I’ve posted Entry #392 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller in 1996: “Long-Run Investors Should Stay Out of the Market for the Next Decade.”
Juicy Excerpt: Shiller states: “Looking at the diagram, it is hard to come away without a feeling that the market is quite likely to decline substantially in value over the succeeding ten years; it appears that long run investors should stay out of the market for the next decade. Is this conclusion right? How can we reconcile it with the widespread public impression that the random walk hypothesis is at least approximately true?”
Thankfully I didn’t take his advice.
I can certainly understand why someone would say that, Evidence. I believe that the vast majority of investors would share your view. Shiller’s prediction did not prove out. That’s an objective fact. At the end of the 10 years, the investor who remained heavily in stocks would be ahead. So the numbers support your view, from one popular way of looking at things.
All that said, my view is that Shiller’s advice was good advice. It all comes down to one thing. When prices go up beyond fair-value levels, are the extra gains the product of economic realities, as the Buy-and-Holders believe? Or are they the product of irrational exuberance, as the Valuation-Informed Indexers believe? If those extra gains are the product of irrational exuberance, they are going to disappear sooner or later. We don’t know when. But we know that they are going to disappear. So the risk of going with a heavy stock allocation at those sorts of prices is sky high. I think Shiller gave good advice in suggesting that investors with high stock allocations lower them.
I think you are wrong to say that you are happy that you didn’t take Shiller’s advice. Have you done calculations to see where you will stand if we see a 50 percent price crash, as we will if Shiller’s research is legitimate? You won’t be ahead at that point. So what good will having been in stocks all those years end up having done for you? Even in a case in which Shiller’s prediction ends up failing (which it did), those who ignore it end up behind in the long run. Huh? What the f?
The big deal here, in my assessment, is — What causes overvaluation? If it is true economic gains, Buy-and-Hold is the ideal strategy. If it is irrational exuberance, which is going to disappear in time, you have to consider the risk that you are taking by investing your retirement money in something that could disappear at any moment. I don’t like taking that sort of risk with my retirement money. So I follow Shiller’s advice. Even when he gets the timing wrong, the general point that he is making — that stocks are more risky when prices are high — is so important that the advice pays off in the long run.
That’s my sincere take, in any event.
I naturally wish you all good things.
Risk-Aware Rob