John Bogle offered some surprising words in an interview that he did with the IndexUniverse.com site in the Summer of 2009. He said: “Big moves out of stocks should not be done at all… But tactical asset allocation – I should say strategic asset allocation rather than tactical — can be done at very rare times, so rare and so difficult to observe, maybe six times in an investor’s lifetime, three times when the market is stupidly high and three times when stupidly low.”
Wow. Those are not the sorts of words that one expects to hear coming from the mouth of John Bogle, probably the most severe critic of market timing alive on Planet Earth today. What Bogle is endorsing (perhaps not quite, but almost) in the words above is Valuation-Informed Indexing, which of course is what I endorse. I think of these words from time to time when I am trying to figure out how it came to be that I am perceived as a critic of Saint Jack when in reality I view him as a personal hero. Our only significant difference is on the issue of long-term market timing. And the words quoted above suggest that our differences re that one are not nearly as big as they have been made out to be.
But we don’t quite agree. As I note in the parenthetical above, Bogle is kinda, sorta endorsing Valuation-Informed Indexing in the interview. But he is also expressing reservations. I would not feel comfortable saying that he has endorsed the concept without noting several caveats.
There are four things that Bogle says that make me feel that his words come close to constituting an endorsement.
One, he says that big moves out of stocks should not be done at all. A key principle of Valuation-Informed Indexing is that short-term timing doesn’t work. Given that reality, there is no price level at which it could be said that it is certain that stocks will perform poorly in the next year or two or three. So the typical investor should never get entirely out of stocks. At the prices that apply today, I think that a stock allocation of 30 percent makes sense for the typical investor. It’s possible that Bogle would consider that low a stock allocation as a big move out of stocks. If that’s so, then we certainly are not in agreement. But if he feels that keeping to at least a 30 percent stock allocation even at times of very high prices is consistent with his injunction never to make big moves out of stocks, then we are on the same page.
Two, I like it that Bogle suggested that it only makes sense to lower one’s stock allocation when prices are “stupidly” high or low. I don’t entirely agree. I think that a good case could be made that investors should make small adjustments in their stock allocation in response to small shifts in stock valuations. That’s certainly something different than what Bogle is describing. But I also believe that most of the benefits following from a valuation-informed strategy come in those rare cases when stock prices go to “stupid” levels both on the high and low side. In a practical sense, that sort of approach gets the job done even if it is not the theoretically pure way to go.
Three, a second reason why I like Bogle’s use of the word “stupid” in describing extreme valuation levels is that it represents a rejection of the Efficient Market Theory. The Efficient Market Theory posits that investors are collectively rational in the investment choices they make. If investors were rational, they could never act “stupidly.” I have struggled to figure out to what extent Bogle believes in the Efficient Market Theory. His use here of the word “stupidly” suggests strongly that he is not a true believer, which I find reassuring.
Four, it makes me crazy happy that Bogle used the word “strategic” rather than “tactical” to describe investor decisions to increase or lower their stock allocation in response to shifts in valuation levels. I am not aware of any other case in which an expert in the field referred to that sort of decision as a strategic decision; it is always described as tactical. That’s a pet peeve of mine. The purpose of changing one’s stock allocation in response to big valuation shifts should be strategic. The idea is to keep one’s risk profile roughly constant over time in a world in which valuations affect long-term returns and in which risk is thus a variable rather than a constant.
There’s one question re which I suspect that Bogle and I are not in agreement. He says that “big moves” out of stocks are always a bad idea. How much of an allocation shift is a “big move”? I could see an investor electing to go with a stock allocation of as high as 90 percent when stocks are priced at insanely low levels and of as low as 30 percent when stocks are priced at insanely high levels. That’s a shift of 60 percent, which surely qualifies as a “big move.” The investor would be well-advised to make that shift in at least two stages so that there would never be an allocation shift of more than 30 percent. A case could be made that a shift of 30 percent is not too big. But I recall reading elsewhere of Bogle viewing allocation shifts of more than 15 percent as dubious. So I suspect that he could not endorse even a 30 percent shift.
Overall, I believe that Bogle’s views and my views are more in accord than most of my critics would be willing to acknowledge. I don’t think we are in perfect agreement, however. I continue to believe that the best way to state things is to say that on at least one occasion Bogle kinda, sorta endorsed Valuation-Informed Indexing but that as a general rule he does not.
Rob’s bio is here.