I’ve posted Entry #686 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Not Enough to Tolerate Market Timing — We Need to Encourage It.
Juicy Excerpt: Either the Buy-and-Holders got it right or they got it wrong. They didn’t get it half right and half wrong. If market timing is required for investors seeking to keep their risk profile constant over time, it is irresponsible to undersell the benefits of market timing for fear of offending the people who claimed otherwise when all of the research was not yet in. We do no favors for our Buy-and-Hold friends by taking the bandage off ever so slowly. If Shiller’s research is legitimate, we need to leave the Buy-and-Hold stuff behind and move on to the first true research-based model for understanding how stock investing works as quickly as possible.
Buy and Holders collectively will achieve the market return (minus very small transaction costs)
Market timers collectively will achieve the market return (minus much larger transaction costs)
I appreciate you making an effort in this comment to present a rational case for the Buy-and-Hold position rather than just engaging in name-calling, Evidence.
The transaction costs for Valuation-Informed Indexers do not need to be large at all. They need to check the CAPE value once a year to see if their stock allocation percentage still makes sense given the risk profile that they believe is appropriate for someone in their circumstances and for someone with their financial goals. But dramatic swings in CAPE values do not take place frequently. A person can obtain most of the benefits of valuation-based market timing by making only one allocation change every ten years on average.Making only a small number of allocation changes permits the investor to retire years sooner while dramatically reducing the risk he takes on by investing in stocks. The transaction costs incurred are trivial relative to the benefits obtained by following a research-based strategy,
Please remember that Shiller’s Nobel-prize-winning research bad not yet been published at the time the Buy-and-Hold strategy was being developed. At the time, the Efficient Market Theory was popular among academic economists. If the market were efficient, there would be no need for valuation-based market timing. The reason why Shiller was awarded a Nobel prize is that he DISCREDITED the Efficient Market Theory. He showed that irrational exuberance is a real thing. If irrational exuberance is a real thing, an investor who wants to keep his risk profile stable over time (that is, to Stay the Course in a meaningful way) is REQUIRED to engage in valuation-based market timing. In a world in which valuations affect long-term returns, there is no other way to get the job done.
I naturally wish you all the best that this life has to offer a person, in any event.
Rob
“Making only a small number of allocation changes permits the investor to retire years sooner while dramatically reducing the risk he takes on by investing in stocks.”
I have previously pointed out that the figures from Wade Pfau’s paper about market timing showed no increased returns for market timing based on knowledge available at the time of investing. I attempted to discuss the matter with you a few months ago but you were unwilling or unable to discuss the matter.
Once we have opened every site to honest posting re the peer-reviewed research, you’ll be able to talk over these matters with THOUSANDS of people, Buy-and-Holders and Valuation-Informed Indexers alike. I much look forward to the day when that becomes possible for all the people of the United States.
My best and warmest wishes to you and yours.
Rob
Beyond just transaction related costs, there are also tax implications for those funds that are in taxable accounts. With buy and hold, you are deferring taxes on the gains until much later. As such, you can benefit from continued gains through the years and you are much more likely to be in a lower tax bracket during retirement.
So do that. Nobody is saying that you can’t do that. You should do what you think is best. Some others might want to do something different. So what, you know? You do you and they can do them.
The issue that started the controversy 22 years ago is whether the safe withdrawal rate can be calculated without taking valuations into consideration. If valuations affect long-term returns (they do, according to Shiller’s Nobel-prize-winning research), valuations affect what is safe. So why do you feel so strongly that people should not be permitted to discuss valuation-adjusted safe withdrawal rates?
It doesn’t bother me if there are people who want to take a 4 percent withdrawal rate regardless of the valuation level that applies. I am certainly not going to follow that practice and I am not going to recommend it to others. But it doesn’t bother me even a tiny bit to know that there are people who want to do it that way. It’s their money. They should do what they think best with their money.
That’s not how you see it. I think that’s strange. There are different ways to look at these questions. I feel just as strongly that my way is the right way as you feel that your way is the right way. There are more people who agree with you. But there is a significant minority (about 10 percent of the population) that agrees with me. Why not let the 10 percent have the discussions that they want to have just as the 90 percent is able to have the discussions that they want to have?
If I pretend to agree with the 90 percent (which is what I am doing if I don’t even mention that I don’t share their way of looking at the question), I am being dishonest. Which is creepy, given the importance of the question being discussed. I didn’t like being creepy. I felt better about myself after I worked up the courage to post honestly. I would like to see everyone feeling free to post honestly. I believe that, if everyone felt free to post honestly, more and more people would come around to my point of view over time.
No one is trying to tell you not to look at tax implications. You should do that if you think that is important. I am saying that you should look at valuations. That’s something different. You have never offered a good reason not to take valuations into consideration. Not once in 22 years. I think that valuations is a much bigger factor than taxes or transaction costs.
Rob
“ So do that. Nobody is saying that you can’t do that. You should do what you think is best. Some others might want to do something different. So what, you know? You do you and they can do them.”
And that is what we have done. We go with buy and hold because it works. We avoid risky timing schemes so that we don’t go broke (like you). We ban internet trolls that make up stories about abusive posting and criminal acts.
Sorry, but I would rather be sitting with $7.6 million in my accounts vs having $0 in my 60’s. Call me crazy.
I wish you the best of luck with it, Anonymous. I can go that far.
I can’t say that I believe that the Greaney retirement study contains a valuation adjustment. That’s the point of conflict that became evident on the afternoon of May 13, 2002. If I say that the Greaney retirement study lacks a valuation adjustment, people gradually lose confidence in the study. I think that’s a good thing. Greaney does not see it as being a good thing. So, since May 13, 2002, we have been working at cross purposes.
I consider him a friend. I enjoyed the good times we had together in the days before I pointed out the error in his study. But I feel better about myself when I post honestly. So, since May 13, 2002, I do that.
I don’t believe that Greaney himself truly believes that his study contains a valuation adjustment. I think that Evidence nailed that one. But Greaney doeesn’t like to see people talking about it. The more they talk about it, the more that their common sense becomes dominant over their Get Rich Quick/Buy-and-Hold impulse. I like it when common sense and rationality and research become dominant. Greaney doesn’t like that one tiny little bit. He hates it, hates it, hates it.
The only reason why Greaney hates me so much is that I tried to bring rationality and common sense and research into discussions of safe withdrawal rates. That’s the “bad behavior” for which I have been banned at every site. I don’t see it as bad behavior. I see it as good behavior. I offer precicsely zero apologies for pointing out that the Greaney study lacks a valuation adjustment.
I wish you all good things.
Rob
And how has all this worked out for your retirement plan, Rob? Is it fully funded? Is you family now financially secure?
How has Buy-and-Hold worked out for us as a nation of people? Was the 2008 economic crisis a positive experience? Are we happy with today’s CAPE value of 34?
Rob