Where Does the Money Come From to Support the Higher Returns Enjoyed by Valuation-Informed Indexers?

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Valuation-Informed Indexing #279

by Rob Bennett

Buy-and-Holders believe that it is okay to maintain the same stock allocation regardless of how much valuations change. Valuation-Informed Indexers believe that investors should seek to maintain the same risk level at all times and must adjust their stock allocations in response to big valuations shifts to do that.

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The research shows that Valuation-Informed Indexers earn far higher long-term returns at greatly reduced risk. How can that be possible? Market returns are determined by the productivity of the economy. How can one investing strategy earn far higher returns than another off of the same level of economic productivity?

There are four explanations.

First, to some extent the higher returns enjoyed by Valuation-Informed Indexers come out of the pockets of Buy-and-Holders. Buy-and-Holders are confident that they will receive the average long-term return of 6.5 percent real that the U.S. market has generated for 140 years now. The reality is that they are fooling themselves.

Stock valuations can move gradually upward for 20 years and then drop hard. During the 20 years of upward movement, stock investors enjoy the 6.5 percent real return supported by the economic realities as well as the pretend gains generated by the increases in valuation levels. The small price drops that are mixed in with the gains are in a big picture sense inconsequential. But the investors who ride out these price drops congratulate themselves for doing so, thinking that the small bits of pain that the market has dished out over this 20-year period is as bad as it gets and that they have demonstrated the tenacity needed to stick with stocks for the long run.

The devastating price drops that come only in the aftermath of huge bull markets shock most investors. Those who had come to believe that they were tough enough to stick with their high stock allocations through the worst that the market is capable of dishing out learn that they underestimated how difficult it is to follow a Buy-and-Hold strategy in the real world. They sell at low prices and hold back from buying back in when stock prices reach rock-bottom levels. They diminish their lifetime return dramatically by doing so.

Those lost returns end up in the hands of the Valuation-Informed Indexers, who are able as a result of their willingness to go with low stock allocations when prices are sky high to afford to go with very high stock allocations when prices are low and long-term returns are off the charts. It’s not just that paying attention to valuations permit those who follow the first true research-based strategy to capture the 6.5 percent real return that the Buy-and-Holders seek but fail to obtain. Followers of the new strategy actually earn a return a good bit higher than 6.5 percent real.

The second explanation is that Valuation-Informed Indexing diminishes inequities in how returns are distributed throughout the population. Periods in which stock returns are poor are not randomly distributed across time. Amazing returns are supplied throughout the 20 years or so of increasing valuations, then awful returns are supplied during the 15 years or so of poor returns that follow. This means that investors who happened by virtue of being born at the right time to have lots of assets to invest during the bull phase end up with higher lifetime returns than those who by virtue of being born at the wrong time cannot earn much on their stock investments during the stage of their lives when they have lots of assets to invest.

A shift to Valuation-Informed Indexing would diminish or reduce these inequities. This factor does not increase or decrease the returns earned collectively by all investors but it smooths them out. A higher percentage of investors earns returns good enough to finance a decent middle-class retirement in a world in which the last 34 years of peer-reviewed research is widely promoted than is the case in a world in which Buy-and-Hold is the dominant strategy.

The third factor is that risk is greatly diminished by Valuation-Informed Indexing. This factor does not increase the returns enjoyed by investors in a direct way. However, it does increase the return obtained in response to taking on a specified amount of risk, which is a benefit of significant value.

Valuation-Informed Indexing reduces risk by stabilizing returns. Investors who change their stock allocations in response to price shifts act as a brake on the general inclination to push stock prices ever higher. Investors who understand that stocks offer a less appealing value proposition when prices are high counter the effect of the emotional investors who get caught up in the irrational exuberance of bull markets. Stock prices are self-regulating in a world in which the “revolutionary” (Shiller’s word) findings of recent years are widely known and understood. In such a world, all investors (even Buy-and-Holders) get a better deal for their investing dollar because the price they must pay in terms of risk to obtain their stock returns is smaller.

Don’t be so surprised! Valuation-Informed Indexing is an intellectual advance. Learning new things is one way in which humans have been tapping into free lunches ever since caveman days and the discovery of the wheel and of fire.

The final explanation of where the money comes from to support the better results of Valuation-Informed Indexing is that effective investing makes the economy more productive. Look at how many great businesses were destroyed in the economic crisis that began in 2008 and that was caused by the out-of-control bull market of the late 1990s. Entrepreneurs struggled for years to build those businesses and then lost everything when most of their customers lost so much money in the inevitable price crash that they could not longer afford to purchase their goods and services. It’s not only entrepreneurs who lose something of value when good businesses fail. We all do.

We should all want more stable stock prices. The only way to avoid huge price drops is to avoid huge price gains. The only way to avoid huge price gains is to educate investors re the research showing that stocks offer a poor long-term value proposition when prices reach insanely dangerous levels.

Rob Bennett’s bio is here.

Updated on

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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18 COMMENTS

  1. Seriously Rob. expecting a windfall as part of a retirement plan is just silly. It is just like those that think they will fund their retirement by winning the lottery, except your odds are even worse. you are now at an age in which it will get harder and harder to find and/or work a job with each year that goes by.

  2. Back up plan? Ever think about getting a job? Just think, you could have spent the last 13 years working a low-skilled job in fast food or retail sales and would have been in better financial shape then you are now.

    You can also drop the stupid “honest posting” garbage. You tell more lies than anyone else I know.

    As for John Greany, you are just mad because he made you look foolish (which isn’t hard to do). That is why you continue to make up stuff about John.

    Do yourself and your family a favor and get a job.

  3. I don’t have a back-up plan because I cannot imagine posting dishonesty. I view the idea as 100 percent crazy. I have always posted honestly on every other subject that I have written about and that has always worked out just fine. I cannot post dishonestly, Sammy. It’s not in me. It’s not a “plan.” It’s just a reality that cannot be changed no matter how much pressure is applied to me.

    I don’t have enough money to fund the remaining years of my retirement. I wont be running out of money anytime soon. But there will come a time when I will run out unless this cover-up comes to an end. I believe it is going to come to an end. So I think it is all going to work out well for me.

    But that’s not a plan! You keep suggesting that this is some kind of plan on my end. Posting honestly is a practice that I believe in, not a plan.

    I didn’t say on the morning of May 13, 2002, “oh, I have this great plan, I will post honestly and then these Goons will make it their life project to destroy me and then I will get a settlement and be rich.” That’s crazy. I never expected that anything like this would happen.

    I obviously knew that Greaney was an abusive poster. I knew that he had a Goon Squad. I knew that they would cause trouble. I presumed that the trouble would last about two days. Then Motley Fool would ban him and that would be the end of it and the rest of us would live happily ever after.

    I didn’t know about the cover-up of the error in the Buy-and-Hold strategy that Shiller revealed in his research from 1981 (the error is the idea hat long-term timing [price discipline] might not be required). The cover-up had already been going on for 22 years at that time. I didn’t know, just as most people today don’t know. I had no idea what I was getting into. I was just trying to help out my board community. Then the roof fell in on me.

    There was no plan and I don’t really feel that there is a plan today. There is a BELIEF that I must continue to post honestly. And there is a BELIEF that that will pay off big-time down the road a bit. I don’t think it is right to call it a plan because I have never had any other options presented to me. If I post honestly, you Goons are going to do your best to destroy me. That’s a reality. There’s nothing that I can do about it, so there is no “plan.” I certainly am not going to agree to post dishonestly. Asking me to do that is like asking me to flap my arms and fly to the moon. It can never happen. So, this is a road that I will continue to walk. But not because I planned it, just because I have no other options.

    I do believe that things will work out well. I have talked to too many people who are excited about the huge breakthroughs that we have achieved together over the past 13 years not to believe that. I have seen how so many people love hearing about those breakthroughs until they are intimidated into silence. So, yes, I believe that we are as a society on the threshold of making some amazing advances.

    But I don’t feel that what I am doing is the product of planning. I am doing the only thing that I can do given the cards that I have been dealt. I will just keep doing that and hoping for the best and expecting good things down the road a piece.

    I hope that helps a bit.

    Rob

  4. In reading your own words, you have stated that you have banked your future on getting a settlement statement. Do you need to be reminded again of your own words? You have stated that you do not have a back up plan and you do not have enough money to fund your remaining years in retirement.

    As to the thousands of people you speak of, they are all part of your imagination and are just as made up as your fantasy of getting some kind of settlement payment. You have been caught time and again telling us about people who you say have made certain comments and then we see they actually said something else. These have been documented time and again. Take the example of Mike Piper. Anyone can google that.

    As for Wade, he wrote to you in an email he thought would be private stating that you had caused him much more harm than any “goon”.

    Not a good track record, Rob.

    Don’t you think it is time to live in a state of reality versus a fantasy world?

  5. It’s true that I haven’t made a dime in 13 years.

    I believe that I will be seeing settlement payments. But it’s not right to say that I have “banked my future” on that belief. I say what I say about investing because that’s what I believe about investing. I believe that everyone should be saying what they believe. That’s how we handle things in every other field of human endeavor. That’s what would work in the investing realm too, in my assessment. When we all say what we believe, the people listening in get to hear all sides and eventually people figure things out.

    That brings us to Wade Pfau. Yes, Wade has said that I am wrong. But he said that after working with me for 16 months and saying that I was right over and over again and praising me to the skies and saying that he couldn’t sleep at night because he was so excited about the stuff he was learning from me and saying that he was going to submit the research paper that we co-authored to the leading journal in the field. And it so happens that he said that he thinks I am wrong only after a group of you Goons threatened to destroy his career. And I am supposed to believe that he was shooting straight the one time he said I was wrong and not shooting straight the hundreds of times he said the opposite? No, Sammy. I don’t believe that. Not for two seconds.

    Wade isn’t the only one who has behaved that way. I have had numerous investment advisors call me on the telephone after reading material at my site and pick my brain about all sorts of questions. I have spoken to several of these people for hours at a time. And then at the end of the call several of them have said to me “please don’t tell anyone that I spoke to you, okay?” Huh?

    And I have had numerous site owners ban me from their sites after telling me that they think that my stuff has huge value. I ask them why and they say that hearing what I have to say upsets their readers too much, their readers want to believe in Buy-and-Hold and seeing my research-based arguments just causes them too much pain. Huh?

    And I have talked to academics who have told me that lots of researchers in this field want to do research showing how dangerous Buy-and-Hold is in the long term but that they have been taken aside and warned that it would be a career-limiting move to publish such research. Rob Arnott is one of the ones who told me that and Rob served for several years as the editor of the Financial Analysts Journal. He is no dummy. He has a well-deserved reputation as a straight shooter. Huh?

    And I have had thousands of my fellow community members put up posts expressing a desire that you Goons knock off the funny business. They are not the majority. There are lots of Buy-and-Holders who hate my stuff. But a lot of the people who express a desire that honest posting re the last 34 years of peer-reviewed research be permitted are among the smartest and most popular posters at the various boards. They get quiet once they see that the site owners are not willing to take action against you Goons. But they often say what they believe before it becomes clear that they will be punished for standing up to you Goons. Huh?

    Buy-and-Hold was once a wonderful thing. It stopped being a wonderful thing when Shiller published his “revolutionary” (his word) research and the Buy-and-Holders failed to update their strategy to reflect the new findings. The result is that, 34 years later, the Buy-and-Holders are too ashamed to come clean re the mistake they made and most of us have been intimidated into not demanding that they do so. That’s too sad, in my opinion. I think we need to stand up to them and that they need to come clean. I think that’s best for everyone.

    I could be wrong. That’s always a possibility. But I haven’t been dishonest. I say what I truly believe. That’s important to me. You say that I have “suffered substantially for a very long time.” I’ve suffered financially. I’ve suffered lots and lots of hits to my reputation. I’ve been defamed tens of thousands of times. I’ve lost contact with lots of good friends when I was banned from discussion boards where I played a leadership role for years (I was once banned from a board that I founded — beat that!). But I can go to sleep at night knowing that I have insisted on my right to post honestly for 13 years running and that I’ve been able to develop hundreds of amazing insights as a result and that lots of good and smart people have praised my work product to the skies because they appreciate how important it is that we explore the implications of Shiller’s revolutionary findings in great depth.

    All of that matters to me. I see myself as a huge winner re this matter despite the financial and reputational hit. I would do it all again, you know? Despite all that I have been through, I would do it all again because the good side of this story is 50 times more good than the bad side of this story is bad. We have seen more advances in our understanding of how stock investing works over the past 34 years than we have seen advances in computer technology over that time-period. By a factor of 20! And I have played a leading role in developing many of the insights and in spreading the word about them. That’s pretty heady stuff for a guy who never went to investing school and who never managed a big fund. I have achieved things on the content side many, many times beyond anything that I ever thought it might be possible for me to achieve in the days before May 13, 2002.

    I believe that I will see those settlement payments. I don’t think that’s a fantasy at all. I believe that everyone in this field wants this nasty stuff to go away. I think thats true of Jack Bogle, who is the lead Buy-and-Holder. I got started on this journey because of things I learned from reading Jack’s book. That tells me that deep down he wants to help people. So I believe that following the next price crash, he is going to look deep down and decide that he needs to come clean about the doubts that he feels about his claim that it is not necessary for investors to exercise price discipline when buying stocks.

    And I believe that this story is going to lead to legislative changes that will limit the ability of you Goons to ruin sites and to ruin people’s reputations and to intimidate good people into not posting their sincere views at web sites. I believe that this new communications medium is going to be freed to achieve its full potential as a result of how many lives you Goons have damaged over the course of your 13-year Campaign of Terror against our board and blog communities.

    I talk to people at the annual personal-finance bloggers convention (FInCon) each year and I can tell you that lots of people would like to see these matters addressed in a responsible way. There’s lots of money to be made giving people accurate and honest and research-based investing advice and lots of people would like to be earning good money while helping people out if only they do not have to go up against you Goons to do so.

    We’ll see how it all turns out, Sammy. I believe that we are going to see some exciting developments following the next price crash. I believe that most people are basically good. And so I am not able to imagine how things could ultimately go down any other way. There is too much potential for good here and the nasty stuff has caused too much human misery.

    I naturally wish you all the best that this life has to offer a person, in any event.

    Rob

  6. ” I also acknowledge that I have been wrong before and that it could be that it is happening again.”

    Yes you are wrong. Wade Pfau pointed that out to you a long time ago (as did many others), but you have chosen to ignore it.

    Because you decided to ignore it, you have suffered substantially for a very long time. You somewhat acknowledge that in a recent post at your blog in which you say the following:

    “I’m not making any money, Reality. You got that one right. I haven’t made a dime in 13 years. That makes me very, very, very sad. It makes my wife even sadder!”

    Instead, you have banked your future on some kind of windfall coming from what you describe as “settlement payments” (all part of a fantasy).

  7. If someone says “the safe withdrawal rate is 4 percent” and the peer-reviewed research of the past 34 years shows that it is really 1.6 percent at the time because of the valuation level that applies, Buy-and-Holders view it as “hijacking the thread” to tell people that. But the people who are trying to determine the safe withdrawal rate for purposes of planning their retirement need to know that, Sammy. They need to know the right numbers.

    The Buy-and-Holders say that the safe withdrawal rate is 4 percent “over and over.” If we are required in conscience to let people know that that number is wrong, then we are required in conscience to let people know that that number is wrong as often as the Buy-and-Holders put forward the number. That is, we need to say that “over and over.”

    The root problem here is that there are two schools of academic thought as to how stock investing works, the model based on Fama’s research (Buy-and-Hold) and the model based on Shiller’s research (Valuation-Informed Indexing). Both of these men were awarded the Nobel Prize for their research, so it can be said that both models are legitimate. But both cannot possibly be right. The two models are rooted in opposite premises.

    The answer is for advocates of both models to tell people that there are two models and that the numbers they favor are the ones supported by their model and that their readers need to know that there is another model that generates very different numbers. When you do it that way, you are leaving it to the reader to make the decision as to which model to follow. You are providing information that you personally believe is accurate but you are not trying to hide anything from the reader that he needs to know. That solves the problem.

    I think it would be fair to say that the Buy-and-Holders don’t do this because they feel that it would hurt their marketing efforts. They want to be perceived as “experts” and letting people know that there is another model that generates very different numbers undermines the claim that they are true experts. We all should want to undermine that claim. The reality is that no one in this field is a true expert today. The science is just too new. We are still in the early stages of learning how stock investing works. We have made important progress in recent decades. But we do not today know enough for sure to say in full honesty that we are certain of what we are saying, that we possess true expertise.

    I believe that Valuation-Informed Indexing is the answer, Sammy. I believe that strongly. I also acknowledge that I have been wrong before and that it could be that it is happening again.

    Can you say the same?

    Can Jack Bogle say the same?

    Bogle needs to say that. When Bogle and the other Buy-and-Holders get in the habit of saying that, all those who feel doubts about Buy-and-Hold will begin speaking up. We will see lots of articles questioning the root premises of Buy-and-Hold. We will see new types of calculators being developed. We will be hearing hundreds of podcasts describing strategies that we have never heard about before.

    Perhaps Buy-and-Hold will prevail in the marketplace of ideas. Perhaps Valuation-Informed Indexing will prevail. There’s only one way to find out. We need to launch a national debate re these questions.

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

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

    Rob

  8. It is bad behavior when you hijack other people’s threads. It is bad behavior when you repeat the same thing over and over again despite people asking you to move on as they have heard your tired lines eat too many times. It is bad behavior when you post repeated lies (like you just did). It is bad behavior to make up things like death threats and job threats and refuse to back them up with proof when confronted. It is bad behavior to avoid answering questions, despite board owners asking you to support your claims. It is bad behavior to make slanderous comments about well respected financial experts, such as Jack Bogle and Wade Pfau.

  9. You view it as “poor behavior” when I warn people of the dangers of Buy-and-Hold strategies, Sammy. We are working at cross purposes. Do you not see that?

    I’ll be able to hold my head up high following the next price crash. I’ll be able to say that I’ve been advocating honest and free and frank discussion of the past 34 years of peer-reviewed research at every discussion board and blog on the internet for 13 years now. That’s the position that I want to be in. I don’t want to give that up.

    It’s nothing personal, okay?

    I love the idea of using peer-reviewed research to guide one’s investing decisions. I learned that one from my good friend Jack Bogle, by the way. Prior to 1981, the Buy-and-Holders were in FAVOR of the use of peer-reviewed research as a guide. I think they were right the first time. Everything that I say today just follows from what the Buy-and-Holders said prior to 1981. It was when they started ignoring the new research that I believe that the Buy-and-Holders got on the wrong track.

    Back in 2002, when everyone was going crazy about my claim that the Old School safe-withdrawal-rate studies don’t include a valuations adjustment (a claim since affirmed by every major publication in the field, including the Wall Street Journal and the Economist magazine, by the way), I was calling what I now call “Valuation-Informed Indexing” either “Buy-and-Hold 2.0” or “The New Buy-and-Hold.” I saw the work that I was doing as just an extension of the work that the Buy-and-Hold Pioneers had been doing for years.

    I still see it that way. I look forward to the day when we are all working together to learn more and more and more about how stock investing works in the real world. It wasn’t me who wanted this split. I stopped calling the new model “Buy-and-Hold 2.0” because there were lots of Buy-and-Holders threatening to kill my wife and children if I didn’t shut up about the errors in the Old School SWR studies. It got to a point where it sounded kind of stupid for me to say that we were all Buy-and-Holders. So I came up with a new name.

    But it’s still the same thing. We are all in an ultimate sense still on the same side. Humankind is always in the process of learning new things. In 1965, we learned that short-term timing never works and jumped to the hasty and wrong conclusion that long-term timing (price discipline) doesn’t work either. In 1981, we learned that long-term timing ([price discipline) ALWAYS works and is ALWAYS 100 percent required. Good for us, you know? That’s the biggest advance in our understanding of how stock investing works that we have ever achieved. I sure do not apologize for telling people about it. I am very proud to be the one leading the effort to get the word out.

    It makes the Buy-and-Holders crazy when I tell. But they’re going to come around in time. What choice do they have? Valuation-Informed Indexing reduces the risk of stock investing by 70 percent. Buy-and-Hold causes economic crises. How are you going to hold back progress when the difference in results is that stark? It cannot be done. So the best thing for everyone, including my Buy-and-Hold friends, is that we all begin moving forward today, that we not even wait for the turn of the year.

    That’s my sincere take re this terribly important matter anyway. I very much look forward to getting down to work with all my Buy-and-Hold friends. I wish to heck that we didn’t need to live through another price crash to get there! But whachagondo? These things happen in this mixed-up world. You always have to look out for those darn humans, you know?

    It’s a process. We’ll get there. We are on the one-yard line today. You gotta have a little faith in people. You gotta believe!

    My take.

    And my best wishes.

    Rob

  10. I’ve been banned at lots of places. That much is for sure.

    Anyway, I naturally wish you the best of luck in all your future endeavors, Sammy.

    Rob

  11. Just change the word “process” for “insanity”. on top of that, everything else you just posted is one big lie. Is it any wonder as to why you have been banned at so many boards.

  12. The stuff that you are referring to is process stuff, Sammy. My site is not filled with process stuff. I do indeed address the process side of things there and there is indeed a lot of material there on the process side at this point. In particular, the daily blog entries mostly deal with the process side of things. I report on my conversations with you Goons, which sometimes deal with substantive questions but which more often than not deal with process-oriented issues. There is a lot of process stuff at the site. But there is even MORE substantive-oriented stuff. The site is balanced. I don’t ignore either side of the overall project of moving us from Buy-and-Hold to Valuation-Informed Indexing and I don’t think it would be right for me to do so.

    I do have warm wishes for you. I do wish the best for you. The suggestion in your comment is that it would be more charitable for me to ignore the process side of the matter. That is not so. We all want the same things. We are all on the same side. We all should be working together to enhance our understanding of how stock investing works in the real world and to share what we learn with all other investors. We are not doing that today and that needs to change. The only way to change things is to address the process side of things. This is not optional. It is imperative.

    The Buy-and-Hold Pioneers made a good number of amazing contributions. You certainly have never heard me say otherwise. I feel the greatest respect and affection possible for all of my many Buy-and-Hold friends. The big problem on the process side of the question is that as a society we have let the Buy-and-Holders down.

    The Buy-and-Holders made one huge mistake. They proved with peer-reviewed research that short-term timing never works. Then they jumped to a hasty conclusion that long-term timing (price discipline) doesn’t work either. Nothing could be further from the truth. Long-term timing (price discipline) is 100 percent required. It ALWAYS works. There has never been a single exception in the 145 years of stock market history available to us for study today. The peer-reviewed research has shown this to be the case for 34 years now.

    We need to tell people. We need to stop saying that timing doesn’t work or that timing isn’t required and start saying instead that short-term timing doesn’t work and that long-term timing is price discipline and always works and is always 100 percent required. Then we all begin obtaining far higher returns at dramatically reduced risk. Which is what we all want.

    The only thing holding us back are these process-oriented matters that you suggest I not discuss. Bogle made a mistake back in 1981, when Shiller published the peer-reviewed research showing that valuations affect long-term returns and that thus long-term timing (price discipline) always works and is always 100 percent required for all investors seeking to keep their risk profiles roughly stable and Bogle failed to step to the front of a big room and acknowledge his mistake in thinking that long-term timing might not be required. Bogle’s failure to do that put us on the track we are on today, where we have 34 years of peer-reviewed research saying one thing and the vast majority of “experts” saying the opposite. We have to get off this track.

    We cannot get off this wrong track by discussing only substantive issues. We certainly should be discussing substantive issues and I do and I encourage all others to do so as well. But we must deal with those process-oriented issues as well. Shiller doesn’t discuss how-to-invest questions in his amazing book Irrational Exuberance.. Why do you think that is? It’s because he knows that it would upset Buy-and-Holders for him to do that. They have their lives staked on Buy-and-Hold and they believe that it is a research-based strategy when in reality it has not been that for 34 years now. People get very upset when they learn that. So Shiller (and countless others) keeps it zipped.

    We all have to stop keeping it zipped. We need to have a national debate about the IMPLICATIONS of Shiller’s “revolutionary” (his word) findings. What Shiller added to the story of how stock investing works in the real world is the biggest advance in the history of personal finance. We cannot afford to pass up the benefits that come from making practical use of this advance (which means engaging in in-depth analysis of the implications of his findings). But, given the 34-year cover-up, the statements made by those who do this come off as shocking to most investors hearing them. The Old School retirement studies get the numbers wildly wrong? We now know how to reduce the risk of stock investing by 70 percent? The promotion of Buy-and-Hold strategies caused the economic crisis? Huh? Huh? Huh? That’s the reaction we commonly see from ordinary investors when they are exposed to those kinds of claims.

    We need to change that. The only way to do it is to launch a national debate. The Buy-and-Holders should of course be part of that debate. There are lots of different viewpoints on all these questions and they all need to be heard. But each of those three claims (and lots of others that generate almost an equal amount of controversy) are perfectly reasonable statements given what the last 34 years of peer-reviewed research in this field shows us re how stock investing works in the real world. They come off as shocking only because they have been so rarely heard. And they are rarely heard because of the 34-year cover-up. That cover-up MUST be addressed for us all to move forward.

    The Buy-and-Holders did not directly intend to engage in a cover-up. They truly believe in Buy-and-Hold. They follow it themselves. They are good people, not bad people. They are smart people, not dumb people. They didn’t appreciate the far-reaching significance of Shiller’s findings when first exposed to them. But here we are all the same.

    The easy way to see that there has been a 34-year cover-up is to ask yourself what changes Bogle has made in the Buy-and-Hold Model in response to Shiller’s findings. There have been no changes even though Shiller’s research is deemed of such huge importance that he was awarded a Nobel Prize for it. It may well be that Bogle truly believes that it is safe for investors to ignore Shiller’s findings (that’s what I believe to be the case). Bogle still has a responsibility to address the Shiller findings, to tell all those who follow his advice WHY he thinks it is safe to ignore these findings.

    Bogle also has a responsibility to do everything in his power to insure that Shiller’s findings are discussed in an open and forthright manner at any discussion board or blog that purports to be telling people how to invest in stocks. That’s a responsibility that applies to anyone who puts himself forward as an expert in this field. Shiller’s research has been public information for 34 years now. All experts have an obligation to keep up on the new research as it is published. Bogle has failed to honor this responsibility. He is obviously aware of Shiller’s revolutionary findings. He has not said why he has failed to update the Buy-and-Hold strategy to reflect these important findings.

    I write about the process-oriented stuff at this column. My focus here is on the substantive side of things but I do not ignore the process side of things here (this very comment is obviously process-focuced). The most important reason is that the process side is hard for people to take. People HATE it when I talk about the process side. So I tend to play down the process side. My aim is to get people interested in Valuation-Informed Indexing by showing them what a huge advance it is. Once people get interested, they will be inclined to explore the process-side questions on their own. And, as you note, I have a mountain of material re the process side at my site. I don’t duck those questions, I just tend to play them down at places other than my own web site.

    That’s the story. We all want the benefits that follow from permitting open and full discussion of the last 34 years of peer-reviewed research. But the cover-up has gone on so long that it makes the Buy-and-Holders look bad when we talk about these matters in a clear way. I do not want to make the Buy-and-Holders look bad. I want to make the Buy-and-Holders look very, very good. We wouldn’t have Valuation-Informed Indexing today had Buy-and-Hold not come first. We all owe the Buy-and-Holders a huge debt for building the foundation on which VII has been built.

    But those darn process-oriented issues are standing in the way of the Buy-and-Holders getting the credit they deserve for all of their many powerful insights! I am trying to bring the nasty business to a full and complete stop. Once we bring the cover-up to an end, it is downhill sledding for all of us, good stuff piled on top of good stuff piled on top of good stuff. These are exciting times. We all are on the threshold of achieving a far better and more rewarding understanding of how stock investing works in the real world. Good for us!

    But we must as a society deal with those nasty process questions first. Most people are today afraid to talk plainly about their true beliefs about how stock investing works. I have spoken to many academics who are afraid. I have spoken to many journalists who are afraid. I have spoken to many investment advisors who are afraid. This must change. This is unacceptable.

    No one can do his or her best work so long as he or she is afraid to speak plainly and clearly and honestly. So the cover-up really must be brought to a full and complete stop, the process questions really must be addressed in a frank although charitable way.

    But not in every single column entry! The substantive questions are of huge importance too. So the substantive side of things is going to continue to be my focus here. Those who want to know more about the process side of things should go to my blog, where I explore those questions in more than half of the daily entries that I put forward.

    Does that help?

    I naturally wish you all the best that this life has to offer a person, my good friend.

    Rob

  13. Warm wishes? How does that align with your comments about prison sentences, Bernie Madoff comments, made up death threats, goons, $500 million settlements and all those other silly comments you make on your own website? Why is it that your site is filled with that, but you seem to avoid it here? Is it because you are worried that people will think you are a nut-job?

  14. As pointed about by others, your VII scheme was outperformed by many other buy, hold and rebalance strategies. People don’t need to worry about timing gimmicks when they can already use low cost, proven systems that are simple to implement. In short, what you wrote in this column is pure fiction.

    With that said, your retirement failure was a result of low savings, which is also the number one issue for most people that are falling short in retirement. Try fixing that one first.

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