I’ve posted Entry #513 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Do Compounding Returns on Pretend Stock Gains Produce Real Value?
Juicy Excerpt: Another issue is that investors who are open to the idea of moving a portion of their assets into non-stock investments can often obtain better-than-normal returns on those investments by looking for alternatives to stock when prices go out of control. Treasury Inflation-Protected Securities (TIPS) were paying a return of 4 percent real in January 2000. Stocks purchased at that time have offered a return of only 3.7 percent real during those years. That 4 percent return was an exceptional deal, to be sure. But I don’t think that it was a coincidence that an amazing return was being offered on a non-stock investment class at the time in U.S. history when irrational exuberance was at its height. It took that sort of return to attract investors to a non-stock asset class at that time. Investors who were unwilling to participate in the irrational exuberance were properly rewarded by the market for their contrary convictions.
Investing isn’t just one point in time. Compare your long term results with my long term results and you will see a shocking gap. Only one of us has a failed retirement and it isn’t me.
Wade Pfau and I spent 16 months investigating this question and we published research in a peer-reviewed journal showing that Valuation-Informed Indexing has been FAR superior to Buy-and-Hold for as far back as we have good records (1870). Could it be that everything that we know about how stock investing from the peer-reviewed research will be turned on its head this morning? I suppose that anything is possible. But I don’t feel comfortable betting my retirement money on the longest of all possible long shots. When something has been true for 150 years, I am inclined to believe that it will continue to be true in the future. I don’t say that it is a certainty. I certainly don’t advocate banning discussion of Buy-and-Hold. But I believe that the far more likely outcome is that Valuation-Informed Indexing will remain superior, So that’s what I say that I believe.
My best and warmest wishes to you and yours.
Rob