I’ve posted Entry #309 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Value Proposition of Stocks Changes By a Factor of Three As Valuations Move from Low to High Levels. 

Juicy Excerpt: Please understand that it is Rob Bennett saying these things about Wade Pau’s graphic, not Wade himself. I believe that, if you asked him privately, Wade would agree with the thrust of what I am saying. We exchanged hundreds of e-mails during the 16 months that we were working together and he told me during that time that he was so excited about what he was finding in his research that he could hardly sleep at night. He once exclaimed bluntly: “Yes, Virginia — Valuation-Informed Indexing works!” But for now Wade is letting his graphic do the talking for him — that alone shows that he is a lot smarter than his old friend!

I’ve posted Entry #308 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Worth Examining How Numerous Allocation Options Are Likely to Perform Over Numerous Time-Periods.

Juicy Excerpt: I started writing about safe withdrawal rates in May 2002. At that time, it was common practice among Buy-and-Holders to assume that smart retirees would employ a portfolio allocation of 80 percent or so. The conventional wisdom of the day was that stocks had been proven to be the far superior investment choice and so retirees would be leaving lots of money on the table by going with stock allocations too much less than that.

To be fair, not all Buy-and-Holders took this position. But the voices of the ones who did often drowned out the voices of those who did not. Those of us who held reservations about the idea of going with high stock allocations at times of insanely dangerous valuation levels often censored ourselves. We shared our thinking in limited, tentative ways. But we knew that stating our views in too clear a manner would make us unpopular and so we walked on eggshells when making this painfully basic and important and accurate and responsible point.

It’s a different story today. Stocks have been performing poorly for nearly 17 years now. Today, the Buy-and-Holders know that saying that stocks are always the far superior asset class does not go over nearly as well as it did in 2002. So they state things differently. They suggest that perhaps 50 percent stocks is a better allocation fort most retirees or even for most investors. Occasionally you will see a Buy-and-Holder advocate a stock allocation even lower than that, something I can never recall seeing in the days of wildly inflated prices.

I’ve posted Entry #207 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Who’s Afraid to Know the True Safe Withdrawal Rate?

Juicy Excerpt: There’s a sense in which that reality renders Wade’s report more scary than it would had he told the story as bluntly as John Walter Russell and I did a number of years back. He tells us the sustainable spending rate, not the safe withdrawal rate. Not because the safe withdrawal rate cannot be calculated accurately. Because he doesn’t believe that we could bear to hear the accurate numbers.

The most scary reality of all is that the 11 years of reactions that I have seen to the publication of my own retirement calculator shows that he is right.

I’ve posted Entry #306 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Nine Rules for Exercising Price Discipline When Buying Stocks — Part Three.

Juicy Excerpt: There are lots of ways to exercise price discipline when buying stocks. You could increase your stock allocation a tiny bit each time valuations go down and decrease your stock allocation a tiny bit each time valuations go up. Or you could limit your allocation changes to a tiny number by making them only in circumstances in which it is imperative that they be made. Stocks offer a reasonably strong long-term value proposition so long as the P/E10 level remains below 20 and it is rare (except in recent years!) for the P/E10 level to remain much above 20 for an extended period of time.

In my early days of working with the calculators, I made an effort to limit my allocation shifts as much as possible. I was influenced by the relentless anti-timing preaching of the Buy-and-Holders. I knew that it did not make sense to avoid the exercise of price discipline altogether but I tried to comply with the conventional wisdom to the extent possible by waiting until the case for a change in allocation was so strong that it could not be denied.

Over time, I’ve become more comfortable with the idea of making more allocation changes. I still don’t make them at all frequently. But I permit myself an allocation change whenever a significant valuation change takes place. The only downside to frequent allocation changes is the costs associated with making them. Those costs are small compared to the benefits obtained by choosing the proper stock allocation.

I’ve posted Entry #305 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Nine Rules for Exercising Price Discipline When Buying Stocks — Part Two.

Juicy Excerpt: If you compare the results for Buy-and-Hold and for Valuation-Informed Indexing over 30 years, you will see that for the vast majority of those years the results will be comparable. Both strategies call for high stock allocations when prices are at low or fair-value levels. So they obviously yield similar results at most times. When prices are high, Valuation-Informed Indexers go with lower stock allocations. Those lower stock allocations often yield lower returns.

Stocks are more risky when prices are high. But it doesn’t at all follow that returns are never good at high price levels. The reality is that returns are often very good indeed at high price levels. In fact, the odds of high returns go up a bit when prices reach insanely dangerous levels (because price changes are determined primarily by investor emotion and extreme price levels generate even more of the irrational exuberance that produced them).

However, gains enjoyed at times of high prices always prove to be short-lived. That’s the reality that Buy-and-Holders overlook. It can take a good number of years for the economic realities (which justify price gains of 6.5 percent real per year but not more than that) to assert themselves in market prices. But they always do. The greater the artificial gains experienced in a bull market, the greater the real losses experienced once the fantasy investor expectations are exposed for what they are.

The benefits of the Valuation-Informed Indexing strategy are achieved through a lot of waiting for prices to be set right. The waiting pays off big time in the tiny number of years in which the Valuation-Informed Indexing portfolio far outpaces the Buy-and-Hold portfolio. A tiny number of years of extreme outperformance frequently counters a larger number of years of small outperformance by the Buy-and-Hold portfolio. Valuation-Informed Indexing is a strategy of infrequent but big scores.

I’ve posted Entry #304 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Nine Rules for Exercising Price Discipline When Buying Stocks — Part One.

Juicy Excerpt: Many investors are not impressed by the 35 years of peer-reviewed research showing that long-term predictions always work. There is great interest in short-term predictions — experts in this field continue to offer them on a daily basis despite the mountain of research showing that they don’t work because the demand for short-term predictions is insatiable. Oddly, the interest in long-term predictions — the type that can be made effectively — is limited. The five calculators show the great value of long-term predictions.

I’ve posted Entry #302 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It Can Take 20 Years for Sound Long-Term Investing Strategies to Pay Off.

Juicy Excerpt: In short, the Buy-and-Hold investor has a small chance of being ahead by a small amount at the end of 30 years while also having a large chance of being behind by a large amount at the end of 30 years. I think it is fair to say that on a risk-adjusted basis, practicing price discipline when buying stocks is always the superior choice.

I’ve posted Entry #301 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Most Investing Strategies Perform Differently Over Different Time-Periods.

Juicy Excerpt: Another important feature of the calculator is that it reports results at six time-periods: (1) five years; (2) ten years; (3) fifteen years; (4) twenty years; (5) twenty-five years; and (6) thirty years. Too much of today’s investing commentary is rooted in a belief that one strategy is superior for all time-periods. This is often not the case. A strategy that is likely to work well for five years may be likely to work poorly 20 years out. Investors need to know what long-term risks they are taking on by following a strategy that may well make them happy enough for five or ten years. Some strategies work well at all time-periods but are only a small bit superior in the early years and then become far superior only over a long period of time. Investors are more likely to be able to exercise patience if they know in advance that that is how things are likely to play out.

I’ve posted Entry #303 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s a Mistake to Avoid the Risk of Stocks But It’s Also a Mistake to Fail to Mitigate that Risk by Exercising Price Discipline.

Juicy Excerpt: Please note how the change from a 20-percent stock allocation to a 50-percent stock allocation brought on gains of about $100,000 and the change from a 50-percent stock allocation to an 80-percent stock allocation brought on gains of about $100,000 while the change from a fixed 80-percent stock allocation to a valuation-adjusted allocation brought on gains of almost $150,000. Increasing one’s stock allocation is a big plus in the long run. But switching from a Buy-and-Hold approach to a valuation-informed approach is an even bigger plus. The same general pattern applied in the first run but in that case the relative benefit that resulted from increasing one’s stock allocation was greater and the benefit from going to a varying allocation was less.

I’ve posted Entry #300 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Bad Side of Bull Markets.

Juicy Excerpt: Imagine two investors who starts with a portfolio value of $10,000 and then add $10,000 in contributions for every year of a 30-year returns sequence. Say that one of the investors experiences 10 percent gains for each of the first ten years of the 30-year sequence and that the other investor experiences 10 percent losses for each of the first 10 years of the 30-year sequence. The return sequence beginning with 10 years of gains produces a closing balance of $796,051. The returns sequence beginning with ten years of losses produces a closing balance of $2,435,295. Bear markets pay off big-time for long-term investors. You’ll be able to retire much sooner if only you are lucky enough not to live through a prolonged bull market like the one we saw come to an end in January 2000.

It turns out that the stock market works just like every other market that has ever come into existence. Price drops are good news. Price increases are bad news. Time periods in which we see one price increase after another for many years in a row (bull markets) are horrible setbacks for us all. It all works just the opposite from what the Buy-and-Holders have been saying for 50 years now.