Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“ We’ll see how the millions of middle-class people who see the size of their stock portfolio diminish by 50 percent feel about it in the days following the next crash, Anonymous.”
We already know the answer to that as we see what happened in 2008/2009. They will keep buying more stock because they are happy they can get it so cheap.
I saw people begin to question Buy-and-Hold in a serious way in the days when the CAPE had dropped to 13. There were people at the Bogleheads Forum flat-out calling Taylor Larimore a liar. That was unimaginable in the days before the crash.
That development never gained much momentum because prices recovered quickly. We will see whether having prices remain low for a long time makes a difference with the next Buy-and-Hold crisis.
There is no such thing as “cheap” if the market is efficient. If there is such a thing as cheap, there is such a thing as expensive. If there is such a thing as expensive, we all should be timing the market. We should be buying more stocks when they are cheap than we do when they are expensive.
Rob
The last 20 years did not turn out as you said it would. Why should anyone listen to what you have to say?
The last 150 years did not turn out as you said it would. Why would anyone listen to what you have to say?
To be wrong for 150 years is worse than to be wrong for 20 years. And the 20-year thing (it’s really only 15 years) can be explained. We are going through a weird period. I have written several articles explaining why that is so. So has Jeremy Grantham. No Buy-and-Holder has ever offered an explanation for why there has been a correlation between valuation levels and long-term returns for 150 years now (if the market were efficient, there would be no correlation).
If someone wants to say that they are not going to follow my advice because the price crash has been long deferred, I have no problem with that. But you have to do something, you have to follow some investment strategy. And the pure Get Rich Quick/Buy-and-Hold approach has been doing great harm to stock investors ever since the first market opened for business. That’s hardly an improvement. If someone comes up with a third way that checks out, I will certainly take a look at it. As of today, there are only two models that are promoted as research-based. And 100 percent of the data available to us supports one of those models while 0 percent supports the other. I go with the model with 100 percent support. Call me madcap.
Rob
“ The last 150 years did not turn out as you said it would. Why would anyone listen to what you have to say?”
Actually, it has. Buy and hold has always rewarded the patient. The market has always recovered and gone on to new highs. Yet we have never seen any successful outcome with market timing.
The Get Rich Quick element of Buy-and-Hold (the idea that market timing is not required) has always subtracted from investor returns and had always added to investor risk. Get Rich Quick/Buy-and-Hold always subtracts and never adds. We would all be better off if we permitted honest posting re the last 40 years of peer-reviewed research at every discussion board and blog, without a single exception.
That’s my sincere take re this terribly important matter, in any event.
Rob
Actually, it has. Buy and hold has always rewarded the patient. The market has always recovered and gone on to new highs. Yet we have never seen any successful outcome with market timing.
The Great Depression was a great boon to mankind. The near depression of the early 1900s was a great boon to mankind. The stagflation of the 1970s was a great boon to mankind. The 2008 economic crisis was a great book to mankind,
What was I thinking?
Rob
No one can predict if and when bad times will come. Buy and holders have been rewarded, while market timers have not. We have history to inform us.
An increase in irrational exuberance always brings on human misery. There has never been an exception in the historical record. It is not possible for the rational human mind to to imagine how there could ever be one. Just as eating an unhealthy diet or smoking or driving drunk always brings on human misery.
It is of course true that we cannot know in advance how many times a person will get away with driving drunk before he will kill himself and others with the dangerous practice. Similarly, a person can fail to engage in market timing and still remain standing for years or even for decades. But sooner or later anyone who fails to engage in market timing is going to pay a terrible price for that choice. The thing to do is to permit honest posting so that people can hear both sides of the story and decide for themselves whether they believe that Shiller’s Nobel-prize-winning research possesses any merit or not.
That’s my sincere take re these terribly important matters, in any event.
Rob
“ An increase in irrational exuberance always brings on human misery.”
I am in so much misery with $6.5 million. Yet you would say that is I had $600k with VII, I would be better off? Really?
More than half of the value of today’s stock market is irrational exuberance, not real and lasting gains backed by an increase in economic productivity. If you subtracted $3.5 million from the number on your portfolio statement to identify the true and lasting value of your portfolio, it would show that you have stock holdings of $3 million. Yes, you would be far better off. You could plan your financial affairs using real numbers rather than the funny numbers Buy-and-Hold stuff. There is no comparison.
Rob
But what about the poor VII investor who is only sitting on $600k? He was never able to build up enough for retirement. Does he just wait for a windfall? Is that the strategy?
The only difference between Valuation-Informed Indexing and Buy-and-Hold is that Valuation-Informed Indexers use real, research-based numbers while Buy-and-Holders use phony baloney pumped-up irrational exuberance numbers. Counting irrational exuberance as money that you can rely on to finance a retirement is not “building up” anything. It is engaging in a dangerous fantasy, You are always better off knowing the real numbers. It is a logical impossibility that there could ever be an exception.
Rob
“ The only difference between Valuation-Informed Indexing and Buy-and-Hold is that Valuation-Informed Indexers use real, research-based numbers while Buy-and-Holders use phony baloney pumped-up irrational exuberance numbers. Counting irrational exuberance as money that you can rely on to finance a retirement is not “building up” anything. It is engaging in a dangerous fantasy, You are always better off knowing the real numbers. It is a logical impossibility that there could ever be an exception.”
By your own guidance on VII, theVII would have far less in their account today vs the buy and holder. How would I be able to retire with only $600k? Last I checked, you also said that the SWR is now below 2%. How do I retire with $12k a year I’d I am a VII investor?
The Valuation-Informed Indexer would have less in dollar terms. But we could have a price crash of as much as 75 percent. At the end of every earlier bull/bear cycle, the CAPE value dropped to 8. That’s a loss of more than 75 percent. When the CAPE is 8, the most likely 10-year annualized return for stocks is 15 percent real. The Valuation-Informed Indexer will have a lot more assets to invest in stocks when prices are good. And he will enjoy compounding returns on those gains for decades to come.
The proper way to do the comparison is by looking at lifetime returns. I have run hundreds of 30-year return sequences on The Scenario Surfer to compare how Buy-and-Holders and Valuation-Informed Indexers do over the long term. The VII investor has ended up ahead on 90 percent of the scenarios, in many cases far, far ahead (hundreds of thousands of dollars). As I said above, there really is no comparison.
Is there a one in ten chance that the Buy-and-Holder could end up ahead? There is. But, if your odds of ending up ahead are only 10 percent, you are taking on far more risk than the guy with a 90 percent chance of ending up ahead. At any rate, we should be permitting honest posting at every site so that each investor can decide for himself which strategy to employ.
My sincere take.
Rob
“ The Valuation-Informed Indexer would have less in dollar terms.”
That’s my point. If you are in your 60’s then you are screwed. It is too late to make up for it. Also, think about those that are already 10 years into retirement with VII. They have been spending down the balance and are even in worse shape.
There’s nothing to make up for. Irrational exuberance is not real money, it is pretend money.
A Valuation-Informed Indexer would determine the true value of his portfolio on bis retirement date and spend down only the amount that could afford to spend down. It is the Buy-and-Holder who is in danger of running out of money in retirement. The Buy-and-Holder counts irrational exuberance as real So he has no idea where he stands at any time. The Buy-and-Holder is always shooting in the dark while the Valuation-Informed Indexer uses real numbers.
Rob
“ There’s nothing to make up for. Irrational exuberance is not real money, it is pretend money.”
We are talking about VII. The return rates are much lower vs buy and hold. VII has not been able to capitalize on a crash, which has put the VII investor behind. You have a knot hat before and said VII would eventually catch up. The crash did not happen and now it is too late for that 60 year old investor as well as those that have already entered retirement with the hope for a crash.
The return rates for Buy-and-H0ld are only higher if you count irrational exuberance as real. If you make the necessary adjustment, they are not higher, they are much lower. There are a small number of cases (10 percent) in which the Buy-and-Hold returns are a bit higher, But there is no way to know in advance if you are going to be in that super lucky group or not, The odds are heavily against it, Going with a Buy-and-Hold strategy is liked putting your retirement money into lottery tickets and then saying “you’re telling me that there’s a chance!” The sensible thing to do is to go with the 90 percent bet, not the 10 percent bet.
Going pure Get Rich quick is not the answer, Anonymous. I mean, come on. Buy-and-Hold is a marketing gimmick, nothing more and nothing less. It’s appeal is emotional, not intellectual. The rational thing to do us to use real, valuation-adjusted numbers at all times. The you always know where you stand. The fact that the Buy-and-Holders feel a need to deceive themselves about where they stand should tell you that it is not a sound strategy.
Rob