Set forth below is the text of a comment that I put yesterday to a thread on Valuation-Informed Indexing at the My Personal Finance Journey site. The blog entry was posted some time ago. I only discovered the most recent posts by Carlyle (to which my post responded) yesterday.
I would say is that the notion that Buy-and-Hold had anything to do with the economic downturn is beyond ridiculous.
You speak for many with these words, Carlyle. I wish that one of those who feel this way would try to articulate why he feels this way. That would give us something to work with.
Stocks were overpriced by $12 trillion in January 2000. That’s a matter of public record. Bogle says that stock prices always return to fair value. He says that is an “Iron Law” of stock investing. So we knew in 2000 that the U.S. economy was going to lose $12 trillion in spending power over the next 10 years or so. Are you able to imagine any way that losing $12 trillion in spending power would not bring on an economic crisis?
The reason why I say that Buy-and-Hold caused the crisis is that it was Buy-and-Hold that caused the $12 trillion in overpricing. If investors knew that they needed to lower their stock allocations when prices got too high, there could never again be another out-of-control bull market. People would sell stocks and prices would go down when prices got out of hand. Take Buy-and-Hold out of the picture and stock market prices are self-regulating. It’s Buy-and-Hold that tells people they do not need to sell. Do you see that?
I believe you when you say that you find the idea ridiculous. But I think we could all advance the discussion if you could articulate why you believe this. Is there some reason why you think that the promotion of Buy-and-Hold strategies could not cause an economic crisis?
My personal belief is that it may be that the reason is that you are emotionally attached to Buy-and-Hold. I don’t say that to hurt your feelings. I say it because it is my sincere belief that that is what is driving your belief.
Thanks for the back and forth in any event.
Programming Note: The Bennett family vacation has been postponed due to uncooperative weather. Grrr…. Those horrible , no-account Buy-and-Holders are no doubt the cause of this somehow!