I’ve posted Entry #50 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Buy-and-Hold Is Either the Best Strategy of All Time or the Worst.
Juicy Excerpt: It’s not possible to reach a compromise on points re which both camps are in agreement. Thus, we need to turn to points re which the Buy-and-Holders and the Valuation-Informed Indexers are in disagreement to have any hope of developing a middle-ground position. Unfortunately, there’s only one point of disagreement. And the point of disagreement is a light-switch sort of point; it’s a yes or no matter and it is hard to see how any compromise middle-ground position could be developed.
The one point that divides the two camps is that Valuation-Informed Indexers say that valuations matter and Buy-and-Holders say that they do not. The historical data shows that, if valuations matter, they matter a lot. The valuations factor is roughly 70 percent of the game, according to the data. Those who understand valuations nearly always do well. Those who do not understand valuations nearly always do poorly.
azanon says
Your point that valuations do not matter in a buy-and-hold strategy is only partially (at best) correct.
They don’t matter when one initially sets up a buy-and-hold portfolio, but they DO matter from that point forward. How so? Most all buy-and-hold strategies include the recommendation to rebalance based upon a fixed timeframe, such as annually. So, for example, if stocks drop 20% in one year, then a buy-and-holder will typically sell some bonds and fixed income, and buy some stocks to reset the percentages. In other words, a buy-and-holder that rebalances (which is nearly all of them) will be implementing a form of “value-informed indexing” whether they realize it or not. Sure, it’s milder than what you suggest, but valuations are considered.
There have been plenty of scientific studies that have shown that the point that you initially invest has miniscule effect when one’s investment period is 30 years or more.
Rob says
We agree re the 30 years or more thing, Azanon. The data shows that the effect of valuations is insignificant for practical purposes at 30 years out. This is an important insight that was brought to us by the Buy-and-Holders. My view is that we should be grateful to them for teaching us this.
I also agree that rebalancing is a minimalist form of Valuation-Informed Indexing (which means it is also a minimalist form of market timing, no?).
The only point re which I disagree with the Buy-and-Holders is that I say that one should not be staying at the same stock allocation (rebalancing) when there are big swings in valuations. Instead one should be aiming to remain at roughly the same risk level by being sure to change one’s stock allocation in response to big price swings.
Buy-and-Holders agree re a whole big bunch more than they disagree. In fact, there is only one point re which they disagree. Buy-and-Holders say that you Stay the Course by sticking to the same stock allocation. Valuation-Informed Indexers say that you Stay the Course by maintaining the same risk profile.
I am not aware of anything else re which the two schools of thought differ.
Rob
azanon says
“The only point re which I disagree with the Buy-and-Holders is that I say that one should not be staying at the same stock allocation (rebalancing) when there are big swings in valuations. Instead one should be aiming to remain at roughly the same risk level by being sure to change one’s stock allocation in response to big price swings.”
I wish we could discuss this issue with Shiller himself, but let us do it.
I’ve watched several Shiller videos and lectures, and what I have heard him say many times is that Markets behave IRRATIONALLY. They should be rational, but according to him, they are not. That being the case, the buy-and-hold, and rebalance, method allows one to reap profits for years on end while the market is, as he puts it, irrational, such as during the 90s.
Case and point, someone who faithfully rebalanced from 1991-1999 would have banked so much money in their bond/cash fund, that they would have easily kept up with or beat a value informed investor.
If Shiller admits that markets can’t be predicted under a 10 year period, that allows for a lot of money to be made with a rebalancing valuation method.
In any event, I’m glad to see that you revised your position that the buy-and-hold w/rebalance does involve some valuation consideration. Do you intend to correct your original article? You should because I’ve never seen buy-and-hold recommended with no rebalancing.
Valuations matter to almost every investor. They might not realize it (when they’re rebalancing), but it’s true.
Drip Guy says
Rob claims: “…rebalancing is a minimalist form of Valuation-Informed Indexing (which means it is also a minimalist form of market timing, no?)”
It is neither.
Properly applied, it is merely a rational, predefined mechanistic process.
Rob, when will you quit trying to prove the world is wrong, in the hopes that can somehow make you right? It’s not gonna happen.
Rob says
I wish we could discuss this issue with Shiller himself
This is a FANTASTIC point. Thanks so much for saying this, Azanon.
For nine years now, we have been discussing these issues amongst ourselves (I don’t mean just you and me, I mean the Retire Early and Indexing communities). We are mostly people whose expertise in this field is that we figured out how to get posts to appear on the internet. Why the heck don’t we bring our questions to the people who study this stuff for a living and demand clear answers to all of the outstanding questions of them?
What you are saying here makes so much sense, Azanon. How could there be even one rational person who opposes this idea?
There are lots of Buy-and-Holders who oppose the idea. We see them voice their opposition over and over again.
I have contacted Shiller. I have contacted Bogle. I have contacted Burns. I have contacted Bernstein. I have contacted Kitces. I have contacted Pfau. I have contacted Clements. I have contacted lots and lots of others.
I think we all should be doing this. And we should be insisting on straight, clear answers. We should be contacting people on both “sides.” They should be grateful to us for contacting them. We are bringing the fruits of our explorations to them. We are helping them learn, just as they are helping us learn, It is a win/win/win/win/win.
Shiller did not respond to my e-mail.
Do you not wonder why?
He has said that he has never told us all he knows about investing. Why? He says that he would be dismissed as “unprofessional” if he did so. That suggests that what he has to say would be pretty darn shocking, no?
If you read his book. you can get a pretty good idea of why what he has to say about investing would shock us. The subtitle of his book describes his investing ideas as “revolutionary.” Within the pages of his book he describes the stock market at times of insane overvaluation (this is where we have been since 1996) as a “Ponzi scheme.” He predicts in a book published in March 2000 an economic crisis (resulting from massive stock overvaluation) that would rank as the worst ever experienced in U.S. history.
Scott Burns said that I was right about safe withdrawal rates. But he failed to provide a link to my site or to tell his readers what the SWR is when it is calculated accurately. Why? He explained that, at times of insane overvaluation, accurate reports of the SWR is “information most people don’t want to hear.”
Bogle said in an interview that I have linked to at this site that Valuation-Informed Indexing can work. Bogle has described in published interviews how he successfully timed the market in 2000 and why he did so (his concern over valuations was one of the reasons he cited).
A posted named “Ataloss” asked Bernstein if the Old School safe withdrawal rate studies are “analytically invalid,” as I maintain. Bernstein said that “of course” they are analytically valid. But he added that any aspiring retiree giving thought to using one of them to plan a retirement beginning at a time of overvaluation would be well-advised to “FuhGedDaBouDit!”
A good number of the experts are willing to tell you what you need to know if you are willing to ask them and if you make clear to them that you want to know what works, not just what sells, Azanon. A lot of them are also willing to pass along Buy-and-Hold mumbo jumbo, if that’s what you prefer. It’s up to you (and other investors, obviously) to decide whether you want to invest according to the realities or according to the Get RIch Quick gibberish that causes out-of-control bull markets in the first place.
My guess is that you have a pretty darn good idea where I come down on this one. I have zero interest in being conned about what to do with my retirement money. I want to know the realities. Being conned feels good for so long as the fantasyland valuations remain in effect. The financial losses you suffer in exchange for the temporary thrill that comes with being conned hold you back from accomplishing your life goals for the remaining years of your life.
Not this boy.
Rob
Rob says
If Shiller admits that markets can’t be predicted under a 10 year period, that allows for a lot of money to be made with a rebalancing valuation method.
Shiller shows in his research that the gains are temporary, Azanon.
No one questions but that Get Rich Quick appears to work for a time.
The problem is that it never works long term. It is a mathematical impossibility that it ever could.
Rob
Rob says
I’m glad to see that you revised your position that the buy-and-hold w/rebalance does involve some valuation consideration. Do you intend to correct your original article? You should because I’ve never seen buy-and-hold recommended with no rebalancing.
An investor who rebalances remains at the same stock allocation, Azanon. That’s by deliberate intent.
The mumbo jumbo won’t get you your retirement money back once it is gone. Word games do not impress me. I will continue to report honestly on safe withdrawal rates (and on many other critically important investment-related topics).
The joke becomes less and less funny all the time.
Rob
Rob says
Valuations matter to almost every investor.
The only way in which a concern over valuations can do any practical good is for the investor to change his stock allocation in response to changes in valuation levels that cause his risk profile to go wildly off from what he intended it to be. If you go with a stock allocation that is wildly wrong for you out of deference to Buy-and-Hold “strategies,” you will sooner or later pay a financial price for doing so.
Or at least so says the 140 years of historical stock-return data available to us today (as well as common sense).
Rob
Rob says
Properly applied, it is merely a rational, predefined mechanistic process.
Um — good point, Drip Guy.
Truly outstanding!!!!!!!!!!!!!!!!!!!!
Rob
Rob says
Rob, when will you quit trying to prove the world is wrong, in the hopes that can somehow make you right? It’s not gonna happen.
It’s already happened, Drip Guy.
I checked the posting rules at the Motley Fool site before I put forward my May 13, 2002, post.
They permit honest posting on safe withdrawal rates and on all other critically important investment-related topics.
It was “the world” that adopted the social norms that led to the decisions to word those posting rules in the way in which they were worded.
This is not the first time that widespread promotion of Get Rich Quick investing strategies caused a wipe-out of our free market economy, Drip Guy. It is the fourth.
The numbers say that it is going to end up being the most painful.
The encouraging side to that otherwise highly distressing news is that, if we make it through this time (I believe we will, just because that’s the way I’m wired), this may well be the last time that the Get Rich Quickers ever become so dominant in our discussions of how to invest for our retirements.
Now there’s an Alfred Hitchcock twist to the story!
How did I know? It’s almost like I cheated and took a peek at the last page before putting forward that fateful May 13, 2002, post.
But how?
Rob
Drip Guy says
Rob lied: “Bogle said in an interview that I have linked to at this site that Valuation-Informed Indexing can work.”
Rob, you once again prove you are an outright liar.
Mr. Bogle has *never* used the term “Valuation-Informed Indexing” in any of his speeches, or writings, including the one you supposedly linked to.
Now, you may well have personally interpreted some collection of OTHER things he said at various times about indexing, or about investing, or about valuations, or about any number of things to (in your mind) mean he WOULD endorse it, if he even knew it existed.
However, since you yourself — it’s sole creator and exponent, cannot define it with sufficient specificity so that it could be modeled, it is clear that any such endorsement is now, and will ever remain, a mere figment of your (frankly damaged) imagination.
Drip Guy says
“Um — good point, Drip Guy.
Truly outstanding!!!!!!!!!!!!!!!!!!!!”
Just a little tip, Rob:
Your habit of providing dripping sarcasm in response to legitimate points is hardly a way to improve your tattered credibility, Rob.
Rob says
Um —
Two super contributions, Drip Guy!
Rob
Rob says
Or maybe not!
Rob
Rob says
Can’t we just all get along?
Rob