I’ve posted Entry #26 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Numbers on Your Portfolio Statement Are Wrong!
Juicy Excerpt: This one puts me on the spot. If I say “yes,” I sound like a crazy person. If I say “no,” I contradict my claim that valuations need to be taken into consideration when calculating safe withdrawal rates and when performing all others sorts of investment analyses. If valuations matter, they always matter. If valuations don’t matter when determining how much a mutual fund company should pay you for your shares, it cannot logically be argued that they matter in other contexts.
I say “yes,” Vanguard should discount the portfolio value for the extent that stocks are overvalued at the time shares of an index fund are sold. This will indeed make me sound like a crazy person in the ears of many. But you know what? This isn’t the first time this sort of thing has happened. And you know what else? I think it makes sense to discount the nominal amount of the portfolio to reflect the effect of overvaluation. I think that if we made that change, it would lead to all sorts of good things.