I’ve posted Entry #82 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Five Most Important Advances in Our Understanding of How Stock Investing Works.
Juicy Excerpt: In the days when we thought that the market was efficient, Buy-and-Hold strategies (staying at the same stock allocation at all times) made all the sense in the world. If stock returns cannot be predicted, stocks are equally risky at all times. Thus, it makes sense for an investor to identify the stock allocation best suited to his risk tolerance and maintain it through his investing lifetime.
This logic does not apply in a world in which returns are predictable. In a world in which returns are predictable, the risk associated with stocks changes with changes in valuations (stocks are obviously more risky at times when likely returns are low than they are when likely returns are high). Investors should obviously be aiming to maintain the same risk profile at all times. So in a world in which returns are predictable, Buy-and-Hold is a dangerous and irresponsible strategy.