If Buy And Hold Doesn’t Work… Then What?

Since you’ve now read my treatises on Investor Psychology and the Flaws of the Efficient Market Hypothesis, we’re finally ready to discuss what we originally set out to discuss – how to improve on buy and hold investing, Rob Bennett’s controversial ideas on “valuation informed indexing“, the concept of the safe withdrawal rate, and the state of buy and hold investing.

How Can Buy And Hold Investing Be Improved?

As you know, buy and hold investing has its roots in the Efficient Market Hypothesis, an idea that currently quoted prices of securities perfectly reflect the actual valuation of stocks, bonds, and other assets.  To sum it up in a single phrase, they suggest that “if you can’t beat them, join them”.  With buy and hold investing, you accept the market’s returns, minus some small cost for management fees and transactions.

Graph of price to earnings averaged over 10 years versus subsequent returns

P/E10 vs. 20 Year Returns (Wikipedia)

In most cases, unless you are willing to put the time in to learn about valuation of individual stocks and all of the other knowledge that comes along with it, buy and hold is a great idea for the vast majority of investors.  In fact, only high information investors with a mechanical buy/sell system should even consider leaving the relative safety of the buy and hold arena.  As I stated in the last article – the vast majority of individuals (and 2/3 of mutual fund managers!) underperform the market.

However, what if you could take the low time investment of passive investment, and combine it with some sort of valuation metric which gives a decent idea of how to allocate between two asset classes?  For example, say you normally split your investments with 60% stocks and 40% bonds and fixed income.  If stocks can be shown to be somehow undervalued,could you increase this to 70/30 or 80/20?  How about if stocks looked overvalued – could you reduce your holdings in stocks and increase your holdings in bonds?

What if you did this across multiple asset classes – looking at the valuation of that asset versus a historical valuation, and under or over-weighting that asset in your portfolio by extension?  Well, at the risk of boring the low-information investors by applying too much thought to this method – there has to be something to this.

Nearby, you’ll find an application of Robert Shiller’s (who is more well known for applying valuation to real estate prices in the Case-Shiller index) method of taking the price to earnings ratio of the S&P 500 over the previous ten years and graphing it against subsequent returns.  You’ll note that as P/E10 increases, average returns for the S&P 500 fall, with better returns coming with lower valuations.

Valuation Informed Indexing

Enter Rob Bennett and John Walter Russell’s Valuation Informed Investing, or VII.  Russell, before his death, released a chart which showed the coefficient of determination (square of the correlation) of 10 year returns and PE/10 having a (somewhat high) .47.  For reference, a value of 1, or 100%, would mean two values perfectly track each other, while a value of 0 would mean no relation.  To give one example, the Vanguard ETF [[VV]] attempts to track the MSCI US Prime Market 750 Index.  It’s R-squared is 99.92%, implying that the two move in almost absolute lockstep.

So even though P/E10 isn’t as predictive as say an ETF tracking an index, it seems to have decent predictive powers.  We have to ask one more thing: are the variables related?  The fallacy we are worried about is post hoc ergo propter hoc – basically, saying that a correlation doesn’t automatically prove a relationship.  (Read more on fallacies in investing here).  However, my personal belief is that value methods have proven themselves to be a rather reliable indicator of future returns – even if they don’t eventually move markets with absolute predictability.

So, in essence, VII uses this P/E10 (and usually on the S&P 500, where the most research has been done) to decide when to invest in the S&P 500, and when to move to safer assets.  Wade Pfau, writing for the National Graduate Institute for Policy Studies, evaluated a mix of 100% stocks or bonds using a methodology originally advanced by Fisher and Statman in 2006.  He showed that yes, using a P/E10 of 16.4 (historic median) to set 100/0 stocks/bonds or 0/100 stocks bonds outperforms buy and hold investing over the long run.  Other research by Pfau and Robert Shiller seems to point to a few valuation methodologies which can, surprise, surprise… beat buy and hold (100% stock holdings) even when using the traditional CAPM models for risk.  Of course, note that if you are anywhere close to retirement (even using buy and hold) you should move to a less extreme allocation of stock (like 60/40 or 50/50 split with fixed income investments).

Safe Withdrawal Rates

Rather than rewriting a great piece of financial writing, I’d direct you to fellow financial writer Todd Tresidder’s writing over at The Financial Mentor.  Todd has already written up a post on the history of safe withdrawal rates, and you would be poorly served by me duplicating the tremendous effort he undertook.

The key points of his article are that the “Magic 4%” withdrawal rate that most financial advisers quote is bunk, and is likely only valid for American portfolios due to a confluence of good luck over the last couple of centuries in America.  I’d tend to agree here – he cites Wade Pfau heavily in the article, and Pfau even posted this example of safe withdrawal rates for another first world economy over the last century – Japan.

Remember, all of the ideas we just explored don’t just inform our asset allocation – they also can be used to predict what a safe withdrawal rate is when you are drawing down your retirement funds and savings.  Your biggest risk in retirement is outliving the resources you have acquired, so you want to know how much you can take out early in retirement so you don’t have to cut back drastically near the ‘end’.  A good place to look to get an idea of your ‘length’ of retirement is on the Social Security Actuarial Life Table, which will give you the odds they expect you to live a certain length of time based on your age.  Your mileage (or age!) may vary…

If all of this research is to be believed, you should consider valuations when you go to take out funds in retirement.  If stocks are insanely overvalued, you might be better served by both switching from stocks and taking out less than the so-called magic 4%, while if they are undervalued you might find yourself able to take out a lot more.

Other strategies which might make sense?

  • Set a minimum withdrawal percentage, say 1.5 or 2.0%.  Only increase it if your total funds lost with withdrawal are less than some benchmark, say 6%.  Your funds may drop 10% one year, so you only take out 1.5%.  Another year, they increase 10%, so you take out 4%.  They drop 2.5%?  You take out 3.5%.  Rinse and repeat.
  • Take out a percentage of current funds.  The 4% number is only a risk if you base it on your original funds and the market drops.
  • Recognize the 4% number, and go with something less – like 3.  Note that 4% implies you need to save 25 times your annual draw.  3%?  33.3 time.  So this method means small movements towards conservatism mean massive increases in resources are needed.

The State of Buy and Hold Investing

Shots are being fired across the bow of the buy and hold ship, but many people… the low information investors for certain… should probably continue to sit tight and monitor the developments.  In extreme conditions – like really frothy valuations and insanely cheap stocks, maybe you should consider shifting away form or towards more stocks in your portfolio.

For the high information investors?  You should probably read as much on these topics as you are comfortable with.  Those of you with ETFs and mutual funds, you should start to fold these concepts into your methodology and start to watch the overall valuation of stocks in your portfolio.  Those of you who deal strictly with individual stocks should already have implemented some style of valuation to your buy and sell decisions.

I’m curious to dig into some methods of evaluating the entire market – P/E10, regular price/earnings, dividend yield, earnings expectations, even implied closing prices (my specialty!) or some combination thereof (or something not mentioned here).  Perhaps if all of this is interesting or controversial enough, I’ll do some of my own informal studies as well, and try to figure out if some are better than others.  I’m hoping it is.

What do you think of all of this information?  Are you reconsidering your style of investing?  Are you going to use valuation to determine the allocation of your mutual funds?  How do you think age should factor into your allocation?


  1. says

    Good article, PK.  There is much about conventional wisdom that needs to be turned on its head.  Our plan is not to be in full retirement, but partial retirement supplemented by consulting income and more production on the home front.  I’d get nervous with a 4 percent withdrawal rate.

    • says

      Thanks! My co-writer Cameron hates this series (Bryan couldn’t be reached for comment), so I know it’s a good one.

      If anyone is productive on the home-front, it’s you. I only wish I could do half the stuff you do in my California yard, haha.

  2. says

    I don’t want to turn this into a 4% SWR discussion, but it should be pointed out that I would be comfortable, if retiring today on a 4% SWR AND I only expected to need the money for 30 years (which is the span of time Bengen et al based their research on).  E.g. I was 60, expected to kick the bucket by 90.  This of course assumes SS is in place and as Dr. Pfau shows on his blog, spending may even decrease with age.  But, if I bowed out of the work thing at 45, I definitely wouldn’t be comfortable with 4% (some exceptions apply).  But, all that is another conversation.

    My problem with valuations is they are relative.  There is no basis for them.  P/E of 10 may be all the rage one year and the next it may be 40.  Or why do some industries have “acceptable” P/E many times different than others?  And why do those change with time?  Then we start talking about beta and EPS and growth per share etc.  All of which I am fully aware of, but I have yet to find predictable, consistent way to beat the market, net of fees. 

    When I was a kid, it was deemed that I had a birth defect in my right arm.  The doctor had some big cool phrase for my problem after looking at it for all of 30 seconds.  The family and I dubbed the issue with my arm “idiopathic” which was the first fancy word in the big chain of words the Dr had diagnosed my arm to have.  A few years later, to our dismay, we found out idiopathic is latin for “I don’t know what the hell is going on” and found the high dollar amount we paid to see the Dr for a few minutes was then a rip off.

    So, when you talk about valuations, use those esoteric words and phrases, talk confidently, speak quickly, but not too rushed, don’t stammer, and practice what you will say.  For that is how you sell something. 

    Putting all the theories aside (who cares if EMT is fully relevant, partially relevant or just babble), the fact remains, very few of the best and brightest Wall St finds can put together consistent returns above the market year after year after year net of costs/fees.  And for us, picking those “winners” has to be done ex ante, so there is no real way of knowing if they are skilled (long term performance/less likely) or they are lucky for a few years.

    I’ve done the valuation thing, I’ve tried to beat the market and I have failed.  I am far from the best and brightest Wall St hires, but I am still not stoopid.  My experience has shown, “passive investing is more simple and less risky”.  -Bichon.       

    • says

      You mean like Irritable Bowel Syndrome, Sarcoidosis, Fibromyalgia, Chronic Fatigue Syndrome and my personal favorite, Colic in babies? I’ve also got a family member with MGUS – “Monoclonal Gammopathy of Undetermined Significance”. Three cheers for the Diagnosis of Exclusion? Well, they’re all in the ICD, I guess…

      I’m with you – not knowing if PE10 is the right way, but suspecting that, if I’m going to check valuation, it’s not going to be with the PE10. It does seem completely arbitrary – “Well, we have data going back to 1926, so let’s draw the line at the average since then!” or whatever. Not to mention, it’s sort of a new valuation, so who’s to say that the market won’t start to discount PE10 and make it the average? As I point out sometimes – if everyone does something it becomes the average.

      I also don’t like the esoteric terms, but I think both sides are trying to use them, haha. “Efficient Market Portfolio” and “Capital Asset Pricing Model” vs. “Valuation Informed Indexing” and SWR instead of “Safe Withdrawal Rate”. I guess it’s just when someone joins a camp they start to pick up terms which they assume the average person should know, when that definitely isn’t the case.

      So, passive investing/buy and hold is probably the right path for most people. Note that my cowriter and I have been arguing about this all week, so you should get a response from him (and I might even audit my trades since 2009 here) soon.

      “Thanks for suffering through this three part series!” – PK

    • says

      Just to interject one thought about mutual funds and performance. I think it’s important for investors to recognize that managers have to have at least 20 securities in a mutual fund. Finding 20 companies that are worth holding is an effort all it’s own – I would say managers would more more likely to outperform is they could concentrate holdings in 10 major positions rather than 50 or 40, or even the possible legal limit of 20. (No security can make up more than 5% of a portfolio.)

      • says

        And to interject another point, I would argue that holding fewer than 40-50 securities exposes one to unsystematic risk (in the hopes of being “un”-esoteric, risk which can be mitigated through diversification).  You are not rewarded well for taking on this kind of risk since it is easy to protect one’s self from it through diversification. 

        What number of securities makes someone diversified?  I dunno.  I’ve seen research showing 40-50.  Does that mean 39 is a bad number? probably not.  Or buying the top 40 oil companies is diversifying? no.  10 or 20 would make me nervous.  I’m more comfortable in the 40-50 range (but I prefer Vanguard Total Stock Market).

        “Absorbing unsystematic risk is unnecessary.” -Bichon   

        • says

          So – analyze stocks, but buy so many that you cannot greatly outperform the market. That doesn’t make sense. Once you’ve done that, you might as well index. 

          • says

             JT.  There are certain things in this world I have no control over.  Not being compensated for taking on unsystematic risk is one of them.  Like it or not, one is not rewarded for taking on a risk that is easily done away with. 

            So yes, you have drawn the same conclusion I have, you might as well index.   

          • says

            No, my conclusion is that I would prefer to run the risk of a few losers compromising a large part of my portfolio than to put a large part of my portfolio in companies that are losers.

    • says

      My problem with valuations is they are relative.  There is no basis for them.  
      Buy-and-Holders have the idea that staying at the same stock allocation at all times is a neutral choice. So they view any moves away from that choice as dangerous.

      My question is — What makes staying at the same stock allocation the neutral choice?

      Bogle is the king of Buy-and-Hold. Bogle says that his most important piece of investing advice is that investors must always seek to “Stay the Course.” Stocks MUST be more dangerous when they are priced at three times fair value than they are when they are priced at one-half fair value, right? So how could it be said that investors who are at the same stock allocation in both sets of circumstances are “Staying the Course”?

      It seems to me that investors give up any hope of Staying the Course on the day they become Buy-and-Holders. Staying at the same stock allocation is not a neutral choice. In the event that the riskiness of stocks changes with shifts in valuation levels, staying at the same stock allocation at all possible valuation levels is a dangerous choice. It might work for awhile. But then it might fail spectacularly.

      My aim is to stay at the same risk profile at all times. I agree with Bogle that the key is to Stay the Course. To do that, I feel that I MUST be willing to change my stock allocation in response to big valuation shifts.

      My idea is that there is no “basis” for the idea that staying at the same stock allocation at all times is a neutral or good or reasonable choice. My view is that Buy-and-Hold is a marketing gimmick. It sounds kinda sorta plausible on first impression. But, when you think about it a bit, you see that the logic just doesn’t add up. Buy-and-Holders are free in their criticisms of other strategies. But they never apply their skepticism to their own favorite strategy.


    • says

      very few of the best and brightest Wall St finds can put together consistent returns above the market year after year after year net of costs/fees.
      We are not talking about an intellectual issue here. We are talking about an emotional issue. That’s the disconnect.

      Buy-and-Holders are uncomfortable talking about emotions. They are comfortable talking about studies and numbers and graphics. What if investing is 80 percent an emotional game?

      Buy-and-Holders deny the effect of emotions. All of their ideas are rooted in an assumption (NOT a finding!) that investors are rational. What if they aren’t?

      Valuation-Informed Indexers acknowledge emotion for the purpose of avoiding its effects. By accepting that emotions/mispricings matter, we are able to steer around the dangers they cause. 

      Buy-and-Holders agree that investor emotion is a bad thing. But by denying it rather than coping with it, they make investor emotion 20 times more powerful a force than it would be if they would just acknowledge its great power.

      Emotions count. Emotions matter. All the studies and graphics and numbers in the world don’t make them go away. I mean no personal dig at my Buy-and-Hold friends when I say that I believe that they are fooling themselves. I believe that the reason why Buy-and-Holders are so afraid to discuss these issues is that on some level of consciousness they wonder if the points made by Shiller are very much on the mark.

      Buy-and-Hold investors are frightened and defensive investors trying to keep the bogeyman at bay by pretending that they have it all figured out. They possess bravado, not true confidence.


  3. says

    Another awesome analysis. I do think that VII would probably be too complicated for someone like me, who would be considered a low information investor. I still think we are in for at least one more plummet, so I’m going to stay away from all of it until Europe gets ahold of itself.

    • says

      There’s no shame in buy and hold – and I think some of the attacks are pretty unfair. You’ve got a strategy there you barely ever have to think about, and has served investors well for at least 50 years. Sure, those years were particularly good. But hey, that’s a pretty good track record, regardless.

      • says

        You’ve got a strategy there you barely ever have to think about, and has served investors well for at least 50 years.
        I would date the popularity of Buy-and-Hold to the 1974 publication of A Random Walk Down Wall Street. That’s 38 years.

        Stocks were priced to give strong long-term returns from 1974 through 1995. So anything positive that is said for Buy-and-Hold re those years must also be said for VII. The two strategies put you in the same place for those years.

        It is only from 1996 forward that the two strategies have recommended different allocations. From 1996 forward, VII is ahead. I don’t say that is absolute proof. But if we are going to say that Buy-and-Hold has a good track record, I think we have to note that VII has an even better track record over the same time-period.


        • says

          There’s no shame in buy and hold – and I think some of the attacks are pretty unfair.
          If you come to believe that Buy-and-Hold was the primary cause of the economic crisis, as I do, I think you might come to see the shame in it, PK.

          It’s an objective fact that the market was overpriced by $12 trillion in 2000. It’s also a fact that even John Bogle acknowledges that stock prices Revert to the Mean (Bogle calls this an “Iron Law” of stock investing) over the course of about 10 years. So we knew in 2000 that $12 trillion of consumer spending would be leaving our economy by late in the first decade of the 21st Century. 

          I think it would be safe to say that the odds of an economic crisis were at least 95 percent once we reached those valuation levels. Such valuation levels are a logical impossibility in a VII world (because high prices always bring on sales, which lower prices).

          Shiller predicted the economic crisis. So did I. So did Andrew Smithers. So did Rob Arnott. So did Jeremy Grantham. So did all others that I know of who believe that valuations matter.

          Again, it is not my intent to be argumentative and you of course are 100 percent in the right to express your sincerely held view that some of my criticisms of Buy-and-Hold are unfair. I just want to let you know that my intent is to be fair while also being honest.

          I have great admiration and respect for the Buy-and-Holders. I learned that the Old School safe withdrawal rate studies get the retirement numbers wildly wrong by reading Bogle’s book. There would be no Valuation-Informed Indexing today if the Buy-and-Holders had not laid the foundation for it in earlier times. 

          So there is no animus toward the Buy-and-Holders in me. My take is that I am trying to do today what Bogle was trying to do when he started out. He wanted to develop an investing strategy rooted in the academic research. I think that was a wonderful, breakthrough idea. The message of the research changed dramatically in 1981. I think we need to change the strategy to reflect the new research. No one else has done the job. So I figured it has been left to me to get the job done.

          Anyway, I am extremely grateful to you for all the work you put into this three-part series. I consider you a friend. I hope you take no offense to any of my comments. Certainly none is intended. I think you have done a wonderful job of trying to get some new questions on the table and that you have been fair and warm and kind to all while doing so. My hat is off to you, my new friend.


          • says

            Rob, call me old fashioned, but I think Real Estate speculation was the bubble causer and popper, not buy and hold. Any stock invested strategy got smacked in the downturn – except ones that said buy on the way down.

            I’m not sure you could say there was $12 trillion in excess liquidity in the stock markets in 2000. Sure we had back to back bubbles, but GDP is higher now – on a real and nominal basis – than 12 years ago. That’s the wacky thing about cash and credit – it seeks the highest returns. We have abnormally low interest rates to blame for the crash as much as we do any other factor – any time the government is forcing liquidity and spending you’ll see a flight to the highest paying assets no matter the risk.

            And I do think you have a point… and maybe I’m just pessimistic, but I’d rather that people captured the greater returns already available to them with B&H before juicing them. I invested for years in mutual funds before I ever touched an individual stock. I wanted to make sure I knew ‘enough’ to not be caught off-guard by the market, and I’ve still made mistakes. Most people aren’t as interested in the market as I am, and I just wonder how easy would be for them to use value, considering how most people invest.

            No worries on the three part series, I just have to back up my assertions with my returns next week (as an individual stock evaluator!). No offense is taken, and even if you meant offense, which I doubt, I tend to have very thick skin, haha. I know you’ll continue to advocate for VII, so I hope you subscribe to the idea of “steel sharpening steel” and fold some of my concerns into your new work. Feel free to keep commenting – although, to be honest, I’d prefer if you kept it in a single comment because it’s easier to read, haha.

          • says

            I hope you subscribe to the idea of “steel sharpening steel” and fold some of my concerns into your new work.
            I hope that I am intellectually honest enough to do that, PK. That’s the primary benefit I receive from these exchanges and I rob myself of them if I get too caught up in “proving” my case to see when it is the other guy making the better point. I thank you for challenging me so effectively.

            I’d prefer if you kept it in a single comment because it’s easier to read, haha.

            Dylan had a song called “Highlands” on his “Time Out of Mind” album. Some people complained about it being 18 minutes long. They asked him: “Couldn’t you have recorded a shorter version for the album?”

            He said: “I did that! That IS the cut-back version. The original was 22 minutes!”


        • says

          Although that book is definitely the most prominent example, the history of a ‘Random Walk’ being used to model stock prices goes back much further. I was just using the assumption that most of this was well known in academic circles in the 50s-60s, but fair enough.

          As for VII – I don’t think you could point to anyone recommending it for a while. Sure, Shiller is on it now and a few others, but the earliest stuff would have to be Behavioral Econ (and Finance) which is way newer than the EMH.

          I’d prefer a track record moving forward. If we look backwards, as my co-writer points out, a 100% allocation in IBM or Alcoa would have beat both methods hands down (and it’s not even close). It’s identifying strategies after they have been tested which is more impressive to me – and I think as valuation gets vetted we’ll see more studies of this sort.

          • says

            I’d prefer a track record moving forward. 
            Shiller published his research in 1981. So we now have 30 years of going-forward testing in place.

            Brad Delong: “If the evidence of return predictability and “excess volatility” presented a generation ago were “junk science,” the addition of the last thirty years of data to the previous eighty-year sample should have led to an erosion of both the statistical and economic significance of long-run return predictability. The key distinguishing feature of “junk science” is that it does not work out of sample, and that as the sample is extended beyond the one over which the specification search was originally constructed the statistical significance and substantive importance of the results drop off very quickly. They have not.”



          • says

            That’s an interesting find, but it isn’t really saying what you are using it to prove. That paper is saying that PE10 or CAPE, or whatever you want to call it… Delong calls it “on the ratio of the current price of the S&P composite Pt to a ten-year trailing moving average of earnings E
            t10”) has predictive powers similar to those in (which I’m assuming is the 1981 Shiller article you reference) “Do Stock Prices Move Too Much To Be Justified By Subsequent Changes in Dividends?“. Now, maybe I’m missing something, but Shiller and Delong aren’t advocating for the usage of PE10 in this article, even though they might be saying some metric might be good to use. In fact, fast forward (rewing) to 1996 and look at this paper Shiller wrote in 1996 entitled “Price–Earnings Ratios as Forecasters of Returns:
            The Stock Market Outlook in 1996

            Choice quote? “Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.”

            And, he was right. *A* crash happened, but it was forgotton by 2006, and what looked like a massive problem in 1996 was erased by 2006. The second crash happened in late 2007, more than 10 years after Shiller’s warning.

          • says

            Shiller and Delong aren’t advocating for the usage of PE10 in this article, even though they might be sayingsome metric might be good to use.
            That’s what I’m saying, PK.

            I personally like P/E10. But one doesn’t have to use P/E10 to be a Valuation-Informed Indexer. What distinguishes Valuation-Informed Indexers from Buy-and-Holders is that they recognize that investors MUST use SOME valuation metric to change their stock allocations in response to big price shifts if they are to have any hope whatsoever of keeping their risk profile roughly constant.

            We will all be talking about precisely HOW to do this in the best possible way for hundreds of years. We don’t have it all figured out today.

            The key is that we begin talking about the right questions. During the Buy-and-Hold era, a good number of “experts” have been saying that there is no need to talk about this question at all, that it is okay to just stay at the same stock allocation at all times. It is that Buy-and-Hold thinking that needs to come to a full and complete stop.

            Once there is a consensus that there is some valuation level at which allocation changes are needed, this matter of precisely HOW to make the changes will become the dominant issue examined by investing analysts. This will be 80 percent of what people working in this field advise us about. During the Buy-and-Hold Era, we couldn’t even talk about 80 percent of what we need to know to become effective investors.


          • says

            This. I can agree with this.

            Let me state, for the record, that I think that PE10 is crude, and there is probably a better measure of an index’s valuation. I think PE10 is clunky to use and tough for the individual investor. However, at some point you mentioned that ‘we would be hearing it on radio shows’.

            If it was more widely publicized? Maybe more people would pay attention. However, just because it works now to beat the market doesn’t mean returns won’t come down as it ‘becomes’ the market. Maybe on your site you can start the trend with a giant PE10 box above the fold?

          • says

            Maybe on your site you can start the trend with a giant PE10 box above the fold?
            The problem I have with this is that it suggests that there is some sort of urgency to knowing the P/E10 value. There isn’t. You only need to change your stock allocation about once every 10 years or so on average. It seems odd to put a number on the front page above the fold that people only need to refer to once every 10 years.

            I think the thing we need to emphasize is not so much the P/E10 number but the error made by the Buy-and-Holders. The statement “timing always works” is every bit as true as the statement “timing never works” because long-term timing always works and short-term timing never works. It is the idea that the Buy-and-Holders have spread that it is okay not to time the market that has caused all our troubles.

            That one I do put above the fold. Not literally. But I try to be blunt on this point in all my writing. I am not defensive in my advocacy of market timing. I don’t say “timing might be not so terrible in some circumstances.” I say “Timing is required for any investor who wants to have a realistic chance of long-term investing success.” I say it that way because that’s what the research shows and because I need to overcome the influence of the hundreds of millions that Wall Street has spent putting the opposite idea in people’s heads.

            Every time people hear someone on Wall Street say “it’s not necessary to time the market,” they should hear that message as being “it’s not a good idea to look at the price of the thing we are selling before handing over your money to us.” When you translate it that way, you see that this Buy-and-Hold thing is just a big scam. 

            It has brought hundreds of millions of dollars into The Stock-Selling Industry. But it has done so by wiping our the middle-class. In the long run, the wipeout of the middle-class ends up hurting us all, even those on Wall Street.


          • says

            Well, in one of your comments you mentioned PE10 being more commonly mentioned on the radio, so I was just running with that. And yes, you do need to monitor it – what if PE10 is at say 15.5 and climbs to 16.5 or whatever you draw the line? You may have checked at 15.5 and be 9+ years away from checking again if you only check every 10 years.

            “Timing is required for any investor who wants to have a realistic chance of long-term investing success.” – Even a straight buy and holder would do fine as long as they didn’t panic sell (or buy) in times of irrational exuberance or times of irrational panic. Telling them to care about values is skipping a step – you have to explain that a good investor moves slowly, and then, step two explain valuation. So, in my thoughts, I would say, “hey, step one buy 60% stock and 40% bonds”. Then, if they can do that properly, I’d be like, “hey, let me show you how valuation works”. Two steps to get there – if you try to jump, you might lose some people.

          • says

            Even a straight buy and holder would do fine as long as they didn’t panic sell (or buy) in times of irrational exuberance ortimes of irrational panic. 
            That’s like saying that even someone who drives drunk at 90 MPH might not get killed if he happens to luck out. Anything can happen in this crazy, mixed-up world of ours. But you are looking at extremely long-odds scenarios now, in my assessment.

            Stocks were priced at three times fair value at the top of the bull. Prices always drop to one-half of fair value during the economic crisis that follows every bull. That’s a drop in portfolio value of five-sixths. A Buy-and-Holder who had saved $1.2 million over the course of his lifetime and thinks he is ready to retire ends up with 200,000. And you’re telling me that this person is not going to panic?

            I need to see one such case before I can believe it is possible. The Stock-Selling Industry has been pushing Buy-and-Hold for years now. Do they have the name of a single investor who stuck with this strategy through an entire bull/bear cycle and did not panic? I have been asking this question for 10 years now and not one Buy-and-Holder has ever came forward with a name.

            I don’t think they have a name. I think this is all marketing mumbo jumbo. I think it would be 50 times simpler for everyone involved for the people who came up with Buy-and-Hold to just acknowledge their mistake and move on to something better.


          • says

            I would say, “hey, step one buy 60% stock and 40% bonds”. Then, if they can do that properly, I’d be like, “hey, let me show you how valuation works”. 
            That’s like saying “first, we’ll teach you how to drive drunk and then, if you live through that, we’ll be willing to show you the far less dangerous approach.” Huh?

            Why not just tell people what works right from the get-go?

            You noted in another comment that there have always been lots of people who fell for Get Rich Quick. This is why. The Stock-Selling Industry has always controlled the advice given in this field. So it has always been 90 percent promotion of Get RIch Quick and then 10 percent some genuine insights to make the Buy-and-Hold stuff look legitimate. 

            Why not just tell people what works right from the start? That’s what I think would change things. If we told people what works right from the start, it would never even enter anyone’s head not to consider price when setting his stock allocation. The idea would horrify people if their heads hadn’t first been filled with all the Buy-and-Hold gibberish. I don’t see how any of that adds anything at all.


          • says

            I hope you don’t mind if I respond to the three comments all in this place.

            First, even if we did start pushing valuation, where would we educate people? There is no mandatory class in high school or college on stock index valuation.

            Second, “drives drunk at 90 MPH might not get killed” seems pretty extreme. I went back and checked Shiller’s figures. From January 1996 to January 2006 (I’m assuming you pulled our your money in January, correct me if I’m wrong), the S&P returned 112.824%, or 7.845% annually (I’m going to post my calculator tomorrow, don’t worry). Yes, valuation was bad – but how do you address massive opportunity cost? If you went on VII alone you would have probably been 100% out of the market. Sure, you missed the tech bubble, but you also missed the subsequent run-up. We have to acknowledge that the relationship between PE10 and stock returns isn’t perfect, and there is an opportunity cost of leaving the market too early. In short? I don’t think we have enough samples. I’d repeat Shiller’s warning here, which you can find in that 1996 paper, but mainly I’m pointing out – a naive investor could have bought and hold from 1996 to 2006 and made almost 8% annually… while never checking the above average VII.

            Third, why would there be different asset allocations for different levels of risk if stocks no longer had risk?

            Fourth, you should be careful with statements like, “Prices always drop to one-half of fair value during the economic crisis that follows every bull.” We’ve now had two bubble in a row – tech and real estate – where that isn’t the case. Basically, PE10 hasn’t been in range for a while, and I noted earlier that the R^2 for the relationship is around .4. Decent, but not an overwhelming relationship (like Delong says, the R^2 of a single year is closer to .1). Suffice to say, leaving the market too early presents an opportunity cost. My suspicion? Valuation works, to a degree, but PE10 isn’t the answer.

          • says

            Oh, maybe reduce the information conveyed. Giant Thumbs Up or Thumbs Down gif? That way you wouldn’t need to dig into the intricacies of the method, but you’d know if we were above 16.4 PE10 (correct me if you are using a different number).

          • says

            Giant Thumbs Up or Thumbs Down gif?
            The problem with that is that the value proposition is different for people in different circumstances. When stocks are priced as they were in 1982, everyone should be buying. And, when stocks are priced as they were in 2000, no one should be buying. But there are a lot of circumstances in-between those two extremes.

            There are circumstances in which a risk-taker might go with a stock allocation of 50 percent and a risk-averse investor might not want to go above 25 percent. Thumbs up or thumbs down doesn’t provide the information needed.

            My view is that we should all just report what the academic research says honestly and accurately. That solves every problem. That would bring the economic crisis to an end. That would allow us all to retire years sooner. That would provide us all with much higher returns at greatly reduced risk. I personally don’t see why any of this needs to be the slightest bit “controversial.” It’s a win/win/win/win/win.

            The “controversy” is the result of the shame that people feel over having fallen for a Get Rich Quick scheme. We just need to get over that. We will feel the shame for a short while and, then, things will be so great that we will forget all about it. Sometimes you just need to take your medicine and move on to better things. I think this is one of those cases.

            We made a mistake. So what? Big deal! We fix it, we move on. It’s a win/win/win/win/win, with no possible downside.


    • says

      I do think that VII would probably be too complicated for someone like me, who would be considered a low information investor.

      If you are not convinced that VII will work, it really is not for you. This is a long-term strategy and it will not work for those who are not confident in it. So your decision is the right one.

      VII is not complicated, however. It’s just looking at price. It’s no more complicated than that.

      The U.S. market has always provided an average long-term return of 6 percent real. That’s what the productivity of our economy supports. So if you pay a fair price for an index fund, that’s what you are going to get.

      If you pay two times fair value, you will get half of that — 3 percent. Right? How could it be otherwise?

      If you pay three times fair value, you will get one-third of that — 2 percent.

      If you pay one-half of fair value, you will get 12 percent.

      That’s the way it has been since the day the market opened for business. I honestly do not see how it could ever be any different.

      I am not trying to be argumentative. This isn’t for everyone. You have lots of good company in your doubts. I just don’t want people to think that there is anything even a tiny bit complicated about this. P/E10 is the price-tag for stocks. VII is just looking at the price-tag before making a purchase. For good or for ill, that’s the idea and I think people would appreciate that it’s a very simple one if it were not for the hundreds of millions of marketing dollars that have been directed to the promotion of the idea that there is no need to look at price when buying stocks (an exceedingly counter-intutive idea in my assessment).


  4. says

    My co-writer Cameron hates this series 
    This is the thing I don’t get.

    I don’t mean to pick on Cameron. He is in good company. What I don’t get is why anyone would object to examination of an issue.

    If Buy-and-Hold is legitimate, it will survive the challenge and the case for it will be all the stronger as a result. No?


    • CameronDaniels says

      Never said that. Never will. I do not and would never object to an examination of an issue that I believe in, one way or the other.

  5. says

    I do not and would never object to an examination of an issue that I believe in, one way or the other.
    Thanks much for saying that, Cameron. It makes me feel happy and encouraged to hear those words.

    Please know that I will always be happy to participate in any sort of interaction or discussion of the ideas that you would ever think might be helpful. You have an open invitation to post at my blog at any time you like to challenge any of my ideas you would like to challenge. I will not edit your article in any way (I will of course respond to criticisms either in comments or in a separate article).

    We’re all in this together. We all want to know the best possible way to invest our retirement money. Anyone who challenges me and thereby causes me to have doubts about something re which I really should have doubts is my friend. And anyone who tries but fails to cause me to experience doubts is also my friend because by doing so he increases my confidence in the ideas I now hold.


    • says

      No, especially treasury bonds. TIPS have been flirting with negative yields for a while, and it’s possible the rest of the Government lineup her ein the US move to the negative zone soon. How that will affect money market accounts? Beats me…

      • says

        Nothing wrong with bonds.  I just fetched some I-bonds @ 3.06%.  People who have avoided bonds for past couple of years have lost out on some money.  

        • says

          It’ll be interesting to see the yield after inflation (ignoring taxes, since I don’t know what account you bought them in). If you bought 30 years, it looks like T-Bills are trading at .75, so your real yield might be less than 1%. Better than a bank, for sure, but it’s interest rate environments like these which blow bubbles…

          • says

             First, comparing apples to apples.  My choice was, I-bonds (not traded on a secondary market) or a 5 yr CD (1.7ish%), MMA (ppfffttttt) or “high” yield savings (ppfffttt part deux).  So, money I don’t want to loose principal on.  I could do the Sam structured note, but I am skeptical he is getting the deal he thinks he is.  So I-bonds (which are indexed to CPI, less FIT) and 5 yr CD’s it is for me. 

            Nonetheless, I think the “wise investor” above was most likely spilling boilerplate PF talk about how if interest rates rise, which the Fed has promised isn’t until 2014 at the earliest, you take a bath on your NAV.  And while that is generally true, you can either hold the bonds to maturity or some bonds have features which can protect an investor to varying degrees from interest rate risk.  But, bonds are important in a portfolio for a lot of people, so it doesn’t just mean you ignore them because of interest rate risk.  Our bond series starts Monday.   

          • says

            I see now where the 3.06% came from – that was the CPI adjustment right? I think the bond itself has something like a 0% return before CPI though, so you’re at the mercy of the adjustment. I think you did the right thing though – I’m assuming this is all money you want to use in the next 5 years or at least have semi-handy.

            One thing I mentioned on Sam’s post was Tax Free Munis. I don’t know what state you’re in (or what sort of tax rate you’re paying) but as a Californian I find myself in and out of SWCAX in my Schwab account. The rest of my money is in “high yield” savings accounts, haha. Lose to inflation and pay tax!

  6. says

    I also agree with a slightly lower withdrawal rate. I think 3% will work well with lowered risk. Also, depends on your expenses — if you take some of that capital and say, buy a home with it, then you’ll just need cashflow for property taxes. Hopefully those don’t rise significantly above the rate of inflation.

    • says

      Do you mean like a 3% as of today, or a 3% no matter when you retire? The implications of this research cut both ways – while suggesting a SWR closer to 2% if you retire today, sometimes the SWR would rise to as much as 9% (!). I don’t know if I could withdraw 9% from my portfolio in good faith, haha.

      • says

        Sandy, I have a Fido account – have you ever seen them vary that amount as a SWR? I play with some of their savings modeling apps all the time, heh. Fidelity has some good stuff.

  7. says

    You may have checked at 15.5 and be 9+ years away from checking again if you only check every 10 years.
    It makes sense to check the P/E10 level once per year, PK. But we don’t need to all place it on the top of the home page of our blogs to send the message that it needs to be checked once per year.

    The thing that we need to be placing at the top of the home page of our blogs is a message that Buy-and-Hold thinking is dangerous. Common sense tells people that they need to consider price when buying stocks — middle-class people already consider price with everything they buy except for stocks. The problem is that there is so much money to be made pushing Buy-and-Hold (Get Rich Quick) investing strategies. Many people believe that the “experts” in this field are shooting straight re what the academic research says. We need to tell them the truth.

    Once everyone understands what has been done to them and once everyone gets it that price matters when buying stocks just as it does when buying anything else, people will know to check P/E10 themselves. Does Edmunds.com feel a need to tell car buyers to ask what the price of the car is before putting money down on the table? Everyone already knows to do that. Edmunds.com just provides the tools people need to buy cars effectively. That’s what all of us in the Personal Finance Blogosphere should be doing in the investing area.


  8. says

    where would we educate people? 
    We should take advantage of every opportunity available to us.

    We should tell the truth about stock investing in newspaper articles. In blog posts. On television programs. On radio shows. In speeches. In materials handed out to employees signing up for Section 401(k) programs. In textbooks. In calculators. In podcasts. And on and on and on.

    I personally am not able even to imagine any possible downside.

    The only thing holding us back today is this fear we have that it will hurt the feelings of the Buy-and-Holder if we report accurately what the academic research says. My experience is that we end up hurting them a lot more by not speaking up. 

    I was told at the Bogleheads Forum (it was then called the Vanguard Diehards forum) that we shouldn’t ask Bogle to acknowledge making a mistake because he is “a nice old man.” I certainly agree that Bogle is a nice, old man. But how do you think this nice old man feels knowing that for years he has been promoting an investing strategy that has become the primary cause of the greatest economic crisis in U.S. history? I think it would be safe to say that Bogle would feel 50 times better about himself and his contributions to this field if he had acknowledged his mistake back when I first suggested he do so (I began posting at Vanguard Diehards in July 2005).

    When you make a mistake, you want to acknowledge it and get it behind you as quickly as possible. Stretching things out and covering things up is the worst possible thing to do. I believe we have an obligation to the Buy-and-Holders to dissuade them from following the dark path they are walking today and to encourage them to come clean on the mistakes they have made. They will end up being viewed as heroes by the vast majority of investors once we make the shift to Valuation-Informed Indexing and people learn that none of this would have been possible but for the foundation laid in the early 1970s by the Buy-and-Holders.


  9. says

    We have to acknowledge that the relationship between PE10 and stock returns isn’t perfect, and there is an opportunity cost of leaving the market too early.
    It appears to me that the correlation is perfect, PK. At least as perfect as it is possible for it to be, given the realities of how stock investing works.

    You always have to keep in mind the distinction between the short-term and the long-term. Prices are set in the short-term by emotion and in the long-term by the economic realities.

    The P/E10 level does not tell us with precision what the 10-year return will be. That’s not because the correlation between valuations and long-term returns is less than perfect. It is because valuations (economic realities) are not the only thing affecting the return that applies at the end of 10 years. The return at any given point of time is the product of a combination of short-term and long-term effects. P/E10 predicts the long-term effect perfectly. But the short-term effects are pure emotion and cannot be predicted. So they always throw things off a bit.

    We can say in advance how much the short-term effects can throw things off. We can identify the range of possible returns and assign rough probabilities to each point on the spectrum of possibilities. So you can know the odds of good and poor outcomes in advance. It is up to the investor to determine for himself what sort of odds he wants to take on.

    Say that an investor has an average level of risk aversion. There is virtually zero risk to stock investing when prices are what they were in 1982. So an investor with an average risk aversion should have been going with a stock allocation of about 90 percent. In 2000, risk was off the charts. So an investor with an average risk aversion should have been going with a stock allocation of about 20 percent. The Buy-and-Holder might be going with 60 percent stocks in both circumstances, getting his stock allocation wildly wrong in both time-periods.

    If it weren’t for the possibility of quirky returns sequences, I would say that the investor should have gone to 0 percent stocks in 2000. But I do acknowledge that we sometimes see those quirky return patterns (caused by outlier levels of investor emotion). So I say 20 percent sounds better for the typical investor. But 60 percent? Huh? How did the Buy-and-Holders come up with that one?

    There is no rational case for going with 60 percent stocks when stocks are priced at insanely risky levels. The idea that it is “okay” to go with the same stock allocation at all times is marketing mumbo jumbo. It brings in hundreds of millions in profits to Wall Street. It wipes out most of the accumulated wealth of a lifetime of the middle-class. 

    The Buy-and-Holders aren’t even trying to get their allocations right. They are just mindlessly doing what the marketing materials tell them to do. I say that there’s an opportunity cost in setting your stock allocation pursuant to marketing mumbo jumbo rather than pursuant to what the academic research reveals about how stock investing works in the real world.


  10. says

    Sure, you missed the tech bubble, but you also missed the subsequent run-up.
    I use the word “miss” differently than you do, PK.

    If I were out of stocks when they were priced at one-half fair value and they shot up to fair value, I would agree that I had “missed” something. Prices had to go up. So I missed out on an opportunity for oversized gains.

    If I got out of stocks when prices went to two times fair value and they then shot up to three times fair value, I “missed” nothing. Those gains are temporary. Prices will be coming back down to fair value and probably even lower. All the gains that the Buy-and-Holders are counting as real that we earned as prices went from two times fair value to three times fair value will be disappearing within a few years. Who needs temporary gains? I want the real stuff.

    Gains earned at times of high prices are not the same as gains earned at times of low prices.

    The same is so with losses. Losses experienced at times of low prices are temporary. Losses experienced at times of high prices are permanent and real.


  11. says

    I don’t think we have enough samples.
    I of course agree that it would be a good thing to have more samples.

    But we all need to do something with our money. There is no neutral ground here. So, despite the lack of samples, we need to do the best we can.

    There is now 140 years of data supporting Valuation-Informed Indexing and 0 years of data supporting Buy-and-Hold. What are we going to do, go with Buy-and-Hold on the grounds that 140 years of data is not enough to prove that VII will always work?


  12. says

    Third, why would there be different asset allocations for different levels of risk if stocks no longer had risk?
    Risk would only be eliminated (speaking precisely, it would be reduced by 80 percent) for those who hold stocks for 10 years. There are circumstances in which investors might need the money in a shorter time-span. Stocks might not be the best choice for investors in those circumstances.

    There is no reduction of risk whatsoever for those who are not willing to hold stocks for 10 years. Short-term timing doesn’t work. Short-term prices are determined by investor emotions and we cannot predict the course of investor emotion.

    There will always be differences between stocks and super-safe asset classes like TIPS and IBonds and CDs. But those differences will be greatly diminished as the findings of the last 30 years of academic research become more widely known and appreciated and examined and explored and understood.

    The more we learn about how stock investing works, the less risky stocks are. Wouldn’t you expect that to be the case? Risk is uncertainty. As we learn more about stocks, there is less uncertainty involved in investing in them. Wasn’t the entire idea of engaging in investing research to learn more about how stock investing works? Wasn’t it clear from the first day that that would reduce risk? Why are we so surprised that things turned out just as we expected when we first began doing the research?

    We should take comfort in how far we have come. We should be celebrating our good fortune, not fretting about an economic crisis that threatens to destroy us. We need to let go of our proud to move from the dark place in which we today find ourselves to the wonderful, life-enriching place which deep in our hearts we all would very much life to discover.


  13. says

    We’ve now had two bubble in a row – tech and real estate – where that isn’t the case. 
    The research that I am reporting on is research into how stock investing works. That should be understood re every post I put forward.

    My guess is that similar phenomena apply re non-stock bubbles. But I cannot point to research showing how non-stock bubbles work. It would certainly make sense for people to perform such research.

    We need to fix the investing problem first! Then we can move on to these other areas of concern.


  14. says

    the R^2 for the relationship is around .4. Decent, but not an overwhelming relationship 
    If the market were efficient (which it must be for Buy-and-Hold to work), the correlation would be zero. It’s not. So Buy-and-Hold cannot possibly work.

    There’s also the common-sense factor to consider. Price matters with everything we buy other than stocks. Has any Buy-and-Holder ever been able to explain why it doesn’t matter with stocks? If it matters, we should all be taking it into consideration when buying stocks.

    Common sense tells us that Buy-and-Hold never can work and that Valuation-Informed Indexing always should work, and the entire historical record confirms what common sense tells us.


  15. says

    leaving the market too early presents an opportunity cost.
    Again, we have different understandings of what the term “too early” signifies.

    Stocks were an insanely risky asset class in 1996. The insanely risky asset class offered good returns in 1996, 1997, 1998 and 1999. Did someone who got out in 1996 get out too early? I say “no.” A middle-class person should not be taking on insane levels of risk with his retirement money.

    If someone put all his retirement money into lottery tickets and won the bet, would you say that those who refused to follow the “investing advice” of The Lottery Ticket Industry suffered an “opportunity cost” by not taking that path?

    I don’t want to be heavily in stocks when the risk level is off the charts. I don’t feel that I got out “too early” if the reason I got out is that the risk level for stocks went far beyond what a middle-class person can tolerate. To try to win those sorts of long-offs bets is gambling, in my assessment.

    It is the price at which stocks are selling that determines how risky they are. If you ignore price when setting your allocation (Buy-and-Hold), you are deliberately ignoring risk and turning the investing project into a gambling project. It can work for short periods of time. The academic research shows that it has never paid off for any long-term investor. The odds against long-term success are just too high.


  16. says

    My suspicion? Valuation works, to a degree, but PE10 isn’t the answer.
    This is where most people come down, PK. My sense is that people think of it as a moderate, non-extreme, compromise position.

    My objection is that this position makes no theoretical sense. If the market is efficient, Buy-and-Hold is the ideal strategy. If valuations affect long-term returns, there is zero chance that Buy-and-Hold could ever work in the long run. I see it as an either/or question. Either Fama is right or Shiller is right, and we need to figure out which it is.

    The frustrating thing from my perspective is that the conversation doesn’t go forward so long as people take the compromise position. Most of those adopting the compromise position stick fairly close to a Buy-and-Hold strategy, perhaps with some adjustments at the edges. If Shiller is right, those people are going to suffer a wipeout and our economy is going to go into the Second Great Depression sometime over the next few years.

    I obviously don’t want to see that happen. You obviously don’t either. You cannot help what you believe and I cannot help what I believe. All I can do is make my case to the best of my ability and hope for the best for all of us.

    I certainly am grateful to you for being so willing to engage in so much back and forth. I wish that there were more out there willing at least to hear challenges to their thinking. That’s the best that any blogger can ask of another. I greatly admire you for that, PK. I think you’re a super guy.

    And it could be that you are right and I am wrong. It has been known to happen. If it were me who is wrong, I would probably be the last to catch on. Whatchagondo?


  17. says


     It’s getting too hard to reply to each individual comment – you sure there isn’t a chance you can aggregate them?  To me it’s more like the 9 part rock anthem Shine on You Crazy Diamond than Highland, and for the record I love both Dylan and Floyd.  It’s just harder to listen to multi-part songs!  (On the topic of long songs, I also like Alice’s Restaurant Massacree on Thanksgiving)

    A few points:

    1) You said that “There is now 140 years of data supporting Valuation-Informed Indexing and 0 years of data supporting Buy-and-Hold”, but in the study I’ve seen most prominently featured by Wade Pfau, in those 110 period, B&H won in 8.  Additionally, it isn’t a zero sum game, and while I personally wouldn’t give up alpha, in most of those periods both methods made money… more money than investors likely would have, due to emotions.

    2) PE10 isn’t perfect.  The fit gave an r^2 of .49.  The square root of .49 is .7, so you’re talking as good of a correlation as maybe the heritability of IQ.  Strong, but certainly not perfect – and we have to note that both Pfau and Shiller have warned about reading too much into PE10.

    3) I wouldn’t call us polar opposites – it’s true that stocks can be overvalued for 10 years (or undervalued), so we can both be right.  I’m a valuation guy at heart – ROE, ROA, DCF, ROIC – I’m just not for trying to teach grandmothers how to use my methods.  Baby steps!

    Thanks for the kind words!  I’m certainly not here to squelch any opinions – but I think you’ll find that there is a lot of common ground in what we are both saying.  I don’t think I’m compromising by saying B&H is better than what most people do now…

    • says

      it’s getting too hard to reply to each individual comment – you sure there isn’t a chance you can aggregate them?
      Thanks for the playful spirit in which you made this point, PK (with your reference to Pink Floyd, etc.). I don’t think it would help to aggregate because then there would be fewer comments but each one would be even longer (!).

      The real problem here is that these issues are just not discussed often enough. People try to avoid talking about them and then, when they do come out, it is like a nuclear explosion and we see more good stuff than we can possibly process in a reasonable amount of time.

      The answer is to have more discussion (I do not at all mean to chastise you with this comment, you have been an amazing help, my purpose is to make a general point). If there were people everyday questioning the merit of Buy-and-Hold, people would know all the arguments and counter-arguments and this wouldn’t all come out in a flood. 

      In a perfect world, we wouldn’t have blog entries titled “The Buy-and-Hold Myth.” We would have blog entries exploring particular points raised by those who believe that Buy-and-Hold is a myth. But, for the time-being, it’s hard to write articles on the particular points because the arguments for those points need to assume an understanding on the reader’s part that Buy-and-Hold is a myth and a lot of our readers have not yet ever even been exposed to that point of view.

      We need more discussion of more of these issues at more places with participation by more people holding a greater variety of points of view. That’s how discussion of these topics becomes normalized over time. I very, very, very much look forward to the day when that happens.


      • says

         Rob, you remind me of parasite.  Discussion is fine to a point. You seem to lack the ability to make concise points.  Perhaps you should offer up your track record?  For those who don’t know, M. Bennett here was terminated from employment earlier last decade.  Why, I have no idea.  But, he has essentially been trying to sell a book on his valuation methods.  Which, would have you out of the stock market since 1996 and living off of TIPS, i-bonds and CD’s for the last 16 years.  And while M. Bennett loves to debate, especially the topic of SWR, his has been much greater than that since he attempted to raise a family of 3 on approximately $400k, drawing down $30k to $38k/yr.  Those are the rumors anyway.  Perhaps the man himself can make it clear.  

        He is the oppressed, and his ideas have validity b/c of the heckling he receives.  This is his rationale.  Very intelligent individuals have sincerely asked excellent questions, in which M. Bennett flaps his arms, screams bloody murder and on his own blog censors these questions.  He still won’t answer any of the questions. 

        Being verbiose does not equal intelligence.  he is nothing more than Spam. 

        For those who are bored…http://bit.ly/hZpoxw and an excellent review of his passion saving book…http://bit.ly/KaMXG2 

    • says

      in the study I’ve seen most prominently featured by Wade Pfau, in those 110 period, B&H won in 8.
      That’s so. But think of the added risk you are taking on by going with a strategy that works less than 10 percent of the time. My own calculator shows that Buy-and-Hold puts up better numbers in a small percentage of cases (about 10 percent of the return sequences we have seen in the historical record). But I still say that Buy-and-Hold never works because, in those cases in which it produces better numbers, the investor is taking on more risk to get those better numbers. The proper and complete way to say it is to say that Buy-and-Hold never works on a risk-adjusted basis.

      If we say that Buy-and-Hold sometimes works because in rare cases it puts up better numbers, then we have to say that putting all your retirement money in lottery tickets sometimes “works” too. Lottery tickets put up very good numbers in a small percentage of cases. The problem with lottery tickets (and Buy-and-Hold) is that the risk is just too darn high.

      PE10 isn’t perfect.

      It doesn’t tell us everything we would like to know. In that sense it is not perfect. But I don’t see why people place so much emphasis on this point. It represents a HUGE advance, by far the biggest advance in the history of investing analysis. 

      Using P/E10 to adjust your stock allocation reduces the risk of stock investing by 80 percent. I agree that it would be nice if we could get it to 100 percent. But I’m pretty darn excited about the 80 percent success. From my point of view, pointing out that P/E10 is not perfect is like saying the Beatles released a few clinkers. “Don’t Pass Me By” is a truly horrible song. But come on.

      I think you’ll find that there is a lot of common ground in what we are both saying.  

      Absolutely. But please understand that there is also a lot of common ground between me and all Buy-and-Holders. John Bogle is a hero of mine. You know those people who came on the thread at the “Married (with Debt)” blog and said some not entirely kind things about me? Those guys were my good friends in the days before I put forward my famous post on safe withdrawal rates. If you had asked me to identify my investing philosophy on the morning of May 13, 2002, I would have said “I’m a Buy-and-Holder.” Sometimes it is the people with whom you share a lot of common ground who are most hurt when you take a different position on one important issue.

      I spend some time every single day trying to understand why a good number of Buy-and-Holders have reacted so violently to my work. The best explanation that I can come up with is that the change from Buy-and-Hold to Valuation-Informed Indexing is just so big that people cannot easily process it. There is only one difference. I agree with everything the Buy-and-Holder say except for the thing they say about investors not needing to change their stock allocations in response to big price swings. The problem we have is that Buy-and-Hold is a numbers-based strategy and changing that one thing changes all the numbers dramatically.

      There are times when the Buy-and-Holders would say that the ideal stock allocation is 80 percent and the Valuation-Informed Indexers would say that the ideal stock allocation is 20 percent. That’s a 400 percent difference! And these are both numbers-based strategies. The asset allocation advice in both cases is rooted in an objective review of the historical data. How do you work out a difference of that magnitude?

      The history here is that we discovered the need to take valuations into consideration in 1981 and, at that time, valuations were so low that no one thought it mattered in a practical sense. So we just kept on pushing Buy-and-Hold. Valuations didn’t reach dangerous levels until 1996. By that time, so many books had been written promoting Buy-and-Hold that it would have been highly embarrassing to lots of big shots for us to acknowledge the mistake. So we all either participated in the cover-up or kept quiet about it. That allowed valuations to go even higher! So high that we caused an economic crisis! Now we find ourselves painted into a corner so tight that it is hard to imagine any way out of it.

      The way out is to focus on the positive. We need to be charitable toward those who made the mistake. They were pioneers and all pioneers make mistakes in their efforts to help us discover new and better worlds. But most of all we need to shift the focus from the negative (the economic crisis) to the positive (the huge economic boom we will see once we make the corrections to the Buy-and-Hold model needed to make it work in the real world). The shame and embarrassment and anger and nastiness will disappear when we all get excited about the economic boom that is coming.

      There’s a sense in which Buy-and-Hold and Valuation-Informed Indexing are virtually identical. There’s only one difference! But that one difference is so important that it changes the underlying strategy from the most dangerous ever concocted by the human mind to the most life-enhancing ever concocted by the human mind. I think the key to getting from the dark place where we are today to the wonderful place where we all deep in our hearts want to be tomorrow is to focus on the positive side of the story. The positives here are very, very exciting indeed. 

      But we do all need to acknowledge that, if valuations matter, it makes no sense to stay at the same stock allocation at all times. That’s what it means to “matter.” If there is no need to change your stock allocation, valuations do not matter in a practical sense. And there really is zero support in the academic research and in the historical record for the idea that valuations do not matter. We need to give that one up to open the door to all the good stuff.


  18. says

    Those are the rumors anyway.  Perhaps the man himself can make it clear.  
    I certainly can make it all clear if we all work together to bring the smear campaigns to a total and complete stop by the close of business today, Bichon. I was the most popular poster at the Motley Fool site on the day that I put up my post pointing out the errors in the Old School safe withdrawal rate studies. My findings have in the ten years since been confirmed by a large number of the biggest names in this field. I obviously did a wonderful thing by helping thousands of my fellow community members (and millions of middle-class investors who I don’t even know) avoid suffering failed retirements. So why is it that there is today some fellow on the internet who says that I remind him of a “parasite”?

    It’s because of the smear campaigns that a group of Buy-and-Holders have been directing at me for 10 years now. Thousands of my fellow community members have expressed support for my right to post honestly and have asked that the smear campaigns be brought to a stop. But those leading the smear campaigns have shown zero willingness to honor these requests. So we are where we are.

    If you want to know about my personal financial circumstances, you can go to my site and read articles that have my name on them. If you are reading articles that do not have my name on them, you cannot trust anything said in them. Many smart and good people have read the smear posts at various boards and blogs and, noting that no one at those places objects to them (most normal people give up when their requests that honest posting be permitted are ignored as they fear what the leaders of the smear campaigns will do to them if they continue to make the point), assume that there is something to them.

    It is standard practice for the Goon posters to take my words and twist them into something different, retaining enough of the original words to fool those not paying close attention to the discussions. If I were to respond to your questions about my personal circumstances, there will in the next few months be hundreds or perhaps thousands of new smear posts put to the internet using the “ammunition” I provide in those posts. It is obviously not my aim to mislead people about my personal circumstances. So it obviously would not be responsible for me to respond to any questions you have about my personal circumstances.

    If you want to pretend that you believe the smear campaigns, you may do so. If you want to know the realities, I will help you learn them. But to make progress we have to be able to agree that there is no place at any of our boards or blogs for death threats or defamation or unjustified board bannings. When we become so desperate to “defend” our positions that we permit that sort of thing to happen in communities of which we are a part, we give up the reason and decency that makes us human and we become the sorts of savage animals you see posting to the board you linked to in your comment.

    I oppose that sort of thing, Bichon. I oppose it strongly. There is no one alive on Planet Earth today who has spoken out in opposition to that sort of thing as frequently or as forcefully as I have. There is no one in a close second place. I would be grateful for anything you can do to spread the word far and wide all over the internet.

    his ideas have validity b/c of the heckling he receives.

    No. My ideas have validity because they are in accord with what common sense tells us must be so and because there is now 30 years of academic research based on 140 years of historical return data confirming what common sense tells us must be so.

    You say the Buy-and-Holders are engaged in “heckling.” Death threats are heckling? Really? Defamation is heckling? Really? Unjustified board bannings are heckling? Really? If the subject were anything other than the dangers of your favorite investing strategy, I wonder whether you would view these sorts of behavior as “heckling.” We are talking about criminal acts, Bichon. The Goon posters who have been trying to “defend” Buy-and-Hold for the past 10 years have gone a whole big bunch past “heckling.” You degrade yourself to pretend otherwise, in my assessment.

    I do say that the behavior of those seeking to “defend” Buy-and-Hold is a third proof of my claims (on top of the common-sense-based proof and the research-based proof). By itself, I wouldn’t call it dispositive. But in a context in which there is 30 years of academic research showing that Buy-and-Hold can never work for any long-term investor, I find it highly illuminating. The question you should be asking is — Why do we see such outlandish behavior when these sorts of questions come up at our boards and blogs? 

    The obvious answer is that the Buy-and-Holders don’t have anything else. There have been thousands of books written in accord with Buy-and-Hold beliefs. There have been thousands of calculators built under this model. There have been thousands of careers built under this model. What happens to all those books and all those calculators and all those careers if Rob Bennett is permitted to post honestly on the internet re safe withdrawal rates?

    They fall. They were rooted in a mistake made at a time when all the research was not available to us. If they don’t completely fall, they certainly are changed in very serious ways. Is that a good thing or a bad thing? I see it as a very good thing. We all move forward to a much better world when we achieve an advance of this magnitude. But I think it would be fair to say that some of those who have published books or produced calculators or built careers would like the cover-up to continue a few weeks or a few months or a few years longer.

    So they do this sort of thing you make reference to here. The behavior we have seen is not the principle proof of the merits of Valuation-Informed Indexing. But it is indeed a supplemental proof. The one thing that has stopped us all from moving forward for 10 years now is the smear campaigns. The fact that the Buy-and-Holders have felt a need to adopt such desperate tactics certainly says something about the level of confidence they feel in their strategies. 

    an excellent review of his passion saving book

    The fellow who wrote that review was the founder of the Motley Fool board at which I put forward my May 13, 2002 post reporting on the errors in the Old School safe withdrawal rate studies, Bichon. After I had been posting at the board for a few months, he put up a comment addressed to newcomers to the board in which he advised them to “read everything by Rob” before reading anything else posted to the board because my stuff was the “seminal” material on the subject of early retirement. Those words were removed after I put up the post pointing out the errors in his study and after hundreds of our fellow community members described the discussions that followed as the best we have ever experienced in the history of the board.

    My friend John behaved poorly. But you know what? All of my other friends who failed to speak up to him share in the shame we all feel over what has been done to him. I begged him not to take the dark path he has taken. I care about the man and I did all that any one person can do to help him out when he needed some helping out. Can you say the same, Bichon?


  19. says

    I redact my parasite comment.  My mind has been swayed.  You are a delusional narcissist.  
    So we really are making forward strides with this thing!

    And it’s only taken 10 years!