Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
What I say is that we have not even one successful outcome using market timing. If you heart surgeon said that he wants to do heart surgery on you, but has yet to have a successful outcome, are you going to do the surgery? Of course not. You don’t risk your life and you don’t risk your retirement. You go with proven outcomes, like buy and hold.
What I say is that we do not have one successful outcome with Get Rich Quick/Buy-and-Hold. If irrational exuberance is a real thing (and there is 40 years of peer-reviewed research showing that it is), then you always need to adjust the number on your portfolio statement for the effect of irrational exuberance to know the real numbers. Failing to do that always hurts you because it is always a bad thing to make decisions based on bad numbers. Shiller’s Nobel-prize-winning research showing that irrational exuberance is a real thing changes everything that we once thought we knew about how stock investing works.
Rob
Article after article tells us of some pending drop in the market like this one:
https://www.cnn.com/2021/08/18/investing/stock-market-correction/index.html?utm_source=optzlynewmarketribbon
Notice that no one ever blames buy and hold. The market will keep going up and down, while you continue to be ignored.
I blame Buy-and-Hold.
Shiller showed that irrational exuberance is a real thing. It is obviously not a good thing. It is a bad thing. So every investor alive should be united in a desire to minimize irrational exuberance to the greatest extent possible. There’s only one way to combat irrational exuberance. That’s by exercising price discipline (engaging in market timing!) when buying stocks.
So I favor doing everything possible to persuade all investors to practice market timing at all times. Yes, stock prices have always gone up and down. So long as the ups and downs are moderate, that’s fine. But there have been four times in U.S. history when the downs were so big that they were catastrophic and millions of lives were destroyed. We are priced for such a catastrophic price drop today. We should all be doing everything we can to avoid the millions of failed retirements and hundreds of thousands of business failures and millions of job losses that we have seen on every occasion on which the Buy-and-Hold strategy (no market timing!) has become popular.
I think it would be fair to say that every Buy-and-Holder alive would vote for widespread promotion of market timing if only the Buy-and-Holders had not once made a mistake by thinking that it might not be absolutely required. I believe that, when people see with their own eyes how horrifying these Buy-and-Hold crises are, we will have a lot more people standing up to you Goons and we will be able to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field. We’ll see.
If we had been permitting honest posting all along, in all likelihood that article would have been written in a different way and would indeed note that it is the Get Rich Quick/Buy-and-Hold “idea” that has put us at risk of another catastrophic price drop. Pointing out that people are not able to speak properly about a subject until they are able to learn about the research relating to that subject is like blaming people for not knowing that the earth is not the center of the universe in the days when people were not permitted to speak that truth.
We permit honest posting re the research in other fields for good reason. Permitting honest posting re the research enables us all to live richer and better lives on a going forward basis. That sounds fine to me. I believe that the same procedure that is today followed in all areas of life endeavor other than the investment advice field would do wonders in the investing advice field as well. It will be interesting to see how things play out in the days following the next crash.
My best and warmest wishes to you and yours, Anonymous.
Rob
“I blame Buy-and-Hold.”
And, so far, you have been wrong. If anyone took your advice, they would have had a small fraction in their retirement accounts and that would have been a major failure of epic proportions.
Get Rich Quick/Buy-and-Hold (no market timing!) has been hurting investors for as far back as we have records of stock prices. The peer-reviewed research that I co-authored with Wade Pfau shows that beyond any reasonable doubt whatsoever. That’s why you Goons threatened to destroy Wade’s career if he continued doing honest work.
Here’s Wade:
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.”
Rob
Think how that article would read if we had opened the entire internet to honest posting re the past 40 years of peer-reviewed research back on the afternoon of May 13, 2002, as I proposed at the time, and if we had been learning from a national debate re these matters ever since. The article would indeed be pointing out that it was the relentless promotion of the Buy-and-Hold “strategy” that caused today’s insane CAPE level and it would be suggesting ways to counter the Get Rich Quick stuff so that we all can live better and richer lives on a going forward basis.
Take the logic chain a link further. If articles like the one I am describing had been appearing all along, we never would have seen a CAPE level in the mid-30s. Such a CAPE level is impossible in a world in which honest posting re the past 40 years of peer-reviewed research is permitted. Investors want to act in their self-interest. It is in the interest of stock investors for stocks always to be priced properly. So, each time prices got a little out of hand, articles would appear pointing out the benefits of market timing and prices would come back down to levels in the neighborhood of fair value.
You would still have ups and downs. But not CRAZY ups and downs. Not DANGEROUS ups and downs. That stuff would be buried in the past, along with the Buy-and-Hold “strategy.” Research is supposed to help us. That’s what the past 40 years of peer-reviewed research in this field does. We should be permitting (and encouraging!) honest discussion of it.
My sincere take.
Rob
You know that you are wrong, so you try and compensate with long winded posts, delete most posts and never let anyone else have the last word.
I don’t believe that there can ever be a last word. There’s always going to be new research. So people are always going to be learning new things. If everyone converted to Valuation-Informed Indexing today, tomorrow someone would come up with some new wrinkle that hadn’t been considered prior to today. So there would be a Valuation-Informed Indexing Plus. And the discovery of that wrinkle would lead to the discovery of even more new wrinkles. Learning how things work is a never-ending process.
People believe different things. And that’s healthy. There might be some threads in which a Valuation-Informed Indexer wrote the last post in the thread. That’s fine so long as there are other threads in which a Buy-and-Holder wrote the last post. That’s not the way it was at the Retire Early board in the days prior to May 13, 2002. There were hundreds and hundreds of threads discussing Greaney’s retirement study and none of them pointed out that it lacked a valuation adjustment. That led people to believe that the study was legitimate. The Valuation-Informed Indexers were afraid to point out the error in the study because you Goons had made clear that there would be consequences if anyone did that.
I am proud that I eventually worked up the courage to post my sincere view that that study lacks a valuation adjustment. I think that people using the study to plan a retirement need to know that. If there are people who want to use the study regardless, that’s their business. But, if I truly believe that the study lacks a valuation adjustment and I fail to say anything, that’s on me. I should post honestly, whether my post happens to be the first in the thread or the last or somewhere in the middle. The big thing for me is that we all feel free to post our honest views.
Rob