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 always risk in everything. Stock, CDs, Bonds, Real Estate, precious metals, etc. That is how it goes.
No, Rob, you have not found any special magic or insight. If YOUR research was successful, then you would not be broke. We haven’t seen one single successful outcome with VII. You can slap as many labels as you want to try and package things up like some miracle cure, but it doesn’t make it so.
There’s more risk in drunk driving than there is in sober driving.
There’s more risk in Buy-and-Hold than there is in Valuation-Informed Indexing.
The thing that causes risk for stock investors is irrational exuberance. Failing to engage in valuation-based market timing permits irrational exuberance to get out of control. Engaging in valuation-based market timing reins in irrational exuberance.
Stock investing risk is not something that comes out of the sky randomly. We have control over it. It’s up to stock investors how risky stocks become for them. The peer-reviewed research tells us what is needed.
Rob
The risk in VII is missing out on stock market growth, as you have demonstrated. The risk in stocks is short term loss of value. Do a case study on the 1929 crash and bear market, which went down 90 percent from the high. Over the medium to long term the buy and holder beat every other asset class. Gold, bonds, real estate. Name the major asset class and the stocks best it.
The risk in VII is missing out on stock market growth, as you have demonstrated. The risk in stocks is short term loss of value. Do a case study on the 1929 crash and bear market, which went down 90 percent from the high. Over the medium to long term the buy and holder beat every other asset class. Gold, bonds, real estate. Name the major asset class and the stocks best it.
But most people don’t put 100 percent of their savings in stocks. Why? Because they have a risk profile that they want to achieve and going with 100 percent stocks doesn’t get them there.
If the risk level of stocks changes with changes in valuation levels, as Shiller’s research shows, then investors who want to keep their risk profile constant over time need to adjust their stock allocation to the extent needed to do so.
Stock risk is not the same at all times. So the safe withdrawal rate, which is a risk assessment tool, cannot be the same number at all times.
Rob
The point is that some people do put 0% into stocks and that these people typically do worse than stock market investors do. You’re one of them.
The guy who put all his money under the bed or in boxes buried in the back yard, and a lot of Depression era people did this, lost money. The person who was able to scrape by without selling stocks typically did very well. Better if they were able to buy more during the Depression.
I love stocks, Sensible. That’s not an issue.
My only dispute with Buy-and-Holders is that they ignore the 43 years of peer-reviewed research showing that valuation-based market timing is required for every investor who wants to Stay the Course in a meaningful way by keeping his risk profile constant over time.
The Bennett/Pfau research shows that Valuation-Informed Indexers do dramatically better than Buy-and-Holders over the long run. They experience less risk and enjoy higher returns.
The financial problems that I have experienced are solely because of the abusive behavior of you Goons. Thousands of our fellow community members have expressed a desire to hear both sides of the story and I support them in that desire. Hence, your wrath. The fact that there is a portion of the Buy-and-Hold community that gets so angry over seeing discussion of the research supports Shiller’s finding that at times stock investing can be a highly emotional endeavor.
There never should have been any controversy whatsoever over whether the peer-reviewed research could be discussed. You see it as a threat. That’s because the people who developed Buy-and-Hold didn’t have Shiller’s research available to them at the time they did and thus made a mistake in thinking that valuation-based market timing is not always required. Now they “feel funny” about acknowledging the mistake. I believe that, the sooner all Buy-and-Holders acknowledge the mistake, the sooner they will begin to feel better about themselves.
Please remember that the Buy-and-Holders themselves were once in favor of the idea of using the peer-reviewed research as guidance. At one time it was a core principle.
My best wishes.
Rob
You’re missing the point. The person who bought in 1929 and then held though the depression did better than the guy who didn’t invest in stocks and held cash, gold, bonds, or real estate.
The guy who adjusted his stock allocation to keep his risk profile constant did far better than the Buy-and-Holder in the long run. It’s not even a close call. That was the entire point of the Bennett/Pfau research. All investors should be aiming to Stay the Course in a meaningful way by practicing valuation-based market timing.
Stocks are an amazing asset class. We have zero disagreement re that one. But there is no market that cannot be damaged by a failure of participants in it to practice price discipline. The only times when stock returns have dropped dramatically have been the times when we have seen large numbers of investors follow Buy-and-Hold (no market timing now!) strategies. Such strategies make the stock market dysfunctional for a time and cause the destruction of massive amount of wealth. We would be better off to just permit honest posting re the research at every site.
Rob
Great. How many people sold off near the top, escaping the 1929 crash, and then bought near the bottom, several years later with the DJIA down 90 percent? Who are these people?
There’s no need to identify tops and bottoms. It can’t be done. That’s the guessing game approach to market timing. It doesn’t work.
Any investor who practiced valuation-based market timing to Stay the Course in a meaningful way did much better than the Buy-and-Holders. That’s been true for as far back as we have good records of stock prices.
Shiller’s Nobel-prize-winning research was not available in 1929. So most stock investors didn’t know the basics of how stock investing works at that times. That’s why we experienced that horrible 1929 Buy-and-Hold Crisis in the first place. But Shiller’s research is available today. So we all should be doing everything in our power to make every investor aware of his amazing findings by opening every internet site to honest posting re the research.
I think that’s the answer, Sensible.
I know it is!
Rob
Let’s say that the next 20 years are the same as the past 20 years in that no one believes your story, no crash happens, you are still broke, etc. Will you then admit you wasted all your time?
That alone would not do it. It would cause me to experience doubts. I would explore those doubts and see what people I respected were saying about the matter.
If there were still a Ban on Honest Posting re the peer-reviewed research, that would make it hard for me to develop confidence in Buy-and-Hold. I view the Ban on Honest Posting as a very negative sign for Buy-and-Hold. It’s not the way that people behave when they have confidence in their ideas.
Rob