I’ve posted Entry #634 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Theory Behind Buy-and-Hold Makes Intuitive Sense.
Juicy Excerpt: Until the price crash hits, most investors remain unconcerned. Most aren’t even aware of changes in the CAPE value. Most of those who are shrug them off. So long as the market doesn’t crash, the CAPE value is just a number. A high CAPE value is a flashing red light. But a red light is not itself a terrifying event, it is only a warning that one is coming. Most investors drive merrily though the red light without a care.
Many years ago, you were asked about when a crash would occur. Eventually, you said that if a crash did not happen by 2015, we should question timing and VII. It never occurred. Now we are 8 years after that point and it still hasn’t happened. This just illustrates the problem with market timing. While waiting around for a crash, the market timer watches their portfolio erode and then they have nothing left when they expect to benefit from a new cycle.
To the opposite, we have seen that the market ALWAYS returns after EVERY drop and goes on to new highs.
We are in 100 percent agreement that the market always returns after every drop and goes on to new highs, Anonymous. I don’t think that that justifies failing to engage in market timing/price discipline because you need to engage in market timing/price discipline to keep your risk profile constant as valuations change in a world in which valuations affect long-term returns (the world we live in, according to Robert Shiller’s Nobel-prize-winning research). But I certainly believe in your core point and I think it is an important point. This point is part of the reason why I do not advocate extreme allocation decisions (I say that investors should maintain a 30 percent stock allocation even when stock prices rise to crazy, scary highs, like what we see today).
The Bennett/Pfau research shows that this idea that engaging in price discipline will cause an investor’s portfolio value to erode over time is just a Buy-and-Hold myth. Wade Pfau and I looked at the history of stock price movements going back to 1870 and it has never yet happened. Market timing has always proven to be far superior to Buy-and-Hold over the long term. The evidence is so strong that Wade (who holds a Ph.D. in Economics) was amazed at what our research found. He told me that he kept asking himself: “Am I doing something wrong?” But, no, he wasn’t doing anything wrong. It was the people who came up with Buy-and-Hold who did something wrong by failing to distinguish short-term timing (which really doesn’t work) from long-term timing (which is really just price discipline and which thus of course always works and is always 100 percent required for investors who want to keep their risk profile stable over time).
Investors who are worried that they may “miss out” on some gains in the event that it takes longer for an overpriced market to crash than it ever has in the past can of course follow a Buy-and-Hold strategy if that sounds like a good idea to them. I have never objected to that and I have never heard any other Valuation-Informed Indexers object to that. What I object strongly to is the ban on honest posting re the last 41 years of peer-reviewed research, which means that investors do not get to hear both sides of the story when making their allocation decisions.
The ban on honest posting is a national scandal, in my personal assessment, the worst case of financial fraud in our nation’s history. It is proper that you decide on your own allocation. It is not even a tiny bit proper that you determine the allocation decisions of millions of others by engaging in absusive and in some cases criminal behavior to block them from learning what they need to learn to make informed decisions of their own. That makes you responible for the losses of millions of people (I am presuming here that stocks may continue in the future to perform something along the lines of how they have always performed in the past) and the collective losses are likely to be in the many trillions of dollars, far more than you Goons will be able to cover. Which means that the United States will be facing not just an economic crisis but a political crises as well. Not good.
My best and warmest wishes to you and yours, in any event.
Rob
“ We are in 100 percent agreement that the market always returns after every drop and goes on to new highs, Anonymous.”
And that is all you needed to say. It proves that Buy and Hold ALWAYS works. To the opposite, we have never seen one successful outcome with market timing. In fact, it never worked for you.
Okay, Anonymous.
Please take good care, old friend.
Rob