“There Is Certainly Some Point at Which, If an Expected Crash Has Not Taken Place for Many Years, It Would Have Been Better to Have Just Followed a Buy-and-Hold Strategy. Stocks Offer Much Higher Returns Than Super-Safe Asset Classes. So There Is a Point at Which It Would Pay Off. But It Is Clear That That Point Is Much Farther Out Than Most People Realize. MUCH Farther Out.”

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

But all the crash predictions haven’t materialized and the gap between buy and hold vs VII continues to grow. Aren’t we at the point that even a crash still doesn’t bring the buy and hold portfolio below VII?

I have done that analysis before. I have not done it super recently. The conclusion when I did it before was that it was a close call. It depended on whether you felt that you should be compensated for the extra risk that you take on when you invest in stocks. If you felt that you should be compensated for the extra risk, the Valuation-Informed Indexing portfolio ended up ahead. If you looked only at the numbers and didn’t insist on compensation for extra risk, the Buy-and-Hold portfolio ended up a little ahead in some circumstances. But not by a huge amount.

I believe that every investor should do the analysis. And not from just one angle. People should look at the question from multiple perspectives. The more you do that, the better you understand stock investing. And, the better you understand stock investing, the more likely you are to stick with your plan for the long term. Both Buy-and-Holders and Valuation-Informed Indexers say that that is critical. So I see the process of going through the analysis with an open mind as being absolutely critical for all investors.

This is always the sticking point between you Goons and me. I think that, the more you learn, the better off you are. And that we learn by talking things over. You want to silence all challenges to Buy-and-Hold. I think that’s nuts. If Buy-and-Hold is the real thing, it will be able to withstand any challenges. The fact that many Buy-and-Holders want to silence challenges is a very bad sign for Buy-and-Hold, in my assessment.

There is certainly some point at which, if an expected crash has not taken place for many years, it would have been better to have just followed a Buy-and-Hold strategy. Stocks offer much higher returns than super-safe asset classes. So there is a point at which it would pay off. But it is clear that that point is much farther out than most people realize. MUCH farther out. Crashes are devastating. Lose 70 percent of your portfolio in a crash and it can take a long, long time to recover from that loss. It is counter-intuitive how much you can hurt yourself by taking a hit like that.

In the final analysis, these questions are personal. Some people are willing to take the hit rather than ever put a significant amount of their money in a low-return asset class. That’s not me. But it is not my place to tell people what to do. If people want to go that way, I wish them the best of luck with it.

But others do not want to be placed in circumstances in which they could suffer a devastating hit. I think that we all should be doing everything in out power to let those people know what alternatives are available to them. I see Valuation-Informed Indexing as an amazing alternative for millions of people. So I want to get the word out. It is my sincere belief that everyone, including you Goons, ends up better off if the word gets out.

So I am 100 percent if favor of that, even though I acknowledge that there comes a time when, if the crash has been delayed long enough. Buy-and-Hold comes to be the better choice. I don’t think we are there yet. But I do think there could come a time when we would be there for some portion of the population. I think you Goons greatly, greatly exaggerate the benefits of Buy-and-Hold and that it is dishonest and foolish to do it to the extent you do. I think that Valuation-Informed Indexing is a far superior strategy on an overall basis but that there may be some exceptions to the general rule, and given how long the crash has been deferred, the past 24 years is a time-period that may end up being one of the exceptions to the general rule, at least for a portion of the population (but almost certainly not for all of it).

Rob