I”ve posted Entry #200 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Moving Stock Returns From One Time-Period to Another Reduces Economic Productivity.
Juicy Excerpt: People complain all the time about our low savings rate. Bull markets contribute to that. Buy-and-Hold contributes to that.
People save when they are motivated to save. During a bull market, people look at the 30 percent gains they are seeing on their stock portfolios and determine that they don’t really need to buckle down just yet. It’s not irrational behavior. Stocks were priced at three times fair value in 2000. So an investor who had $200,000 of real value in his stock portfolio was led to believe that he had $600,000 of real value in his stock portfolio. It should shock no one that someone who thinks he is $400,000 farther along in his effort to finance his retirement would ease up on saving efforts for a time.
Anonymous says
“People complain all the time about our low savings rate. Bull markets contribute to that. Buy-and-Hold contributes to that.”
Wrong again. You can break this down by income groups. The negative savings rate is driven by groups that have little to nothing in the stock market. There was and is no stock balance (or very little balance) to look at for middle class Americans.
70% of the stock is held by the top 5%. This group saves regardless of the balance in their stock account.
The savings rate is driven more by the employment market. Prior to 2008, consumers would be using the equity in their home to finance their consumer debt. They were tapping home equity because most consumers had very little in the market. Once the economy hit the skids in 2008, home prices dropped, equity disappeared, unemployment rose and consumers stopped spending. The only rise in the savings rate came during the economic crisis. We are now heading back to the wild spending that happened before 2008 and the vast majority of stock continues to be held by the top 5%.
Here we are at near records highs in the stock market, yet take a look at the pitiful balances in the average person’s retirement accounts.
Rob says
We agree that people should save more. Outside of that, we disagree on most of what you said here, Anonymous.
The promotion of Buy-and-Hold strategies created $12 trillion worth of Pretend Money. That Pretend Money is now in the process of disappearing. Assume any saving number you please and call it “X.” With $12 trillion of Pretend Money disappearing, the saving number for the time-period in which the Pretend Money disappears is “X minus $12 trillion.” That’s bad stuff and there is no getting around it.
If we all were wonderful savers, Buy-and-Hold would still be a huge drag on us. We would be better off if we were wonderful savers. But Buy-and-Hold would still be causing enormous pain. There is no way that you or anyone else can make any rational case for Buy-and-Hold being a positive (with one exception — if the market were efficient, Buy-and-Hold would be the ideal strategy [it was a belief that the market is efficient that caused millions of good and smart people to be drawn to the strategy in the first place]).
It always comes back to the same thing, Anonymous. Investing matters. So we should tell people the truth about investing. There is now 33 years of peer-reviewed research showing that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. So we should discourage people from giving in to their Buy-and-Hold impulse, not encourage it.
We should encourage effective saving too. But there is no saving rate that could ever make it okay to tolerate the widespread promotion of Buy-and-Hold investing strategies. Buy-and-Hold causes too much human misery.
That’s my sincere take re these terribly important matters, in any event.
Rob
x says
“People complain all the time about our low savings rate…Buy-and-Hold contributes to that.”
That is probably the dumbest thing I’ve ever heard you say, and that’s saying something. If you are not saving, by definition you are not buying stock. You might as well say that exercise contributes to sloth, or mental illness contributes to sanity.
Rob says
The most important contributor to effective saving is PLANNING. Talk to effective savers. You will find almost without exception that they are PLANNERS. People who learn the value of planning become effective savers. People who do not see the value of planning rarely are able to save effectively.
Believing in Buy-and-Hold renders effective financial planning impossible. Say that you are trying to put together an effective financial plan in 2000. Your stock portfolio is temporarily priced at three times its fair value. How the heck do you plan? You have no idea how much you have. You can use spreadsheets and calculators and all that sort of thing, but all the numbers you enter into them will be wrong. Huh?
Buy-and-Hold is a Lie, X. It’s a big, giant, huge Lie.
It serves no positive purpose. It never can. Lies hurt you. Always. In many different ways.
You are trying to defend the indefensible.
If Shiller had done his revolutionary research in 1961 instead of 1981, there never would have been a Buy-and-Hold. No one would have stood up and said “you know what, it might be a good idea to lie to ourselves about the value of our portfolios so that we all have no idea whatsoever what we are doing!” No one is stupid or evil enough to do something like that.
It started out as a mistake. Bogle hadn’t yet founded Vanguard in 1965, when Fama did his famous research. So long-term timing was not a practical possibility. So he didn’t even bother looking at it. He looked at the only form of market timing that people were capable of employing at the time, found that it doesn’t work, and declared that “timing doesn’t work.”
We only learned how critical it is to always practice long-term timing (price discipline) 16 years later and by that time an entire industry had been built around the promotion of Buy-and-Hold and all the big shots were too embarrassed about the mistake they had made to feel comfortable acknowledging it. The longer they held off, the more embarrassment they felt. And here we are 33 years later with some internet Goon trying to make a case that it doesn’t hurt people’s efforts to save effectively to tell them enormous lies about the value of their portfolios.
It hurts people’s efforts to save effectively to tell them enormous lies about the value of their portfolios, X. If you were not so filled with embarrassment and anger and hate and envy, you could see that. It is your EMOTIONS talking when you say that perhaps Buy-and-Hold is not as destructive as the last 33 years of peer-reviewed research in this field shows it to be.
I wish you well. But you are going to have to make an effort to rein in those nasty emotions if you are going to make progress in your understanding of what the peer-reviewed research in this field says. I mean no insult in saying that. I am trying to help you. It is your emotions holding you back and anyone who fails to mention the problem you have with your emotions (because you fell for the Buy-and-Hold mumbo jumbo!) is not helping.
I hope you understand at least a little bit. And I wish you well.
Rob
Anonymous says
Buy and hold means that you are always saving/investing, regardless of where the stock market is at. On the other hand, market timing means that people are moving in our out of the stock market and would be more likely to be impacting the savings rates depending on their interpretation of the market.
Thanks for once again confirming the superiority of buy and hold, Rob.
Rob says
I am not able to make any sense out of that comment, Anonymous.
The difference between Buy-and-Hold and Valuation-Informed Indexing is that with Buy-and-Hold you invest in stocks regardless of whether they offer a strong value proposition or not while with Valuation-Informed Indexing you invest in the asset class that offers the strongest long-term value proposition. How could investing in your own best interests hurt saving? The better your payoff from investing, the better the payoff for saving becomes. Knowing that I can obtain a higher return at reduced risk makes me want to save more, not less.
Those are my sincere thoughts, in any event. I naturally wish you all good things.
Rob
Anonymous says
“I am not able to make any sense out of that comment, Anonymous.”
You never have understood buy and hold and your comment shows that you don’t.
With buy, hold and rebalance, you set an allocation (stocks, bonds, cash) and you keep buying at that allocation (along with periodic rebalancing). Those follow this do not let emotions get involved, like what happens with market timing schemes. You have already been given long-term return rates to see that it has not only performed well, but is less risky versus market timing. The problem is that you ignore that and/or delete those comments.
You comments only fit buy and hold, Rob, yet you just can’t admit it.
Rob says
I believe that you sincerely believe in Buy-and-Hold, Anonymous.
And I naturally wish you the best of luck with it.
Take good care, man.
Rob