Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. Set forth below is the text of another e-mail that I sent to Wade on the same day.
I like the chart showing post-1996 results very much. I am going to add a link to that chart in the “Links That Matter” section on the home page of my blog.
Before commenting on that, I need to comment on a statement you made just above that in a post that I did not see until I returned to the thread just now. You say: “an even bigger problem is that in the past no one could have even replicated the fixed allocation or valuations-based strategies because there were no index funds. ” This is HUGE.
The introduction of index funds changed the nature of the risk taken on by stock investors in a FUNDAMENTAL way. When the only option was to pick individual stocks, there were 20 varieties of risk being taken on. You had to worry about the management of the company, the research pipeline, the competition, lawsuits, and on and on. Risk was great for those who did not study stocks with great care.
Those days are gone. With index funds, there are only two unknowns: (1) whether the productivity of the general economy will remain strong enough to support an average long-term return of 6.5 percent real; and (2) whether the valuation level that applies at the particular time you make a purchase is one that permits you personally to obtain that rate.
The first risk is not likely to be a big problem. The 6.5 percent number could change half a point in either direction. But the odds against it changing too much are long. If you want to be cautious, you can subtract from the numbers generated
by the Return Predictor and you are covered.
The second risk is OPTIONAL. Adjust your allocations in response to valuation levels and you are set.
So stocks are no longer a high-risk asset class. Stocks are today a low-risk asset class for those willing to leave Buy-and-Hold behind. This is the biggest breakthrough of all. Getting the word out re this would bring on a period of huge economic growth as millions of middle-class workers came to feel more confident over their financial futures. This is a game-changer re the economic crisis.
Best of all, spreading the word re this one lets the Buy-and-Hold advocates off the hook for the mistake they made in saying that timing isn’t required. It is the same people who said that timing isn’t required who also advocated indexing. So
their net contribution was a huge positive. There is nothing for them to be defensive about!
The trick is getting people to let their guard down long enough to let in the wonderful news. That one is a bear. But once this comes to click with the Buy-and-Holders — We’re going to be seeing some truly exciting stuff happen on lots of different levels.
I’ll offer my thoughts re the chart in a separate e-mail.