I’ve posted Entry #184 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Yearly Review Illusion: Short-Term Ups and Downs Have Little Effect on Long-Term Results.
Juicy Excerpt: I think it is yet another reason for rejecting the core Buy-and-Hold idea that the market is efficient. An efficient market would not remain either overvalued or undervalued for such long time-periods. It would jump from one state to another with more frequency. To understand why markets remain either overvalued or undervalued for so long, we have to take into consideration the role played by investor emotions and that of course means leaving behind us the possibility that the Efficient Market Theory is valid.
It’s exciting news that stocks remain overvalued or undervalued for long periods of time. It means that you don’t have to worry about missing out on gains or losses because you are slow to make moves. The best thing was to go with a high stock allocation in 1975. But if you missed that bus, another one came along in 1976 and then another in 1977 and then another in 1978 and on and on and on. It worked the same way when the long-term value proposition was headed in the other direction. You wanted to lower your stock allocation in 1996. But 1997 was another good year for doing so. And 1998 was yet another. And 1999 was yet another. And so on and so on and so on.