Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Another article shows once again that buy and hold has always worked and lowers risk versus timing schemes:
https://www.fool.com/investing/2021/11/17/how-to-turn-30000-into-over-500000-with-almost-no/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Juicy excerpt: “ In fact, if you had put your money into the S&P fund at any point and left it alone for at least 20 years, you would have turned a profit no matter how poor your timing was for your initial investment.”
I like the article. It’s the points made in this article that persuaded me to become a Buy-and-Holder a good number of years back.
But it’s not realistic. Look at that statement that you advanced as your juicy excerpt. The numbers show that the investor does well if he leaves his money in for 20 years. `Today’s CAPE value is 40. At the end of a bull/bear cycle, we usually see the CAPE value fall to 8. That’s a loss of 80 percent. Say that a guy is near retirement age and he has a portfolio value of $1,000,000. But he loses $800,000 in the next price crash. What do you think that the chances are that that fellow is going to stick with his high stock allocation after losing $800,000? It’s not going to happen.
Please think about this. The CAPE value could never even get to 8 if the vast majority of investors did not lower their stock allocations. It’s the selling that brings the price down. A CAPE of 8 is insane, just as insane on the low side as a CAPE of 40 is on the high side. It is the Buy-and-Hold “strategy” the encourages such insanity, that makes such crazy CAPE values inevitable both on the high side and on the low side.
Now please consider how Valuation-Informed Indexing solves this problem. The Buy-and-Holders have an injunction that I like a lot — “Stat the Course!” If only they really believed in it! In a world in which valuations affect long-term returns — the world in which we happen to live — stock investing risk is not constant but variable. So the investor who wants to Stay the Course in a meaningful way MUST practice valuation-based market timing to do so. Investors who fail to engage in market timing are letting their risk profile jump all over the place for no good reason.
So the Valuation-Informed Indexer has a very different reaction when the bull market ends and the bear market begins. He is not shocked to see his imaginary gains — the irrational exuberance that Buy-and-Holders treated as real — disappear into thin air. He was expecting that to happen and he adjusted his stock allocation as necessary to keep his risk profile constant over time. And he is not bummed up that stock prices are now lower. He knows from his reading of the last 40 years of peer-reviewed research in this field that lower stock prices translate into higher stock returns on a going-forward basis. So he is not freaked out. He doesn’t suffer devastating losses. He doesn’t lower his stock allocation at the worst possible time for doing so. He obtains much higher lifetime returns, as shown in the peer-reviewed research co-authored by Wade Pfau and Rob Bennett.
There’s a lot that is good in Buy-and-Hold. That’s why I incorporated everything in Buy-and-Hold except for the one horribly mistaken idea that market timing is not always required into the Valuation-Informed Indexing concept. I think that it would be fair to say that the stuff described in that article is 35 percent of what is needed to be a successful long-term stock investor. There’s one element missing — market timing. Valuation-Informed Indexing adds that critical element, which is 65 percent of the story. It does you no good to get a lot of stuff right if you make a critical mistake that causes the entire strategy to collapse. Valuation-Informed Indexing fixes the thing that the Buy-and-Holders got wrong. We don’t discourage market timing, we encourage it! Valuation-Informed Indexing is the approach to Buy-and-Hold that actually works in the real world!
That’s Rob Bennett’s sincere take re this terribly important matter, in any event.
My best and warmest wishes to you and yours, dear Goon friend.
Rob
“The numbers show that the investor does well if he leaves his money in for 20 years.”
Good news for long term investors
“What do you think that the chances are that that fellow is going to stick with his high stock allocation after losing $800,000? It’s not going to happen.”
The VII investor needs to increase his stock allocation greatly after an 80% drop. How likely do you think that is to happen?
The more people there are talking about the need to do it, the more likely it is that investors will see the point being made and follow the advice. I believe that we need to open every investing discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field, without a single exception. Shiller’s amazing research does none of us any good if we do not talk about its far-reaching implications and learn everything there is to know about it.
That’s my sincere take re these terribly important matters, in any event.
Rob
“The more people there are talking about the need to do it, the more likely it is that investors will see the point being made and follow the advice. ”
That might be true if investors weren’t emotional. History teaches us that investors are very emotional (because they are human)
We agree that investors are emotional, Evidence. My sense is that we disagree re how much effort we should be putting into helping them to become less emotional. I believe that it is investor emotionalism that causes most of the risk of stock investing. So we should be doing everything we can to make investors less emotional and thereby to make stock investing less risky.
It’s done with market timing. Shiller’s CAPE metric tells us how much irrational exuberance is present in the stock price at a given time. Market timing is the thing that overcomes irrational exuberance. In a market in which investors buy more stocks when they are priced low and buy less stocks when they are priced high, prices are self-regulating. We should always be aiming to keep the CAPE value as close to 17 as possible. That’s the Valuation-Informed Indexing concept.
Rob