“The Question Under Dispute Is — Does the Risk/Reward Analysis Change When Valuations Change?”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“Valuations have been affecting long-term returns for 148 years now. ”

They sure do, for bonds as well as stocks. Expected returns for both are lower than what we’ve seen over the past few decades. So what? Doesn’t make a buy, hold and re-balance portfolio an invalid choice.

Stocks might drop, then again they might double – just like they did when valuations were high five years ago.

It absolutely makes Buy-and-Hold an invalid choice, Anonymous.

When the expected return is lower, the risk/reward analysis changes. So your stock allocation should change.

Now —

Some changes in the risk/reward analysis might not be big enough to require a change. So there are going to be some judgment calls as to whether a change is needed and as to how big a change is appropriate. The fact that judgment calls are required is all more reason why honest posting must be permitted. We need to hear from people holding all sorts of perspectives to accumulate all of the inputs we need to make the best possible judgment calls. The worst thing in the world would be to only hear from one segment of the community. Then you get a slanted view. That hurts every single investor alive and helps precisely no one.

I agree with you that stock prices might drop or might double again. That’s not under dispute. The question under dispute is — Does the risk/reward analysis change when valuations change? Up to a point, you seem to be agreeing that it does. But then you pull back and suggest that there’s no need to quantify how big a change there has been in the risk/reward profile and how big a change investors need to make in their stock allocations in response. I strongly believe that we all should be trying to quantify this stuff.

I am in favor of more discussion and of more research and of more quantification. You are in favor of blind obedience to Buy-and-Hold dogmas. That’s the difference between us. You want to shut down discussion of the most important investment-related questions and I want to open up discussion to include all research-based findings, both those from before 1981 and those from after that point in time.

Rob