Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
For the last 2 decades, you keep saying that we have to see how things turn out. That is not a valid statement for a large percentage of our population, including you and me. Right now, 1/3 of working adults are already retirement between the ages of 60 and 64 (my group) and 70% are retired between the ages of 65 and 69 (your age group). Clearly, people need to have a fully funded retirement when they turn 60 since it is too late to fix the short fall.
There is no way that people can keep sitting around for decades more to see if your VII strategy FINALLY works. They need to go with a system that has always worked. Buy and hold has worked over EVERY 30 year period. That is not even debatable. It is a fact as we can look at history.
Many Buy-and-Holders believe today that they have fully funded retirements but, if they took the last 44 years of peer-reviewed research into consideration, they would see that they do not. Today’s CAPE level is 38. We usually see the CAPE drop to 8 in a Buy-and-Hold Crisis. That’s a drop of more than 75 percent. Say that there’s a fellow who needs a portfolio of $1 million to have a fully funded retirement and that he has that today. Then we experience a Buy-and-Hold Crisis and he is left with a portfolio of less than $250,000. He no longer has a fully funded retirement.
Irrational exuberance is a real thing, Anonymous. Irrational exuberance is the cancer of the personal finance realm. You could have a guy who on the surface appears to be perfectly healthy but a terrible cancer is eating away at his insides. Would you say that this guy is in good health? I would not. To know whether our retirements are fully funded or not, we need to know how much of our retirement account is real and how much is just phony baloney irrational exuberance.
How much do you subtract from the number on your portfolio statement for the effect of irrational exuberance?
Buy-and-Hold has never worked. It’s not even logically possible that it ever could work. Buy-and-Holders don’t subtract for the effect of irrational exuberance. It is not possible to engage in effective financial planning if you are not even open to looking at what you need to look at to know how much wealth you have accumulated over the years. That’s the most important question. It is fundamental.
Rob
First of all, the buy of holder is just fine. Let’s use a typical 60/40 split, which is often a 60/30/10 split (stock/bonds/money market or CDs). That means that the retiree has 40% of their portfolio in something other than stocks. Downturns are always temporary. The Buy and Holder can simply start using the money market/CD portion of the portfolio and then move on to the bond portion after that. The buy and holder also has interest and dividend income coming from the portfolio as well as social security. The buy and holder can easily wait for stock prices to recover, should their be a downturn during retirement.
What people can’t do is wait to see how it all plays out. Look at what would have happened to people if they did as you suggested over the last few decades. When you reach 60 years old, you have to have it fully funded. People lose their jobs and have health issues. 70% of people retire before the age of 60.
If you want more security, just listen to Wade Pfau presentation from last week. Build yourself a bridge to 70, add on an asset buffer, etc. Telling people to follow a timing scheme that has never worked is dishonest at best.
Your first paragraph makes a certain amount of sense to me. I don’t entirely agree with it. But there is a core reality to it — that stocks are a good investment class in the long run and so a strategy that keeps you mostly in stocks is not going to be too terrible. What it misses is that you can do better by Staying the Course in a meaningful way (keeping your risk profile constant over time). But, if you keep that to one side, there is a bit of logic here. Stocks are indeed a great investment class.
The second paragraph I don’t get. What does it mean to be “fully funded”? If you are at the same risk profile that you determined was best for you when you started, why aren’t you fully funded. I think that you can’t get out of the habit of taking the numbers on your portfolio statement too seriously. If those numbers show you not to be fully funded, you’re not fully funded. It’s those official numbers that matter! Forget irrational exuberance!
I don’t forget it. I think that accepting irrational exuberance and doing what you can to overcome it is the key. That’s 70 percent of what it takes to invest successfully for the long term. Stock investing is a battle with irrational exuberance and the Buy-and-Holders don’t even put up a fight — they feel that they can avoid the fight by conceding before the fight begins. Some strategy!
I don’t think of Buy-and-Hold as a strategy, I think of it as a marketing gimmick. I believe that it started out as a strategy. But I think it stopped being a true strategy when the Buy-and-Holders decided “let’s ignore all research from 1981 forward” The thing that I loved about Buy-and-Hold in the days when I was a Buy-and-Holder was the respect for the peer-reviewed research. When I saw how committed many Buy-and-Holders were to blocking discussion of Shiller’s Nobel-prize-winning research, the appeal of the thing just went “Poof!” The Buy-and-Holders aren’t even true to their own core principles.
You either believe that peer-reviewed research has value or you don’t. You can’t say “I believe in all peer-reviewed research except for the research that shows that I didn’t know everything when I came up with the best strategy that I could come up with in the days before the most important research was published.” Valuation-Informed Indexing is what Buy-and-Hold would have been had Shiller published his amazing research in 1961 instead of 1981.
My best wishes,.
Rob
If you don’t understand the term “fully funded”, you may want to sit down with a financial planner.
Buy and hold is clearly a strategy and it works (well documented).
We don’t agree with what you describe as “peer reviewed research”. Just throwing a label on something doesn’t make it so.
I suspect that the term “fully funded” is part of the Buy-and-Hold lexicon and is rooted in the “idea” (it’s really an assumption) that stocks are always worth buying because valuations do not need to be given serious consideration. It’s not a term that I worry about. For me the aim is to maintain the same risk profile over time and thereby to earn the highest possible return at the lowest possible risk.
If Buy-and-Hold worked, Buy-and-Holders would have no objection to open discussion of the last 44 years of peer-reviewed research. I mean, give me a break. The Great Depression was “working”? The Great Recession of 2008 was “working”? The stagflation of the 1970’s was “working”? Give me not working.
If you permitted discussion of Shiller’s Nobel-prize-winning research, you would come to understand it better over time. You don’t understand it because you don’t want to understand. You reject my understanding of it but I have asked you many times to describe one change in your strategy you have made in response to Shiller’s amazing research and you have never been able to identify anything. I guess he was awarded that Nobel prize because he has a nice haircut. Makes sense!
I believe that he showed that valuations affect long-term returns, that stock investment risk is not stable but variable.
Rob
You seem to think you can throw out a few catch phrases like “peer-reviewed research” or “Nobel prize winning research” and that it somehow gives credibility to whatever you say. The problem is that you don’t know the fundamentals and even admit that you are not a “numbers guy”. It is scary to think that you can’t really understand what “fully funded” really means, but again, maybe that is not overly surprising if we look at your retirement plan that you put out there back in 2002.
Go ahead and just keep playing your word games, Rob and you will keep getting the same lack of results that you have seen for the last several decades.
Good luck with that.
I definitely don’t accept the fundamentals believed in by Buy-and-Holders. The question of whether the market is efficient or valuations affect long-term returns is fundamental. If you get that one wrong, you are going to get most of them wrong.
The sad thing is that the Buy-and-Holders have passed up so many opportunities to acknowledge their mistake and learn from it. We should have all been doing that on a daily basis at every site going back to that magical day in 1981 when Shiller published his Nobel-prize-winning research. If we had, we would today be 44 years further along in our understanding of how Valuation-Informed Indexing works.
I believe we will get there. It has taken a whole big bunch more time than I imagined was possible for us to even take the first step of opening every site to honest posting re the research. But I have seen too many good sign not to believe that we will eventually get there. The fact that we permit honest posting re the research in every other field of human endeavor is a big tell. The problem in the investment advice field is that there is so much darn shorrt-term money to be made telling people that irrational exuberance gains are real. Yucko!
Not this boy, you know?
Rob
You clearly got it wrong because you are broke.
Okay, Anonymous.
My best and warmest wishes to you and yours, in any event.
Rob