Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
It is never your fault that you are broke and divorced. It is somebody else: the goons, the nation, the investment community, board owners, Wade Pfau, Robert Shiller (pulling his punches), Jack Bogle (the man you called a big con-man), etc.
And Rob Bennett. I was afraid to speak up for three years. We’re all born with that Get Rich Quick impulse that makes us want to believe that it’s all going to be different this time and Buy-and-Hold is actually going to work out okay for one or two long-term investors.
I didn’t create the humans the way they are. I observe it. I report on it. The peer-reviewed research reveals it. I just say that we should acknowledge it, at the bare minimum let people who acknowledge it talk about it so that they can protect themselves from irrational exuberance if they are inclined to do so.
If Buy-and-Hold was a real thing, hat wouldn’t upset you.
Rob
I just listened to a seminar from Wade Pfau on Fours Ways to Manage Sequence of Return Risk. Wade does not recommend market timing. Further, he starts with a 4% withdrawal rate and then offers up four paths to offset risks/drops:
1. Spend conservatively
2. Spend flexibility
3. Reduce portfolio volatility
4. Use a buffer asset
The portfolio allocation was always constant and market timing was not recommended. Many options were discussed, but a very clear cut path was to build a social security bridge (additional savings to cover the time between retirement and maxing out social security at the age of 70. After that, utilizing an asset buffer to be used during downturns. Both a very simple tools that give you certainty without needing gimmicks like trying to time the market (which makes people go broke).
The unfortunate part of all this is that there is not one single thing that can help out someone that does not have existing savings and/or a job brining in income.
It sounds like he is going out of his way to avoid mentioning the most simple and direct and obvious solution to the problem, of Overvaluation. Overvaluation is a problem. It makes stocks more risky. It brings down return. It’s not hard for an investor to figure out what to do to solve the problem — engage in valuation-based market timing.
Is there some sort of negative attached to the idea of keeping one’s risk profile constant over time? I sure can’t think of one. And Wade couldn’t think of one back in the days when we were working together and he was excited to explore the possibilities of Valuation-Informed Indexing. There has to be some sort of explanation for this weird behavior (I don’t mean just in the case of Wade,I mean for lots of people).
One, the people who developed the Buy-and-Hold strategy did not have Shiller’s amazing research available to them at the time they were doing it and they made the mistake of thinking that market timing (price discipline!) might not be 100 percent required for every investor. Then they didn’t want to acknowledge the mistake. So they covered it up. Then they didn’t want to acknowledge the cover-up of the cover-up of the cover-up. This can’t go on forever. At some point we just need to come clean and acknowledge that O COURSE valuation-based market timing (price discipline!) is required for every investor. It’s not possible for the rational human mind to imagine any possible downside.
Two,acknowledging the importance of market timing would bring on a recession. We are currently at two times fair-value price levels. So to tell investors the truth about stock investing as revealed by the last 44 years of peer-reviewed research would translate into the loss of trillions of dollars of consumer buying power. That wouldn’t be good. But at least it would bring this crazy stuff to an end. Once we free ourselves to talk realistically about stock investing, we would never again need to worry about bull markets or bear markets or economic collapses. That seems worth it to me. We should do whatever we can to soften the blow (and there certainly are things that can be done), But we need to get the cover-up behind us and start enjoying the benefits of the last 44 years of peer-reviewed research.
Price discipline is what makes markets work, Anonymous. In the stock market, price discipline is achieved through market timing. It’s pretty darn essential. Twisting one’s self into a pretzel to ignore the obvious solution to a pressing problem to avoid having to point out an error made by the Buy-and-Holders is just silliness. I of course understand why people feel pressured to go that way. But it is foolishness. The thing to do when stocks get insanely overpriced is to buy less of them. That’s how you bring the price back down to reasonable levels.
My sincere take.
Rob