Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
It matters when it comes. If it takes 60 years and stocks only use 50% of their value there is no way you will ever catch up due to lose compounding.
145 backwards looking years are irrelevant. The next 40 years is what matters for the current generation.
The basic point that you are making here is legitimate, Laugh.
It obviously is true that what you care about is the next 40 years, not the past 145 years. The problem, of course, is that none of us knows what the next 40 years will bring. We look to the last 145 years of returns for guidance re that question. There have been lots of different types of scenarios that have played out over the past 145 years. The most realistic assumption is that something at least generally along the lines of one of the scenarios that we have seen play out in the past is what we will play out in the future.
If you are confident that we will see something different in the future than what we ever seen in the past, it’s fine to go with that belief. But if you are offering advice to others that is rooted in that belief, you need to let them know that that’s the case. The Buy-and-Hold retirement studies said that a 4 percent withdrawal was safe for retirements in which the historical return data showed that no withdrawal greater than 1.6 percent was safe. That’s fraud when it is done knowingly and it is error even when it is done as the result of cognitive dissonance. If you say “presuming that stocks perform in the future in a way in which they never have in the past have performed, then 4 percent is safe,” that’s on the right side of the line. The Buy-and-Holders don’t do that. They claim that there is data supporting their crazy claim that the safe withdrawal rate is always the same number. That’s fraud (not knowing fraud in cases where cognitive dissonance rules, but still).
There ARE scenarios where the Valuation-Informed Indexer fails behind because overvaluation remains in place longer than anticipated and then cannot catch up because he has missed out on compounding returns. These cases are rare. They constitute about 10 percent of the scenarios that can be generated using the 145 years of historical return data available to us. Investors do need to know about this possibility. It would be wrong to hide this reality from them.
Still, we are talking about a 10 percent possibility. There is a 90 percent possibility that the VII investor will end up ahead in the long run. And, in the 90 percent of cases in which the VII investors ends up ahead, he usually ends up FAR ahead while, in the 10 percent of cases in which he ends up behind, he is usually behind by just a little. Investors have no way of knowing in advance whether one of these rare scenarios is going to play out or not. So I think it is fair to say that VII always offer the better risk-adjusted long-term return. The Buy-and-Hold investor occasionally will end up ahead but he takes on far more risk in gaining that slight chance of ending up ahead.
Does that help?