A Rich Life

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

Academic Researcher Wade Pfau: “Valuation-Informed Indexing Always Provides More Returns for Often Less Risk”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 1, 2011. He sent his response later that day.

Wade said that he shared my view that using 30-year rolling time-periods to make the case for Valuation-Informed Indexing was “compelling” and that “I’m definitely going to be using tables like the one I showed at Bogleheads with all the risk measures.” He explained that: “My idea is to show many different tables with results over the whole period for returns and risks.  Valuation-Informed Indexing always provides more returns for often less risk.” Wade’s e-mail continued: “I also want to read more about the “information ratio” measure, as I think it may be the most important of all the measures in that table. But I need to better explain its full power.”

He stated: ” I will pick some of the cases where VII did least well and show the 30-year rolling periods for those.  This is to help avoid data mining.  But the fact will remain that no matter what I try, VII will still perform better in 85-95% of cases for 30 years, and the times that it does worse are those in which buy and hold was doing its best in history (which is always right around the peak of the bubble in 2000), and so VII is not more risky.  I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years.  I think it is all quite persuasive.”

Beyond Buy-and-Hold #60 — Risk-Free Stock Investing

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I’ve posted Entry #60 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Risk-Free Stock Investing.

Juicy Excerpt: You are taking on more than one form of risk when you choose investment classes. One is the chance that the investment class will perform poorly. Another is that you might miscalculate how much you need to retire and thus end up in trouble even if all of your investment choices perform precisely how you hoped they would.

Stocks counter this risk because they perform so much better than CDs in the vast majority of return sequences likely to pop up. Investing in stocks exposes you to slightly more of one type of investing risk but investing in CDs exposes you to much more of another type of investing risk. Stocks are in an overall sense the less risky asset class, in my assessment.

Stocks Are Far More Risky When Valuations Are High

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I’ve posted a Guest Blog Entry at the Invest It Wisely site titled Stocks Are Far More Risky When Valuations Are High.

Juicy Excerpt: My interpretation of these numbers is that stocks are a less risky asset class than most believe. So long as you limit yourself to buying stocks only at moderate or better prices and commit to a 10-year holding period, you are virtually guaranteed to at least break even. That’s a very good deal, given the upside potential that applies when stocks are purchased at those prices (the annualized return that applies if the best-case returns sequence in the historical record happens to turn up for stocks purchased at fair value is 12.3 percent).

It’s a very different story when stocks are purchased at high prices. The P/E10 level in January 2000 was “44.” The worst-case 10-year return for stocks purchased at those prices is a negative 7.09 percent. That means losing an average of 7 percent of your money every year for 10 years running!

Even the most likely return here is a negative number. And even at 20 years there is a 20 percent chance that your annualized return would be a negative number. And even at 40 years there’s a chance that your annualized return would be under 3 percent. Now that’s risk!

Beyond Buy-and-Hold #3 — Stocks Are a Lot Less Risky Than You Think

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The Out of Your Rut site has posted Entry #3 in my new Beyond Buy-and-Hold column. It’s titled Stocks Are a Lot Less Risky Than You Think.

Juicy Excerpt: Indexing changes everything. The sad thing is that most indexers (including Bogle) have little idea today just how important an innovation indexing is. The availability of indexes revolutionizes our understanding of stock risk. And in an entirely positive way. The truth is, stocks are far less risky than even the most enthusiastic stock advocates today realize. For investors willing to invest in indexes and open to taking valuations into consideration when setting their stock allocations, stocks are a significantly less risky asset class than bonds.

Early Retirement Extreme Forum: Risk Revisited

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I recently started a thread at the Early Retirement Extreme Forum titled Risk Revisited.

Juicy Excerpt #1: I view the attitude toward risk that Kevin is describing (he is accurately describing the Buy-and-Hold approach) as exceedingly dangerous. In all other areas of life endeavor, we think of risk as something to be avoided. When it comes to investing, we think of risk as something to be sought out. I believe that this is why we are in an economic crisis today. We have taught millions of middle-class people to seek out risk and the result is that we have collectively taken on so much excessive risk that the losses have become big enough to crater the entire economy. We need to rethink this risk question!

Juicy Excerpt #2: But then Bernstein spends the rest of the book showing how it was impossible to win by purchasing individual stocks or to time the market and that the best way to invest is to buy and hold in specific asset allocations. So, in other words, even as he said the market appeared to be priced way too high, still the best thing to do was to buy into it.

Juicy Excerpt #3: I believe that we are working our way through an elaborate social dance. How do we get to the point where it becomes possible to say openly that we all goofed up? I believe that once we get that part of the job out of the way, the rest is going to come easy.

Podcast # 195 — Risk!

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I’ve posted Podcast #195 to the “RobCasts” section of the site. It’s called Risk!

You are compensated for taking on some forms of investing risk and not for takjng on others.

Stocks Are a Lot Less Risky Than You Think

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I recently posted a Guest Blog Entry at the Money & Such blog entitled Stocks Are a Lot Less Risky Than You Think.

Juicy Excerpt: The price volatility of stocks is an illusion. It’s not real. Change how you react to it and it goes away. Stop taking volatility seriously and it goes “Poof!”.

There were several good comments posted in response to the blog entry.

Juicy Excerpt: I think you provide a unique approach to the topic. It sounds to me very similar to the idea of actually researching and understanding the companies you invest in but taken to a different level. Rather than researching individual companies you seem to promote the research of an economy’s productivity as a whole.

This is the Guest Blog Entry than was posted at the Quest for Four Pillars blog several weeks ago. Mike, the owner of the blog (who advocates Buy-and-Hold Investing) deleted the blog entry after several positive comments about it were posted by community members. Mike also banned me from posting any further comments myself at his blog. There’s some sort of funny business going on here — I can tell!

Podcast #134 — Risk Without Risk

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I’ve posted Podcast #134 to the “RobCasts” section of the site. It’s called Risk Without Risk.

Passive Investors will tell you that you must take on more risk to obtain a higher return. It’s not so. What you must take on is a higher perceived risk. That’s something very different. When you discover an asset class that is perceived as risky but that in fact is not risky, you can obtain the best of both worlds — a high return at little real risk.