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

Wrong.  Buy and holders know that in the long term their portfolio value will be even higher as time goes on, based on history.  We know that no one has ever been successful with market timing, but if you hold for the long term, the market has always recovered and gone on to new highs.

It’s a logical impossibility that prices would not in time recover from any fall and go on to new highs. Stock prices ultimately reflect the economic realities. And the core economic reality in the United States is that the underlying companies have always been sufficiently profitable to generate an average annual return of 6.5 percent real. So prices are indeed always going to come back and then go on to new highs. We certainly agree on that much.

I do not believe that it follows even a tiny bit that it is a good idea for us to lie to people about how big their portfolios are and about what the safe withdrawal rate is and all that sort of thing. If investors were thinking clearly (that is, if they were informed of what the peer-reviewed research teaches us about these matters and gave that research enough consideration to take it to heart), they would price stocks to reflect that core reality that the average long-term return is 6.5 percent real. So, when prices went up by more than that, they would see that the going-forward return was likely to be lower than 6.5 percent real and would lower their stock allocation as needed to get their risk profile where they had determined it should be.

So long as most investors followed this practice, irrational exuberance could never get too far out of control. We would still get those great 6.5 percent real returns. But we wouldn’t see the ocean of human misery that inevitably follows every time our Wall Street Con Men friends are successful in persuading a large number of us that there might be some alternative universe where a pure Get Rich Quick/Buy-and-Hold “strategy” (no market timing now!) might work for one or two long-term investors. You wouldn’t see the millions of failed retirements or the hundreds of thousands of business failures or the millions of people thrown out of work or the increase in political frictions that are synonymous with the pure Get Rich Quick/Buy-and-Hold approach.

All of the nasty stuff is optional today (and has been since Shiller published his Nobel-prize-winning research in 1981). We can all elect to live better lives from this point forward by putting irrational exuberance behind us. Or we can continue down the path of turning a blind eye to the suffering of our fellow humans for the sake of turning a quick buck yet one more time (even though there are plenty of bucks to be turned advancing sensible, research-based strategies). You can probably tell which approach gets my vote.

Rob