“Will the Market Recover From its Losses Eventually? It Will. But It Could Take Investors Who Suffer a 60 Percent Price Drop in the Next Crash Years or Even Decades to Make Up for That Loss. We All Only Get So Many Years to Fund Our Retirement Account. To Lose Years or Decades of Compounding Is a Very Big Deal.”

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

“When millions of people see 50 percent of their retirement savings disappear into thin air for no good reason, I have a funny feeling that they are going to know that SOMEONE is lying about how this stock investing stuff works. I have a further funny feeling that they are going to be able to figure out that it isn’t me.”

You just made the case again for buy and hold. How so? Well, if people followed your advice in 2009 and onwards, by staying out of the market, they would have lost out on one of the largest bull markets we make seen in our lifetime. We cannot predict when we will see the ups and the downs in order to time the market. Look at you, for example. One of the worst track records we have seen. Yet, what we do know is that the market will continue to cover from any downturn and will set new heights if we hold versus sell (which would be timing).

I don’t advise people to stay out of the market at ANY time. I say that risk is greater when the CAPE value is higher. And so, to keep their risk profile constant, I say they MUST be willing to adjust their stock allocation downward. I recommend a stock allocation of about 30 percent when the CAPE value is where it has been from 2009 forward.

We cannot predict PRECISELY when we will see ups and downs. But we know with certainty that we always see more downs when the CAPE value is high and more ups when the CAPE value is low. Yes, the market is up from where it was in 2009. But most of those “gains” are the product of irrational exuberance. So they will not be lasting in the event that stocks continue to perform as they always have in the past. Having a temporary gain and then watching it disappear is not a plus. The peer-reviewed research that I co-authored with Wade Pfau shows that Valuation-Informed Indexing ALWAYS beats Buy-and-Hold on a risk-adjusted basis in the long term. There has not yet been one exception in the 150 years for which we have good records of stock prices

Will the market recover from its losses eventually? It will. But it could take investors who suffer a 60 percent price drop in the next crash years or even decades to make up for that loss. We all only get so many years to fund our retirement account. To lose years or decades of compounding is a very big deal. Investors should be aiming to keep their risk profile roughly constant over time. That REQUIRES market timing. Market timing is price discipline. If you are not engaging in market timing, you are investing irrationally. Obviously you want to go with the form of market timing that always works — long-term timing — and avoid the form that never works — short-term timing.

My sincere take.

Market Timing Rob