Valuation-Informed Indexing #414: Buy-and-Holders Are Satisfied With Their Strategy Because They Don’t Adjust Their Portfolio Statement Numbers for the Effect of Valuations

I’ve posted Entry #414 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders Are Satisfied With Their Strategy Because They Don’t Adjust Their Portfolio Statement Numbers for the Effect of Valuations.

Juicy Excerpt: Stock prices have increased by 309 percent from July 1996 (when Shiller issued his warning) through today. So an investment of $100,000 would have grown to over $400,000. But stocks are today priced at over two times fair value. If overvaluation is the product of irrational exuberance not possessing lasting economic significance, that $400,000 could be reduced to $200,000 in the next year or two or three. IBonds and Treasury Inflation-Protected Securities (TIPS) were available in the years following Shiller’s warning that paid long-term returns of 4 percent real that could be locked in for up to 30 years. Investors who were prompted by Shiller’s warning to lock in those juicy returns will end up ahead of their Buy-and-Hold friends in the event that stock prices fall by 50 percent and they would have gotten ahead by investing in far less risky asset classes. They would have obtained higher returns while taking on reduced risk, a good deal all around.