A Rich Life

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

Financial Mentor Site: “The 4% Rule Could Cause You to Leave a Fortune on the Table or Run Out of Money Long Before You Die”

by

Todd Tresidder has written a super article about the evolution of our understanding of how safe withdrawal rates work at his Financial Mentor site. It is called Are Safe Withdrawal Rates Really Safe?

Juicy Excerpt #1: It is known as the “4% Rule”, and it is widely considered to be “the truth” in safe withdrawal rates for retirement. The problem is it’s not the truth and every day people risk a lifetime of retirement savings on it.

Juicy Excerpt #2: It is the single most important question I get from retirees and near retirees. The reason is because safe withdrawal rates impact every aspect of retirement planning — from the lifestyle you can afford to the amount of savings needed to fund it. Small errors in safe withdrawal rates multiply over many years causing huge financial impacts.

Juicy Excerpt #3: The key point defining all 2nd Generation research is that each study applies the same basic premises thus producing extraordinarily consistent results. This consistency caused the 4% Rule to become conventional wisdom and be mistaken as “truth” when it is really just a product of the research premises.

Juicy Excerpt #4: To understand the problems with 2nd Generation research we need look no further than the amazing breadth of dubious assumptions behind the results.

Juicy Excerpt #5: Rob Bennett was an early pioneer in 3rd Generation modeling by advocating (through various online forums) that withdrawal rates must be adjusted for market valuations consistent with research by Cambell and Shiller (1998). Also, Wade Pfau (2010-2011) broke new ground by applying safe withdrawal rates to international market data with shocking results. He also applied valuation, interest rate, and inflation metrics in regression analysis to form a dynamic and robust safe withdrawal rate model. The key point illustrated by 3rd Generation research is that a deeper level of complexity underlies the sacred cow “truth” known as the 4% rule. It was the best answer for its day, but those days are gone. It is a second generation model whose shortcomings have been proven well enough that it must be retired.

Juicy Excerpt #6: This problem is why 2nd Generation models chose to define the highest withdrawal rate that could survive all historical data periods. The assumption was the best and worst performing periods could not be determined in advance so the only safe choice was the lowest common denominator that survived all time periods. Fortunately, that assumption is false. Future investment returns are not “luck” or random as many would guess. As it turns out, market valuations at the time you begin your investment holding period are inversely correlated to the return you can expect over the following 10-15 years.

Juicy Excerpt #7: The reason I focused on the 2nd Generation model is because it has been elevated to the status of “truth” in the financial planning industry. The 4% Rule is quoted regularly in the financial media and used as a benchmark by which all other retirement planning models are compared. The problem is it’s not really safe. The 4% rule could cause you to leave a fortune on the table or run out of money long before you die. The 4% rule is a static conclusion in a world that is dynamically evolving. In summary, there are specific assumptions built into the research supporting the 4% model that must be seriously questioned.

ITNR #50 — Game Changers: Part Two

by

I’ve posted Column Entry #50 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Game Changers: Part Two.

Juicy Excerpt: Stock returns are slightly predictable at five years out but the correlation between valuations and returns is not statistically significant at this point. At 10 years out, statistically significant return predictions are possible but the range of possible returns is large; that is, the precision of the predictions that can be made is not great. Greater precision is possible at 15 years out and the valuation level that applies on the day of an index fund purchase tells us 78 percent of what we need to know to know the return that applies at 20 years.

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

by

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!

Associate Professor Wade Pfau Has Contacted Trinity Study Authors re Analytical Errors in Their Safe Withdrawal Rate Study

by

Wafe Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has sent an e-mail to the authors of the famous (infamous?) Trinity study of safe withdrawal rates for retirees asking the authors whether it was their intent when preparing the study to identify the safe withdrawal rate for retirees. Here are his words:

“Okay, I took care of it. I was a little timid about contacting them, as I was publicly critical of their study in the past. But first I apologized to them for that. Then I explained my concerns about 4% for retirees since the mid-1990s. Valuations was a part of my list. I’ve even invited Prof. Walz to give a seminar at my university, as he is in Hong Kong during the spring term. This matter is settled.”

There’s been a debate raging on the internet re this question for nine years now. The debate is referred to as “The Great Safe Withdrawal Rate Debate.”

Numerous discussion boards and blogs have banned honest posting on the safe withdrawal rate matter after seeing the rage (which has at times evidenced itself in death threats, defamation and long-ongoing internet harassment campaigns) evidenced by those who believe in the Buy-and-Hold investing strategy when accurate reports of the safe withdrawal rate are posted. Buy-and-Holders view accurate reporting of the safe withdrawal rate as a threat to the dominant model for understanding how stock investing works.

The reason why the Old School safe withdrawal rate studies do not include an adjustment for valuations is that they are rooted in a belief in the Efficient Market Theory (developed by University of Chicago Economics Professor Eugene Fama), an academic construct that posits that the community of investors always considers all factors bearing on stock prices when setting stock prices and that overvaluation and undervaluation are thus logical impossibilities. Yale University Economics Professor Robert Shiller discredited the Efficient Market Theory (and the Buy-and-Hold strategy rooted in a belief in its principles) with research done in 1981 (and replicated many times in the three decades since) showing that valuations affect long-term returns. If valuations affect long-term returns, both overvaluation and undervaluation are obviously real phenomena.

Pfau has expressed numerous concerns about the Trinity study but does not share my view that the study needs to be corrected.

My view is that the study needs to be corrected because the safe withdrawal rate is the product of a mathematical calculation and it looks very bad when investors hear two wildly different reports as to the results of that mathematical calculation. Common sense tells us that something fishy is going on when different people make such wildly different claims for the result of the same mathematical calculation.

Thus, the friction generated by this “controversy” (there of course is no genuine controversy over what the numbers say — the historical stock-return data is public information and anyone who has ever gone to the trouble to check the data has found that Shiller is right that valuations affect long-term returns, at least in the 140 years of historical data available to us today) cannot go away without a resolution of the question of whether valuations really do affect long-term returns or not. I think it would be wonderful if as a society we could explore all of the amazing breakthrough insights that follow from Shiller’s research (I write weekly about these insights in my “Valuation-Informed Indexing” column at the www.ValueWalk.com site) and that only becomes possible when we open investing boards and blogs to honest posting on safe withdrawal rates and other critically important investment-related topics.

Pfau’s view is that it is possible that the Trinity authors did not intend to identify the safe withdrawal rate. He points out that the study uses the phrase “sustainable withdrawal rate” rather than “safe withdrawal rate.” I do not see the significance of this point given that the two phrases signify the same thing. A sustainable withdrawal rate is a safe withdrawal rate and a safe withdrawal rate is a sustainable withdrawal rate. I presume that “safe withdrawal rate” became the popular term because it is shorter.

Pfau also notes that the Trinity authors properly identify the withdrawal rate that has always survived historically. The problem with this argument is that the thousands of us who have expressed a desire that honest posting be permitted have been saying since May 2002 that the entire “controversy” could be put to rest in seconds if the Buy-and-Holders would be willing to refer to the number generated by the Trinity study (4 percent) as the Historical Surviving Withdrawal Rate (HSWR) rather than the Safe Withdrawal Rate (SWR). The Buy-and-Holders have been unwilling to consider this idea. If it were to become widely known that the Trinity study and the other Old School SWR studies report the HSWR rather than the SWR, the millions of investors who need to know the SWR to plan their retirements would lose interest in those studies. The SWR has great value as a planning tool. The HSWR does not.

John Greaney, the author of the Old School SWR study that appears at the www.RetireEarlyHomePage.com web site, has started a thread at the Motley Fool Retire Early board (honest posting on the subject of early retirement is no longer permitted at the board) suggesting that Pfau may be denied tenure because he has crossed Greaney by asking the authors of the Trinity study a question about their intent in preparing the study. The intimidation tactic is typical of Greaney’s behavior going back to the morning of May 13, 2002, when I put a post to that same board (at a time when honest posting on early retirement was not only permitted but encouraged) pointing out the analytical errors in the Old School studies.

The encouraging news is that, while in the old days, there would within a few hours have been scores of posts put forward by Buy-and-Holders endorsing Greaney’s intimidation tactics, in this case Greaney’s post has gone unanswered. This is how change happens. There’s a famous post by Ghandi in which he observes something to the effect (I am paraphrasing) that “first they ignore you, then they ridicule you, then they attack you, then they say that everyone knew you were right all along.”

I think it would be fair to say that Pfau’s suggestion that perhaps the Trinity authors had never intended to identify the safe withdrawal rate brings us to the “then they say that everyone knew that you were right all along” stage of this particular “battle.” Let’s all pray that the Trinity authors are able to work up the grace and courage to say something in response that pushes the ball even a little bit farther ahead.

Heaven help us all!

The Economic Crisis Is the Best Thing That Ever Happened to Us, and Seven Other Guest Blog Entries

by

Set forth below are links to eight Guest Blog Entries on the Valuation-Informed Indexing strategy and on the Passion Saving money management approach:

1) The Economic Crisis Is the Best Thing That Ever Happened to Us, at the Hope to Prosper site;

2) The Truth About the Shiller P/E, at the Bad Money Advice site (this article is about Valuation-Informed Indexing but was not written by me);

3) Valuation-Informed Indexing/Emotional Market Theory, at the Value Investing Congress Group at www.LinkedIn.com (this is a discussion thread);

4) Is Efficient Market a Theory, Hypothesis, Fact, Law or Notion?, at the Early Retirement Extreme Forum (this is a discussion thread);

5) Interview with Rob Bennett, at the Financial Odyssey site;

6) Why Are There No Ads Urging Us to Save?, at the Get Rich Slowly site;

7) Stock Crashes and Recessions Often Hurt Young Investors Most, at the Own the Dollar site; and

8 ) All Stock Price Drops Help You, All Stock Price Gains Hurt You, at the Online Investor AI site.

About

by

My name is Rob Bennett. My bio is here. You can also get a good idea about my background by reading the 80-plus quotes about me and my work that appear at the “People Are Talking” section of the home page of my blog (please look to the left-hand side of the page).

The story is that the true cause of the economic crisis was the reckless promotion of Buy-and-Hold Investing for 30 years after the academic research showed that there is zero chance that it can ever work in the long term. I wrote a Google Knol titled Why Buy-and-Hold Investing Can Never Work and another titled The Bull Market Caused the Economic Crisis. I also wrote an article titled The True Cause of the Current Financial Crisis Is Buy-and-Hold Investing.

The short form of the story is that the stock market was overvalued by $12 trillion in 2000. This is public information. All in the field acknowledge that stock prices over time revert to the mean (John Bogle calls this an “Iron Law” of stock investing). So those who were paying attention to valuations knew in 2000 that within 10 years or so close to $12 trillion of spending power would disappear from our consumer economy. An economic crisis became inevitable once we permitted stock prices to rise so high. We should tell people to lower their stock allocations when prices rise to insanely high levels both to protect their own retirements and to protect the general economy from collapse. We should encourage Valuation-Informed Indexing, described in a Guest Blog Entry I wrote for the Free From Broke site titled A Better and Less Risky Way to Invest in Stocks.

The real puzzle here is why there are not lots of good and smart people speaking up in strong opposition to Buy-and-Hold, given its dangers. The answer to that one is revealed in an article at my site in which I quote from 101 of my fellow community members who expressed a desire that honest posting on important investing-related topics be permitted at investing boards and blogs. Discussion of Valuation-Informed Indexing, the alternative to Buy-and-Hold, has been banned at every major board and at a good number of the most influential personal finance blogs. The bans came about as the result of brutally abusive smear campaigns (including death threats) led by people who have published studies or calculators rooted in the Buy-and-Hold Model. Most of the people who are aware of the dangers of Buy-and-Hold are afraid to speak up and self-censor themselves when talking about investing in public places. Thus, those who otherwise might be skeptical have wrongly come to conclude that there is no serious opposition to the concept.

Dallas Morning News Columnist Scott Burns spilled the beans in a June 2005 column he wrote about my showing that the numbers used by most financial planners to help us plan our retirements are wildly wrong. Burns observed that the reason why we see few media reports about the errors in the retirement studies even though they will cause millions of middle-class people to suffer failed retirements in days to come if they are not corrected is that: “It is information most people don’t want to hear.” The “experts” (who see themselves as being in the business of selling stocks, not of giving independent and accurate investing advice) encourage us to follow dangerous strategies, and, once we do so, we become so emotionally invested in the strategies that we become hostile to hearing the realities.

Many big names have seen the merit of the new investing ideas. Carl Richards, owner of Clearwater Asset Management and author of the Behavior Gap blog, told me: “I have read everything I can about Valuation-Informed Indexing, and I agree with you that Buy-and-Hold Passive Investing is extremely problematic… I value and respect the passion, hard work and research that you have put into this very important issue…. I think what you are doing has huge value.” Rahiv Sethie, a professor of economics at Barnard College, Columbia University said of me: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than Passive Investing over long horizons (ten years or more). I am not in a position to evaluate this empirically but it is consistent with Shiller’s analysis and I can see how it could be true.” Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, researched the question and learned that “Valuation-Informed Indexing provides more wealth for 102 of the 110 30-year periods” in the historical record. Bill Schultheis, author of The New Coffeehouse Portfolio exclaimed upon discovery of my web site: “Holy Toledo! This is great stuff!”

A calculator at my site called The Stock-Return Predictor will let you see with numbers why Buy-and-Hold is so dangerous. The calculator runs a regression analysis of the historical stock-return data to show the most likely 10-year annualized return starting from any of the various possible starting-point valuation levels. In 1982, the most likely 10-year annualized return was 15 percent real. In 2000, it was a negative 1 percent real. Given that the value proposition of stocks changes dramatically with big price changes, there is obviously no one stock allocation that can work for any investor at all times. Investors need tools like this to learn when they need to change their allocations.

I don’t think it should be too hard to understand why The Stock-Selling Industry desperately wants to keep tools like this out of the hands of middle-class investors. All industries would like their customers to believe that their product is worth buying at any possible price. But when too many become convinced that Buy-and-Hold can work, the insane level of overvaluation that follows causes an economic crisis (this has happened four times in U.S. history now — we have not since 1900 had an economic crisis that was not preceded by a time of insane stock overvaluation and we have not had a time of insane overvaluation that did not produce an economic crisis). There comes a point when marketing considerations need to take a back seat to preservation of our free market economic system, which cannot survive if all middle-class investors see their retirement savings wiped out (the historical data shows that we are likely to see another 65 percent price drop from where we stand today in the event that stocks continue to perform in the future anything at all as they always have in the past).

You also might want to check out a recent Wall Street Journal column in which Brett Arends says: “For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go…. It’s hooey…. They’re leaving out more than half the story.”

The tool that is used by those informed about valuations to predict long-term returns (short-term returns cannot be predicted — it is true that short-term timing does not work) is “P/E10”. The P/E10 value is the price of the S&P index over the average of the last 10 years of earnings. Yale Economics Professor Robert Shiller (author of Irrational Exuberance) has been showing with research for 30 years now that P/E10 can be used to effectively predict long-term returns. Arends pointed out in an earlier article that: “This ratio [P/E10] has been a powerful predictor of long-term returns” and that “valuations is by far the most important issue for investors.”

A graphic that compares the Year 20 Annualized, Real, Total Return v. the P/E10 that applied on the day the index fund was purchased is here. The same graphic for 10 years out is here. A graphic comparing how investors following a Buy-and-Hold strategy would have fared over the entire historical record compared with those following a Valuation-Informed Indexing strategy is here. Norbert Schenkler, the financial planner who prepared the graphic, concluded that: “The evidence is pretty incontrovertible. Valuation-Informed Indexing…is everywhere superior to Buy-and-Hold over 10-year periods.” The one exception found by Schenkler, the late 1990s, no longer applies since the onset of the stock crash (the graphic was prepared prior to the crash).

Shiller used the P/E10 tool to warn us of the economic crisis that began in 2008 in his book (published in March 2000). He said that in the event that stocks performed from 2000 forward as they always have in the past: “The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”

I’ve collected a number of quotes from leading experts in the field who have expressed grave doubts about Buy-and-Hold here. I’ve collected 20 studies showing that valuations affect long-term returns and that thus Buy-and-Hold can never work in the long term here. If you prefer taking in information by listening rather than by reading, I have recorded 200 podcasts addressing various aspects of the question. They are available for downloading here. I post updates on developments relating to this story daily at my twitter feed here.

Please contact me with questions or thoughts about how best to get the word out to millions of our fellow middle-class investors by sending me an e-mail at hocusreports@verizon.net or by giving me a call at 540-751-0685. I look forward to hearing from you, my new friend!

A Better and Less Risky Way to Invest in Stocks

by

I’ve posted a Guest Blog Entry at the Free From Broke blog. It’s called A Better and Less Risky Way to Invest in Stocks.

Juicy Excerpt: Let’s return for a moment to our discussion of cars and cameras and computers and comic books.  If you were in the car business and you had somehow persuaded millions of your customers that cars were worth buying at any price imaginable, would you want the word to get out that this was nonsense?

You wouldn’t.  You would want to keep the realities hushed up.  The academic research has been showing for 30 years now that valuations affect long-term returns.  The Stock-Selling Industry has continued spending hundreds of millions promoting Buy-and-Hold.  It’s a good deal for them.  Just not for you!

Juicy Question/Comment #1: I have seen your stuff for years and you have even guest posted on my blog years ago, but I don’t get why the passion. You think you have the answer (and I am not even disagreeing with you), why fight everyone? Why not just keep the idea quiet and make your millions off investing?

Juicy Question/Comment #2: I’m hearing you on a lot of fronts Rob (and I’ve seen where commenters will follow your work online just to dispute it), but is Buy and Hold really the cause of the economic crisis?

Juicy Question/Comment #3: Wow, Rob … that is definitely an intriguing post. You have really strong opinions on the matter for sure! I don’t think I’ve ever seen someone post several comments on a blog that are actually longer than their original article!

Juicy Question/Comment #4: I met Tom Gardner of the Motley Fool not long ago and he says getting around your emotions is one of the big obstacles in investing (or at least he said something similar to that). He also mentioned that one of the things that makes Buffett great (and Buffett says this too) is being able to control his emotions.

My Second E-Mail to John Bogle: “I Haven’t Been Banned at Any New Boards or Blogs for Six Months!”

by

Set forth below is the text of an -mail (with the subject heading “More Defamation/Intimidation/Deception at Bogleheads Forum)  that I sent to Vanguard Founder John Bogle a few moments ago:

John:

This is Rob Bennett, the fellow who has been pushing that crazy, newfangled approach to indexing (Valuation-Informed Indexing) that has caused our mutual friend Mel Lindauer and a few others to go off their rockers in recent years.  I wrote you on July 9, 2009, asking for your help with the problem of abusive posting employed at the Bogleheads Forum to discourage community members there from making an effective case pointing out the dangers of Buy-and-Hold Investing (and to get those who don’t pay heed to the warnings removed!). I believe that the time has come for a follow-up report.

The problem has gotten both a bit better and bit worse in the time since. It has gotten better because the stock crash and the economic crisis have helped many middle-class investors appreciate the dangers of Buy-and-Hold (if you do not today possess a good understanding of why Buy-and-Hold is the purest and most dangerous Get Rich Quick approach ever, I invite you to read the material at the links set forth in the blog entry referred to below or to send me a return e-mail asking any questions you are struggling with re this matter). I haven’t been banned at any new boards or blogs for six months now! We are gradually seeing the changes we need to see to take your many powerful insights to a far better place that we have been able to take them in earlier days.

However, things have also gotten worse as those who have participated in defamation and deception and intimidation and word games in “defense’ of Buy-and-Hold have become even more defensive as it has begun to hit them how much financial damage they have done with their advocacy of this now-discredited but once very promising idea (fated to achieve its promise as we all move together to the Valuation-Informed Indexing Era, to be sure).

The optimistic and pessimistic signals recently met in one strange Bogleheads thread reporting on exciting research by Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, showing that Valuation-Informed Indexing beat Buy-and-Hold in 102 of 110 30-year periods. That of course is breakthrough stuff that we should all be working together to spread to every middle-class investor alive. The crazy, insane, sad, pathetic part of the thread (about half of the posts put forward rationalizations for not doing all we can to get this wonderful news out to middle-class investors as quickly as possible), is summed up in the words of a post put forward by Site Administrator Alex Frakt.

Here are Fract’s words: “We’ve had to remove a couple of comments and posts from this thread regarding Rob Bennett. I have been in contact with the OP offline and he is now fully aware of hocus’ modus operandi, so there is no further need for these posts. Let’s continue to keep this forum a hocus-free zone. P.S. For anyone confused by this message, I suggest googling “hocomania.'”

Huh?

And — Yucko!

We need your help, man! Really!

We need it now. By the close of business today if at all possible!

I wish you luck in all your future endeavors and look forward to working with you to bring your many wonderful and powerful insights from earlier days to fruition as we move from the discredited Buy-and-Hold strategy to the investing model that we all know you would have put forward in the first place if only Shiller’s research showing that valuations affect long-term returns had been available to you back in the 1970s.

Take a sad song and make it better, John. Please?

Here’s a link to my blog entry reporting on Frakt’s words (there are 12 links to background materials contained therein):

http://arichlife.passionsaving.com/2011/01/25/site-administrator-alex-frakt-doubles-down-on-defamationintimidationdeception-strategy-at-bogleheads-forum/

Rob

Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies: Valuation-Informed Indexing Works

by

Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has posted at his blog preliminary research showing that Valuation-Informed Indexing works.

Juicy Excerpt #1: I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.

Juicy Excerpt #2: I don’t like the term “long-term market timing.”  Market-timing is much too pejorative, and is also too easy to confuse with short-term market timing.  Also, market-timing seems to be associated with extreme strategies: either 100% stocks or 100% Treasury bills.  I don’t like that either.  I think the best term for this is “Valuation-Informed Indexing.”

Juicy Excerpt #3: Valuation-Informed Indexing [is] a term coined by Rob Bennett, who is banned from posting at the Bogleheads Forum.

Juicy Excerpt #4: Rob Bennett in his podcast “RobCast #137, Nine VII Portfolio Allocation Strategies,” indicates some preference for his high-medium-low strategy, which would be 60% stocks in the baseline, but would switch to 30% stocks when the PE10 ratio moves above 21, and would switch to 90% stocks when the PE10 ratio moves below 12.  My example will be a variation of this strategy that captures the spirit of what he suggested.

Juicy Excerpt #5: What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following buy-and-hold against someone following VII…. VII provides more wealth for 102 of the 110 rolling 30-year periods, while buy-and-hold did better in 8 of the periods.

Juicy Excerpt #6: The underperformance of VII [in the eight cases] is minimal…. In these final years, buy-and-hold was performing as well as it ever had at any point since 1880, and the slightly lower VII numbers also provided wealth that was on the high end of the spectrum compared to what buy-and-hold had provided in the past.  This seems like a small price for VII to pay for insurance against market crashes when valuations are out-of-control.

Juicy Excerpt #7: I welcome your comments and criticisms about this.

“Sure, He [Shiller] Does Support Value-Informed Indexing”

by

Set forth below are comments that were posted by Azanon to the blog entry titled “Does Shiller Endorse Valuation-Informed Indexing?”:

Sure he does (support value informed indexing). I’ve watch all of the Yale lecture series of his economics class that are available for free on the web, and it is painfully obvious that Shiller endorses the concept of considering valuations, the current “animal spirit”, and the degree of irrational exuberance in place at any given time. He is constantly being interviewed to access the real estate market and its future direction.

If he feels all of these things can be intelligibly accessed, then certainly he would support the idea of making portfolio adjustments based upon market climate, not just upon one’s age or risk tolerance.

Rob, “value informed investing” is not as shunned as I think you believe that it is. I have read 100s of articles during my adult years with topics accessing whether various stocks, sectors, the (U.S.) market in general, or world markets are under or overpriced which often include suggestions to move into or out of the topic of discussion. The concept in general is practiced as least as often as buying-and-holding (in theory).

Outside of theory, true buy-and-holding is EXTREMELY rare. I can’t say that I know a single individual that has maintained a pre-defined buy-and-hold allocation which survived both the 2000 crash and the 2007 crash, without either one of these events compelling them to do something different (in other words, fail at buying and holding).