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:
That would be a market timer. A buy and hold person doesn’t sell when the stock drops. Therefore, looking at return rates of the life of the fund as well 10 years are showing actual results of buy and holders. As said before, you have been given this data.
What if the Buy-and-Holder doesn’t hold when he sees most of his life savings evaporate?
If people who say they are Buy-and-Holders really held through dramatic price downturns, we wouldn’t see dramatic price downturns. It is the massive selling that CAUSES dramatic price downturns.
The reality is that Buy-and-Holders always lose confidence in their strategy when the numbers come to show that it doesn’t work. Stocks are now priced at two times fair value. So we should be expecting a 50 percent price drop. Do you really think that all Buy-and-Holders are going to hold when 50 percent of their life savings is washed away? Most will not. It is a very rare person who can avoid panic after losing 50 percent of his life savings. Buy-and-Hold was not designed with the realities of human nature in mind. And so it never works. Investing is done by humans. Humans SELL when they experience life-destroying losses.
The better way is to keep your risk profile constant over the years. Exercise price discipline as you go along and you will never feel pressured to sell when your excessive risk causes you to suffer unacceptable losses. Stocks are obviously a lot more risky when prices are at two times fair value than they are when they are at fair value, right? So lower your stock allocation a bit to bring it where you wanted it when you started out. With the proper risk profile, you will be able to hold. Then things really will work out long term. That’s Valuation-Informed Indexing.
Both Buy-and-Holders and Valuation-Informed Indexers are seeking to “Stay the Course.” The question is, is it more important to always have the same stock allocation or is it more important to always have the same risk profile? Bogle says that it is more important to always have the same stock allocation. I say that it is more important to always have the same risk profile. Shiller’s research shows that risk is not static but variable. So our stock allocations must be variable too if we are to have any hope of keeping our risk profiles roughly stable over time. It is the investor with the constant risk porfile who is able to stick with his plan for the long term because he doesn’t suffer the devastating hits that those who keep their stock allocation stable instead always suffer in secular bear markets.
Those are my sincere thoughts re these matters in any event.
I naturally wish you all the best that this life has to offer a person despite any differences we might have re stock investing, Sammy.