Set forth below is the text of a comment that I recently posted to another blog entry at this site:
I think we need a label for what everyone on Bogleheads does — let’s call it Strategy B. Strategy B says: “Historical data shows valuations explain some of the variability in future stock returns. If I choose to, and it makes sense for my circumstances, I may vary my asset allocation based on them.”
What do you think of Strategy B? Since it sounds like what you employ personally, and what most other investors (including myself) use, isn’t this a general system we can all agree on? If now, how is it flawed?
I agree that Strategy B is what most people follow today, Anonymous.
I certainly have no objection if people follow it. People should follow what they believe in. Lots of people believe in what you call “Strategy B.” They are right to follow it.
I don’t follow Strategy B. And it’s not true that all Buy-and-Holders follow Strategy B. I agree with you that most do. But I don’t believe that John Greaney follows Strategy B. I don’t believe that Eugene Fama follows Strategy B. Greaney and Fama are Buy-and-Hold purists. I am a Valuation-Informed Indexing purist.
The only problem I would have with Strategy B being “a general system we can all agree on” is if making that the general system means that the Buy-and-Hold purists and the Valuation-Informed Indexing purists cannot speak their minds.
We do not today know all there is to know about how stock investing works. Perhaps the Valuation-Informed Indexing purists are right. Perhaps the Buy-and-Hold purists are right. Perhaps the Strategy B people are right. Members of all three groups should express their sincere views and members of the other groups should show them respect when they are speaking. In time, one of the three groups will win the day. But we are just not there yet.
You are saying something important when you say that Strategy B is the most popular belief system today. That really is so. The problem for me as a Valuation-Informed Indexer is that most people view Strategy B as an offshoot of Buy-and-Hold and view both Strategy B and Buy-and-Hold as “acceptable” strategies. Valuation-Informed Indexing, in contrast, is viewed as “out there” and hard to accept.
Valuation-Informed Indexing will not become more popular over time unless people hear about it and are able to ask questions about it. So I need to open up space for debate over Valuation-Informed Indexing at every board and blog. I have no intention of closing up space for Buy-and-Hold or for Strategy B when doing that. My intent is a positive one, not a negative one. I am trying to add something, not to put an end to something (except to the extent that that something tries to put an end to Valuation-Informed Indexing before it even has a chance to grow into something big).
I view this as an encouraging post. If you are checking with me as to whether I am okay with the idea of all “sides” taking a less dogmatic position re what they believe in, I support that effort 100 percent and want to do anything in my power to see that it is successful.
I don’t personally believe that Strategy B is the right answer in an ultimate sense. But it IS more popular than either of the two purist approaches and it is also less dogmatic than either of the two purist approaches, which is a plus from a process standard. If there is ever going to be a time when large numbers of people are going to become Valuation-Informed Indexers, there probably is first going to need to be a time when there is widespread support for Strategy B.
It is a lot easier to make the shift from Buy-and-Hold to Strategy B than it is to make the shift from Buy-and-Hold to Valuation-Informed Indexing. And it is a lot easier to make the shift from Strategy B to Valuation-Informed Indexing than it is to make the shift from Buy-and-Hold to Valuation-Informed Indexing.
Helpful post. I hope we can work together to use it to take us all to good places.