I’ve posted Podcast #129 to the “RobCasts” section of the site. it’s called Are Middle-Class Investors Too Dumb to Invest Effectively?
The “experts” insult us with this explanation for their promotion of the Passive Investing model. Yes, we’re highly emotional about our investing choices today. That’s because our heads are filled with the Passive Investing gibberish and we are not able to develop any confidence that our strategies are going to work out long-term as a result. Their suggestion that we are “dumb” is a case of Blaming the Victim. We’re not dumb. We’re confused (and largely because the investing advice they have been pushing for three decades now doesn’t add up).
Rob,
I love the Investor’s Prayer: “Lord, protect us from our protectors.”
Have fun.
John Walter Russell
Yes.
I remember when I put that one to the Vanguard Diehards board. I always put a little effort into coming up with punchy headlines for my posts. And I was personally very happy with that one. But I worried a bit that it was going to upset the Lindauerheads. So I almost held back. But ultimately I decided that it was just too funny not to go with it. So I did work up the courage to push the “submit” button.
There’s an interesting and important question raised here. Is it mean-spirited to use a headline like that? Is it ridiculing the Passives to take that path?
I hope not. If it is mean-spirited, it is wrong. So we all need to be careful not to go too far down that path. It is a dangerous path.
The other side of the story is that one of the ways that humans communicate is through jokes. There have actually been a lot of people who have pointed out the holes in Passive over the years. But they tend to do it in tentative and cautious ways, certainly not engaging in any ridicule. I think that’s one of the reasons why Passive is still around. I think we need all those who see through the nonsense to speak up much more strongly, to point out just how dangerous Passive is to all who fall for it. People in the middle see that no one is speaking strongly in opposition and that influences the extent to which they are persuaded to check out the Rational case.
So we need to speak more strongly and we need to go with humor in appropriate cases. Yet we must work hard never to give in to any unfortunate temptations to be mean-spirited or to be personal in our criticisms. That can be a tricky business.
Right now my hope is of course that we can get many more people speaking out strongly in opposition to Passive. I have some concerns though that things may flip too far in the future, that when millions learn of the trickery that has been employed to cause their retirement accounts to be wiped out there are going to be some who are too aggressive and who become angry and counter-productive.
Yes, we need to tell jokes about Passive. Humans tell jokes about the horrible things in this world that hurt humans and the Passive idea certainly fits the bill. But we must always keep in mind that Love Is the Answer. We need to tell friendly jokes, not the other kind. We don’t want to do anything to antagonize the Passives, we want to offer the hand of friendship to them to persuade them to begin putting their energies to more constructive purposes.
Balance — The secret of life!
Rob
Rob,
Not only Professor Shiller’s readers but also Alan Greenspan himself thought that the economy had entered a new, golden age with permanently higher returns.
Have fun.
John Walter Russell
Rob,
I think that there is at least one group that benefits from passive investing. They include engineers who don’t have the personality for investing. They find patterns in randomness and outsmart themselves. Taking their overactive hands away from the throttle helps them immensely.
Have fun.
John Walter Russell
Taking their overactive hands away from the throttle helps them immensely.
Wow.
That’s an interesting theory. I’m going to need to think that one over a bit.
Rob
Rob,
It would be disgustingly easy for the experts to talk about new findings related to bubbles.
That is how the experts could provide themselves with cover for their mindless dogmatism.
Have fun.
John Walter Russell
That is how the experts could provide themselves with cover for their mindless dogmatism.
I hope that they can find a way before events force things. My worry is that it gets harder as more time passes.
Rob
Hi Rob,
Just found your site and blog thru Options For Rookies and have had a quick look around.
I am interested in learning more about the weaknesses, in your opinion, of re-balancing as an adjunct/alternative to the traditional buy-and-hold approach.
Doug
ps. I also left a comment/question over at the option site.
I am interested in learning more about the weaknesses, in your opinion, of re-balancing as an adjunct/alternative to the traditional buy-and-hold approach.
Thanks for checking out the site, DJ. I responded to your question at the Options for Rookies blog over at that site. Thank for the kind words you posted there.
Rebalancing is a disaster!
Here’s a link to the “Scenario Surfer” section of the site:
http://www.passionsaving.com/portfolio-allocation.html
The headline there is “Portfolio Allocation Shocker — Timing Beats Rebalancing!” Check out the calculator to come to a full understanding of why this is so.
Rebalancing leads people to think that they are doing something about the problem of investing in insanely overvalued stocks without coming close to doing the job. It’s an awful idea. What you want to do is to check what the long-term value proposition of owning stocks is at the various valuation levels and set your stock allocation accordingly. You can use The Stock-Return Predictor to do this.
Using that calculator, you see that the most likely long-term return on stocks purchased in the early 1980s was an annualized 15 percent real. In the late 1990s, the most likely long-term annualized real return was a negative 1 percent. What stock allocation makes sense both when stocks are providing a positive 15 percent return and when they are providing a negative 1 percent return? There is none. Rebalancing is insane!
The most important thing that an investor does is to set his stock allocation. This is something that you very much want to get right. It is 100 percent impossible to get it right if you rebalance. If you got it right in 1982, you got it wrong in 1999. If you got it right in 1999, you got it wrong in 1982.
Rebalancing is a Passive Investing strategy. Passive Investing was developed by people who believed in the Efficient Market Theory and the Efficient Market Theory has been entirely discredited by the academic research of the past 28 years. It is time to put a stake through this one’s heart and get about the business of developing more rational and prudent and realistic and effective strategies.
The short version of my thoughts re idea of middle-class investors giving consideration to adopting a rebalancing strategy? —
Triple Yucko!
Rob
To dj:
I have looked at rebalancing from several different perspectives. The answer keeps coming up the same: it is a mistake.
Valuations are much, much more important.
Have fun.
John Walter Russell