Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
“I am ahead of the Buy-and-Holders on a risk-adjusted basis”
That claim means nothing with details. Given your admitted 15 years with no income (or at least, none earned by you) most likely your net worth is at or near zero. Of course, you are always free to set the record straight.
These discussions have been going on for 15 years, Dan. You have been present for them the entire time. There have been dozens of times when community members have suggested that we run the numbers for how Buy-and-Hold compares with Valuation-Informed Indexing starting from 1996 (when I got out of stocks) or from 2000 (when the bull market peaked). Every time the numbers come back the same. Those who moved to TIPS or IBonds in 2000 are ahead today. Those who moved in 1996 are a small bit behind on a nominal basis and a small bit ahead on a risk-adjusted basis.
I am 100 percent confident that, if you do the calculation again, you will find something similar. It’s been turning out that way for 145 years now. How could it ever be different. To stick with the same stock allocation regardless of valuations is to fail to practice price discipline when buying stocks. Huh? What the? Why would any rational person think that such an “idea” could ever work?
It never works. The popularity of Buy-and-Hold has nothing to do with any intellectual merits. It is popular because it offers EMOTIONAL relief. We are all worried about having enough to retire. Double your portfolio size and the numbers work better. Buy-and-Hold tells us to ignore the fact that stocks are today priced at two times their fair value and thus to fool ourselves into thinking that our portfolio values have been doubled.
The question remains as to whether we will continue fooling ourselves after prices have crashed and we are all feeling the real-world pain of having engaged in such a massive act of self-deception. I think we are going to give it up. But there’s only one way to find out for sure — we are just going to have to be a little patient and see how things play out.
I wish you the best of luck with it, Dan. Maybe I will be proven wrong. I don’t think it is going to happen. But Bogle didn’t think that Shiller or anyone else was ever going to be able to show that valuations affect long-term returns and that one sure happened. So we all need to try to keep our minds a tiny bit open to the possibility that we could be wrong. Especially when millions of retirements are riding on what we say.
Hang in there, my good friend.