Value Investing

It’s a Mistake to Avoid the Risk of Stocks But It’s Also a Mistake to Fail to Temper That Risk by Exercising Price Discipline

Valuation-Informed Indexing #303

by Rob Bennett

I wrote last week about The Investor’s Scenario Surfer. The calculator permits an investor to compare the results of a Buy-and-Hold strategy (using a fixed 80-percent stocks allocation, a fixed 50-percent stocks allocation or a fixed 20-percent stocks allocation) with the results of a Valuation-Informed Indexing strategy (one in which the investor has the option of changing his stock allocation after seeing his return for each year of a 30-year return sequence consistent with those we have seen throughout the historical record). The Valuation-Informed Indexing strategy has beat all three Buy-and-Hold strategies in 90 percent of the runs that I have performed with the calculator, often by large amounts. But in many runs it appears that for many years that the Buy-and-Hold strategies will prevail. So the calculator shows the importance of investors being patient enough to permit the long-term realities to assert themselves.

This week I thought that it might be helpful to report on the results of three runs of the calculator and to explain how the results achieved at the end of the 30-year time-periods examined played out over time. I did not perform multiple runs and choose three that make the points that I advance below. I pledged when beginning the test to perform only three runs and to report the results generated regardless of whether the results obtained were typical of those generally obtained or not.

In each run, I established a portfolio amount of $100,000. I did not call for yearly additions to the portfolio or for yearly withdrawals from it. I set the starting-point P/E10 level at “26/bear market” since that’s what applies today. I entered an assumption that assets not invested in stocks would earn 2.5 percent real.

In the first run, the Valuation-Informed Indexing portfolio was worth $818,000 at the end of 30 years. The 80-percent-stocks Buy-and-Hold portfolio was worth $629,000. The 50-percent-stocks Buy-and-Hold portfolio was worth $452,000. The 20-percent-stocks portfolio was worth $295,000.

The returns sequence (which is generated by the calculator to be consistent with returns sequences that we have seen historically) showed a drop to fair-value prices in Year Six. Prices fell to bear-market levels in Year 11 and remained there until Year 27. As a result of the long period of bear-market prices, the 20-percent-stocks portfolio was running ahead of the 50-percent-stocks portfolio and the 80-percent-stocks portfolio through Year 18. It was even running even with the Valuation-Informed Indexing portfolio through Year 17.

In Year 27, the Valuation-Informed Indexing portfolio raced far ahead of the three Buy-and-Hold portfolios. It ended up beating the 20-percent-stocks portfolio by more than $500,000.

I went with a 20 percent stock allocation for the first three years, when stock prices were at very high levels. I then dropped to a 0 percent stock allocation for two years when the P/E10 level exceeded 30. I then went to a 40 percent stock allocation for two years when the P/E10 level was near 20. When the P/E10 level dropped below fair-value levels, I increased the stock allocation to 90 percent. The price level dropped even lower and I went to a 100 percent stocks allocation when it dropped to 10. I stuck with that allocation for 16 years. My biggest gain came when I was going with a stock allocation of 100 percent and the P/E10 level jumped from 14 to 21. In this one year, my portfolio amount increased by $245,000.

In the second run, the Valuation-Informed Indexing portfolio had a value of $622,000 at the end of 30 years. The 80-percent-stocks Buy-and-Hold portfolio had a value of 477,000. The 50-percent-stocks Buy-and-Hold portfolio had a value of $367,000. The 20-percent-stocks Buy-and-Hold portfolio had a value of $268,000.

Please note how the change from a 20-percent stock allocation to a 50-percent stock allocation brought on gains of about $100,000 and the change from a 50-percent stock allocation to an 80-percent stock allocation brought on gains of about $100,000 while the change from a fixed 80-percent stock allocation to a valuation-adjusted allocation brought on gains of almost $150,000. Increasing one’s stock allocation is a big plus in the long run. But switching from a Buy-and-Hold approach to a valuation-informed approach is an even bigger plus. The same general pattern applied in the first run but in that case the relative benefit that resulted from increasing one’s stock allocation was greater and the benefit from going to a varying allocation was less.

In the third run, the Valuation-Informed Indexing portfolio ended up with a portfolio amount of $624,000. The 80-percent-stocks Buy-and-Hold portfolio came in at $496,000. The 50-percent-stocks portfolio was valued at $378,000 at the end of 30 years. The 20-percent-stocks portfolio came in at $272,000.

You see the pattern, no? There is a price to be paid for being too timid to accept the risk of stock investing. But Buy-and-Holders take on unnecessary risks by refusing to exercise the price discipline that is the key to making successful purchases in ANY market. The best long-term strategy is to take on the risks you need to take on to earn the returns needed to finance a solid retirement but also to temper risk by cutting back on stocks when the risk level goes off the charts and by taking advantage of the great value proposition made available when prices drop so low that risk virtually disappears.

Exercising price discipline when buying stocks pays off in the long run. Big time.

Rob Bennett’s bio is here.

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  • Sammy Soda

    You use long statements all the time. As such, people refer to your comments as “hocomania”. You do, however, cut short formation that is not favorable to you. In fact, not only did you cut out much of what John said, and also avoided what Wade said, you also left out the part where you acknowledged you were wrong and apologized. You have been spending your days since trying to change the record.

    Meanwhile, your own financial/retirement became a bust. You probably shouldn’t have listed all the details on the Internet for all to see.

    Here is the truth Rob. When I first read your claims, I was interested in learning more to see if there was a better way of investing. What I found is that my buy, hold and rebalance strategy was still the best way to go and that you not only had a track record of failure, but you are a liar, lack integrity and that you personally attack those that differ in opinions to your’s.

  • RobBennett

    Long statements are not required, Sammy. Shiller showed in 1981 that valuation adjustments are required. I pointed out in 2002 that the Old School retirement studies don’t contain them. 14 years later this remains true. Millions of investors will be suffering failed retirements as a result. That’s not good.

    I do wish you well.


  • Sammy Soda

    You have only partially commented on John’s response and Wade made a very long public explanation pointing out you are wrong. Making up stories about threats just makes you look silly. Just as silly is when you sent out 30,000 emails about Wade.

    Here we are, two decades later and you are still reflecting back on your hurt feelings. Meanwhile, you are on the cusp of 60 years old and facing a failed retirement, hoping that you get some mystical windfall to rescue you from folly.

    Not smart.

  • RobBennett

    What John said is that anyone who wants to go with a lower withdrawal rate is free to do so. There obviously was never any controversy over that point. The question is — Is the safe withdrawal rate the same number at all times (John said that it is always 4 percent) or is it a number that is higher when valuations are low and lower when valuations are high. If that’s the case (it is), then claims that the safe withdrawal rate is a constant number are in error and need to be promptly corrected.

    Wade agree with me until you Goons threatened to send defamatory e-mails to his employer if he continued to say so publicly. He wrote me many, many e-mails telling me that he agreed with me. He even sent an e-mail to the authors of the Trinity study saying that they should correct their error. Only after he was threatened did he say that he agreed with John. Gee, I wonder why!

    I am going to continue posting honestly re safe withdrawal rates and re scores of other critically important investment-related topics, Sammy. We will see how things play out following the next price crash. I have a funny hunch that I already know how they are going to play out. But there won’t be any uncertainty in anyone’s mind whether permitting honest posting is a good idea or not at that time. So we will all have to exercise a little patience.

    I have somehow come to believe over the years that “financial training” is not the most important thing that one needs to possess to give good investing advice. Call me madcap.

    Hang in there, many. It gets better. A LOT better.


  • Sammy Soda

    It was pointed out to you with hours as to where you were wrong when you made your post. In short, John made you look foolish due to your lack of knowledge. Wade Pfau confirmed that. Unfortunately, you never got over your butt hurt and since that time, you have gone off the deep end.

    This is all not that surprising, Rob, as you have no financial training and you admit that you are not a numbers guy.

    After all these years, you need to get over your hurt feelings.

  • RobBennett

    I said on the morning of May 13, 2002, that the Old School safe-withdrawal-rate studies lack adjustments for the valuation level that applies on the day the retirement begins and thus get the numbers wildly wrong. That’s the “behavior” that Buy-and-Holders find problematic.

    Because those “studies” really do lack valuation adjustments. Thousands of people have checked. And not one person has ever found a valuation adjustment in those “studies.”

    Millions of people will likely be suffering failed retirements in days to come as a result of the errors in those studies, errors that have remained uncorrected to this day. This will cause us big political problems following the next price crash. I will be proud to be able to say at that time that I never gave in to the intimidation tactics of the Buy-and-Holders but continued to warn people of the dangers of all the Buy-and-Hold “studies” that lack valuation adjustments (which is all of them).

    I please guilty to this bad behavior, Sammy.

    Please spread the word all over the internet. I would be grateful if you could make it so there are thousands of articles saying that I have been guilty of this bad behavior for 14 years running now. My reputation as the guy who discovered the errors in those studies and then stuck to my guns in my insistence that they be corrected before they do me more harm will be the key to my marketing efforts in those days.

    I wish you the best of luck in all your future life endeavors.


  • Sammy Soda


    It is your behavior that has been the problem. That is why ever major financial discussion board has banned you. After John pointed out your errors, you went off the deep end seeking revenge, along with a track record of revisionist history. Try dealing with your problems like an adult.

    By the way, no one is going to prison over your mad up fantasy world.

  • RobBennett

    That’s a warm wish, Sammy.

    The sooner the prison sentences are announced, the shorter they are going to be.

    It’s the people who are not calling you out on your behavior who are hurting you. I’ve been calling you out for 14 years now.

    In no other field of human endeavor are things handled in the manner in which they are handled in the investment advice field. That’s why we are in an economic crisis today.

    If I were king of the world, you wouldn’t be going to prison AT ALL. If I were king of the world, Greaney would have been banned back in June 2002. Three months later I would have put up a request that he be let back in and everyone would have agreed and that would have been the end of it. We all would be in a much better place today.

    That’s my sincere take re these terribly important matters, in any event.

    And, yes, I naturally wish you all the best that this life has to offer a person.


  • Sammy Soda

    Warm wishes?

    On your blog, you say:

    “I am doing everything in my power to get the prison sentences announced by the close of business today. ”

  • RobBennett

    My best and warmest wishes to you and yours, Sammy.

    Thanks for taking time out of your day to share your thoughts with us.

    Please take good care, old friend.


  • Sammy Soda

    Your calculator must be broke since your retirement plan failed.