Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Yet another article that says you are wrong, Rob.
And can you tell us how his data is wrong?
It’s not his data that is wrong. It’s his thinking process that is wrong. This fellow is testing what John Walter Russell referred to as “Idiot Switching.” Idiot Switching never works. For obvious reasons.
The thought process behind Idiot Switching is that overvaluation is irrational and that the irrationality should be exposed by the market and that the smart investor should therefore be able to exploit this irrationality by timing his moves in and out of the market. It makes sense. I don’t deny that. But it doesn’t work. Idiot Switching has a TERRIBLE track record. My guess is that Idiot Switching does even worse than Buy-and-Hold in the long run. Sometimes it works just by luck. But the historical record shows that it is a very, very bad strategy. One of the things that I love about the Buy-and-Holder is that they have done more than anyone else to EXPOSE the flaws of Idiot Switching.
Look at what happened in the late 1990s. Stock prices were at insanely high levels in 1996. We were priced for a crash. Idiot Switchers got out of stocks. Then we had three years of the biggest gains in history in 1997, 1998 and 1999. If you want to know how stock investing works in the real world, you need to take a moment to try to understand why that happened, why Idiot Switching was such a disaster in that particular case and in fact fails just about every time it is tried.
The Idiot Switchers are applying reason to an unreasonable situations. They are saying “prices SHOULD come down because they are now so high.” But the entire reason why prices got so high in the first place is that investors are not rational but highly EMOTIONAL Those darned emotional investors DON’T CARE that stocks are priced for a crash, they just go ahead and send them to higher and higher price levels anyway despite the logic behind the Idiot Switching “strategy.”
Valuation-Informed Indexing is not Idiot Switching. Not in any way, shape or form. Valuation-Informed Indexers are as much opposed to Idiot Switching as they are to Buy-and-Hold. Idiot Switching is at heart really just another emotional approach, another marketing gimmick.
Valuation-Informed Indexing is a risk management approach. The core idea is that investors should be trying to keep their risk profiles roughly constant over time. Risk increases as price increases. So for an investor to keep his risk profile constant, he MUST adjust his stock allocation in response to big price swings. Do that and you reduce the risk of stock investing by 70 percent while also increasing your returns enough to be able to retire many years earlier. It is impossible to imagine any scenario in which keeping your risk profile constant would not produce good results and of course the entire historical record shows that taking this simple step has been paying off big time for the investors who follow it for 145 years now. It is impossible for the rational human mind to imagine any circumstances in which it would not.
A showing that Idiot Switching does not work is old, old news, Anonymous. Those who follow the research in this field have known what this guy is saying for a long, long time. To check the merit of VII, you have to do what Wade Pfau and I did in the research that we co-authored and had published in a peer-reviewed journal. We checked the merit of VII. That is of course something very, very different from what this fellow did.
That’s of course why you threatened to destroy Wade’s career if he continued to do honest work while you did not threaten this fellow in any way. Idiot Switching offers no threat to Buy-and-Hold. Once the American people are able to learn about Valuation-Informed Indexing, which is the first true research-backed strategy, there will be no more Buy-and-Hold. We will all pull together to bury the smelly Get Rich Quick “strategy” 30 feet in the ground, where it can do no further harm to humans and other living things.
That’s Rob Bennett’s sincere take re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors.