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New Wade Pfau Study Shatters Market Timing Myths, Shows That Long-Term Timing ALWAYS Provides Higher Returns at Reduced Risk

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Wafe Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has published new research showing that, contrary to the incessant marketing campaigns of The Stock-Selling Industry, market timing always works. That is, those who change their stock allocations in response to big price shifts with the aim of keeping their risk profiles roughly constant obtain far higher returns while taking on greatly reduced risks than do those following widely promoted Buy-and-Hold strategies.

Pfau states: “On a risk- adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks buy- and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”

Pfau kindly credits my nine years of work in this field (during which I have argued forcefully that honest posting on safe withdrawal rates and other critically important investment-related topics should be permitted at every investing board and blog on the internet), saying “I am also extremely grateful to Rob Bennett for motivating this topic and contributing his experience and encouragement.”

In a show of his generosity of spirit, he also pays tribute to the leaders of the Bogleheads Forum, who have banned honest discussion of safe withdrawal rates and other important investment-related topics at their site, saying: “Because market-timing strategies are specifically not part of John Bogle’s investment philosophy, the author wishes to thank without implicating users including Adrian Nenu, afan, alec, Alex Frakt, bob90245, cjking, crl848, dmcmahon, DP, grayfox, Les, lostcowboy, market timer, matt, Mel Lindauer, Norbert Schlenker, peter71, pkcrafter, Rodc, SP-diceman, tadamsmar, wearethefall, and yobria.” That sort of comment heals wounds and heaven knows we need wound-healing in the Retire Early and Indexing discussion-board communities today.

The only part that I take issue with is the suggestion (Wade does soften the claim with use of the word “specifically”) that Vanguard Founder John Bogle does not see the merit in long-term market timing. Bogle talks out of both sides of his mouth on this question in nearly every speech he gives. However, the reality remains that Bogle has many times made the case for long-term market timing in clear and compelling terms. I learned about the need to engage in long-term market timing from Bogle’s book and Bogle has said in an interview that he believes Valuation-Informed Indexing can be a good strategy (he did not quite endorse it). It is true, of course, that Bogle often fails to distinguish between short-term market timing (which never works) and long-term market timing (which always works), presumably largely because of the marketing benefits that follow from encouraging investors in their Get Rich Quick fantasies (in fairness to Bogle, I believe that there is a good bit of cognitive dissonance at work here as well).

Pfau explained his purpose in conducting the study in posts he put to the Bogleheads Forum. Stock-selling experts have been telling us for decades that “timing doesn’t work.” And, indeed, many studies have been produced showing that short-term timing (changing your stock allocation because of some expectation of how prices will move in the next year or two) does not work. But how about long-term timing (changing your stock allocation in response to big price shifts with an understanding that doing so may not pay off for as long as 10 years)? Amazingly, Pfau was able to find only one serious study looking at this critically important question. Much of Pfau’s study is aimed at pointing out the flaws in the FIsher and Statman study, which evidenced doubts on the part of the authors about the merits of long-term timing.

It is of course a logical impossibility that long-term timing would not work, given Yale Economics Professor Robert Shiller’s research showing that valuations affect long-term returns. If valuations affect long-term returns, returns should be higher and risks should be reduced at times of low valuations. How could going with a higher stock allocation at times when returns are high and risks are low than one goes with at times when returns are low and risks are high not produce good long-term results? In a rational world, the question Pfau focuses on in his new study would have been analyzed in great depth by many researchers many years ago.

The only explanation for why it has not been is that InvestoWorld is today not generally a rational world. Modern Portfolio Theory (which posits that investors are paid higher returns for taking on more risk, the opposite of what logic says must often be the case if valuations affect long-term returns) has influenced our thinking to such an extent that we do not even know to research the most important questions facing us. As World-Renowned Portfolio Strategist Bob Dylan pointed out in his Idiot Wind Theory (a popular counter to the excessively rationalistic Modern Portfolio Theory), “we’re idiots, babe, it’s a wonder we can even feed ourselves.”

This does indeed appear to be the case. At least that’s what the 140 years of historical data available today for our inspection reveal to the researcher willing to listen to its Forbidden Message.

Pfau charts the nominal wealth accumulation of $1 invested at the start of 1871. The Buy-and-Hold strategy examined is a 100 percent S&P 500 portfolio. The baseline market timing strategy chooses either 100 percent stocks or 100 percent Treasury bills at the start of each year, depending on whether the value of P/E10 is below or above it’s historical average at that time.

The Buy-and-Hold portfolio was worth $95,404 at the end of 139 years. The Valuation-Informed Indexing portfolio was worth $124,147.

Pfau writes: “For every risk measure considered, the market-timing strategies result in less risk and higher risk-adjusted returns than the 100 percent stocks Buy-and-Hold strategy. The highest standard deviation for portfolio returns from market timing is 13.93 percent, compared to 18.02 percent for buy-and-hold. The Sharpe ratios are also larger using two different definitions, showing that market timing provides higher returns on a risk-adjusted basis…. The maximum drawdown, which is the maximum percentage drop in wealth between high points and any subsequent low points in the historical period, is also significantly less for market timing. The maximum drawdown was only 24.16 percent, compared to 60.96 percent for buy-and-hold.”

Noting that the Valuation-Informed Indexing portfolio is able to generate the same returns as the Buy-and-Hold portfolio while being out of stocks half of the time and thus putting itself at what should be a huge disadvantage according to Modern Portfolio Theory, Pfau also compares the Valuation-Informed Indexing portfolio, which has an average stock allocation of 50 percent, with a 50 percent Buy-and-Hold portfolio. In this case, the risks of the two portfolios are roughly equal but the returns for the Valuation-Informed Indexing portfolio are dramatically superior. The Buy-and-Hold portfolio has an end-point (2010)  value of $13,426. The Valuation-Informed Indexing portfolio has an end-point value of $94,866.

The study concludes: “Valuation-based market timing with PE10 has the potential to improve risk-adjusted returns for conservative long-term investors.”

Truly amazing stuff!

We’re idiots, babe. But I think it would be fair to say that those who read this study and spend some time thinking through the implications that follow from it are perhaps a bit less idiots than they were on the day before they took that promising step into the light. Thank you, Wade Pfau!

Please find some room for reporting on this fellow’s work on your front page, New York Times editors! By the close of business today if at all possible!

Valuation-Informed Indexing #34:
I Favor Market Timing — No Apologies

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I’ve posted Entry #34 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called I Favor Market Timing — No Apologies.

Juicy Excerpt: Larry said: “What you have done is beyond awesome.” He said: “The P/E10 tool could drastically change how the entire investing industry operates and measures risks.” He said: “I believe this tool, combined with quality macro-economic analysis, will change the history of investing in this country.”

So Larry and I are partners. We are working together to spread the word.

No. That last part isn’t true.

Larry got cold feet. As excited as he was about the positive changes that promotion of Valuation-Informed Indexing could bring to our world, there is one element of this strategy that he just couldn’t accept: It involves a form of market timing.

Larry said: “The key is explaining that Valuation-Informed Indexing is a tool of asset allocation, not market timing.” He said: “Timing is cast in such a negative light by the press and this is reinforced by most planners.” He said: “I can’t visualize large institutional investors telling their clients that they are engaged in market timing.”

Note: Please check out the Carnival of Passive Investing #4. My article titled “The Market Is Backwards-Looking” is included!

Wade Pfau: “Any Data Mining I Am Doing Favors Buy-&-Hold…The Findings for ‘Market Timing’ Are So Robust That It Hardly Matters How We Do It”

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Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, advanced several posts to the Bogleheads Forum this morning showing that, when risk is held stable, Valuation-Informed Indexing beats Buy-and-Hold by a huge margin, and , when the long-term return is held stable, Valuation-Informed Indexing provides the same long-term return as Buy-and-Hold at dramatically less risk. This is must-read stuff for all middle-class investors, for all who put themselves forward as investing experts, and for all journalists and policymakers interested in learning the true cause of the economic crisis.

Juicy Rxcerpt #1: I take the issue of data mining very seriously, and with all due respect, any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.  I don’t think either the 100% stocks buy-and-hold, or the market timing strategy which switches between 100% stocks and 100% Treasury bills, are at all realistic or feasible for a conservative long-term investor. But for now, let’s play by the Fisher and Statman rules, as the findings for “market timing” are so robust anyway, that it hardly matters how we do it.

Juicy Excerpt #2: As is considered in Fisher and Statman, this table shows the results of a horserace between 100% stocks, and market timing over the entire period, January 1871 to January 2010, for $1 invested in 1871.

Juicy Excerpt #3: 100% stocks provides final wealth of $95,404. I consider 4 different decision rules for market timing. The one used by Fisher and Statman, “historical median” provides final wealth of $124,147. But the rolling mean and rolling median approaches are more realistic. The worst performing one of these is the “rolling median” one, and with that the market timer has final wealth of $94,866, which is slightly below the buy-and-hold. In the example I gave above, I data-mined in buy-and-hold’s favor by basing it on the market-timing strategy that gave the worst results for market timing. I think a fair conclusion is that market timing will provide you with approximately the same wealth as 100% stocks buy-and-hold.

Juicy Excerpt #4: The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The buy-and-hold once experienced a 60.96% drop, whereas the worst drop market timing was 24.16%. Considering returns over maximum drawdown, market timing still does much better. Then, there is another set of risk measures which considers that investors are more sensitive to losses rather than gains. The downside deviation which only penalizes returns less than zero shows that market timing is much less risky, and this in turn favors market timing for the Sortino ratio. Market timing also has a much lower average stock allocation, and market timing changes its allocation on average once every 5 years.  So, market timing provides essentially the same returns, but with much less risk.

Juicy Excerpt #5: This is in spite the fact that market timing has to overcome one major obstacle in its battle with 100% stocks buy-and-hold: the very generous average equity premium enjoyed by U.S. stock investors in the past.  I think it is more realistic to compare market timing to a fixed 50/50 allocation rebalanced each year. With that, the wealth accumulation is only $13,426. That’s the equity premium in a nut shell. Fixed 50/50 provides much less wealth than fixed 100/0. At least in historical U.S. data. Mr. Bogle would suggest not to count on this necessarily continuing in the future. Ex-ante, I would have expected market timing to be much riskier than fixed 50/50. That is because the market timing strategy is rather extreme and unrealistic anyway, as I explained at the start. But comparing risk measures here, market timing is holding its own. It does have higher standard deviations, higher downside deviations and lower Sortino ratios. At the same time, it has higher Sharpe ratios, and I already discussed its positive information ratios which are compared to 50/50, and it has lower maximum drawdowns, and higher returns over maximum drawdowns. Compared to 50/50, I think it is fair to conclude that market timing provides signficantly higher returns at a comparable level of risk.

Juicy Excerpt #6: This new figure shows the horserace over the entire historical period. Looking at each possible date as the end period:

-market timing provides more wealth in 51.8% of cases
-buy-and-hold provides more wealth in 32.37% of cases
-they are essentially tied in 15.83% of cases, where I define being tied as the difference in wealth accumulations between the two strategies as being less than 1% of the value of the buy-and-hold wealth accumulation. I think there is no point in declaring a winner in cases where they are so close.

So, if you wish to focus on one of the 32.37% of cases in which buy-and-hold is clearly ahead, I respectfully submit that you are the one doing data mining. Even though market-timing is ahead more often than not, I’d be willing to call it a draw on this point, and instead focus on how market timing provides substantially less risk for the same general returns.

Juicy Excerpt #7: About the potential market impacts of many people adopting this strategy, I don’t have any clear answer. Some may think it will eliminate booms and busts from the market, but as a “dismal scientist” (a nickname for economists) I can’t accept that. There are always unintended consequences to new policies. Bubbles would just form elsewhere. This is an important question though. Under my assumptions, people make their moves on January 1st of each year, but I suppose in reality things wouldn’t work out quite that precisely. But at the end of the day, as well, it will probably be hard to convince a lot of people to overcome the psychological roadblocks of this contrarian investment strategy, so that the market impacts may not be so large. After all, as you kindly pointed out much earlier, all of this has been around at least since the time of Graham and Dodd.

Wade Pfau: “The Market Timer Enjoys a Far Less Risky Strategy”

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It’s not only that Valuation-Informed Indexers have obtained far higher returns that Buy-and-Holders over the entire 140 years of historical data available to us today. Perhaps even more important is that they have done so while taking on dramatically less risk.

Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan (Wade is the fellow who recently posted preliminary research showing that Valuation-Informed Indexing provides better long-term returns than Buy-and-Hold in 102 of the 110 rolling 30-year time-periods in the historical record), advanced a post to the Bogleheads Forum this morning pointing out that the entire historical record shows that long-term market timers (Valuation-Informed Indexers) take on far less risk than Buy-and-Holders.

Set forth below are the words of Wade’s post:

Mel, thank you for the comment. If you think I am trying to be sneaky, I think you are missing something important.In the Fisher and Statman framework, the market timer would have finally returned to 100% stocks in 2009 so that they would have had the same returns that year and would still be together at the end of 2009.

For 2010, I don’t have the market returns data yet, but the PE10 decision rule would have sent the market timer back to Treasury bills. I know stocks outperformed Treasury bills in 2010, and this would hurt the market timer.

Anyway, I just thought that figure was interesting. I know it is not the full story. I hope to have the full story for you in another couple of weeks.

But DP is right that the market timer enjoys a far less risky strategy. I can’t understand why Fisher and Statman glossed over this rather essential detail. They comment that the Sharpe ratio for the market timer is biased upwards because it is comparable to someone with a 50/50 asset allocation rather than a 100/0 allocation. But that suggests to me that we should compare the market timer to a 50/50 allocation instead of a 100/0 allocation. But even without adjusting for risk, the market timer produces more or less the same returns over the whole historical period. That segment of the horserace I showed you began in 1871, not 1995.

And it took the unprecendented 1990s boom for the buy-and-hold guy to catch back up to the market timer. For most of history, the market timer was ahead. Relying on a 100% stocks strategy throughout the 1990s boom doesn’t sound very low-risk to me.

“I Have Been Invested Solely in Super-Safe Asset Classes for 14 Years — That Biases Me”

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Set forth below is the text of a comment that I put today to a discussion thread at the Free Money Finance blog on the topic of the merits or lack thereof of market timing:

Thanks for your kind words and thanks for indeed adding some thoughts that those listening in here very much need to take into consideration, MBTN There’s no question (at least in my mind, but I believe that I probably speak for a lot of people re this one) that you are making an important point.

Stock prices can be affected by either rational/economic factors or by irrational/emotional factors. I think we are in agreement re that. And I think we are also in agreement in a belief that we can never know for certain which it is that is having the dominant effect. So we don’t know everything that we would like to know.

The question is — What do we do about this unfortunate reality? There is no neutral ground. We either report the nominal stock price as if it is real (which is what we have been doing during the Buy-and-Hold Era). Or we let people know that there is good reason (but not 100 percent compelling evidence) that the nominal price is heavily affected by emotional inputs. The key message that I want to get across is that THERE IS NO NEUTRAL GROUND. Both of the two possible choices (ignoring the emotional inputs that we believe are there or incorporating the emotional inputs into a price adjustment) carry risks.

Consider the situation in January 2000. The P/E10 valuation metric (the metric used by most of the people who are best informed about valuation questions) indicated that stocks were priced at three times fair value. Say that there is an individual who has a nominal portfolio value of $600,000. If we ignore valuations (which is what we did during the Buy-and-Hold Era), we send him a portfolio statement saying that he possesses $600,000 in stock wealth. If we incorporate a valuation adjustment into our reporting of his stock value, we send him a portfolio statement saying that he possesses $200,000 in stock wealth.

You are right when you say that we do not know with certainty that the true metaphysical value of his portfolio is $200,000. But I am right that we do not know with certainty that the true metaphysical value of his portfolio is $600,000. And getting the number wrong in either direction is going to have horrible consequences for the economy. If you tell someone that he possesses $600,000 in wealth when he really possesses only $200,000, he is going to spend money on houses and cars and vacations that he cannot afford to spend. Then a few years later he is going to regret having overspent for all those years and is going to pull back on his spending and cause an economic crisis. I believe strongly that the crisis we are living through today is the consequence of 30 years of promotion of Buy-and-Hold Investing.

I think that a lot of people experience unease with the thought of putting any number on that portfolio statement other than 600,000. In people’s minds, the $600,000 is a hard number while the $200,000 number is just sort of a guess. So people say “it’s okay to mention that there might be some overvaluation present, but you have to report the $600,000 number on the portfolio statement.” This is where I get off the Buy-and-Hold reservation.

I acknowledge that the $200,000 number is not 100 percent solid. If you asked informed people, some would say a better number is $250,000 and some would say a better number is $150,000. But I really don’t think that there is any reasonable person who would say that the best number is $600,000, that there was zero overvaluation present in the market in January 2000. In January 2000 we were reporting numbers that we all knew to be wildly wrong on millions of portfolio statements because we were not as a society willing to look at these difficult questions squarely and come up with REASONABLE AND BALANCED solutions to them.

My claim is not that there is a perfect way to do things and that the Buy-and-Holders won’t go along. My claim is that there is a better way than the Buy-and-Hold way and that the Buy-and-Holders are using a demand for absolute 100 percent perfection that they apply only to non-Buy-and-Hold approaches get in the way of consideration of approaches that are better than Buy-and-Hold but something short of perfect. Using $600,000 as the portfolio number was no more “right” than using $200,000 (my personal view is that it was far less right). So why did all of our portfolios use the $600,000 number? Why was there not even a DEBATE about this at the time?

The consequences of avoiding the debate are huge. I discussed above the retirement question. I have a retirement calculator that includes a valuation adjustment. If this debate were proceeding as it should, that calculator would be getting linked at thousands of web sites where people could check it out and DECIDE FOR THEMSElVES whether they want to use valuation-adjusted numbers in planning their retirements or not. The reality is that the calculator is linked at only a tiny number of sites. Not because it does not add something important to the debate. Because Buy-and-Holders feel that it makes them look bad for people to see how far off their numbers turn out to be if a valuation adjustment is employed.

When there is not even a debate about these questions, there is no brake on the car. People have a natural tendency to want to see stocks overvalued — overvaluation makes for bigger numbers on our portfolio statements and we all want to be prepared for retirement as soon as possible. All humans have an inclination for self-deception and the only thing that can rein this in is a voicing of the dangers. But for so long as we do not permit the debate (because it embarrasses Buy-and-Holders), there can be no voicing of the dangers! And the worse the problem goes, the greater the embarrassment becomes!

We left the market no way to correct prices except through a huge crash. We did that by cutting off the only way that overvaluation steam can be released outside of a crash — HONEST and REASONED DISCUSSION of the risks of overvaluation. I am proposing a sea change in how investing analysis is performed. I am NOT disputing the point you are making, MBTN. I see it as an important and legitimate point and I consider you a friend for being willing to go to the trouble to advance it here. The sea change that I am proposing is in asking/insisting that in future days the Buy-and-Holders extend that same hand of friendship to Valuation-Informed Indexers, that we all think of each other as friends engaged in a mutual effort to overcome our personal flaws and come to the best overall answers we can come to.

I am biased. I have been invested solely in super-safe asset classes for 14 years. That inevitably biases me against stocks. But the Buy-and-Holders are also inevitably biased in favor of stocks. If we want our boards and blogs to work, we need to acknowledge these biases and make an effort to work together to give ourselves and others the best possible discussions of the issues possible. When all of the people on one side of the table are not participating because it has been made clear to them that their comments will be dismissed as “rude” if they state their honest views, the discussions become misleading and dangerous and irresponsible. None of us really want that. So we all need to make a greater effort to try to put ourselves in the shoes of the other fellow and treat him as we would want to be treated if we held his viewpoint.

That’s my strongly held belief re all this, in any event. It is possible that I am wrong on the substance. I am certainly sincere in what I am saying (my record shows this beyond any reasonable doubt whatsoever). Again, I need to say that I am grateful to FMF for providing the forum for this discussion and I offer to do anything that it is in my power to do to see that it proceeds to a good place for every single person involved in it or affected by it.

Rob

Free Money Finance Blog Links to WSJ Article on Market Timing Myth

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I recently wrote a column on the Wall Street Journal article acknowledging that the Buy-and-Hold claim that long-term investors need not engage in market timing is a marketing gimmick aimed at making the “experts” rich at the expense of the millions of middle-class investors sure to be wiped out by following such a “strategy.” I wrote a second column pointing out that few Buy-and-Holders have acknowledged the article or commented on it or debated it.

The blogger who writes the Free Money Finance blog has now done so!

This is a big deal. It is the Get Rich Quick aspects of the Buy-and-Hold strategy that were the primary cause of today’s economic crisis. The problem we face today is that all of us who either advocated Buy-and-Hold or followed Buy-and-Hold strategies at some time — and that’s most of us! — feel shame over what we have done and are highly reluctant to come clean. But until we come clean there is no way for us to get to work rebuilding the economic and political systems we have destroyed!

The first step on the way back is opening up the possibility of honest discussions of the flaws in the Buy-and-Hold Model on the internet. We all want the same things. We all wants our economic and political systems to survive. We all want to be able to obtain good returns without taking on insane amounts of risk. We all want to feel that we are good and honest and helpful and kind and reasonably intelligent and reasonable people. Once we become able to have a conversation about how we came to find ourselves on the wrong track, it will not be long before we all will be celebrating the day this economic crisis began the struggle that over time is leading us to form doubts over the insane dogmatism that we have come to evidence in discussions of the merits and dangers of Buy-and-Hold Investing.

FMF is a longtime advocate of Buy-and-Hold. Other Buy-and-Holders will be following his lead (Let us pray!). He has advanced the ball in a major way by sending a signal to other Buy-and-Holders that permitting honest posting at their sites will not cause the world to explode. This is how we begin the process of bringing about a healing process.

I am grateful to FMF for what he has done here and I believe that you should be too. I hope you will consider letting him know how you feel in an e-mail or in a post at his blog (if you are the especially brave sort!). Heaven knows the humans move slowly when they have messed up in a big way. But they do move. We are not doomed. There will be better days ahead, perhaps sooner than some now expect to see them arrive.

Set forth below are the words that I posted in the comments section of FMF’s blog:

I am very grateful to you for posting this article, FMF. Yes, this is the method that I follow and advocate. It is called Valuation-Informed Indexing. At my site there are four unique calculators (which took years of effort and many thousands of dollars to develop) and 200 podcasts and 100 articles and scores of links to Guest Blog Entries describing the various aspects of how it works.

It greatly increases returns while also greatly reducing risk. It permits middle-class investors to retire five years sooner on average. If we could teach people about it, we would be unlikely to ever again see the sort of economic crisis we are living through today. I would need to write an entire book to describe all the benefits (I’m in the process of doing so — it is called Investing for Humans: How to Get What Works on Paper to Work in Real Life).

I know that you are widely respected in the personal finance blogosphere (and entirely properly so, in my assessment). I hope that some of the people who have been hostile to an examination of the pros and cons of VII and Buy-and-Hold will perhaps see your article and rethink whether as a community we have proceeded with our consideration of these topics in the best possible way. I can assure you that from my end I will do everything I can to make the discussions that I believe are going to begin soon a success for EVERY SINGLE PERSON involved in them.

Our discovery that long-term timing always works is a win/win/win/win/win. Do you know who gets the most credit for development of the VII strategy? A fellow named John Bogle. And of course the thousands of smart and good people who followed in his footsteps also deserve huge amounts of credit for their many positive and helpful and constructive contributions. Valuation-Informed Indexing would not exist if it were not for the many powerful insights developed by the Buy-and-Holders that form its foundation.

We all want the same thing. We are all in this together. Buy-and-Hold was a huge advance over what we had before it came along. VII is a huge advance over Buy-and-Hold. The Buy-and-Holders need to understand that no one ever expected them to get the data-based approach 100 percent right on the first try. We are learning new things all the time. We need to incorporate those new things into our investing strategies. The very first step is acknowledging that we do not already know it all and that it is silly even to imagine that we do.

Please let me know if there is ever anything that I can do to help things to get kicked off in the right way or to proceed in the right way. I admire and respect and like the Buy-and-Holders and I have long hated having been placed in circumstances in which I have come across to many as being critical of my friends who follow (and believe in) Buy-and-Hold strategies. I want to be working WITH my friends for our mutual benefit and for the benefit of all our readers.

Thanks again for showing the courage and love for your readers that I know it took for you to advance this post. There’s wonderful, wonderful stuff on the other side of this black mountain. There’s going to come a day when we all are going to look back at the past eight years and laugh that it took us so long to understand the importance of Learning Together all that we can about how stock investing works in the real world.

Rob

Beyond Buy/Hold #11:Only Thing More Dangerous Than Market Timing Is Failing to Engage In It

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I’ve posted Entry #11 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called The Only Thing More Dangerous Than Market Timing Is Failing to Engage In It.

Juicy Excerpt: You’re arranging a family reunion. Hundreds of people will be invited to the picnic event and many will need to travel long distances to ge there. There will be lots of good food, a magician is being hired to entertain the children and there will be a band playing music for the adults. Expenses will be considerable.

You’ve scheduled the event for February 15 in New York. One family member observes that the odds are strong that it is going to be too cold in February for a picnic, but you pooh-pooh these concerns. “No one can predict the weather with 100 percent accuracy,” you point out. You add: “If I were to look in an almanac and schedule the picnic for a time when the weather is likely to be more suitable, that would be timing the picnic. I know better than to put us all at that sort of risk. I’m going to take the prudent bet here, ignore the historical record of weather patterns in New York and hope for the best. Making predictions about this sort of thing is far, far too dangerous.”

Beyond Buy-and-Hold #4 — Long-Term Timing Is Not At All Similar to Short-Term Timing

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I’ve posted Column Entry #4 to my new weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Long-Term Timing Is Not At All Similar to Short-Term Timing.

Juicy Excerpt: Stock prices reached insanely high levels in January 1996. What happened if you missed that exit point? You got another change in 1997. And then another in 1998. And then another in 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, and 2008. It wasn’t hard to pick a good spot to get out.

And what will happen if you miss the good entry point that will be coming after the next price crash? You may have as long as 10 years to buy into stocks at a good price. That’s what happened after the crash we saw in the early 1970s. Stocks remained a good buy from 1975 all the way through 1995. You had 20 years to find a good time to get back in.

Valuation-Informed Indexing #7 — The Real Reason Why Short-Term Timing Doesn’t Work

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I’ve posted Entry #7 in my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Real Reason Why Short-Term Timing Doesn’t Work.

Juicy Excerpt: It could be that short-term price changes are unpredictable not because the market is highly rational but because it is highly irrational. You can’t beat the market if it is so rational that you cannot get an edge. But you also cannot beat the market if it is so crazy (in the short term) that all the analysis in the world does not give up a clue as to where it is headed.

“I Can’t Visualize Large Institutional Investors Telling Their Clients They Are Engaged in Market Timing”

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Recent blog entries have reported on e-mail correspondence between a community member named “Larry” and me. Set forth below is the text of an e-mail Larry sent to me on November 12, 2009.

Rob,

Thank you for your note.

I’ll really think through your comment about market timing. My initial reaction to the timing word  was negative when I first went to your site. Timing is cast in such a negative light by the press and reinforced by most planners. The asset allocation words are hailed by most people as the best process  for overall investment return. I can’t visualize large institutional investors telling their clients that they are engaged in market timing. I can visualize them saying that they are using new asset allocation tools to reduce risk. The entire  industry is looking for ways to reduce risk right now.

The target audience for this tool really is the middle class (non accredited investors). My comments regarding Hedge Funds were more for discussion purposes. I know Hedge Fund managers really look at valuations to determine the perceived best asset class at the moment.

Please take a look at my Index Fund Movement chart and description of the P/E 10 when I send it to you. I will be curious if you change your view about the timing issue after you review the information. I’m working on this very part time so it is still going to be at least a  few weeks before I have a decent draft.