robbennett

Valuation-Informed Indexing #145 by Rob Bennett The Buy-and-Holders did something wonderful. They rooted their investment advice in the academic research. This provided both accountability and independence. You can’t complain that Wall Street Con Men are trying to pull a fast one on you when the people from whom you obtain your advice on how to invest are rooting what they say in the research advanced by those holding doctorates in economics. Doctorates in economics are not on the take. Doctorates in economics DO make mistakes, however. Therein lies the rub. When some Wall Street fellow says something that sounds fishy, you don’t place much confidence in it. You figure that it is part of a sales pitch. When a fellow with a doctorate in economics says something that doesn’t seem to add up, you assume that the problem is on your end. Probably you are just not smart enough to get it. We are all inclined to put more of our trust in academics than in people with something to sell. The great idea will produce great results somewhere down the road. When the academics in this field get their act together, their input really will be more valuable than
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Valuation-Informed Indexing #144 by Rob Bennett Buy-and-Holders are worried. And getting more worried every day. How do I know that Buy-and-Holders are worried? I began writing about the errors in the Old School safe withdrawal rate studies in May 2002. I have been trying to spread the word about the dangers of the 4 Percent Rule for 11 years, generally meeting with little success. In the past two years, numerous top-name publications have run articles pointing out the dangers of the studies. A few weeks ago, the Wall Street Journal joined them. When the leading financial publication in the United States is no longer worried about the reaction it will get from Buy-and-Holders to an article in which it lays the blame for millions of failed retirements on the long-discredited idea that investors don’t need to consider valuations when constructing their retirement plans, Buy-and-Hold is not inspiring much confidence in anyone anymore. And how do I know that Buy-and-Holders are getting more worried every day? I read the reactions to the article posted by its readers and by readers of the article who gave voice to their reactions at a Bogleheads Forum thread discussing the article. Beth Strycharz wrote: “It’s
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Valuation-Informed Indexing #143 by Rob Bennett Just about everyone has given up on the Old School withdrawal rate studies. These studies claimed to identify for aspiring retirees an amount that they could take out of their portfolios each year to cover living expenses.The studies failed to consider valuations and thus generated insanely risky “safe withdrawal rates.” An analytically valid methodology shows that retirements that were initiated at the top of the bubble and that employed the famous 4 Percent Rule stand only a 30 percent chance of surviving 30 years. Unfortunately, we are not yet in a place where the “experts” who have long advocated Buy-and-Hold strategies feel comfortable acknowledging their mistake (the Buy-and-Hold concept was developed prior to the publication of Robert Shiller’s research showing that valuations affect long-term returns). Acknowledging the mistake means rewriting all the textbooks in this field and revisiting all the conventional wisdom about how stock investing works. So we live today in a Twilight Zone where everyone who is paying attention knows that the old ideas don’t work but in which few dare to talk openly about what the research really says. People putting together retirement plans today need advice today. They cannot wait
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Valuation-Informed Indexing #142 by Rob Bennett Most fast-food places are fanatical about keeping their restrooms clean. It’s considered a more important job than providing friendly service or juicy hamburgers. Customers draw conclusions about all sorts of things when they see dirty restrooms. They imagine that a restaurant that doesn’t care about keeping the restrooms clean doesn’t care about lots of other things that the customer cannot check out for himself. I believe that in days to come people are going to see that the failure of The Stock-Selling Industry to do something about the errors that were discovered in the Old School safe-withdrawal rate studies over 10 years ago was a sign of bigger problems. The history here is that I put up a post at a Motley Fool discussion board back in May 2002 pointing out that the studies that say that a retiree can count on a retirement plan calling for a 4 percent withdrawal to work fail to adjust for the valuation level that applies on the day the retirement begins and thus are are analytically invalid. It’s obviously not possible to do the calculation properly without adjusting for valuations. So those studies are dangerous. Millions of
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Valuation-Informed Indexing #141 by Rob Bennett I received a telephone call from a stockbroker a few months ago. I’ve never used the services of a stockbroker. In ordinary circumstances I wouldn’t stay on the phone long enough for one to make a pitch. This case was a little different and I stayed on long enough to come to feel some sympathy for the voice on the other end of the line. This fellow was calling from the brokerage firm that my dad used when I was a boy. I remember getting phone calls for my dad those many years ago. When the fellow used a name that brought back those memories, it softened my heart just enough for me to listen to what he had to say for a few minutes. I don’t think stocks are worth buying at today’s prices. And, even if I did, I invest in index funds. So I don’t need the services of a broker. And even if I decided that I wanted to buy individual stocks, I wouldn’t use a broker’s advice to choose them. So there was zero chance that I was going to take advantage of the services that this fellow was
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Valuation-Informed Indexing #140 by Rob Bennett You will experience a devastating stock price crash at least once in your investing lifetime. How you come through it will be the primary factor determining whether you achieve your investing goals or not. This is the hardest point to communicate about how investing works. We are accustomed to engaging in activities in which feedback is provided far more quickly. Say that you want to determine whether a particular football coach is a good choice for the job or not. You see how he does the first year after he is hired. Perhaps you conclude that the won-loss record he achieves in a single year is not conclusive enough evidence and you give him a second chance. Perhaps there are particular circumstances that come into play that cause you to tolerate two years of poor performance before making a move. But it is unlikely that you would stick with a football coach with a poor record for more than three years. After three years, you are looking to cut your losses and move on. So it is with a job. You don’t stay at a job that you do not find fulfilling if things
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Valuation-Informed Indexing #139 by Rob Bennett No one deliberately tries to drive in a risky manner. No one starts out a school year saying “I want to risk getting an “F” this semester, so I am going to try to get in the habit of never doing homework.” No football player practices how to drop the football with the aim of increasing the risk of a turnover. It drive me crazy that Buy-and-Hold investors describe how investing works in such a manner as to suggest that risk is a good thing. They tell investors that stocks pay high returns because they are a risky asset class. The clear suggestion is that taking on risk is inherently a good thing. The idea of an effective investing strategy is to avoid risk. Yes, there are certain risks that an investor must take on. A football player doesn’t avoid the risk of a fumble by refusing to suit up and go on the field. And an investor must be willing to purchase asset classes more risky than Certificates of Deposit. But there is a deep confusion in this field concerning the risk question that I believe must be overcome if we all are
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Valuation-Informed Indexing #138 by Rob Bennett I say that we have another stock crash coming. I say this because there has never yet in U.S. history been a secular bear market that did not eventually take us down to a P/E10 level of 7 or 8. That’s a 65 percent price drop from where we stand today. Most people think I am delusional. What if I turn out to be right? Would it be okay for me to say “I told you so?” I raise this question because of a conversation I had with a fellow who posted under the name “Uncle Mick” at the Safe Withdrawal Rate Research Group board a number of years back. Mick agreed with me on many but not all points. At one point he expressed concern that, if the stock crash I was predicting (this conversation took place prior to the 2008 crash) took place, it would serve no purpose for people who had predicted it to say “I told you so.” I of course agree that it is in bad taste to say those precise words. A crash is going to hurt people. It serves no constructive purpose to make them feel even
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Valuation-Informed Indexing #137 by Rob Bennett The fellow who owns the Bad Investing Advice blog once asked me a toughie. I say that bull market gains are phony. Investors bid up prices not because economic realities justify the higher prices but because — well, because they can. We all want our retirement plans to be in good shape. And we collectively possess the ability to push stock prices higher. So we push them higher! That’s what is happening in years in which we see the price of stocks increase by more than the 6.5 percent real increase justified by the productivity of the U.S. economy. The Bad Investing Advice blogger doesn’t agree with me. But he’s a good guy and a smart guy. So one day he agreed to humor me a bit and assume for purposes of discussion that I am right about that much. He still wouldn’t be able to buy into the theory behind Valuation-Informed Indexing, he told me. If investors really can push stock prices to whatever they want them to be, he wondered, why do they ever stop pushing them upward? If we have the power to set prices wherever we want them to be,
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Valuation-Informed Indexing #136 by Rob Bennett There’s now 30 years of academic research showing that investors need to be willing to change their stock allocations in response to big valuation shifts to have any hope of keeping their risk profiles roughly constant over time. Valuation-Informed Indexing always offers much higher long-term returns than Buy-and-Hold at greatly reduced risk. It’s investor heaven. So why does Wall Street continue to relentlessly push Buy-and-Hold? Many have concluded that it’s a profit-enhancement thing. There’s more money to be made in commissions on stock purchases than there is in the purchase of most alternative investment choices. The Buy-and-Hold Model posits that stocks are always the best investment choice. It’s no coincidence, the cynics among us argue. Wall Street will always push Buy-and-Hold regardless of what the academic research shows re its dangers. Wall Street will always look out for its own and will never feel much concern for the investors hurt by its self-interested marketing campaigns. There’s nothing we can do. I’m not a cynic. I don’t buy it. I wish that I could say that money plays no role whatsoever in the continued promotion of Buy-and-Hold. I cannot go that far. To go that
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Valuation-Informed Indexing #135 by Rob Bennett Chuck Carnevale recently posted an article to the Seeking Alpha titled Shiller P/E Continues to Mislead Investors. He’s not a fan of Valuation-Informed Indexing! Yikes! Actually, this is good news. I don’t agree with most of the points made in the article. But the appearance of the article is encouraging. I believe that we need to convert the entire world to Valuation-Informed Indexing. That won’t happen as a result of me posting articles praising the concept. It can only happen as the result of a national debate in which people who support the concept argue to the best of their ability in support of it and in which people who see flaws in the concept argue to the best of their ability to opposition to it. Canavale is advancing the debate by trying to shoot the concept down. For that we all owe him our gratitude. A second reason why we should all be happy to see this article is that it shows that the Buy-and-Holders are getting nervous. I was around in the day when the Buy-and-Holders were so sure of themselves that they wouldn’t go to the bother of shooting down Shiller’s
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