Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
So, what you are saying is that if Vanguard says I have $4 million in my account, they are lying to me and I am actually broke, right?
I’m not saying that you are broke. I am saying that you need to divide by two to identify the true, lasting value of your portfolio at a time when the market is priced at two times its fair value. The real value of your account is roughly $2 million.
Is it a lie to say that the value of the account is $4 million? it is. We need to be careful here. It would also be bit untruthful to say flatly that the value of the account is $2 million. You could cash in the account today for $4 million. So the $4 million figure has significance. But the lasting value of the account (according to the last 36 years of peer-reviewed research, not just me) is $2 million. So that has to be noted.
The most truthful way to talk about the value of your account is to note both realities. The account has a short-term value of $4 million because it can be cashed in for that amount today. But it has a long-term value of $2 million because 36 years of peer-reviewed research shows that valuations affect long-term returns. You don’t have a $4 million account that will be earning a return of 6.5 percent real for as long as you hold it. You have a $4 million account that will be earning returns far below 6.5 percent real until the stated value of the account comes to reflect its real value (which is half of today’s stated value).
Does that help?