Set forth below is the text of a comment that I recently put to another blog entry at this site:
Most people understand that this gap is the equity risk premium and is compensation for the increased risk of owning equities.
Stocks pay higher returns that most other asset classes. We agree on that.
And it is true that the primary reason is that people PERCEIVE stocks as more risky. We agree on that.
We do NOT agree that stocks are significantly more risky. Stocks are more risky for Buy-and-Holders, but not for Valuation-Informed Indexers. The risk is that you will fall for the arguments of those promoting Buy-and-Hold strategies (people who make a living selling stocks). So long as you buy stocks in the same manner as you buy everything else (ALWAYS taking price into consideration when making purchase decisions) stocks purchased through index funds are a low-risk asset class.
Yet stocks still pay higher returns. Why?
Because most people don’t understand the implications of Shiller’s research.
We need to be spreading the word. We need this stuff written up in every newspaper, on every blog, at every discussion board, on every investing-related television show.
We knew from research that smoking caused cancer a long time before people began cutting back on smoking. Why didn’t we cut back sooner?
Because the people who made money selling cigarettes were happy to see millions of people die from cancer so long as it meant that they made an easy buck. That’s how it is with the Buy-and-Holders today. There has OBVIOUSLY never been a single study showing that Buy-and-Hold can ever work for even a single long-term investor. But so long as the penalties imposed for telling the truth are great enough, you can still get very rich promoting the smelly Buy-and-Hold garbage, no?
Did the people who financed advertising campaigns saying that everyone should be sure to take up smoking because of all the wonderful health benefits enjoyed by smokers “know” that their lies were causing huge amounts of human misery?
They did and they didn’t. They obviously knew that it was all b.s. That’s why they were so defensive when questioned about the “studies” that they said backed up the absurd claims. But they didn’t focus on the millions of deaths. They rationalized. They told themselves “oh, smoking probably isn’t that bad, everyone has to make a buck in this world.” They smoked themselves, you know? They said “I am not trying to persuade anyone to do anything that I don’t do myself!” And that was true.
So it is with the Buy-and-Holders. There obviously has never been a single study published showing that long-term timing is not 100 percent required of all long-term investors. The idea is absurd. It would defy common sense for such a thing to be so. But there sure is a LOT of money to be made pretending that you believe that such a study exists, is there not?
So people say they believe this baloney. And they rationalize. They say “oh, we survived the First Great Depression brought on by the promotion of Buy-and-Hold, who is to say that we will not survive the Second?” And they tell themselves that they follow Buy-and-Hold strategies themselves, so they are not really horrible people. And they do follow Buy-and-Hold strategies themselves. That part really is true.
The problem is that smoking really does cause cancer.
And Buy-and-Hold always brings on a financial wipeout for every investor who comes to believe in it.
And the collective losses caused by the widespread promotion of Buy-and-Hold “strategies” are always large enough to cause an economic crisis in the society that permits the relentless promotion of this Get Rich Quick garbage.
So we have to do something about the b.s..
We need to open the entire interest to honest posting about safe withdrawal rates and many other critically important investment-related topics.
That’s my sincere take in any event, Laugh.
I naturally wish you all the best that this life has to offer a person.