Set forth below is the text of an answer that I recently posted to a question (“When Will the Stock Market Crash Again?”) at the Quora site:
There are two popular schools of thought re market timing. One is that it is impossible to time the market effectively and a waste of effort to try. The other is that knowing when crashes are coming is so valuable that you just have to give the objective of predicting them your best possible shot.
I hold a third view, a view which I believe is strongly supported by the research of Yale University Economics Professor Robert Shiller and research (including one paper that I did most of the work on myself!) done over the past 32 years (and largely ignored so far!). That view holds that short-term timing (predicting when crashes will come with precision) really is impossible but that predicting in a general way when they will come (long-term timing) is highly doable and absolutely required for those seeking to hold any realistic hope of long-term investing success.
Shiller’s model uses valuations to make long-term predictions. Once prices go insanely high, we ALWAYS experience a wipe-out. There has never in 140 years of stock market history ever been an exception. But we CANNOT say with precision when the wipeout will come, only that it is on its way.
There is a wipe-out on its way today, according to the Shiller model. Thus, I think it makes sense to go with a low stock allocation today.
Now —
We may see stock prices double over the next year. If we see that, there are people who will complain that I was “wrong” in my advice.
I don’t see it that way. The way I look at it is that the RISK of a crash is high this year. Thus, we all should be going with low stock allocations. It doesn’t matter whether stocks actually crash this year or not. The risk is there. That’s what matters.
Those who stay in stocks and enjoy another run-up in prices will NOT get to keep the money. They will lose all those gains plus a lot more in the crash that will follow next year or the year after that. So what good do those gains do them? I invest for the long-term. I want gains I can keep. Investors have never earned permanent gains from stock purchases made when stock were selling at the sort of prices at which they are selling today.
The losses you will see if stocks continue to perform in the future anything at all as they have always performed in the past will be devastating. It is hard for people to get their heads around how much one wipeout in a lifetime can hold you back. You lose not only the dollar value taken from your portfolio, you also lose decades of compounding returns on those dollars. Stay heavily in stocks at a time like today and you could easily set your retirement back 10 years, according to the last 30 years of academic research.
The “experts” won’t tell you this. Most of the “experts” in this field make money only when people buy stocks. So they are compromised. You need to become personally familiar with what the academic research really says, not just what the people quoted as experts in this field SAY that it says. These are very, very, very different things, in my experience. The conventional wisdom in this field is dangerous stuff.
Rob
Evidence Based Investing says
The “experts” won’t tell you this. Most of the “experts” in this field make money only when people buy stocks.
You do understand that it is a two way transaction don’t you?
When someone buys stock it means that someone else sells.
And when someone sells another person buys.
So who exactly are these “experts” who only make money when someone buys stock?
Rob says
IBonds were paying 4 percent real in 2000, Evidence. Stocks were priced to provide a negative long-term return.
90 percent of middle-class investors should have been primarily in IBonds (or TIPS) at that time. If you lose 5 percentage points of return for 10 years running, you bring down your accumulated earnings of a lifetime by 50 percent. It takes decades to recover from such a mistake. It was the reckless promotion of Buy-and-Hold “strategies” that caused the economic crisis.
There were articles all over the newspapers and magazines and web sites of the time saying that Buy-and-Hold might work. Why? There was at the time 19 years worth of peer-reviewed academic research showing that the chances of Buy-and-Hold ever working out for a single long-term investor are precisely zero.
What’s your explanation of the scam, Evidence?
I am a reporter. We have a slogan we follow when investigating cases of financial fraud: “Follow the money.”
The relentless and reckless and ruthless promotion of Buy-and-Hold strategies bankrupted the middle-class. But that’s not all it did. It puts hundreds of billions of dollars in the pockets of the Wall Street Con Men.
Why do the Wall Street Con Men react so violently when someone posts honestly on what the academic research says? I have a funny hunch that it might have something to do with the fact that the Buy-and-Hold gravy train comes to a quick halt once one large site permits honest posting on even a single issue. I think it is fair to say that there has never been one investor alive who has switched from Buy-and-Hold to Valuation-Informed Indexing and then later switched back. To keep the con going, honest posting must be dealt with ruthlessly.
What’s your explanation of the phony baloney claims we have heard that there is some mystical, magical “study” somewhere supporting this smelly Get Rich Quick garbage? Wade Pfau has a Ph.D. from Princeton, He searched the literature for a long time trying to find one study supporting the Buy-and-Hold Con. He found nothing. He went to Bogleheads to see if anyone there had ever heard of a single study. Bogle had not. Bernstein had not. Swedroe had not. Ferri had not.
Why is there not one “expert” alive who can point to a single study supporting the pure Get Rich Quick approach if it is really so wonderful?
If it looks like a con and it sounds like a con and it smells like a con, maybe it really is a con.
No?
Rob the Con-Sniffer-Outer