Value Indexing

Wade Pfau Posts More New School Safe Withdrawal Rate Research

December 28, 2011 by Rob

Wade Pfau, associate professor of economics at the National Graduate Institute for Economic Studies, has published additional New School safe withdrawal rate research. The new study is titled Withdrawal Rates, Saving Rates and Valuation-Based Asset Allocation.

Juicy Excerpt: While most everyone would agree that valuations matter, the question remains as to whether clients with a long-term outlook (such as those planning for retirement) can hope to act successfully on information about valuations. This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies.

Financial Highway Article #4 — What Other Bloggers Think of Valuation-Informed Indexing: Part Two

November 16, 2011 by Rob

I’ve posted #4 in my series of articles at the Financial Highway site. It’s called What Other Bloggers Think of Valuation-Informed Indexing: Part Two.

Juicy Excerpt: The articles link to and quote from blog entries discussing Valuation-Informed Indexing in an intelligent way (and in some cases to my responses to those articles). The bloggers who wrote these articles do not necessarily endorse Valuation-Informed Indexing or believe that Buy-and-Hold needs to be replaced. They believe that Valuation-Informed Indexing possesses enough potential appeal that we all should be comparing the two models and over time coming to reasoned conclusions as to what is the best path for the future. Part Two also contains links to discussion-board threads on Valuation-Informed Indexing hosted at the Bogleheads Forum.

What Bogle Says About Valuation-Informed Indexing and Seven Other Guest Blog Entries

October 6, 2011 by Rob

Set forth below are links to Guest Blog Entries I wrote dealing with the Valuation-Informed Indexing strategy and to discussion-board threads relating to the new stock investing approach:

1) What Bogle Says About Valuation-Informed Indexing, at the Balance Junkie site;

2) How Has Buy-and-Hold Survived So Long?, at the Hope to Prosper site;

3) How to Change Your Stock Allocation in Response to Valuation Shifts, at the Free From Broke site;

4) Predicting Stock Returns for Fun and Profit, at Barbara Friedberg Personal Finance;

5) The Magic (and Limits) of Using Historical Data to Guide Your Investing Decisions, at My Personal Finance Journey;

6) The Pros and Cons of Valuation-Informed Indexing, at the Bogleheads Forum;

7) Discussion of Associate Professor Wade Pfau’s Research Showing That Valuation-Informed Is Superior to Buy-and-Hold, at the Bogleheads Forum; and

8 ) Discussion of Associate Professor Wade Pfau’s Research Showing That Investors Who Engage in Long-Term Timing Obtain Higher Returns While Taking on Reduced Risk, at the Bogleheads Forum.

1) Invest it Wisely Article;

What Bogle Says About Valuation-Informed Indexing

September 23, 2011 by Rob

I’ve posted a Guest Blog Entry at the Balance Junkie site called What Bogle Says About Valuation-Informed Indexing.

Juicy Excerpt: The purpose of this post is to describe and comment on Vanguard Founder John Bogle’s views on Valuation-Informed Indexing. Bogle is widely recognized as the primary advocate of Buy-and-Hold alive on Planet Earth today, as I am the primary advocate of Valuation-Informed Indexing. The surprising truth is that, despite common misperceptions, the two of us are not all that far apart in our investing views!

Juicy Comment #1: To me, Bogle’s remarks are cryptic and vague. It does him injustice to speculate what he is really thinking. Would he not be interested to explain these remarks more fully if asked?

Juicy Comment #2: Regarding some ‘buy and holders’ with whom I have engaged they don’t necessarily completely practice what they preach. They do in fact take advantage of market downturns to time their rebalancing of their asset allocations and when confronted they get angry and say it’s just common sense!

Juicy Comment #3: I don’t think I’m smart enough to know when stocks are at fair value and when they’re at double fair value.

Juicy Comment #4: VII is as much John Bogle’s creation as it is Rob Bennett’s creation. All I did to develop VII was to take Buy-and-Hold and drop out the Get RIch Quick stuff (Bogle did not know it was Get Rich Quick stuff at the time he adopted it because the research showing this had not yet been done at the time). VII is going to permit all middle-class investors to retire five to ten years sooner than they can hope to today. It is a huge advance. And Bogle is going to get a huge portion of the credit for it. I am going to see to it.

Juicy Comment #5: As you note, even the Buy-and-Holders see that Buy-and-Hold does not jive with common sense. So, just as you say, they make a million exceptions to the “rules” of the Buy-and-Hold approach. You’ll note that Buy-and-Holders never object to people who don’t follow the rules. It doesn’t bother them. Why? Because those people are not pointing out that there are no studies. So they represent no threat. It’s the people who take Buy-and-Hold seriously and ask to see the studies that are trouble.

The Bogleheads Forum Discusses the Pros and Cons of Valuation-Informed Indexing

September 2, 2011 by Rob

The Bogleheads Forum has been discussing the merits (or lack thereof) of Valuation-Informed Indexing again.

The discussion is wildly imbalanced. The Bogleheads Forum was created to permit Buy-and-Hold advocates in that community to escape the Morningstar Forum, where honest posting on Valuation-Informed Indexing was permitted for two years. Those discussions were some of the best investing discussions we have ever seen on the internet (a good number of those who were trying to defend Buy-and-Hold from the challenges put to it do not agree, to be sure). The first action taken upon formation of the new forum was to ban honest discussion of Valuation-Informed Indexing. So those listening in to that thread are obviously not getting to hear both sides of the story.

That said, there are lots of smart people in the Bogleheads community and there are some positive as well as negative comments contained in the thread. That’s to the forum’s credit. Also, some of the negative comments are worthy of consideration. You want to explore the pitfalls of a strategy before adopting it. There’s no place where you are more likely to hear a well-crafted criticism of Valuation-Informed Indexing than at the Bogleheads Forum.

Juicy Excerpt #1: You say “You’re right, you are smart and I admire you and you are a sharp dresser. Indexing is great. And we like it so much that we’ve developed something much better than that moldy old indexy indexing. It’s…. active indexing, yeah! It’s Indexing Plus! Or Indexing-X-Treme! Or enhanced indexing or fundamental indexing. It’s indexing, but it’s better! And because it’s better, and only we have it, we get to charge high fees….”

Juicy Excerpt #2: A lot of people on this Forum are skeptical of valuation-informed allocation. I am in the minority. I recently revised my IPS to take into account valuations of both stocks and bonds when making allocation decisions. The algorithm I use is very simple.

Juicy Excerpt #3: Notice that even if he were right that indexing is not the best strategy, it would not follow that his own specific strategy is better. Differences in opinion is what makes horseracing, and difference in opinion on valuation is what makes the stock market. The case against “valuation-informed” anything is that it is hard to value assets correctly. Even in the year 2000, people were arguing dead seriously that Stock Prices Are Still Far Too Low. I just don’t believe that a few simple rules based on numbers that are easily available to everyone will substantially improve your risk-adjusted returns.

Juicy Excerpt #4: To RB’s credit, I’d love to see even an incoherent 18-point list titled, “The Case Against Pyramiding Up”

Programming Note: The blog will return on September, 12. Goodbye, Summer of 2011!

Valuation-Informed Indexing #55 — The Four Proofs

August 17, 2011 by Rob

I’ve posted Entry #55 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Four Proofs.

Juicy Excerpt: If the New York Yankees beat the Boston Red Sox in 102 of 110 match-ups, we would not say that the Yankees were experiencing a lucky streak. We would say that the Yankees possess superior pitching or superior hitting or perhaps both. The entire historical record of stock investing in the United States shows that Valuation-Informed Indexing is superior to Buy-and-Hold. That’s not opinion. That’s objective fact.

Valuation-Informed Indexing vs. Passive Investing: Which Is Better?

June 10, 2011 by Rob

Jacob at the My Personal Finance Journey blog has posted a blog entry tiled Valuation-Informed Indexing vs. Passive Investing: Which Is Better?

Juicy Excerpt #1: While Valuation-Informed Index Investing may have outperformed passive investing in most previous historical periods, evidence of it not performing as well in recent years is enough to keep me as a passive investor, at least until VII is refined.

Juicy Excerpt #2: Valuation-Informed Index Investing has great potential because it greatly reduces the risk to investor returns. Even though VII failed to outperform passive investing in my analysis, it also provided much less risk, as evidenced by the sharp decrease in standard deviation of the portfolio value over time. For example, VII Portfolio 1 provides a slightly lower return of 185% over the time period analyzed (compared to the passive investing portfolios). However, the portfolio also has 34%, 55%, and 21% less risk (standard deviation of portfolio value) compared to the 60/40, 75/25, and 50/50 passive portfolios, respectively.

Juicy Comment #1: If there is someone reading these words who has the ability to bring this post to the attention of John Bogle, I think it would be a huge plus if he or she would let him know about it and would ask him if he would be willing to comment. Bogle said in an interview with Index Universe that he believes that Valuation-Informed Indexing can work. It would be a huge step forward if he would provide us with a more detailed statement of his thoughts about the concept.

Juicy Comment #2: Bogle has said that Valuation-Informed Indexing can work. That leads me to believe that I AM a Passive Investor. But I am banned from posting at the Bogleheads Forum. I think it is fair to say that that would cause many to conclude that I am NOT a Passive Investor.

The Good Side of Stocks’ Lost Decade and Seven Other Guest Blog Entries

May 7, 2011 by Rob

Set forth below are links to eight Guest Blog Entries that I wrote on the Valuation-Informed Indexing strategy:

1) The Good Side of Stocks’ Lost Decade, at the Consumerism Commentary blog;

2) Six Dangerous Investing Myths, at the Barbara Friedberg Personal Finance blog;

3) How To Use Valuation-Informed Indexing: Part One, at the Balance Junkie blog;

4) How To Use Valuation-Informed Indexing:Part Two, at the Balance Junkie blog;

5) Retirement Planning As If Valuations Mattered, at the Retire Happy! blog;

6) The No-Stock Portfolio: Zero Stocks for 15 Years and Doing Fine!, at the The Digerati Life blog;

7) Long-Term Trend Investing, at the Stock Trend Investing blog ; and

8 ) What If Everything You Thought You Knew About Stock Investing Turned Out to be Wrong?, at the Free Money Wisdom blog.

How to Use Valuation-Informed Indexing — Part One

April 11, 2011 by Rob

I recently posted a Guest Blog Entry at the Balance Junkie blog titled How to Use Valuation-Informed Indexing — Part One.

Juicy Excerpt: There is one important factor that can never be priced in to your purchase of an index fund — overvaluation. To overvalue a fund is to misprice it. Mispricing by definition can never be factored into the price you pay and must be considered separately.

Say that you pay two times the fair price for an income stream of 6 percent real. You obviously are not going to obtain an income stream of 6 percent with that purchase. Your return will not be $6 for each $100 you spend but $6 for each $200 you spend. Your income stream will be 3 percent real.

If you pay three times fair value (stocks were priced at three times fair value in the United States in January 2000), your return will be $6 for each $300 you spend. That translates into an income stream of 2 percent real.

If you pay one-half fair value (U.S. stocks were priced at one-half fair value in January 1982), your return will be $6 for each $50 your spend. That translates into an income stream of 12 percent real.