The Balance Junkie blog is hosting an exciting debate on the merits of Buy-and-Hold vs. Valuation-Informed Indexing. The post is titled Couch Potato Rebuttals.
Juicy Excerpt: You can also take a look at some of Robert Shiller’s work, which Rob Bennett recently summarized very nicely in a post at Out of Your Rut. It runs along the same lines and is backed by Shiller’s empirical evidence. These are not fortune tellers. These are people using the same rationale (historical data) as Potatoes to invest – with a different twist. For the record, I am somewhat more skeptical of the reliance on historical data than either the Potatoes or the valuation-informed investing contingent for reasons that I can hopefully outline in a future post.
Juicy Comment #1: I look at historical data a lot when I’m studying the markets. It can be very useful. But I think it can be dangerous to only look in the rear view mirror. At least being aware of what’s right in front of you has to be factored in as well. More on that later.
Juicy Comment #2: This is the crux of my disagreement. I’d like to see data. Show us studies of real world investors (adjusted for survival bias) who are doing better than their benchmarks by moving in and out of asset classes.
Juicy Comment #3: At first glance, I find this interesting. It is a little bit thin to hang your hat on, don’t you think? The author himself says that the research is preliminary and he has to test a wide variety of assumptions before he can confidently say he’s not data mining. Also, the strategy outlined here does not take higher expenses and taxes into account. Any competing strategy to buy-and-hold should be adjusted for real world expenses because a strategy (such as January Effect) that beats the benchmark before expenses but lags after expenses would simply be an interesting but impractical anomaly.
Juicy Comment #4: Thanks, CC. That’s kind. People who are skeptical of these ideas obviously respond to such studies differently than someone like me who has been a true believer for years. I’m more likely to learn from the reactions of someone like yourself than from my own reactions, which are obviously influenced by a strong bias. So I take some comfort that you find some tiny appeal in the ideas (I certainly understand that you are by no means endorsing them and maintain [properly so, in my assessment] a strong skepticism).