Set forth below is the text of a comment that I recently put to the discussion of a blog entry at this site:
If you predict something twelve years too soon, have you really predicted anything?
Thank you for asking an intelligent and important question, Trevor. I believe that there are millions of middle-class people who experience precisely the doubt you are evidencing by asking this question.
The reality here is counter-intutive. It seems like the answer might be “no.” It seems like predicting something 12 years too soon is not doing something terribly useful. But what seems is not always what is. The answer to the question is “yes,” you are doing something amazing by being able to predict something 12 years in advance.”
The best way to see why this is such a big deal is to experience it for yourself. Please go to the Scenario Surfer:
Run through some 30-year returns sequences. What you will find is that over and over and over again you will see yourself “predicting” a crash years before it comes. And, if you lower your stock allocation as you should, over and over and over again you will find yourself far, far ahead of the Buy-and-Hold portfolio in the long run. You will obtain FAR higher long-term returns while taking on DRAMATICALLY reduced risk. There will be some cases (not the norm) when your portfolio value at the end of 30 years will be more than DOUBLE the size of any of the three (20%, 50% and 80%) Buy-and-Hold portfolios.
What you are seeing here is the power of compounding returns applied to investing. When you lose money in a crash, you lose not only the numbers of dollars you lose directly in the crash. you also lose DECADES of compounding on those returns. The losses are so large that the human mind can barely process the information.
Valuation-Informed Indexers NEVER experience those losses. Not once in 140 years have they experienced those losses. But every Buy-and-Holder HAS experienced them. There has never been an investor who lived a normal lifetime of 80 years or so who did not experience at least one crash in his investing lifetime. So every Buy-and-Holder has been hit in a very hard way that not a single Valuation-Informed Indexer has ever been hit.
As a truly great and kind man was often known to say –