I’ve posted Entry #153 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Five Reasons Why Valuation-Informed Indexing Always Beats Buy-and-Hold in the Long Run.
Juicy Excerpt: Three, the compounding returns phenomenon grows the edge gained by going with a low stock allocation at a time of high prices into a very large number over time. It is hard for people who have not studied the numbers to get their heads around this one. I have seen the power of compounding work its magic so many times that I now can predict how a 30-year returns sequence is going to turn out in Year 10 or 12 or 15. Often, the Buy-and-Holder will go ahead of me for a few years at times of high valuations (when I go with a low stock allocation but a bull market pushes crazy prices to even crazier levels). Then there will be a price crash that will put me ahead by a modest amount. Then, with prices back at reasonable levels, I will return to a high stock allocation matching the one held by the 80-percent-stocks Buy-and-Holder. But compounding will cause my differential to get bigger and bigger over the years and I will end up with a far larger portfolio amount at the end of 30 years.