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:
If you invested a lump sum in stocks at the beginning of the bull/bear cycle (1982),”
Who is investing just in one lump sum? People are investing over many years while the market does up and down. We know in the long run the market will continue to grow.
This is all part of how you spin the data.
We agree that the market grows over time, Sammy. Historically, it grows by 6.5 percent real per year on average.
Where we differ is that you say that it is not possible to predict future returns (to time the market) and so you generally stay at the same stock allocation at all times. In contrast, I say that we CAN predict long-term returns to a high (but not perfect) degree of accuracy by looking at valuation levels. Thus, I say that the sensible thing is to go with a higher stock allocation at times of low valuations and with a lower stock allocation at times of high valuations.
Wade Pfau and I co-authored research a few years back that showed that an investor who goes with a 90 percent stock allocation when valuations are low, with a 60 percent stock allocation when valuations are moderate and with a 30 percent stock allocation when valuations are high will end up with far higher lifetime returns while taking on dramatically less risk. It’s been working that way for 150 years now. That’s as far back as we have good records of stock prices.
Those who follow a Buy-and-Hold strategy are not practicing price discipline when they buy stocks. There’s a big penalty to be paid for failing to practice price discipline when buying stocks, just as there is a big price to be paid for failing to practice price discipline when buying anything else. The tricky part is that with stocks it can take a long time for the price that is being paid to become evident. But there always is a big price to be paid for failing to exercise price discipline and there always is a big benefit to be realized for being willing to engage in long-term timing (price discipline).
Investors need to focus on their lifetime return, not on what is going on in the market at any one particular moment in time. Gaining a much higher lifetime return permits you to do all sorts of exciting things with your life that you would not be able to do if you followed a Buy-and-Hold strategy (like retiring early!). There is no downside.
That’s my sincere take re these matters, in any event.
Thanks for stopping by.
Rob
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