I’ve posted Entry #326 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Three Return Scenarios That Applied in the Wake of the 2008 Crash.
Juicy Excerpt: It’s not just the drop in their portfolio values that cause Buy-and-Holders to panic in the wake of price crashes. Another factor is their belief that price changes are caused by unforeseen economic developments. If one believes that price changes are caused by economic developments and prices fall hard, the obvious conclusion is that the economy is in bad shape. It is more than a little troubling for investors whose retirements depend on the smooth operation of the economy to learn suddenly that it is not doing at all well. Buy-and-Holders are hit with a double dose of bad news when stock prices crash.
The Valuation-Informed Indexing strategy helps investors develop a more balanced mindset. It is of course a negative that crashes cause portfolio values to diminish. But the other side of the story is that every drop in valuations causes long-term return expectations to increase. So the investor who is investing for the long term and who follows a Valuation-Informed Indexing strategy does not view a price crash as a negative; he sees it as a negative countered by a positive, an event that has an overall neutral effect on his retirement prospects. No one panics in response to neutral events.
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