Set forth below is the text of a comment that I recently posted to another blog entry at this site:
It doesn’t look like Shiller is planning on a crash. He says that the S&P is going up and he makes a good case for buy and hold:
Thanks much for sharing the link, Anonymous. You have shared a good number of links to Shiller stuff and I am grateful for that. Shiller is the Master. I have a strong belief in the importance of his research and all of my work is an attempt to tease out implications of his research. But there is no question but that Shiller and I do not agree on all points. It is important that people see where the differences are so that they can make up their own minds. You have been super at bringing Shiller videos and articles to people’s attention.
I was not able to play the video at the link you provided. I don’t know why. I tried to find another site offering the video but was unsuccessful in finding one. So all I have to go by is the article that accompanied the video in your link.
The article indicated that all that Shiller said was that the S&P may reach 1430 by the year 2020. I haven’t done the math to see how likely that scenario is but it doesn’t sound unreasonable to me. I don’t agree even a tiny bit that that statement alone would suggest either that Shiller does not expect another crash or that Shiller is making a good case for Buy-and-Hold. We disagree strongly re that one.
It is entirely possible that we could see a crash sometime in the next year or two and then see the S&P rise to 1430 by the Year 2020. In fact, a scenario along those lines is precisely what we should expect given the last 34 years of peer-reviewed research in this field. It always happens like that. In the 145 years of historical return data available to us, there has never been a single case in which it did not go like that. We do not know precisely when the crash will come or precisely when we will recover and then boom back up to 1430. But we know from 145 years of stock market history (as analyzed in 34 years of peer-reviewed research) that it is highly likely both that we will see another crash taking us down 65 percent from where we stand today and that we then will see a recovery that will take us to something in the neighborhood of 1430.
I am mystified as to how you could say that the playing out of that scenario would make a case for Buy-and-Hold. I think the playing out of that scenario would make the strongest case imaginable for Valuation-Informed Indexing.
Those who follow Buy-and-Hold will be losing 65 percent of their retirement money over the course of the next few years if this scenario plays out. We will then be seeing a huge boom in stock prices in the years following that crash. The Buy-and-Holders will have very little capital remaining at that time to invest in a booming stock market. The Valuation-Informed Indexers, in contrast, will be loaded. They will suffer only small losses in the crash because they have adopted valuation-informed stock allocations. So they will be able to participate to a far greater extent in a booming stock market. That’s not an advantage? Huh?
It’s a huge advantage. I have performed hundreds of runs on the Scenario Surfer. Scenarios like this show up over and over and over again. In fact, they show up in the MAJORITY of 30-year runs. The scenario that Shiller is describing (going by the text set forth at your link — I have not seen the video) is the one that makes Valuation-Informed Indexing so magical.
What happens is that for many years the two strategies either perform equally or Buy-and-Hold is actually superior to VII for a time. Then we see a scenario of the type being forecast by Shiller and the VIIer goes so far ahead in a very short amount of time that the Buy-and-Holder cannot ever catch up. It’s not just the huge differential in returns. The VIIer obtains compounding on that differential for decades into the future. At the end of his lifetime, the VIIer is usually hundreds of thousands of dollars ahead. I have seen numerous cases in which the VIIer is over $1 million ahead. That is not the norm, to be sure. But it happens not too terribly infrequently.
Anyway, that’s my take.
I expect to try to turn this one into a column. Thanks again for your help here. I am learning from you. I hope that I am giving something back so that it is a two-way street.
My best wishes to you.