A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“If Shiller Appears at Bogleheads and Says That He Does Not Believe That It Is Possible to Calculate the Safe Withdrawal Rate Accurately Without Taking Valuations Into Consideration, Will He Be Banned?”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

<em>Shiller is welcome at the Bogleheads forum. You are not because it requires you to post truthful statements and good behavior.</em>

If Shiller appears at Bogleheads and says that he does not believe that it is possible to calculate the safe withdrawal rate accurately without taking valuations into consideration, will he be banned?

Rob

Comments

  1. Rob

    What exactly is your investing strategy? Are you sitting on cash waiting for the next price crash? In TIPs?

    Given your concern about valuations, what do you think in a reasonable way to invest now?

  2. I am a Buy-and-Holder in every respect but one. I incorporate into the Buy-and-Hold strategy Shiller’s Nobel-prize-winning finding that valuations affect long-term returns.

    I believe strongly that investors should Stay the Course. But in a meaningful way, not in a pointless, self-destructive way. In the days when Buy-and-Hold was being developed, there was a belief among academics that the market was efficient (that is, rational). If that were so, market timing would not be required. Shiller showed the it is investor emotion that is really the driving force behind stock price changes and that the only way to keep irrational exuberance from getting out of control is to always keep investors informed of how high prices diminish the long-term value proposition of stocks and that the only way for an investor to keep his risk profile stable when prices rise is to lower his stock allocation.

    Each investor’s life goals and risk tolerance are different. So there is no one answer to your question. But I believe that it makes sense to take the conventional Buy-and-Hold stock allocation recommendation and adjust it 30 percentage points down at times of insanely high stock prices and 30 percentage points up at times of insanely low stock prices. That would put the typical investor at 30 percent stocks today. I would put the remainder in something fluid because you want to be able to move it into stocks if prices drop to insanely low levels, as they have in previous Buy-and-Hold crises. If the CAPE drops to 8, the most likely 10-year annualized return rises to 15 percent real.

    TIPS, IBonds and Certificates of Deposit are all good choices. Cash is not just a holding place. It is an asset choice of great strategic value in a world in which the Buy-and-Hold “strategy” is being pushed relentlessly and causing an insanely dangerous bull market.

    Rob

  3. “TIPS, IBonds and Certificates of Deposit are all good choices. ”

    What long term real return are they offering at the minute?

  4. A Valuation-Informed Indexer would not be buying them for the purpose of obtaining the return that they offer “at the minute.”Valuation-Informed Indexing is a long-term strategy. The Valuation-Informed Indexer would invest in those asset classes because it would permit him to buy more stocks when stocks are available at good prices. The peer-reviewed research that I co-authored with Wade Pfau shows that Valuation-Informed Indexing has performed far better than Buy-and-Hold for the entire history of the stock market.

    It is impossible for the rational mind to imagine a circumstance in which exercising price discipline (by engaging in market timing!) could be a bad thing and the entire history of the stock market confirms this common-sense understanding of how things work. Buy-and-Hold/Get Rich Quick is what sells. It’s a fantastic marketing gimmick to persuade people that irrational exuberance gains are real and lasting.

    Valuation-Informed Indexing is what works. It is the first true research-based strategy. It is Buy-and-Hold corrected for what we have learned from the last 41 years of peer-reviewed research in this field. Those 41 years of peer-reviewed research are the most important 41 years of peer-reviewed research in the history of investment analysis.

    My best wishes to you.

    Rob

  5. “Valuation-Informed Indexing is a long-term strategy. ”

    Which is why I asked “What long term real return are they offering at the minute?”

    If I am making a decision as to what my asset allocation should be today I am going to compare the long term returns being offered at current prices by stocks, bonds and cash.

  6. The CAPE value that applies for stocks at the moment affects that determination. That’s the question on the table — whether investors should take the CAPE value into consideration or not? If you ignore the CAPE value and just stick with the same stock allocation at all times, you are a Buy-and-Holder. If you take the CAPE value into consideration, you are a Valuation-Informed Indexer.

    If the CAPE value is high, that makes stocks less appealing because high CAPE values translate into low long-term returns, It also makes cash-like asset classes more appealing because high CAPE values increase the probabilities of a price crash for stocks. Cash-like asset classes offer an amazing value proposition when stock prices crash because they protect one’s portfolio from suffering big losses at such times and permit one to invest more heavily in stocks when stock prices are highly appealing than one could if one were following a pure Get Rich Quick/Buy-and-Hold strategy. Following research-based strategies is a win/win/win/win.

    Do you see?

    Rob

  7. Tell us about your track record of investing over the last 2 decades. What has your rate of return been?

  8. The last 26 years has been the worst time to invest in stocks in the history of the United States. Never before has the CAPE value risen so high and then remained at insanely high levels for so extended a period of time. Certainly those years should be taken into consideration by all investors seeking to determine their stock allocation. But to look solely at the past 26 years of stock-market history while ignoring entirely the 126 years of stock market history that occurred before this time-period when Get Rich Quick/Buy-and-Hold got entirely out of control makes no sense. Both sorts of time-periods matter. We should be looking both at time periods when irrational exuberance is killing nus all and at times periods in which investors have demonstrated an ability to keep their Get Rich Quick/Buy-and-Hold urges under at least a reasonable amount of control.

    I am happy to discuss the entire historical record. That’s why I co-authored (with Wade Pfau) peer-reviewed research doing just that. As you know, that research showed that “Yes, Virginia, Valuation-Informed Indexing works!” (in Wade’s words). I am not willing to select relatively short time-periods in the historical record and pretend that I believe that they tell us something important in isolation. Times in which Get Rich Quick/Buy-and-Hold “strategies” become insanely popular are inevitably followed by time-periods of great human suffering and economic destruction. To look at the Get Rich Quick/Buy-and-Hold years in isolation without giving consideration to the pain they bring on for the entire nation would be irresponsible and misleading and dangerous and foolhardy.

    A drunk driver can obtain good results for a limited amount of time. To look only at what happens in the time before he crashes gives a biased view of the merits of drunk driving. To get the full picture, you need to be willing to look also at the death and heartache his dangerous driving practices inevitably bring on. So it is with Buy-and-Hold/Get Rich Quick. Get Rich Quick/Buy-and-Hold can APPEAR to give good results for a limited amount of time. But viewed from a long-term perspective, those appearance are an illusion. You need to be willing to look at the entire picture to develop an informed understanding of the realities. That’s what Wade and I did in our research, which you Goons very, very, very much did not want people to see or talk about.

    Rob

  9. “ Never before has the CAPE value risen so high and then remained at insanely high levels for so extended a period of time. ”

    In short, stock went up way more than what you predicted.

  10. Stock prices rose higher than I expected and remained at high levels longer than I expected. That much is certainly so.

    The point of dispute is — Was that a good thing for stock investors or a bad thing?

    If the market is efficient (as it was widely believed to be in the days when the Buy-and-Hold strategy was being developed) it was a very good thing. If the market is efficient, then the stock prices reflects a reasoned assessment of the realities. A high stock price results from a high level of productivity. High levels of productivity permit us all to live better lives. So we all should rejoice when stock prices rise.

    If valuations affect long-term returns (as Shiller showed with his Nobel-prize-winning research), it was a very bad thing. If valuations affect long-term returns, any price increases beyond those justified by the economic realities (that is, any price increases beyond those that produce a fair-value CAPE level of 17) are the product of investor emotionalism and will not last. They are the product of irrational exuberance. Price increases that do not last are a negative because they mislead investors as to the amount of their accumulated wealth. They cause them to save less and to spend more than they can afford to spend, They bring on failed retirements and business failures because consumer spending contacts when millions of investors suffer the price crash that inevitably follows a period of out-of-control irrational exuberance.

    I prefer to know the true value of my stock portfolio. I think we should be permitting honest posting re the last 41 years of peer-reviewed research at every site on the internet, without a single exception. I view the last 41 years of peer-reviewed research in this field as the most important 41 years of peer-reviewed research in the history of investment analysis. I would like to see us all working together every day to bring the CAPE level down to a reasonable level and to keep it there.

    My best wishes to you, Anonymous.

    Rob