Set forth below are some words that I recently posted at the Get Rich Slowly blog. The blog entry advocated rebalancing. I put up a comment pointing out the dangers of rebalancing. J.D. Roth, owner of the site, then put up a response stating: “Hey, Rob. Not picking a fight here, but asking a simple question: What investments do you recommend instead? My stock portfolio is up 65% since I moved it to Fidelity in 2009. I’m about to rebalance to have less in stocks, but I’m not going to move everything out. What would you recommend instead?”
What investments do you recommend instead?
You’re not picking a fight, J.D. You’re asking a question that is on the minds of all of your readers. I am grateful to you for asking it and thereby helping us all engage in a little bit more of an effort to figure this investing stuff out together.
There is no one stock allocation that I can suggest everyone adopt. And there is no one non-stock asset class that I can suggest everyone move to when stocks are not a good choice. There are obviously lots of factors that come into play. You would never tell all of your readers to follow one allocation and it is not fair of you or anyone else to think that I might be able to do something like that either.
What I say is that we all should evidence much more skepticism re claims that rebalancing is a good strategy than we have in the past, given the economic crisis we are living through today (which I believe was brought on primarily by the heavy promotion of Buy-and-Hold investing strategies).
Rebalancing is staying at the same stock allocation at all times. Yet there are some valuation levels when stocks offer great returns at low risk and other valuation levels when stocks offer poor returns at insanely high risk. Why would you want to be at the same stock allocation in both sets of circumstances? Rebalancing simply does not make sense. The historical explanation for why it once was considered a good idea is that there was once research suggesting that the market is efficient — rebalancing would be the ideal asset allocation strategy if the market really were efficient).
If you are saying that 65 percent stocks is the allocation that you think makes sense for you at times of moderate valuations, I would say that a stock allocation of perhaps 30 percent makes sense for you today (and 90 percent will make sense when we go to super-low valuation levels). My choice would be to put the money you moved out of stocks into TIPS or IBonds or CDs. That way you will have it to invest in stocks when the likely long-term return on stocks improves (that is, when valuation levels drop).
Please understand that I am not trying to tell you what to do. It is obviously not my place to do that. I’m just a guy who posts on the internet, like you (the difference is that you have been about 500 times more successful than me and please understand that I believe that you deserve your success).
I believe that you are sincere in your Buy-and-Hold convictions, J.D. I also believe that part of the reason why you hold those convictions is that you rarely hear them challenged. That’s because there is a Social Taboo today against saying the sort of things I say about rebalancing and about Buy-and-Hold in general. My hope is that in time (perhaps soon!) you will use your influence in the Personal FInance Blogosphere to overturn that Social Taboo. I am 100 percent confident that we would all be better off as a result.
I don’t know everything there is to know about stock investing. Neither do you. Neither does anyone else. The usual rule that applies when that is the case is that we all post the best thoughts we can with good intent and we all are grateful that the friends we meet on the various blogs are doing that. We learn together. I want to see that Learning Together process take place in investing discussions too. For that to happen, we need to make those who don’t think rebalancing is a good idea as comfortable expressing their thoughts as those who favor rebalancing are comfortable expressing theirs.
I want to help you and all your readers, J.D. I cannot do that with both hands tied behind my back. I respect your views. But I do happen to think you are wrong about this particular point. I’m happy to answer any questions. But I really think it would be a huge plus if some of the leaders in the Personal Finance Blogosphere could get together and issue a statement saying that they oppose the bans that apply today at all of the large discussion boards and at a number of important blogs. To make real progress on these questions, we have to welcome input from all points of the spectrum of opinion.
My bottom-line response to your question is: I don’t want you listening only to me when forming your opinion re rebalancing. I know that, if signals were sent that we want to hear from people who don’t favor rebalancing, we would be hearing from many more people with that viewpoint. I know this because people who hold these views have told me that they are afraid to post. That’s very, very wrong. We all should want to change that, regardless of what particular investing views we happen to hold.
Rob
Hi, Rob,
Happy Easter, guy. Hope you and yours are well. A potpourri for you:
Rob wrote in: http://www.passionsaving.com/how-to-of-investing.html
“I wrote this article in December 2007. You might be reading it five years later. The realities might be very different today from what they were when I wrote the article. If you take Step Nine seriously, you will be able to figure out how to proceed under the new realities. If you failed to integrate the ideas put forward in this article into an overall investing philosophy informed primarily by common sense, you might not be able to do so.
Think about it. Does it make sense? If yes, move ahead slowly. If not, jump off the tracks before you get hurt; if it does not make sense to you, it does not make sense for you.”
—
Kinda’ interesting to look back on this now, huh?! Perhaps, in the face of your admonitions, many would have reduced equity allocation to a reasonable, though still risky, 30%. But had they done that, they would have rode through the 2008-’09 recession and held most of what they made in the past 5 years. Of course, that allocation should have been “low” well before that, if working off average, historical PE/10. So they would not have similarly enjoyed the run-up (post-2002) either, but still made money with a conservative approach to valuations.
I think even at rich valuations, it is still worth having a “low” allocation to equities. After all, the history is dynamic and the average adjusts some.
So me? I’m still sitting at 30% equities (have been for some time); yeah, I think we are richly valued at P/E 23.6 or so. I wish the fixed income alternatives were better— but that is a damned bad reason to throw more into equities right now as the “experts” are pushing many to do.
—
Listening to your old podcasts, and also even casual viewing of CNBC, it occurs to me that this is the one field where being an “expert” has no more assurance of practical implementation mastery than it would for a novice. How different from being a plumber, or auto mechanic, eh? Ha! That is how frequently investing experts are wrong in Bizarro World.
—
After much thought, I think you are right to work just off the S&P 500 (or its proxy TSM) for the equity portion, if one is to use the P/E 10 model. I see no reason to confound the historical (Shiller) data with other asset classes. And it keeps it as simple as it gets; a beautiful thing and all you need…
—
Of course, if one wants a buy-and-hold approach using very disparate asset classes for diversification (like the ole’ Harry Browne we discussed ages ago), then that is another approach entirely. In revisiting HB, though, even if his approach works well (and it has been shown to work very well for very long with almost no appreciable downturns), its symmetrical but bizarre allocation is so alien to many (absent some marketing push) as to be hardly used.
Maybe then, you’ve got another point in your favor, this being the S&P is familiar jargon to even novices, needs just one fund to represent, and one needs but one other “safe” asset class with which to marry it. Then just apply a low-medium-high P/E 10 adjustment (to fair pricing) and you’re done. If anything you’ll end up being too conservative but not broke! And one can’t ask for simpler, which is a big advantage.
The biggest threat to sensible approaches, be it HB or P/E 10 inspired, might again be emotions, especially when one lags the broad markets in upswings. Thus, as I said years ago, you have to be willing to make less in the boom years to use rational investing approaches (yours or HB’s). So there is always discipline needed…
Peace,
Arty
Here is a daily P/E 10 updater for you in case you don’t have it updated on your page: http://www.multpl.com/
It’s always nice to hear from you, Arty. Happy Easter to you too.
I agree with and relate to all you say here. Probably the one that hits me hardest is the comment about “experts.” I actually think the experts are at a disadvantage. They need to sell and all marketers will tell you that it’s emotion that sells. So they feel pressured to go with the most emotional approaches of all. That’s precisely what doesn’t work for the long-term investor.
I actually think it would be a big help for the experts if we were to start permitting honest posting re the historical data and the academic research. If there were a few places where honest posting were permitted, the experts would feel that they had no choice but to report things accurately too. Once everyone was doing it, no one would feel that he was putting himself at a disadvantage by giving realistic and effective advice. I strongly believe that the vast majority of investing experts got into the field with just that idea in mind. So I think they would be thrilled.
It’s the old story of all the mice agreeing that it’s a good idea to put a bell on the cat but none wanting to volunteer for the job.
Rob
Rob,
I know you have been banned from boards and by your account treated harshly by some, even threatened. I was not around in those days to see any of that, and there should be no tolerance for tough-guy BS, even within the absurdity “internet courage”.
But I do see discussions on Valuations and how they should (or should not) affect the decisions an investor makes. I read some of Wade Pafu’s work on Bogleheads, I think. (Plus others discuss the topic.) And some experts do outright claim that valuations matter when forming a plan (expected returns and all that). So maybe the word is getting out there. Sadly, the last downturn may be helping impel that, bit still, it seems to be happening.
Also saw Shiller on CNBC going head-to-head with, of all people, Jeremy Siegel. A nice pairing and fun talk. Shiller seems a shy guy, even on radio, and especially so on TV. But his work does speak volumes. Funny, I always think of you when I hear Shiller because that is how I discovered him, years ago!
Arty
Arty:
The point you are making about people saying valuations matter is of course 100 percent true. I learned that valuations matter from John Bogle, for heaven’s sake. I didn’t learn this from Shiller, I learned it from Mr. Buy-and-Hold himself (I later graduated to Shiller, but Bogle is the guy who got me on the right track). So there is zero question but that Buy-and-Holders permit people to say that valuations matter. They say themselves that valuations matter. Just about all of them do.
That’s not the problem.
The problem is that, while saying that valuations matter, they continue promoting Buy-and-Hold! Huh?
Buy-and-Hold was developed when the Efficient Market Theory was state of the art knowledge in this field. If the Efficient Market Theory were valid, Buy-and-Hold would be aces. But Shiller published research showing that valuations affect long-term returns in 1981! That’s 30 years ago now!
When we are we going to begin permitting people to report the safe withdrawal rate accurately? When are we going to begin permitting people to give realistic asset allocation advice? When we are going to begin permitting people to discuss in reasonable ways whether stocks are risky or not and how to avoid the risks? These are the questions that matter.
I think it would be fair to say that, had we all along permitted honest posting on the academic research of the past 30 years, we would not be living through an economic crisis today. We’d be living through the greatest period of economic growth ever seen in history. It’s nice that people praise Shiller’s book and say he’s a swell guy and all this sort of thing. But when are we going to start telling people what Shiller’s research tells us about how we all need to go about investing in stocks in practical nut-and-bolts terms? That’s the day I am looking forward to. I think it’s fair to say that six months from that day we will all be looking at this economic crisis in the rear-view mirror and there won’t be any further “controversies” as to whether permitting honest posting on investing topics is a good idea or not.
That’s the key to getting things back on the right track. Publishing a book does no good if people don’t apply the insights picked up from it. And how the heck are people going to apply the insights if they have no means to learn about them, if honest posting on the academic research is banned at every large investing board on the internet?
Go to Bogleheads and try posting honestly on safe withdrawal rates or asset allocation or risk management and see what happens to you. I said that to a financial planner once and he thought I must be overstating the case, so he went over there and took me up on the challenge. He was banned within three days. The same thing will happen to you or Wade Pfau or John Bogle or Bill Bernstein anyone else who tries it.
The site administrator over there even told us why. He acknowledged in a recent post that I was banned even though I never put up a single abusive post. He said the reason was that I represent “a threat to the community.” Huh? What does that even mean?
What that guy (Alex Frakt) really means is that I represent a threat to Buy-and-Hold That’s the true deal. If valuations really affect long-term returns (and there is now a mountain of evidence showing that they do), Buy-and-Hold is the purest and most dangerous Get RIch Quick scheme ever concocted by the mind of mortal man. It was not developed with the intent of being that. But that is what is has become in objective terms since it was discovered that it could never work and The Stock-Selling Industry elected to continue spending hundreds of millions of dollars promoting it.
This helps no one, Arty. How many lawsuits do you think we are going to see after the next crash, when we have millions of people suffering failed retirements because they follow safe withdrawal rate studies that get all the numbers wildly wrong and that were not corrected for more than nine years after the errors in them became public knowledge? This is madness. How are we helping people by causing them to get sued by tens of thousands of people?
They are in a trap, Arty. They understand on some level of consciousness that they should have either corrected the studies or at least let people know that there is good reason to doubt the findings many, many years ago. I presume that the hought today is that, if the cover-up continues, perhaps there will never be lawsuits. But how realistic is that? We are still in the early days of the Buy-and-Hold Crisis. People are already starting to ask questions. What happens after the next crash? Do they all just say “oopsie” and hope that no one notices who it was who was pushing Buy-and-Hold strategies for 30 years?
I am the biggest friend the Buy-and-Holders have in the whole world, Arty. I am the guy holding out the hand of friendship to them. I respect them and admire them. I learned many wonderful things from them. Valuation-Informed Indexing is just Buy-and-Hold with the Get Rich Quick element removed. The Get Rich Quick element is not going to work to their benefit! Not in the long run!
I am trying to bring healing. I am trying to help these people out. I have been doing that from the first day. I just don’t have the power to do this all by myself. We need other responsible and caring people to step forward. Once people see how we can fix Buy-and-Hold to make it the most wonderful investing strategy ever (under the new name of “Valuation-Informed Indexing” — VII is really just Buy-and-Hold brought up to data to reflect what we learned from Shiller’s research), people are going to be so excited that to a large extent the losses we have suffered will over time become old news.
But it becomes a lot harder to pull that off after we are living in the Second Great Depression. It sounds bad to say that you didn’t correct a retirement study for nine years after you learned about the errors you made in it. But it hits people harder after they have lost all their money and have no means of getting it back.
I think this stuff is crazy, Arty. All of these people started out wanting to help people learn how to invest and I believe strongly that somewhere deep inside that that’s what they still want to be doing today. Are the words “I” and “Was” and “Wrong” really that hard to pronounce? It’s an exceedingly strange business.
Anyway, if you meet up with any of them, please tell them that I care and that I am grateful to them for what I have learned from them and that I am always here to help. But I will NOT post dishonestly on SWRs. Will not! Please don’t say anything to lead them on re that one. It would only encourage them in these strange hopes they have, and that’s a cruel thing to do.
Again, it’s always interesting to hear your take. I am grateful to you for taking time out of your day to share your thoughts re these matters.
Rob
Rob,
Lots of subjects raised here, too many good ones for one discussion mouthful. If I understand you, I think I disagree with your take on Efficient Markets (as I disagree with others who believe they understand what it means). For one thing, the EMH does not require that investors behave rationally, which is the biggest misunderstanding about EMH that gets repeated. That is simply the way it is, and one can write Fama on that rather than take my word for it. But that’s another topic we can discuss another time in detail.
I read Wade’s work and some others who discuss valuations, and did not see them cast down. I saw plenty of disagreement, to be sure. But even some of the big advisors there mention valuations all the time (not just equities) and how they must be respected. Some advisor (or poster) even quoted you (Norbert?) and wrote at length in a way that appeared to support one possible implementation of your belief.
Anyway, it appears that the “ghost” of you still lurks like Hamlet’s father, frightening some—but that’s their problem. Point is, I think you indeed have been heard (still are in the echoes), even as Shiller is the biggest voice out there in this area. Thanks again for writing so much on Shiller (and Bogle), such that I discovered him and read his primary works via your original site, seemingly long ago.
Miss John. I know you guys were close. I am sorry on that loss.
Arty
What Efficient Market Theory really says is the topic, Arty.
How long has this theory been out? Decades, right? Why is it that no one today can even say clearly what it signifies? Does that not strike you as a little bit odd?
If the Efficient Market Theory doesn’t say that investors are rational, then it doesn’t say anything. There is no way that “efficiency” could be achieved without rationality.
The entire risk of stock investing is the irrationality of investors. If we are going to help people become more effective investors, we are going to need to help them become more rational. The first step is acknowledging that they are not rational today. But Efficient Market advocates can’t permit that because it violates their “theory.”
This is a bad theory, Arty. There are good points to it. It could be developed into something good. But as it has been put forward for several decades now, it is bad stuff.
That’s my opinion. I am always happy to hear other opinions voiced here. It helps our fellow community members for them to hear different sides. There are lots of good and smart people who believe as you do. I could be wrong. I’ve been wrong many times in the past.
Rob
one can write Fama on that
I’ll bet you five dollars that, if you write him, you won’t get a straight answer in response.
Fama believes in it, just like Bogle believes in Buy-and-Hold.
I can point out the contradictions in Fama’s thinking and in Bogle’s thinking because I can see those contradictions. Fama and Bogle cannot see them. They are emotionally invested in their ideas.
They can’t help it. But they are not the best people to be turning to for answers as to whether the ideas that made them famous stand up to scrutiny.
Rob
I read Wade’s work and some others who discuss valuations, and did not see them cast down. I saw plenty of disagreement, to be sure.
Do you see Wade saying that the Old School safe withdrawal rate studies need to be corrected?
He doesn’t say that. That’s why he is permitted to post there, Arty.
I’ve been saying that those studies should be corrected since the morning of May 13, 2002. I was the first person to say that publicly. That’s why I am banned from the board. That’s why the site administrator sees me as a “threat.” Mel Lindauer has a book in which he cites one of the Old School studies positively.
If Wade puts up a post saying that the Old School studies need to be corrected before they cause more failed retirements, a smear campaign will be started against him. You can count on it. If he doesn’t leave in response to the smear campaign, he will be banned. Again, you can count on it. This has been going on for nine years, Arty. There are people who really, really, really, really, really do not want to correct those studies.
Rob
it appears that the “ghost” of you still lurks like Hamlet’s father
That’s a funny way of putting it, Arty.
It’s really the ghost of the historical data.
I am just some fellow who posted what the historical data says on a few discussion boards and blogs. I possess no special powers. I am a humble reporter. It is not really Rob Bennett who is at the center of this show.
It is the historical data and the academic research that are the true stars of the show. The historical data and the academic research possess great power.
It would be different if the Buy-and-Holders didn’t claim that Buy-and-Hold is rooted in data and research. But they do. When you claim that your ideas are rooted in research but ban discussion of the research findings of the past 30 years, people notice and wonder why.
Rob
but that’s their problem.
It’s our problem too, Arty.
We all live in the same society. When the economic system collapses because millions of middle-class people lose most of their retirement money pursuing Get Rich Quick investing schemes marketed as science, we all are left worse off. Every single one of us.
Getting out of this economic crisis is a group project.
Rob
Thanks again for writing so much on Shiller (and Bogle)
I love that parens! That’s what I am all about, Arty. So few people get that.
People get it that I like Shiller. But Rob Bennett is not just a Shiller guy. Rob Bennett is the guy who thought to combine Bogle and Shiller. That’s the true story.
Thanks for taking the care to say it that way. That makes me happy.
Rob
Miss John. I know you guys were close. I am sorry on that loss.
I miss John every single day.
It’s not fair that he’s gone!
Rob
Rob,
I have exchanged emails with Fama. He has written me back. He gets challenged in video interviews on EMH all the time (by goofball CNBC salesman) and all the time wins the arguments, of course. I’ve had no reason to ask him about EMH as it seems pretty clear to me (I do ask about the 3-Factor model). What EMH states is fairly clear. There are two parts.
The first part is that prices reflect all available info and as such represent the best estimate of being correct. (Whether someone thinks prices are high or low is irrelevant. Whether there comes a bubble or crash is irrelevant. That is what people who attempt to criticize EMH don’t understand.)
The second part of EMH is the business end. It says, in essence, because of the first part, it is very difficult to make abnormal profits. If there were inefficiencies, as is always claimed, then it would be very easy to exploit them. But there is no evidence that—after costs—this is being done with any consistency. None.
I think (my opinion) that the word “Efficient” is being taken into different (inappropriate) contexts than intended by the EMH. For one thing, efficient does not mean that folks can’t also be irrational. And Irrational behavior is irrelevant to EMH—providing it is unpredictable and unexploitable. If this were not so, exploitations of all those “inefficiencies” would happen all the time. And there is no evidence of that—especially by so-called experts!
It is far better to discuss useful implementations of PE/10, which you do. It is all you can do since folks may, or may not, use the tool because emotions need to be managed—with any investing approach—including PE/10.
What I really wanted to discuss with you, follows next.
Arty
I definitely applaud Fama for responding to your e-mails, Arty.
That’s straight-up behavior all the way.
Rob
Rob,
I’m interested in seeing if there is any true buy-and-hold strategy that can make sense (putting aside the Harry Browne Portfolio). I raise this only to test the hypothesis that buy-and-hold “cannot work”, as is sometimes claimed (by many and for different reasons).
Here follows a simple 2-fund allocation that anyone could have held for 4 decades (or can hold go forward). I would like to see VII compared to this, given the same starting period (perhaps contact Wade Pafu to run a 30/60/90 against this 2-fund portfolio) for this time period.
1972-2010
40% Total Stock Market
60% Intermediate Treasuries
Cost-adjusted Gross Return 9.5%
Worst year in 2008: -6.82%
*No Losses* in 2001-’02
Overall, just five small negative years in 40 years. I think we can agree that the above Return was a good one. I have the yearly data on the above. Looks like a very smooth ride to a very nice outcome at any rolling 10-year period.
Now, is this 40 equity/60 bonds performance due to the past 40 years being kind to bonds (the “Bond Bull)? Or is it something else, like a “conventional” allocation is damned good way to go as a general idea?
Any way you cut it, 40 years is a long time and a healthy period to examine outcomes, so this is not data mining. I can’t see how this very simple buy and hold portfolio can be judged to have “not worked”.
Lets discuss this approach.
Arty
And Irrational behavior is irrelevant to EMH—providing it is unpredictable and unexploitable. If this were not so, exploitations of all those “inefficiencies” would happen all the time. And there is no evidence of that—especially by so-called experts!
There is 140 years of evidence of it, Arty. That’s the entire historical record.
Have you looked at Wade Pfau’s research showing that Valuation-Informed Indexing beat Buy-and-Hold for 102 of the 110 rolling 30-year periods now in the record?
The true experts are the people who understand that valuations affect long-term returns. The sorts of “experts” you are making reference to are just stock salesmen. These are the people pushing Buy-and-Hold and the Old School SWR studies.
Rob
I can’t see how this very simple buy and hold portfolio can be judged to have “not worked”.
It’s data-mining Arty.
You only knew to go with that allocation because you are looking backwards and can see what worked.
VII isn’t the product of data-mining. I was saying that VII would always beat Buy-and-Hold for nine years before Wade did his research showing that this is indeed so.
How did I know? I’ve bought lots of stuff — books, cameras, cars, sweaters, bananas, on and on. I’ve learned that taking price into consideration when you are making buying decisions is always a good thing. It’s not even possible that there could ever be an exception.
The 140 years of historical data merely confirms what common sense tells us must be so.
Ignoring price (Buy-and-Hold) can never be a plus. Ignoring price is always a minus. Ignoring price can never work. It’s a logical impossibility.
Rob
I’m interested in seeing if there is any true buy-and-hold strategy that can make sense
If it is your dream to find a way that most investors could always stay at the same stock allocation, that can be done. But it cannot be done with Buy-and-Hold. It can only be done by permitting discussion of Valuation-Informed Indexing.
If we let all investors know that they need to be willing to change their stock allocations in response to big price swings, there will never again be any big price swings. Once prices start to get out of hand, enough people will sell to bring prices back to reasonable levels. After that happens, the people trying to pursue Get Rich Quick ends will give up and prices will remain stable for so long as honest posting is permitted.
Market prices are self-regulating, Arty. In a world in which we permitted honest posting, stocks would go up 6.5 percent real each year, the amount of gain justified by the annual productivity of the economy.
What Fama didn’t factor for is the Ban on Honest Posting. For so long as investors have no means of getting their hands on accurate SWR numbers or accurate asset allocation numbers or any of the rest of what they need to invest effectively, rational investing (and efficient markets) remain a pipe dream.
Fama put forward a dream of efficient markets. I am telling people how to achieve them in the real world: Let investors use the internet to inform themselves of the realities. Informed investors are rational investors and it takes rational investors to create an efficient market in the real world.
Rob
Rob,
My 2-fund portfolio example is not data mining—it contains all the data available that existed since those investable vehicles (funds) existed. If you can’t invest in particular vehicles there is little utility to any approach that is historically derived.
By definition, VIINDEXING can exist only as long as INDEXING existed, otherwise the data is synthetic. This cannot be disputed. “Indexing” is built into the model. So my period embraces the period where Indexing was invented (since 1975 or so).
Stated differently, for you to show show me the returns that include earlier periods (pre-indexing), you would have to use synthetic data—and, of course, no indexing. My example uses REAL data using Index-like funds—not synthetic data. Still, I’d like to see how the portfolio would do in other periods—even “synthetic” ones. Maybe I’ll contact Wadu myself on that. Wadu’s paper is not peer-reviewed and it is a work in progress—his words. Still, I think it interesting.
Over four decades, the 2-fund portfolio has worked—and worked well—using simple vehicles despite the fact you (“you” meaning anyone) claim this was “impossible”. The point is that a *conservative* model worked far better than moderate or aggressive models as a buy-and-hold approach. And it worked for the better part of an investor’s working lifetime (4 decades). These are the facts; I have yearly non-synthetic data to prove it.
Note that I am not saying VII would not be comparatively better over that period. It might be better, or not. Chances are it would not be much better or much worse in this example, or any other. Of course, there are an infinite number of ways VII can be applied—not just 90/60/30 (which is a valid approach, IMO). I would like to see Wadu run VII against the portfolio I showed—year by year since 1972. But again, my point is not to provide a winner in that race. Maybe I’ll ask him to do just this.
Thus far what I see is this. My real point is simply that it is unfair to say ALL buy and hold models are equally problematic when it seems that it is the over-aggressive approaches that are the real problem. The Harry Browne buy-and-hold “works”. The portfolio I provided “works”. So general statements like “cannot work” are wrong. But they are both (HB and the 2-fund) conservative approaches, albeit very different from each other. It is only greed that prevents many from using these solid, proven approaches. Greed usually does not work, in my view, for ordinary folk not called Gordon Gekko using insider info.
Finally, PE/10 and shifting allocations requires discipline and emotional fortitude for many reasons. There will sometimes be years of underperformance before the payoff—and you know that because you talk about that. How many people will wait through years of underperformance? Not many, I think.
Still, I think many can benefit from PE/10. But it would never “cure” anything because humans are by nature emotional, impatient, and likely to chase performance. That is the main reason they get screwed. This is true whether there was “honest posting” or not, and also because very few investors have the desire to read the posts or anything related to investing anyway! That is, in a perfect world of honest posting, most investors would not read the posts or likely even know they existed. They don’t care about investing literature as you or I do.
PE/10 is useful for the disciplined, I grant that. I certainly use it to inform my allocations. But perhaps a *conservative* approach can also work. So far, I don’t see these two ideas (*conservative* investing and VII) as mutually exclusive and the non-synthetic evidence proves it.
Arty
My 2-fund portfolio example is not data mining—it contains all the data available that existed since those investable vehicles (funds) existed.
It’s data-mining, Arty. You focused on these two classes because you know today that the numbers for the past 40 years turned out good.
Can you offer any reason why you would have thought that the numbers would have been good at the beginning of the 40 years? Can you offer any reason why we should believe that the numbers will be good for the next 40 years?
There’s always going to be some asset class that is going to perform better than the market as a whole. There are also always going to be asset classes that are going to perform worse than the market.
I am not saying that you might not make a good pick if you take a guess as to what is going to do well over the next 40 years. You might make a great guess. You also might make a poor guess.
Valuation-Informed Indexers don’t have to take any guesses. We buy the entire market when buying the entire market makes sense and we avoid buying the entire market when buying the entire market doesn’t make sense.
I am NOT saying that there will not be some picks that will do better. There will be. I am saying that there is no way to know what will do better in advance. You can’t invest retroactively. You can’t go back 40 years in a time machine. You need to make your picks for the next 40 years today, when you do’t know what is going to happen.
Go with the market as a whole and you don’t have to worry about getting the pick right. When you buy the market as a whole, you are buying a share of the productivity of the U.S. economy.
This is the part that Bogle got right, by the way. Bogle is the first person who made a serious effort to provide middle-class people a simple way to tap into the benefits of stock investing. He will long be remembered as a hero to the middle-class investor for having done this, in my assessment. He is a much-loved pioneer and rightly so.
Rob
it would never “cure” anything because humans are by nature emotional, impatient, and likely to chase performance. That is the main reason they get screwed.
We don’t agree re this point, Arty.
I agree that we all have a Get RIch Quick impulse within us. We are indeed all flawed humans.
But I don’t see these other things you (and many other smart and good people) are seeing — the greed and the lack of discipline and the performance chasing and all this sort of thing. Why is Buy-and-Hold so popular? I think it’s because people are looking for a NON-Get Rich Quick approach. Most people believe today that the data and the research really support Buy-and-Hold. That’s a very good sign. That tells us that there are millions of investors who are sick of the GRQ stuff and who are looking for something REAL.
Tell people the realities and then see what happens. It’s not fair to put down middle-class investors until we provide them a means of learning the realities and see how they respond. There have been thousands who have expressed a desire that honest posting be permitted. Why? If they are so greedy, why do they care?
I view these characterizations as unfair (although, again, I do agree that we all have a Get RIch Quick impulse within us and that we have indeed messed up big time — we are all sinners to a greater or lesser extent [very much including yours truly!]).
Rob
I don’t see these two ideas (*conservative* investing and VII) as mutually exclusive
I certainly don’t see them as mutually exclusive.
I don’t see VII and Buy-and-Hold as mutually exclusive. I have tons of friends who are proud Buy-and-Holders. I wish them the best of luck with their investing strategies, you know? Maybe they are right and I am wrong. It’s been known to happen.
I am not able to come up with any rational justification for ignoring price when setting your stock allocation. That’s why I say that Buy-and-Hold can never work. But I am all for those who believe in it giving it a try. Let a thousand flowers bloom! Maybe the Buy-and-Holders will be able to break through my thick skull and teach me a few things one of these days!
Rob
Rob,
As currently defined, VII requires Indexing. As such, only data from the indexing period can be used to backtest the approach. By definition, synthetic data cannot be used to support the VII model, unless you alter the word “Indexing” to something else.
In the indexing period, I have shown a *particular* buy and hold approach worked very well—the data proves it. But it is a *conservative* approach, as judged by most investing terminology. As such, it is very different from other buy and hold models that are more aggressive and those are the very ones that have harmed many.
I emphatically do not recommend those other (aggressive) approaches to buy and hold. But I cannot ignore data that shows a conservative approach also works. I’ll see if I can get Wade to run a regression on my two-fund model and report back to you what he finds.
A model based on Shiller’s PE/10 also works. I like it. If the price is a problem (as it is for you and some others), than VII is clearly the approach for a particular investor. If an investor requires consistency and does not want to assess valuations, then *conservative* may work better—for that person.
So, the approach that is likely to work best is the one most aligned to a particular investor’s emotional makeup—the one that permits him to enact the approach (either approach) over the long haul. Clearly, not getting crushed in downturns is helpful to that. Either approach can and has accomplished this.
What both approaches have in common, as I said many times, is that emotional fortitude is *required* to reap their benefits. You know this because you mention it also. One must be willing to make less in Bull markets than aggressive investors make. The tradeoff is that one then survives the Bear markets, and a better chance to stay invested with the approach. But one must accept the tradeoff in either approach as there must be periods of comparative underperformance.
We are agreed that the aggressive buy and hold does not work. And I do not refute Shiller or VII. I’m all for promoting that view. But both approaches—the *conservative* and a Shiller-inspired model— can work. That’s all I’m saying, really.
For ME, I’d probably always be conservative (as a Base) and also have an eye to PE/10—making the equity shifts at the more extreme ends of valuations. But that is me.
Arty
Thanks for sharing your thoughts, Arty.
Rob