I’ve posted Entry #531 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Rising Interest Rates Could Lock In Irrational Depression At the Worst Possible Time.
Juicy Excerpt: We cannot predict the short-term direction of interest rates any better than we can predict the short-term direction of stock prices. But we can predict the long-term direction of both. When interest rates are a good bit lower than their norm, the odds are that they will be moving in the direction of their norm in the long run. Interest rates may remain low for some time. But they will not remain low indefinitely. And, when they rise, that will put downward pressure on stock prices. It’s the long run that matters. That should be Shiller’s focus.
Look into your crystal ball and tell us where interest rates will be in 10 years. Tell us where the market will be at that time as well.
Stock prices are likely to be a lot lower since they are insanely high today.
Interest rates are likely to be a lot higher since they are insanely low today.
All of this is a game of percentages. I gave thought to calling the model rooted in a belief in Shiller’s research findings “Probability Investing” instead of “Valuation-Informed Indexing.” We can never know the precise outcome but we can always know the rough probabilities. It makes no sense to not make use of what we know. If an investor knows that stock prices will likely be headed downward over the next ten years, he should take that into consideration when deciding on his stock allocation.
That’s where I am coming from, Anonymous.
Rob
So tell us then what you would invest in based on YOUR crystal ball.
I think that the average investor should be going with a 30 percent stock allocation at today’s prices. He should have the remaining money in something liquid — certificates of deposit or IBonds — so that he can move that money into stocks as prices fall. When prices go to reasonable levels, he should go to 60 percent stocks. Then, when prices go to crazy low levels, he should go to 90 percent stocks.
The only difference between Buy-and-Hold is that, instead of going 60 percent stocks all the time, you go 60 percent stocks when prices are moderate. 30 percent when they are crazy high and 90 percent when they are crazy low. The peer-reviewed research that I co-authored with Wade Pfau shows that that permits you to retire many years sooner while taking on only a fraction of the risk. Stocks are like anything else you can buy — price matters. A lot. The price at which you buy is 70 percent of the story. It is crazy to ignore that factor when making purchases.
Rob