I’ve posted Entry #662 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Fact That People Still Push the Long-Discredited 4 Percent Rule Shows the Irrationality of Buy-and-Hold.
Juicy Excerpt: The safe withdrawal rate is not always the same number. The 4 percent rule makes no sense. Those of us who follow the peer-reviewed research have known this for 42 years. Once Shiller published his research showing that valuations affect long-term returns, it was clear to everyone that the safe withdrawal rate is a number that changes with changes in valuations.
It’s clear enough. But it’s also controversial. It’s clear in the way that it’s clear that smoking causes cancer and that driving drunk is dangerous and that one should pay attention to red flags before getting romantically involved with the wrong person. We humans know that some things are bad for us but we elect to do them anyway because there’s something about the way that they make us feel that we like.
Here is the email Wade’s firm sent out today:
“ As people, we are always looking for patterns. We always want to know what is going to happen next – and what we should do about it. And those tendencies absolutely extend to the financial markets. This means that we are constantly trying to guess which way they are going to move next. The problem is that we are really bad at predicting what’s about to happen in the markets. But that doesn’t seem to stop all that many people.
This week we’re going to look at why market timing doesn’t work”
Those words describe short-term timing. Short-term timing doesn’t work. I am 100 percent with the Buy-and-Holders re that one.
Long-term timing has nothing to do with patterns. Long-term timing is price discipline. It is a logical impossibility that there could ever be a market in which price discipline didn’t work. All that Shiller’s Nobel-prize-winning research showed is that what common sense tells us must be so really is so.
People who claim expertise in this field should tell people the straight story. They should distinguish short-term timing from long-term timing and they should encourage long-term timing while discouraging short-term timing.
There never should be any abusive posting. And certainly no acts of extortion. When you find yourself engaging in acts of extortion, that’s a sure sign that the investing strategy that you are trying to defend is beyond the reach of a reasoned defense.
My sincere take.
Rob
Where does it differentiate short term vs long term? It doesn’t.
“The problem is that we are really bad at predicting what’s about to happen in the markets.”
Rob
Where are the words “ short term”?
It is also missing from Shillers words.
Why is that?
That’s a good question, Anonymous. The Buy-and-Holders would have made an important contribution when they declared that “timing doesn’t work” if they had specified that it is only short-term timing that doesn’t work and that long-term timing is price discipline and of course that always works and is always required. Instead, they said something that is right for one form of timing and wrong for the other form of timing, which is the much more important form of timing. So the net contribution there was negative. It’s a shame. But that appears to be what happened. Every iota of evidence available to us tells us that short-term timing cannit possibly work and that long-term timing cannot possibly not work. The realities are clear to any fair-minded person in both cases.
Were the Buy-and-Holders dumb to fail to make the distinction? I don’t think it is quite fair to say that. Please recall that Shiller’s Nobel-prize-winning research showing that valuations effect long-term returns had not yet been published at the time when the Buy-and-Hold strategy was being developed. And indexing was not a thing in this days (this was before Bogle founded Vanguard). Long-term timing only works with indexes. So long-term timing is not something that people were trying to engage in. Our knowledge of how stock investing works was not anything close to complete. We knew some things and we didn’t know some other things. The people who developed Buy-and-Hold focused on the questions that seemed important at the time. Lots of people were trying to engage in short-term timing. Very few were trying to engage in long-term timing. So, when research was publushed showing that short-term timing doesn’t work, they shortened their description of the finding to a statement that timing doesn’t work.
That was just one of those things. No biggie. It became a biggie in 1981, when Shiller published research showing that long-term timing is required for any investor seeking to keep his risk profile constant over time. There should have been a national debate launched on the far-reaching how-to implications of Shiller’s research on the evening of the day on which it was published. That obviously didn’t happen. That’s why we are in the mess we are in today.
Why wasn’t a national debate launched in 1981? The biggest factor was probably the embarassment over the mistake that had been made. Thousands of investment advisers had already told millions of investors that timing is not required. These people made their living because of their reputation as experts. What sort of expert makes that sort of mistake. There was a widespread desire among the experts in this field to play down the mistake, to not make too big a fuss about it. And it was easy to rationalize ignoring the mistake at the time. Stocks were selling at rock-bottom prices in 1981. What risk was there that overvaluation would ever hurt anyone? At the time, it was all but impossible to imagine stocks ever again being fairly priced, much less overpriced. So the thing was downplayed.
Now it’s been 42 years. If you point out the reality today, it sounds like you are calling people liars. And the people who we are talking about are powerful and wealthy and well-connected people. Calling such people liars is not generally the path to career advancement. So everybody who works in this field learns early on that it’s touching the third rail of the investment advice field to point out that there’s 42 years of peer-reviewed research showing that long-term timing always works and is always 100 percent required for every investor. The claim that timing in general doesn’t work is the biggest mistake ever made in the history of personal finance. The Great Buy-and-Hold Con is the biggest case of financial fraud in U.S. history, far bigger than anything Bernie Madoff ever dreamed up.
It get worse with every day that the cover-up continues. The only way to bring it to an end is to just state plainly that short-term timing never works and that long-term timing always works. You Goons put up posts here almost every day showing why so many good and smart people don’t want to say that. Most people don’t like the idea of seeing their careers and their marriages destroyed. So they keep it zipped. We need people to stop keeping it zipped. I think that’s the answer.
I know it is!
Rob
“ Now it’s been 42 years. If you point out the reality today, it sounds like you are calling people liars.”
It is actually YOU that is calling other people liars. Notice how you make allegations of a cover up, criminal acts, etc. We keep asking for actual evidence, but you seem to have a problem finding links to give us. I guess those goons also hack the internet to remove the words “short term”, right?
People self-censor.
If there were no abusive posting, there would be no self-censoring and we would all be free to enjoy living the richer and better and freer lives promised by the last 42 yesrs of peer-reviewed research in this field.
Rob
What abusive posting? What peer-reviewed research? Why 42 years?
Um….
Rob