“The Buy-and-Hold Stuff Is Just a Marketing Gimmick. It Is a Money-Making Thing. The Idea Is Just to Keep You Dumb So That You Will Do What You Are Told. If a Car Dealer Told Me Not to Ask About the Price of His Car Before Buying It, I Would Feel That He Was Insulting My Intelligence.”

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

What guaranteed real returns are available in CDs, TIPS, IBonds etc. today?

I looked on Bankrate and there is a 3% APY for a CD with a 2-year term and a deposit of $2,500.

I presume that the point that you are seeking to make is that that return is not good enough to generate the level of compounding needed to finance a solid middle-class retirement. I’ve heard that concern expressed many times.

It’s a whole lot better than a loss of 70 percent, okay? A whole lot better.

Now you will come back and say that I cannot give you the precise date that we are going to see the loss of 70 percent. I cannot do that, that’s for sure. But 70 percent losses don’t just pop up randomly. They always take place at times of insanely high prices, like those that apply today. So I can say that the RISK that we are going to see a 70 percent loss in stocks is far higher today than it would be if we were at reasonable price levels. And I can give you the historical data you need to assess how big a risk that is and whether it is worth going with the 3 percent (non-inflation-adjusted) return that is available with CDs today.

Investing is a risk-assessment exercise. That’s the name of the game. You cannot build a retirement account earning 3 percent non-inflation adjusted. I certainly acknowledge that. But there is no reason to believe that you would ever need to do that. If you put a portion of your money in an investment class earning 3 percent at a time when there is a strong likelihood of a 70 percent price drop in the more heavily promoted asset class, you have protected that money during a bad time for investors. If stocks suffer a 70 percent loss (as they will if the CAPE level drops to the level to which it has dropped at the end of every earlier bull/bear cycle in U.S. history), the most likely annualized 10-year real return for stocks going forward from that point will be 15 percent real. If you earn 3 percent for a year or two on a certain amount of money and then 15 percent real for the next 10 years, your 12-year return is plenty good enough to support a solid middle-class retirement.

Valuation-Informed Indexing is about taking risk and return into consideration when making allocation decisions instead of going with what the Wall Street Con Men say regardless of whether or not it makes sense for you. There was a fellow at the Bogleheads Forum who said “no one would go into a bank and say ‘I’ll take a certificate of deposit” without first asking about the return being offered. That’s exactly right. No one should buy stocks without first checking the likely return either. It’s never a plus to fail to inform yourself of how your investment class is likely to perform.

If you inform yourself, you will do better in the long term. That’s been so for 150 years now, as far back as we have records. There’s never been an exception to the general rule. The Buy-and-Hold stuff is just a marketing gimmick. It is a money-making thing. The idea is just to keep you dumb so that you will do what you are told. If a car dealer told me not to ask about the price of his car before buying it, I would feel that he was insulting my intelligence. I think that you should feel the same way when the Wall Street Con Men come up with all these marketing slogans aimed at keeping you in the dark as to whether stocks offer a strong value proposition at a given point in time or not. I am trying to make you rich, not our Wall Street Con Men friends. Our Wall Street Con Men friends are rich enough already, in my assessment.

Anyway, that’s the concept. I wish you the best of luck in all your future life endeavors.

Educated-Consumer-of-Stocks Rob