I’ve posted Entry #569 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Nothing But Flexibility in Stock Allocations Can Stabilize the Economy.
Juicy Excerpt: My view is that all of those considerations are secondary ones. The biggest influence on the economy is the amount of irrational exuberance present in the stock market. I don’t recall ever hearing anyone else say that. So I feel that I have to doubt myself. But the case seems so clear and strong that I cannot dismiss the thought from my mind.
A person who made money in the market over the last 25 years can take that money out and buy all sorts of things with it. On the other side of any great crash it’s unlikely that they’ll have seen their holdings wiped out.
They will get to keep the gains that were rooted in economic productivity. That’s 6.5 percent real per year. They will not get to keep the irrational exuberance, Pretending that irrational exuberance generates real and lasting gains makes it impossible to engage in effective financial planning. We should be telling people the real numbers. We hurt them in very, very, very serious ways when we fail to do that.
Rob
Even with drops, the buy and holder would still be way ahead of the guy who stayed out of the market. The buy and holder will also draw from the cash/bonds portion during downturns as he has such a significant portfolio, he has the ability and patience to watch it go back up and reach new highs.
This is precisely the question that Wade Pfau and I examined in the peer-reviewed research that we co-authored. We found that Valuation-Informed Indexing always ends up ahead on a risk-adjusted basis, sometimes by hundreds of thousands of dollars. His conclusion after 16 months of analysis of the question was: “Yes, Virginia, Valuation-Informed Indexing works!”
You Goons threatened to destroy his career if he continued to do honest work in this field. Extortion is a felony. So you put yourself at risk of a long prison term. I can’t help but wonder why.
Rob
Rob, even if the market is this irrational the person who benefitted from “irrational exuberance” can diversify as they go. Take your “irrational” gains and buy land or even gold (which I wouldn’t touch), upgrade your house along the way, and invest in other ways such as with your health. But, again, the person who is 100% in the market will come out on the other side smelling like a rose while the guy who spent through his nest egg BEFORE the crash will have a much tougher time.
It might be worth your time to do a case study of hypothetical early retirees who lived through the greatest financial disaster in modern history. Assume you start in the year 1904 and do some modelling based on a starting portfolio of $400,000. One can be split between the DJIA stocks, one can be split 50/50 between stocks and bonds, one can be 100% bonds, and another can buy gold. Do models with both a 4% and a 3% withdrawal rate. See where each retiree stands before the Great Crash of 1929, where they stand a few years later at the bottom of the market, and where they stand 25 years after the crash when they die and pass their belongings down to their heirs. It would be a totally worthwhile study.
There are thousands of worthwhile studies that could be done. And I would like to see them all completed so that we can all benefit from thousands of learning experiences. This is why I say that we need to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research (as well as re the research that came before that and that appeared at the time to support Buy-and-Hold), without a single exception.
My best and warmest wishes to you.
Rob
Rob, people HAVE conducted these back studies. Equity investors came out ahead. I was suggesting that you do it so you could learn this.
I say that stocks are the best investment class out there. So I hardly need to see any new studies to be persuaded of that.
I also say that price discipline (market timing!) is just as critical when buying stocks as it is when buying anything else. So, yes, there are times when it makes sense to lower one’s stock allocation and other times when it makes sense to increase one’s stock allocation. ALL of the research available to us today shows that. There is nothing on the other side, This is why I say that we need to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research. The longer we hold off on doing that, the more people there are who get hurt.
Make sense?
Rob
You would make more sense if you weren’t completely out of stocks for the past 20+ years.
I agree that that is an extreme position. I don’t recommend it for others. But a person always needs to take his personal circumstances into account. I have enough risk in my overall plan in trying to get my internet writing business off the ground. So I think it makes sense for me to take on less risk with my investments than would be appropriate for someone in more typical circumstances.