Larry Swedroe: “While Valuations Do Provide Information on Future Returns, the Research Has Found That They Do Not Provide Information That Allows Investors to Profitably Time the Market.”

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

The Larry Swedroe looks at the research and says that Rob Bennett is wrong about timing the market with CAPE:

The Shiller CAPE 10: how to use it, not abuse it

Note the following: “ While valuations do provide information on future returns, the research has found that they do not provide information that allows investors to profitably time the market.”

And the summary says as follows:

“ The bottom line is that the CAPE 10 does provide us with valuable information (as do other current valuation metrics). However, it’s important that the information be used in the right way, as misusing it can lead to bad outcomes and the failure of plans. You should not use a valuation metric in a deterministic way (i.e., “I’m going to earn x percent”). Instead, the forecast should only be used in a probabilistic manner. And you should not use valuations to time the market, shifting allocations toward higher expected returning assets. “

Did you read that last line? It says “YOU SHOULD NOT USE VALUATIONS TO TIME THE MARKET”

I like the article. It provides value. So thanks for the link.

I don’t agree that CAPE cannot be used to profitably time the market. The Bennett/Pfau research shows that timing can be used to reduce risk by nearly 70 percent or to permit the investor to achieve his retirement goals much earlier in life. That’s investor heaven!

The article doesn’t even discuss the Bennett/Pfau research. Why? It’s either because Swedroe hasn’t heard of it (which shows how much damage the ban on honest posting is doing to all of us) or because he realized how much trouble he will be in with the Buy-and-Holders if he points to the peer-reviewed resesrch showing that timing always works and is always required for every investor seeking to keep his risk profile constant over time.

As always, the answer is to open every site to honest posting re the last 41 years of peer-reviewed research. Wade Pfau and I (and lots and lots of others) can make the case for market timing and Larry Swedroe and lots and lots of others can make the case against it. That’s how we all learn, by talking thijgs over amongst ourselves. That debate should have been launched on the afternoon of May 13, 2002. Or, better yet, on the day following the publication of Shiller’s Nobel-prize-winning research in 1981.

Please note that early in the article he explains why it is a logical impossibility that the safe withdrawal rate is the same number at all valuation levels. He explains that valuations affect long-term returns. If that’s so (all evidence available to us today shows that it is), it is a logical impossibility that the safe withdrawal rate is the same number at all valuation levels.

He doesn’t discuss how much encouraging market timing would help us to avoid economic crises. We could never get to the sort of CAPE level we have today if market timing were being encouraged at every site on a daily basis. It’s the failure of most investors to engage in market timing when needed that brought us this CAPE level (and that will have brought us the economic crisis that will follow from it, presuming that stocks continue to perform in the future somewhat as they always have performed in the past).

Rob