I have been sending e-mails to various and numerous people in an effort to spread the word re The Silencing of Academic Researcher Wade Pfau. Set forth below are the words of response that I received from Kent Thune, who writes The Financial Philosopher blog:
Greetings, Rob. I recall your passion on the potential problems with “buy and hold” on the Get Rich Slowly blog. I looked at your article on your site and see that you’ve made some good points. However, as you may recall in my past reasoning, the “buy and hold” concept is extremely abstract, which makes it a difficult concept to argue for or against. The concept of “market timing” is also abstract.
In a sense, every investor is buying and holding and every investor is timing the market; buying a security, holding it, and selling it at a later point is both “buy and hold” and “market timing.” Your argument can be made stronger if you define Buy-and-Hold and market timing in a more concrete way. Then build your case from there.
It seems you point your argument primarily at 401(k) investors and the Boglehead crowd that buys index funds and then plans to leave their savings untouched until retirement. Is this correct? If so, you will need to prove that dollar-cost averaging is also bad for the investor and for the economy at large. You will also need to provide a viable alternative that is feasible for the “average” person. Otherwise, your ideas may be dismissed by the same crowd you wish to hear your argument.
I also believe your argument that Buy-and-Hold caused the recent financial crisis is interesting but not entirely accurate. In my view, and this is a generalization that is widely accepted, most Buy-and-Hold investors are individuals saving for long-term goals, such as retirement or college education. I recall from various studies in my experience as an investment advisor that these individuals collectively combine to represent roughly 30% of the entire “market”, whereas institutional traders represent 70%. It seems the latter was the largest factor in the Great Recession, especially with their use of derivatives and the prevalence of hedge funds.
I have not studied in depth the cause of the Great Recession, but I believe it to have been primarily driven by the housing market and secondarily by the financial sector of the economy. How do you explain millions of people using their 401(k)’s as “Buy-and-Hold” instruments but using their homes as equity taps? Those people were not taking equity out of their homes and placing it in their 401(k)s; they were using the cash-out-refi money to enhance a lifestyle—the clothes, the cars, the bigger houses, the social club memberships and so on. The creation of the financial bubble, the so-called credit crisis, was largely enabled by rising home prices—the stock market prices were actually a reflection of this extreme growth, not directly a cause of it.
In summary, I believe the “Buy-and-Hold” phenomena is certainly a player in the crisis but not a primary cause. In other words, the capital created by the money flowing into the market certainly enabled corporations to inflate the economic bubble but the market did not create all of the fuel for the crisis. For example, stock prices have doubled over the past 3.5 years but the economy (GDP) has been essentially flat over that time frame. If the stock market (all investors, including the Buy-and-Hold crowd) is a leading economic driver, the economy would be in much better shape by now. Would it not? I’m no economist, but you may need to address this point as well in your argument.
I’d love to know more of your thoughts. As I have said before, at a minimum, your ideas provoke thought (as you can see by my long response) and I appreciate your view even if I do not completely agree. If you ask me, “None of the Above” caused the credit crisis; it was caused by natural and unavoidable human emotion (i.e. complacency, greed, and hubris). But I digress…