A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

The Coming Revolution in Our Understanding of How Stock Investing Works

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I’ve posted a Guest Blog Entry at the My Personal Finance Journey blog titled The Coming Revolution in Our Understanding of How Stock Investing Works.

Juicy Excerpt: If the market is efficient both in the short-term and in the long-term, Buy-and-Hold is the perfect strategy. The only way to capture the high returns of stocks is to be heavily invested in them and, since there is no way to predict returns, the only thing to do is to remain heavily invested in stocks at all times.

However, if the market is inefficient in the short term and efficient in the long term, Buy-and-Hold is the worst of all possible strategies. If the market is always in the process of moving in the direction of efficiency, long-term returns are highly predictable. The last thing you want to do is to maintain a high stock allocation when the market is insanely overpriced and in the process of returning to fair value prices.

We now have the advantage of both the wonderful insights of Fama and of the wonderful insights of Shiller. We need to combine them into a model for understanding for the first time how stock investing really works. The strategy that combines both insights is Valuation-Informed Indexing. Valuation-Informed Indexers disdain short-term timing but always practice long-term timing as needed to keep their risk profiles roughly constant.

Juicy Comment #1: An interesting take on a well researched topic. (This one’s going in my round up thurs)

Juicy Comment #2: Until I do my research more on this technique, I am still a believer in investing with the market. However, it’s cool to hear about new ways to analyze things! Who knows? There might be something better out there! 🙂

Juicy Comment #3: I would never want anyone to go with this without checking it out carefully. The is 100 percent contrary to the conventional investing wisdom of our day.

Juicy Comment #4: What is “the market”? The market is us! The market is just the collection of all investors! So when we say that “you cannot beat the market,” what we are really saying is that we are so gosh-darned wonderful that it is impossible to beat us, is it impossible for us ever to make mistakes. Doesn’t it sound a bit arrogant when put that way?