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:
In 2002, you detailed your “retirement plan” in which you got out of the stock market, and continue to be as of today, according to your posts. In 2005, you provided an update in which your spending had gone up at a higher than expected rate. You at stated you were returning 3.5% real and that the market returns close to 7%. You stated that you were not worried because with your VII timing strategy, you would return more than the market average and then your finances would be fine. Here we are almost 15 years after the 2005 update. You did not get back in the market to get those higher returns. As of midnight tonight, a decade has passed without that market crash that you said would have happened long ago. Early in the decade, people kept pointing out your failed predictions, so you said that if the crash did not happen by 2015, it was right to question the VII strategy. Tomorrow, we enter 2020. Your plan clearly failed and you have acknowledged that you have to get a job again as your retirement plan failed. In a preposterous attempt to save face, you claim that you really haven’t failed because all these people will want to pay you $500 million for advice on your VII strategy, that has caused you a retirement failure. It should not surprise you that no one wants to follow your plan.
Shiller published a paper in the Summer of 1996 saying that investors who stuck with their high stock allocations would come to regret it because valuations were so high. We did not see a crash by 2006 but we did see one in late 2008. In early 2009, there really were a lot of investors who expressed regret that they stuck with their high stock allocations. But the Buy-and-Holders said that the thing to do was just to stay the course and prices would head upward again. That’s what happened. People who followed the advice of the Buy-and-Holders at that time are now happy that they did so because stocks have provided very good returns for the past 10 years.
Does that show that Buy-and-Hold is the way to go? Not in my opinion. Shiller showed that, when prices go above fair-value levels, it is not a rational assessment of economic developments causing that to happen, it is irrational exuberance. It was a collapse of irrational exuberance that explained the 2008 crash and it was a resurgence of irrational exuberance that explained the big price gains of the last 10 years. The trouble is that irrational exuberance always collapses again. So, in the event that Shiller’s Nobel-prize-winning research is legitimate research, we are likely to see another price crash within the next year or two or three. What will the investors who followed the advice of the Buy-and-Holders in 2009 say then? Lots of them will wish that they had learned more about Shiller’s research.
With Buy-and-Hold, you never know where you stand. Buy-and-Holders ASSUME that the numbers on their portfolio statements are real. They have never generated any peer-reviewed research showing this to be so, they just assumed it. I acknowledge that the idea has a certain surface plausibility. But Shiller published research showing that it is NOT so. His research shows a strong correlation between the valuation level that applies today and the price level that will apply ten years from today. How is it that the CAPE level is able to tell us what the price level will be 10 years from now? This is possible because irrational exuberance ALWAYS collapses. There has never been a single exception in the historical record. When prices are high, they always go down hard in the long run.
Shiller’s research lets us know something important about stocks that we did not know before. It lets us know the true value of our portfolio (the value adjusted for the effect of the irrational exuberance present in the current-day price). I like knowing the true value of my portfolio. It is a huge help in trying to plan my financial future. And I have heard from thousands of investors (and a good number of experts in the field) who feel the same way. The Buy-and-Holders don’t like Shiller’s Nobel-prize-winning research one tiny bit; they like believing that the numbers on their portfolio statement are real. But that’s not what the last 39 years of peer-reviewed research in this field tells us about this important question.
I wish you the best of luck with your investment strategy even though I do not personally see it as the way to go, Sammy.
Rob
Wade Pfau’s form says you can’t time the market. Sounds like you are pushing a fraudulent timing scheme.
https://retirementresearcher.com/occams-cant-time-markets/
I can’t look at this now. But I will try to take a look at it later today.
Rob
Wade Pfau didn’t write that article. Wade wrote what he believed about market timing in the peer-reviewed research that we co-authored. He summed up the conclusions he reached as the result of his 16 months of study of the question by saying: “Yes, Virginia, Valuation-Informed Indexing works!”
One thing that I like about the article is that it sums up all of the important arguments that I have heard against market timing over the years. There’s value in having them all presented in one place.
The flaw in the article is the one made by Buy-and-Holders over and over and over again. The article looks only at short-term timing. The arguments that it makes against short-term timing are all valid. People who follow the peer-reviewed research have known for many years now that short-term timing never works. There’s no harm in repeating those arguments since they are valid and all investors need to hear them. But an argument that short-term timing doesn’t work is not an argument that long-term timing doesn’t work.
Long-term timing always works. The Bennett/Pfau research shows that. And the core reason why short-term timing never works is pretty close to the same core reason why long-term timing always works (and is always 100 percent required). Stock price changes are determined by shifts in investor emotion. Short-term timing doesn’t work because it is not possible to predict shifts in emotion. People who are in a committed relationship sometimes change their mind and leave it. Is there a certain number of arguments that it takes for that to happen? There is not. Outsiders will say “I have seen so many arguments that I cannot believe that they are still together” and yet the couple will remain together. And then one day over seemingly nothing one member of the couple will end it. That’s how stock price changes happen. They are rooted by shifts in emotion and you cannot predict when they will happen.
But the market must ultimately reflect reality. The core purpose of any market is to set prices properly. We cannot say when the emotion will shift and prices will move in the direction of fair value but we can say with absolute certainty that sooner or later it will happen. Long-term timing always works. It has always worked in the past because there is no possibility that it could ever not work. The market cannot remain at emotional extremes indefinitely. The farther away the market gets from setting prices properly, the more dysfunctional it gets. Sooner or later, it just collapses.
The thing that they call a price crash is really an emotions crash. If investors were willing to engage in market timing, we would never see a price crash because prices would just adjust to reality naturally. But when large numbers of investors refuse to practice market timing (price discipline!), the only way left for the market to set prices properly again is to crash them. When causes us all great pain by causing an economic crisis. We would be better off if we all just practiced market timing and didn’t have to live through bear markets and economics crises and all the pain associated with them.
I’ll sign off on a statement saying that short-term timing never works. There is a lot of evidence that that is so.
But, when Wade studied long-term timing, he was amazed that no researcher had done so before him given how strong the case is that long-term market timing always works. We should be permitting Wade and all other academic researchers to do honest work re these matters. Those researchers would love to help us all out if only they were not made to feel that they were putting their careers at risk by doing so.
My sincere take.
Honest Research Advocate Rob
The article is from Wade’s firm. Also, his latest book is on asset allocation and not timing.
Here are some comments that Wade made during the 16 months when we were working together on the research that we had published in a peer-reviewed journal and prior to when you threatened to send defamatory e-mails to his employer in an effort to get him fired from his job:
1) “What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”
2) “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”
3) “Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”
4) “The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
5) “The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”
6) “Market timing provides signficantly higher returns at a comparable level of risk.”
7) “The market timer enjoys a far less risky strategy.”
8) “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”
9) “If everyone increased exposure after a market fall and vice versa, then this would dampen out the big swings in the market aggregates, and we might get shallower boom/bust cycles.”
10) ““‘I’m excited about this, as depending on what you have already done, I think I can design a study using the Shiller data to provide historical simulations of Valuation-Informed Indexing strategies against fixed Buy-and-Hold strategies and also lifecycle strategies (declining allocation to stocks as one ages). If Valuation-Informed Indexing consistently outperforms fixed and lifecycle strategies, then the proof is in the pudding so to speak. Given how well valuations help to explain withdrawal rates, I think there is a lot of potential for this topic.”
11) “Yes, Virginia, Valuation-Informed Indexing Works!”
12) “It makes complete sense to have an equity allocation that is in some way flexible. Having a completely inelastic demand for equities is a bit bonkers; no-one acts that way with life’s other important commodities.”
13) “I wrote up the programs to test your Valuation-Informed Indexing strategies against Buy-and-Hold, and I must say that the results look very promising…. I am quite excited about the findings so far. As you say in the podcast, Valuation-Informed Indexing should beat Buy-and-Hold about 90 percent of the time, and I am getting results that support this for various strategies.”
14) “I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance.”
15) “Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”
16) You shouldn’t be too excited with great wealth accumulations if they happened due to unusually high valuations, and low wealth accumulations shouldn’t be as scary if valuations are also quite low.”
17) “My idea is to show many different tables with results over the whole period for returns and risks. Valuation-Informed Indexing always provides more returns for often less risk.”
18) “No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”
19) “I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years. I think it is all quite persuasive.”
20) “You haven’t seen anything yet! This was just the secondary study. I’m still working on the main one!”
21) ” I know that there is an extensive literature about the predictability of long-term stock returns dating back to Campbell and Shiller’s work in the mid-1990s. I also know that there is an extensive literature about short-term market timing strategies…. But my question is about LONG-TERM market timing strategies. In other words, using market timing over periods of at least 10 years to obtain better returns than a Buy-and-Hold strategy. The literature seems slim.”
22) “Let me just explain a bit more why I posted about this here. Valuation-Informed Indexing has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I just couldn’t understand why. And that bothered me.”
23) “Two papers by Fisher and Statman are still all I can find that provide evidence against long-term market timing.”
24) “I’m so confused by why Fisher and Statman didn’t consider risk in their idiot switching tests. Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”
Rob
Wade Pfau and Michael Kitces research show that Rob Bennett is wrong and retirees would reduce risk by going with a rising equity glide path.
https://www.onefpa.org/journal/Pages/Reducing%20Retirement%20Risk%20with%20a%20Rising%20Equity%20Glide%20Path.aspx
Nothing in this article is saying that I am wrong about anything. This article is questioning the conventional advice. I am in favor of questioning the conventional advice. I think that this is worth looking at. I have never said that people should invest less in equities. Equities are my favorite asset class. I say that the safe withdrawal rate is not always 4 percent. It is sometimes much lower than 4 percent. It is also sometimes much higher than 4 percent. It depends on the valuation level that applies on the day the retirement begins.
The only thing that I have ever said about safe withdrawal rates is that people who discover errors in their studies should correct them. A failed retirement is a serious life setback. Wade Pfau described the Greaney study as “dangerous” because of the errors in it. That’s another way of saying that it should be corrected. If it were corrected, it wouldn’t be dangerous anymore. It is better that a retirement study not be dangerous.
One of the reasons why this study shows what it does is that returns do not fall in the pattern of a random walk, as the Buy-and-Holders claim. Bad stretches of returns are followed by good stretches of returns because irrational depression about stocks is followed by irrational exuberance about stocks. If the market were efficient, returns would play out in the pattern of a random walk and we would not see this sort of result.
Basically, we need to move on from the Buy-and-Hold stuff and find out what works. For us to do that, the Buy-and-Holders need to learn how to pronounce the words “I” and”Was” and “Wrong.” All learning begins with a recognition that you do not already know it all.
Also, neither irrational exuberance nor irrational depression would be as severe if we opened every site on the internet to honest posting re the past 39 years of peer-reviewed research in this field. If we did that, stock investing would be far less risky for everyone,including retirees. I think it would be a good thing if stock investing were far less risky for everyone, I see that as a win/win/win.win.win, with no possible downside.
My sincere take.
Rob
The whole article says you are wrong. You said buy and hold never works, but Wade and a Michael gave data showing otherwise. You also said people must use timing, yet there is no timing in any of their scenarios.
That’s absolutely timing. If you are changing your allocation at different TIMES, you are timing.
This is not Buy-and-Hold. The Buy-and-Holders say that people should NOT change their allocation at different times. This is the OPPOSITE of Buy-and-Hold.
This is a step in the right direction. I don’t say it is perfect. We need to study it more and we need to look at various alternatives and help people to figure out what is best.
But this is certainly not what the Buy-and-Holders have been telling people. Bogle was the king of Buy-and-Hold. He told people to go with a stock allocation that is 100 minus their age. This is nothing like that at all. The entire point of the article is to show that the conventional Buy-and-Hold wisdom is in error. The entire point of the article is to blow up Buy-and-Hold dogmas. That’s what I do with every article that I write. This article is rooted in research, not marketing garbage.
The article does not say that I am wrong. There is nothing in this article that says that retirement studies that have been shown to be in error should remain uncorrected for 18 years. It’s not even a remotely close call. If there were a statement like that in this article, I would have noticed it. It would have jumped out at me.
My sincere take.
Rob
“That’s absolutely timing. If you are changing your allocation at different TIMES, you are timing.”
Wrong again. Timing is when you make trades trying to predict the market going up or down. Wade and Michael are setting allocation based on age not on specific timing with the market.
The article clearly says that you are wrong. It blows up everything you have said about buy and hold.
You’re the one who is wrong re this one, Anonymous.
The allocation changes that they are making are NOT strictly based on age. They are based on the results that would be obtained by holding stocks for specified lengths of time. The article points out that retirements fail when they obtain poor results in the first 15 years of retirement. That’s the problem that they are trying to address. Buy-and-Holders believe that results are random. So there would be no reason to increase one’s stock allocation following years of bad results. But those who are familiar with the past 39 years of peer-reviewed research in this field know that results are NOT random, they follow a hill-and-valley pattern. If the early years of your retirement took place during a valley, then a hill is coming up ahead. So it makes sense to go with a higher stock allocation. The strategy examined in this article is making allocation changes based on predictions as to where stock prices are headed, something that you yourself define as TIMING.
The strategy explored in this article is something that would not make sense to a Buy-and-Holder. It only makes sense to those who have studied the research well enough to know that returns do not follow a random walk pattern but a hill-and-valley pattern. Both Wade Pfau and Michael Kitces obviously fall into that category. That’s why both of them have warned of the dangers of Buy-and-Hold strategies, strategies that disdain market timing (price discipline!).
If you want to understand why this works, you need to understand how the stock market works. And the Buy-and-Holders do not understand that. The Buy-and-Holders believe that the market is efficient. But those who follow the peer-reviewed research have known for 39 years that that is not so. In a world in which the market is not efficient, market timing is 100 percent required for all investors seeking to keep their risk profile constant over time. Market timing is price discipline and price discipline is the thing that makes all markets work. The idea of a stock market in which market timing is not required is an absurdity.
That’s my sincere take, in any event.
Rob
Uh oh, no one is blaming the drop on buy and hold.
https://www.cnbc.com/2020/02/24/us-futures-coronavirus-outbreak.html
Something else is always blamed for any drop. No chance in getting that $500 million windfall.
Buy-and-Hold is the dominant model today. I certainly don’t say different.
But Valuation-Informed Indexers have a different understanding of how the stock market works and of how the stock market interacts with the economy. If Shiller’s Nobel-prize-winning research is legitimate research, then the risk of a price crash is higher when valuations are high. Something like the virus could serve as the precipitating cause of a crash. But it is the high prices that applied before the virus came along that caused the crash to be so severe. And it is the loss of buying power in the economy that results from the price crash that causes the overall economy to collapse.
People are going to continue to explain things according the Buy-and-Hold Model until every site on the internet is opened to honest posting re the last 39 years of peer-reviewed research. When that happens, lots of people will ask lots of good questions and we all will enjoy an amazing learning experience. I think it will happen. We will just have to wait and see.
The key thing that we need to see is whether a price drop of 50 percent or more shakes people’s confidence in Buy-and-Hold. That sort of price crash will mean that millions of retirements will fail and hundreds of thousands of businesses will go under and millions of people will be thrown out of work. I think that that will cause some attitudes toward the need for discussion of this stuff to change.
You Goons represent only a small portion of the population. Your power to block discussion comes from the fact that the 90 percent of Normals are generally complacent. They have not seen the horrors of what huge bull markets always produce since the stagflation of the 1970s and the CAPE value that led to that was much lower than the 44 we saw in this bull/bear cycle. I think that the pain that we will see will be enough to get a larger percentage of the population agreeing that the laws of the United States should be enforced in regards to discussions of how stock investing works just as they are in every other field of human endeavor. From that point forward, it should be downhill sledding for each and every one of us.
I wish you the best of luck with it, dear Goon friend.
Downhill Sledder Rob
If the drops are always blamed on some other cause, how will anyone come to your conclusion as to buy and hold being the root cause?
It’s not going to happen in one day.
I put up my famous post pointing out the error in the retirement study posted at John Greaney’s web site on the morning of May 13, 2002. If you had asked me on that day “what causes price crashes and economic crises?” I would have given the same answer as all the Buy-and-Holders. I was a Buy-and-Holder myself on that day.
I now give a different answer because I have spent every day of the last 18 years thinking about this stuff. That’s how a person learns. The first step is to be open to learning, to acknowledge that there is at least a possibility that you do not know everything there is to know about a subject. Then you learn the first new thing. Then you start wondering, if that new thing is so, what else follows from that? Then you learn a second thing. And it goes on like that until you reach a point where you see that it was the relentless promotion of Buy-and-Hold that caused the 2008 economic crisis, that the factors that are usually mentioned probably played a secondary role but that once stock prices reached the levels they reached in the late 1990s an economic crisis had become inevitable. That’s why Shiller was able to predict the economic crisis that took place in 2008 in a book that was published in March 2000.
There is only one thing re which I disagree with the Buy-and-Holders. I think they made many, many important contributions. But, if Shiller’s Nobel-prize-winning research is legitimate research (I obviously believe that it is), then the Buy-and-Holders got the market timing thing wrong. The Buy-and-Holders say that market timing is not required, that it might even be a negative. That’s because, at the time Buy-and-Hold was developed, most people believed that the market is efficient. Shiller showed that that is not so in 1981. If the market is not efficient, then there is no reason to believe that the stock market doesn’t function much like any other market, that price discipline is what makes it work and, if you remove price discipline from the equation, the market will sooner or later collapse and take the economy with it. So that’s the whole deal — is the market efficient (in which case Buy-and-Hold is ideal) or does valuation affect long-term returns (in which case Buy-and-Hold is the most dangerous strategy ever concocted by the human mind because it discourages market timing, which is the thing that makes the market function in a healthy manner.
All of the things that people need to learn are not going to click for them in a single day. Millions of people believe that Buy-and-Hold is just fine. For us as a society to make the transition to a new model, we need to open every investing site on the internet to honest posting re the last 39 years of peer-reviewed research. That’s how we achieve a learning experience. That’s the only way it can be done.
We have seen over the past 18 years that we have lots of good and smart people willing and able to help us. We have site owners who want to permit honest posting. We have academic researchers who want to publish honest research. We have policymakers who want to bring economic crises to an end. We have laws in place to protect us from the sorts of individuals (you, Anonymous!) who for 18 years now have been leading a Campaign of Terror to block honest discussion of these matters. All that we need to do as a people to achieve an amazing advance in our understanding of how stock investing works is for a number of us (not just me!) to insist on enforcement of the laws against extortion and death threats and financial fraud.
In theory, we already have millions of people who should be doing that. We all will benefit from the learning experience. So we all should be insisting on enforcement of our laws. But we have not seen enough people speak up to get the job done. Criminal behavior scares people. So lots of people have decided that it is better that they keep quiet. The reason why those people are so complacent is that they have not seen with their own eyes how much human misery always results from the widespread promotion of a Buy-and-Hold strategy. Perhaps they have read in books about the Great Depression or they saw the movie Grapes of Wrath or something. That’s not personal witness. That sort of thing is not as compelling as seeing your own retirement fail or seeing your own business go under or whatever.
In the event that stocks continue to perform in the future at least somewhat as they always have in the past, millions of us will be seeing the horrors always brought on by the widespread promotion of Buy-and-Hold in the days ahead. I think that at least a small percentage of us will work up the courage to insist on reasonable enforcement of U.S. law in discussions of stock investing. And then the site that opens up first will get lots of attention because there is a huge pent-up desire for honest discussion in this field. The people who own that site will make tons of money and then other site owners will jump in and copy what they did. In time, every site on the internet will be opened to honest posting and life will get better and better and better for each and every one of us.
We need to enforce our laws so that we can all enjoy a huge learning experience. Once that process gets started, there will be nothing that you Goons will be able to do to stop. We won’t be discussing what causes economic crises on the first day. But the question is obviously going to come up sooner or later. Those who still believe in Buy-and-Hold will make their case at that time. And those who believe that Shiller’s Nobel-prize-winning research is legitimate research will make their case. And all the people listening in will decide for themselves what to believe after having heard both sides of the story presented in civil and reasoned discussion.
Which of course is how we should have been playing it going back to the morning of May 13, 2002, in my sincere assessment.
My best wishes to you and yours.
Rob (Not a Fan of Economic Crises or the Bull Markets That Cause Them)
There is not a single person coming to your conclusions, so why would anyone think to blame buy and hold?
We will never know what conclusion millions of people will come to until we have opened every investing discussion board and blog on the internet to honest posting re the last 39 years of peer-reviewed research in this field. That’s the first step. Once we do that, we have taken things to the right side of the felony line. Then we can see where things go from there.
I am not willing to say that the retirement study posted at John Greaney’s web site contains an adjustment for the valuation level that applies on the day the retirement begins. That would put ME on the wrong side of the felony line. Not freakin’ interested, you know?
A) Academic Researcher Wade Pfau’s Statements Showing Interest In and Confidence in Rob Bennett’s Work
1) “I do cite you and John Walter Russell in my paper as the earliest and strongest advocates of this approach [New School safe-withdrawal-rate research].
2) “Are you aware of Shiller offering asset allocation advice based on PE10? …. If you read Rob Bennett’s stuff carefully, I think he did provide an important contribution in terms of describing a way for PE10 to guide asset allocation for long-term conservative investors. I also think he was right on the issue of safe withdrawal rates.” — Posted at the Bogleheads Forum discussion board.
3) “I am also extremely grateful to Rob Bennett for motivating this topic and contributing his experience and encouragement.” — Written in Acknowledgments section of Wade’s breakthrough research paper.
4)”You deserve much of the credit as the whole idea of Valuation-Informed Indexing belongs to you.”
5) “I definitely need to cite some of your work as the founder of Valuation-Informed Indexing, as I have not found anyone else who can lay claim to that. Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”
B) Academic Researcher Wade Pfau’s Statements on the Superiority of Valuation-Informed Indexing Over Buy-and-Hold
1) “What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”
2) “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”
3) “Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”
4) “The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
5) “The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”
6) “Market timing provides signficantly higher returns at a comparable level of risk.”
7) “The market timer enjoys a far less risky strategy.”
8) “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”
9) “If everyone increased exposure after a market fall and vice versa, then this would dampen out the big swings in the market aggregates, and we might get shallower boom/bust cycles.”
10) ““‘I’m excited about this, as depending on what you have already done, I think I can design a study using the Shiller data to provide historical simulations of Valuation-Informed Indexing strategies against fixed Buy-and-Hold strategies and also lifecycle strategies (declining allocation to stocks as one ages). If Valuation-Informed Indexing consistently outperforms fixed and lifecycle strategies, then the proof is in the pudding so to speak. Given how well valuations help to explain withdrawal rates, I think there is a lot of potential for this topic.”
11) “Yes, Virginia, Valuation-Informed Indexing Works!”
12) “It makes complete sense to have an equity allocation that is in some way flexible. Having a completely inelastic demand for equities is a bit bonkers; no-one acts that way with life’s other important commodities.”
13) “I wrote up the programs to test your Valuation-Informed Indexing strategies against Buy-and-Hold, and I must say that the results look very promising…. I am quite excited about the findings so far. As you say in the podcast, Valuation-Informed Indexing should beat Buy-and-Hold about 90 percent of the time, and I am getting results that support this for various strategies.”
14) “I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance.”
15) “Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”
16) You shouldn’t be too excited with great wealth accumulations if they happened due to unusually high valuations, and low wealth accumulations shouldn’t be as scary if valuations are also quite low.”
17) “My idea is to show many different tables with results over the whole period for returns and risks. Valuation-Informed Indexing always provides more returns for often less risk.”
18) “No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”
19) “I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years. I think it is all quite persuasive.”
20) “You haven’t seen anything yet! This was just the secondary study. I’m still working on the main one!”
C) Academic Researcher Wade Pfau’s Statements of Incredulity That He Was the First Academic Researcher to Examine the Valuation-Informed Indexing Strategy
1) ” I know that there is an extensive literature about the predictability of long-term stock returns dating back to Campbell and Shiller’s work in the mid-1990s. I also know that there is an extensive literature about short-term market timing strategies…. But my question is about LONG-TERM market timing strategies. In other words, using market timing over periods of at least 10 years to obtain better returns than a Buy-and-Hold strategy. The literature seems slim.”
2) “Let me just explain a bit more why I posted about this here. Valuation-Informed Indexing has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I just couldn’t understand why. And that bothered me.”
3) “Two papers by Fisher and Statman are still all I can find that provide evidence against long-term market timing.”
4) “I’m so confused by why Fisher and Statman didn’t consider risk in their idiot switching tests. Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”
D) Academic Researcher Wade Pfau’s Statements on the Dangers of the Conventional Retirement Planning Advice
1) “The traditional approach to retirement planning (as described on pages 10 and 11 of The Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.”
2) “Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study…. This is not the information that current and prospective retirees need for making their withdrawal rate decisions.”
3) “This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies.”
4) Wade sent me a link to an article in Business Week that was published more than eight years after my post pointing out the errors in the Old School retirement studies and which he characterized as “quite sympathetic to the point you were trying to make all along”.
5) “Though I was only trying to do an Old School safe-withdrawal-rate study, all that I ended up doing was showing in a different way what you had been saying all along: the safe withdrawal rate changes with valuations.”
6) “Valuations are the driving factor. ”
7) “This is similar to your drunk driving analogy, which I agree with.” The discredited but uncorrected retirement studies find that in most circumstances a 4 percent withdrawal rate provides a huge cushion for the retiree using it. However, in each of the three cases in history when stocks reached insanely high price levels, retirements using a 4 percent withdrawal came within a whisker of failing. To say that this shows that a 4 percent withdrawal is “100 percent safe” (these words are used in the Greaney study) for a retirement beginning at a time of insanely high price levels is like saying that driving drunk is “100 percent safe” because 97 sober drivers drove their cars 20 miles without incident while 3 drunk drivers were paralyzed for life in car accidents but did not die. The fact that 4 percent only worked by a whisker in the cases in which valuations were high at the beginning of the retirement shows that a 4 percent withdrawal is high-risk at times of high valuations, not that it is “100 percent safe.”
8) ” Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.”
9) Naturally, I am finding that Valuation-Informed Indexing can allow you to reach a wealth target with a lower savings rate, use a higher withdrawal rate, and also have a lower “safe” savings rate, than a fixed allocation.
E) Academic Researcher Wade Pfau’s Statements Showing His Concerns that Continuing to Report Honestly on the Investing Realities in the Face of the “Hostile Environment” for Doing So Created by Buy-and-Holders Would Harm His Career
1) “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.”
2) “Valuations and long-term investors is a somewhat controversial topic.” Wade posted these words to his blog in October 2011 as his explanation of why he was abandoning his plan of doing further research on the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. He had told me in earlier days that “You ain’t see nothing yet!” when I praised his breakthrough research in this area. After his flip to the dark side, Wade removed the page containing this blog entry from his site.
3) “We have both read and met to discuss your paper. Unfortunately, we did not find the paper’s incremental contribution to the academic finance literature, assuming the analysis proved to be correct, rose to the level that we are seeking for papers in the JFR. Thus sending the paper to a reviewer would be inefficient.” These words are from an academic journal’s “desk reject” of Wade’s breakthrough research.
4) ) ““ I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals.”
5) “I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.”
6) I don’t want them [the Goons] working behind the scenes to derail me.”
7) “I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.”
“ It’s not going to happen in one day.”
There is nothing of substance to ever making anything happen, even if we wait 100 years.
Then why have academic researchers? Why have Ph.D. programs?
If it is impossible that we could ever learn anything that we did not know in the days when Buy-and-Hold was developed, then we should shut down all the Ph.D. programs and have all of the academic researchers find new jobs.
I believe that learning remains possible. I believe that the Buy-and-Holders are every bit as capable of making mistakes as all the other humans who have ever walked Planet Earth. I believe that we have learned important things over the past 39 years that we should be discussing at every discussion board and blog on the internet. I believe that Robert Shiller merited the Nobel prize that he was awarded.
It will be interesting to see how things play out.
Learning-Oriented Rob
The PhD’s speak for themselves versus your creative interpretations.
Wade Pfau does not speak for himself today. He spoke for himself during the 16 months that he worked with me developing research that showed that “Yes, Virginia, Valuation-Informed Indexing works!” He still tries to do good work. But he does not give voice to all that he believes re the dangers of Buy-and-Hold. It hurts us all that he does not feel safe doing that. We will never be able as a people to get Buy-and-Hold replaced with Valuation-Informed Indexing as the dominant model for understanding how stock investing works until Wade Pfau and thousands of others feel 100 percent safe saying precisely what they believe about every aspect of the stock investing project.
That’s my sincere take, Anonymous. I believe that we will be facing a turning point as a nation when the next price crash causes millions of retirements to fail and causes millions of good people to be thrown out of their jobs. We can continue to keep quiet about the 39 years of peer-reviewed research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for a single investor or we can open the entire internet to honest posting re the last 39 years of peer-reviewed research in this field and enjoy the biggest surge of economic growth in our history.
I am voting for the American people to win this one. I am not voting for you Goons to lose it. Because you are American too and I want you to share in the benefits that we all will be opening for ourselves. But I am voting that we bring the criminal stuff to a full and complete stop. That stuff is hurting each and every one of us, you Goons as much as or more than all the others.
I naturally wish you all good things. And so I naturally continue to insist on my right to post honestly re safe withdrawal rates and scores of other critically important investment-related topics at every investing discussion board and blog on the internet.
Creative Interpreter Rob
Wade Pfau is not your puppet. He speaks honestly and without reservation.
He’s not your puppet either.
Why did he stop saying the things that he said in that list of 45 statements that he made during the 16 months in which he was working with me on the day that you Goons threatened to send defamatory e-mails to his employer in the event that he continued doing honest work?
Every investor on the planet needs to know the answer to that one. If Wade truly believes all the things that he said during the 16 months in which he was working with me, then I think it would be fair to say that there’s a good chance that Shiller’s Nobel-prize-winning research is legitimate research. If that’s so, that changes everything that we believed back in 1980 about how stock investing works and we need to open every discussion board and blog on the internet to honest posting re the far-reaching (and wonderful!) implications of Shiller’s work.
Death threats have no place in discussions of stock investing.
Extortion had no place in discussions of stock investing.
Financial fraud has no place in discussion of stock investing.
My sincere take.
Puppet Master Rob
“He’s not your puppet either.’
I am not the one putting words in his mouth. You are. I listen to what Wade says versus trying to make up my own interpretation.
You put words in his mouth when you say that he no longer believes all of the things that he said before you threatened to get him fired from his job. Wade believes that “Yes, Virginia,Valuation-Informed Indexing works!”
Extortion is a crime in the United States. It’s a felony. I don’t go for that sort of thing.
Extortion-Free Rob
There was no threat to his job. Just you making the claim. In fact, Wade confirmed his job was not threatened.
The list of 45 statements by Wade Pfau that I often post is broken into five sections. The last of the five deals with statements that he made about intimidation. Wade felt intimidated.
And Rob Arnott. reported the same thing. Arnott, who said that my work is “solid,” said that he knows researchers who had plans to do research that would question Buy-and-Hold dogmas and who were taken aside and told that that would be a career-limiting move.
Bill Bernstein said in his book that the safe withdrawal rate needed to be reduced by two points when valuations were high. But when I asked him to say that at the Bogleheads Forum where we both posted, he declined. Again, that’s intimidation.
Lots of posters were intimidated there. Microlepsis, John D Craig, John Walter Russell, others. That should never happen. If the Buy-and-Holders believed that there is research showing that long-term timing is not required, they would welcome questions because they would have responses to them.
Wade searched the record of peer-reviewed research during the time he was working with me and found that there has never been a single legitimate study showing that long-term timing does not work.That’s huge. That changes history if it is so. Is he still saying that? If not, he should be able to point to the study that shows this. He has never done so.
And no one else has ever done so. Given how important this claim is, it is impossible to believe that no one has ever thought to check the record. Again, intimidation is the only possible explanation for such a strange reality.
There was a time when people sincerely believed that market timing is not required. Now we know better. But the Buy-and-Holders don’t want people to know that they made a mistake. So people who have doubts pull their punches.
Meanwhile, we have millions of people whose retirements riding on a belief that it really is true that market timing (price discipline!) is not required when buying stocks.
What is Robert Shiller is right? What if Wade Pfau is right? What if Rob Arnott is right? What if Carl Richards is right? What if John Walter Russell was right? What is Rob Bennett is right?
Even John Bogle, the king of Buy-and-Hold, said that he could see how market timing could work when prices are at extremes (once every 10 years or so). What if John Bogle was right?
I think that all these people were right. I think that we need to be talking about this stuff openly and without fear at every discussion board and blog on the internet.
I am going to continue saying that I do not believe that the retirement study posted at John Greaney’s web site contained an adjustment for the valuation level that applies on the day the retirement begins. I love my country. I believe that someone who loves his country should be willing to follow his country’s laws.
My best wishes to you and yours.
Law-Abiding Rob
How come none of those people post here or say things like that on their own websites or articles?
They’re afraid.
Many people want to do honest work but they do not want to see their loves ones threatened or their careers derailed.
We all need to pull together to bring the intimidation to a full and complete stop.
That’s the best way forward for every single person involved, without a single exception.
I am sure.
Rob
Not a single one said they are afraid and there is no evidence to back up that assertion.
I posted at this site the e-mail in which Rob Arnott said that he had experienced the same sort of stuff that I wrote about in my article reporting on what happened with Wade Pfau.
Wade said in those 45 statements that I frequently post that he was afraid of what you Goons would do to him.
John Walter Russell said that Greaney was engaging in “The Big Lie.” Part of a big lie strategy is the intimidation tactics that are used to keep the Big Lie covered up.
There was a poster at the Bogleheads Forum who said that the tactics of you Goons had the effect that an electronic fence has on a dog — posters there saw what happened to those who posted honestly and they didn’t even dare try to do it themselves.
The only reason why anyone still believes today that long-term timing is not 100 percent required is because the intimidation tactics employed by the Buy-and-Holders have kept people who understand the realities from speaking up. I don’t think that was true in the early days. I think that Buy-and-Hold was a legitimate effort to explain how stock investing works in the early days. But Shiller published research showing that the market is not efficient in 1981. People should have been talking about whether it is Fama who is right or Shiller who is right at every site on the internet for 39 years now (and there wasn’t even an internet 39 years ago!). I say that the problem is intimidation tactics practiced by Buy-and-Holders. Do you have a better explanation of why this stuff is not today being discussed at every site?
I put up my post pointing out that Greaney’s retirement study lacks a valuation adjustment on the morning of May 13, 2002. I say that no one did it before me because they were afraid of what the Buy-and-Holders would do to them if they posted honestly. Do you have a better explanation?
The stuff we have seen ain’t normal, Anonymous. There has to be some explanation.
Thousands of people have looked at the Greaney study over the past 18 years. Not one of them has been able to identify a valuation adjustment in it. I wonder why.
Explanation-Seeking Rob
Rob Arnott never said he was afraid. Wade Pfau never said he was afraid. You are making it up.
Wade Pfau: “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.” Why a hostile environment, Anonymous? Why would it make Buy-and-Holders hostile for someone to question whether there is a valuation adjustment in a retirement study if they truly believed that there was one there and they could point it out?
Wade Pfau: “Valuations and long-term investors is a somewhat controversial topic.” Why is it controversial? We have seen hundreds of community members express their excitement over discussions of this topic. Why not have the discussions without any controversy if there is truly a valuations adjustment in the Greaney study or if there truly is peer-reviewed research showing that it is not necessary for investors to practice market timing (price discipline!)? The controversy results because the Buy-and-Holders don’t want to admit a mistake they made many years ago that was revealed by Nobel-prize-winning research published in 1981.
Wade Pfau: “I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals.” Wade believed that the paper that he co-authored with me was worthy of publication in the most prestigious journal in the field. So why was he rejected anywhere? Our research is the most important piece of research published in this field in 30 years. Investors have been told thousands of times that market timing does not work. And someone prepares research showing that one form of market timing (long-term timing) has always reduced risk dramatically while also always increasing returns dramatically and a journal concludes that that is not worthy of publication. Huh? The entire point of journals is to advance new knowledge. This advance benefits every investor alive. It is intimidating for a researcher to see a journal elect not to publish a study of this nature. Wade should have been celebrated by that journal, not turned down. And the only way to change this is to get this information out to millions of investors, so they can all understand when they lose 50 percent of their life savings in the next crash why it happened.
Wade Pfau: “I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.” Wade was intimidated by the behavior of you Goons at the Bogleheads Forum.
Wade Pfau: “I don’t want them [the Goons] working behind the scenes to derail me.” Same.
Wade Pfau: ““I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.” Same.
Rob Arnott:”I’ve had similar experiences to those you describe; so, I can empathize with you for your travails.”
Rob Arnott: “My work has often triggered overt hostility from the guardians of the status quo. And, as one of the “godfathers” of Tactical Asset Allocation and of the Fundamental Index® concept, which are kissing-cousins to your work on Valuation-Informed Indexing, it’s clear that you and I both think the markets are inefficient in much the same way.” Overt hostility is inappropriate. Why not engage in civil and reasoned discussions with someone who offers new ideas?
Rob Arnott: “I’ve also had difficulties getting some of my more controversial ideas published. For instance, I’m having a dickens of a time getting any journal to publish my work with Harry Markowitz, Jason Hsu and Jun Liu, which shows that a modest amount of error in stock prices would create – and fully explain – the Fama-French size and value effects. Journals turning down a Nobel Laureate? Yep, it happens. And the journals that published some of my more controversial papers did get “hate mail” for doing so.” We all need to know what Nobel Laureates think re these matters. And journals should not be getting hate mail in response to articles on stock investing. Hate is an emotion. It is an intense emotion. If the market were efficient, investors would be 100 percent rational in their thinking re these matters. It is Shiller who says that investors are being highly emotional during times of high prices. The fact that journals are receiving hate mail from Buy-and-Holders shows that Shiller is right in his understanding of how stock investing works.
Rob Arnott: “I also know of two young professors who wanted to do research on Fundamental Index® and reported to me that their colleagues advised them that this line of research could derail their career prospects. Outrageous? Not necessarily: in the early days of Fundamental Index®, people weren’t yet sure whether this was the investing equivalent of “cold fusion!” I find the story outrageous. I can believe that there were people who genuinely believed that Fundamental Index was the investing equivalent of cold fusion. Skepticism is a healthy, scientific reaction. But scientists need to be encouraging the exploration of new ideas. If Fundamental Index is really the investing equivalent of cold fusion, that will come out when the research is reviewed. The important thing is that the research be published so that lots of people can consider the merits of the new idea. I understand that there are millions of good and smart people who sincerely believe that even long-term market timing is a mistake. But I sincerely believe that those people are wrong and that their views would change if they were exposed to the other side of the story. The intimidation tactics block that from happening. So we all need to be working to bring the intimidation tactics to a full and complete stop. I believe that we all will be working on that project together in the days following the next price crash. It breaks my heart that that is what it will take for us to move forward in our understanding of how stock investing works. The thing that I once loved about Buy-and-Hold is that it was once rooted in science. Intimidation is anti-science. Buy-and-Hold today is the opposite of what it was in its early days, in my assessment. Intimidation has no place in these discussions.
Rob Arnott: “I’m too embroiled in my own controversies to magnify them further with collaboration. Your ideas are sound.” Rob Arnott has offered many important contributions. He should not be embroiled in any controversies. He should be happy to engage with those with similar ideas in an effort to gain those ideas a wider hearing. It is the intimidation that has been directed at him by Buy-and-Holders that causes him to feel “embroiled.” That intimidation is hurting everyone alive in the United States today. I believe that people will see that more clearly in the days following the next price crash, when we will all be able to see in very real and concrete ways what happens when as a society we permit irrational exuberance to get out of control. Intimidation re these matters is going on on a daily basis and it is in the process of causing millions of people great pain. I love people. So I oppose the use of intimidation tactics to block the discussion of how stock investing works in the real world according to the last 39 years of peer-reviewed research in this field.
Intimidation Critic Rob
Just as I said. They NEVER said they were afraid.
Okay, Anonymous.
I do wish you all good things, in any event.
Fear Mongering Rob