I’ve posted Entry #644 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investing Risk Is Variable, Not Constant.
Juicy Excerpt: I do find fault with the people who came up with these ideas for one thing. They stated them too dogmatically. You sometimes hear people who believe in the efficient market concept refer to it as the efficient market hypothesis rather than the efficient market theory. That’s the right spirit.
It’s really just a guess. Guesses are fine. But they need to be distinguished from ideas that have been tested and found to possess some substance. That’s not the efficient market theory. There’s never been an iota of evidence to support this one.
Today there is a mountain of evidence showing that it does not check out. They put this one forward too soon. The efficient market concept is a half-baked idea or perhaps a quarter-baked one.
There is risk in stock. There is risk in buying bonds. There is risk in buying CDs. There is risk in buying a home. Each and every one of them is also variable.
You can choose to participate or you can sit at home and do nothing like you. Sorry, but we have decided to live our lives while you waste your time away.
We agree that there is risk in all of these other asset choices and that the risk for them is variable. What we don’t agree on is the idea that the risk for stocks is constant. The safe withdrawal rate is a risk assessment tool. When you say that the safe withdrawal rate is always the same number, you are saying that stock investing risk is contant. Shiller showed that it is not by showing that valuations affect long-term returns. Investors who want to keep their risk protfile constant over time (to Stay the Course in a meaningful way) MUST engage in market timing (changing their stock allocation in response to changes in valuations). There is no other way to pull it off.
If someone walked into a bank and said “I would like two CDs” without first checking what return is being offered, you would say that he is a fool. That’s precisely what any investor who refuses to engage in market timing is doing. He is implicitly saying “I don’t care what return is being offered on stocks, I am going to go with the same stock allocation regardless.” It’s irrational.
Market timing/price discipline brings rationality into the stock purchasing process. To the benefit of every investor and, indeed, to the benefit of our economic system (and our political system too!) as a whole.
Price matters. Always. So investors should always be taking the price at which stocks are selling into consideration when making a decision as to what stock allocation to go with at a particular time.
That’s my sincere take re this terrbly important matter, in any event.
I naturally wish you the best of luck with your investment choices, regardless of which strategy you elect to pursue.
Rob
Risk is not constant for anything. Period. How did CDs do over the last couple of years when inflation was/is running white hot? Look at your predictions and how things worked out for you.
If risk is not constant for anything, then we should be permitted to speak honestly about what the research says about stock investing at every site on the internet.
There were people at the Motley Fool board who were using the Greaney study to plan their retirements.
Rob