“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.”

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

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