High School Courses in How to Invest Wouldn’t Help


Valuation-Informed Indexing #91

by Rob Bennett

I have heard lots of people argue that we need to teach investing in high school courses. The idea of high school is to prepare kids to make their way in life. Trying to make your way today without knowing at least the basics of investing is a hard business. So why not provide courses insuring that all those who gain high school diplomas have been exposed to at least the basics?

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My hero Robert Shiller has offered a different twist to the same basic idea. Shiller has proposed that a government subsidy be provided to pay people who become certified for the skills needed to answer basic investing questions. Shiller’s concern is that ordinary middle-class people need to have a source to turn to for answers to their questions that is not biased by the desire to make a buck off them and that is not so expensive as to be as a practical matter not available to them.

The concerns are legitimate. And, as a long-term initiative, it’s hard to argue that teaching something about investing in school makes all the sense in the world.

Still, I see big problems arising with any effort to move forward on such an initiative today.

Say that we were to agree to teach investing in school. What is it precisely that we would teach?

The Buy-and-Holders say that the market is efficient and that there is no need to take valuations into consideration when setting your stock allocation. The Valuation-Informed Indexers point to Shiller’s research showing that this is not so and argue that to set one’s allocation without looking at the P/E10 value before doing so is akin to buying a used car without first checking on Edmunds.com to identify the fair-value selling price. A single high school course could hardly teach both ideas!

We may have just identified a way to make the controversy over whether to teach Intelligent Design appear a relatively minor battle in relative terms!

Wall Street would love it if we pushed Buy-and-Hold in the schools. That would make their job so much easier. And I have no doubt but that Wall Street could come up with the campaign contributions needed to see that their views were given, um, serious consideration.

But do we really want the force of government lining up behind an investing theory that was discredited by the academic research 30 years ago? Shouldn’t it be the purpose of government to protect us from marketing-driven strategies rather than to encourage even more widespread adoption of them?

Shiller’s idea suffers from the same drawbacks.

If middle-class people are to place any trust in the answers they obtain to their investing questions from the new government program, there would need to be “official” answers to the most basic questions. But do we have enough confidence today in the conventional investing wisdom to assign the status of “official” to any of them?

I pointed out the errors in the Old School safe withdrawal rate studies in May 2002 to a Motley Fool discussion board. There is a widespread consensus today that I was right in my criticisms but none of the studies has yet been corrected. What sort of answer should an accredited advisor give to the question “What is the safe withdrawal rate?”, the one that the research shows is correct or the one that has the far bigger marketing pull?  Until we have an answer to that question, we cannot proceed with a government program.

And that is of course not the only basic question to which we don’t yet possess enough clarity of thought to say we have available to us today an official, correct answer.

Does market timing work? Some people say that market timing never works. Others say that long-term timing is required of those investors hoping to have some realistic chance of long-term success.

What is the proper stock allocation when stocks are priced as insanely high as they were in the late 1990s and through most of the 2000s? John Bogle says that an investor never needs to lower his stock allocation by more than 15 percent, no matter how high prices go. The historical data shows that the likely annualized long-term return on stocks can rise to as high as 15 percent real at times of low prices and can drop to as low as a negative 1 percent real at times of high prices. That suggests that investors seeking to keep their risk profiles stable need to be willing to change their stock allocations by a lot more than 15 percent in response to big price swings.

Are stocks risky? The conventional wisdom is that they are the riskiest asset class. But if Shiller is right that long-term returns can be effectively predicted, the risk of investing in index funds cannot be great. Risk is uncertainty. To the extent that returns are predictable, the outcome of a stock investment is known in advance. What’s so risky about investing in an asset class in which the long-term outcome is to a large extent known?

We cannot teach kids how to invest in stocks until we figure out how to do it ourselves.

We don’t need high school courses on how to invest. It would be a good idea for somewhere down the road. We need something different today.

We need a national debate on what really works in stock investing, a national debate in which the questions noted above and many others are given a full airing from all sides of the table. We are flattering ourselves in thinking that we can teach this stuff to the next generation. Learning comes before teaching.

Rob Bennett believes that saving too much is a big problem. His bio is here.


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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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