“You Either Believe That Peer-Reviewed Research Has Value or You Don’t. Valuation-Informed Indexing Is What Buy-and-Hold Would Have Been Had Shiller Published His Amazing Research in 1961 Instead of 1981.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

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