Set forth below are some words that I put yesterday to the discussion thread for an earlier blog entry titled Wade Pfau: “This Paper…Suggests that the Traditional Approach to Retirement Planning Is Counterproductive and Possibly Damaging.
Wade and I were discussing whether the long-term market timing that is practiced by Valuation-Informed Indexers is properly characterized as “tactical” or “strategic.” Wade pointed to a book that sets forth the conventional understanding that allocation shifts are tactical in nature. My view is that short-term timing is indeed tactical in nature but that long-term timing is strategic because the aim is to keep one’s risk level roughly constant.
The words in italic below are the words of Wade’s to which I was responding. My own words follow them.
I think you are trying to redefine the generally accepted interpretation
Yes. Precisely so.
You stated things exceedingly well in that comment, Wade.
I believe that Shiller’s finding (that valuations affect long-term returns) changed the history of investing. It stands all of the old thinking on its head.
All of the friction that we have seen is the result of the reality that people who have spent their lives studying under the old model are having a very hard time letting in how big a change we are talking about here.
The Buy-and-Holders are good and smart people. I respect them. I admire them. I feel gratitude toward them. I don’t say that sort of thing just to put forward some nice words to balance out the strong ones. I say that stuff because I believe it. If the Buy-and-Holders could see what I see, they would be as excited about where things are headed as I am. I wish I could figure out how to help them become able to see what I see.
All of the old books have to be rewritten. All of the old rules have been turned on their heads.
If valuations affect long-term returns, long-term returns can be predicted. Something that affects something else determines (at least to some extent) what is going to happen to it. When we know what determines something, we gain the ability to predict what will happen to it. Risk is uncertainty. To the extent we make stocks predictable, we take away the riskiness of stock investing. Stock risk is today to a large extent optional.
There is obviously nothing bad about this. It is good news piled on top of good news piled on top of good news.
The only problem we have ever had is that the news is so good that people just cannot bear to let it in. I cannot make the news less good than what it really is. That’s beyond my powers. We have an amazingly wonderful advance on our hands here, the biggest advance in the history of personal finance.
Think about when the humans gained the ability to harness the power of electricity. I have no doubt that there were skeptics about the wisdom of moving forward into the bright, warm, more action-filled world that had thereby been created.
“We never had light during the nighttime before — this must be from the devil!”
“Anything that can bring light to the nighttime is too darn powerful — people are going to get electrocuted, just you wait and see!”
“People have not had light in the nighttime for hundreds of years now so why do we now need it all of a sudden?– the people who came up with this must be crazy!”
And on and on. People fear change.
We can generate hundreds of excuses for sticking with the old way. But electricity was not from the devil. And changing your stock allocation in response to big price changes is not tactical. It is strategic.
The purpose is to get your stock allocation right, to choose the one that keeps your risk level constant. That’s key. There should be universal acceptance of the importance of that goal. There is no rational argument that can be made that keeping one’s risk level constant is a bad thing or even a non-mandatory thing. Getting your allocation right is the #1 goal. This is of STRATEGIC importance.
Making the point DOES require changing the commonly accepted understanding of what asset allocation decisions are strategic and tactical. It changes the commonly accepted understanding of just about everything.
It changes the commonly accepted understanding of what is involved in retirement planning. It changes the commonly accepted understanding of risk management. It changes the commonly accepted understanding of how risk and return interact. It changes the commonly accepted understanding of the differences between stocks and the other asset classes.
What do you think all the noise is about, Wade? You don’t see this sort of reaction when you are making a small point.
Why do you think Alex Fract views me as “a threat to the community”? Because I favor tactical asset allocation?
John Bogle is okay with tactical asset allocation.
So that’s not it.