactly what the issue is. Where and how did the get the number wrong?

    I really want to understand

  17. Hello World says

    The mistake he found is that if the study does not study something that he wanted it to study, it is a mistake.

    The ‘study’ was not a study at all, it was charts of a rolling back test and some descriptive texts around them without any real conclusions other than ‘this is how things worked over these time periods’.

    Rob’s complaint with the study is that it did not use his magic 8-ball methodology.

  18. Rob says

    Can you please tell me what exactly is the error you found in the “Old School” safe withdrawal rate studies? Please be specific.

    The error is the failure to factor in the effect of the valuation level that applies on the day the retirement begins. The historical data shows that this is the most important factor affecting the safety of a retirement portfolio. The Old School studies disregard this critical factor altogether. As a result, they get all the numbers wildly wrong.

    You can compare the results obtained under the Old School studies with those obtained under the New School studies by looking at The Retirement Risk Evaluator (there’s a link at the “Our Calculators” widget on the right side of this page). The Old School studies report the safe withdrawal rate as being 4 percent at all valuation levels. The New School studies report it as being 2 percent at times of insanely high valuations and as being 9 percent at times of insanely low valuations.

    If valuations affect long-term returns (Bill Bernstein says that this is so as a matter of “mathematical certitude”), the SWR obviously cannot be a constant. It is a number that varies with changes in valuations.

    Rob

  19. Rob says

    The ’study’ was not a study at all, it was charts of a rolling back test and some descriptive texts around them without any real conclusions other than ‘this is how things worked over these time periods’.

    Then why is it that, when I enter the phrase “safe withdrawal rate study” into the Google search engine, Greaney’s “charts of a rolling back test and some descriptive texts around them without any real conclusions” comes up first in the listing of results?

    There are thousands upon thousands of posts at which the thing that Greaney put together has been described as something that tells us the safe withdrawal rate for a retirement portfolio. It it these thousands of acts of deliberate deception that have been the entire cause of the problem.

    There are many community members who have been urging Greaney to stop calling the thing that he put together a safe withdrawal rate study, going back to the Summer of 2002. If he reported accurately what he calculated, there would of course be no objection because there would be no deception.

    There are thousands of community members who believed Greaney when he claimed to have calculated the safe withdrawal rate. This can be verified by reviewing the Post Archives of the discussions held in the Retire Early and Indexing discussion-board communities over the past seven years.

    I would of course have no problem with him reporting on his “charts of a rolling back test and some descriptive texts around them without any real conclusions” if he would kindly stop referring to his “charts of a rolling back test and some descriptive texts around them without any real conclusions” as the safe withdrawal rate.

    That they are not. It’s not even a close call. 4 percent is not 2 percent and 4 percent is not 9 percent.

    I will continue to report accurately what the historical data says re safe withdrawal rates and I will continue to urge all other community members to do the same. Deal with it, Hello World.

    Rob

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