Phil: Hi, a little bit related to this thread, I’ve been reading a bit up on Rob Bennett’s “Passion Saving” site and blog and what he calls “Valuation-Informed Indexing”. While there seems to be a little confusion over people using the term passive and what exactly it entails and to what extent, I’m trying to work out if his approach is similar to your passive approach or is against it!?
For example are his “stock allocation” changes really just the same as Monevator “rebalancing” the portfolio every year or 2 or a different more active strategy?
When he suggests share reallocation depending on the P/E ratio as an indicator of the markets over/under valuation does he really mean reducing/increasing exposure to the stock market as a % of your entire asset portfolio (I guess to be held in cash or bonds instead?) or just rebalancing your funds ( in a selling high, buying low balancing of funds as is recommended on this site)?
I’m sure you may have covered this before but any thoughts/ opions you have on his strategy would be great.
Owner of the Monevator Blog: @Phil — No, the strategies are not the same. Our rebalancing is a mechanical process whereby you return after some period or level of fluctuation to your original asset allocations. So if you were 40/60 bonds/equities, say, and changes in asset prices changed your allocation to 30/70 after one year, say, then you’d sell equities to top up bonds.
Rob Bennett’s approach is one of varying your allocation based on the perceived valuation of the market. It sounds quite seductive and I don’t think it will actually do too much harm provided you use it to tweak (not set!) your stock market exposure. i.e. If you used valuation — he uses CAPE, or PE/10 from memory — to determine whether you were 40/60 or 50/50 or 60/40 in shares — then it might have some utility over the long-term. I say that because valuation methods have a very poor short term prediction record, and even over 10 years CAPE only explains about 40% of stock market moves. That’s better than anything else, but hardly a slam dunk.
The big risk of anything more — i.e. using it for extreme market timing moves — is it could keep you out of the market for long periods of time. If PE10 really does work it’d even out eventually, perhaps (though you’d have to remember you’ve forgone dividends, too, when doing your calculations) but very often you’ll find the windows where you can buy are extremely small. From memory it gave no buy signal in 2009, for instance.
Rob Bennett used to comment on this site a lot until I got fed up with his “strident” approach and warned him I’d start delete his posts. He carried on (IMHO) so I started deleting them. To his credit he finally took the hint and stopped commenting, which saved us all some time. If you Google “Rob Bennett” in the Search box in the sidebar you’ll see some of his side of the story. Any particular contribution is usually fine to read, but it was the relentlessness of it that took its toll. He’s met a similar fate across a great many sites across the Web, which is a shame as it doesn’t help his message at all, which is perfectly coherent, albeit not one I am fully on board with.
Personally I think most passive investors will do best with the mechanical rebalancing strategy (adjusting allocations as you age) but I can’t tell the future, and so can’t guarantee it.
Phil: Thanks for the reply, I did search his name in your posts and just wow, that’s some pretty long and epic comments he had! Needless to say just the style and magnitude of his replies have greatly reduced any merit I thought they may hold! I applaude you for being as patient as you were! He just didn’t seem to to get the point
Anyway many thanks for your help and your ongoing blogging, it really is very useful for the uninitiated. I have just started up a lifestrategy 80% fund with drip feeding monthly and will see how it goes! In time once I have built up my account and contributions (to perhaps 10/15k mark) and increased my understanding I may become a bit more active and control my own portfolio of index funds rather than soley through Vanguard lifestrategy one stop!