Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Market Declines are Normal
by Larry Swedroe, 2/14/22
https://www.advisorperspectives.com/articles/2022/02/14/market-declines-are-normal
“Investors who abandoned their plans due to panicked selling not only missed out on those great returns, but they were then faced with the extremely difficult decision of determining when it was safe to get back in. That’s one of the problems with market timing – you have to be right twice, not once”
I know of one investor who has been waiting for about 25 years to get back in.
It’s not hard to know when to lower your stock allocation and when to increase your stock allocation. You lower it when the CAPE value has risen so much that you are now taking on more risk than you determined was the proper amount of risk for you. And you increase it when the CAPE value has dropped enough so that you are taking on less risk than you determined was the proper amount of risk for you. In short, you engage in market timing for the purpose of keeping your risk profile constant over time.
You don’t want to be right one time or two times or three times. You want to be right for every day in which you have money invested in stocks. The good news is that, so long as you are always certain to practice market timing as needed, you always have confidence that you indeed are right. There’s 40 years of peer-reviewed research supporting Valuation-Informed Indexing, based on 150 years of return data. That’s a lot more than the zero years of peer-reviewed research supporting the pure Get Rich Quick/Buy-and-Hold “strategy.” And it’s not a terribly close call.
My sincere take.
Rob
“It’s not hard to know when to lower your stock allocation and when to increase your stock allocation.”
It is extremely unlikely that you will ever raise your stock allocation.
If we go yet another 5 years without a crash, will you finally admit you were wrong?
It is extremely unlikely that you will ever raise your stock allocation.
I advised anyone who was going with a low stock allocation in early 2008 because of the dangerously high stock valuations that applied at that time to raise their allocation after the price crash that we saw at the end of that year.
The median CAPE value is 16. Given how many years we have see with CAPE values above 16, we could be looking forward to a long stretch of years with median values below 16. In those days, I will be as consistent about arguing for investors going with higher stock allocations than their norm as I have been consistent about arguing for investors going with lower stock allocations than their norm in recent years.
Buying more stocks when the long-term value proposition is strong than when you do when the long-term value proposition is poor — What will they think of next?
Rob
If we go yet another 5 years without a crash, will you finally admit you were wrong?
Valuation-Informed Indexing has been far superior to Buy-and-Hold for 152 years running. There are some who say that that is not the case from 1996 forward. I don’t buy into that argument because we have not yet seen the Buy-and-Hold Crisis that the earlier data shows is the inevitable result of it. But I can see where those people are coming from. If we go another five year, that would bring the stretch of years in which Valuation-Informed Indexing temporarily did not work up to 31 years, according to that way of looking at things. 31 years is still a lot less than 126 years.
Buy-and-Hold was discredited by Shiller’s research. Some (not me) believe that Valuation-Informed Indexing has been discredited by the exceedingly strange length of the current bull market. If both of those models have been discredited, it would seem to me that we should be looking for a third model. That’s another reason to open every discussion board and blog on the internet to honest posting. Each day in which the Ban on Honest Posting remains in place is a day in which we deny ourselves lots of powerful insights into how stock investing works in the real world. Which benefits absolutely no one.
Rob
“I advised anyone who was going with a low stock allocation in early 2008 because of the dangerously high stock valuations that applied at that time to raise their allocation after the price crash that we saw at the end of that year.”
If only you had fallowed your own advice.
I like what I did. I did not increase my stock allocation. But I did enter discussions about doing so with my wife. By the time we agreed that it was a good idea to do so, prices had started their way back up and it was no longer such a hot idea. Did I miss out on a small amount of gains by not acting quickly? Yes. But a basic principle of Valuation-Informed Indexing is that there is no need to make quick moves, which is one of the things that distinguishes from any strategy involved short-term timing. And, the truth is, it didn’t make that much difference. It’s being generally aware of prices that is the big deal, not being super focused on them. So long as you are generally focused on prices, you will do just fine.
Rob
“ If we go another five year, that would bring the stretch of years in which Valuation-Informed Indexing temporarily did not work up to 31 years, according to that way of looking at things. 31 years is still a lot less than 126 years.”
31 years is longer than the average time in retirement. That means we have a whole generation of failed retirements with those that followed VII during that time.
“Did I miss out on a small amount of gains by not acting quickly? Yes. ”
In early 2009 the DJIA dropped below 8,000. It is now over 35,000
31 years is longer than the average time in retirement. That means we have a whole generation of failed retirements with those that followed VII during that time.
It doesn’t mean that at all. Valuation-Informed Indexing calls for an investor to go from a 60 percent stock allocation to a 30 percent stock allocation at times when prices are at scary high levels. Someone who moved from a 60 percent stock allocation to a 30 percent stock allocation could have locked in a 4 percent real return for that money. The earnings on the S&P with dividends reinvested were 7.0 percent. So that person lost 3 percentage points of return on 30 percent of his portfolio while investing with greatly reduced risk. That would not cause a generation of failed retirements.
And of course all that I have ever argued is that we should permit honest posting re the peer-reviewed research. No investor would ever be required to follow any one particular strategy. By permitting honest posting, we are opening the decision to the investor himself. Since it is the investor who earned the money, he is the one who should be making that decision. Otherwise, the internet Goons who blocked honest posting are responsible for any losses suffered. Please remember that, if stocks continue to perform in the future anything at all as they have always performed in the past, we may be seeing huge losses for millions of investors sometime within the next year or two.
Rob
In early 2009 the DJIA dropped below 8,000. It is now over 35,000
I obviously would not have stayed at the higher allocation once prices again reached insanely dangerous levelds.
You are making the same mistake that you have made 10,000 times before — treating irrational exuberance gains as if they are the same thing as real economic-growth gains. They are very, very different things. That’ fundamental.
Rob
“ So that person lost 3 percentage points of return on 30 percent of his portfolio while investing with greatly reduced risk. That would not cause a generation of failed retirements.”
Thanks for admitting that people following your timing scheme have done much worse. Yes, they have a failed retirement as they have not kept up with the market. Those that stayed out, like you, have been completely destroyed.
Lots of different people are in lots of different circumstances. Think how those who followed Buy-and-Hold strategies are going to feel if we suffer a 75 percent price drop, which is what we have seen at the end earlier bull/bear cycles.
I continue to believe that we should open the entire internet to honest posting re the past 41 years of peer-reviewed research. And I continue to believe that you make a horrible analytical mistake when you treat irrational exuberance gains as if they were real and lasting. When you ignore the most important factor of the analysis, you come to crazy conclusions.
Rob
“ Think how those who followed Buy-and-Hold strategies are going to feel if we suffer a 75 percent price drop, which is what we have seen at the end earlier bull/bear cycles.”
When did the markets fail to recover after ANY drop?
Meanwhile, we have yet to see 1 single successful outcome with timing (that includes you).
Market timing (the long-term variety, not the short-term variety) has worked every single time it has been tried. The Bennett/Pfau peerr-reviewed research shows that beyond any doubt whatsoever. It is not even possible for the rational human mind to imagine how there could ever be an exception. Market timing is price discipline. There’s no other market in which anyone would eve suggest that price discipline might not be a good thing. Price discipline is what makes markets functional. Persuade enough stock investors not to practice market timing and you are going to see an economic collapse. It happens every time because it must happen every time. There is no other way that that story could ever turn out.
The market always recovered. But every year in which you are waiting for it to recover is a year in which you miss out on the benefits of compounding returns. If prices go down and stay down for 20 years, you have missed out on 20 years of compounding. We only get 40 years to accumulated the assets we need to retire. Going with a pure Get Rich Quick/Buy-and-Hold “strategy” greatly diminishes your prospects of being able to retire at a reasonable age. To deliberately follow a strategy that eventually causes hour risk profile to get wildly out of whack is an act of self-destruction.
That’s my sincere take, in any event.
Rob
“ Market timing (the long-term variety, not the short-term variety) has worked every single time it has been tried.”
You say it,but you can’t show even one example of a successful outcome with timing. We can all look at the history and see how wrong you have been.
To get your risk allocation back where you determined it should be is a successful outcome. A market timer achieves that goal on the day he changes his stock allocation. It’s not possible for the rational human mind to imagine how it could ever be a bad thing to adopt the proper risk profile. That’s “Staying the Course” (as opposed to “Staying the Allocation”) in a meaningful sense.
Rob
“ So that person lost 3 percentage points of return on 30 percent of his portfolio while investing with greatly reduced risk.”
You agree that the market timer did worse. Further, you have zero stock, which means you were substantially worse than that. If you had listened to those that said to keep working and stay invested in the market, you would have millions by now. Instead, you are broke.
I missed out on a lot of irrational exuberance, that’s all In the event that stocks continue to perform in the future somewhat as they always have in the past, it will eventually disappear into the mist.
I prefer to focus on the real stuff. I have noticed that you NEVER adjust for the effect of irrational exuberance. I can;t help but wonder why.
Rob
“ I prefer to focus on the real stuff.”
Really? It’s not real if you can’t spend it. I can spend my $7 million. Can you spend even $1 of your mythical $500 million windfall?
I can’t spend one penny of the $500 million and you could spend the entire $7 million if you cared to. But the last 41 years of peer-reviewed research shows that only $3.5 million of that $7 million is real and lasting wealth and the other $3.5 million is irrational exuberance. That’s true not just for you, it’s true for millions of people. The guy with $1 million has only $500 thousand of real wealth and the guy with $100,000 has only $50,000.
It seems to me that that makes financial planning impossible. How can you plan your future effectively when you have no idea how much wealth you have accumulated. I see it as a national tragedy that we have 41 years of peer-reviewed research showing us how stock investing really works and yet we can not share with anyone what we know because of the abusive stuff and the criminal stuff. That’s a journalism issue and I am a journalist. So it makes sense to me that I try to do something to help those millions of people.
It sure seems to me that doing that would lead to me collecting a settlement payment of at least $500 million. It’s hard for me to imagine a scenario in which it would not. Once we open every site to honest posting, there will be thousands and thousands of people offering honest and accurate advice. it will be the biggest economic advance in our history. So I am not able to imagine a circumstance in which it would not produce a settlement payment of at least $500 million.
I see that $500 million as being a lot more real than the $3.5 million of irrational exuberance that you are treating as real. I would say that the other $3.5 million is perfectly real. Lots of people will be treating half of that amount as not real in the event that stocks continue to perform in the future somewhat as they have always performed in the past. In that event, the CAPE value will go down to lows just as crazy as the highs that apply today. I will be saying at that time that the entire $3.5 million is real no matter what the portfolio statement. It will be important that people say that at that time. If the irrational depression gets too out of control, we could go into a Second Great Depression. I sure don’t want to see that.
I think it is important to get the numbers right. That’s the bottom line re all this stuff. Financial planning matters. So we should all make an effort to get the numbers right. I see no downside.
Rob
Yet you can’t get a single lawyer to help you get your $500 million. So tell us how it is remotely even real.
I haven’t found a lawyer willing to take the case on a contingency basis, that’s so. I chalk that up to the entire bull market psychology thing The way that I see it is that a bull market is a liar’s market. What Shiller did was ti provide us the tool we need (the CAPE value) to identify the true and lasting value of our stock holdings. I see that as a huge advance. But there is a negative to it on the eyes of people whose lives are riding on a belief that the bull market prices are real and lasting. If people like me are permitted to talk openly about the realities, people will lower their stock allocations for their own benefit and those sales will causes the phony bull market to collapse.
I think that’s why lawyers don’t want to take the case (which is very strong on the merits) on a contingency basis, What really happens in a legal proceeding is that the community as a whole determines what is right and what is wrong. I’ve already had that happen on the various discussion boards. I always had 10 percent saying “Rob’s stuff is amazing, please permit him to speak.” But I have also had 10 percent saying “Ban this guy immediately” and the remaining 80 percent sort of leaning in the direction of the 10 percent of Goons while not really approving of their methods. The same general pattern would probably play out on a jury. So lawyers do not feel comfortable devoting thousands of hours of work effort to a case that may not produce a financial payoff if it is taken on a contingency basis.
Does that change after we have seen another Buy-and-Hold Crisis, one that caused stock prices to fall by 70 percent and causes millions of failed retirements and hundreds of thousands of business failures and millions of people thrown out of work and perhaps even a Second Great Depression and lots of worsening political conflicts?
I think that will cause a change. And at that point I may well have hundreds of lawyers expressing an interest in talking to me. I believe that this may become an entire new type of litigation. There will be millions of people who will have suffered large financial losses because honest posting re the last 41 years of peer-reviewed research was banned at every site on the internet. The more cases there are that produce large financial awards, the more publicity there will be re that matter and the more causes that will then be brought.
Which is all to the good. We need as a society to get past this thing where honest posting re the past 41 years of peer-reviewed research is banned because it makes the Buy-and-Holders feel bad to see that they made a mistake and that their cover-up of that mistake has hurt millions of people and held back progress of our society’s effort to learn more about how stock investing works over time. Legal awards are one thing that our society uses to get over problems like this. So I think it would be a good thing to see that happen.
One concern I have is that there may be too many successful cases. Even people who work in the stock selling industry only have so much money. I believe that we may need legislation limited the number of lawsuits that may be brought. I would sign on to something like that so long as we made absolutely sure that the Ban on Honest Posting re the Peer-Reviewed Research was going to come to an end once and for all. Spreading knowledge of how stock investing works is the real prize here. I think we all need to keep our eyes on the prize.
Rob
Lawyers will take anything to get. It means you don’t have a case.
Are you okay with waiting to see how things play out in the days following the next price crash?
Lawyers as a rule make a good bit of money. So they are as a class going to lose more than most others in the event that stocks continue to perform in the future at least somewhat in the same way in which they always have in the past.
Rob
“ Are you okay with waiting to see how things play out in the days following the next price crash
It has been over 20 years. You said long term timing is 10 years. Are you moving the goal posts yet again?
The ordinary rule is 10 years. But there is no absolute rule re how long irrational exuberance can remain in place. The best way to insure that it is eliminated quickly is to point out to all investors how much pain it causes to those who ignore it. I have been advocating that we all pull together and tell people about the dangers of Buy-and-Hold investing strategies. You Goons have employed every trick in the book to make those efforts unfruitful. If you really want to see the CAPE level return to more reasonable levels, perhaps you should be more cooperative with those who are trying to do something to make that little dream come true.
Rob
So maybe we can all freeze ourselves and then have someone wake us up in the future when it “ all play out” for you.
Or you could educate yourself as to what the last 41 years of peer-reviewed research is trying to teach us all about how stock investing works in the real world. We didn’t know it all in the mid-1960s, when Buy-and-Hold was being developed. We achieved a huge advance in our understanding in 1981. Now we need to tell people about the advance so that we don;t continue to suffer these Buy-and-Hold Crises every 40 years or so. They hurt us in very, very, very serious ways.
Rob
“ Or you could educate yourself as to what the last 41 years of peer-reviewed research is trying to teach us all about how stock investing works in the real world”
I am not interested in your version of peer-reviewed research because I don’t want to deplete my savings like you. I follow the undisputed peer review research that show buy and hold (time in the market) has always worked. This is how I got $7 million. I don’t need a get rich quick scheme, like $500 million fantasy windfalls.
I wish you the best of luck with it, Anonymous.
Rob
Somehow you think it would be better for all of us to quit or jobs, get kicked off the investment boards, deplete our savings and then base our retirement on getting a big windfall payment to pay our bills in retirement.
I think it would be best if we all felt free to say what we believe about stock investing on discussion boards. If that were the case, the CAPE value would not be 35. The crazy Get Rich Quick/Buy-and-Hold stuff would be reined in by people making a case for research-based strategies. Permitting that would change the world in a very big and very positive way.
Rob
I guess if anyone is looking to deplete their savings and get kicked off all the boards, they can com3 to you for your research-based advice.
Research-based strategies are not super popular at time when irrational exuberance is out of control and people are trying to persuade themselves that the numbers on their portfolio statement are real. But I see it as the entire benefit of research that it helps you to see the dangers of the current moment and to see how stocks have always performed IN THE LONG TERM.
Buy-and-Hold is what sells. Valuation-Informed Indexing is what WORKS.
People shouldn’t get kicked off boards for reporting on the last 41 years of peer-reviewed research. The fact that they are shows how dangerous it is to go pure Get Rich Quick/Buy-and-Hold. If Buy-and-Hold were a real thing, Buy-and-Holders wouldn’t see the peer-reviewed research as such a threat.
Rob
You are banned for your bad behavior.
You consider it bad behavior to point out the error in the Greaney retirement study.
Rob