A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

VII #29 — Valuation-Informed Indexing Is Not the Same Thing As Tactical Asset Allocation

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I’ve posted Entry #29 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuation-Informed Indexing Is Not the Same Thing As Tactical Asset Allocation.

Juicy Excerpt: The similarity is that both VII and TAA call for occasional allocation shifts. The big difference is in the thought process that goes into the decision-making process as to when to make those shifts and what sorts of shifts to make. The allocation shifts made by Valuation-Informed Indexers are not optional shifts made with the hope of gaining some short-term edge. They are mandatory shifts. They are made solely with long-term considerations in mind. They are strategic shifts, not tactical shifts.

VII #27 — Not One Study Supports the Claim That the Market Is Efficient

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I’ve posted Entry #27 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Not One Study Supports the Claim that the Market is Efficient.

Juicy Excerpt: The idea that the market is efficient is an attempted explanation of the data, not itself a finding. The two are not the same thing. A research finding can be said to be the product of science. An attempted explanation of a research finding can never be anything more than subjective opinion until it is tested in follow-up research.

Short-term timing doesn’t work. That’s a research finding. The idea that the market is efficient is (or at least once was) a plausible explanation of this finding. An efficient market is one in which the price is always right or at least as close to right as it is possible to get (an “efficient” market is one in which all factors known to have a bearing on price have been taken into consideration by the investors setting the price). If the market price is always right, it is not possible for any investor to gain an edge by analysis of the factors affecting price. Any insight he might develop was taken into consideration by the market before he developed it. It is only by gaining an edge that investors can hope to engage in effective market timing. The idea that the market is efficient does indeed explain why short-term timing doesn’t work.

But it is not the only possible explanation.

VII #26 — The Numbers on Your Portfolio Statement Are Wrong!

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I’ve posted Entry #26 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Numbers on Your Portfolio Statement Are Wrong!

Juicy Excerpt: This one puts me on the spot. If I say “yes,” I sound like a crazy person. If I say “no,” I contradict my claim that valuations need to be taken into consideration when calculating safe withdrawal rates and when performing all others sorts of investment analyses. If valuations matter, they always matter. If valuations don’t matter when determining how much a mutual fund company should pay you for your shares, it cannot logically be argued that they matter in other contexts.

I say “yes,” Vanguard should discount the portfolio value for the extent that stocks are overvalued at the time shares of an index fund are sold. This will indeed make me sound like a crazy person in the ears of many. But you know what? This isn’t the first time this sort of thing has happened. And you know what else? I think it makes sense to discount the nominal amount of the portfolio to reflect the effect of overvaluation. I think that if we made that change, it would lead to all sorts of good things.

VII #25 — Stocks Are Less Risky Than Bonds

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I’ve posted Entry #25 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Are Less Risky Than Bonds.

Juicy Excerpt: Stocks can be more risky than bonds. Obviously there was huge risk when prices were so high that the likely long-term stock return was a negative number. But the risk of stock investing is a voluntary risk. It’s not that stock investors collectively take on more risk than the risk that is taken on by bond investors collectively. Stock investors who ignore valuations take on astronomical levels of risk. But stock investors who take valuations into consideration can easily keep their risk below the level taken on by bond investors.

It is not stock investing that is risky. It is valuation-uninformed stock investing strategies that are risky. The risks of stocks can be largely avoided by those willing to give consideration to the effect of valuations on long-term returns. It is much harder for investors to avoid the risks of bonds, since inflation is unpredictable and constitutes the biggest risk for bond investors. For the valuation-informed investor, bonds are more risky than stocks.

VII #28 — Wade Pfau’s Research Understates the Superiority of Valuation-Informed Indexing Over Buy-and-Hold

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I’ve posted Entry #28 for my weekly Valuation-Informed Indexing column at the Value Walk site. It explains why Wade Pfau’s research understates the superiority of Valuation-Informed Indexing over Buy-and-Hold.

Juicy Excerpt: We have seen three secular bull market in the historical record. The average price drop that followed (from the high point to the low point) was  68 percent. The average 20-year return following the bull top was 0.7 percent (including dividends). It is exceedingly unlikely that more than a tiny percentage of Buy-and-Holders stuck with their high stock allocations through so many years of financial pain and yet any investors who sold obtained worse results than the results than caused Buy-and-Hold to come up short in 102 of 110 of the 30-year periods in the historical record.

Valuation-Informed Indexers do not experience the same difficulty sticking to their planned stock allocations because Valuation-Informed Indexers go with far lower stock allocations at times when stocks are priced to crash (times of high valuations). So failing to consider the reality that most Buy-and-Holders are forced to sell when prices crash slants things in favor of Buy-and-Hold.

VII #24: Does Shiller Endorse Valuation-Informed Indexing?

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I’ve posted column entry #24 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Does Shiller Endorse Valuation-Informed Indexing?

Juicy Excerpt: Shiller has said surprisingly little about how to implement his investing ideas. His focus has been on doing research and on setting forth a new theory of how stockinvestingworks (the subtitle of his book is: “The National Bestseller That Revolutionized the Way We Think About the Stock Market.”). The idea behind this column is to put forward one person’s take on where our understanding of how stock investing works is headed presuming that Shiller’s ideas prevail in days to come. My ultimate aim is to launch a national debate in which we will hear thousands of people offering views on these topics, some of them likely being at least somewhat in line with what I suggest here and some of them likely sketching our very different perspectives on where things are headed.

Read more:http://www.valuewalk.com/valuation-informed-indexing/ivaluationinformed-indexingi-24-brdoes-shiller-endorse-valuationinformed-indexing/#ixzz1Ak5maZK1

VII #23: Even Stock Pickers Can Benefit from Allocation Shifts

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I’ve posted Entry #23 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Even Stock Pickers Can Benefit from Allocation Shifts.

Juicy Excerpt: Stock pickers do not believe in market efficiency; effective stock picking is impossible in an efficient market. But presuming that there might be some efficiency to the market, it is likely that there is a greater measure of efficiency on the micro side (how individual stocks are priced) than on the macro side (how the overall market is priced). Stock pickers are better informed than most indexers. So the market is probably better able to price stocks well relative to each other than it is to price the overall market properly.

Market inefficiencies present opportunities to stock pickers. They seek to take advantage of micro inefficiencies by picking stocks. It may be that even greater opportunities are available to them in the form of macro inefficiencies. Stock picking is all about gaining an edge. Lots of people are studying annual reports of all the companies in an effort to find profitable edges. How many are giving thought to how much of a change in their overall stock allocation is appropriate at various valuation levels? It may be that it is on the macro side that the low-hanging fruit is to be found.

Valuation-Informed Indexing #22: Low Stock Returns Need Not Hurt You As An Investor

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I’ve posted Entry #22 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Low Stock Returns Need Not Hurt You As An Investor.

Juicy Excerpt: Investors seeking high returns are not required to take on high levels of risk, under the Valuation-Informed Indexing Model. So there is no penalty associated with going with a low stock allocation or even a zero stock allocation for a time. Valuation-Informed Indexers have opportunities available to them that are not available to Buy-and-Holders. Valuation-Informed Indexers are free to move their money to super-safe asset classes (TIPS, IBond and CDs) at times when stocks offer a poor value proposition.

VII #21 — We’ve Been Driving in the Wrong Direction for 30 Years

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I’ve posted Entry #21 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called We’ve Been Driving in the Wrong Direction for 30 Years.

Juicy Excerpt: If the market is efficient, Buy-and-Hold is the best investing approach ever developed by the human mind. I have no problem saying that. It really is an objective approach. So, if the Buy-and-Holders got the fundamental question right, I think it makes sense to go with what they say about asset allocation and retirement planning and risk management and all other sorts of topics.

VII #20 — Shiller Did Not Anticipate the Tech Bubble Pop

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I’ve posted Entry #20 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Did Not Anticipate the Tech Bubble Pop.

Juicy Excerpt: Shiller anticipated the second biggest economic crisis in U.S. history, a crisis that has already established itself as the most important political development of the first decade of the 21st Century. He did this more than eight years before it took place. He spoke publicly about why the crisis was coming at a time when policymakers could have headed it off. That’s a truly impressive accomplishment, far more impressive than just happening to publish a book about stock bubbles in the month that one of the bubbles happened to burst.